<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
STICKER SUPPLEMENT FOR PENNSYLVANIA RESIDENTS ONLY
This Supplement No. 1 to the Company's Prospectus dated February 11, 1999
modifies certain information in the Prospectus on the cover page, under the
captions "Who May Invest" and "Plan of Distribution-- Escrow Conditions" and
"--Representations and Warranties in the Subscription Agreement," and the form
of the Subscription Agreement included as Appendix C, and shall only apply to
residents of Pennsylvania. Unless otherwise defined capitalized terms used
herein shall have the same meaning as in the Prospectus.
PENNSYLVANIA INVESTORS: Subscribers residing in Pennsylvania may not be admitted
as Stockholders to the Company until subscriptions have been received and
accepted for 2,500,000 Shares ($25,000,000) from all sources (the "Pennsylvania
Minimum Offering"). The funds representing subscriptions for Shares from
Pennsylvania residents will be placed in an escrow until subscriptions for
Shares for Gross Offering Proceeds of at least $25,000,000 have been obtained.
If the Pennsylvania Minimum Offering has not been obtained by the end of 120-day
escrow periods (with the initial 120-day escrow period commencing upon the
effectiveness of this Offering), the Company shall notify the Pennsylvania
subscribers in writing by certified mail within 10 calendar days after the end
of each such 120-day escrow period that they have a right to have their
investment returned to them. If a subscriber residing in Pennsylvania requests
the return of such subscription funds within 10 calendar days after receipt of
the notification, the Company will return those funds, together with any
interest earned thereon for the time those funds remain in escrow subsequent to
the initial 120-day escrow period, to the subscriber within 15 calendar days
after receipt of the subscriber's request.
Funds received from subscribers residing in Pennsylvania will be released to the
Company from the escrow immediately after subscriptions for at least $25,000,000
have been received from all sources. Subscriptions from Pennsylvania residents
may be included in determining whether subscriptions for the Pennsylvania
Minimum Offering have been obtained.
Because the Minimum Offering is less than $50,000,000, Pennsylvania investors
are cautioned to carefully evaluate the Company's ability to fully accomplish
its stated objectives and to inquire as to the current dollar volume of the
Company's subscription proceeds.
Subscribers residing in Pennsylvania must sign a Subscription Agreement wherein
they acknowledge receipt of this Sticker Supplement in addition to making the
other representations and warranties contained in the form of the Subscription
Agreement included as Appendix C to the Prospectus.
<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-64391
PROSPECTUS
200,000 SHARES OF COMMON STOCK--MINIMUM OFFERING
INLAND RETAIL REAL ESTATE TRUST, INC.
$10.00 PER SHARE* MINIMUM INITIAL PURCHASE--300 SHARES (100 SHARES FOR
TAX-EXEMPT ENTITIES)*
Inland Retail Real Estate Trust, Inc. (the "Company") is a Maryland
corporation which intends to operate as a REIT, and shall, through entities
owned or controlled directly or indirectly by the Company, acquire and manage
real estate improved primarily as shopping centers or single-user retail
properties leased on a triple-net lease basis by creditworthy tenants. Of the
gross proceeds of the offering, approximately 83.5% are expected to be available
for the purchase of one shopping center if the minimum offering is sold, and
approximately 87% are expected to be available for the purchase of properties if
the maximum offering is sold. See "Estimated Use of Proceeds," "Investment
Objectives and Policies" and "Real Property Investments."
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF THE FOLLOWING AND OTHER RISKS
WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN SHARES OF THE
COMPANY:
- There is no public market for the Shares;
- The Shares are illiquid and suitable only for those able to make a
long-term investment;
- There are restrictions on the transferability of the Shares;
- Only three properties have been identified for investment;
- The minimum offering would provide sufficient funds to acquire only one of
the identified properties;
- Investments are primarily limited to retail properties located in states
east of the Mississippi River (initially focused in the southeastern
states, primarily Florida, Georgia, North Carolina and South Carolina);
- Certain provisions in the Company's organizational documents and of
Maryland law may deter takeovers, discourage acquisition proposals or
force a stockholder to forfeit the benefit of Share ownership;
- Failure to qualify as a REIT would materially affect distributions on the
Shares;
- There are conflicts of interest between the Company, its Board of
Directors and certain of its affiliates;
- There is authorization for payment of substantial fees to affiliates of
the Company; and
- The Company's management has limited experience in operating retail
properties in some of its designated geographical area for investments.
(CONTINUED ON FOLLOWING PAGE)
<TABLE>
<CAPTION>
PRICE TO SELLING PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
Per Share.................................................... $10.00 $0.95 $9.05
Minimum Purchase--300 Shares................................. $3,000.00 $285.00 $2,715.00
Total Minimum Offering....................................... $2,000,000.00 $190,000.00 $1,810,000.00
Total Maximum Offering(4).................................... $538,000,000.00 $47,500,000.00 $490,500,000.00
</TABLE>
*(1) The minimum initial purchase requirements, minimum financial
suitability standards and the price per Share may be different in certain
instances. See "Who May Invest" and "Plan of Distribution." Volume and other
permitted discounts are not reflected in the above table.
(2) Except for certain sales described herein, the Company will pay the
Dealer Manager cash selling commissions of 7%, a marketing contribution of 2%,
and a due diligence expense allowance of up to 0.5%, of the gross proceeds of
the Shares sold by the Dealer Manager and the Soliciting Dealers; and offer to
sell to the Dealer Manager a Soliciting Dealer Warrant to purchase one Share for
every 25 Shares sold. See "Plan of Distribution--Compensation Payable by the
Company for the Sale of the Shares" for an explanation of the compensation
payable for the sale of the offered Shares and "Description of
Securities--Soliciting Dealer Warrants" for the terms of the Soliciting Dealer
Warrants, which are part of such compensation. This table includes and assumes
the maximum cash selling commissions, marketing contribution and due diligence
expense allowance, but does not include any amount attributable to the
Soliciting Dealer Warrants which may be issued (such attributable amount is
approximately $0.90 per Warrant or an aggregate of approximately $1,800,000,
assuming the maximum offering of 50,000,000 Shares is fully subscribed and the
maximum of 2,000,000 Soliciting Dealer Warrants are issued). See "Plan of
Distribution--Indemnification" for information regarding the Company's agreement
to indemnify the Dealer Manager and the Soliciting Dealers against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
(3) Before deducting certain organization and offering expenses, estimated
at $14 million if the maximum offering is sold (of which $110,000 will be paid
if the minimum offering is sold). However, if the minimum offering is not sold,
none of the offering proceeds will be used to reimburse an affiliate of the
Company for advancing these expenses. Does not include any proceeds from the
issuance or exercise of any Soliciting Dealer Warrants. See "Compensation
Table--Nonsubordinated Payments--For And In Connection With The Offering" for an
explanation of the organization and offering expenses at specific levels which
are payable by the Advisor.
<PAGE>
(4) Includes 4,000,000 Shares which may be issued pursuant to the Company's
Distribution Reinvestment Program.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 11, 1999.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Investors purchasing Shares must sign a Subscription Agreement (the form of
which is included as Appendix C to this Prospectus), wherein they make certain
representations and warranties. See "Plan of Distribution--Representation and
Warranties in the Subscription Agreement."
The Company will be the general partner of Inland Retail Real Estate Limited
Partnership, an Illinois limited partnership ("the Operating Partnership"),
which is expected to hold, directly or indirectly, the interests in
substantially all of the real property acquired by the Company.
See "Descriptions of Securities--Restrictions on Ownership and Transfer" and
"Federal Income Tax Considerations--Taxation of the Company--Share Ownership
Tests," for certain restrictions on ownership and transferability of Shares.
Except for certain Shares which may be sold directly by the Company, Inland
Securities Corporation will act as the Company's agent and will manage this
offering as the "Dealer Manager." The "Soliciting Dealers" are those securities
dealers who are members of the NASD and who are designated by the Dealer Manager
to participate in this offering. See "Plan of Distribution--Compensation Payable
by the Company for the Sale of the Shares" for an explanation of direct sales by
the Company. Other than those Shares sold directly by the Company, the Shares
offered hereby will be sold through the Dealer Manager and the Soliciting
Dealers. No Shares will be sold unless subscriptions for at least 200,000 Shares
($2,000,000) have been obtained within six months after the initial date of this
Prospectus (the "Minimum Offering"). Subscription proceeds received from
investors initially will be held in escrow in an interest-bearing account at
LaSalle National Bank, N.A. (the "Escrow Agent"), until the first of the
following to occur: (i) subscription funds for the Company's Shares total at
least $2,000,000 (in which event such funds will be released to the Company) or
(ii) six months after the initial date of this Prospectus without such
subscription funds totalling at least $2,000,000 (in which event such funds will
be promptly refunded to subscribers, together with the interest earned thereon).
If the Minimum Offering is sold and this offering continues, subscription
proceeds thereafter will be held by the Escrow Agent only until release to the
Company. If the Minimum Offering is sold and this offering continues, the
offering will terminate on or before February 11, 2000, unless the Company
elects to extend it to a date no later than February 11, 2001, in states that
permit such extension. For additional information regarding the escrow, see
"Plan of Distribution--Escrow Conditions."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE COMPANY IS NOT A MUTUAL FUND OR AN INVESTMENT COMPANY WITHIN THE MEANING
OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND, THEREFORE, INVESTORS
WILL NOT HAVE THE BENEFIT OF THE PROTECTIONS PROVIDED BY THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED.
THE USE OF FORECASTS IN CONNECTION WITH THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY AND, ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE
AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCES
WHICH MAY FLOW FROM AN INVESTMENT IN THE COMPANY, ARE PROHIBITED.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERENCED IN THIS
DOCUMENT. THE COMPANY HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ADDITIONAL
INFORMATION OR INFORMATION THAT IS DIFFERENT.
ii
<PAGE>
WHO MAY INVEST
An investment in Shares involves certain risks and is suitable only as a
long-term investment for Persons (which is defined to mean any individual,
corporation, business trust, estate, trust, partnership, limited liability
company, association, two or more persons having a joint or common interest, or
any other legal or commercial entity) of adequate financial means who have no
immediate need for liquidity in their investment and who can bear the loss of
their investment. Shares will be sold only to Persons who initially purchase a
minimum of 300 Shares ($3,000) or Tax-Exempt Entities (which are defined to mean
generally any investor that is exempt from federal income taxation, including a
pension, profit-sharing, retirement, IRA or other employee benefit plan which
satisfies the requirements for qualification under Section 401 of the Internal
Revenue Code of 1986, as amended, and the Regulations thereunder (collectively
the "Code"), an endowment fund or a charitable, religious, scientific or
education organization; and each such plan which is so qualified under Section
401 of the Code is defined as a "Qualified Plan") which purchase a minimum of
100 Shares ($1,000), except for investors resident in the State of Iowa where
the minimum investment for IRAs will be 300 Shares ($3,000) and for investors
resident in the State of Minnesota where the minimum investment for IRAs and
other Qualified Plan accounts will be 200 Shares ($2,000). In addition, the
Company has established financial suitability standards for investors who
purchase Shares. These standards require investors to have either: (i) a minimum
annual gross income of $45,000 and a minimum net worth (exclusive of home, home
furnishings and automobiles) of $45,000; or (ii) a minimum net worth (determined
with the foregoing exclusions) of $150,000.
There are higher financial suitability standards for residents of certain
states. If the investor is a resident of Massachusetts, Missouri or Tennessee,
the investor must have either: (i) a minimum net worth (excluding home, home
furnishings and automobiles) of $225,000; or (ii) a minimum annual gross income
of $60,000 and a minimum net worth (exclusive of home, home furnishings and
automobiles) of $60,000. If the investor is a resident of Maine, the investor
must have either: (i) a minimum net worth (excluding home, home furnishings and
automobiles) of $200,000; or (ii) a minimum annual gross income of $50,000 and a
minimum net worth (exclusive of home, home furnishings and automobiles) of
$50,000.
In addition, suitability standards may be higher or different in certain
states. For example, if the investor is a resident of Ohio or Pennsylvania, the
investment also may not exceed 10% of the investor's liquid net worth.
In the case of sales to fiduciary accounts, these minimum standards must be
met by the beneficiary, the fiduciary account, or by the donor or grantor who
directly or indirectly supplies the funds to purchase the Shares if the donor or
the grantor is the fiduciary.
In the case of gifts to minors, the suitability standards must be met by the
custodian account or by the donor. By acceptance of the confirmation of the
purchase or delivery of the Shares, an investor represents that he satisfies any
applicable suitability standards.
Investors must meet all of the applicable requirements set forth in the
Subscription Agreement relating to the Shares (the "Subscription Agreement"). A
specimen copy of the Subscription Agreement, including instructions for
completing the Subscription Agreement, is contained in Appendix C to this
Prospectus. Under the laws of certain states, an investor may transfer his or
her Shares only to Persons who meet similar standards, and the Company may
require certain assurances that these standards are met. Investors should
carefully read the requirements in connection with resales of Shares set forth
in the Subscription Agreement and under "Description of Securities--Restrictions
on Ownership and Transfer." The Subscription Agreement contains representations
and warranties which are explained under "Plan of Distribution--Representations
and Warranties in the Subscription Agreement."
In purchasing Shares, custodians or trustees of employee pension benefit
plans or IRAs may be subject to the fiduciary duties imposed by the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA
iii
<PAGE>
and related provisions of the Code. In addition, prior to purchasing Shares, the
trustee or custodian of an employee pension benefit plan or an IRA should
determine that such an investment would be permissible under the governing
instruments of such plan or account and under applicable law. See "Federal
Income Tax Considerations--Taxation of Stockholders--Taxation of Tax-Exempt
Stockholders"; and "ERISA Considerations."
The agreements between the Dealer Manager and each of the Soliciting Dealers
requires each Soliciting Dealer to make diligent inquiries as required by law of
all prospective purchasers in order to ascertain whether a purchase of Shares is
suitable and appropriate based upon information provided by the prospective
purchaser regarding his financial situation and investment objectives and to
transmit promptly to the Company the fully completed subscription documentation
and any other supporting documentation reasonably required by the Company. By
executing the Subscription Agreement, by tendering payment for Shares and by
accepting confirmation of purchase or delivery of the Shares, an investor
represents that it, he or she satisfies any applicable suitability standards.
In addition, each Soliciting Dealer will, by completing the Subscription
Agreement, acknowledge its determination that the Shares are a suitable and
appropriate investment for the subscriber, and will be required to represent and
warrant his or her compliance with applicable laws requiring the determination
of the suitability and appropriateness of the Shares as an investment for the
subscriber. The Company will, in addition to the foregoing, coordinate the
processes and procedures utilized by the Dealer Manager and Soliciting Dealers
and, where necessary, implement such additional reviews and procedures deemed
necessary to assure the adherence by registered representatives to the
suitability standards set forth herein.
See "Plan of Distribution--Volume Discounts" and "--Other Discounts" for
information regarding discounts available to certain investors.
See "How to Subscribe" and the Subscription Agreement contained in Appendix
C to this Prospectus for instructions regarding how to subscribe for Shares.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WHO MAY INVEST............................................................ iii
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................. 1
Inland Affiliated Companies............................................. 1
The Types of Real Estate That the Company Intends to Acquire and
Manage................................................................ 1
Summary Risk Factors.................................................... 2
Investment Risks...................................................... 2
Company Risks......................................................... 4
Risks of Real Estate Ownership........................................ 4
Tax Risks............................................................. 5
Conflicts of Interest................................................... 5
Compensation to be Paid to the Advisor and its Affiliates............... 6
Offering Stage........................................................ 6
Acquisition Stage..................................................... 6
Operational Stage..................................................... 6
Liquidation Stage..................................................... 7
The Company's Primary Business Objective and Strategies................. 7
Acquisitions.......................................................... 7
Operations............................................................ 7
Shares Outstanding Before the Offering.................................. 8
Shares To Be Outstanding Upon Completion of the Offering................ 8
Terms of the Offering................................................... 8
Investment Objectives And Policies...................................... 9
Structure and Formation of the Company.................................. 11
Organizational Chart.................................................... 12
Formation Transactions.................................................. 14
Benefits of the Formation Transactions to Affiliates of the Company..... 15
Real Property Investments............................................... 17
Prior Offerings Summary................................................. 18
Distribution Reinvestment and Share Repurchase Programs................. 18
Annual Valuations....................................................... 18
RISK FACTORS.............................................................. 19
1. Investment Risks..................................................... 19
Share Price/Limited Liquidity......................................... 19
Investors Do Not Know What Properties May Be Acquired in the Future... 19
Insufficient Offering Proceeds and Possible Resulting Lack of
Diversification...................................................... 20
Competition with Others for the Acquisition of Properties............. 20
Competition with Other Real Estate Investment Programs Sponsored by
TIGI Affiliated Companies............................................ 20
Mortgage Indebtedness and Other Borrowings May Increase the Company's
Business Risks....................................................... 21
Working Capital Reserves May Be Insufficient.......................... 22
Limitation on Types of Properties Which the Company Intends to Acquire
and the Area in Which the Company May Acquire Retail Centers......... 22
Limited Experience of Management in Acquiring and Managing Properties
Within the Primary Geographical Area of Investment................... 22
Limitation on Borrowing Could Cause Adverse Business Consequences..... 23
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Limits on Share Accumulation and Provisions in the Organizational
Documents of the Company and the Operating Partnership and the
Maryland General Corporation Law May Have an Anti-Takeover Effect and
Inhibit a Change in Control of the Company........................... 23
Ownership Limits and Restrictions on Transferability and Ownership
in the Articles.................................................... 23
Certain Provisions in the Articles, Bylaws, Operating Partnership
Agreement, and Maryland General Corporation Law.................... 23
The Articles.................................................. 23
The Operating Partnership Agreement........................... 24
MGCL--Business Combinations................................... 24
MGCL--Control Shares.......................................... 24
Investment Return May Be Affected by Availability of Properties to Be
Acquired within One Year of the Termination of the Offering.......... 25
Distributions to Stockholders Affected by Many Factors................ 25
Possible Adverse Effects on Share Price Arising from Shares Eligible
for Future Sale...................................................... 26
Fluctuations in Market Interest Rates or Equity Markets Affect Raising
Capital.............................................................. 26
Stockholders Have Limited Control over Changes in Policies............ 27
Objectives of Joint Venture Partners May Conflict with the Company's
Objectives........................................................... 27
Seller Financing by Company May Delay Liquidation or Reinvestment..... 27
Possible Loss on Dissolution and Termination.......................... 27
2. Company Risks........................................................ 27
Dependence on the Directors and Advisor............................... 27
Conflicts of Interest Between the Company and Its Affiliates and
Payments to Affiliates............................................... 28
Prices Paid for Properties Acquired from Affiliates May Exceed Prices
That Would Have Been Paid by Non-Affiliates.......................... 29
All Stockholders Bound by Vote of Majority............................ 29
Company's and Stockholders' Rights Against the Directors and the
Advisor are Limited.................................................. 29
Dilution.............................................................. 30
Risks of Investments in Securities Related to Real Estate............. 30
Year 2000 Risks....................................................... 31
3. Risks of Real Estate Ownership....................................... 31
General............................................................... 31
The Initial Properties Will Face Competition and Changing Economic
Conditions........................................................... 32
Dependence on Geographical Region and Retail Industry................. 32
Rising Expenses Could Reduce Cash Flows and Funds Available For Future
Acquisitions......................................................... 32
Inability of Tenants to Meet Their Obligations or Their Election Not
to Extend a Lease Upon its Expiration................................ 32
Reliance on Certain Tenants........................................... 32
Potential Additional Costs in Connection with Acquiring Single-User
Retail Properties.................................................... 33
Competition for Tenants and Customers................................. 33
Restrictions on Re-leasing Space...................................... 33
Sale of Properties.................................................... 33
Uninsured Losses; Unavailability of Insurance......................... 34
Real Estate Related Taxes............................................. 34
Effect of Bankruptcy of Tenants....................................... 34
Environmental Laws and Certain Other Governmental Laws and
Regulations.......................................................... 35
Costs Associated with Complying with the Americans with Disabilities
Act.................................................................. 35
Risk of Recharacterization of Sale and Leaseback Transactions......... 36
Potential Additional Costs in Connection with Acquiring Newly
Constructed Properties............................................... 36
Risks Associated with Investments in Unimproved Real Property......... 36
Construction and Development Risks.................................... 36
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company May Acquire Properties with Lock-Out Provisions........... 37
4. Tax Risks............................................................ 37
General............................................................... 37
Risks Regarding REIT Qualification and Consequences of the Failure to
so Qualify........................................................... 37
Risk of Failing to Qualify as a REIT under the Code................. 37
Adverse Effects of REIT Minimum Distribution Requirements........... 38
Limitations on Share Ownership...................................... 39
Limitations on Opinion of Counsel................................... 39
Risks Regarding Partnership Qualification and Consequences of Failure
to Qualify as a Partnership.......................................... 40
Miscellaneous Tax Risks............................................... 40
Other Tax Liabilities............................................... 40
Tax Liability on Reinvested Distributions........................... 40
5. ERISA Risks.......................................................... 40
Suitability of the Company's Investments for Qualified Pension and
Profit-Sharing Trusts................................................ 40
Annual Statement of Value is an Estimate.............................. 41
CONFLICTS OF INTEREST..................................................... 41
1. Competition for the Time and Service of the Advisor and Its
Affiliates............................................................ 41
2. Process for Resolving Conflicting Investment Opportunities.......... 42
3. Acquisition from Affiliates......................................... 43
4. The Company may Purchase Properties from Persons with whom
Affiliates of the Advisor have Prior Business Relationships........... 43
5. Property Management Services are being Rendered by an Entity owned
Principally by Individuals Who are Affiliates of Inland............... 43
6. Receipt of Commissions, Fees and Other Compensation by the Advisor
and Its Affiliates.................................................... 43
7. Non-Arm's-Length Agreements......................................... 44
8. The Company and the Advisor Have the Same Legal Counsel............. 44
9. Inland Securities Corporation Is Participating as Dealer Manager in
the Sale of the Shares................................................ 44
10. The Advisor may have Conflicting Fiduciary Obligations in the Event
the Company Acquires Properties with Affiliates....................... 44
11. The Business of the Advisor and the Management Agent May be Acquired
by the Company Without Further Action by the Company's Stockholders... 45
COMPENSATION TABLE........................................................ 46
Nonsubordinated Payments................................................ 46
For and in Connection With the Offering............................... 46
Acquisition Stage..................................................... 48
Operational Stage..................................................... 49
Liquidation Stage..................................................... 50
Subordinated Payments................................................... 51
Operational Stage..................................................... 51
Liquidation Stage..................................................... 52
Compensation to Officers and Directors.................................. 52
ESTIMATED USE OF PROCEEDS................................................. 55
PRIOR PERFORMANCE OF THE COMPANY'S AFFILIATES............................. 58
Prior Investment Programs............................................... 58
Summary Information..................................................... 58
Publicly Registered Real Estate Investment Trust........................ 60
Publicly Registered Limited Partnerships................................ 60
Private Partnerships.................................................... 63
Private Placement Real Estate Equity Program............................ 64
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Private Placement Mortgage and Note Programs............................ 64
Loan Modifications and Work-Outs........................................ 66
Effects of Property Exchanges on Investors.............................. 69
Additional Information.................................................. 69
Summary Tables.......................................................... 71
MANAGEMENT................................................................ 72
Inland Affiliated Companies............................................. 72
General Management of the Company....................................... 75
Directors and Executive Officers of the Company......................... 77
Committees of the Board of Directors.................................... 79
Compensation of Directors and Officers.................................. 80
Independent Director Stock Option Plan.................................. 80
The Advisor............................................................. 81
The Advisory Agreement.................................................. 82
The Management Agent and the Management Agreement....................... 85
Inland Securities Corporation........................................... 87
Other Services.......................................................... 89
CERTAIN RESPONSIBILITIES OF DIRECTORS AND THE ADVISOR; INDEMNIFICATION.... 90
General................................................................. 90
Limitation of Liability and Indemnification............................. 90
PRINCIPAL STOCKHOLDERS.................................................... 92
STRUCTURE AND FORMATION OF THE COMPANY.................................... 92
Structure of the Company................................................ 92
Ownership Chart......................................................... 93
Formation Transactions.................................................. 94
Benefits of the UPREIT Structure........................................ 96
Advantages and Disadvantages of the Formation Transactions to
Unaffiliated Stockholders............................................. 96
Benefits of the Formation Transactions and the Offering to Inland and
its Affiliates........................................................ 96
SELECTED FINANCIAL DATA................................................... 97
INVESTMENT OBJECTIVES AND POLICIES........................................ 98
1. General............................................................. 98
2. Distributions....................................................... 98
3. Types of Investments................................................ 98
4. Acquisition Standards............................................... 100
5. Description of Leases............................................... 101
6. Property Acquisition................................................ 101
7. Borrowing........................................................... 102
8. Sale or Disposition of Properties................................... 103
9. Change in Investment Objectives and Policies........................ 103
10. Certain Investment Limitations...................................... 103
11. Appraisals.......................................................... 104
12. Return of Uninvested Proceeds....................................... 104
13. Additional Offerings and Exchange Listing........................... 104
14. Joint Ventures...................................................... 104
15. Construction and Development Activities............................. 105
16. Other Policies...................................................... 105
REAL PROPERTY INVESTMENTS................................................. 106
General................................................................. 106
Insurance Coverage on Properties........................................ 107
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Initial Properties...................................................... 107
Tenants................................................................. 110
Tenant Lease Expirations................................................ 111
Additional Information Regarding the Initial Properties................. 111
Merchants Square Shopping Center, Zephyrhills, Florida................ 111
Lake Olympia Square, Ocoee, Florida................................... 115
Lake Walden Square, Plant City, Florida............................... 120
CAPITALIZATION............................................................ 124
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION OF THE
COMPANY................................................................. 124
Liquidity............................................................... 125
Results of Operations................................................... 125
Initial Properties...................................................... 125
Capital Resources....................................................... 126
Impact of Accounting Principles......................................... 127
Inflation............................................................... 127
Year 2000 Issues........................................................ 127
DESCRIPTION OF SECURITIES................................................. 128
Authorized Stock........................................................ 129
Common Stock............................................................ 129
Preferred Stock......................................................... 130
Soliciting Dealer Warrants.............................................. 130
Issuance of Additional Securities and Debt Instruments.................. 131
Restrictions on Issuance of Certain Securities.......................... 131
Restrictions on Ownership and Transfer.................................. 132
Certain Provisions of Maryland Law and of the Articles of Incorporation
and Bylaws............................................................ 134
Business Combinations................................................. 134
Control Share Acquisition............................................. 135
Meetings of Stockholders.............................................. 135
Certain Responsibilities and Indemnification.......................... 135
SHARES ELIGIBLE FOR FUTURE SALE........................................... 135
Shares to be Outstanding or Issuable upon Exercise or Conversion of
Other Outstanding Securities.......................................... 135
Securities Act Restrictions............................................. 136
Independent Director Stock Option Plan.................................. 136
Soliciting Dealer Warrants.............................................. 137
Effect of Availability of Shares on Market Price of Shares.............. 137
Conversion and Redemption Rights........................................ 137
Registration Rights..................................................... 138
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS................................... 138
Certain Articles of Incorporation and By-law Provisions................. 138
Stockholders' Meetings.................................................. 138
Board of Directors...................................................... 139
Stockholder Voting Rights............................................... 139
Stockholder Lists; Inspection of Books and Records...................... 140
Amendment of the Organizational Documents............................... 140
Dissolution or Termination of the Company............................... 140
Advance Notice of Director Nominations and New Business................. 141
Restrictions on Certain Conversion Transactions and Roll-Ups............ 141
Limitation on Total Operating Expenses.................................. 143
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Transactions with Affiliates............................................ 143
Restrictions on Borrowing............................................... 144
Restrictions on Investments............................................. 144
OPERATING PARTNERSHIP AGREEMENT........................................... 147
Description of Partnership Units........................................ 147
Management of the Operating Partnership................................. 148
Indemnification......................................................... 149
Transferability of Interests............................................ 149
Extraordinary Transactions.............................................. 149
Issuance of Additional Units............................................ 150
Capital Contributions................................................... 150
Distributions........................................................... 150
Operations.............................................................. 151
Limited Partner Conversion Rights....................................... 151
Limited Partner Redemption Rights....................................... 152
Tax Matters............................................................. 153
Duties and Conflicts.................................................... 153
Term.................................................................... 153
Lock Out Policy......................................................... 153
FEDERAL INCOME TAX CONSIDERATIONS......................................... 154
General................................................................. 154
Opinion of Tax Counsel.................................................. 155
Taxation of the Company................................................. 155
Overview.............................................................. 155
REIT Qualification Tests.............................................. 156
Ownership of a Partnership Interest................................... 157
Ownership of a Qualified REIT Subsidiary.............................. 157
Share Ownership Tests................................................. 158
Asset Tests........................................................... 158
75% Asset Test...................................................... 158
25% Asset Test...................................................... 159
Gross Income Tests.................................................... 159
75% Gross Income Test............................................... 159
95% Gross Income Test............................................... 161
Annual Distribution Requirements...................................... 161
Failure to Qualify.................................................... 162
Prohibited Transactions............................................... 162
Tax Aspects of the Company's Investments in Partnerships.............. 163
Partnership Classification............................................ 163
Partnership Anti-Abuse Regulations.................................... 164
Income Taxation of the Partnerships and Their Partners.................. 165
Contributions of Property............................................. 165
Determination of Initial Basis and Adjusted Basis in Units ........... 165
Partners, not Partnership, Subject to Tax............................. 165
Partnership Allocations............................................... 166
Tax Allocations with respect to the Properties........................ 166
Depreciation Deductions Available to the Operating Partnership........ 167
Other Deductible Expenses of the Operating Partnership................ 167
Tax Consequences of Distributions..................................... 168
Tax Consequences of Dispositions of Units Generally................... 168
</TABLE>
x
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Consequences of Exercise of Conversion Right...................... 169
Tax Consequences of Exercise of Redemption Right...................... 169
Tax Consequences of Termination of the Operating Partnership.......... 170
Tax Consequences of the Liquidation of the Operating Partnership...... 170
Taxation Of Stockholders................................................ 170
Taxation of Taxable Domestic Stockholders............................. 170
Capital Gains and Losses.............................................. 171
Termination of REIT Status............................................ 172
Backup Withholding.................................................... 172
Taxation of Tax-Exempt Stockholders................................... 172
Taxation of Foreign Stockholders...................................... 173
Other Tax Considerations................................................ 175
Company's Purchase of Properties with Shares.......................... 175
Distribution Reinvestment Program..................................... 175
State and Local Taxes................................................. 175
Legislative Developments.............................................. 175
ERISA CONSIDERATIONS...................................................... 177
PLAN OF DISTRIBUTION...................................................... 178
General................................................................. 178
Escrow Conditions....................................................... 179
Advisor's Company Contribution and Advisor's Partnership Contribution... 179
Subscription Process.................................................... 180
Representations and Warranties in the Subscription Agreement............ 180
Determination of Investor Suitability................................... 181
Compensation Payable by the Company for the Sale of the Shares.......... 181
Volume Discounts........................................................ 182
Other Discounts......................................................... 184
Transfer of Shares...................................................... 184
Indemnification......................................................... 185
HOW TO SUBSCRIBE.......................................................... 185
SALES LITERATURE.......................................................... 186
DISTRIBUTION REINVESTMENT AND SHARE REPURCHASE PROGRAMS................... 186
Distribution Reinvestment Program....................................... 186
Share Repurchase Program................................................ 187
REPORTS TO STOCKHOLDERS................................................... 188
LEGAL MATTERS............................................................. 189
EXPERTS................................................................... 190
ADDITIONAL INFORMATION.................................................... 190
GLOSSARY.................................................................. 191
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS.................... F-i
APPENDICES:
PRIOR PERFORMANCE TABLES.................................................. A-1
DISTRIBUTION REINVESTMENT PROGRAM......................................... B-1
SUBSCRIPTION AGREEMENT.................................................... C-1
</TABLE>
xi
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT IS
INTENDED FOR QUICK REFERENCE ONLY. BECAUSE THIS IS A SUMMARY, IT DOES NOT
CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS
ENTIRE PROSPECTUS AND ITS APPENDICES CAREFULLY BEFORE YOU DECIDE TO INVEST IN
THE SHARES. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE
"COMPANY" IN THIS PROSPECTUS INCLUDE INLAND RETAIL REAL ESTATE TRUST, INC. AND
THOSE ENTITIES OWNED OR CONTROLLED DIRECTLY OR INDIRECTLY BY THE COMPANY,
INCLUDING INLAND RETAIL REAL ESTATE LIMITED PARTNERSHIP (THE "OPERATING
PARTNERSHIP"), AND ANY ENTITIES OWNED OR CONTROLLED BY THE OPERATING
PARTNERSHIP. CAPITALIZED TERMS USED IN THIS PROSPECTUS AND NOT FULLY DEFINED IN
THE TEXT ARE DEFINED IN THE "GLOSSARY" BEGINNING ON PAGE 191.
<TABLE>
<S> <C>
The Company............................. The Company is a Maryland corporation formed in September 1998, which
intends to operate as a real estate investment trust (commonly known
as a "REIT") for federal and state income tax purposes. See generally
"Federal Income Tax Considerations."
The Company's principal executive offices are located at 2901
Butterfield Road, Oak Brook, Illinois 60523 and its telephone number
is (630) 218-8000.
Inland Affiliated
Companies............................. The Inland Group, Inc. ("Inland" or "TIGI"), a Delaware corporation,
together with its subsidiaries and its and their Affiliates
(collectively, the "Inland Affiliated Companies," or "TIGI Affiliated
Companies" or the "Inland Organization"), is a fully-integrated real
estate company providing property management, leasing, marketing,
acquisition, disposition, development, redevelopment, syndication,
renovation, construction, finance and other related services. Inland
Real Estate Investment Corporation, a Delaware corporation ("IREIC"),
a subsidiary of Inland, and one of the Inland Affiliated Companies, is
the Sponsor and organizer of the Company. As of June 30, 1998, IREIC
had an audited net worth of approximately $95.8 million, much of which
is illiquid. Inland Retail Real Estate Advisory Services, Inc., an
Illinois corporation (the "Advisor"), is a wholly owned subsidiary of
IREIC. Inland Securities Corporation ("ISC"), another of the Inland
Affiliated Companies, is the Dealer Manager of this offering, except
for Shares sold directly by the Company. Inland's, IREIC's, the
Advisor's and ISC's principal executive offices are located at 2901
Butterfield Road, Oak Brook, Illinois 60523 and their telephone number
is (630) 218-8000. See "--Organizational Chart" in this Prospectus
Summary and "Management."
The Types of Real Estate That the
Company Intends to Acquire and
Manage................................ The Company intends, through entities owned or controlled directly or
indirectly by the Company, to acquire and manage real estate primarily
(i) improved for use as retail establishments, principally
multi-tenant shopping centers, with gross leaseable area ("GLA")
ranging from 10,000 to 300,000 square feet, but also including
single-user retail facilities; or (ii) improved with other commercial
facilities which provide goods or services (all of the foregoing,
collectively "Retail Centers" or individually a "Retail Center").
The Retail Centers will be located mainly in the states east of the
Mississippi River (the Company's "Primary Geographical Area of
Investment"), but initially will be focused in the southeastern
states, primarily Florida, Georgia, North Carolina and South Carolina.
The Company may also, through entities owned or controlled directly or
indirectly by the Company, acquire, among other real estate,
single-user commercial properties located anywhere throughout the
United States if they are leased on a basis pursuant to which a
creditworthy tenant is responsible for the base rent and all costs and
expenses
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
in connection with and related to property taxes, insurance, repairs
and maintenance applicable to the leased space (a "Triple-Net Lease
Basis"), including such properties acquired in sale and leaseback
transactions ("Triple-Net Single-User Retail Properties Outside the
Primary Geographical Area of Investment"). The Retail Centers in the
Primary Geographical Area of Investment and the Triple-Net Single-User
Retail Properties Outside the Primary Geographical Area of Investment
are collectively referred to as the Company's "Primary Property
Investments."
Each real property and improvements thereon acquired, or considered or
proposed to be acquired, by the Company, directly or indirectly, is
referred to as a "Property" and all of such properties are
collectively referred to as the "Properties."
See "Real Property Investments" for more detailed information on the
diversified types of Properties that the Company intends to acquire
and manage and for information regarding the three Properties that the
Company has rights to acquire and intends to acquire with the net
proceeds from the offering, provided that the net proceeds are
sufficient to make such acquisitions. Those three Properties are
collectively referred to as the "Initial Properties." The Merchants
Square Shopping Center ("Merchants Square"), one of the Initial
Properties, will be the first Property purchased if the Minimum
Offering is sold.
Summary Risk Factors.................... Investment in shares of the Company's common stock (the "Shares")
involves various risks which are described in the "Risk Factors"
section of the Prospectus, which begins on page 19. The following is a
summary of the risks which the Company believes are the most relevant
to an investment in the Shares.
INVESTMENT RISKS:
- There is currently no public trading market for the Shares, and,
therefore, the Shares constitute an illiquid investment and are
suitable only as a long-term investment.
- The offering price of the Shares was determined by the Company's
Board of Directors (the "Board") and may not be indicative of the
price at which the Shares may trade if they were listed on an
exchange or traded in over-the-counter markets, nor of the proceeds
that a Stockholder may receive if the Company were liquidated or
dissolved.
- There is no assurance that the Shares will ever be listed on a
national stock exchange or included for quotation on a national market
system. The failure to have the Shares so listed or included could
have an adverse affect on the value of the Shares and the likelihood
of takeover offers, and will affect the liquidity of the Shares.
- Except for the Initial Properties, the Company has not identified
any additional Properties for acquisition. Therefore, investors must
rely on the Company to locate and acquire suitable Properties and
will be unable to evaluate the manner in which the net proceeds of
the offering are to be invested or the economic merit of particular
Properties prior to their acquisition. Furthermore, there is no
assurance that the net proceeds of the offering will be sufficient
to acquire any of the Initial Properties or any other Properties.
- If only the Minimum Offering is sold, the Company will acquire only
one Property, and will not have any diversification of its
investments. The lack of diversification will increase the potential
adverse effect on the Company from that Property's unperforming
tenants, if any, and from adverse economic conditions affecting the
area in which that Property will be located.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
- Adverse economic conditions affecting the Company's Primary
Geographical Area of Investment could affect the Company's ability to
acquire, lease and dispose of Retail Centers in that area, as well
as the ability of tenants to make lease payments, and, hence, could
affect the Company's results of operations and financial condition,
including the Company's ability to make cash distributions to
Stockholders arising from their interest in the Company
("Distributions").
- There are limitations on ownership of Shares and certain other
provisions in the Articles of Incorporation of the Company, as amended
(the "Articles"), the Bylaws of the Company, as amended (the
"Bylaws"), and the Operating Partnership Agreement of the Operating
Partnership, as well as certain provisions in the Maryland General
Corporation Law (the "MGCL"), which may discourage, impede or
prevent certain mergers, tender offers or proxy contests, even if
such an event would be favorable to the interests of Stockholders.
In addition, certain of such limitations and provisions may (i)
compel a Stockholder or its transferee, as of the date any of these
limitations is violated, to involuntarily dispose of Shares in
excess of such limitations and, as a result, to forfeit as of such
date any voting and dividend rights and the right to realize any
further appreciation in the value of the Shares causing the
violation; or (ii) discourage a person from acquiring Shares.
- The Company will compete for the acquisition of Properties with many
other entities engaged in real estate investment activities,
including existing and future real estate investment programs
sponsored by the Inland Affiliated Companies, which may result in
the Company being unable to acquire Properties that it desires. This
may also have an adverse impact on the Company's business.
- The Company intends to purchase certain Properties (including all of
the Initial Properties) directly from Affiliates of the Advisor, who
purchased those Properties from unaffiliated third parties on behalf
of the Company. Even though the Company will be paying such
Affiliates' acquisition costs of those Properties, such acquisitions
may be on terms less favorable to the Company than if the Company
conducted arm's-length transactions directly with an unaffiliated
seller. Accordingly, such acquisitions may result in concessions as
to price or otherwise, including payment of financing costs to
Affiliates or others, which may be less advantageous to the Company
than a direct arm's-length transaction.
- Real estate financing risks, including the potential inability to
refinance mortgage indebtedness upon its maturity, or defaults on
secured indebtedness, may result in foreclosure on the Company's
assets, which could result in the Company losing its investment in
the Properties securing such indebtedness.
- The Company may borrow funds to maintain operations of one or more
of its Properties or to enable it to maintain its REIT status, thus
increasing the Company's indebtedness and the risks associated
therewith.
- Although the Company intends to establish a working capital reserve
with 1% of the Gross Offering Proceeds from this offering (which is
defined to mean generally the total proceeds from the sale of the
50,000,000 Shares in the best efforts offering during the public
offering period before deducting the expenses relating to the
organization of the Company and associated with this offering (the
"Organization and Offering Expenses")), which it believes should be
adequate, that amount may be insufficient to meet the cash needs of
the Company and the Company may have to obtain financing
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
from either affiliated or unaffiliated sources. Additional financing
would increase the Company's indebtedness and the risks associated
therewith.
- The Articles include a provision limiting the amount of aggregate
borrowing in relation to the Company's assets that the Company may
incur. Such limitation could have adverse consequences such as (i)
freezing the Company's ability to purchase additional Properties,
(ii) causing the Company to lose its REIT status if borrowing was
necessary to pay the required minimum amount of cash Distributions
to Stockholders to qualify as a REIT, (iii) causing operational
problems if there are cash flow shortfalls for working capital
purposes, or (iv) resulting in the loss of a Property if, for
example, financing was necessary to cure a default on a mortgage. As
Stockholder approval is required to change this limitation, there
will be a delay before such approval can be obtained, if it can be
obtained at all. It is possible that even if the approval is
obtained, it may not be obtained in sufficient time to avoid the
adverse consequences of not having the funding when it is needed.
- The Company may authorize the issuance of Shares or other securities
(E.G., Preferred Stock) in addition to Shares issued pursuant to this
Offering, thereby diluting the interest of existing Stockholders,
including investors in this Offering, none of whom have preemptive
rights. Shares, together with Preferred Stock, are hereinafter
collectively referred to as "Equity Stock." Depending upon the
preferences, powers and rights of the Preferred Stock, the issuance
of Preferred Stock could have the effect of delaying or preventing a
change of control of the Company that might involve a premium price
for holders of Shares or otherwise be in their best interest.
COMPANY RISKS:
- The Company's ability to achieve its goals will depend, to a large
extent, on the quality of management provided by Inland Southeast
Property Management Corp. (the "Management Agent"), which will
manage the Company's Properties, the Advisor, which will manage the
Company's day to day operations, and Affiliates of the Advisor.
During the 10-year period ending September 30, 1998, Affiliates of
the Advisor have sponsored one REIT, six public and one private real
estate equity programs, and nine private placement note and mortgage
programs. Certain of these programs have experienced setbacks, such
as tenant defaults or move-outs, and defaults by mortgagees under
mortgages. These negative events, which vary by program, have had
the effect of reducing the benefits which investors in those
programs have received. Some tax-shelter private partnerships
programs that invested primarily in apartments had to work out
reduced or restructured debt with unaffiliated lenders resulting
from the adverse effects of 1986 tax law changes and the weakening
of apartment markets in the late 1980s, and tax-deferred property
exchanges were utilized to mitigate those adverse effects. See
"Prior Performance of the Company's Affiliates" and Appendix
A--"Prior Performance Tables."
RISKS OF REAL ESTATE OWNERSHIP:
- All equity real estate investments are subject to some degree of
general economic risks, including lease defaults, which could
adversely affect the Company's results of operations and financial
condition, including the Company's ability to make Distributions.
- Adverse trends for the types of Properties included in the Company's
Primary Property Investments or adverse economic developments in
general or within the Primary Geographical Area of Investment in
particular
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
could have an adverse effect on the Company's results of operations
and financial condition, including the Company's ability to make
Distributions.
TAX RISKS:
- The Company's qualification as a REIT depends upon its ability to
meet numerous requirements through actual operations. There can be no
assurance that the Company will be able to satisfy these
requirements. If the Company fails to qualify as a REIT, its
Distributions would not be deductible to the Company. This would
increase the Company's tax liability and substantially reduce the
funds available to make Distributions to Stockholders. In addition,
the actions and transactions the Company will undertake to maintain
its REIT status may not produce the highest economic profit.
- Although Wildman, Harrold, Allen & Dixon ("Counsel") has rendered
its opinion (as described in this Prospectus) as to certain federal
income tax matters, such opinion is based on various assumptions and
factual representations made by the Company and by the Advisor to
Counsel. See "Risk Factors--Tax Risks--Risks Regarding REIT
Qualifications and Consequences of the Failure to so
Qualify--Limitations on Opinion of Counsel," "Federal Income Tax
Considerations" and "ERISA Considerations." Counsel will not review
compliance with the requirements for qualification as a REIT on a
continuing basis after the initial effective date of the
registration statement (of which this Prospectus is a part) filed
with the United States Securities and Exchange Commission (the
"Commission" or "SEC") for this offering (the "Registration
Statement"). An opinion of Counsel represents its legal judgment
based on the law in effect as of the date of this Prospectus, is not
binding on the Internal Revenue Service (the "Service") and could be
subject to modification or withdrawal based on future legislative,
judicial or administrative changes to the federal income tax laws
(or the interpretation thereof), any of which could be applied
retroactively.
The failure to manage the impact of the foregoing risks effectively
may impair the Company's ability to meet its investment objectives and
may reduce or entirely eliminate the benefits to the Stockholders from
their investment in the Company. See "Risk Factors," "Prior
Performance of the Company's Affiliates," and Appendix A--"Prior
Performance Tables."
Conflicts of Interest................... - There are conflicts of interest between the Company and its
Affiliates. These include: (i) competition for the time and services
of personnel of the Advisor and its Affiliates; (ii) receipt by the
Advisor and its Affiliates of substantial compensation from the
Company for their various services which may not be on market terms
and is payable, in most cases, whether or not Stockholders receive
Distributions; (iii) possible conflicting investment opportunities;
(iv) acquisition of Properties from Affiliates; and (v) the
possibility that the Company may do business with entities that have
pre-existing relationships with the Advisor or its Affiliates which
may result in a conflict between the ongoing business relationship
between the Advisor or its Affiliates and the Company's business.
Such conflicts of interest may also arise in connection with the
potential sale or refinancing of Properties or the enforcement of
certain agreements. See "Conflicts of Interest," commencing on page
41, for a fuller description of these and other conflicts of
interest.
- The Management Agent is owned principally by individuals who are
Affiliates of Inland. The Company has the option to cause the business
conducted by the Advisor and/or the Management Agent to be acquired
by or consolidated into the Company at any time after three years
from the date of this Prospectus for Shares in an amount determined
in accordance with a
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
prescribed formula. See paragraph 11 under "Conflicts of Interest"
and "Management--The Advisory Agreement."
Compensation to be Paid to the Advisor
and its
Affiliates............................ The Advisor and its Affiliates will be paid substantial amounts for
managing the Company's business. The most significant items of
compensation are:
OFFERING STAGE: Except for certain sales, the Company will generally
pay to the Dealer Manager (i) cash selling commissions of 7%, (ii) a
contribution of 2% in lieu of reimbursement of specific expenses
associated with marketing (the "Marketing Contribution"), and (iii) an
allowance of up to 0.5% for BONA FIDE due diligence expenses (the "Due
Diligence Expense Allowance"), of the Gross Offering Proceeds. The
cash selling commissions, Marketing Contribution and Due Diligence
Expense Allowance may be retained by the Dealer Manager or reallowed
to Soliciting Dealers. Generally, no portion of the Marketing
Contribution will be reallowed to Soliciting Dealers unless they reach
prescribed minimum annual sales volumes.
Except for certain sales, and in certain cases, the Company will offer
to sell to the Dealer Manager one Soliciting Dealer Warrant for each
25 Shares sold during the Offering, some or all of which that are
issued may be retained or reallowed to the Soliciting Dealers who sold
such Shares. See "Description of Securities--Soliciting Dealer
Warrants."
ACQUISITION STAGE: The Advisor and its Affiliates will be reimbursed
by the Company for actual out-of-pocket Acquisition Expenses which are
estimated to be equal to 0.5% of the aggregate of the (i) Gross
Offering Proceeds from the sale of 54,000,000 Shares (including
4,000,000 Shares under the DRP), and (ii) gross proceeds from the
issuance and exercise of the Soliciting Dealer Warrants.
OPERATIONAL STAGE: An annual "Advisor Asset Management Fee" of not
more than 1% of the average of the aggregate book value of the
Company's assets invested, directly or indirectly, in Properties or
loans secured by real estate, before reserves for depreciation or
other non-cash reserves (the Company's "Average Invested Assets") will
be payable quarterly to the Advisor. Payment of this fee is
subordinated on an annual basis to the payment of Distributions to
Stockholders in an amount equal to a non-cumulative, non-compounded
return equal to 7% per annum on Invested Capital (the "Current
Return"). "Invested Capital" is the net amount that a Stockholder has
invested, being the amount paid for the Shares less the Distributions
received on those Shares from the sale or financing of the Company's
Properties. Furthermore, this fee is subject to reimbursement to the
Company to the extent in any calendar year it and all other operating
expenses of the Company paid in that year exceed the greater of 2% of
the Company's Average Invested Assets, or 25% of the Company's net
income, for that year.
The Management Agent will receive a fee for management of the
Company's Properties (the "Property Management Fee") equal to not more
than 90% of the fee which would be payable to an unrelated party
providing such services, which fee shall initially be 4.5% of the
gross revenues of each of the Company's Properties, payable monthly.
Inland Mortgage Servicing Corporation ("IMSC"), one of the TIGI
Affiliated Companies, will receive a fee for servicing the Company's
mortgage loans. Such fee will be equal to no more than .08% of the
principal amount of the loans serviced, up to the first $100 million
in aggregate loan balances, and a lesser percentage on a sliding scale
basis thereafter, which will be prorated on an annual basis and, be
payable monthly.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
LIQUIDATION STAGE: A fee will be payable to the Advisor or its
Affiliates when a Property is sold (the "Property Disposition Fee"),
equal to the lesser of: (i) 3% of the sale price of a Property; or
(ii) 50% of the commission customarily paid to third parties. In
addition, after receipt by the Stockholders of a cumulative,
non-compounded 7% per annum return on Invested Capital (the
"Cumulative Return") and a return of their Invested Capital, an
"Incentive Advisory Fee" will be payable equal to 15% of the net
proceeds from the sale of a Property.
The Advisor and its Affiliates may receive a number of other
incidental fees for services or expense reimbursement during the
operational and liquidation stages of the Company. For an explanation
of such other fees and expense reimbursements and a fuller discussion
of the above fees, see generally, "Compensation Table,"
"Management--Other Services" and "Plan of Distribution--Compensation
Payable by the Company for the Sale of the Shares."
The Company's Primary Business Objective
and Strategies........................ The Company's primary business objective is to enhance the performance
and value of its Properties through management strategies designed to
address the needs of an evolving retail marketplace. Key elements of
the Company's strategy are:
ACQUISITIONS:
- Selectively acquiring diversified types and well-located Properties
of the type described as the Company's Primary Property Investments.
- Acquiring Properties usually on an all-cash basis to provide the
Company with a competitive advantage over potential purchasers who
must secure financing. The Company may, however, acquire Properties
subject to existing indebtedness if it believes this is in its best
interest. The Initial Properties will be acquired subject to the
unpaid amount of the existing first mortgage debt.
- Diversifying geographically within the Primary Geographical Area of
Investment by acquiring Properties primarily located in major
consolidated metropolitan statistical areas ("CMSAs") in order to
minimize the potential adverse impact of economic downturns in
certain markets.
- Use the Company's UPREIT structure to acquire Properties for cash,
Shares, limited partnership interests ("LP Common Units") of the
Operating Partnership, preferred limited partnership interests of
the Operating Partnership ("LP Preferred Units") (LP Common Units
and LP Preferred Units are collectively referred to as "LP Units"),
equity interests ("Interests") in a Property Partnership (as defined
below), or a combination thereof, thereby deferring some or all of a
seller's potential taxable gain, and enhancing the ability of the
Company to consummate transactions and to structure more competitive
acquisitions than competitors that may lack the Company's ability to
acquire Properties for cash, Shares, LP Units, Interests, or a
combination thereof. A "Property Partnership" (collectively the
"Property Partnerships") may be an entity such as a limited
liability company, a general or limited partnership, or a trust,
that owns one or more of the Properties, and which will be owned or
controlled directly or indirectly by the Operating Partnership.
OPERATIONS:
- Actively manage costs and minimize operating expenses by
centralizing all management, leasing, marketing, financing,
accounting, renovation and data processing activities.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
- Improve rental income and cash flow by aggressively marketing
rentable space.
- Emphasize regular maintenance and periodic renovation to meet the
needs of tenants and to maximize long-term returns.
- Maintain a diversified tenant base at its Retail Centers, consisting
primarily of retail tenants providing consumer goods and services.
- In general, limit mortgage indebtedness to an aggregate amount not
to exceed 55% of the combined fair market value of all of its
Properties, and aggregate borrowings to 300% of the Company's Net
Assets (which is defined to mean generally the Company's total
assets (other than intangibles) at cost, before deducting
depreciation and other non-cash reserves, less total liabilities,
calculated at least quarterly). The proceeds from any such
borrowings will be used primarily to allow the Company to acquire
additional Properties.
Shares Outstanding Before the
Offering.............................. There are 20,000 Shares outstanding as of the date of this Prospectus
which were issued to the Advisor in connection with the organization
of the Company for a purchase price of $10 per Share, an aggregate
purchase price of $200,000 (the "Advisor's Company Contribution").
Shares To Be Outstanding Upon Completion
of the Offering....................... Assuming only the Minimum Offering is sold, the Company will have
220,000 Shares outstanding, and assuming the sale of all Shares
offered on a best efforts basis, the Company will have 50,020,000
Shares outstanding, not taking into account issuance of Shares, if any
(i) under the Company's DRP, (ii) upon exercise of the Soliciting
Dealer Warrants to be issued and sold to the Dealer Manager, (iii)
upon exercise of options granted and which may be granted under the
Company's Independent Director Stock Option Plan, (iv) upon the
conversion of the LP Common Units issued to the Advisor, (v) which
might be issued directly for equity interests in Properties, or (vi)
upon conversion of any LP Units (other than the Advisor's 200 LP
Common Units) in the Operating Partnerships or of any Interests in a
Property Partnership which might be issued for equity interests in
Properties. Each holder of one or more Shares is hereinafter referred
to as a "Stockholder."
Terms of the Offering................... The Company is offering a minimum of 200,000 Shares ($2,000,000) and a
maximum of 56,000,000 Shares, of which (i) except for certain Shares
which may be sold directly by the Company, 50,000,000 Shares are being
offered on a best efforts basis through the Dealer Manager at $10.00
per Share, subject to discounts in certain cases (the "Offering");
(ii) up to 4,000,000 Shares will be issued for $9.50 per Share to
purchasers of Shares who elect to participate in the Company's DRP;
and (iii) up to 2,000,000 Shares, underlying 2,000,000 Soliciting
Dealer Warrants (also offered hereby), will be issued upon the
exercise of the Soliciting Dealer Warrants that may be issued and sold
to the Dealer Manager for an exercise price of $12.00 per Share.
Reference is made to the cover page of this Prospectus for an
explanation of the Minimum Offering and the terms of the escrow of the
proceeds therefrom, and to "Plan of Distribution" for further
information on such escrow and, generally, for a fuller description of
the terms of the Offering.
An offering on a best efforts basis is one in which the securities
dealers participating in the offering are under no obligation to
purchase any of the securities being offered and, therefore, no
specified number of securities are guaranteed to be sold and no
specified amount of money is guaranteed to be raised from the
offering.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Investment Objectives And Policies...... The Company's investment objectives are to:
- PROVIDE REGULAR DISTRIBUTIONS TO STOCKHOLDERS. In order for the
Company to maintain its REIT status, the Company must generally make
annual Distributions equal to not less than 95% of its REIT Taxable
Income (which is defined to mean generally taxable income as
computed for a corporation which is not a REIT, with certain
adjustments applicable only to REITs). See generally "Federal Income
Tax Considerations."
The maximum time that an investor should have to wait to receive the
first Distribution is (i) if the investor was an accepted purchaser
of Shares in the Minimum Offering, 30 days after the Minimum Offering
is sold and the escrowed subscription funds therefrom are released to
the Company, and (ii) if the investor purchases Shares after the
Minimum Offering is completed and the escrowed subscription funds
therefrom are released to the Company, 30 days following the end of
the calendar quarter in which the investor's subscription was
accepted by the Company.
- HEDGE AGAINST INFLATION. The Company intends to hedge against
inflation by entering into leases with tenants which provide for
scheduled rent escalations or participation in the growth of tenant
sales designed to provide increased Distributions and capital
appreciation.
- PRESERVE STOCKHOLDERS' CAPITAL. The Company intends to seek capital
preservation by acquiring diversified types and well-located
Properties of the type described as the Company's Primary Property
Investments entirely for cash, or for Shares, LP Units, Interests,
or a combination thereof. The Company will, in certain instances,
utilize borrowing to acquire Properties.
There can be no assurance the Company will achieve these objectives.
To the extent possible, the Company will seek to avoid fluctuations in
Distributions which might result if Distributions were based on actual
cash received during the Distribution period. To do this, the Company
may use income earned during prior periods, or income earned
subsequent to the Distribution declaration date but prior to the
payment date, in order to distribute annualized Distributions
consistent with the Distribution level established from time to time
by the Board. The Company's ability to utilize this policy is
dependent upon the availability of cash flow from operations (its
"Cash Flow") and the REIT Requirements (the requirements for
qualifying as a REIT under the Code). In addition, the accumulation of
income for distribution in a later period may increase the federal
taxes the Company must pay, even if it does not affect the status of
the Company as a REIT.
The Company will seek, subject to the applicable REIT Requirements
(including requirements regarding Distributions), to reinvest in
additional Properties proceeds from the sale, financing, refinancing
or other disposition of its Properties.
The Company initially intends to pay Distributions to its Stockholders
on a quarterly basis, with daily record and Distribution declaration
dates. However, the Company reserves the right, at any time, to
commence paying Distributions on a monthly basis.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
In general, Distributions are treated as taxable dividends to the
extent of current and accumulated earnings and profits. Distributions
in excess of current and accumulated earnings and profits are treated
first as a tax-deferred return of capital to Stockholders and are
sheltered from current taxation to the extent of the Stockholder's
adjusted basis in his or her Shares, and then as capital gain.
However, the Company may designate a portion of its Distributions as
capital gain Distributions to the extent of its net capital gain for
the year.
The Company intends to acquire Properties free and clear of permanent
mortgage indebtedness by paying the entire purchase price of each
Property in cash or for Shares, LP Units, Interests, or a combination
thereof. The Company may, however, utilize financing to acquire
Properties where the Board deems it to be in the Company's best
interest. In addition, the Company anticipates pledging selected or
all Properties purchased on an all-cash basis (or for Shares, LP
Units, Interests, or a combination thereof) to secure indebtedness
incurred post-acquisition. The proceeds from these loans will be used
primarily to acquire additional Properties. The Company may also incur
indebtedness to finance improvements to its Properties.
The Company anticipates that, in general, aggregate borrowings secured
by all of the Company's Properties will not exceed 55% of their
combined fair market value. This anticipated amount of leverage will
be achieved over time; however, initially, the aggregate borrowings on
the Initial Properties will exceed 55% of their combined fair market
value. The Articles provide that the aggregate amount of Company
borrowings in relation to the Company's Net Assets shall, in the
absence of a satisfactory showing that a higher level of borrowing is
appropriate, not exceed 300% of the Company's Net Assets. There is no
prescribed limit on the amount of borrowings which may be secured by
any one Property. Accordingly, the amount of leverage will vary from
Property to Property, and is not expected to exceed, on average, the
specified overall limitations. The Company does not anticipate
incurring indebtedness to fund Distributions payable to Stockholders,
unless necessary to maintain its status as a REIT. See "Investment
Objectives and Policies--Borrowing" and "Summary of the Organizational
Documents--Restrictions on Borrowing."
For federal income tax purposes, depreciation deductions will be
computed using the straight-line method. Buildings, structural compo-
nents and improvements thereto generally will be depreciated over 40
years. Certain improvements to land are depreciated over 15 years.
Proceeds from the Minimum Offering, along with first mortgage debt
assumption, will be used to acquire Merchants Square, to pay Acquisi-
tion Expenses (defined generally to mean expenses related to the
Company's selection, evaluation and acquisition of, and investment in,
Properties) and to establish working capital reserves relating to the
acquisition of Merchants Square, to pay certain Organization and
Offering Expenses, and for other working capital purposes. Proceeds
from the sale of any additional Shares will be used to acquire other
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Properties and to pay Organization and Offering Expenses and Acqui-
sition Expenses, with the balance (but not less than 1% of Gross
Offering Proceeds), to be applied to fund working capital reserves.
See "Estimated Use of Proceeds."
Structure and Formation of the
Company...............................
The Company is the general partner of the Operating Partnership. The
Company has contributed the $200,000 of proceeds from the Advisor's
Company Contribution and will contribute, as and when received, the
proceeds of the offering to the Operating Partnership in exchange for
general partnership interests in the Operating Partnership ("GP Common
Units"). The Company currently intends to conduct substantially all of
its business and to hold most of its interests in the Properties
through the Operating Partnership or the Property Partnerships.
However, the Company may in the future also conduct some of its
business and hold some of its interests in Properties directly or
through wholly-owned subsidiaries of the Company (each a "Qualified
REIT Subsidiary" or a "QRS"). As the general partner of the Operating
Partnership (the "General Partner"), the Company will have the
exclusive power to manage and conduct the business of the Operating
Partnership, subject to certain exceptions set forth in the Agreement
of Limited Partnership of the Operating Partnership (the "Operating
Partnership Agreement"). LP Common Units in the Operating Partnership
valued at $2,000 have been issued to the Advisor in exchange for its
capital contribution of $2,000 to the Operating Partnership (the
"Advisor's Partnership Contribution"). Additional LP Common Units in
the Operating Partnership may be issued in the future to owners of
Properties in exchange for such Properties. See "Operating Partnership
Agreement."
The following Organizational Chart depicts the services to be ren-
dered to the Company by TIGI Affiliated Companies, and the organi-
zational structure of the Company and the Operating Partnership upon
completion of the Offering and the Formation Transactions (which are
explained in the next section of this Summary). Because the Company
does not intend to initially have any QRSs, none are shown on the
following Organizational Chart.
</TABLE>
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
<PAGE>
ORGANIZATIONAL CHART
THE INLAND GROUP, INC. ("INLAND" OR "TIGI")
<TABLE>
<S> <C> <C> <C> <C> <C>
The Inland
The Inland Property Inland Real Estate The Inland
Construction Management Group, Inland Real Estate Investment Transactions Financial Group,
Group, Inc. Inc. ("IPMGI") Corporation ("IREIC") Group, Inc. Inc.
Inland Southeast
Property Inland Retail Real Inland Mortgage
Management Corp. Estate Advisory Inland Securities Inland Real Estate Investment
(the "Management Services, Inc. Corporation (the Acquisitions, Inc. Corporation
Agent")(1) (the "Advisor") "Dealer Manager") ("IREA") ("IMIC")
Inland Mortgage
Corporation
("IMC")
Inland Mortgage
Construction and Property Organization, Property Servicing
Development Management and Advisory and Real Acquisition Corporation
Services Related Services Estate Services Securities Sales Services ("IMSC")
Mortgage Brokerage
and Loan Servicing
</TABLE>
Inland Retail Real Estate Trust, Inc. (the "Company")
The Company will be principally owned by Public Investors. Ownership will be
represented by Shares of the Company.(2)
Inland Retail Real Estate Limited Partnership (the "Operating Partnership")(3)
The Company is the General Partner of the Operating Partnership and owner of the
GP Common Units of the Operating Partnership.(4)
The Advisor is a Limited Partner of the Operating Partnership and owner of LP
Common Units.(5)
Potential Future Property Partnerships or Limited Partnerships
or Limited Liability Companies (the "Property Partnerships")(6)
SOLID LINES INDICATE 100% OWNERSHIP,
EXCEPT FOR THE OPERATING PARTNERSHIP
WHERE IT INDICATES CONTROL.(6) BROKEN
LINES INDICATE SERVICES.
(FOOTNOTES ON FOLLOWING PAGE)
12
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
1) The Management Agent is owned principally by individuals who are Affiliates
of Inland.
2) The Advisor has purchased from the Company 20,000 of the Company's Shares
for $10 per Share, for an aggregate purchase price of $200,000, in
connection with the organization of the Company. If only the Minimum
Offering of 200,000 Shares is sold, such Shares will represent 90.9% of the
issued and outstanding Shares, assuming no other Shares are issued and
outstanding, and the Advisor's 20,000 Shares will then represent 9.1% of the
issued and outstanding Shares. If 54,000,000 of the Shares offered by this
Prospectus are sold, such Shares will represent 99.96% of the issued and
outstanding Shares, assuming no other Shares are issued and outstanding, and
the Advisor's 20,000 Shares will then represent only 0.04% of the issued and
outstanding Shares.
3) The Company has contributed to the Operating Partnership the proceeds from
the Advisor's purchase of 20,000 Shares from the Company and, as and when
received, the Company will contribute the proceeds of the Offering to the
Operating Partnership. The Advisor has also made a capital contribution to
the Operating Partnership of $2,000 for 200 LP Common Units. Other LP Common
Units or LP Preferred Units may be issued in the future to owners of
Properties in exchange for such Properties.
4) GP Common Units have been issued for the Company's contribution to the
Operating Partnership of the proceeds from the Advisor's purchase of 20,000
Shares from the Company (for which the Company has received 20,000 GP Common
Units), and GP Common Units will be issued for the Company's contribution to
the Operating Partnership of the proceeds of the Offering. Prior to this
Offering, the Company's 20,000 GP Common Units represent 99.01%, and the
Advisor's 200 LP Common Units represent 0.99%, of the outstanding Units of
the Operating Partnership. The "Units" are defined as all the Units of
partnership interests representing the equity in the Operating Partnership,
being the LP Units and the GP Common Units collectively. If only the Minimum
Offering of 200,000 Shares for gross offering proceeds of $2,000,000 is
sold, the Company will receive 200,000 GP Common Units for contributing such
proceeds to the Operating Partnership. Assuming no other Units are issued,
the Company's 220,000 GP Common Units will then represent 99.9%, and the
Advisor's 200 LP Common Units will then represent 0.1% of the outstanding
Units. If 54,000,000 of the Shares offered by this Prospectus are sold for
gross offering proceeds of $538,000,000 as set forth on the cover page of
this Prospectus, the Company will receive 53,800,000 GP Common Units for
contributing such proceeds to the Operating Partnership. Assuming no other
Units are issued, the Company's 53,820,000 GP Common Units will then
represent 99.9996%, and the Advisor's 200 LP Common Units will then
represent only 0.0004%, of the outstanding Units.
5) The initial LP Common Units have been issued to the Advisor for the
Advisor's $2,000 capital contribution to the Operating Partnership.
6) Property Partnerships have been formed for the acquisition of each of the
Initial Properties. Other Property Partnership(s) may be formed for the
acquisition of additional Properties. They will be owned or controlled
directly or indirectly by the Operating Partnership. In the case of the
Initial Properties, the Property Partnerships will be effectively owned 100%
by the Operating Partnership. In other instances, there likely will be other
investor(s) who would be the former owner(s) of Properties acquired for
interests in such Property Partnerships.
13
<PAGE>
<TABLE>
<S> <C>
Formation Transactions..................Except as indicated, the following transactions will be completed
prior to or concurrently with the effectiveness of the Registration
Statement (collectively, the "Formation Transactions"):
- The Company was formed as a corporation in Maryland. The Operating
Partnership was formed as a limited partnership in Illinois. The
Company is the General Partner of the Operating Partnership.
- The Advisor, an Affiliate of TIGI, purchased from the Company 20,000
Shares in connection with the organization of the Company for $10
per Share, for an aggregate purchase price of $200,000 (the
"Advisor's Company Contribution"). The Advisor also contributed
$2,000 to the Operating Partnership for 200 LP Common Units of the
Operating Partnership valued at $2,000 (the "Advisor's Partnership
Contribution"). The Advisor is the initial Stockholder of the
Company and the initial Limited Partner of the Operating Partner-
ship.
- Pursuant to the Offering, the Company will offer for sale to the
public on a best efforts basis 50,000,000 Shares. In addition,
4,000,000 Shares will be offered by the Company to Stockholders who
elect to participate in the Company's DRP, and up to 2,000,000
Shares will be issued upon exercise of the Soliciting Dealer War-
rants.
- The Company has contributed the proceeds from the Advisor's Company
Contribution and, as and when received, the Company will contribute
the proceeds from the sale of the 56,000,000 Shares included in this
Offering, to the Operating Partnership.
- The Company has acquired 20,000 GP Common Units of the Operating
Partnership in exchange for the contribution to the Operating
Partnership of $200,000 of proceeds from the Advisor's Company
Contribution and, the Company will receive one GP Common Unit of the
Operating Partnership in exchange for the contribution to the
Operating Partnership of the proceeds of each of the 56,000,000
Shares sold pursuant to this Offering. The Company will own all of
the GP Common Units of the Operating Partnership.
- Subject to certain conditions, the Operating Partnership anticipates
acquiring all of the Initial Properties, provided that the Net Pro-
ceeds of the Offering are sufficient to make such acquisitions.
Merchants Square will be acquired with the proceeds of the Minimum
Offering, along with first mortgage debt assumption. However, the
Company may not acquire any of the other two Initial Properties if
the Company (i) determines that it is not in the best interests of
the Company to purchase any or all of those Properties due to market
conditions or tenancy matters at the time funds are available for
such purchases, or (ii) locates other Properties which the Company
determines to be more suitable for investment. See "Real Property
Investments."
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
- Provided that the Net Proceeds of the Offering are sufficient, the
Operating Partnership anticipates acquiring the Initial Properties
from certain Affiliates of TIGI (collectively, the "Initial Property
Sellers"), for approximately $30 million in cash and first mortgage
debt assumption (representing the total acquisition costs of the
Initial Properties to the Initial Property Sellers). Of such total
acquisition costs, approximately $5.7 million were incurred by the
Initial Property Sellers to acquire Merchants Square, and approxi-
mately $1.4 million of the Net Proceeds of the Offering will be used
by the Operating Partnership to acquire Merchants Square.
- When the Initial Properties were acquired by the Initial Property
Sellers on behalf of the Company, they were subject to existing
mortgage debt of approximately $20.6 million (the "Initial Mortgage
Debt"), of which approximately $4.3 million relates to Merchants
Square. In addition, the Initial Property Sellers borrowed
approximately $9.4 million from an Affiliate of TIGI in connection
with their acquisition of the Initial Properties (the "Affiliates'
Acquisition Debt"), of which approximately $1.4 million relates to
Merchants Square. When the Initial Properties are acquired by the
Company, they will be subject to an expected unpaid Initial Mortgage
Debt (depending on when each acquisition occurs) of approximately
$20.3 million (of which approximately $4.3 million will be
attributable to Merchants Square), leaving approximately $9.4
million of the purchase price to be paid in cash from the Net
Proceeds of the Offering (of which approximately $1.4 million will
be paid to acquire Merchants Square). The Company's approximately
$9.4 million cash payment to the Initial Property Sellers to acquire
the Initial Properties will be used by the Initial Property Sellers
to retire in full, as of the date of the Company's closing of such
purchases, the Affiliates' Acquisition Debt relating to the Initial
Property acquired. Also, as each of the Initial Properties is
acquired, the Company will use a portion of the Net Proceeds of the
Offering to pay Acquisition Expenses and to establish working
capital reserves relating to the Initial Property acquired. In
addition, the Company will reimburse IREIC, an affiliate of TIGI,
for certain Organization and Offering Expenses which IREIC advanced.
To the extent that there are additional Net Proceeds of the Offering
available, after establishing working capital reserves, such
proceeds will be used to acquire additional Properties or to further
reduce the Initial Mortgage Debt on the Initial Properties. See
"Estimated Use of Proceeds."
Benefits of the Formation Transactions
to Affiliates
of the Company........................
The consummation of the Formation Transactions will result in bene-
fits to certain officers, members of the Board ("Directors") and
Affiliates of the Company, which include the following:
- Robert D. Parks, who is a director of TIGI and an officer and
director of various Affiliates of TIGI, and Barry L. Lazarus, who
previously was associated with the TIGI Affiliated Companies, have
agreed to serve on the Board of Directors of the Company. In
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
addition, Mr. Parks will be Chairman and Chief Executive Officer,
and Mr. Lazarus will be President and Chief Operating Officer, of
the Company. Messrs. Parks and Lazarus will not receive any Director
fees. Mr. Parks will not receive any compensation for his services
as an officer of the Company. Mr. Lazarus will receive an annual
salary of $35,000 from the Company for his services as an officer of
the Company, and reimbursement for his out-of-pocket expenses
incurred on behalf of the Company.
- As each of the Initial Properties is acquired, the Initial Property
Sellers, who are Affiliates of TIGI, will be relieved of principal
debt obligations and interest costs relating to that Property. The
total of such principal debt obligations, as of the proposed dates
of acquisition of the Initial Properties, is expected to be
approximately $29.7 million (of which approximately, $9.4 million
will be attributable to the Affiliates' Acquisition Debt) and the
total of such interest costs is approximately $215,000 per month (of
which approximately $39,500 per month relates to Merchants Square).
In addition, certain Inland Affiliated Companies will be released
from guarantees of certain obligations (not the principal or
interest) relating to the Initial Mortgage Debt and approximately
$9.4 million of Affiliates' Acquisition Debt.
- The Advisor will enter into an agreement with the Company pursuant
to which it will receive substantial fees from the Company for its
advisory services. Such fees include the Advisor Asset Management
Fee of not more than 1% of the Company's Average Invested Assets. If
only the Minimum Offering is sold, and if all of the $1,670,000 of
estimated Net Proceeds from the Offering to be available for
investment in Properties is so utilized, and assuming such proceeds
approximate the average book value of the Properties purchased, then
thereafter the Advisor Asset Management Fee is estimated to be
approximately $16,700 annually. If the Maximum Offering is sold, and
if all of the $468,430,000 of estimated Net Proceeds from the
Offering to be available for investment in Properties is so
utilized, and assuming such proceeds approximate the average book
value of the Properties purchased, then thereafter the Advisor Asset
Management Fee is estimated to be approximately $4,684,300 annually.
However, payment of the Advisor Asset Management Fee is subordinated
on an annual basis to the payment of the Current Return to
Stockholders. In addition, this fee is subject to reimbursement to
the Company to the extent in any calendar year it and all other
operating expenses exceed the greater of 2% of the Company's Average
Invested Assets, or 25% of the Company's net income for that year.
- The Management Agent will enter into an agreement with the Company
pursuant to which it will receive a Property Management Fee from the
Company for its property management services. The Property
Management Fee initially will be equal to 4.5% of the gross revenues
of each of the Company's Properties.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
- The Company has the option to cause the business conducted by the
Advisor and/or the Management Agent to be acquired by or
consolidated into the Company for Shares according to a prescribed
formula based on their net income.
- Certain TIGI Affiliated Companies will no longer be liable as a
general partner of the Property Partnerships that own the Initial
Properties, and other TIGI Affiliated Companies will be paid
approximately $9.4 million of advancements represented by the
Affiliates' Acquisition Debt, of which approximately $1.4 million
relates to Merchants Square.
- The Dealer Manager, one of the TIGI Affiliated Companies, will
receive, if the entire offering is sold and there are no special
sales, cash selling commissions of up to $35,000,000, a marketing
contribution of up to $10,000,000, a due diligence expense allowance
of up to $2,500,000, and Soliciting Dealer Warrants, which it may
retain or reallow to certain Soliciting Dealers. If only the Minimum
Offering is sold, the Dealer Manager will receive cash selling com-
missions of up to $140,000, a marketing contribution of up to
$40,000 and a due diligence expense allowance of up to $10,000.
For further information on the compensation and reimbursements payable
to the Advisor, the Management Agent and the Dealer Manager, and on
other compensation to be paid to other Affiliates, see "Compensation
Table" and "Estimated Use of Proceeds." For additional information
regarding these and other benefits, see "Structure and Formation of
the Company--Benefits of the Formation Transactions to Affiliates of
the Company."
Real Property Investments...............
The Initial Properties contain an aggregate of approximately 417,000
square feet of GLA, are located in the State of Florida. Of the
Initial Properties, two are Neighborhood Centers (defined as shopping
centers that are leased primarily to one or more retail tenants
providing for the sale of convenience goods and personal services for
the day-to-day living needs of the immediate neighborhood, with GLA
ranging from 10,000 to 100,000 square feet) and one is a Community
Center (defined as shopping centers leased primarily to retail tenants
providing for the sale of soft lines and hard lines, in addition to
the convenience goods and personal services provided by a Neighborhood
Center, with GLA ranging from 100,000 to 300,000 or more square feet).
The Company has approximately $200,000 available for investment in
Properties (from the Advisor's Company Contribution) as of the date of
this Prospectus, but will have an additional approximately $1,670,000
of Net Proceeds from the Offering available if the Minimum Offering is
sold, and approximately $468,430,000 of Net Proceeds from the Offering
(including the Net Proceeds from the Minimum Offering) available if
this Offering is fully sold, to acquire the Initial Properties and
other Properties or to further reduce the Initial Mortgage Debt on the
Initial Properties.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
Prior Offerings Summary.................
The Inland Organization, during the 10-year period ending September
30, 1998, has sponsored six public and one private real estate equity
programs which have raised $147,350,520 from 13,965 investors. In
addition, IREIC sponsored one other REIT, which through September 30,
1998, has raised $477,717,785 from approximately 20,000 investors.
Also, the TIGI Affiliated Companies have sponsored nine private
placement mortgage and note programs during the mentioned 10 year
period which have raised $22,641,000 from 545 investors. See "Prior
Performance of the Company's Affiliates."
Distribution Reinvestment and Share
Repurchase Programs...................
The Company provides the following programs to facilitate investment
in Shares and to provide limited liquidity for Stockholders:
- THE DISTRIBUTION REINVESTMENT PROGRAM (the "DRP") allows Stock-
holders who purchase Shares in this Offering to automatically
reinvest Distributions by purchasing additional Shares from the
Company, subject to the limitations on Share ownership contained in
the Articles. These purchases may be made at a 5% discount of the
price at which Shares are being offered for sale by the Company to
the public (initially purchases under the DRP may be made at $9.50
per Share), reflecting lower costs associated with the issuances of
these Shares. See "Distribution Reinvestment and Share Repurchase
Programs--Distribution Reinvestment Program."
- THE SHARE REPURCHASE PROGRAM (the "SRP") allows, subject to certain
restrictions, Stockholders to sell Shares back to the Company,
initially at a price equal to $9.05 per Share (a reduction of $0.95
from the $10.00 initial Offering price per share, reflecting selling
commissions and the Marketing Contribution and Due Diligence Expense
Allowance). The Company repurchases Shares under the SRP on a first
come, first served basis, subject to certain limits. See
"Distribution Reinvestment and Share Repurchase Programs-- Share
Repurchase Program."
Annual Valuations.......................
Stockholders that are subject to ERISA will be provided with an annual
statement of value reporting the value of each Share based upon an
estimated amount they would receive if the Company's assets were sold
as of the close of the Company's fiscal year and if such proceeds
(without reduction for selling expenses) and all the other funds of
the Company were distributed in liquidation of the Company; provided,
however, the Net Asset Value of each Share will be deemed to be $10.00
per Share for the first three annual statements of value following the
termination of the Offering. See "Risk Factors--ERISA Risks" and
"ERISA Considerations."
</TABLE>
18
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective purchasers should carefully consider the following risk factors
before purchasing Shares in the Offering. These factors could adversely affect
the Stockholder's investment and the return on such investment.
This prospectus contains "forward-looking statements", which represent the
Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance, the acquisition, financing or leasing of
Properties, and the Company's operations, performance, financial condition,
plans, strategies, growth and prospects. Any statements contained in this
Prospectus that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
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 negative thereof or other variations thereon or comparable
terminology. The cautionary statements set forth under the captions "Risk
Factors" and "Conflicts of Interest" and elsewhere in the Prospectus identify
important factors with respect to such forward-looking statements, including
certain known and unknown risks, uncertainties and other factors, that could
cause actual results, performance or achievements to be materially different
from those expressed or implied in such forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including those
described below under the captions "Risk Factors" and "Conflicts of Interest"
and elsewhere in this Prospectus.
1. INVESTMENT RISKS
SHARE PRICE/LIMITED LIQUIDITY. The offering price of the Shares was
determined by the Board in the exercise of its business judgment after
considering (i) the offering price of the earlier REIT organized by IREIC, (ii)
the range of offering prices of other REITs that do not have a public trading
market, and (iii) the recommendation of the Dealer Manager based on its
consultations with likely Soliciting Dealers. However, the offering price of the
Shares may not be indicative of the price at which Shares may trade if they were
listed on an exchange or actively traded by brokers nor of the proceeds that a
Stockholder may receive if the Company were liquidated or dissolved. Further,
there is currently no public trading market for the Shares and no assurance
exists that one will develop. The Shares may not ever be listed for trading on a
national stock exchange or included for quotation on a national market system.
However, the Company anticipates that within five years from the date of this
Prospectus, the Board will determine whether it is in the best interests of the
Company to apply to have the Shares so listed or included, provided that the
Company meets the then applicable listing requirements. See "Investment
Objectives and Policies--Additional Offerings and Exchange Listing." The failure
of a public trading market to develop could adversely affect the price of the
Shares and the likelihood of takeover offers. As a result, an investor may not
be able to liquidate his or her investment on favorable terms, if at all.
Because an investment in the Shares is illiquid, it is suitable only for those
able to make a long-term investment.
INVESTORS DO NOT KNOW WHAT PROPERTIES MAY BE ACQUIRED IN THE FUTURE. The
Company intends to initially acquire Merchants Square with the net proceeds from
the Minimum Offering, and thereafter, subject to certain conditions, two other
Retail Centers comprising the Initial Properties, provided that the Net Proceeds
of the Offering are sufficient to make such acquisitions. All of the Initial
Properties will be acquired from Affiliates of TIGI who purchased the Initial
Properties from unaffiliated third parties on behalf of the Company. These
Initial Properties will be acquired at the Affiliates' cost with the approval of
a majority of the Directors (including a majority of the then Independent
Directors). Although this Prospectus describes the parameters the Company will
use to acquire additional Properties, as of the date of this Prospectus no
Properties have been specified for acquisition by the Company other than the
Initial Properties. Accordingly, no information is available as to the
identification, location, operating histories, lease terms or other relevant
economic and financial data of any Properties to be purchased by the
19
<PAGE>
Company other than the Initial Properties. As a result, investors must rely on
the Company to locate and acquire suitable Properties and will be unable to
evaluate the manner in which the Net Proceeds of the Offering are invested or
the economic merit of particular Properties prior to their acquisition. There
may be a delay between the sale of the Shares and the Company's purchase of
Properties other than the Initial Properties (assuming that the Net Proceeds of
the Offering are sufficient to acquire the Initial Properties), which could
result in a delay in making the expected amount of Distributions to
Stockholders.
The Advisor evaluates potential additional Property acquisitions and Inland
Real Estate Acquisitions, Inc. ("IREA"), one of the TIGI Affiliated Companies,
engages in discussions with sellers on behalf of the Company. During the
pendency of the Offering, as soon as the Advisor believes a reasonable
probability exists that a Property will be acquired on specified terms upon
completion of due diligence, which includes review of the title insurance
commitment, an appraisal and an environmental analysis, the Company will issue a
supplement to this Prospectus setting forth certain details concerning the
proposed acquisition. Investors should be aware, however, that proposed
acquisitions at this stage require negotiation of final binding agreements and
there can be no assurance that a Property will be acquired on the same terms as
described in the relevant supplement or other disclosure document prepared with
respect thereto. In addition, Properties which are identified for potential
acquisition by the Company prior to the termination of the Offering may not be
acquired unless sufficient Shares are sold. Investors should be aware that
audited financial statements of prior operations of existing Properties acquired
by the Company, or of the lessees or of the Property or guarantor of the
underlying leases, generally will not be available until after a supplement to
this Prospectus describing the acquisition has been provided to potential
investors, and financial statements for recently constructed Properties may not
be available at all.
INSUFFICIENT OFFERING PROCEEDS AND POSSIBLE RESULTING LACK OF
DIVERSIFICATION. This offering is being made on a best efforts basis and is
conditioned on the sale of at least 200,000 Shares for $2,000,000 (the "Minimum
Offering"). Because this Offering will be made on a best efforts basis, the
potential profitability of the Company and its ability to diversify its
investments, both geographically and by type of Property, will be limited by the
amount of funds it has to invest. If only the Minimum Offering is sold, the
Company will be able to acquire only one of the specified Initial Properties,
Merchants Square, as approximately $1,430,000 will be required to pay the cash
portion of the purchase price, and to pay Acquisition Expenses and establish
working capital reserves, relating to the acquisition of that Property. As a
result, there would not be any diversification of the Company's investments.
This lack of diversification will increase the potential adverse effect on the
Company if Merchants Square experiences unperforming tenants or if the area in
which Merchants Square is located experiences adverse economic conditions. There
can be no assurance that the Company will sell the minimum number of Shares and,
in such event, all proceeds from subscribers will be returned to them together
with the interest earned thereon. See "Investment Objectives and
Policies--Return of Uninvested Proceeds" and "Plan of Distribution--Escrow
Conditions" for explanations of when uninvested proceeds and escrowed funds will
be returned to investors.
COMPETITION WITH OTHERS FOR THE ACQUISITION OF PROPERTIES. The Company
competes with many other entities engaged in real estate investment activities,
some of which have greater resources than the Company. Larger, national REITs
may enjoy significant competitive advantages that accrue from, among other
things, a lower cost of capital and enhanced operating efficiencies. In
addition, the number of entities and the amount of funds available for
investment in Properties of a type suitable for investment by the Company may
increase, resulting in increased competition for such investments and possible
increases in the prices paid therefor. All of these factors could have a
material adverse effect on the Company's results of operations, financial
condition and prospects.
COMPETITION WITH OTHER REAL ESTATE INVESTMENT PROGRAMS SPONSORED BY TIGI
AFFILIATED COMPANIES. TIGI Affiliated Companies have previously sponsored
another REIT, private real estate equity programs and private placement mortgage
and note programs, and TIGI Affiliated Companies in the future may sponsor other
real estate investment programs. The Company will compete with such existing and
future real estate
20
<PAGE>
investment programs for the acquisition of Properties of a type suitable for
investment by the Company, for the time and services of personnel of the Advisor
and Affiliates of the Advisor in connection with the operation of the Company
and the management of its assets, and for obtaining and retaining investors for
its Shares. See "Conflicts of Interest" and "Prior Performance of the Company's
Affiliates."
MORTGAGE INDEBTEDNESS AND OTHER BORROWINGS MAY INCREASE THE COMPANY'S
BUSINESS RISKS. The Company intends to usually acquire Properties free and
clear of permanent mortgage indebtedness by paying the entire purchase price of
each Property in cash, or with Shares, LP Units, Interests, or a combination of
the foregoing. However, if it is determined to be in the best interests of the
Company, the Company may, in certain instances, utilize either existing or new
borrowings to acquire Properties. The Initial Properties will be acquired
subject to the unpaid amount of the existing first mortgage debt. Furthermore,
the Company intends to incur or increase mortgage indebtedness by obtaining
loans secured by selected or all of the Properties. The proceeds from these
loans will be used to acquire additional Properties. The Company may incur
indebtedness if necessary to satisfy the requirement that the Company distribute
at least 95% of its REIT Taxable Income (as defined in the Code), or otherwise
as is necessary or advisable to assure that the Company maintains its
qualification as a REIT for federal income tax purposes. The Company anticipates
that, in general, aggregate borrowings secured by all of the Company's
Properties will not exceed 55% of their combined fair market value. This
anticipated amount of leverage will be achieved over time; however, initially,
the aggregate borrowings on the Initial Properties will exceed 55% of their
combined fair market value. The Articles include a provision limiting the
aggregate amount of borrowing in relation to the Company's Net Assets, in the
absence of a satisfactory showing that a higher level of borrowing is
appropriate, to 300% of Net Assets. Any excess in borrowing over such 300% of
Net Assets level shall be (i) approved by a majority of the Independent
Directors, (ii) disclosed to Stockholders in the Company's next quarterly report
to Stockholders, along with justification for such excess, and (iii) subject to
approval of the Stockholders.
In deciding upon the appropriate limitation on borrowings in relation to
fair market value, the Company studied the range of the limitations utilized by
publicly traded REITs. The Company wanted to adopt a leverage limitation within
the industry norm so that it would be accepted in the marketplace. The Company
concluded that 55% of the fair market value of Properties was an acceptable
level of leverage within the REIT industry. The 300% of Net Assets limitation on
borrowings is prescribed by the Statement of Policy Regarding Real Estate
Investment Trusts adopted by the North American Securities Administrators
Association, Inc. (the "NASAA REIT Statement"), which many states require
non-listed REITs (such as the Company) to comply with in order to sell their
securities in that state.
The Company does not intend to incur mortgage debt on a particular Property
unless the Property's projected cash flow is sufficient to service the mortgage
debt. However, if there is a shortfall in interest coverage, then the amount
available for Distributions may be affected. In addition, incurring mortgage
indebtedness increases the risk of loss since defaults on indebtedness secured
by the Properties may result in foreclosure actions initiated by the lenders and
loss by the Company of the Property securing the loan which is in default. For
tax purposes, any such foreclosure would be treated as a sale of the Property
for a purchase price equal to the outstanding balance of the debt secured by the
mortgage. If the outstanding balance of the debt secured by the mortgage exceeds
the Company's basis in the Property, the Company would recognize taxable income
on foreclosure, but would not receive any cash proceeds. The Company will seek
to limit its indebtedness to "non-recourse" indebtedness, meaning that the
lender may look only to the Property or Properties securing the mortgage
indebtedness for satisfaction of the indebtedness. See "Investment Objectives
and Policies--Borrowing" and "Real Property Investments." However, in the event
any mortgages contain cross-collateralization or cross-default provisions, there
is a risk that more than one Property may be affected by a default.
There are risks of (i) potential unavailability of permanent financing,
either initially or after the acquisition of a Property, (ii) an inability to
refinance mortgage indebtedness upon its maturity, or (iii) an inability to
refinance mortgage indebtedness on advantageous terms. Furthermore, there is a
risk of a
21
<PAGE>
potential increase in interest cost resulting from increases in market interest
rates upon the refinancing of a mortgage indebtedness. To the extent the
Company's exposure to increases in interest rates is not eliminated through
interest rate protection or cap agreements, such increases will adversely affect
the Company's Net Income, Funds from Operations and cash available for
Distributions and, thus may affect the amount of Distributions the Company can
make to Stockholders, as well as inhibit the Company's ability to raise capital
and issue equity securities in public and private markets.
WORKING CAPITAL RESERVES MAY BE INSUFFICIENT. The Company will establish
working capital reserves equal to 1% of the Gross Offering Proceeds from this
Offering, which it believes should be adequate. However, if these reserves prove
insufficient to meet the Company's cash needs (including satisfying cash
redemption rights of Limited Partners of the Operating Partnership), the Company
may have to obtain financing from either affiliated or unaffiliated sources to
fund its cash requirements. There is no assurance that sufficient financing will
be available or, if available, will be available on economically feasible terms
or on terms acceptable to the Company. Additional borrowing for working capital
purposes will increase the Company's interest expense, and adversely affect the
Company's (i) Net Income (defined for purposes of this Prospectus to mean
generally revenues less expenses other than depreciation and other non-cash
reserves and excluding gain from the sale of assets; such definition is
prescribed by the NASAA REIT Statement; however, such definition is not in
accordance with generally accepted accounting principles in the United States
("GAAP") because, for GAAP purposes, depreciation and other non-cash reserves
are deducted in determining net income), (ii) Funds from Operations (defined to
mean generally net income, excluding the effects of debt restructuring and sales
of Properties, plus depreciation of real property and amortization), and (iii)
cash available for Distributions.
LIMITATION ON TYPES OF PROPERTIES WHICH THE COMPANY INTENDS TO ACQUIRE AND
THE AREA IN WHICH THE COMPANY MAY ACQUIRE RETAIL CENTERS. The Company will
primarily acquire and manage Retail Centers. Acquisition of Retail Centers (but
not Single-User Retail Properties Outside the Primary Geographical Area of
Investment) is limited primarily to the Company's Primary Geographical Area of
Investment and will initially be focused in the southeastern states, primarily
Florida, Georgia, North Carolina and South Carolina. Adverse economic conditions
affecting that area could adversely affect the Company's profitability to a
greater degree than if the Company diversified its investments to include other
types of real estate over a larger geographic region. See also "--Risks of Real
Estate Ownership--Dependence on Geographical Region and Retail Industry" in this
Section.
LIMITED EXPERIENCE OF MANAGEMENT IN ACQUIRING AND MANAGING PROPERTIES WITHIN
THE PRIMARY GEOGRAPHICAL AREA OF INVESTMENT. TIGI Affiliated Companies have
sponsored one public REIT, six other public real estate equity programs, one
private real estate equity program and nine private placement mortgage and note
programs during the 10-year period ending September 30, 1998. During that
period, Inland Real Estate Corporation ("IREC"), the IREIC-sponsored REIT,
raised $477,717,785 from approximately 20,000 investors, the public and private
real estate equity programs raised $147,350,520 from 13,965 investors, and the
private placement mortgage and note programs raised $22,641,000 from 545
investors. IREC, and several of the prior investment programs sponsored by TIGI
Affiliated Companies which have owned and operated retail properties, had
investment objectives which were similar to those of the Company, except,
however, they invested in geographical areas (principally within a 400-mile
radius of Oak Brook, Illinois) different than what will be most of the Company's
Primary Geographical Area of Investment. Also, the vast majority of the other
investment programs sponsored by TIGI Affiliated Companies were dissimilar from
the Company in that the programs owned apartment properties, pre-development
land and whole or partial interests in mortgage loans. Therefore, there can be
no assurance that the Company will attain its investment objectives since the
Company's management, the Advisor and its Affiliates have limited experience in
acquiring, as well as managing and operating, Properties within most of the
Company's Primary Geographical Area of Investment.
22
<PAGE>
LIMITATION ON BORROWING COULD CAUSE ADVERSE BUSINESS CONSEQUENCES. As
explained above under "--Mortgage Indebtedness and Other Borrowings May Increase
the Company's Business Risks" in this Section, the Articles include a provision
limiting the amount of aggregate Company borrowing, in the absence of a
satisfactory showing that a higher level is appropriate, to 300% of the
Company's Net Assets. That limitation could have adverse business consequences
such as (i) freezing the Company's ability to purchase additional Properties,
(ii) causing the Company to lose its REIT status if borrowing was necessary to
pay the required minimum amount of cash Distributions to Stockholders to qualify
as a REIT, (iii) causing operational problems if there are cash flow shortfalls
for working capital purposes, or (iv) resulting in the loss of a Property if,
for example, financing was necessary to cure a default on a mortgage. As
Stockholder approval is required to change this limitation, there will be a
delay before such approval can be obtained, if it can be obtained at all. It is
possible that even if the approval is obtained, it may not be obtained in
sufficient time to avoid the adverse consequences of not having the funding when
it is needed.
LIMITS ON SHARE ACCUMULATION AND PROVISIONS IN THE ORGANIZATIONAL DOCUMENTS
OF THE COMPANY AND THE OPERATING PARTNERSHIP AND THE MARYLAND GENERAL
CORPORATION LAW MAY HAVE AN ANTI-TAKEOVER EFFECT AND INHIBIT A CHANGE IN CONTROL
OF THE COMPANY. Provisions which may have an anti-takeover effect and inhibit a
change in control of the Company include:
- OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFERABILITY AND OWNERSHIP IN THE
ARTICLES. In order for the Company to qualify as a REIT, no more than 50% of
the outstanding Shares may be beneficially owned (as defined in the Code),
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 each 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 test, the Articles provide that, commencing July 1, 2000,
subject to certain exceptions, no person may beneficially own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% (the
"Ownership Limit") of the number or value of the issued and outstanding Shares
and/or Preferred Stock of the Company. The Board, upon receipt of a ruling from
the Service, 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 such Ownership Limit; provided that such exemption would not
result in the termination of the Company's status as a REIT. The Articles place
additional restrictions on Share ownership and transfer. See "Description of
Securities--Restrictions on Ownership and Transfer."
These restrictions may: (i) have the effect of delaying, deferring or
preventing a tender offer, other transaction or a change in control of the
Company that might involve a premium price for the Shares or otherwise be in the
best interest of the Stockholders; (ii) limit the opportunity for Stockholders
to receive a premium for their Shares in the event an investor is making
purchases of Shares in order to acquire a block of Shares in excess of such
restrictions or to otherwise effect a change in control; or (iii) compel a
Stockholder or its transferee, as of the date the restriction is violated, to
involuntarily dispose of Shares in excess of such restrictions and, as a result,
to forfeit as of such date any voting and dividend rights and the right to
realize any further appreciation in the value of the Shares causing the
violation of the restriction; or (iv) discourage someone from acquiring Shares.
- CERTAIN PROVISIONS IN THE ARTICLES, OPERATING PARTNERSHIP AGREEMENT, AND
MARYLAND GENERAL CORPORATION LAW. Certain provisions contained in the Articles,
the Operating Partnership Agreement and the MGCL may have the effect of
discouraging a third party from making an acquisition proposal for the Company
or the removal of existing management and, as a result, could prevent
Stockholders from being paid a premium for their Shares over then-prevailing
market prices.
THE ARTICLES. The Articles permit the Board to issue up to 10 million
shares of Preferred Stock, issuable in one or more classes or series. The
Board may classify or reclassify any unissued Preferred Stock and
establish the preferences and rights (including the right to participate
in
23
<PAGE>
earnings and to convert into Shares) of any such Preferred Stock. Thus,
the Board could authorize the issuance of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or
other transaction in which holders of some or a majority of the Shares
might receive a premium for their Shares over the then-prevailing market
price of such Shares.
THE OPERATING PARTNERSHIP AGREEMENT. A Limited Partner in the Operating
Partnership has the option to convert his or her LP Common Units for
Shares in the Company, subject to the Company's right to deliver cash
instead of Shares under certain circumstances, according to specific
terms in the Operating Partnership Agreement. Those conversion rights are
generally not exercisable until the Limited Partner has held those LP
Common Units for more than one year. However, in the event the Company or
the Operating Partnership proposes to engage in any merger, consolidation
or other combination with or into another Person or a sale of all or
substantially all of its assets, or a liquidation, or any
reclassification, recapitalization or change of Equity Stock into which
an LP Common Unit may be converted (each a "Business Combination"), the
Company is required to send to each LP Common Unit holder advance notice
of the proposed Business Combination, and each holder of an LP Common
Unit shall have the right to exercise the conversion right prior to the
Stockholder vote on the transaction, even if the Limited Partner has held
his or her LP Common Units for less than one year. Accordingly, LP Common
Unit holders who timely convert their Units prior to the record date for
the Stockholder vote on any such Business Combination shall be entitled
to vote their Shares with respect to the Business Combination. The
additional Shares that might be outstanding as a result of such
conversions of LP Common Units may deter an acquisition proposal. See
"Operating Partnership Agreement-- Extraordinary Transactions" for a
description of such rights.
MGCL--BUSINESS COMBINATIONS. Under the MGCL certain Business
Combinations (including certain issuances of equity securities) between
the Company and any Person who (i) owns 10% or more of the voting power
of the Shares or (ii) is 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 Company
(any of the Persons specified in the preceding clauses (i) and (ii), an
"Interested Stockholder"), or between the Company and an affiliate of an
Interested Stockholder, are prohibited for five years after the most
recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, any such Business Combination must be approved
by the Board and a super-majority Stockholder 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 Stockholder for its
Shares. As permitted by the MGCL, the Articles provide that the Business
Combinations provisions of the MGCL do not apply to any Business
Combination involving the Company and TIGI or any of its Affiliates.
Accordingly, the five-year prohibition
and the super-majority Stockholder vote requirement will not apply to any
Business Combinations between TIGI or any of its Affiliates and the
Company. As a result, TIGI or any of its Affiliates may be able to enter
into Business Combinations with the Company, which may or may not be in
the best interests of the Stockholders, without the super-majority
Stockholder approval and with only approval of a majority of outstanding
Shares. Further, the Business Combinations statute could have the effect
of discouraging offers from third parties to acquire the Company and
increasing the difficulty of consummating any such offer. See
"Description of Securities-- Certain Provisions of Maryland Law and of
the Articles of Incorporation and Bylaws--Business Combinations."
MGCL--CONTROL SHARES. Maryland law provides that Control Shares (as
defined below) of a Maryland corporation acquired in a Control Share
Acquisition (as defined hereinafter) have no voting rights except to the
extent approved by a vote of two-thirds of the votes eligible under the
24
<PAGE>
statute to be cast on the matter. "Control Shares" are voting shares of
stock or beneficial interest which, when added to all other such shares
of stock or beneficial interest previously acquired by the acquirer,
would entitle the acquirer to exercise voting power in electing directors
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. A "Control Share Acquisition"
means the acquisition of Control Shares, subject to certain exceptions.
If voting rights for the Control Shares are not approved at a meeting of
Stockholders then, subject to certain conditions and limitations, the
Company may redeem any or all of the Control Shares (except those for
which voting rights have previously been approved) for fair value. If
voting rights for Control Shares are approved at a Stockholders' meeting
and the acquirer becomes entitled to vote a majority of the Shares
entitled to vote, all other Stockholders may exercise appraisal rights.
The Bylaws contain a provision exempting only TIGI or any of its
Affiliates from the Control Share Acquisition statute. The Control Share
Acquisition statute could have the effect of discouraging offers to
acquire the Company and of increasing the difficulty of consummating any
such offer by, in each case, Persons other than TIGI or any of its
Affiliates, and may permit TIGI or any of its Affiliates to make
acquisitions of Control Shares which may or may not be in the best
interests of the Stockholders. See "Description of Securities--Certain
Provisions of Maryland Law and of the Articles of Incorporation and
Bylaws--Control Share Acquisition."
INVESTMENT RETURN MAY BE AFFECTED BY AVAILABILITY OF PROPERTIES TO BE
ACQUIRED WITHIN ONE YEAR OF THE TERMINATION OF THE OFFERING. In order to
maintain the Company's exemption from regulation under the Investment Company
Act, the Investment Company Act requires, among other things, that the Company
be engaged primarily in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate, within one year of
the termination of the Offering. If the Company does not invest a significant
portion of the Net Proceeds of this Offering in Properties within one year of
the termination of the Offering, the Company may decide to temporarily invest
any unused proceeds in certain government securities that could yield lower
returns than other investments in order to avoid registering as an investment
company. Such lower returns will adversly affect the Company's ability to pay
the Current Return. It is impossible to determine as of the date of this
Prospectus when the Offering will be terminated as that will depend principally
on when all the Shares being offered are sold, if all of them are sold. However,
see the cover page of this Prospectus for the latest possible date for
termination of the Offering.
DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by
the Company to its Stockholders will be based principally on cash available for
Distributions from the Properties. Cash available for Distributions will be
based on many factors, including but not limited to, the ability of the Company
to make additional acquisitions, investment of the Net Proceeds of this
Offering, and the anticipated operating expense levels (which may not prove
accurate). Actual cash available for Distributions may vary substantially from
estimates. Some of the factors are beyond the control of the Company, and a
change in any factor could affect the Company's ability to pay future
Distributions. Contractual increases in rent under the leases of the Properties
or the receipt of rental revenue in connection with future acquisitions will
increase the Company's cash available for Distribution to Stockholders. However,
in the event of a default or a lease termination by a tenant, there could be a
decrease or cessation of rental payments and thereby a decrease in cash
available for Distributions. Also, cash available for Distributions may be
affected by the necessity to expend funds to correct defects or to make
improvements to Properties. In addition, cash available to make Distributions
may decrease if Properties yield lower than expected returns.
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 there will be 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 Distributions to Stockholders.
25
<PAGE>
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and/or
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result cash available for Distributions may
decrease. Distributions by the Company will also be dependent on a number of
other factors, including the Company's financial condition, any decision to
reinvest funds rather than to distribute such funds, capital expenditures, the
annual distribution requirements under the REIT Requirements and such other
factors as the Company deems relevant. In addition, the Company may issue from
time to time additional Shares, Units or Interests in connection with the
acquisition of Properties or in certain other circumstances. No prediction can
be made as to the number of such Shares, Units or Interests which may be issued,
if any, and, if issued, the effect on cash available for Distributions on a per
Share basis to holders of Shares. Such issuances, if any, will have a dilutive
effect on cash available for Distributions on a per Share basis to holders of
Shares. The possibility exists that actual results of the Company may differ
from the assumptions used by the Board in establishing the initial distribution
rate to Stockholders.
The Company intends to make Distributions to its Stockholders to comply with
the distribution requirements of the Code and to eliminate, or at least
minimize, exposure to federal income taxes and the nondeductible excise tax.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income and the effect of required debt amortization
payments could require the Company to borrow funds on a short-term basis to meet
the distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT. Such borrowing would increase interest
expense, and adversely affect Net Income and Funds from Operations. See
"Investment Objectives and Policies--Distributions."
POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM SHARES ELIGIBLE FOR
FUTURE SALE. No prediction can be made as to the effect, if any, of future
sales of Shares, or the availability of Shares for future sales, on the market
price of the Shares. Sales of substantial amounts of Shares (including Shares
issuable upon the exchange of LP Units or Interests, exercise of options granted
to Independent Directors under the Independent Director Stock Option Plan, and
exercise of the Soliciting Dealer Warrants), or the perception that such sales
could occur, may adversely affect prevailing market prices, if any, for the
Shares. The issuance of additional Shares, LP Units or Interests in private
offerings not registered under the Securities Act of 1933, as amended (the
"Act"), will be deemed to be "restricted securities" within the meaning of Rule
144 under the Act and may not be transferred unless such Shares, LP Units or
Interests have been registered under the Act or an exemption from registration
is available, including any exemption from registration provided under Rule 144.
Holders of restricted Shares will be eligible to sell such Shares pursuant to
Rule 144 at prescribed times and subject to the manner of sale, volume, notice
and information restrictions of 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.
The Company may issue from time to time additional Shares, LP Units or
Interests in connection with the acquisition of Properties. The Company
anticipates that it will file a registration statement with respect to the
Shares issuable upon exercise of options under the Independent Director Stock
Option Plan following or concurrent with the completion of this Offering. Such
registration statement generally will allow Shares covered thereby to be
transferred or resold with fewer restrictions under the Act.
FLUCTUATIONS IN MARKET INTEREST RATES OR EQUITY MARKETS AFFECT RAISING
CAPITAL. Fluctuations in market interest rates and equity markets have to be
expected over time. If these fluctuations, or the financial condition of the
Company, lead prospective Stockholders to demand higher yields from their
investments, it may adversely affect the Company's ability to sell Shares for
$10 per Share to raise capital to finance future Property acquisitions,
developments and improvements, and the Company may have to sell Shares for less
than $10 per Share. On the other hand, conditions may be such that the Company
could sell Shares
26
<PAGE>
for in excess of $10 per Share. One of the factors that may influence the price
of the Shares in the future will be the annual yield on the price paid for
Shares from Distributions made by the Company.
STOCKHOLDERS HAVE LIMITED CONTROL OVER CHANGES IN POLICIES. The major
policies of the Company, including its policies with respect to implementing its
investment objectives or policies, 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 Stockholders. Accordingly,
Stockholders will have limited control over changes in policies of the Company.
OBJECTIVES OF JOINT VENTURE PARTNERS MAY CONFLICT WITH THE COMPANY'S
OBJECTIVES. The Company may, from time to time, make investments in joint
ventures or other partnership arrangements between the Company and Affiliates of
the Advisor or with third parties unaffiliated with the Advisor or its
Affiliates. Investments in joint ventures which own Properties may involve risks
not otherwise present when the Company purchases Properties directly. For
example, the Company's co-venturer may file for bankruptcy protection, may have
economic or business interests or goals which are inconsistent with the
interests or goals of the Company or may take actions contrary to the Company's
instructions, requests, policies or objectives. Among other things, actions by
such co-venturer might subject Properties owned by the joint venture to
liabilities in excess of those contemplated by the terms of the joint venture or
other adverse consequences. See "Investment Objectives and Policies--Joint
Ventures."
SELLER FINANCING BY COMPANY MAY DELAY LIQUIDATION OR REINVESTMENT. If the
Company decides to sell any of its Properties, it intends to use its best
efforts to sell for cash. However, the Company may sell its Properties by
providing financing to purchasers. When the Company provides financing, it will
bear the risk of default by the borrower and will be subject to remedies
provided by law. A purchase money obligation secured by a mortgage may be taken
as part payment and there are no limitations or restrictions on the Company
taking such purchase money obligations. The terms of payment to the Company will
be affected by custom in the area where the Property being sold is located and
the then prevailing economic conditions. To the extent the Company receives
promissory notes or other property in lieu of cash from Property sales, the
distribution of the proceeds of such sales to the Stockholders, or their
reinvestment in other Properties, will be delayed until such time as the
promissory notes or other property are actually paid, sold, refinanced or
otherwise disposed of. In some cases, the Company may receive initial down
payments (cash and other property) in the year of sale in an amount less than
the selling price and subsequent payments will be spread over a number of years.
See "Investment Objectives and Policies-- Sale or Disposition of Properties."
POSSIBLE LOSS ON DISSOLUTION AND TERMINATION. At the date of dissolution or
termination of the Company, the undistributed proceeds realized from the
liquidation of assets, if any, will be distributed to Stockholders after
satisfying claims of creditors. Accordingly, a Stockholder's ability to recover
all of his or her investment under such circumstances will depend on the amount
of funds so realized and claims to be satisfied therefrom. There can be no
assurance that any proceeds will be available after satisfying the claims of
creditors and paying the expenses of liquidation.
2. COMPANY RISKS
Many of the risk factors identified and discussed in this "--Company Risks"
section involve potential conflicts of interest between and among the Company,
the Sponsor, the Advisor and/or Affiliates of the Company, the Sponsor and/or
the Advisor. For a more extensive explanation of such potential conflicts of
interest, see generally "Conflicts of Interest."
DEPENDENCE ON THE DIRECTORS AND ADVISOR. The Board has supervisory control
over all aspects of the Company's operations. The Company's ability to achieve
its investment objectives will depend to a large extent on the Board's ability
to oversee, and the quality of, the management provided by the Advisor, the
27
<PAGE>
Management Agent, their Affiliates and employees for day-to-day operations.
Therefore, the Company is dependent, in large part, on the ability of the
Advisor and its Affiliates to retain the services of each of its executive
officers and key employees; however, none of these individuals has an employment
agreement with the Advisor or its Affiliates. The loss of any of these
individuals could have a materially adverse effect on the Company. The Company
does not currently maintain key man life insurance policies on any of the
individuals employed by the Advisor or its Affiliates. See "Management."
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ITS AFFILIATES AND PAYMENTS TO
AFFILIATES. The operation and management of the Company may be influenced or
affected by conflicts of interest arising out of the Advisor's relationship with
its Affiliates on the one hand, and the Company on the other hand. For example,
the Company will compete with the Affiliates for the time and services of
personnel of the Advisor and of certain Affiliates of the Advisor. There is no
requirement that the personnel of the Advisor dedicate a specified amount of
time to management of the Company's affairs.
Further, the due diligence investigation of the Company by the Dealer
Manager, also an Affiliate, cannot be considered to be an independent review of
the Company and, therefore, may not be as meaningful as a review conducted by an
unaffiliated broker-dealer or investment banker. Additionally, except for
certain sales (which are explained and defined as "Special Sales" under
"Compensation Table-- Nonsubordinated Payments--For and in Connection With the
Offering"), a substantial portion of the proceeds of the Offering will be paid
to the Dealer Manager, an Affiliate, for managing the Offering, including cash
selling commissions of 7% of the Gross Offering Proceeds ($140,000 if only the
Minimum Offering is sold; and $35,000,000 assuming the Offering is fully
subscribed and there are no Special Sales), a marketing contribution of 2% of
Gross Offering Proceeds and a due diligence expense allowance of up to 0.5% of
Gross Offering Proceeds (collectively, $50,000 if only the Minimum Offering is
sold; and up to $12,500,000 for the Marketing Contribution and Due Diligence
Expense Allowance, assuming the Maximum Offering is sold and there are no
Special Sales). The selling commissions and Marketing Contribution and Due
Diligence Expense Allowance are payable only on the 50,000,000 Shares sold
through the Dealer Manager on a best efforts basis (and generally excluding the
Special Sales), all of which the Dealer Manager may retain or reallow to
Soliciting Dealers. The Dealer Manager has served as the dealer manager for four
offerings of shares of common stock of another REIT sponsored by IREIC. The last
of such offerings concluded as of December 31, 1998.
IREIC, one of the TIGI Affiliated Companies, will be reimbursed for costs
related to the organization of the Company and the offering of the Shares for
sale, which are estimated to be $110,000 if only the Minimum Offering is sold;
and $14,000,000 (excluding the selling commissions, Marketing Contribution and
Due Diligence Expense Allowance) if the Maximum Offering is sold. An Affiliate
of TIGI will also be reimbursed for actual out-of-pocket acquisition expenses of
up to approximately 0.5% of Gross Offering Proceeds ($10,000 if only the Minimum
Offering is sold; and $2,810,000 assuming all 50,000,000 Shares offered on a
best efforts basis are sold, all 4,000,000 Shares are sold under the DRP, and
all of the 2,000,000 Soliciting Dealer Warrants are issued and exercised).
In addition, an Advisor Asset Management Fee of not more than 1% per annum
of the Average Invested Assets will be paid quarterly to the Advisor. The
Advisor will also receive a Property Disposition Fee equal to the lesser of (i)
3% of the sale price of a Property; or (ii) 50% of the commission customarily
paid to third parties. After receipt by Stockholders of a cumulative
noncompounded 7% per annum return on Invested Capital and a return of their
Invested Capital, an Incentive Advisory Fee equal to 15% of the net proceeds
from the sale of Properties will be paid to the Advisor.
Also, a Property Management Fee equal to not more than 90% of the fee which
would be payable to an unrelated party providing such services, which fee shall
initially be 4.5% of the gross income earned from each of the Properties, will
be paid on a monthly basis to the Management Agent, which is owned principally
by individuals who are Affiliates of TIGI, which fee is dependent upon results
of operations.
28
<PAGE>
The Advisor and its Affiliates will provide other property-level services to
the Company and may receive compensation for such services, such amounts
received will be dependent upon results of operations and, therefore cannot be
determined at the present time. The fees received by the Advisor may cause the
Advisor to delay the sale of Properties or liquidation of the Company.
The Advisor, the Management Agent and their Affiliates will receive
substantial fees and payments for services rendered to the Company irrespective
(except for the Advisor Asset Management Fee and Incentive Advisory Fee) of
whether Stockholders receive Distributions or the Current Return or the
cumulative, non-compounded return of 7% per annum on the investor's Invested
Capital commencing upon acceptance of the investor's subscription (the
"Cumulative Return"). These fees may result in greater costs to the Company than
if the Company was self-administered and performed these services in-house. If
an Affiliate breaches its fiduciary obligations to the Company, or does not
resolve conflicts of interest in the manner described in the section of this
Prospectus titled "Conflicts of Interest--Process for Resolving Conflicting
Investment Opportunities," the Company may not meet its investment objectives.
See "Compensation Table," and "Management--The Advisory Agreement" and "--The
Management Agent," and "Certain Responsibilities of Directors and the Advisor;
Indemnification."
See also "Conflicts of Interests" for additional discussion of various
conflicts of interest, including the Company's option to have the business
conducted by the Advisor and/or the Management Agent acquired by or consolidated
into the Company.
PRICES PAID FOR PROPERTIES ACQUIRED FROM AFFILIATES MAY EXCEED PRICES THAT
WOULD HAVE BEEN PAID BY NON-AFFILIATES. A majority of the Directors (including
a majority of the then Independent Directors) approved the Company's intended
purchases of the Initial Properties. However, there can be no assurance that the
prices paid for Properties which may in the future be acquired from Affiliates
would not exceed that which would be paid by an unaffiliated buyer. The Articles
provide that the Company may not purchase any Property from an Affiliate unless:
(i) a majority of the Directors (including a majority of the Independent
Directors) not interested in the transaction approve the purchase as fair and
reasonable to the Company; and (ii) the price to the Company is no greater than
the cost of the asset to the Affiliate (such cost would include the purchase
price paid plus any cost associated with the purchase plus any capital
improvements made by the Affiliate plus any loan fees or points or any fee of a
similar nature, however designated, paid by the Affiliate in connection with
financing for the Property) unless substantial justification for a greater price
exists and the additional price is reasonable. In no event may the cost to the
Company exceed the Property's appraised value at the time of its acquisition by
the Company. See also "Conflicts of Interest-- Acquisition from Affiliates."
ALL STOCKHOLDERS BOUND BY VOTE OF MAJORITY. The Articles require a majority
of the outstanding voting Shares of Equity Stock to constitute a quorum to vote
on those matters on which holders of voting Equity Stock are required to vote
(such as elections of Directors) and a majority of a quorum can vote approval.
Therefore, a substantial majority of the Stockholders may be bound by the
decision of the holders of a minority of the outstanding shares of Equity Stock
with respect to any matters submitted to a vote of the holders of voting Equity
Stock other than those matters (such as mergers and sales of substantially all
assets other than in the ordinary course of business) which require approval of
a majority of all outstanding shares of Equity Stock.
COMPANY'S AND STOCKHOLDERS' RIGHTS AGAINST THE DIRECTORS AND THE ADVISOR ARE
LIMITED. The MGCL provides that a Director who performs his duties in good
faith and in a manner he or she reasonably believes to be in the best interests
of the Company and with the care that an ordinarily prudent person in a like
position would use under similar circumstances has no liability by reason of
being or having been a Director. The Articles, in the case of the Directors,
officers, employees and agents of the Company, and the Advisory Agreement, in
the case of the Advisor, require the Company to indemnify the Directors,
officers, employees and agents of the Company and the Advisor for certain
actions taken by them in good faith and without negligence or misconduct. As a
result, the Company and the Stockholders may have
29
<PAGE>
more limited rights against the Directors, officers, employees and agents of the
Company, and the Advisor than they would otherwise have under common law and,
furthermore, may be obligated to fund the defense costs incurred by the
Directors, officers, employees and agents of the Company or the Advisor in
certain cases. Neither the Directors, nor officers of the Company, nor the
Advisor, may be held liable to the Company or the Stockholders for monetary
damages unless: (i) it is proven that the person actually received an improper
benefit or profit in money, property or services; and (ii) to the extent that a
judgment or other final adjudication adverse to the person is entered in a
proceeding based on a finding in the proceeding that the person's action, or
failure to act, was the result of active or deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. See "Certain
Responsibilities of Directors and the Advisor; Indemnification."
DILUTION. Stockholders have no preemptive rights, and therefore, in the
event the Company: (i) issues its Shares or convertible debt or Preferred Stock
pursuant to a subsequent public offering or a private placement thereof; or (ii)
issues Preferred Stock or Shares (a) upon exercise of warrants or options or (b)
to sellers of Properties acquired directly or indirectly (E.G., upon exchange of
LP Units of the Operating Partnership or Interests in a Property Partnership) by
the Company in lieu of or in addition to cash consideration, investors
purchasing Shares in this Offering who do not participate in any future stock
issuances, if any, will experience dilution in the percentage of the Company's
issued and outstanding Equity Stock represented by their Shares. Stockholders
should not experience any monetary dilution in their investment as a result of
any such future stock issuances, provided that, as intended, the Company sells
any subsequently issued Shares for cash or property having a net asset value not
less than the then offering price or market price of the stock issued. The
Soliciting Dealer Warrants to be issued to the Dealer Manager in connection with
this Offering, options to purchase Shares to be issued to Independent Directors
under the Company's Independent Director Stock Option Plan, and/or convertible
securities, if any, likely would be exercised or converted at a time when the
Company would be able to obtain needed capital through a new offering of its
securities on terms more favorable than those provided by such securities. As
long as such securities remain unexercised or unconverted, the terms on which
the Company could raise additional capital may be adversely affected. See
"--Investment Risks--Possible Adverse Effects on Share Price Arising From Shares
Eligible for future Sale" in this Section and "Conflicts of Interest."
RISKS OF INVESTMENTS IN SECURITIES RELATED TO REAL ESTATE. The Company may
(but has no current plans to) partially pursue its investment objectives through
the ownership of securities of entities engaged in the ownership of real estate.
Ownership of such securities may not entitle the Company to control the
ownership, operation and management of the underlying real estate. In addition,
the Company may have no ability to control the distributions from such
securities, which may (i) reduce cash available for Distributions to
Stockholders and (ii) cause the Company to realize non-cash income from such
securities which will make it more difficult to satisfy the Distribution Test
(generally, 95% of REIT Taxable Income minus certain excess non-cash items) of
the REIT Requirements. However, the Company does not intend to rely on such
distributions from investments in other entities in order to meet its own
Distribution requirements. Furthermore, if the Company desires to control an
issuer of securities, it may be prevented from doing so by the limitations on
the assets and gross income tests which must be satisfied by the Company in
order for the Company to qualify as a REIT for federal income tax purposes. The
Company intends to operate its business in a manner that will not require the
Company to register under the Investment Company Act and Stockholders will
therefore not have the protection of the Investment Company Act.
The Company also may invest in mortgages or other debt instruments secured
by real estate and may do so as a strategy for ultimately acquiring the
underlying real estate. In general, investments in mortgages include the risk
that borrowers may be unable to make debt service payments or pay principal when
due, the risk that the value of the mortgaged property may be less than the
principal amount of the mortgage note securing such property and the risk that
interest rates payable on the mortgages may be lower than
30
<PAGE>
the Company's cost of funds to acquire these mortgages. In any of these events,
funds from operations and the Company's ability to make required Distributions
to Stockholders could be adversely affected.
YEAR 2000 RISKS. Many computer operating systems and software applications
were designed such that the year 1999 is the maximum date that can be processed
accurately. In the conduct of its own business, the Company relies on computers
and operating systems provided by equipment manufacturers, and also on
application software developed internally and, to a limited extent, by outside
software vendors.
The Company will test its internal information technology systems to
determine Year 2000 compliance, and will survey proposed tenants, suppliers and
other parties with whom the Company intends to do a significant amount of
business to identify the Company's potential exposure in the event such parties
are not year 2000 compliant in a timely manner.
Also, the Company will evaluate its potential exposure and costs if certain
non-informational technology systems in certain equipment used to operate
Properties are not Year 2000 compliant.
The Company believes that its information technology systems will be Year
2000 compliant. In addition, the Company is not currently aware of any material
impact on its business, operations or financial condition due to year 2000
non-compliance by any of the Company's proposed tenants or suppliers or by
non-informational technology systems in equipment used to operate Properties.
Although the Company will test its critical systems, survey its proposed tenants
and suppliers and evaluate certain non-informational technology systems in
certain equipment used to operate Properties intended to be acquired, there is
no assurance that the Company's information technology systems, or those of its
tenants or suppliers, or such non-informational technology systems in equipment,
will function correctly, if at all, after December 31, 1999. Any malfunction in
the Company's information technology systems, or those of its tenants or
suppliers or in such non-informational technology systems in equipment, could
cause the Company to incur significant costs and adversely affect the Company's
ability to make Distributions and acquire Properties.
See "Management's Discussion and Analysis of the Financial Condition of the
Company--Year 2000 Issues."
3. RISKS OF REAL ESTATE OWNERSHIP
GENERAL. All real property investments are subject to some degree of risk.
Equity real estate investments are generally illiquid and, therefore, the
Company's ability to promptly vary its portfolio in response to changing
economic, financial and investment conditions is limited. Real property
investments are also subject to adverse changes in general economic conditions
or local conditions which reduce the demand for the goods or services of
tenants, as well as other factors affecting real estate values, including: (i)
possible federal, state or local regulations and controls affecting rents,
prices of goods, fuel and energy consumption and prices, water and environmental
restrictions; (ii) increasing labor and material costs; and (iii) the
attractiveness of the Property to tenants in the neighborhood.
The yields available from equity investments in real estate depend in large
part on the amount of rental income earned and capital appreciation generated,
as well as the property operating and other expenses incurred. If the Company's
Properties do not generate revenues sufficient to meet operating expenses, the
Company may have to borrow amounts to cover fixed costs, and the Company's cash
available for Distributions may be adversely affected.
The principal real estate related adverse effects experienced by prior
investment programs sponsored by the Inland Affiliated Companies were mortgage
defaults and restructuring of debt. Between 1990 and December 31, 1997, 40 of
the Inland-sponsored partnerships owning 27 properties ceased making debt
service payments to unaffiliated lenders which held the underlying financing on
the properties. Seven of those partnerships, either directly or indirectly
through newly formed partnerships, filed for financial reorganization in federal
court. Only one of the seven properties was acquired by a lender through
31
<PAGE>
foreclosure, and the general partner replaced that property with a retail store
leased on a Triple-Net Lease Basis. Most of the mortgage defaults and
restructuring of debt resulted from the adverse effects of 1986 tax law changes
and the weakening of apartment markets in the late 1980s. For a discussion of
these adverse effects, see "Prior Performance of the Company's Affiliates--Loan
Modifications and Work-Outs," "-- Effects of Property Exchanges on Investors"
and "--Additional Information."
THE INITIAL PROPERTIES WILL FACE COMPETITION AND CHANGING ECONOMIC
CONDITIONS. Each of the Initial Properties will be subject to competition from
similar Retail Centers within their respective market areas, and their economic
performance could be affected by changes in local economic conditions.
DEPENDENCE ON GEOGRAPHICAL REGION AND RETAIL INDUSTRY. The Company's
Properties are to be located mainly in the states east of the Mississippi River
in the United States, and will be initially focused in the southeastern states,
primarily Florida, Georgia, North Carolina and South Carolina. Such Properties
primarily will be improved for use as retail establishments, principally
multi-tenant shopping centers, or improved with other commercial facilities
which provide goods and services. The Company's performance therefore is linked
to economic conditions in this region and in the market for retail space
generally. Therefore, to the extent that there are adverse economic conditions
in this region and in the market for retail space generally that impact the
market rents for retail space, such conditions could result in a reduction of
Net Income, Funds from Operations and cash available for Distributions and, thus
affect the amount of Distributions the Company can make to its Stockholders.
In addition, the Company intends to own and operate predominantly retail
shopping centers catering to retail tenants. To the extent that the investing
public has a negative perception of the retail sector, the value of Shares may
be negatively impacted, thereby resulting in the Shares trading at a discount
below the inherent value of the assets of the Company as a whole.
RISING EXPENSES COULD REDUCE CASH FLOW AND FUNDS AVAILABLE FOR FUTURE
ACQUISITIONS. The Properties will be subject to operating risks common to
commercial real estate in general, any or all of which may adversely affect the
Company. If any 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 that Property for
operating expenses. The Properties will be subject to increases in tax rates,
utility costs, operating expenses, insurance costs, repairs and maintenance and
administrative expenses. While some of the Properties may be leased on a
Triple-Net Lease Basis or require the tenants to pay some of such expenses,
renewals of leases or future leases may not be negotiated on that basis, in
which event the Company will have to pay those costs. If the Company is unable
to lease Properties on a Triple-Net Lease Basis or on a basis requiring the
tenants to pay all or some of such expenses, or if the tenants fail to pay
required tax, utility and other impositions, the Company could be required to
pay those costs which could adversely affect funds available for future
acquisitions or the Company's cash available for Distributions.
INABILITY OF TENANTS TO MEET THEIR OBLIGATIONS OR THEIR ELECTION NOT TO
EXTEND A LEASE UPON ITS EXPIRATION. The Company is subject to the risk that
tenants, as well as lease guarantors (a "Guarantor"), if any, may be unable to
make their lease payments or may decline to extend a lease upon its expiration.
A default by a tenant, the failure of a Guarantor to fulfill its obligations or
other premature termination of a lease, or a tenant's election not to extend a
lease upon its expiration, could, depending on the size of the leased premises
and the Advisor's ability to successfully find a suitable substitute tenant,
have an adverse effect on the Company's results of operations and financial
condition, including its ability to pay Distributions. See "Prior Performance of
the Company's Affiliates--Loan Modifications and Work-Outs."
RELIANCE ON CERTAIN TENANTS. The Company's results of operations and
financial condition and ability to make Distributions may be adversely affected
by the bankruptcy or insolvency, or a downturn in the business, of (i) any
tenant generally occupying approximately 30% or more of the GLA of a Retail
Center, or (ii) the tenant of any of the Triple-Net Single-User Retail
Properties Outside the Primary Geographical
32
<PAGE>
Area of Investment (each an "Anchor Tenant"), including the decision by an
Anchor Tenant not to renew its lease. All of the Initial Properties have one or
more tenants which individually occupy 30% or more of the GLA of such Properties
and there are a total of seven Anchor Tenants in the Initial Properties. See
"Real Property Investments." In addition, a lease termination by any Anchor
Tenant could result in lease terminations or reductions in rent by other tenants
whose leases permit cancellation or rent reduction in the event an Anchor
Tenant's lease is terminated. In such event, the Company's ability to re-lease
the vacated space could be adversely affected. Similarly, the leases of certain
Anchor Tenants may permit the Anchor Tenant to transfer its lease to another
retailer. The transfer to a new Anchor Tenant could adversely affect customer
traffic in the Retail Center and thereby reduce the income generated by that
Retail Center and could also allow other tenants to make reduced rental payments
or to terminate their leases at the Retail Center.
POTENTIAL ADDITIONAL COSTS IN CONNECTION WITH ACQUIRING SINGLE-USER RETAIL
PROPERTIES. Certain of the Properties or portions thereof may be designed or
built primarily for a particular tenant or a specific type of use. If the tenant
fails to renew its lease or defaults on its lease obligations, the Property may
not be readily marketable to a new tenant without substantial capital
improvements or remodeling which may adversely affect the Company's results of
operation and financial condition.
COMPETITION FOR TENANTS AND CUSTOMERS. The Properties will be located in
developed areas. Therefore, there will undoubtedly be numerous other retail
properties within the market area of each of the Properties which will compete
with the Company for tenants. The number of competitive properties could have a
material effect on the Company's ability to rent space at the Properties and the
amount of rents charged. The Company could be adversely affected if additional
competitive types of properties are built in locations competitive with the
Properties, causing increased competition for customer traffic and creditworthy
tenants. This could result in decreased cash flow from tenants and may require
the Company to make capital improvements to the Properties which it would not
have otherwise made, thus affecting cash available for Distributions, and the
amount of Distributions.
RESTRICTIONS ON RE-LEASING SPACE. In many cases, tenant leases contain
provisions giving the tenant the exclusive right to sell certain types of
merchandise or provide certain types of services within the particular Retail
Center, or limit the ability of other tenants to sell such merchandise or
provide such services. When re-leasing space after a vacancy occurs, these
provisions may limit the number and types of prospective tenants for the vacant
space. The failure to re-lease or to re-lease on satisfactory terms could result
in a reduction of Net Income, Funds from Operations and cash available for
Distributions and, thus affect the amount of Distributions.
SALE OF PROPERTIES. The Company may not be able to sell a Property if or
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 whether it would be able to
sell any Property for the price or on the terms set by the Company, or whether
any price or other terms offered by a prospective purchaser would be acceptable
to the Company. The Company cannot predict the length of time needed to find a
willing purchaser and to close the sale of a Property.
The Company may be required to expend funds to correct defects or to make
improvements before a Property can be sold. There is no assurance that the
Company will have funds available to correct defects or to make improvements.
In connection with the acquisition of a Property, the Company may agree to
restrictions that prohibit the sale of that Property for a period of time or
impose other restrictions, such as a limitation on the amount of debt that can
be placed or repaid on that Property. Such provisions would restrict the ability
of the Company to sell a Property.
33
<PAGE>
UNINSURED LOSSES; UNAVAILABILITY OF INSURANCE. Each lessee is responsible
for insuring its goods and premises and, in certain circumstances, may be
required to reimburse the Company for a share of the cost of acquiring
comprehensive insurance for the Property, including casualty, liability, fire
and extended coverage customarily obtained for similar properties in amounts
which the Advisor determines are sufficient to cover reasonably foreseeable
losses. Tenants of single-user properties leased on a Triple-Net Lease Basis
typically are required to pay all insurance costs associated with those
properties. There is no assurance that material losses in excess of insurance
proceeds will not occur with respect to any Property. However, there are certain
types of losses (generally of a catastrophic nature, such as losses due to wars,
earthquakes, floods, hurricanes, pollution or environmental matters) which are
either uninsurable or not economically insurable or may be insured subject to
certain limitations, such as large deductibles or copayments. If such an event
occurred to, or caused the destruction of, a Property owned by the Company, the
Company could lose both its invested capital and anticipated profits from such
Property. See "Investment Objectives and Policies--Description of Leases" and
"Real Property Investments--Insurance Coverage on Properties."
REAL ESTATE RELATED TAXES. Certain local real property tax assessors may
seek to reassess certain of the Properties as a result of the Company's
acquisition thereof and, generally from time to time as property values or
assessment rates change or for other reasons deemed relevant by the assessors.
An increase in the assessed valuation of a Property for real estate tax purposes
will result in an increase in the related real estate taxes on that Property.
Although some tenant leases may permit the Company to pass through such tax
increases to the tenants for payment, there is no assurance that renewal leases
or future leases will be negotiated on the same basis. Increases not passed
through to tenants will adversely affect the Company's Net Income, Funds from
Operations, cash available for Distributions, and the amount of Distributions.
EFFECT OF BANKRUPTCY OF TENANTS. Any or all of the tenants (or a guarantor
of the tenant's lease obligations, hereinafter a "Lease Guarantor") could be
subject to a bankruptcy proceeding pursuant to the United States Bankruptcy
Code, Title 11, United States Code. A bankruptcy filing would bar all efforts to
collect pre-bankruptcy debts from these entities or their property, absent an
enabling order from the bankruptcy court. Post-bankruptcy debts would be paid
currently.
Should a lease be assumed, all pre-bankruptcy balances owing thereunder must
be paid in full. Should a lease be rejected, the rejection would be treated as a
pre-bankruptcy breach, and the Company would have a general unsecured claim for
damages resulting from the breach. This claim is capped at the rent reserved
under the lease, without acceleration, for the greater of one year or 15% (but
not more than three years) of the remaining term of the lease, plus rent already
due but unpaid (hereinafter, the "Rejection Damages Cap"). This claim could only
be paid to the extent that funds were available, and then only in the same
percentage as that realized on other unsecured claims in the case.
If the bankruptcy is filed by or against a Lease Guarantor, but not by or
against the underlying tenant, the whole range of remedies against the tenant
will remain, and the automatic stay will not prevent the enforcement of these
remedies (absent an affirmative order to the contrary by the bankruptcy court).
However, the Rejection Damages Cap may still be applicable to claims asserted
against the Lease Guarantor.
Following a bankruptcy filing, the tenant or its trustee generally has 60
days to decide whether to assume or reject a lease. Such deadline may be
extended by the court, and there can be no assurances to what extent (if at all)
the deadline may be deferred. Under some circumstances (going-out-of business
sales and the like), a bankruptcy court may override certain non-monetary
provisions of a lease.
In addition to assumption and rejection of a lease, a tenant has the option
of assigning its lease. There can be no assurances as to how a specific request
for assignment will be treated, or how such assignment (if approved) will affect
other tenants.
34
<PAGE>
In summary, a tenant or Lease Guarantor bankruptcy could delay efforts to
collect past due balances under the relevant leases, and could ultimately
preclude full collection of these sums. Such an event could cause a reduction in
the Company's cash flow and the amounts available for Distributions to its
Stockholders. In the event of a bankruptcy, no assurance can be given that the
tenant or its trustee will assume its lease. If a given lease (or guaranty of
such lease) is not assumed, the Company's cash flow and the amounts available
for Distributions to its Stockholders may be adversely affected.
ENVIRONMENTAL LAWS AND CERTAIN OTHER GOVERNMENTAL LAWS AND REGULATIONS. 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 the remediation of contamination
associated with such disposal. Certain of these laws and regulations may impose
joint and several liability on certain statutory classes of persons including
tenants, owners or operators, for the costs of investigation or remediation of
contaminated properties, regardless of fault or the legality of the original
disposal. 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. In addition, the presence of such substances,
or the failure to properly remediate such substances, may adversely affect the
Company's ability to sell or rent such Property or to use such Property as
collateral for its borrowings.
Certain laws and regulations, including those governing air emissions,
underground and above-ground storage tanks, and solid waste management and
disposal, have been amended so as to require compliance with new or more
stringent standards as of future dates. 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, 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 tenants, by the
existing condition of the land, or by operations in the vicinity of the
Properties (such as the presence of underground storage tanks) or by the
activities of unrelated third parties.
These laws typically allow liens to be placed on the affected property. In
addition, there are various local, state and federal fire, health, life-safety
and similar regulations which the Company may, under certain circumstances, be
required to comply with, and be subject to liability in the form of fines or
damages for noncompliance.
State and federal laws in this area are constantly evolving, and the Company
intends to monitor these laws and take commercially reasonable steps to protect
itself from the impact thereof, including obtaining environmental assessments of
each Property acquired. No assurance can be given that such assessments will
reveal all environmental liabilities or that a prior owner of a Property did not
create a material environmental condition not known to the Company. 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. However, there can be no assurance that the Company's
business, assets, results of operations, liquidity or financial condition will
not be adversely affected by these laws, which may adversely affect cash
available for Distributions, and the amount of Distributions.
COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT. The Company's Properties will be subject to the Americans with
Disabilities Act of 1990 (the "ADA"). Under the ADA, all places of public
accommodation are required to comply with certain federal requirements related
to access and use by disabled persons. The ADA has separate compliance
requirements for "public accommodations" and "commercial facilities" but
generally requires that buildings and services (including restaurants and retail
35
<PAGE>
stores) be made accessible and available to people with disabilities. The ADA
requirements could require removal of access barriers and could result in the
imposition of injunctive relief, monetary penalties, or, in some cases, an award
of damages. The Company will attempt to acquire Properties which comply with the
ADA or place the burden on the seller or other third party (such as a tenant) to
ensure compliance with the ADA, although there can be no assurance that the
Company will be able to acquire Properties or allocate responsibilities in this
manner. To the extent that it cannot, Company funds utilized for ADA compliance
may affect cash available for Distributions, and the amount of Distributions.
RISK OF RECHARACTERIZATION OF SALE AND LEASEBACK TRANSACTIONS. The Company
may enter into sale and leaseback transactions, pursuant to which the Company
would purchase a Property and then lease such Property to the Person from whom
it was purchased. In the event of the bankruptcy of such a lessee, a transaction
structured as a sale and leaseback may be recharacterized as either a financing
or a joint venture, either of which outcomes could result in adverse
consequences to the Company.
If the sale and leaseback were recharacterized as a financing, the Company
might not be considered the owner of such Property, and as such would have the
status of a creditor in relation to the lessee. In that event, the Company would
no longer have the right to sell or encumber the fee simple interest in the
Property. Instead, the Company would have a claim against the lessee for the
amounts owed under the lease, with such claim arguably secured by the Property.
The lessee/debtor might have the ability to propose a plan restructuring the
term, interest rate and amortization schedule of its outstanding balance. If
confirmed by the bankruptcy court, the Company could be bound by the new terms,
and prevented from foreclosing its lien on the Property. These outcomes could
adversely affect the Company's Cash Flow and the amount available for
Distributions to its Stockholders.
If the sale and leaseback were recharacterized as a joint venture, the
Company and its lessee could be treated as co-venturers with respect to the
Property. As such, the Company could be held liable, under certain
circumstances, for debts incurred by the lessee with respect to the Property.
The imposition of such liability could adversely affect the Company's Cash Flow
and the amount available for Distributions to its Stockholders.
POTENTIAL ADDITIONAL COSTS IN CONNECTION WITH ACQUIRING NEWLY CONSTRUCTED
PROPERTIES. The Company intends primarily to acquire existing or newly
constructed Properties. Although the Company presently intends to acquire newly
constructed buildings only on a turnkey basis (which means the contractor
completes the work of building and installation to the point of readiness for
operation and occupancy at which time it is then acquired for a prearranged
price), the builder's failure to perform may necessitate legal action by the
Company to rescind its purchase of a Property, to compel performance or to sue
for damages. Any such legal action may result in increased costs to the Company.
RISKS ASSOCIATED WITH INVESTMENTS IN UNIMPROVED REAL PROPERTY. The Company
may invest up to 10% of its assets in Properties other than the Company's
Primary Property Investments, which may include unimproved real property.
Investment in unimproved properties, in addition to the risks of real estate
investment in general, are also subject to risks and uncertainties associated
with re-zoning the land for a higher use or development and environmental
concerns of governmental entities and/or community groups. The Company does not
intend to invest in any unimproved property not intended to be developed.
CONSTRUCTION AND DEVELOPMENT RISKS. Construction and development activities
will expose the Company to certain risks such as cost overruns, carrying costs
of projects under construction or development, availability and costs of
materials and labor, weather conditions and government regulation. Should the
Company elect to engage in construction and development activities, in
accordance with current pronouncements of the Service, and until there is a
change in such pronouncements, the Company intends to have its employees only
perform certain oversight and review functions, including reviewing the
construction and tenant improvement design proposals, negotiating and
contracting for feasibility studies and supervising compliance with local, state
or federal laws and regulations, and the Company will retain
36
<PAGE>
independent contractors to perform the actual physical construction work on
tenant improvements, the installation of HVAC systems or the development of an
entirely new project.
THE COMPANY MAY ACQUIRE PROPERTIES WITH LOCK-OUT PROVISIONS. Lock-out
provisions may prohibit the Company from selling a Property (except in certain
events, including certain transactions that would not result in the recognition
of any gain for tax purposes), or may require the Company to maintain certain
debt levels for a period of years on certain Properties. Thus, the lock-out
provisions could materially restrict the Company from selling or otherwise
disposing of or refinancing such Properties. The lock-out provisions may apply
even if it would otherwise be in the best interests of the Stockholders for the
Company to sell one or more of such Properties, reduce the outstanding
indebtedness with respect to any of such Properties or not refinance such
indebtedness on a nonrecourse basis at maturity, or increase the amount of
indebtedness with respect to such Properties. Such lock-out provisions may
restrict the ability of the Company to sell substantially all of its assets,
even if such a sale would be in the best interests of its Stockholders.
The lock-out provisions could impair the ability of the Company to take
actions during the lock-out period that would otherwise be in the best interests
of the Stockholders and, therefore, may have an adverse impact on the value of
the Shares (relative to the value that would result if the lock-out provisions
did not exist). In particular, the lock-out provisions could preclude the
Company from participating in certain major transactions that could result in a
disposition of the Company's assets or a change in control of the Company even
though that disposition or change in control might be in the best interests of
the Stockholders.
The Company, as the General Partner of the Operating Partnership, will not
permit the Operating Partnership to acquire Properties containing lock-out
provisions if the lock-out period exceeds three years.
4. TAX RISKS
GENERAL. There are various federal income tax risks associated with
investing in the Company. Although the provisions of the Code relevant to an
investment in the Company are generally described in the Section of the
Prospectus titled "Federal Income Tax Considerations," each potential investor
is strongly urged to consult his or her own tax advisor concerning the effects
of federal income tax law on an investment in the Company and on his or her
individual tax situation.
Investors should recognize that many of the advantages and economic benefits
of investing in the Company depend upon the continued treatment of the Company
as a REIT for federal income tax purposes. If the Company were no longer taxed
as a REIT, the Company would pay a corporate level tax on its income which would
reduce its cash available to pay Distributions and the yield from investing in
the Company. The continued treatment of the Company as a REIT is dependent on
laws and regulations, and administrative and judicial interpretations thereof,
all of which are subject to change, which changes may be applied retroactively,
and on the Company's ability to continue to satisfy a variety of objective tests
set forth in the Code.
RISKS REGARDING REIT QUALIFICATION AND CONSEQUENCES OF THE FAILURE TO SO
QUALIFY. Among the various risks associated with the federal income tax aspects
of the Offering of which investors should be aware are:
- RISK OF FAILING TO QUALIFY AS A REIT UNDER THE CODE. The Company intends
to operate its business so as to qualify as a REIT under the Code commencing
with its taxable year ending December 31, 1999. Although the Company believes
that it 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 or
remain so qualified. For example, 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. Further, the
Company's desire to maintain REIT status could cause it not to acquire certain
Properties or undertake certain activities that could affect the return on an
investment in the Shares.
37
<PAGE>
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and others on a quarterly basis) established under highly
technical and complex Code provisions for which there are only limited judicial
and administrative interpretations and involves the determination of various
factual matters and circumstances not entirely within the Company's control. For
example, in order to qualify as a REIT, at least 95% of the Company's gross
income in any year must be derived from qualifying sources and the Company must
make distributions to Stockholders aggregating annually at least 95% of its REIT
Taxable Income (determined without regard to the dividends paid deduction and by
excluding net capital gains). The complexity of these provisions and of the
applicable Treasury Regulations that have been promulgated under the Code is
greater in the case of a REIT that holds its assets through a partnership, as
the Company intends to do through the Operating Partnership. In addition, no
assurance can be given that new legislation, regulations, administrative
interpretations or court decisions, which could apply retroactively, will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. The Company, however, is
not aware of any pending tax legislation that would adversely affect the
Company's ability to qualify or operate as a REIT. The Company has received an
opinion of Counsel to the Company regarding the Company's ability to qualify as
a REIT. However, see "--Limitations on Opinion of Counsel" below in this section
and "Federal Income Tax Considerations--Opinion of Tax Counsel" and "--Other Tax
Considerations--Legislative Developments".
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the value of the REIT's
total assets on certain testing dates. In addition to the 5% limitation, a REIT
is not permitted to own more than 10% of the voting securities of any particular
issuer. If the Company fails to satisfy the 5% or 10% limitation or otherwise
fails to qualify as a REIT in any taxable year, except as to certain failures
for which there may be statutory relief or imposition of intermediate sanctions
in the form of monetary penalties, or loses its REIT status for any other
reason, its Distributions will not be deductible and its taxable income will be
subject to federal income tax (including any applicable alternative minimum tax)
at regular corporate rates. The resulting reduction in net earnings would reduce
or eliminate the cash available for investment and for Distributions. In
addition, the Company may be required to borrow funds, liquidate certain of its
investments or take other steps which could affect its operating results due to
this tax liability. Moreover, if the Company's REIT status is terminated because
of the failure to meet a technical REIT test or it voluntarily revokes its
election, the Company would be disqualified from electing treatment as a REIT
for the four taxable years following the year in which REIT status is lost. If
the Company loses its REIT status, Distributions would no longer be required to
be made. See "Federal Income Tax Considerations--Taxation of the
Company--Failure to Qualify" for a discussion of the consequences of the
Company's failure to qualify as a REIT.
- ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS. 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 to make Distributions to its Stockholders to comply with
the distribution provisions of the Code and to avoid federal income taxes and
the non-deductible 4% excise tax payable at the Company level. 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 of the Operating Partnership), the effect of non-deductible
capital expenditures, and the creation of reserves or required debt amortization
payments could in the future require the Company to borrow funds on a short-term
or long-term basis to meet the distribution requirements that are necessary to
comply with the REIT Requirements. In such circumstances, the Company might need
to borrow funds to avoid adverse tax consequences, even if management
38
<PAGE>
believes that the then prevailing market conditions generally are not favorable
for such borrowings or that such borrowings would not be advisable in the
absence of such tax considerations.
Distributions by the Operating Partnership are determined by the Company, as
General Partner of the Operating Partnership, and are 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 Requirements and such other factors as the Board deems relevant. There can
be no assurance that the Company will be able to continue to satisfy the annual
distribution requirement so as to avoid corporate income taxation of the
earnings that it distributes.
- LIMITATIONS ON SHARE OWNERSHIP. In order for the Company to qualify as a
REIT, no more than 50% of its outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals at any time during the last half of the
Company's taxable year. If the Company failed to satisfy this requirement and no
relief provision is available or can be met, the Company's REIT status would
terminate. See "Federal Income Tax Considerations--Taxation of the
Company--Failure to Qualify" for a discussion of the consequences of the
Company's failure to qualify as a REIT. However, this requirement does not apply
until after the first taxable year for which an entity seeks REIT status.
Because the Company intends to seek REIT status for the fiscal year ended
December 31, 1999, this requirement would become applicable to the Company for
its fiscal year commencing January 1, 2000. To ensure that the Company will not
fail to qualify as a REIT under this test, the Articles provide that, commencing
as of July 1, 2000, no person may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.8% of the number or value of the
issued and outstanding stock of the Company. See "Description of Securities--
Restrictions on Ownership and Transfer."
- LIMITATIONS ON OPINION OF COUNSEL. The opinion of Counsel is based and
conditioned on various assumptions and representations made by the Company and
the Advisor to Counsel as to certain factual matters. As more fully set forth
under "Federal Income Tax Considerations," Counsel has expressed its opinion
based on the facts described in this Prospectus and the Articles and on certain
factual representations made by the Company and the Advisor to Counsel that, as
of the date of this Prospectus: (i) the Company has been organized in conformity
with the requirements for qualification as a REIT beginning with its taxable
year ending December 31, 1999, and that its prior, current and anticipated
methods of operation have enabled and will enable the Company to satisfy the
REIT Requirements; and (ii) distributions to a Stockholder which is a Tax-Exempt
Entity will not constitute unrelated business taxable income ("UBTI") under
current law (except for certain Tax-Exempt Entities described in paragraphs (7),
(9), (17) and (20) of Section 501(c) of the Code, and organizations described in
Section 501(c)(2) of the Code that support such organizations), unless: (a) such
Stockholder has financed the acquisition of its Shares with "acquisition
indebtedness" (within the meaning of the Code); or (b) a Qualified Plan owns
more than 10% of the Shares and the Company is a "Pension-Held REIT." A
"Pension-Held REIT" is defined generally to mean any REIT in which either (i) at
least one Qualified Plan holds more than 25% (by value) of the outstanding stock
of the REIT, or (ii) one or more Qualified Plans (each of which owns more than
10% (by value) of the outstanding stock of the REIT) hold an aggregate of more
than 50% (by value) of the outstanding stock of the REIT. Counsel has not
independently verified the factual assumptions and representations relied upon
in rendering its opinion, but is not aware of any facts that would make such
assumptions or representations false. Counsel will not review compliance with
the REIT Requirements on an on-going basis after the initial effective date of
the Registration Statement or issue additional opinions unless expressly
requested to do so by the Company. Accordingly, no assurance can be given that
the actual operating results of the Company will allow it to satisfy the REIT
Requirements, or would not result in the recognition of UBTI by Tax-Exempt
Entities. See "Federal Income Tax Considerations--Taxation of the
Company--Failure to Qualify." In addition, these opinions represent Counsel's
legal judgment. An opinion of counsel is not binding on the Service or a
39
<PAGE>
court and there can be no assurance that the Service or a court will not take a
position different from that expressed by such opinion. These opinions are based
on the Code and Treasury Regulations, and judicial and administrative
interpretations thereof, in effect as of the date of this Prospectus, any of
which are subject to change, possibly with retroactive effect.
RISKS REGARDING PARTNERSHIP QUALIFICATION AND CONSEQUENCES OF FAILURE TO
QUALIFY AS A PARTNERSHIP. If the Service were to successfully challenge the
status of the Operating Partnership as a partnership for federal income tax
purposes, the Operating Partnership would be taxable 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 affect the character of the
income received from the Operating Partnership, and would reduce substantially
the amount of cash available for Distribution to the Company's Stockholders. In
addition, in the event that any Property Partnerships were classified as an
association taxable as a corporation for federal income tax purposes rather than
as a partnership, it is unlikely that the Company could continue to satisfy the
REIT Requirements. See "Federal Income Tax Considerations--Taxation of the
Company--Failure to Qualify." In addition, classification as an association
taxable as a corporation would affect the character of the income received from
any Property Partnerships and subject profits of any such Property Partnerships
to corporate double taxation. See "Federal Income Tax Considerations--Taxation
of the Company--Partnership Classification."
MISCELLANEOUS TAX RISKS. Among various miscellaneous tax risks are the
following:
- 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. For
example, if the Company has net income from a "prohibited transaction," such
income will be subject to a 100% tax. See "Federal Income Tax Considerations--
Taxation of the Company." In addition, the Company may be subject to state and
local taxes on its income and property.
- TAX LIABILITY ON REINVESTED DISTRIBUTIONS. Stockholders that participate
in the DRP will be deemed to have received, and will for income tax purposes be
taxed on, the amount reinvested in Shares. Therefore, Stockholders (other than
Tax-Exempt Entities) will have to use funds from other sources to pay their tax
liability on the value of the Shares received. In addition, Stockholders who
purchase Shares at a discount either through the DRP or another discount program
offered by the Company may recognize additional taxable income equal to the
amount of such discount. See "Federal Income Tax Considerations--Other Tax
Considerations--Distribution Reinvestment Program."
IN VIEW OF THE COMPLEXITY OF THE TAX ASPECTS OF THE OFFERING, PARTICULARLY
IN LIGHT OF THE FACT THAT CERTAIN OF THE TAX ASPECTS OF THE OFFERING WILL NOT BE
THE SAME FOR ALL INVESTORS, PROSPECTIVE INVESTORS ARE STRONGLY ADVISED TO
CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATION
PRIOR TO INVESTMENT IN THE COMPANY.
5. ERISA RISKS
SUITABILITY OF THE COMPANY'S INVESTMENTS FOR QUALIFIED PENSION AND
PROFIT-SHARING TRUSTS. When considering an investment in Shares of the Company,
a fiduciary of a Qualified Plan should consider: (i) whether the investment
satisfies the diversification requirements of Section 404(a)(3) of ERISA and
other applicable standards imposed by ERISA; (ii) whether the investment is
prudent and meets Plan liquidity requirements as there may be only a limited
market in which to sell or otherwise dispose of the Shares; and (iii) is
permissible under the Plan's governing instrument. The Company has not, and will
not, evaluate whether an investment in the Shares is suitable for any particular
plan, and will accept such entities as Stockholders if an entity otherwise meets
the suitability standards. See "ERISA Considerations."
If the Company is considered a Pension-Held REIT, an investment in the
Company may also produce UBTI which may cause a Qualified Plan holding 10% or
more of the Shares to pay a tax on a portion of
40
<PAGE>
the income distributed to it by the Company. The determination of whether the
Company will constitute a Pension-Held REIT will depend on the concentration of
ownership by one or more Qualified Plans, a factor that is not within the
control of the Company. The likelihood of a Qualified Plan holding 10% or more
of the Shares is remote in view of the Share ownership limit of 9.8% of the
outstanding Shares in the Articles; however, it is possible because the Board
has the power to waive the limitation. See "Federal Income Tax Considerations"
and "Description of Securities--Restrictions on Ownership and Transfer."
In addition to considering their fiduciary responsibilities under ERISA and
the prohibited transaction rules of ERISA and the Code, fiduciaries of Qualified
Plans should also consider the effect of the "Plan Asset" regulations issued by
the Department of Labor. See "ERISA Considerations."
ANNUAL STATEMENT OF VALUE IS AN ESTIMATE. Stockholders subject to ERISA
will be provided with an annual statement of value reporting the value of each
Share based upon an estimated amount (as determined by the Company) they would
receive if the Company's Properties were sold as of the close of the Company's
fiscal year and if such proceeds (without reduction for selling expenses),
together with the other funds of the Company, were distributed in liquidation of
the Company; provided, however, the Net Asset Value of each Share will be deemed
to be $10 for the first three years following the termination of this Offering.
This annual valuation may be revised by the Company from time to time. There can
be no assurance that: (i) such value could actually be realized by the Company
or by Stockholders upon liquidation (in part because estimates of value do not
necessarily indicate the price at which assets could be sold, and because no
attempt will be made to estimate the expenses of selling any asset of the
Company); (ii) Stockholders could realize such value if they were to attempt to
sell their Shares; or (iii) such value would comply with the ERISA requirements.
Should the Shares become listed for trading on a national stock exchange or
included for quotation on a national market system, the Company will no longer
provide such valuations.
CONFLICTS OF INTEREST
The Company is subject to various conflicts of interest arising out of its
relationship with the Sponsor, the Advisor or its Affiliates. All agreements and
arrangements, including those relating to compensation, between the Company and
the Advisor and its Affiliates are not the result of arm's-length negotiations.
The limitations on the Advisor described below have been adopted to control when
the Company enters into transactions with the Advisor and its Affiliates. With
respect to the conflicts of interest described herein, the Advisor and its
Affiliates will endeavor to balance the interests of the Company with the
interests of the Advisor and its Affiliates in making any determination.
However, to the extent that the Advisor or its Affiliates take actions that are
more favorable to other entities than to the Company, such actions could have a
negative impact on the Company's financial performance and, consequently, on
Distributions to Stockholders. These conflicts of interest are not listed in any
order of priority.
1. COMPETITION FOR THE TIME AND SERVICE OF THE ADVISOR AND ITS
AFFILIATES. The Company relies on the Advisor and its Affiliates for the daily
operation of the Company and the management of its assets. Personnel of the
Advisor and Affiliates of the Advisor have conflicts of interest in allocating
management time, services and functions among various existing real estate
investment programs and any future real estate investment programs or other
entities which they may organize or serve, as well as other business ventures in
which they are involved. The Advisor and its Affiliates believe they have
sufficient staff to be fully capable of discharging their responsibilities in
connection with various real estate programs and other business ventures.
The Company believes that the compensation payable to the Advisor and its
Affiliates pursuant to the Advisory Agreement and the Management Agreement is on
terms no less favorable to the Company than those customary for similar services
performed by independent firms in the relevant geographic area. See
"Compensation Table" and "Management--The Advisory Agreement" and "--The
Management Agent and the Management Agreement."
41
<PAGE>
2. PROCESS FOR RESOLVING CONFLICTING INVESTMENT OPPORTUNITIES. Affiliates
of the Advisor and Inland have sponsored publicly and privately offered entities
and may in the future sponsor publicly and privately offered REITs or other
entities which may have investment objectives very similar to the Company's. The
Advisor and its Affiliates could, therefore, be subject to conflicts of interest
between the Company and other real estate investment programs in connection with
the acquisition of properties. To the extent possible, the resolution of
conflicting investment opportunities between the Company and other investment
entities advised or managed by the Advisor and its Affiliates will, as a general
rule, be resolved by giving priority to the investment entity whose primary
geographic area of investment is the area where the prospective Property is
located.
An agreement (the "Property Acquisition Service Agreement") among the
Company, the Advisor, IREC (another REIT sponsored by IREIC), Inland Real Estate
Advisory Services, Inc. ("IREAS," the advisor to IREC), and Inland Real Estate
Acquisitions, Inc. ("IREA," one of the Inland Affiliated Companies), has been
entered into to resolve these conflicting opportunities. Subject to the
exception described below, the Property Acquisition Service Agreement grants the
Company the first opportunity to purchase a prospective Property in the
Company's Primary Geographical Area of Investment placed under contract by IREA,
the Advisor or the Affiliates of the Advisor, provided the Company is able to
close the purchase of the prospective Property within 60 days. Similarly, IREC
is granted the first opportunity to purchase a prospective Property in its
primary geographic area of investment (a 400 mile radius of TIGI's headquarters
in Oak Brook, Illinois), provided it is able to close the purchase of the
prospective Property within 60 days. However, if the prospective Property is
located in both the Company's and IREC's primary geographic area of investment,
and both the Company and IREC have funds available to make the purchase, the
prospective Property will first be offered to IREC. If IREC does not purchase
the prospective Property, it will then be offered to the Company.
If (i) the prospective Property is outside the primary geographic area of
investment of both the Company and IREC, (ii) the Company, IREC and any other
real estate investment program sponsored by IREIC have funds available to make
the purchase, and (iii) the prospective Property meets each of their respective
acquisition criteria, then the prospective Property will (x) first be offered to
IREC, (y) if IREC does not purchase the prospective Property, it will then be
offered to the Company, and (z) if the Company does not purchase the prospective
Property, it will then be offered to such other real estate investment program.
Other factors which may be considered in connection with evaluating the
suitability of the prospective Property for investment by a particular entity
include: (i) the effect of the acquisition on the diversification of each
entity's portfolio; (ii) the amount of funds available for investment; (iii)
cash flow; and (iv) the estimated income tax effects of the purchase and
subsequent disposition.
The Company has been informed that IREC is not currently offering any of its
securities having completed its last offering of securities as of December 31,
1998, and expects to have all of its anticipated funds available for investment
from its last offering of securities fully invested by September 1999.
Accordingly, material conflicting investment opportunities between IREC and the
Company are not currently expected after that date. In addition, the Company
plans to initially focus its purchase of Retail Centers in the southeastern
states, primarily Florida, Georgia, North Carolina and South Carolina, which is
outside IREC's primary geographic area of investment. However, if any conflicts
do arise, they will be resolved as provided in the Property Acquisition Service
Agreement.
The Independent Directors must, by a majority vote, approve all actions by
the Advisor or its Affiliates which present potential conflicts with the
Company. See "Management--The Advisory Agreement."
The Company believes that these factors, together with the obligations of
the Advisor and the Affiliates to present the Company with any investment
opportunity which could be suitable for the
42
<PAGE>
Company, will help to lessen the competition or conflicts with respect to the
purchase of Properties by other entities and the Company.
3. ACQUISITION FROM AFFILIATES. The Company intends to acquire all of its
Initial Properties from the Initial Property Sellers (who are Affiliates of
TIGI) and may acquire other Properties from Affiliates. The purchase prices for
the Initial Properties were not, and the purchase prices of such other
Properties which may be purchased from Affiliates will not be, the subject of
arm's-length negotiations. Such acquisitions may be on terms less favorable to
the Company than arm's length transactions and may result in concessions as to
price or otherwise which may be less advantageous to the Company than an arm's
length transaction. However, the Articles provide that the purchase price of any
Property acquired from an Affiliate: (i) may not exceed its fair market value as
determined by a competent independent appraiser who is a member in good standing
of the Appraisal Institute; and (ii) must be approved by a majority of the
Directors (including a majority of the Independent Directors) not interested in
the transaction as being fair and reasonable to the Company and at a price to
the Company no greater than the cost of the asset to such Affiliate, or if the
price to the Company is in excess of such cost, that substantial justification
for such excess exists and such excess is reasonable. A majority of the
Directors (including a majority of the then Independent Directors) approved the
acquisition of the Initial Properties; however, there can be no assurance that
the prices to be paid to the Affiliates will not exceed those which would have
been paid by an unaffiliated purchaser.
4. THE COMPANY MAY PURCHASE PROPERTIES FROM PERSONS WITH WHOM AFFILIATES OF
THE ADVISOR HAVE PRIOR BUSINESS RELATIONSHIPS. The Company may purchase
Properties from third parties who have sold Properties in the past or who may
sell Properties in the future to the Advisor or its Affiliates. In the event the
Company purchases Properties from these third parties, the Advisor will
experience a conflict between the current interests of the Company and its
interests in preserving any ongoing business relationship. Nevertheless, the
Advisor will not consummate purchases in a manner which would cause it to breach
its fiduciary obligations to the Company. See "Management."
5. PROPERTY MANAGEMENT SERVICES ARE BEING RENDERED BY AN ENTITY OWNED
PRINCIPALLY BY INDIVIDUALS WHO ARE AFFILIATES OF INLAND. The Management Agent,
which is owned principally by individuals who are Affiliates of Inland, provides
property management services to the Company on a competitive basis in a manner
consistent with customary business practices. See "Compensation
Table--Nonsubordinated Payments-- Operational Stage." The Advisor and the
Management Agent believe that the Management Agent has sufficient personnel and
other required resources to discharge all responsibilities to the Company.
Pursuant to the property management services agreement between the Company and
the Management Agent (the "Management Agreement"), the Company pays the
Management Agent a monthly management fee of no greater than 90% of the fee
which would be payable to an unrelated party providing such services, which fee
shall initially be 4.5% of gross income for the month for which the payment is
made. There will be a separate Management Agreement for each Property for an
initial term ending as of December 31 in the year in which the Property is
acquired, and each Management Agreement will be subject to three successive
three-year renewals unless, 30 days prior to the expiration of the initial or
renewed term of the agreement, the Management Agent notifies the Company in
writing that it elects to terminate the agreement. The Company's right to
terminate will be limited so that the Management Agreement will be terminable by
the Company only in the event of gross negligence, willful misconduct or
deliberate malfeasance on the part of the Management Agent. Such termination by
the Company shall become effective 30 days following delivery of proper notice
thereof. The Management Agent may, in certain instances, subcontract the
required property management services for an amount that may be less than the
fee provided for in the Management Agreement. See "Management--The Management
Agent and the Management Agreement."
6. RECEIPT OF COMMISSIONS, FEES AND OTHER COMPENSATION BY THE ADVISOR AND
ITS AFFILIATES. The Advisor and its Affiliates will receive the compensation
described in the "Compensation Table." Certain compensation is payable
notwithstanding the lack of cash available to make Distributions to the
Stockholders. To
43
<PAGE>
that extent, the Advisor and its Affiliates benefit from the Company's retaining
ownership of its Properties and leveraging its Properties, while Stockholders
may be better served by sale or disposition or not incurring indebtedness
secured by the Properties. Furthermore, the receipt and retention of certain
fees and reimbursements is dependent upon the Company continuing to invest in
Properties. Therefore, the interest of the Advisor and its Affiliates in
receiving such fees may conflict with the interest of the Stockholders in
earning income on their investment in Shares. The Advisor and its Affiliates
recognize that they have a fiduciary duty to the Company and the Stockholders,
and have represented to the Company that their actions and decisions will be
made in the manner most favorable to the Company and its Stockholders, so as not
to breach their respective fiduciary duties. See also "Risk Factors--Company
Risks--Dilution" regarding issuance of Soliciting Dealer Warrants to the Dealer
Manager.
7. NON-ARM'S-LENGTH AGREEMENTS. The agreements and arrangements, including
those relating to compensation, between the Company and the Advisor or any of
its Affiliates are not the result of arm's-length negotiations, but the Company
believes that these agreements and arrangements approximate the terms of
arm's-length transactions.
While the Company does not make loans to the Advisor or its Affiliates, the
Company may borrow money from the Advisor or its Affiliates for various purposes
including funding working capital requirements, but only on terms as to interest
rate, security, fees and other charges at least as favorable to the Company as
determined by a majority of the Directors (including a majority of the
Independent Directors) as those charged by unaffiliated lending institutions in
the same locality on comparable loans for the same purpose. Any money borrowed
from an Affiliate is expected to be repaid within 90 days.
The Advisor and its Affiliates may provide services to, and otherwise deal
or do business with, persons who deal with the Company, although there are no
present arrangements with respect to any such services. However, no rebates or
"give-ups" may be received by the Advisor or its Affiliates, nor may the Advisor
or any such Affiliates participate in any reciprocal business arrangements which
would have the effect of circumventing any provision of the Advisory Agreement.
8. THE COMPANY AND THE ADVISOR HAVE THE SAME LEGAL COUNSEL. Wildman,
Harrold, Allen & Dixon ("Counsel") serves as general legal counsel to the
Company, as well as to the Advisor. Wildman, Harrold, Allen & Dixon is not
acting as legal counsel for the Stockholders or any potential investor. There is
a possibility that in the future the interests of the various parties may become
adverse, and under the Code of Professional Responsibility of the legal
profession in effect in Illinois, Counsel may be precluded from representing any
one or all of these parties. If any situation arises in which the interests of
the Company appear to be in conflict with those of the Advisor or its
Affiliates, additional counsel may be retained by one or more of the parties to
assure adequate protection of their respective interests.
9. INLAND SECURITIES CORPORATION IS PARTICIPATING AS DEALER MANAGER IN THE
SALE OF THE SHARES. Inland Securities Corporation, a securities dealer and one
of the TIGI Affiliated Companies, is the Dealer Manager of the Offering and is
entitled to selling commissions, a Marketing Contribution, a Due Diligence
Expense Allowance, and Soliciting Dealer Warrants, some or all of which may be
retained or reallowed to Soliciting Dealers. See "Risk Factors--Company
Risks--Dilution," "Compensation Table--Nonsubordinated Payments--For and in
Connection With the Offering" and "Plan of Distribution--Compensation" regarding
such compensation and allowances and the issuance of the Soliciting Dealer
Warrants to the Dealer Manager. The Dealer Manager may be subject to a conflict
of interest, which may arise out of its participation in the Offering and its
affiliation with the Advisor, in performing its "due diligence" obligations
which arise under the Act. However, the Dealer Manager has informed the Company
that it believes it has properly performed and will properly perform these "due
diligence" activities. Further, the Dealer Manager is currently serving as the
dealer manager for IREC's offering of its shares of common stock.
10. THE ADVISOR MAY HAVE CONFLICTING FIDUCIARY OBLIGATIONS IN THE EVENT THE
COMPANY ACQUIRES PROPERTIES WITH AFFILIATES. The Advisor may cause the Company
to acquire an interest in a Property through a joint
44
<PAGE>
venture with an Affiliate of the Advisor. In such instance, the Advisor will
have a fiduciary duty to both the Company and the Affiliate participating in the
joint venture. In order to minimize the conflict between these fiduciary duties,
the Advisory Agreement provides guidelines for investments in joint ventures
with Affiliates. In addition, the Articles require a majority of the Directors
(including a majority of the Independent Directors) not otherwise interested in
the transaction to determine that the transaction is fair and reasonable to the
Company and is on terms and conditions no less favorable than from unaffiliated
third parties to the Company entering into the venture. See "Investment
Objectives and Policies--Joint Ventures."
11. THE BUSINESS OF THE ADVISOR AND THE MANAGEMENT AGENT MAY BE ACQUIRED BY
THE COMPANY WITHOUT FURTHER ACTION BY THE COMPANY'S STOCKHOLDERS. During the
term of the Company's agreements with the Advisor and the Management Agent, the
Company has the option to cause the business conducted by the Advisor and/or the
Management Agent (including all of their assets) to be acquired by or
consolidated into the Company, without any consent of the Stockholders, the
Advisor or the Management Agent or their respective Board of Directors or
shareholders. The Company may elect to exercise such right at any time after
three years from the date of this Prospectus. The Company's decision to exercise
such right will be determined by a vote of a majority of the Directors not
otherwise interested in the transaction (including a majority of the Independent
Directors). The Advisor and the Management Agent and/or their respective
shareholders will receive in connection with such an acquisition and in exchange
for the transfer of all of the stock or assets of the Advisor and/or the
Management Agent, as the case may be, and for terminating their contractual
relationships with the Company and the release or waiver of all their fees
payable under the provisions of those contractual arrangements until their
stated termination, but not paid, a determinable number of Shares. The Company
will be obligated to pay any fees accrued under such contractual arrangements
for services rendered through the closing of such acquisitions. See
"Management--The Advisory Agreement" for an explanation of how such number of
Shares will be determined. In the event such an acquisition transaction is
structured as a purchase of assets by the Company or a share exchange in which
the Company is the acquiring corporation, the Company's Articles and the MGCL
permit the Company to enter into and to consummate such a transaction without
obtaining the approval of the Stockholders. The Company does not presently
intend to seek such Stockholder approval if it is not then required by the MGCL
or the Articles. Any such transaction will occur, if at all, only if the Board
obtains a fairness opinion from a recognized financial advisor or institution
providing valuation services to the effect that the consideration to be paid
therefor is fair, from a financial point of view, to the Stockholders.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
45
<PAGE>
COMPENSATION TABLE
The compensation arrangements between the Company and the Advisor and its
Affiliates (being TIGI Affiliated Companies) were not determined by arm's-length
negotiations. See "Conflicts of Interest." The following table discloses the
compensation which may be received by the Advisor and its Affiliates from the
Company. In those instances in which there are maximum amounts or ceilings on
the compensation which may be received by the Advisor and its Affiliates for
services rendered to the Company, the Advisor and its Affiliates may not recover
any excess amounts for those services by reclassifying such services under a
different compensation or fee category. See "Conflicts of Interest--Receipt of
Commissions, Fees and Other Compensation by the Advisor and its Affiliates" and
"Management--The Advisory Agreement" and "--The Management Agent and the
Management Agreement."
NONSUBORDINATED PAYMENTS
The following aggregate amounts of compensation, allowances and fees payable
to the Advisor and its Affiliates by the Company are not subordinated to the
Current Return or Cumulative Return to the Stockholders.
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
FOR AND IN CONNECTION WITH
THE OFFERING:
Selling Commissions (payable Except for Special Sales The actual amount depends
to the Dealer Manager and (which are defined in the upon the number of Shares
Soliciting Dealers) following paragraph), the sold. If only the Minimum
Dealer Manager will receive Offering is sold and there
$0.70 per Share for each of are no Special Sales, a total
the 50,000,000 Shares sold on of $140,000 in selling
the best efforts basis and, commissions will be paid. A
under certain circumstances, total of $35,000,000 in
one Soliciting Dealer Warrant selling commissions will be
for each 25 Shares sold; paid if the Maximum Offering
provided that the Company is sold and there are no
will not issue more than Special Sales.
2,000,000 Soliciting Dealer
Warrants. If only the Minimum
Offering is sold, the Company
will not issue more than
8,000 Soliciting Dealer
Warrants. The Dealer Manager
will reallow the selling
commissions and, subject to
applicable federal and state
securities laws, the
Soliciting Dealer Warrants,
to Soliciting Dealers for
each Share they sell.
No selling commissions will
be payable (i) for the sale
of Shares, in connection with
the performance of services,
to employees, Directors and
associates of the Company and
its Affiliates, the Advisor,
Affiliates of the Advisor,
the Dealer Manager or their
respective officers and
employees and certain of
their Affiliates; (ii) for
Shares purchased under
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
the DRP, because those Shares
will be purchased at a
reduced price to reflect
decreased administrative
costs; (iii) in connection
with the issuance of the
Soliciting Dealer Warrants or
the Shares issuable upon
exercise thereof; (iv) for
the sale of Shares to one or
more of the Soliciting
Dealers and to their
respective officers and
employees and certain of
their respective affiliates
who request and are entitled
to purchase Shares net of
selling commissions; (v) for
the sale of Shares to certain
investors whose contracts for
investment advisory and
related brokerage services
include a fixed or "wrap" fee
feature; or (vi) for Shares
credited to an investor as a
result of a volume discount;
and, reduced selling
commissions will be payable
with respect to sales of
Shares which are entitled to
volume discounts, all of
which transactions are
collectively referred to as
the "Special Sales." (1)
Marketing Contribution and An amount equal to 2% of the The actual amount depends
Due Diligence Expense Gross Offering Proceeds will upon the number of Shares
Allowance (payable to the be paid to the Dealer sold. If only the Minimum
Dealer Manager and Soliciting Manager, all or some portion Offering is sold and there
Dealers) of which may be reallowed to are no Special Sales, a total
Soliciting Dealers, in lieu of $50,000 will be paid for
of reimbursement of specific the Marketing Contribution
expenses associated with and the Due Diligence Expense
marketing (collectively, the Allowance. A total of
"Marketing Contribution"). An $12,500,000 will be paid for
additional 0.5% of the Gross the Marketing Contribution
Offering Proceeds may be paid and the Due Diligence Expense
to the Dealer Manager, which Allowance if the Maximum
may be reallowed to the Offering is sold and there
Soliciting Dealers, for BONA are no Special Sales.
FIDE due diligence expenses
(the "Due Diligence Expense
Allowance"). The Marketing
Contribution and Due
Diligence Expense Allowance
will not be payable in
connection with any Special
Sales except those described
in clauses (iv),
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
(v) and (vi) in the preceding
paragraph and those receiving
volume discounts.
Reimbursable Expenses IREIC, one of the Inland Reimbursable Expenses of
(payable to the Advisor and Affiliated Companies, has approximately $598,000 have
its Affiliates) advanced Organization and been advanced by IREIC
Offering Expenses for the through November 30, 1998 in
Company and will be connection with the Offering
reimbursed for actual costs (for Organization and
incurred in connection with Offering Expenses, but
the Offering on behalf of the excluding selling commissions
Company, including legal and and the Marketing
accounting fees, registration Contribution and Due
and filing fees, printing Diligence Expense Allowance).
costs and selling expenses. If only the Minimum Offering
However, if the aggregate of is sold, a total of $110,000
all Organization and Offering will be paid to IREIC in
Expenses, including selling reimbursement for
commissions and the Market- Organization and Offering
ing Contribution and Due Expenses advanced. It is
Diligence Expense Allowance, estimated that approximately
exceeds 15% of the Gross $14,000,000 of Organization
Offering Proceeds, or if the and Offering Expenses
aggregate of all Organization (excluding selling
and Offering Expenses, commissions and the Mar-
excluding the selling keting Contribution and Due
expenses, exceeds 5.5% of the Diligence Expense Allowance)
Gross Offering Proceeds, the will be incurred if the
Advisor or its Affiliates Maximum Offering is sold. In
will promptly pay such excess the event the Offering is not
expenses and the Company will successful, then IREIC shall
have no liability for such be solely responsible for the
expenses at any time Organization and Offering
thereafter. Furthermore, in Expenses to the extent it has
the event that the Minimum not been reimbursed.
Offering is not sold, then no
portion of the proceeds of
the Offering will be used to
reimburse IREIC for Organi-
zation and Offering Expenses.
ACQUISITION STAGE:
Acquisition Expenses for the An amount, for the expenses If only the Minimum Offering
costs and expenses of the associated with Property is sold, Acquisition Expenses
acquisition of Properties acquisitions, estimated to be will not exceed $10,000. If
including surveys, in an aggregate amount up to the Maximum Offering is sold
appraisals, title insurance 0.5% of (i) the Gross and all of the 4,000,000
and escrow fees, legal and Offering Proceeds, (ii) the Shares pursuant to the DRP
accounting fees and expenses, gross proceeds from the sale are sold, and all of the
computer use related of up to 4,000,000 Shares 2,000,000 Soliciting Dealer
expenses, architectural and pursuant to the DRP, and Warrants are issued and
engineering reports, (iii) the gross proceeds from exercised, Acquisition
environmental and asbestos the issuance and exercise of Expenses may not exceed
audits, travel and com- the 2,000,000 Soliciting $2,810,000; however, the
munication expenses and other Dealer Warrants. (2) actual amounts cannot be
related expenses (payable to determined at the present
the time. See
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Advisor and its Affiliates). The Acquisition Expense for note (4) to the table under
See the Glossary for a more any particular Property will "Estimated Use of Proceeds."
complete explanation of what not exceed 6% of the purchase
are included as Acquisition price of any single Property.
Expenses.
OPERATIONAL STAGE (3):
Property Management Fee A Property Management Fee The actual amounts are depen-
(payable to the Management equal to not more than 90% of dent upon results of
Agent) the fee which would be operations and, therefore,
payable to an unrelated party cannot be determined at the
providing such services, present time.
which fee shall initially be
4.5% of the gross revenues
from the Properties, will be
paid monthly to Inland
Southeast Property Management
Corp. (the "Management
Agent"), which is owned
principally by individuals
who are Affiliates of Inland,
in exchange for the
Management Agent's services
in connection with the
rental, leasing, operation
and management of the Proper-
ties. The Management Agent
may in certain instances
sub-contract its duties for a
fee that may be less than the
fee provided for in the
Management Agreement. (4)
Compensation for Other Prop- An Affiliate of the Advisor The actual amounts are depen-
erty-Level Services will provide loan servicing dent upon the amount of loans
services to the Company, for serviced and results of
which it will be paid fees, operations and, therefore,
payable monthly, that for cannot be determined at the
each full year will be equal present time.
to no more than .08% of the
aggregate principal amount of
the loans it is servicing for
the Company during that year,
up to the first $100 million
in aggregate principal loan
balances and a lesser
percentage on a sliding scale
basis thereafter.
In addition, the Affiliates
of the Advisor may, from time
to time, provide other
property-level services to
the Company, such as sales
brokerage, construction
management, loan origination,
property tax reduction, and
risk management services.
Affiliates of the Advisor
will provide such
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
services and will receive
compensation therefor from
the Company only if the
parties agree upon the scope
of such services. Any such
compensation for these agreed
upon services will not exceed
90% of that which would be
paid to third parties for any
such services and all such
compensation must be approved
by a majority of the
Independent Directors. See
"Management-- Other
Services."
Reimbursable Expenses Certain expenses of the The actual amounts are depen-
(payable to the Advisor and Advisor and its Affiliates dent upon results of
its Affiliates) will be reimbursed by the operations and, therefore,
Company. (5)(6) cannot be determined at the
present time.
LIQUIDATION STAGE:
Property Disposition Fee A Property Disposition Fee, The actual amounts to be
(payable to the Advisor and payable upon the sale of each received depend upon the sale
its Affiliates) of the Company's Properties, price of Company Properties
may be paid to the Advisor and, therefore, cannot be
and its Affiliates in an determined at the present
amount equal to the lesser time.
of: (i) 3% of the contract
sales price of the Property;
or (ii) 50% of the commission
which would be payable to a
third party which is
reasonable, customary and
competitive in light of the
size, type and location of
such Property ("Competitive
Real Estate Commission"). The
amount paid, when added to
the sums paid to unaffiliated
parties, shall not exceed the
lesser of the Competitive
Real Estate Commission or an
amount equal to 6% of the
contracted for sales price.
Payment of such fees shall be
made only if the Advisor pro-
vides a substantial amount of
services in connection with
the sale of the Property. See
"Management--The Advisory
Agreement." (4)
</TABLE>
50
<PAGE>
SUBORDINATED PAYMENTS
The following additional fees payable to the Advisor by the Company will be
payable only after specified returns have been paid to the Stockholders as set
forth below:
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
OPERATIONAL STAGE (3):
Advisor Asset Management Fee An Advisor Asset Management The actual amounts are depen-
(payable to the Advisor) Fee of not more than 1% of dent upon results of
the Average Invested Assets operations and, therefore,
will be paid to the Advisor. cannot be determined at the
The fee will be payable present time.
quarterly in an amount equal
to 1/4 of 1% of the Average
Invested Assets of the
Company, as of the last day
of the immediately preceding
quarter, pursuant to the
Advisory Agreement. For any
year in which the Company
qualifies as a REIT, the
Advisor must reimburse the
Company for (i) the amounts,
if any, by which the
Company's Total Operating
Expenses (Advisor Asset Man-
agement Fee plus Other
Operating Expenses) paid
during the previous calendar
year exceed the greater of
(a) 2% of the Company's
Average Invested Assets for
that calendar year or (b) 25%
of the Company's Net Income
for that calendar year; PLUS
(ii) an amount (subject
however, to such amount not
exceeding the amount of the
Advisor Asset Management Fee
for that year) equal to any
deficit between the total
amount of Distributions to
Stockholders for that year
and the Current Return.
Excluded from the definition
of "Total Operating Expenses"
are such items as
Organization and Offering
Expenses, interest, taxes,
non-cash expenditures, the
Incentive Advisory Fee and
Acquisition Expenses. See
"Management-- The Advisory
Agreement" for an explanation
of circumstances where the
excess specified in clause
(i) of the preceding sen-
tence may not need to be
reimbursed.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
LIQUIDATION STAGE (3):
Incentive Advisory Fee After the Stockholders have The actual amounts to be
(payable to the Advisor) first received: (i) their 7% received depend upon the sale
Cumulative Return; and (ii) a price of Company Properties
return of their Invested and, therefore, cannot be
Capital, an Incentive determined at the present
Advisory Fee equal to 15% of time.
the net proceeds from the
sale of a Property will be
paid to the Advisor. If the
business conducted by the
Advisor is acquired by or
consolidated into the
Company, the Incentive
Advisory Fee shall terminate
at that time. (4)
</TABLE>
COMPENSATION TO OFFICERS AND DIRECTORS
The following items of compensation are payable by the Company to officers
and directors of the Company:
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Salaries Only one officer will receive An annual salary of $35,000
compensation for services as will be paid.
an officer.
Director Fees Independent Directors will There will be aggregate
receive an annual fee of annual fees of $3,000 for the
$1,000 and a fee of $250 for three Independent Directors,
attending each meeting of the plus fees for attending
Board or a Committee thereof. meetings. The actual amounts
The Affiliated Directors do to be received for meetings
not receive Director fees. depends upon the number of
meetings and their attendance
and, therefore, cannot be
determined at the present
time.
Stock Options to Independent Pursuant to the Company's This form of compensation is
Directors Independent Director Stock not paid in cash.
Option Plan, each Independent
Director will receive (i) an
initial grant of an option to
purchase 3,000 Shares at a
price of $9.05 per Share,
upon becoming an Independent
Director (subject to certain
conditions); and (ii) each
year on the date of the
annual meeting of the
Company's Stockholders, an
additional grant of an option
to purchase 500 Shares at an
exercise price equal to the
then fair market value per
Share. For additional
information on this option
plan, see "Manage-
ment--Independent Director
Stock Option Plan".
</TABLE>
52
<PAGE>
- ------------------------
(1) Each Soliciting Dealer Warrant grants the holder a right to purchase one
Share at a price of $12.00 per Share during the Exercise Period. No
Soliciting Dealer Warrants will be exercisable until one year from the date
of issuance. The exercise price of any unexercised Soliciting Dealer
Warrants will be adjusted in the event the offering price of Shares pursuant
to this Prospectus for this Offering is increased, which is not presently
anticipated. The value attributable to the Soliciting Dealer Warrants is
approximately $0.90 per Warrant or an aggregate of approximately $1,800,000,
assuming the Maximum Offering of 50,000,000 Shares is fully subscribed and
the maximum of 2,000,000 Soliciting Dealer Warrants are issued. See
"Description of Securities--Soliciting Dealer Warrants" and "Plan of
Distribution--Compensation Payable by the Company for the Sale of the
Shares."
(2) The total of all Acquisition Expenses paid by the Company in connection with
the purchase of a Property by the Company may not exceed an amount equal to
6% of the amount actually paid or allocated to the purchase, development,
construction or improvement of a Property, exclusive of Acquisition Expenses
(the "Contract Price for the Property"), unless a majority of the Directors
(including a majority of the Independent Directors), not otherwise
interested in the transaction, approve the transaction as being commercially
competitive, fair and reasonable to the Company. Notwithstanding the
foregoing, the total of all Acquisition Expenses paid by the Company in
connection with the purchase of a Property by the Company from an Affiliate
may not exceed 6% of the Contract Price for the Property. Acquisition
Expenses will accrue and be paid on Properties purchased with the Gross
Offering Proceeds, gross proceeds from Shares sold via the DRP pursuant to
this Prospectus and gross proceeds received from the issuance and exercise
of the Soliciting Dealer Warrants issued by the Company in connection with
the Offering, as well as on the entire purchase price of all Properties
including any acquisition financing related thereto.
(3) The Advisor and its Affiliates assist the Company in determining the types
of transactions entered into by the Company. The Advisor benefits, in the
form of fees, by the Company retaining ownership of its Properties and
leveraging its Properties, while Stockholders may be better served by the
sale or disposition of the Properties or not incurring indebtedness secured
by the Properties. Furthermore, the Advisor's ability to receive or retain
certain fees and reimbursements is dependent upon the Company continuing to
invest in Properties. Therefore, the interest of the Advisor in receiving
such fees may conflict with the interest of the Stockholders to earn income
on their investment in Shares and may result in the Company entering into
transactions which may not be in the best interest of the Stockholders.
(4) The business conducted by the Advisor and/or the Management Agent may be
acquired by or consolidated into the Company and if either or both of such
transactions occur, the Advisor and/or the Management Agent, as the case may
be, and/or their respective shareholders, will receive in exchange for
terminating their contractual relationship with the Company and the release
and waiver of all their fees payable under the provisions of those
contractual arrangements until their stated termination, but not paid,
Shares in an amount determined in accordance with a prescribed formula. The
Company will be obligated to pay any fees accrued under such contractual
arrangements for services rendered through the closing of such acquisition.
Upon consummation of any such transactions, the Advisory Agreement and/or
the Management Agreement, as the case may be, would be terminated. See
paragraph 11 under "Conflicts of Interest" and "Management--The Advisory
Agreement" and "--The Management Agent and the Management Agreement."
(5) (i) The Advisor and its Affiliates are reimbursed for: (a) the cost to the
Advisor or its Affiliates of goods and services used for and by the
Company and obtained from unaffiliated parties; and (b) administrative
services related thereto. "Administrative services" include ministerial
services such as typing, record keeping, preparing and disseminating
Company reports, preparing and maintaining records regarding
Stockholders, record keeping and administration of the DRP and Share
Repurchase Programs, preparing and disseminating responses to
Stockholder inquiries and
53
<PAGE>
other communications with Stockholders and any other record keeping
required for the Company.
(ii) In extraordinary circumstances fully justified to the official or
agency administering the state securities laws, the Advisor and its
Affiliates may provide other goods and services to the Company if all
of the following criteria are met: (a) the goods or services must be
necessary to the prudent operation of the Company; (b) the
compensation, price or fee must be equal to the lesser of 90% of the
compensation, price or fee the Company would be required to pay to
independent parties who are rendering comparable services or selling or
leasing comparable goods on competitive terms in the same geographic
location, or 90% of the compensation, price or fee charged by the
Advisor or its Affiliates for rendering comparable services or selling
or leasing comparable goods on competitive terms; and (c) if at least
95% of gross revenues attributable to the business of rendering such
services or selling or leasing such goods are derived from persons
other than Affiliates, the compensation, price or fee charged by an
unaffiliated person who is rendering comparable services or selling or
leasing comparable goods must be on competitive terms in the same
geographic location. Extraordinary circumstances shall be presumed only
when there is an emergency situation requiring immediate action by the
Advisor or its Affiliates and the goods or services are not immediately
available from unaffiliated parties. Services which may be performed in
such extraordinary circumstances include emergency maintenance of
Company properties, janitorial and other related services due to
strikes or lock-outs, emergency tenant evictions and repair services
which require immediate action, as well as operating and re-leasing
properties with respect to which the leases are in default or have been
terminated.
(iii) Permitted reimbursements include salaries and related salary expenses
for non-supervisory services which could be performed directly for the
Company by independent parties such as legal, accounting, transfer
agent, data processing and duplication. The Advisor believes that its
employees and the employees of its Affiliates who perform services for
the Company for which reimbursement is allowed pursuant to clause (ii)
above, or this clause (iii) will have the experience and educational
background, in their respective fields of expertise, appropriate for
the performance of such services.
(iv) The Total Operating Expenses of the Company (which are defined to mean
generally the aggregate of expenses of every character paid or incurred
as determined under GAAP, including Advisor Asset Management Fees, but
excluding Organization and Offering Expenses, interest, taxes, non-cash
expenditures, Incentive Advisory Fees and Acquisition Expenses) may not
(in the absence of a satisfactory showing to the contrary) in any
fiscal year exceed the greater of: (a) 2% of the Average Invested
Assets; or (b) 25% of its Net Income for such year. The Independent
Directors may, upon a finding of unusual and non-recurring factors
which they deem sufficient, determine that a higher level of expenses
is justified in any given year. There are certain additional
restrictions on expenses that will be borne by the Company.
(6) The compensation and reimbursements paid by the Company to the Advisor and
its Affiliates shall be approved by a majority of the Directors (including a
majority of the Independent Directors), as being fair and reasonable to the
Company and not less favorable to the Company than would be available from
an unaffiliated source.
54
<PAGE>
ESTIMATED USE OF PROCEEDS
The amounts set forth in the table below represent the Company's current
estimates concerning the use of the Gross Offering Proceeds (as defined below),
assuming that 200,000 Shares (the "Minimum Offering") and 54,000,000 Shares (the
"Maximum Offering") are sold. All proceeds of the Offering will be held in
escrow pending completion of the Minimum Offering, and will be used only for the
purposes set forth below and will not be commingled with the accounts of the
Advisor and its Affiliates. As of the date of this Prospectus, the Company (i)
has rights to acquire three Initial Properties, all of which are Retail Centers
(two Neighborhood Centers and one Community Center) and (ii) had approximately
$200,000 (from the Advisor's Company Contribution) available for additional
investments or other purposes. That $200,000 is not included in the table below.
The Company estimates that, after establishing working capital reserves and
providing for Acquisition Expenses, 83.5% in the case of the Minimum Offering,
and 87.07% in the case of the Maximum Offering, of Gross Offering Proceeds will
be contributed to the Operating Partnership and used to acquire Properties
(including approximately $1.4 million in the case of the Minimum Offering, and
$9.4 million in the case of the Maximum Offering, to acquire the Initial
Properties and to retire in full the related Affiliates' Acquisition Debt). The
Company estimates that, of all the selling commissions, Marketing Contribution
and Due Diligence Expense Allowance and Organization and Offering Expenses,
11.35% in the case of the Minimum Offering and 8.56% in the case of the Maximum
Offering, of the Gross Offering Proceeds will be utilized to pay selling
commissions and due diligence expenses to unaffiliated third parties, and 3.65%
in the case of the Minimum Offering, and 2.87% in the case of the Maximum
Offering, of the Gross Offering Proceeds will be paid to the Advisor and its
Affiliates to pay for all the Organization and Offering Expenses and a portion
of the Marketing Contribution and Due Diligence Expense Allowance.
<TABLE>
<CAPTION>
MAXIMUM OFFERING
(INCLUDING SHARES SOLD
UNDER THE
MINIMUM OFFERING DISTRIBUTION REINVESTMENT
200,000 SHARES(1) PROGRAM)(1)
------------------------- -------------------------
<S> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT
------------ ----------- -------------- ---------
Gross Offering Proceeds(1):..................................... $ 2,000,000 100.0% $ 538,000,000 100.00%
------------ ----- -------------- ---------
Less Expenses:
Selling Commissions(2)........................................ 140,000 7.0% 35,000,000 6.51%
Marketing Contribution and Due Diligence Expense
Allowance(2)................................................ 50,000 2.5% 12,500,000 2.32%
Organization and Offering Expenses(3)......................... 110,000 5.5% 14,000,000 2.60%
------------ ----- -------------- ---------
Total Public Offering Expenses.............................. 300,000 15.0% 61,500,000 11.43%
------------ ----- -------------- ---------
Gross Amount Available for Investment........................... 1,700,000 85.0% 476,500,000 88.57%
------------ ----- -------------- ---------
Less: Acquisition Expenses(4)(5)............................ 10,000 0.5% 2,690,000 0.50%
Less: Working Capital Reserve(6)............................ 20,000 1.0% 5,380,000 1.00%
------------ ----- -------------- ---------
Net Cash Portion of Gross Offering Proceeds Available for the
Purchase of Properties........................................ $ 1,670,000 83.5% $ 468,430,000 87.07%
------------ ----- -------------- ---------
------------ ----- -------------- ---------
</TABLE>
- ------------------------
(1) The amounts shown in this table represent the Company's current estimates of
the uses of the Gross Offering Proceeds if (i) the Minimum Offering (200,000
Shares on a best efforts basis at $10.00 per Share) and (ii) the Maximum
Offering (50,000,000 Shares on a best efforts basis at $10.00 per Share and
4,000,000 Shares pursuant to the DRP at $9.50 per Share, a 5% discount from
the public offering price per Share for this Offering) are sold and there
are no Special Sales (as assumed in this table) and, accordingly, may not
accurately reflect the actual receipt or application of such proceeds. The
proceeds from the issuance of up to 2,000,000 Soliciting Dealer Warrants
($.0008 per Soliciting Dealer Warrant or up to $1,600) and from the exercise
of those Soliciting Dealer Warrants (at $12 per
55
<PAGE>
Soliciting Dealer Warrant or up to $24,000,000) are not included in the
definition of Maximum Offering for purposes of this table nor included in
the amounts shown for Gross Offering Proceeds in this table.
(2) Except for Special Sales, the Company will pay the Dealer Manager cash
selling commissions of 7% of the Gross Offering Proceeds or (i) $140,000
assuming only 200,000 Shares are sold, and (ii) $35,000,000 assuming all
50,000,000 Shares offered on a best efforts basis are sold, and there are no
Special Sales and, under certain circumstances, one Soliciting Dealer
Warrant for every 25 of those Shares sold, all or part of which compensation
may, at the discretion of the Dealer Manager, be retained or reallowed to
Soliciting Dealers; provided that the Company will not issue more than
2,000,000 Soliciting Dealer Warrants. Except for certain Special Sales, the
Dealer Manager will also receive the Marketing Contribution of 2% of the
Gross Offering Proceeds and a Due Diligence Expense Allowance of up to 0.5%
of the Gross Offering Proceeds (or an aggregate Marketing Contribution and
Due Diligence Expense Allowance of up to $50,000 for the Minimum Offering
and up to $12,500,000 for the Maximum Offering, if there are no Special
Sales) from the 50,000,000 Shares offered on the best efforts basis, some
portion of which may, at the discretion of the Dealer Manager, be reallowed
to Soliciting Dealers. This category of expense includes all amounts
attributable to marketing and BONA FIDE due diligence expenses. Certain
volume discounts, payable in Shares, may be given on single or certain
combined orders of 25,000 Shares or more. The Company will not pay any (or
reduced) selling commissions and no Marketing Contribution or Due Diligence
Expense Allowance on certain Special Sales. A maximum of 4,000,000 Shares
available for issuance under the DRP may be sold at a reduced price of $9.50
per Share due to decreased costs associated with these issuances (an
aggregate of $38,000,000 of gross proceeds will be raised if all those
Shares are sold). See "Conflicts of Interest," "Management's Discussion and
Analysis of the Financial Condition of the Company," "Plan of Distribution"
and "Distribution Reinvestment and Share Repurchase Programs--Distribution
Reinvestment Program."
(3) In the event that the Minimum Offering is not sold, neither IREIC nor the
Advisor will be reimbursed for any of the Organization and Offering Expenses
and the Company will not be responsible for payment of any of such expenses.
The amount set forth for Organization and Offering Expenses reflects the
Advisor's best estimate of legal, accounting, printing and other Offering
expenses, including amounts to reimburse the Advisor for marketing, salaries
and direct expenses of its employees while directly engaged in registering
and marketing the Shares and other marketing and organization expenses. The
Advisor has guaranteed payment of all public offering expenses (excluding
selling commissions and the Marketing Contribution and Due Diligence Expense
Allowance and assuming that all 2,000,000 of the Soliciting Dealer Warrants
are issued and exercised) in excess of 5.5% of the Gross Offering Proceeds
or all Organization and Offering Expenses (including such selling expenses)
which together exceed 15% of the Gross Offering Proceeds. This guaranty is
without recourse to or reimbursement by the Company.
(4) The Advisor will be reimbursed for actual out-of-pocket Acquisition Expenses
in an amount estimated to be equal to 0.5% of the Gross Offering Proceeds
plus the gross proceeds received from the issuance and exercise of the
Soliciting Dealer Warrants (which amount would be $10,000 assuming the
Minimum Offering is sold, and $2,690,000 assuming the Maximum Offering is
sold, including Shares sold under the DRP; or $2,810,000, if the Maximum
Offering is sold and all 2,000,000 of the Soliciting Dealer Warrants are
issued and exercised). The additional $120,000 of reimbursable Acquisition
Expenses which would be paid as a result of the issuance and exercise of all
of the Soliciting Dealer Warrants is not included in the amount shown for
Acquisition Expenses. To the extent that the purchase of any Properties
includes acquisition financing, the reimbursement of Acquisition Expenses
(including the 0.5% limitation) will be made on the basis of the entire
purchase price (including acquisition financing relating thereto), not
merely the Gross Offering Proceeds employed in the acquisitions. Acquisition
Expenses include but are not limited to the costs and expenses incurred by
56
<PAGE>
the Advisor in selecting, evaluating, acquiring and investing in the
Company's proposed Properties, whether or not acquired, including, but not
limited to: surveys, appraisals, title insurance and escrow fees,
non-refundable option payments, legal and accounting fees and expenses,
computer use related expenses, architectural and engineering reports,
environmental and asbestos audits, travel and communication expenses and
personnel and miscellaneous expenses related to the selection and
acquisition of Properties. The Acquisition Expense for any particular
Property will not exceed 6% of the purchase price of any single Property.
(5) The Advisor will not receive a fee for the acquisition of Properties.
However, the seller of a Property may pay a real estate brokerage commission
to a third party in connection with the Company's purchase of a Property.
Since a seller may fix the selling price of a Property at an amount
sufficient to cover the cost of a real estate commission, the Company, as
purchaser, may indirectly pay such amount in the purchase price, which
amount may be considered an acquisition fee. The Advisor will endeavor,
whenever possible, to purchase Properties directly from sellers, without the
involvement of a real estate broker. When a Property has been listed by a
seller with a real estate broker, the Advisor will endeavor, whenever
possible, to be allocated a portion of the real estate brokerage commission
paid by the seller. All real estate brokerage commissions so allocated to
the Advisor will then be remitted in their entirety to the Company by the
Advisor.
(6) The Company will allocate 1% of the Gross Offering Proceeds to its working
capital reserve (which amounts will be $20,000 if the Minimum Offering is
sold and $5,380,000 if the Maximum Offering is sold).
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
57
<PAGE>
PRIOR PERFORMANCE OF THE COMPANY'S AFFILIATES
PRIOR INVESTMENT PROGRAMS
During the 10-year period ending September 30, 1998, TIGI Affiliated
Companies have sponsored one REIT, six public real estate equity programs, one
private real estate equity program, and nine private placement mortgage and note
programs, which have in the aggregate raised in excess of $647,700,000 from
approximately 34,510 investors. During that 10-year period, those public real
estate equity programs raised $145,075,520 from 13,880 investors; the private
real estate equity program raised $2,275,000 from 85 investors; the private
placement mortgage and note programs raised $22,641,000 from 545 investors; and
IREC, a REIT sponsored by IREIC (one of the TIGI Affiliated Companies), has
raised $477,717,785 from approximately 20,000 investors. IREC has investment
objectives and policies similar to the Company and has invested principally in
Neighborhood Centers, except however, IREC invests principally in a geographical
area (a radius of 400 miles from Oak Brook, Illinois) different than most of the
Company's Primary Geographical Area of Investment. See "--Publicly Registered
Real Estate Investment Trust--Inland Real Estate Corporation" below in this
Section. The investment objectives and policies of the Company are similar to
those of several of the prior investment programs sponsored by TIGI Affiliated
Companies which have owned and operated retail properties. However, the vast
majority of the other investment programs sponsored by TIGI Affiliated Companies
were dissimilar from the Company in that the programs owned apartment
properties, pre-development land and whole or partial interests in mortgage
loans.
The information in this Section and in the Prior Performance Tables included
in this Prospectus as Appendix A shows relevant summary information concerning
real estate programs sponsored by the TIGI Affiliated Companies, the purpose of
which is to provide information on the prior performance of these programs so
that potential investors may evaluate the experience of the TIGI Affiliated
Companies in sponsoring such programs. The following discussion is intended to
briefly summarize the objectives and performance of the prior programs and to
disclose any material adverse business developments sustained by them.
SUMMARY INFORMATION
The table below provides certain summarized information concerning prior
programs sponsored by TIGI Affiliated Companies for the 10-year period ending
September 30, 1998, and is qualified in its entirety by reference to the
foregoing introductory discussion and the detailed information appearing in the
Prior Performance Tables in Appendix A of this Prospectus. Investors should not
construe inclusion of the succeeding tables, which cover the 10-year period
ending September 30, 1998, as implying in any manner that the Company will have
results comparable to those reflected in the tables; because the yield and cash
available and other factors could be substantially different for the Company's
Properties. Investors should note that by acquiring Shares in the Company, they
will not be acquiring any interests in any prior programs.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
58
<PAGE>
<TABLE>
<CAPTION>
PRIOR PUBLIC PRIOR PRIVATE
PRIOR REAL ESTATE REAL ESTATE EQUITY
REIT EQUITY AND MORTGAGE AND NOTE
PROGRAM PROGRAMS PROGRAMS
-------------- ----------------- ---------------------
<S> <C> <C> <C>
Number of programs sponsored......................... 1 6 10
Aggregate amount raised from investors............... $ 477,717,785 $ 145,075,520 $ 24,916,000
Approximate aggregate number of investors............ 20,000 13,880 630
Number of properties purchased....................... 72 77 7
Aggregate cost of properties (1)..................... $ 487,633,000 $ 119,292,939 $ 1,951,930
Number of mortgages/notes............................ 0 7 517
Principal amount of mortgages/notes.................. 0 $ 2,302,064 $ 22,584,000
Percentage of properties (based on cost) that were:
Commercial--
Retail........................................... 89.8% 1.9% 0.0%
Single-user retail net-lease..................... 10.2% 7.1% 0.0%
Nursing homes.................................... 0.0% 6.3% 0.0%
Offices.......................................... 0.0% 0.0% 0.0%
Industrial....................................... 0.0% 0.0% 0.0%
Health clubs..................................... 0.0% 3.8% 0.0%
Mini-storage..................................... 0.0% 0.0% 0.0%
Total commercial............................... 100.0% 19.1% 0.0%
Multi-family residential........................... 0.0% 3.4% 0.0%
Land............................................... 0.0% 77.5% 100.0%
Percentage of properties (based on cost) that were:
Newly constructed (within a year of acquisition)... 17.6% 0.0% 0.0%
Existing........................................... 82.4% 100.0% 0.0%
Construction....................................... 0.0% 0.0% 0.0%
Number of properties sold............................ 0 11 3
25.9%(2)
Number of properties exchanged....................... 0 0 0
Number of mortgages/notes repaid..................... 0 5 199
</TABLE>
- ------------------------
(1) Includes purchase price and acquisition fees and expenses.
(2) Based on costs of the properties sold and costs capitalized subsequent to
acquisition at September 30, 1998, not including portions of land parcels.
Of the programs included in the above table, the REIT and two of the six
real estate equity programs have investment objectives similar to the Company.
Those programs represent approximately 78% of the aggregate amount raised from
investors, approximately 65% of the aggregate number of investors, approximately
51% of the properties purchased, and approximately 84% of the aggregate cost of
the properties.
During the three years prior to December 31, 1997, (i) IREC purchased 44
commercial properties, and (ii) another publicly registered investment program
sponsored by IREIC purchased one parcel of land. Upon written request of the
Company, any potential investor may obtain, without charge, a copy of Table VI
filed with the Commission in Part II of the Company's Registration Statement of
which this Prospectus is a part, which provides more detailed information
concerning these acquisitions. See "Additional Information."
59
<PAGE>
PUBLICLY REGISTERED REAL ESTATE INVESTMENT TRUST
INLAND REAL ESTATE CORPORATION ("IREC")--On October 14, 1994, IREC commenced
an initial public offering (the "Initial Offering") of 5,000,000 shares of
common stock at $10 per share. As of July 24, 1996, IREC had received
subscriptions for a total of 5,000,000 shares, thereby completing the Initial
Offering. On July 24, 1996, IREC commenced an offering of an additional
10,000,000 shares of common stock (the "Second Offering") at $10 per share. As
of July 10, 1997, IREC had received subscriptions for a total of 10,000,000
shares, thereby completing the Second Offering. On July 14, 1997, IREC commenced
an offering of an additional 20,000,000 shares of common stock (the "Third
Offering") at $10 per share. As of March 19, 1998, IREC had received
subscriptions for a total of 20,000,000 shares, thereby completing the Third
Offering. On April 7, 1998, IREC commenced an offering of an additional
25,000,000 shares (the "Fourth Offering") at $11 per share. As of September 30,
1998, IREC had received subscriptions for a total of 10,054,469 shares from the
Fourth Offering. In addition, as of September 30, 1998, IREC had distributed
1,737,836 shares of common stock through its Distribution Reinvestment Program.
As of September 30, 1998, IREC had repurchased 86,119 shares of common stock
through its Share Repurchase Program. As a result, IREC's gross offering
proceeds totaled approximately $477,717,785 for all of such offerings, net of
shares repurchased through its Share Repurchase Program, as of September 30,
1998. IREC's objective is to purchase Neighborhood Centers and Community Centers
located within an approximate 400-mile radius of its headquarters in Oak Brook,
Illinois, to provide, at a minimum, cash distributions on a quarterly basis and
to provide a hedge against inflation through capital appreciation. IREC may also
acquire single-user retail properties throughout the United States. It is IREC's
intention, whenever possible, to acquire properties free and clear of permanent
mortgage indebtedness by paying the entire purchase price of each property in
cash or shares of IREC's stock, although, IREC does, in certain instances,
utilize borrowings to acquire properties. As of September 30, 1998 the
properties owned by IREC were generating sufficient cash flow to cover operating
expenses plus pay a monthly cash distribution of $0.88 per share.
As of September 30, 1998, IREC raised $477,717,785 from approximately 20,000
investors. IREC has placed financing totaling approximately $178,100,000 on 51
of its 72 properties as of September 30, 1998. IREC's 72 properties, a total
investment of $487,633,000 at September 30, 1998, were purchased with proceeds
received from the above described offerings of shares of its common stock and
financings. Through September 30, 1998, cash distributions have totaled
$42,119,249, all of which were from operating cash flow. In the opinion of
IREIC, IREC is substantially meeting its investment objective for cash flow.
PUBLICLY REGISTERED LIMITED PARTNERSHIPS
INLAND MONTHLY INCOME FUND II, L.P. ("MONTHLY INCOME FUND II")--The offering
period for Monthly Income Fund II began August 4, 1988 and ended August 4, 1990.
The objectives were to invest in improved residential, retail, industrial and
other income-producing properties on an all-cash basis to provide monthly cash
distributions of at least 8% per annum through the first five years of the
partnership and to provide a hedge against inflation through capital
appreciation.
Monthly Income Fund II raised $25,323,569 from more than 2,100 investors and
purchased five properties, a net-leased Wholesale Club retail property in
Indiana, a net-leased health club in Ohio, a net-leased nursing center in
Illinois, a net-leased retail store in Arizona and the Euro-Fresh Market Plaza
(formerly Eagle Plaza), a Neighborhood Center in Illinois, for a total
acquisition cost of $21,224,542. Through September 30, 1998, cash distributions
have been maintained at or above an 8% level and on an accrual basis have
totaled $438.36 per $500 unit or $20,872,988, including $16,477,423 from
operations and an additional $4,395,565 which constitutes the net proceeds from
the sale of the Wholesale Club.
One of Monthly Income Fund II's properties, which represents 35.44% of its
total assets, as measured by its original purchase price, is a nursing center
which is 100% leased to Elite Care Corporation ("Elite"). Monthly Income Fund
II's lease with Elite became effective in February 1991, following the
termination of
60
<PAGE>
a lease with Adventist Living Centers, Inc. ("ALC"), the tenant which was in
place when Monthly Income Fund II purchased the property. After ALC began
experiencing financial difficulties, IREIC sought out Elite as a replacement
nursing home operator/tenant. The net effect to Monthly Income Fund II was an 8%
decrease in the effective rent from the nursing center facility over the term of
the lease, from $77,368 per month when ALC was the tenant to $71,895 from Elite.
Under the terms of the lease agreement for the nursing center, any sublease
transaction requires the approval of the partnership. The partnership has
approved a sublease transaction for this facility with no significant changes to
the terms of the lease.
In January 1991, Monthly Income Fund II sold its Wholesale Club property in
Indiana for $4,400,000. Net sales proceeds of $4,395,565 were distributed to
investors in February 1991. The property was purchased by Monthly Income Fund II
in December 1988 for $3,427,278, which included acquisition fees of $275,013 and
acquisition costs of $9,265. The gain on sale for financial reporting purposes
was $847,467, which is net of selling expenses and commissions.
In January 1994, Eagle Foods, the anchor tenant at Eagle Plaza, a
Neighborhood Center, closed its store. In February 1994 and with the approval of
the partnership, Eagle Foods assigned its lease to Certified Grocers Midwest,
Inc. ("Certified"), which vacated in August 1995. During May 1996, Euro-Fresh
Market ("Euro-Fresh") began its occupancy of the anchor store and the shopping
center has been renamed Euro-Fresh Market Plaza.
In the opinion of IREIC, the partnership is meeting its investment objective
to provide a minimum 8% cash distribution and has, through an early and
profitable sale of the Wholesale Club, achieved capital appreciation on 16% of
the partnership's investment in properties.
INLAND REAL ESTATE GROWTH FUND II, L.P. ("GROWTH FUND II")--The offering
period for Growth Fund II began September 21, 1987 and ended September 21, 1989.
The objectives were to invest in improved residential, retail, industrial and
other income-producing properties on a moderately leveraged basis for capital
appreciation through increases in property values, tax-sheltered quarterly cash
distributions and the build-up of equity through reduction of mortgage
indebtedness.
Growth Fund II raised $4,038,250 from 336 investors and purchased two
properties, a multi-family residential property in Illinois and a health club in
Ohio. These properties were purchased for a total acquisition cost of
$5,615,826. The health club is currently approximately 60% financed with 40%
equity. Cash distributions to limited partners through September 30, 1998
totaled $1,164.14 per $1,000 unit or $4,639,228, including $970,457 from
operations and $3,668,771 as a return of capital from the sale of the
multi-family residential property in Illinois as 18 individual six-unit
apartment buildings. All 18 of the six-unit buildings were sold to third-party
buyers on an installment basis for from $245,334 to $250,000 per building or a
total of $4,261,895 (net of selling expenses). Growth Fund II's cost basis in
the buildings was $4,112,195. The partnership extended financing to buyers to
allow buyers to make monthly interest payments to Growth Fund II for a period of
not more than seven to ten years, at which time the balance of the purchase
price would be due. However, as of December 31, 1995, 13 of the installment sale
loans had been prepaid in full and five had been substantially pre-paid. In
addition, since 1994 the limited partners have continued to receive double digit
returns on their remaining invested capital. The remaining $80,000 owed on these
loans, which were secured by second mortgages, was paid in full on June 5, 1998.
In the opinion of IREIC, the sale of the multi-family property as individual
six-unit apartment buildings has resulted in modest capital appreciation within
a short holding period. IREIC is evaluating strategies to sell the partnership's
remaining asset (the health club in Ohio) and bring the partnership to a
profitable conclusion.
INLAND LAND APPRECIATION FUND, L.P. ("LAND FUND I")--The offering period for
Land Fund I began October 12, 1988 and ended October 6, 1989. The objectives
were to invest in pre-development land on an all-cash basis and realize
appreciation of such land upon resale.
61
<PAGE>
Land Fund I raised $30,001,000 from 3,425 investors and purchased 25 land
parcels, all in suburban counties surrounding Chicago, Illinois, for an
aggregate purchase price of $25,187,069. As of September 30, 1998, Land Fund I
has had multiple sales transactions involving all or portions of 16 parcels
which generated $18,767,530 in net sales proceeds, including notes receivable of
$7,202,935. Land Fund I's cost basis in the land parcels sold was $14,562,645
resulting in a gain, net of selling expenses and commissions, of $4,204,884 for
financial reporting purposes. In the opinion of IREIC, the partnership is
currently meeting its investment objectives and has, through completed sales
transactions, realized significant capital appreciation on the assets sold. Cash
distributions to limited partners through September 30, 1998 totaled $5,996,219,
all from the sale of land parcels.
INLAND LAND APPRECIATION FUND II, L.P. ("LAND FUND II")--The offering period
for Land Fund II began October 25, 1989 and ended October 24, 1991. The
objectives were to invest in pre-development land on an all-cash basis and
realize appreciation of such land upon resale.
Land Fund II raised $50,476,170 from 5,055 investors and purchased, with the
net proceeds available for investment, 27 land parcels and two buildings, all in
suburban counties surrounding Chicago, Illinois, for an aggregate purchase price
of $41,314,301. As of September 30, 1998, Land Fund II has had multiple sales
transactions involving all or portions of nine parcels which generated
$15,959,369 in net sales proceeds, including notes receivable of $2,750,000.
Land Fund II's cost basis in the land parcels sold was $10,608,441 resulting in
a gain, net of selling expenses and commissions, of $5,350,928 for financial
reporting purposes. In the opinion of IREIC, the partnership is currently
meeting its investment objectives and has, through completed sales transactions,
realized significant capital appreciation on the assets sold. Cash distributions
to limited partners through September 30, 1998 totaled $6,836,753, including
$6,115,753 from sales and $721,000 from operations.
INLAND CAPITAL FUND, L.P. ("LAND FUND III")--The offering period for Land
Fund III began December 13, 1991 and ended August 23, 1993. The objectives were
to invest in pre-development land on an all-cash basis and realize appreciation
of such land upon resale.
Land Fund III raised $32,399,282 from 2,683 investors and purchased, with
the net proceeds available for investment, 18 land parcels, one of which
included a house and several outbuildings, for an aggregate purchase price of
$25,945,989. As of September 30, 1998, Land Fund III has had multiple sales
transactions involving the house and portions of seven parcels which generated
$6,410,565 in net sales proceeds, including notes receivable of $1,083,366 .
Land Fund III's cost basis in the land parcels sold was $4,285,403 resulting in
a gain, net of selling expenses and commissions, of $2,125,163 for financial
reporting purposes. In the opinion of IREIC, the partnership is currently
meeting its investment objectives and has, through completed sales transactions,
realized significant capital appreciation on the assets sold. Cash distributions
to limited partners through September 30, 1998 totaled $1,646,334, all from the
sale of land parcels.
INLAND MORTGAGE INVESTORS FUND III ("MORTGAGE FUND III")--The offering
period for Mortgage Fund III began January 9, 1989 and ended January 9, 1991.
The objectives were to make or acquire loans secured by mortgages on improved
income-producing properties, to provide investors with quarterly cash
distributions of at least 8% per annum for the first five years of the
partnership and to maximize cash distributions over the life of the partnership
by participating in capital appreciation and increased cash flows of properties
securing the partnership's loans.
Mortgage Fund III raised $2,837,249 from 281 investors and originally funded
seven mortgages totaling $2,302,064 between October 1990 and June 1992. As of
September 30, 1998, the partnership has one mortgage loan receivable totaling
$124,571 remaining. Cash distributions to limited partners through September 30,
1998 totaled $3,601,916, including $874,292 from operations, $306,874 in
supplemental capital contributions from the general partner in order to meet the
8% per annum distribution requirement and $2,420,750 as a return of capital from
the repayment of mortgage loans receivable and prepayment penalties.
62
<PAGE>
In the opinion of IREIC, the delay in locating suitable investment
opportunities for the partnership, along with the small size of the partnership
and its fixed expenses, has resulted in lower than anticipated earnings from
operations. However, to date, the limited partners have received total
distributions in excess of invested capital.
PRIVATE PARTNERSHIPS
Since inception and through September 30, 1998 (including the programs
described below under "--Private Placement Real Estate Equity Program," and
"--Private Placement Mortgage and Note Programs," in this Section), Affiliates
of Inland have sponsored 514 private placement limited partnerships which have
raised more than $524,201,000 from approximately 17,000 investors and invested
in properties for an aggregate price of more than $1 billion in cash and notes.
Of the 522 properties purchased, 93% have been in Illinois. Approximately 90% of
the funds were invested in apartment buildings, 6% in shopping centers, 2% in
office buildings and 2% in other properties. Including sales to Affiliates, 301
partnerships have sold their original property investments. Officers and
employees of IREIC and its Affiliates invested more than $17,000,000 in these
private placement limited partnerships.
From 1990 and through September 30, 1998, investors in Inland's private
partnerships have received total distributions in excess of $188,045,800,
consisting of cash flow from partnership operations, interest earnings, sales
and refinancing proceeds and cash received during the course of property
exchanges. Following a proposal by the former corporate general partner, which
was an Affiliate of TIGI, investors in 301 private partnerships voted in 1990 to
make IREIC the corporate general partner for those partnerships.
Beginning in December 1993 and continuing into the first quarter of 1994,
investors in 101 private limited partnerships for which IREIC is the general
partner received letters from IREIC informing them of the possible opportunity
to sell the 66 apartment properties owned by those partnerships to a to-be-
formed REIT (the "Apartment REIT") in which Affiliates of IREIC would receive
stock and cash and the limited partners would receive cash. In connection
therewith, the underwriters for the Apartment REIT subsequently advised IREIC to
sell to a third party its management and general partner's interests in those
remaining limited partnerships not selling their apartment properties to the
Apartment REIT (approximately 30% of the Inland-sponsored limited partnerships
owning apartment buildings). The prospective third-party buyers of IREIC's
interests in the remaining partnerships, however, would make no assurance to
support those partnerships financially. As a result, in a March 1994 letter from
IREIC, investors were informed of IREIC's decision not to go forward with the
formation of the Apartment REIT. Following this decision, two investors filed a
complaint in April 1994 in the Circuit Court of Cook County, Illinois, Chancery
Division, purportedly on behalf of a class of other unnamed investors, alleging
that IREIC had breached its fiduciary responsibility to those investors whose
partnerships would have sold apartment properties to the Apartment REIT. The
complaint sought an accounting of information regarding the Apartment REIT
matter, an unspecified amount of damages and the removal of IREIC as general
partner of the partnerships that would have participated in the sale of
properties to the Apartment REIT. In August 1994, the court granted IREIC's
motion to dismiss, finding that plaintiffs lacked standing to bring this case
individually. Plaintiffs were granted leave to file an amended complaint.
Thereafter, in August 1994, six investors filed an amended complaint,
purportedly on behalf of a class of other investors, and derivatively on behalf
of six limited partnerships of which IREIC is the general partner. The
derivative counts sought damages from IREIC for alleged breach of fiduciary duty
and breach of contract, and assert a right to an accounting. IREIC filed a
motion to dismiss in response to the amended complaint. The suit was dismissed
in March 1995 with prejudice. The plaintiffs filed an appeal in April 1996.
After the parties briefed the issue, arguments were heard by the Appellate Court
in February 1997. In September 1997, the Appellate Court affirmed the trial
court decision in favor of IREIC.
63
<PAGE>
PRIVATE PLACEMENT REAL ESTATE EQUITY PROGRAM
WISCONSIN CAPITAL LAND FUND, L.P., an Illinois limited partnership
("Wisconsin Land Fund"), was formed in October 1992. The objectives were to
invest in pre-development land in the Madison, Wisconsin area on an all-cash
basis and realize appreciation of such land upon resale. The offering period for
units in this privately offered partnership began in October 1992 and ended on
June 14, 1993 with the maximum amount, $2,275,000, raised. Seven parcels of land
in the Madison, Wisconsin, area were purchased with the proceeds of the
offering.
Parcel 5, which consists of 63 improved lots in the Village of Mount Horeb,
Wisconsin, has had 37 lot sales since 1995 for total gross sales proceeds of
$1,459,300. Twenty-six remaining lots continue to be marketed for sale. On
October 1, 1997, Parcel 6, located in Windsor, Wisconsin, was sold for $566,597,
which amount is 191% of the original parcel capital.
On March 19, 1998, parcels 3 and 7 were sold for a total of $2,150,000, of
which $1,900,000 was returned in cash to investors. To date, the entire amount
raised of $2,275,000 has been distributed to the limited partners.
As of September 30, 1998, the partnership's remaining assets consists of
parcels 1, 2 and 4 and the 26 remaining lots in parcel 5.
Intervest Midwest Real Estate Corporation, of which Barry L. Lazarus
(President, Chief Operating Officer and an Affiliated Director of the Company)
is President, currently provides property zoning, development and disposition
services to this partnership. See "Management--Directors and Executive Officers
of the Company."
PRIVATE PLACEMENT MORTGAGE AND NOTE PROGRAMS
During 1992 and in 1993, IREIC or its Affiliates sponsored nine private
placement securities offerings, including seven mortgage and note programs,
which are described below.
TRIPLE SECURITY FUND, L.P., an Illinois limited partnership, was formed in
May 1992. The principal investment objectives of the partnership were to invest
in participations in third-party mortgage loans owned by an Affiliate of IREIC
and thereby return investors' capital within five years, and to provide a 10%
annual return on invested capital during the life of the partnership. The return
of capital and the 10% annual return were guaranteed by IREIC. The offering
period for interests in this privately offered partnership began in May 1992 and
ended in June 1992 with the maximum amount of $3,000,000 raised. All of the
offering proceeds were used to invest in participations in 14 wraparound
mortgage loans and first mortgage loans, secured by condominium, multi-family
residential and commercial properties located in the Chicago metropolitan area.
Limited partners received their first monthly cash distribution in July 1992.
Cash distributions to limited partners through September 30, 1996 totaled
$4,294,216, including $1,226,419 from operations, subsidy income of $67,797 from
IREIC, pursuant to the guarantee for that program, and $3,000,000 was a return
of capital resulting from a payoff by the Affiliate. This partnership was
liquidated in 1996.
10% INCOME FUND, L.P., an Illinois limited partnership offering investments
in promissory notes, was formed in May 1992. The offering period for the
purchase of notes began in May 1992 and ended in June 1992 with the maximum
amount of $2,000,000 raised. Notes with a term of five years and providing a 10%
annual return for the first four years and 10.5% in the fifth year were issued
by the partnership. The return of capital to noteholders and the specified
annual returns were guaranteed by IREIC. 10% Income Fund, L.P. invested in loans
made to an Affiliate of IREIC, which were secured by collateral assignments of
third-party mortgage loans owned by the Affiliate. Noteholders received their
first monthly interest distribution in July 1992. Cash distributions to
noteholders through November 30, 1996 totaled $2,878,335, of which $861,051 was
interest earnings, $17,284 was from working capital reserves, and $2,000,000 was
a return of capital resulting from a payoff by the Affiliate. This partnership
was liquidated in 1996.
64
<PAGE>
9% INCOME JUNIOR MORTGAGE FUND, L.P., an Illinois limited partnership, was
formed in July 1992. The principal investment objectives of the partnership were
to invest in third-party junior mortgage loans owned by an Affiliate of Inland
and thereby return investors' capital within six years, and to provide a 9%
annual return on invested capital during the life of the partnership. The return
of capital and the 9% annual return were guaranteed by IREIC. The offering
period for interests in this privately offered partnership began in July 1992
and ended in September 1992 with the maximum amount of $1,000,000 raised. All of
the offering proceeds were used to invest in third-party junior mortgage loans
owned by the Affiliate, secured by condominium, multi-family residential and
commercial properties located in the Chicago metropolitan area. Limited partners
received their first monthly cash distribution in September 1992. Cash
distributions through September 30, 1998 totaled $619,061, of which $493,316 was
interest earnings, $112,851 was a return of capital resulting from the
amortization of mortgage loans and $12,894 was a loan from IREIC, pursuant to
the distribution guarantee for that program.
INLAND EMPLOYEE APPRECIATION FUND, L.P., an Illinois limited partnership
offering investments in promissory notes, was formed in December 1992. The
offering period for the purchase of Notes began in December 1992 and ended in
February 1993 with the maximum amount of $400,000 raised. Notes were offered
only to Illinois residents who were employees of IREIC and its Affiliates. Notes
with a term of four years and providing 10% annual interest were issued by the
partnership. The return of capital to noteholders and the specified annual
return was guaranteed by IREIC. Inland Employee Appreciation Fund, L.P. invested
in a loan made to an Affiliate of IREIC, which was secured by collateral
assignments of third-party investor loans owned by the Affiliate. Noteholders
received their first monthly interest distribution in March 1993. Cash
distributions through May 31, 1996 totaled $502,198, of which $99,769 was
interest earnings and $2,429 was subsidy income from IREIC, pursuant to the
guarantee for that program. The balance of $400,000 was a return of capital.
This partnership was liquidated in 1996.
9% MONTHLY CASH FUND, L.P., an Illinois limited partnership offering
investments in promissory notes to accredited investors, was sponsored by IREIC
in February 1993. The offering period for this program began February 1, 1993
and ended on May 17, 1993, when the maximum amount of $4,000,000 was raised.
Notes maturing August 1, 1999 and providing a 9% annual return were issued by
the partnership. 9% Monthly Cash Fund, L.P. invested in loans made to an
Affiliate of IREIC secured by collateral assignments of third party mortgage
loans owned by the Affiliate. The return of capital to noteholders and the 9%
annual return are guaranteed by IREIC. Cash distributions through September 30,
1998 totaled $1,889,393, of which $1,885,083 was interest earnings and $4,310
was from working capital reserves.
9% MONTHLY CASH FUND II, L.P., an Illinois limited partnership offering
investments in promissory notes to accredited investors, with investment
objectives identical to those of 9% Monthly Cash Fund, L.P., was sponsored by
IREIC in April 1993. The offering period for this program began April 5, 1993
and ended July 23, 1993, with the maximum amount of $4,000,000 raised. Notes
maturing February 1, 2000 and providing a 9% annual return were issued by the
partnership. 9% Monthly Cash Fund II, L.P. has invested in a loan made to an
Affiliate of IREIC, secured by collateral assignments of third-party mortgage
loans owned by the Affiliate. The return of capital to noteholders and the 9%
annual return are guaranteed by IREIC. Cash distributions through September 30,
1998 totaled $1,827,616, of which $1,824,423 was interest earnings and $3,193
was from working capital reserves.
IMC NOTE ISSUE #2 1993, offering investments in promissory notes was
sponsored by Inland Mortgage Corporation, an Illinois corporation and an
Affiliate of IREIC ("IMC"), in July 1993. The offering period for this program
began August 25, 1993 and closed on June 13, 1994 after raising $6,800,000.
Notes maturing December 31, 2003, providing for interest at the rate of 8% per
annum and 100% return of principal guaranteed by IREIC, were issued by IMC.
Proceeds of the offering have been used to invest in a mortgage loan secured by
an apartment property in Manchester, New Hampshire, owned by an Affiliate of
IREIC. Investors may also receive additional interest, dependent on the future
sale of the property. An initial distribution to investors of escrow interest,
totaling $13,685, was made in November 1993. Cash distributions through
September 30, 1998 totaled $2,551,357, of which $2,531,901 was interest earnings
and $19,456 was subsidy income from IREIC pursuant to the guarantee for that
program.
65
<PAGE>
INLAND CONDOMINIUM FINANCING FUND, L.P., an Illinois limited partnership
offering investment in promissory notes, was sponsored by IREIC in December
1993. The offering period for this program began December 15, 1993 and closed on
June 30, 1994. This partnership offered notes in the principal amount of
$1,031,000 maturing July 1, 2001, with interest at the rate of 10% per annum and
100% return of principal guaranteed by IREIC. The proceeds of the offering were
used to make unsecured loans to limited partnerships which are Affiliates of
IREIC, for the purposes of paying expenses relating to the conversion of
apartment properties owned by those partnerships to condominiums, and conducting
condominium unit sales and other partnership expenses. Cash distributions began
in March 1994. Distributions through November 17, 1997 totaled $1,411,617, of
which $380,617 was interest earnings and $1,031,000 was a return of capital.
This partnership was liquidated in 1997.
INLAND JUNIOR MORTGAGE FUND, L.P., an Illinois limited partnership offering
private placement securities, was sponsored by an Affiliate of IREIC in August
1988. The offering period for this program ended in May 1989 with $410,000
raised. All of the proceeds available for investment were used to purchase 82
second mortgages owned by Inland Mortgage Investment Corporation ("IMIC"), one
of the TIGI Affiliated Companies, which were secured predominantly by
condominium units located in the Chicago metropolitan area. In February 1996, 20
limited partners exercised their put option and IMIC bought their interests.
Cash distributions through January 28, 1997 totaled $541,156, including $131,156
from interest earnings and $410,000 was a return of capital. All capital has
been returned and the partnership was liquidated in 1997.
LOAN MODIFICATIONS AND WORK-OUTS
Between 1990 and December 31, 1997, 40 Inland-sponsored partnerships owning
27 properties ceased making debt service payments to unaffiliated lenders which
held the underlying financing on the properties. These actions were taken with
the objective of reducing or restructuring the debt to levels commensurate with
the levels of performance of the operating properties. In the case of six of
these partnerships, namely 14 W. Elm Limited Partnership, 1445 North State
Parkway Limited Partnership, 5600 Sheridan Limited Partnership, 5630 Sheridan
Limited Partnership, 6030 Sheridan Limited Partnership and Oak Brook Commons
Limited Partnership, the original asset of each of these partnerships was
transferred to a new partnership which was 100% owned by the old partnership.
IREIC believed that the new partnerships were better positioned to accomplish a
work-out with the lender. In connection with the transfers of three of these
properties to the new partnerships discussed above, the lender holding the first
mortgages on these properties filed a separate proceeding against the general
partner and its Affiliates, claiming contractual interference and other
allegations. This complaint was withdrawn as part of a final settlement reached
with the lender in February 1993.
Each of these new partnerships filed for financial reorganization in federal
court. In addition, 1036 N. Dearborn Limited Partnership also filed for
financial reorganization in federal court. All of these filings for
reorganization were an extension of negotiations with the lenders, with the
objective of reducing or restructuring the debt on the properties owned by the
partnerships. In the case of the filing for reorganization by each of the new
partnerships owned by 1445 North State Parkway Limited Partnership, 5600
Sheridan Limited Partnership and 5630 Sheridan Limited Partnership, the
reorganization proceedings were dismissed after each lender approved a
tax-deferred exchange transaction between the new partnership and an
unaffiliated third party. The general partner of the 1036 North Dearborn Limited
Partnership was able to purchase the debt encumbering that property at a
discount from the lender and the filing for reorganization of that partnership
was dismissed. The 1036 North Dearborn property was subsequently refinanced with
a third-party lender and then sold to a third party.
The new partnerships owned by the 14 W. Elm, 6030 Sheridan and Oak Brook
Commons Limited Partnerships participated with the general partner and its
affiliates and with 16 other affiliated limited partnerships, all of whose
properties were subject to first-mortgage loans from the same third-party
lender, in a settlement agreement with that lender. Under the terms of the
settlement agreement, the 16 other
66
<PAGE>
affiliated limited partnerships (none of which were in default on their mortgage
loans) provided additional security to the lender with respect to each of their
loans by transferring administration of property tax escrow accounts to the
lender. The transfer of the escrow accounts had no financial impact on the 16
partnerships. Five of the 16 other partnerships also obtained favorable loan
modifications from the lender.
In the case of the new partnership owned by the 14 W. Elm Limited
Partnership, the lender cooperated in a tax-deferred exchange of the
partnership's real estate asset. That partnership assigned its interest in its
property, subject to the existing indebtedness, to an unaffiliated third party
in exchange for an assignment of the unaffiliated third party's interest in
another property, subject to indebtedness in a principal amount similar to that
on the 14 W. Elm property. This transaction was accomplished with the objective
of avoiding the creation of any current income tax liability to the partnership
or its limited partners. As a result of this tax-deferred exchange, the 14 W.
Elm Limited Partnership owns a net-lease commercial property secured by a
long-term lease with a creditworthy tenant. The debt service on the indebtedness
used to acquire the exchange property is in the form of fully amortizing
payments over the term of the store lease, with the net-lease payments received
from the tenant equal to the required debt service payments. The possibility of
cash flow distributions to the limited partners is, therefore, precluded.
However, the expectation exists for equity accumulation through the amortization
of the loan and, therefore, a distribution to the limited partners upon the
disposition of the exchange property. IREIC believes that the limited partners
of the 14 W. Elm Limited Partnership are in a better position to realize a
return of their capital investment through the ultimate disposition of the
exchange property.
In the case of the new partnership owned by the Oak Brook Commons Limited
Partnership, the lender acquired the property through foreclosure and the
general partner has supplied the Oak Brook Commons Limited Partnership with a
new property, an ownership interest in a retail store in Marshall, Minnesota,
leased on a Triple-Net Lease Basis by Wal-Mart Stores, Inc.
In the case of the new partnership owned by the 6030 Sheridan Limited
Partnership, the lender agreed to permit a tax-deferred exchange of the
partnership's property, similar to that completed by the 14 W. Elm Limited
Partnership and subsequently the lender sold its mortgage to an unaffiliated
party who then acquired the property. The new partnership acquired a replacement
property similar to that acquired by the 14 W. Elm Limited Partnership, which
property was then conveyed to the 6030 Sheridan Limited Partnership.
Of the original partnerships discussed above, Mr. Daniel L. Goodwin, a
Director and Chairman and President of Inland, and a Director of IREIC, served
as individual general partner of all but the Oak Brook Commons Limited
Partnership, in which Mr. G. Joseph Cosenza, a Director and a Vice Chairman of
Inland, served as individual general partner. Prior to the filing for
reorganization, and as part of the strategy thereof, Mr. Cosenza relinquished
his position as individual general partner of the Oak Brook Commons Limited
Partnership and Mr. Goodwin did the same for all except the 1036 N. Dearborn
Limited Partnership, for which he continues to serve as individual general
partner. These actions were taken upon the advice of counsel to reduce the
chances of delay in the reorganization efforts. The corporate general partner of
each partnership has elected to continue the business of each of the
partnerships in which the individual general partner relinquished his position.
Four of the 40 Inland-sponsored partnerships described in the first
paragraph of this section owned four adjacent office buildings in Park Ridge,
Illinois. These four operating partnerships were, in turn, owned by 21 other
Inland-sponsored partnerships which had sold their original real estate assets
and reinvested a portion of the proceeds from those sales in ownership units in
the four operating partnerships. During 1991, the lenders which held the first
mortgages encumbering the four office buildings acquired the deeds to the
properties in lieu of foreclosure. The four operating partnerships were
subsequently liquidated. The general partner of the 21 partnerships which had
owned the four operating partnerships arranged for the transfer to each of the
21 partnerships of certain ownership interests in five net-lease commercial
properties having long-term leases with Creditworthy Tenants. The debt service
on the
67
<PAGE>
indebtedness used to acquire the commercial properties consists of principal and
interest payments which fully amortize the indebtedness over the term of the
store leases, with the net-lease payments received from the tenants equal to the
required debt service payments. The possibility of cash flow distributions to
the limited partners in the 21 partnerships is, therefore, precluded. However,
the expectation exists for equity accumulation through the amortization of the
loan and, therefore, a future distribution to the limited partners upon the
disposition of the commercial properties. The 21 partnerships experienced
minimal adverse tax consequences from the liquidation of the four operating
partnerships and their receipt of the ownership interests in the commercial
properties. IREIC believes that the limited partners of the 21 partnerships are
now positioned to realize a return of their capital investment through the
ultimate disposition of the commercial properties.
In the case of the 900 DeWitt and the Hoffman Ridge Limited Partnerships,
two of the 40 limited partnerships mentioned in the first paragraph of this
section, tax-deferred exchanges of the partnerships' properties were
accomplished, in the same manner as described above. The partnerships acquired
net-lease commercial properties. Subsequent to the exchanges, the 900 DeWitt and
Hoffman Ridge properties were acquired by the first-mortgage lenders whose loans
were secured by those properties.
In the case of the Park Colony Limited Partnership, one of the 40 limited
partnerships mentioned in the first paragraph of this section, the partnership
defaulted on a loan secured by a second mortgage against the Park Colony
property. The lender which owned the second-mortgage loan purchased the position
of the lender which had funded the first mortgage loan secured by the property.
The lender then sold the debt, at a substantial discount, to an Affiliate of the
general partner of Park Colony Limited Partnership, and all legal actions
associated with the loan default were dismissed. The partnership then refinanced
the debt at the lower principal amount, retiring the debt owned by the
Affiliate. IREIC believes that this debt reduction is of significant benefit to
the partnership, which is now better positioned to realize its investment
objectives.
In 1990, the Inland New England Limited Partnership, acting as nominee for
14 Florida limited partnerships which own the Sunset Ridge Apartments in
Manchester, New Hampshire, ceased making payments on the bond financing for that
property, which bonds were issued by the New Hampshire Housing Finance
Authority. In August 1993, an Affiliate of the general partner for those
partnerships purchased the bonds and the interests of two savings and loan
associations which had acted as bond credit-enhancers, at a substantial
discount. The partnerships which own the property obtained refinancing funds to
pay off the bonds and the amounts due to the Affiliate under the
credit-enhancement instruments for approximately the discounted price paid by
the Affiliate.
In April 1993, the West Haven Limited Partnership ceased making payments on
the first mortgage loan for that partnership's property. The general partner
attempted to negotiate with the lender to modify the terms of the loan to a
level commensurate with the operating performance of the West Haven property,
but no agreement was reached. A tax-deferred exchange was accomplished and the
partnership acquired an interest in a net-lease commercial property. The West
Haven property was subsequently acquired by the lender whose loan was secured by
a first mortgage against the property.
In the case of the other partnerships referred to in the first paragraph of
this section, subsequent to the acquisition of net-leased commercial properties
via tax-deferred exchanges, the Townsgate, Riverdale, Northwoods and Bridgeview
properties were acquired by the first-mortgage lenders whose loans were secured
by the properties. The Covington Associates and Westbrooke Limited Partnerships'
tax-deferred exchange property, Townsgate II, was acquired by the first mortgage
lender and the two partnerships acquired net-lease commercial properties via
second tax-deferred exchanges. In the case of the Bensenville Industrial Limited
Partnership, subsequent to the acquisition of a replacement net-lease commercial
property, the Bensenville property was acquired by the first-mortgage lender
whose loan was secured by the property.
68
<PAGE>
In addition to the above-described developments, the corporate general
partner of the Walton Place Limited Partnership and the Barrington Lakes Limited
Partnership settled litigation with the lenders for the properties which
resulted in the transfer of the properties and an agreement to make cash
settlements by the partnerships to the lenders. In each case, the litigation
resulted after the partnership ceased making debt service payments in an effort
to bring about a renegotiation of the terms of the financing. The lenders agreed
to permit a tax-deferred exchange of the partnerships' respective properties.
In January 1995, the Timberlake Limited Partnership ceased making payments
on the first mortgage loan for that partnership's property. IREIC attempted to
negotiate with the lender to modify the terms of the loan to a level
commensurate with the operating performance of the Timberlake property, but no
agreement was reached. During August 1996, IREIC initiated a tax-deferred
exchange whereby the partnership acquired an interest in a net-lease commercial
property prior to the Timberlake property being acquired by the lender whose
loan is secured by a first mortgage against the property.
In October 1996, two limited partnerships owning contiguous apartment
buildings in south suburban Chicago ceased making payments on their respective
HUD-insured first mortgage loans. The Chateaux Versailles and Marseilles Limited
Partnerships, through their general partner, are attempting to negotiate with
HUD, as mortgagee, to modify the terms of the loans to levels commensurate with
the operating performance of the properties. To date, no agreement has been
reached.
EFFECTS OF PROPERTY EXCHANGES ON INVESTORS
The Inland Organization has used a strategy of tax-deferred property
exchanges to mitigate the adverse effects of 1986 tax law changes and the
weakening of apartment markets in the late 1980s on Inland's tax-shelter private
partnerships and investors in those partnerships. The loss of deficit-producing
properties to foreclosure would otherwise have resulted in the loss of
investors' capital, as well as substantial income tax liability for those
investors. Through the exchange program, deficit-producing apartment properties
have been disposed of, net-leased retail properties have been acquired, and most
tax liability continues to be deferred. Gradually, through the amortization of
debt secured by the new, net-leased properties owned by these partnerships, the
partnerships and their investors are rebuilding equity which may be realized
upon the future sale or refinancing of these properties. One of the primary
investment objectives of these tax-shelter partnerships, the deferral of tax
liability, continues to be met to a significant degree. However, no cash flow is
being received by the investors in these partnerships. In addition, the
tax-deferred exchanges have extended the expected term of these tax-shelter
partnerships. If and when the net-leased properties are sold or refinanced,
there is no assurance that investors will realize any profit or a complete
return of capital. Because the duration of these partnerships has been extended,
when the net-leased properties are sold or refinanced, the annual rate of
appreciation realized by investors, if any, will be less than if the tax law had
not been changed and apartment markets had not declined in the late 1980s.
ADDITIONAL INFORMATION
Through September 30, 1998, seven private partnerships sponsored by
Affiliates of Inland have agreed to modifications of the original terms of the
installment receivables. The impact of these modifications on the installment
receivables includes reductions in net interest income during the first year or
two following a modification (and corresponding decreases in distributions to
limited partners during that period) and increases in interest income thereafter
(and corresponding increases in distributions), as well as the deferral of some
interest until maturity and, in the case of two partnerships, the extension of a
maturity date. The decreases in distributions to limited partners range from 25%
to 50% of the originally scheduled distributions for the initial one or two-year
period of the modifications followed by similar increases over the originally
scheduled distributions for the year or two following the modifications. Any
interest deferred until maturity would result in a
lower-than-originally-scheduled distribution until the maturity date, when such
deferred amounts would be received from the borrowers. The distribution to
investors of the principal
69
<PAGE>
proceeds due upon maturity would also be received at a later date, I.E., one to
two years later, due to a negotiated extension of the original maturity date.
During 1988, one private partnership sponsored by an Affiliate of IREIC
transferred its property to the municipality in which it was located pursuant to
an involuntary conversion proceeding. On March 1, 1989, the proceeds of the
conversion were reinvested in a new property, a transaction intended to qualify
as tax-deferred under the Code.
Except for re-acquisitions of previously owned properties upon default by
the purchaser, the transfer of a defaulted loan, the tax-deferred property
exchanges and the disputes with lenders described herein, there have been no
further major adverse business developments or conditions experienced by these
prior partnerships which would be material to investors in the Company.
Upon written request to the Company, any potential investor may obtain,
without charge, the most recent Annual Report on Form 10-K filed with the
Commission by any public program sponsored by any of the Inland Affiliated
Companies which has reported to the Commission within the last 24 months. Copies
of any exhibits to such Annual Reports shall be provided, upon request, for a
reasonable fee.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
70
<PAGE>
SUMMARY TABLES
The following summary tables set forth certain information concerning prior
programs discussed above through September 30, 1998.
Land Fund I, Land Fund II, Land Fund III, and Wisconsin Land Fund were
formulated as pure capital appreciation investments. No current return (I.E.,
from rents or interest) was contemplated or available as capital was invested in
non-income producing vacant land parcels. Distributions are received on an
irregular basis, only as a result of a sale of the vacant land parcels. These
distributions consist of both the return of the invested capital amount
allocated to the purchase of the parcel or parcels sold plus the profit on the
involved parcels as measured by the sale price (net of costs of the sale) minus
the fully loaded purchase price (allocated capital). The method of measuring
return on investment to date is on a sold parcel-by-parcel basis, as follows:
<TABLE>
<CAPTION>
FULLY LOADED
PURCHASE PRICE
NET SALES (ALLOCATED NET PROFITS
PRICES CAPITAL ON GROSS RETURN %
OF PARCELS OF PARCELS SOLD = PARCELS SOLD (NET PROFIT/
FUND SOLD TO DATE LESS TO DATE) -- TO DATE ALLOCATED CAPITAL)
- ------------------------ --------------- --- ----------------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Land Fund I............. $ 5,996,219 $ 3,883,452 $ 2,112,767 54%
Land Fund II............ 10,602,689 7,184,802 3,417,887 48%
Land Fund III........... 1,974,816 819,423 1,155,393 141%
Wisconsin Land Fund..... 2,433,738 1,440,186 993,552 69%
<CAPTION>
AVERAGE ANNUAL
RETURN ON ALLOCATED
CAPITAL (GROSS
RETURN %/AVERAGE
NUMBER OF YEARS OF
FUND CAPITAL INVESTED)
- ------------------------ -------------------
<S> <C>
Land Fund I............. 5.40%
Land Fund II............ 5.33%
Land Fund III........... 20.14%
Wisconsin Land Fund..... 11.50%
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE DISTRIBUTIONS TO LIMITED PARTNERS
---------------------------------------------------------------- RETURN ON
CAPITAL = RETURN OF + RETURN ON INVESTMENT
RAISED TOTAL -- INVESTMENT -- INVESTMENT PER YEAR
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Monthly Income Fund II................ $ 25,323,569 $ 20,872,988 $ 4,395,565 $ 16,477,423 8.00%
Growth Fund II........................ 4,038,250 4,639,228 3,668,772 970,456 5.11%
Mortgage Fund III..................... 2,837,249 3,601,916 2,420,750 1,181,166 6.25%
Triple Security Fund, L.P............. 3,000,000 4,294,216 3,000,000 1,294,216 10.00%
Employee Appreciation Fund, L.P.*..... 400,000 502,198 400,000 102,198 10.00%
Inland Junior Mortgage Fund, L.P.*.... 410,000 541,156 410,000 131,156 6.97%
Inland Condominium Financing Fund,
L.P................................. 1,031,000 1,411,617 1,031,000 380,617 10.00%
10% Income Fund, L.P.................. 2,000,000 2,878,335 2,000,000 878,335 10.00%
9% Income Junior Mortgage Fund,
L.P.*............................... 1,000,000 619,061 112,851 506,210 9.00%
9% Monthly Cash Fund, L.P............. 4,000,000 1,889,393 0 1,889,393 9.00%
9% Monthly Cash Fund II, L.P.......... 4,000,000 1,827,616 0 1,827,616 9.00%
IMC Note Issue #2 1993................ 6,800,000 2,551,357 0 2,551,357 8.00%
</TABLE>
- ------------------------
* Returns of Capital prior to Final Distribution.
71
<PAGE>
MANAGEMENT
INLAND AFFILIATED COMPANIES
The Inland Organization is a fully-integrated real estate and financial
organization, providing property management, leasing, marketing, acquisition,
disposition, development, redevelopment, syndication, renovation, construction,
finance and other related services. The first of the Inland Affiliated Companies
was started by a group of Chicago school teachers in 1967, and incorporated the
following year. The founders of Inland all remain actively involved in
overseeing these companies. The businesses of these Inland Affiliated Companies
are still centered in the Chicago metropolitan area. Over the past 30 years, the
Inland Affiliated Companies have experienced significant growth. The Inland
Affiliated Companies, in the aggregate, in April 1998 were ranked by CRAIN'S
CHICAGO BUSINESS as the 39th largest privately held business group headquartered
in the Chicago area. Among the Inland Affiliated Companies is the largest
property management firm in Illinois and one of the largest commercial real
estate and mortgage banking firms in the Midwest.
The Inland Affiliated Companies have approximately 700 employees. The senior
management of the Company includes executives of the Inland Affiliated
Companies. The Company's management personnel have substantial experience in a
full range of real estate services. The top seven senior executives of the
Company have an average of 25 years experience in the real estate industry.
The Advisor and the Dealer Manager are Inland Affiliated Companies. The
relevant skills and experience of each of the Inland Affiliated Companies,
developed over the course of 30 years in business, primarily in the Chicago
metropolitan area, is available to the Company in the conduct of its business.
As of September 30, 1998, limited partnerships for which Inland Real Estate
Investment Corporation ("IREIC"), one of the Inland Affiliated Companies, is the
general partner own in excess of 8,200 acres of pre-development land in the
Chicago area, as well as 9,550,000 square feet of commercial property in Chicago
and nationwide.
The Inland Affiliated Companies developed expertise in real estate financing
as it bought and sold properties over the years. In 1977, Inland Mortgage
Corporation, an Illinois corporation ("IMC"), was incorporated. IMC, during its
history, has originated more than $1 billion in financing, including loans to
third parties and affiliated entities.
Further delineation of functions and duties associated with financing
occurred in 1990, with the separate incorporation of Inland Mortgage Investment
Corporation ("IMIC") and Inland Mortgage Servicing Corporation ("IMSC"). IMIC,
as of September 30, 1998, owned a $122,486,000 loan portfolio, and IMSC serviced
a loan portfolio of 454 loans exceeding approximately $641,494,000.
As of September 30, 1998, The Inland Property Management Group, Inc.
("IPMGI"), one of the Inland Affiliated Companies, and its Affiliates manage
approximately 13,400 multi-family units, principally located in the Chicago
metropolitan area, which IPMGI believes is more than any other firm in that
market. In December 1998 IPMGI was ranked by CRAIN'S CHICAGO BUSINESS as the
11th largest commercial property management firm in the six-county Chicago area
based on its 12.4 million square feet of commercial properties managed in that
area at the end of 1997. The Management Agent was incorporated in 1998 to
segregate responsibility for management of the Company's Properties from IPMGI's
growing management portfolio of commercial properties. The Management Agent will
be responsible for collecting rent, leasing and maintaining the commercial
properties which it manages, which are intended to primarily be the Company's
Properties in the Company's Primary Geographical Area of Investment. The
Management Agent is owned primarily by individuals who are Affiliates of Inland.
In August 1988, IPMGI and its Affiliates owned or managed 1.3 million square
feet of retail property. That figure has grown to over 15 million square feet by
September 30, 1998, of which 5.3 million square feet is represented by
properties owned by IREC.
72
<PAGE>
IPMGI and its Affiliates are responsible for collecting rent and leasing and
maintaining the commercial properties which they manage. As of September 30,
1998, a substantial portion of the portfolio of IPMGI and its Affiliates,
approximately 8.8 million square feet, consists of properties leased on a
Triple-Net Lease Basis to Creditworthy Tenants, which means the tenant operates
and maintains the property and pays rent which is net of property taxes,
insurance and operating expenses.
Inland Real Estate Acquisitions, Inc. ("IREA"), one of the Inland Affiliated
Companies, has extensive experience in acquiring real estate for investment.
Over the years, IREA and its Affiliates have acquired approximately 755
properties.
See also "Prior Performance of the Company's Affiliates" and Appendix
A--"Prior Performance Tables" for information concerning over $647,000,000
raised from approximately 34,510 investors in connection with one other REIT,
six public real estate equity programs, one private real estate equity program
and nine private placement mortgage and note programs sponsored by Inland
Affiliated Companies during the 10-year period ending September 30, 1998, and
the prior performance of those programs.
The following sets forth certain information with respect to the directors
and principal executive officers of Inland:
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH INLAND
- --------------------------------------- ----- ----------------------------------------------
<S> <C> <C>
Daniel L. Goodwin...................... 55 Chairman, President and Director
Robert H. Baum......................... 55 Vice Chairman, Executive Vice
President--General Counsel and Director
G. Joseph Cosenza...................... 55 Vice Chairman and Director
Robert D. Parks........................ 55 Director
Norbert J. Treonis..................... 48 Director
</TABLE>
- ------------------------
* As of January 1, 1999
Messrs. Goodwin, Baum, Cosenza and Parks were the founders of Inland.
DANIEL L. GOODWIN is a Director, Chairman of the Board of Directors and
President of Inland. He has been with The Inland Group, Inc. and its Affiliates
since 1968 and is one of the four original principals.
Mr. Goodwin has served as Director of the Avenue Bank of Oak Park, as
Director of the Continental Bank of Oakbrook Terrace, and as Chairman of the
bank holding company of American National Bank of DuPage. Currently he is the
Chairman of the Board of Inland Mortgage Investment Corporation, one of the
Inland Affiliated Companies.
HOUSING. Mr. Goodwin has been in the housing industry for more than 28
years, and has demonstrated a lifelong interest in housing-related issues. He is
a licensed real estate broker and a member of the National Association of
Realtors. Mr. Goodwin has developed thousands of housing units in the Midwest,
New England, Florida, and the Southwest. He is also the author of a nationally
recognized real estate reference book for the management of residential
properties.
Mr. Goodwin has served on the Board of the Illinois State Affordable Housing
Trust Fund for the past six years. He is an advisor for the Office of Housing
Coordination Services of the State of Illinois, and a member of the Seniors
Housing Committee of the National Multi-Housing Council. Recently, Illinois
Governor Jim Edgar appointed Mr. Goodwin as Chairman of the Housing Production
Committee for the Illinois State Affordable Housing Conference. He also served
as a member of the Cook County Commissioner's Economic Housing Development
Committee, and he was the Chairman of the DuPage County Affordable Housing Task
Force. The 1992 Catholic Charities Award was presented to Mr. Goodwin for his
73
<PAGE>
work in addressing affordable housing needs. The City of Hope designated him as
the Man of the Year in 1980 for the Illinois construction industry. In 1989, the
Chicago Metropolitan Coalition on Aging presented Mr. Goodwin with an award in
recognition of his efforts in making housing more affordable to Chicago's Senior
Citizens. In 1995, PADS, Inc. (Public Action to Deliver Shelter) presented Mr.
Goodwin with an award, recognizing Inland as the leading corporate provider of
transitional housing for the homeless people of DuPage County. Mr. Goodwin also
serves as Chairman of New Directions Housing Corporation, a leading provider of
affordable housing in northern Illinois.
EDUCATION. Mr. Goodwin is a product of Chicago-area schools, and obtained
his Bachelor's and Master's Degrees from Illinois Universities. Following
graduation, he taught for five years in the Chicago Public Schools. His
commitment to education has continued through his work with the BBF Family
Services' Pilot Elementary School in Chicago, and the development of the Inland
Vocational Training Center for the Handicapped located at Little City in
Palatine, Illinois. He personally established an endowment which funds a
perpetual scholarship program for inner-city disadvantaged youth. In 1990 he
received the Northeastern Illinois University President's Meritorious Service
Award. Mr. Goodwin holds a Master's Degree in Education from Northern Illinois
University, and in 1986, he was awarded an Honorary Doctorate from Northeastern
Illinois University College of Education. More than 12 years ago, under Mr.
Goodwin's direction, Inland instituted a program to educate disabled students
about the workplace. Most of those original students are still employed at
Inland today, and Inland continues as one of the largest employers of the
disabled in DuPage County. Mr. Goodwin has served as a member of the Board of
Governors of Illinois State Colleges and Universities, and he is currently a
trustee of Benedictine University. He was elected Chairman of the Northeastern
Illinois University Board of Trustees in January 1996.
ACKNOWLEDGMENTS. Mr. Goodwin served as a member of Illinois Governor Jim
Edgar's Transition Team. In 1988 he received the Outstanding Business Leader
Award from the Oak Brook Jaycees and has been the General Chairman of the
National Football League Players Association Mackey Awards for the benefit of
inner-city youth. He served as the recent Chairman of the Speakers Club of the
Illinois House of Representatives. In March 1994 he won the Excellence in
Business Award from the DuPage Area Association of Business and Industry.
Additionally, he was honored by Little Friends in 1995 for rescuing their
Parent-Handicapped Infant Program when they lost their lease. He was the
recipient of the 1995 March of Dimes Life Achievement Award and was recognized
as the 1997 Corporate Leader of the Year by the Oak Brook Area Association of
Commerce and Industry.
ROBERT H. BAUM has been with The Inland Group, Inc. and its Affiliates since
1968 and is one of the four original principals. Mr. Baum is a Director, Vice
Chairman and Executive Vice President-General Counsel of The Inland Group, Inc.
In his capacity as General Counsel, Mr. Baum is responsible for the supervision
of the legal activities of the Inland Affiliated Companies. This responsibility
includes the supervision of The Inland Group, Inc. Law Department and serving as
liaison with outside counsel. Mr. Baum has served as a member of the North
American Securities Administrators Association Real Estate Advisory Committee
and as a member of the Securities Advisory Committee to the Secretary of State
of Illinois. He is a member of the American Corporation Counsel Association and
has also been a guest lecturer for the Illinois State Bar Association. Mr. Baum
has been admitted to practice before the Supreme Court of the United States, as
well as the bars of several federal courts of appeals and federal district
courts and the State of Illinois. He has served as a director of American
National Bank of DuPage and currently serves as a director of Westbank. Mr. Baum
also is a member of the Governing Council of Wellness House, a charitable
organization that provides emotional support for cancer patients and their
families.
G. JOSEPH COSENZA has been with The Inland Group, Inc. and its Affiliates
since 1968 and is one of the four original principals. Mr. Cosenza is a Director
and Vice Chairman of The Inland Group, Inc. and oversees, coordinates and
directs the Inland Organization's many enterprises. In addition, Mr. Cosenza
74
<PAGE>
immediately supervises a staff of nine persons who engage in property
acquisitions. Mr. Cosenza has been a consultant to other real estate entities
and lending institutions on property appraisal methods.
Mr. Cosenza received his B.A. Degree from Northeastern Illinois University
and his M.S. Degree from Northern Illinois University. From 1967 to 1968, he
taught in the La Grange Illinois School District and, from 1968 to 1972, he
served as Assistant Principal and taught in the Wheeling, Illinois School
District. Mr. Cosenza has been a licensed real estate broker since 1968 and an
active member of various national and local real estate associations, including
the National Association of Realtors and the Urban Land Institute.
Mr. Cosenza has also been Chairman of the Board of American National Bank of
DuPage, and has served on the Board of Directors of Continental Bank of Oakbrook
Terrace. He is presently a director of Westbank in Westchester and Hillside,
Illinois.
ROBERT D. PARKS has been with The Inland Group, Inc. and its Affiliates
since 1968 and is one of the four original principals. He is a Director of The
Inland Group, Inc.; as well as Chairman of Inland Real Estate Investment
Corporation ("IREIC"); and President, Chief Executive Officer, Chief Operating
Officer and an Affiliated Director of Inland Real Estate Corporation, a REIT
sponsored by IREIC.
Mr. Parks is responsible for the ongoing administration of existing
investment programs, corporate budgeting and administration for IREIC. He
oversees and coordinates the marketing of all investments and investor
relations.
Prior to joining Inland, Mr. Parks was a school teacher in Chicago's public
schools. He received his B.A. Degree from Northeastern Illinois University and
his M.A. Degree from the University of Chicago. He is a registered Direct
Participation Program Limited Principal with the National Association of
Securities Dealers, Inc. He is also a member of the Real Estate Investment
Association, as well as a member of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT").
Mr. Parks has been Chairman, Chief Executive Officer and an Affiliated
Director of the Company since its formation.
NORBERT J. TREONIS joined The Inland Group, Inc. and its Affiliates in 1975
and he is currently a Director of The Inland Group, Inc., as well as Chairman
and Chief Executive Officer of Inland Property Management Group, Inc. and
Chairman of the Board of Directors of Inland Commercial Property Management,
Inc. He serves on the Board of Directors of all Inland subsidiaries involved in
property management, acquisitions and maintenance of real estate, including in
addition to those mentioned in the preceding sentence, Mid-America Management
Corp., Metropolitan Construction Services, Inc. and American Building Services,
Inc. Mr. Treonis is charged with the responsibility of the overall management
and leasing of all apartment units, retail, industrial and commercial properties
nationwide for the Inland Affiliated Companies.
Mr. Treonis is a licensed real estate broker. He is a past member of the
Board of Directors of American National Bank of DuPage, the Apartment Building
Owners and Managers Association of Illinois, the National Apartment Association
and the Chicagoland Apartment Association.
GENERAL MANAGEMENT OF THE COMPANY
The Company operates under the direction of the Board that is responsible
for the overall management and control of the Company's affairs. However, the
Board has retained the Advisor to manage the Company's day-to-day affairs,
subject to the Board's supervision.
Investment policies of the Company, as well as fees and expenses of the
Company, have been established by the Board and are reviewed and approved by the
Directors (including a majority of the Independent Directors) with sufficient
frequency (but not less than annually) to ensure that the policies being
followed are in the best interest of the Stockholders. All Directors are
responsible, as a result of their
75
<PAGE>
fiduciary duties, for determining the reasonableness of the Company's total fees
and expenses in light of the Company's investment experience and the fees and
expenses of companies performing comparable services. Each determination, along
with the supporting rationale, is set forth in the minutes of the meetings of
the Board.
The Independent Directors are required to determine, from time to time, but
not less than annually, that the compensation paid by the Company to the Advisor
is reasonable in relation to the nature and quality of the services performed
and within the limits prescribed by applicable state regulatory authorities. The
Independent Directors are also required to supervise the Advisor's performance
and the compensation paid to it by the Company to determine that the provisions
of the Advisory Agreement are being carried out. Each such determination must be
based on at least the factors set forth below and other factors that the
Independent Directors may deem relevant. The findings of the Independent
Directors on each such factor must be recorded in the minutes of the meetings of
the Board. These factors include: (i) the size of the fee paid to the Advisor in
relation to the size, composition and profitability of the portfolio of the
Company; (ii) the success of the Advisor in generating opportunities that meet
the investment objectives of the Company; (iii) the rates charged to other REITs
and to investors other than REITs by advisors performing similar services; (iv)
additional revenues realized by the Advisor and any Affiliate through their
relationship with the Company, including loan administration, underwriting or
brokerage commissions, servicing, engineering, inspection and other fees,
whether paid by the Company or by others with whom the Company does business;
(v) the quality and extent of service and advice furnished by the Advisor; (vi)
the performance of the investment portfolio of the Company, including income,
conservation or appreciation of capital, frequency of problem investments and
competence in dealing with distress situations; and (vii) the quality of the
portfolio of the Company in relationship to the investments generated by the
Advisor for its own account. See "Certain Responsibilities of Directors and the
Advisor; Indemnification" and "--The Advisory Agreement" in this Section.
The Board will be comprised of from three to eleven individuals, a majority
of whom are deemed to be independent of the Company (the "Independent
Directors"). An Independent Director is defined to mean generally Directors who
(i) are not affiliated and have not been affiliated within the two years prior
to their becoming an Independent Director of the Company, directly or
indirectly, with the Company, the Sponsor, the Advisor or any of their
Affiliates through ownership, employment, being an officer or director or having
a material business or professional relationship, (ii) do not serve as a
director or trustee for more than two other REITs organized by the Company, the
Sponsor or the Advisor or advised by the Advisor, and (iii) perform no other
services for the Company. See "Glossary" for a more expansive definition of
"Independent Directors." Election of Board members is conducted on an annual
basis. Each individual elected to the Board serves a one-year term or until his
or her successor is elected. See "Summary of the Organizational Documents."
The Company does not have any policy limiting any of its officers,
directors, Stockholders or Affiliates from engaging for their own account in
business activities of the types to be conducted by the Company. However, the
Company does have policies relating to when the Company may enter into a
transaction with such Persons. See "Summary of Organizational
Documents--Transactions with Affiliates."
[THE BALANCE OF THIS PAGES IS INTENTIONALLY LEFT BLANK]
76
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
Company's Directors and executive officers. The biography of Mr. Parks, who has
been Chairman, Chief Executive Officer and an Affiliated Director of the Company
since its formation, is set forth above under "--Inland Affiliated Companies" in
this Section:
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH THE COMPANY
- ---------------------------------------- ----- ---------------------------------------------
<S> <C> <C>
Robert D. Parks......................... 55 Chairman, Chief Executive Officer and
Affiliated Director
Barry L. Lazarus........................ 52 President, Chief Operating Officer and
Affiliated Director
Roberta S. Matlin....................... 54 Vice President--Administration
Steven D. Sanders....................... 50 Vice President--Acquisitions
Samuel A. Orticelli..................... 45 Secretary
Kelly Tucek............................. 36 Treasurer and Chief Financial Officer
Daniel K. Deighan....................... 58 Independent Director
Michael S. Rosenthal.................... 41 Independent Director
Kenneth E. Masick....................... 53 Independent Director
</TABLE>
- ------------------------
* As of January 1, 1999
BARRY L. LAZARUS has been President, Chief Operating Officer and an
Affiliated Director of the Company since its formation. After a brief career in
public accounting, Mr. Lazarus joined Inland in 1973 as its original controller
and was later promoted to Treasurer. From 1973 to 1979 he supervised all
corporate and partnership accounting and tax matters, and managed corporate
financial affairs. In 1979 Mr. Lazarus relocated to Phoenix, Arizona and formed
The Butterfield Company, a development and contracting firm, while also serving
as a consultant to investors in several commercial ventures. Between 1979 and
1987 the Butterfield Company successfully completed several projects in
conjunction with national real estate firms, including Inland. From 1988 until
October 1990 Mr. Lazarus was Vice President of Finance for UDC Homes, Inc., then
a New York Stock Exchange Company and the largest home builder in the state of
Arizona. His duties included obtaining financing for numerous development and
construction projects in the Southeastern and Southwestern United States, as
well as maintaining investor relations.
Mr. Lazarus rejoined Inland in October 1990 and became President of
Intervest Midwest Real Estate Corporation ("Intervest"), then one of the Inland
Affiliated Companies. Intervest, which has its principal office in Atlanta,
Georgia, has been active in land acquisition, development, financing and
disposition of real estate assets in the Midwest and Southeast, for its own
account and for others. Mr. Lazarus solely owns Wisconsin and Southern Land
Company, Inc., of which he has been President and Director since December 1993.
Wisconsin and Southern Land Company, Inc., which has its office in Atlanta,
Georgia, is a holding company that acquired Intervest from the Inland
Organization in 1994. Intervest, pursuant to a service agreement, currently
provides property zoning, development and disposition services to Wisconsin
Capital Land Fund, L.P. ("Wisconsin Land Fund"), a private placement real estate
equity program sponsored by IREIC. Intervest earned approximately $80,000 of
deferred compensation for 1997, and anticipates earning approximately $165,000
in 1998, for its services rendered and to be rendered to Wisconsin Land Fund.
See "Prior Performance of the Company's Affiliates--Private Placement Real
Estate Equity Program." Mr. Lazarus continues to serve as President of
Intervest.
From September 1994 until recently, Mr. Lazarus was President of Inland
Shelter Group, LLC, Atlanta, Georgia, which was engaged in the development of
apartment buildings in the state of Georgia. He received his B.B.A. Degree from
the University of Wisconsin, is a certified public accountant and holds real
estate broker licenses in the states of Wisconsin and Georgia.
77
<PAGE>
ROBERTA S. MATLIN has been Vice President--Administration of the Company
since its formation in 1998. Ms. Matlin joined Inland in 1984 as Director of
Investor Administration and currently serves as Senior Vice
President--Investments of IREIC, directing IREIC's day-to-day internal
operations. She has also been Vice President-Administration of Inland Real
Estate Corporation, a REIT, since March 1995. Ms. Matlin is a Director of IREIC,
Inland Securities Corporation and Inland Real Estate Advisory Services, Inc.
Prior to joining Inland, she spent 11 years with the Chicago Region of the
Social Security Administration of the United States Department of Health and
Human Services. Ms. Matlin received her B.A. Degree from the University of
Illinois. She is registered with the NASD as a general securities principal and
investment advisor.
STEVEN D. SANDERS has been involved in the real estate industry,
continuously, since 1970. His real estate career began with Carlsberg Financial
Corporation, in Los Angeles, California, a sponsor of national real estate
limited partnerships that acquired office, industrial, multi-family,
manufactured home parks and retail properties throughout the United States. As
Regional Director of Acquisitions, Mr. Sanders' responsibilities included
identification, analysis, negotiations and closings of properties in the eastern
United States, on behalf of Carlsberg Financial Corporation sponsored
partnerships.
In 1979 and 1980, Mr. Sanders worked for R&B Development, Los Angeles,
California, as Director of Acquisitions for multi-family properties acquired for
ultimate conversions to condominiums. In 1981, he formed Irvine Properties, Inc.
which offered real estate consultation, brokerage and management services to
local and national investors. In 1984, Mr. Sanders joined Univest Real Estate
Corporation, Tampa, Florida, an Affiliate of Inland, and spearheaded the
acquisition of multi-family properties throughout the state of Florida.
In 1988, he formed Florida Country Clubs, Inc., which acquired and operated
three golf and country clubs located in Orlando, Florida. In 1991, Mr. Sanders
acquired interests in additional golf and country clubs on the east and west
coasts of Florida. In 1993 he rejoined Inland at its Oak Brook, Illinois
headquarters with the primary responsibility of acquiring shopping centers for
IREC. Through September 30, 1998, Mr. Sanders was directly responsible for
acquiring 49 shopping centers at an aggregate purchase price in excess of
$302,000,000.
He has been Vice President--Acquisitions of the Company since its formation.
SAMUEL A. ORTICELLI has been Secretary of the Company since its formation.
Mr. Orticelli joined the Inland Affiliated Companies in 1984. He is a Vice
President of Inland, Senior Counsel with The Inland Group, Inc. Law Department
and serves as legal counsel for IREIC, with responsibilities relating to
securities law and real estate transactions. Mr. Orticelli has been Assistant
Secretary of Inland Real Estate Corporation, a REIT, since its formation in
1994. He received his B.S. Degree in accounting from Marquette University and
his law degree from DePaul University. Prior to joining Inland, Mr. Orticelli
worked for the Chicago law firm of Katz, Randall & Weinberg, specializing in
real estate transactions. He is a member of the Illinois State Bar Association
and served on the Corporate Law Departments Section Council (1995-1998) and the
Real Estate Law Section Council (1989-1994). He is a past president of the
Justinian Society of Lawyers (DuPage Chapter).
KELLY TUCEK has been Treasurer and Chief Financial Officer of the Company
since its formation. Ms. Tucek joined Inland in 1989 and is an Assistant Vice
President of IREIC. Ms. Tucek is responsible for the Investment Accounting
Department of IREIC, which includes the accounting for the Company and all IREIC
public limited partnership accounting functions, along with quarterly and annual
SEC filings. She has also been Secretary and Treasurer of Inland Real Estate
Corporation, a REIT, since October 1996. Prior to joining Inland, Ms. Tucek was
on the audit staff of Coopers and Lybrand since 1984. She received her B.A.
Degree in Accounting and Computer Science from North Central College.
DANIEL K. DEIGHAN is an appraiser, who holds the MAI designation from the
American Institute of Real Estate Appraisers (the predecessor to the Appraisal
Institute), and has 27 years of appraisal experience. He has testified as an
expert witness in numerous counties throughout Florida, and in some courts in
New York in eminent domain and other appraisal matters. Mr. Deighan is President
of Florida Property
78
<PAGE>
Consultants Group, which has its office in Port St. Lucie, Florida. That firm is
successor to Deighan Appraisal Associates, Inc. and its predecessors, which Mr.
Deighan formed in 1971. Its business is the providing of expert appraisal,
consulting and eminent domain services throughout Florida.
Mr. Deighan has also been President of Southern Real Estate Group, Inc.
since August 1998, a commercial real estate brokerage firm. In addition, since
February 1996, he has been Vice-President of Southern Property Consultants,
Inc., a firm which specializes in real estate tax appeals, and a principal of
Florida Residential Consultants, Inc., which provides appraisal services. All of
the companies mentioned in this paragraph have their offices in Port St. Lucie,
Florida.
Deighan Appraisal Associates, Inc. was honored as the "Business of the Year"
in 1990 by the Port St. Lucie Chamber of Commerce. Mr. Deighan is Vice Chairman
of the Martin County Industrial Development Agency and a past President of the
Tri-County Tec Foundation and the Economic Council of Martin County, Florida. He
received his B.A. Degree from Sienna College, Albany, New York.
MICHAEL S. ROSENTHAL is an attorney who has been in private practice since
1984. He has been a shareholder of the Atlanta, Georgia law firm of Wagner,
Johnston & Rosenthal, P.C. since September 1996. From January 1991 through
August 1996, Mr. Rosenthal was President and a shareholder of the Atlanta,
Georgia law firm of Weinstein, Rosenthal & Tobin, P.C. That law firm's
predecessor conducted business as a partnership under the name of Weinstein,
Rosenthal & Tobin from 1986 through December 1990, and Mr. Rosenthal served as
its managing partner. He represents primarily service industry clients,
providing day-to-day business counseling and advice, and services in the areas
of mergers and acquisitions, real estate acquisitions and financings, as well as
litigation when necessary. Mr. Rosenthal received both his B.A. Degree and his
law degree from the University of Florida.
KENNETH E. MASICK has been a partner of Wolf & Company LLP, certified public
accountants, since its formation in 1978. That firm, one of the largest in the
Chicagoland area, specializes in audit, tax and consulting services to privately
owned businesses. Mr. Masick currently is partner-in-charge of the firm's audit
and accounting department and is responsible for the firm's quality control. His
accounting experience also includes forecasts and projections, feasibility
studies and due diligence activities on acquisitions.
Mr. Masick has been in public accounting since his graduation from Southern
Illinois University in 1967. He is also licensed as a General Securities
Representative. Mr. Masick is a member of the American Institute of Certified
Public Accountants and the Illinois CPA Society.
He also serves as president and director of Wolf Capital Corporation, a firm
specializing in mergers and acquisitions, business valuations and financial
consulting, and as a director of Oak Brook Investor Advisory Services, Inc., a
securities broker dealer firm. All of the mentioned entities with which Mr.
Masick is affiliated have their offices in Oak Brook, Illinois.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company's Bylaws provide for the Board to designate an
Audit Committee consisting of at least two Independent Directors. The Board has
designated the three current Independent Directors as the members of the Audit
Committee. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews the plans and results of the audit
engagement with the independent public accountants, approves professional
services provided by, and the independence of, the independent public
accountants, considers the range of audit and non-audit fees and consults with
the independent public accountants regarding the adequacy of the Company's
internal accounting controls.
EXECUTIVE COMMITTEE. The Board may establish an Executive Committee
consisting of three Directors, including two Independent Directors. The
Executive Committee would likely exercise all powers of the Directors except for
those which require actions by all of the Directors or the Independent Directors
under the Articles or Bylaws or under applicable law.
79
<PAGE>
EXECUTIVE COMPENSATION COMMITTEE. The Board may establish an Executive
Compensation Committee consisting of three Directors, including two Independent
Directors, to establish compensation policies and programs for the Company's
executive officers. The Executive Compensation Committee will exercise all
powers of the Board in connection with establishing and implementing
compensation matters, including incentive compensation and benefit plans.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company pays its Independent Directors an annual fee of $1,000. In
addition, Independent Directors receive $250 for attending (in person or by
telephone) each meeting of the Board or a committee thereof, and reimbursement
for their out-of-pocket expenses incurred. The Affiliated Directors (Messrs.
Parks and Lazarus) do not receive Director fees.
Each Independent Director will be granted an option to purchase 3,000 Shares
at a price of $9.05 per Share under the Company's Independent Director Stock
Option Plan; subject however, to the condition that options may not be granted
at any time when the grant (along with the grants to be made at the same time to
other Independent Directors) would exceed 10% of the issued and outstanding
Shares of the Company. Accordingly, the initial grants to the Independent
Directors will not be made until the Company has 90,000 Shares issued and
outstanding. In addition, each year on the date of the annual meeting of the
Company's Stockholders, each Independent Director then in office will receive an
additional grant of an option to purchase 500 Shares at an exercise price equal
to the then fair market value per Share, as determined in accordance with the
Independent Director Stock Option Plan. See "--Independent Director Stock Option
Plan" in this Section.
With the exception of Barry L. Lazarus, the officers of the Company will not
receive any compensation from the Company for their services as such officers,
but instead will receive compensation from Inland, IREIC or one of their
Affiliates. Mr. Lazarus will receive an annual salary of $35,000 from the
Company, and reimbursement for his out-of-pocket expenses incurred on behalf of
the Company. His "at will" employment is based on an oral agreement. Mr. Lazarus
will devote most of his time to the Company's business; however, he will
continue to devote some time to Intervest Midwest Real Estate Corporation, of
which he is President.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
The Company has an Independent Director Stock Option Plan (the "Independent
Director Stock Option Plan") under which "Non-Employee Directors," as defined
under Rule 16b-3 of the Exchange Act, are eligible to participate.
A total of 75,000 Shares have been authorized and reserved for issuance
under the Independent Director Stock Option Plan. If the number of outstanding
Shares is increased, decreased or changed into, or exchanged for, a different
number or kind of shares or securities of the Company through a reorganization
or merger in which the Company is the surviving entity, or through a
combination, recapitalization, reclassification, stock split, stock dividend,
stock consolidation or otherwise, an appropriate adjustment will be made in the
number and kind of shares that may be issued pursuant to options. A
corresponding adjustment to the exercise price of the options granted prior to
any change will also be made. Any such adjustment, however, will be made without
change in the total payment, if any, applicable to the portion of the options
not exercised but with a corresponding adjustment in the exercise price for each
Share.
Subject to certain conditions, the Independent Director Stock Option Plan
provides for the grant of non- qualified stock options to purchase 3,000 Shares
to each Independent Director following such individuals becoming Independent
Directors (the "Initial Options"), and for subsequent grants of options to
purchase 500 Shares on the date of each annual Stockholder's meeting to each
Independent Director then in office (the "Subsequent Options," collectively with
the Initial Options referred to herein as an "Option" or the "Options").
However, options may not be granted at any time when the grant (along with the
grants to be made at the same time to other Independent Directors) would exceed
10% of the issued and outstanding Shares of the Company. Accordingly, as of
when, and if, the Company has 90,000 Shares issued and outstanding, Initial
Options to purchase an aggregate of 9,000 Shares at $9.05 per Share (the "Option
Price") will be granted (Initial Options to purchase 3,000 Shares as to each of
the three
80
<PAGE>
Independent Directors), all of which Initial Options will vest in the current
Independent Directors upon their granting. The Option Price for subsequent
Options will be equal to the fair market value of a Share on the last business
day preceding the annual meeting of Stockholders, and shall be $9.05 per Share
until the earlier of (i) the termination of this Offering or (ii) two years
after the commencement of this Offering.
One-third of the Initial Options are exercisable beginning on the date of
their grant, one-third of the Initial Options will first become exercisable on
the first anniversary of the date of their grant, and the remaining one-third of
the Initial Options will first become exercisable on the second anniversary of
the date of their grant. The Subsequent Options granted under the Independent
Director Stock Option Plan will become fully exercisable on the second
anniversary of the date of their grant.
Options granted under the Independent Director Stock Option Plan are
exercisable until the first to occur of (i) the tenth anniversary of the date of
grant, (ii) the removal for cause of the Independent Director as an Independent
Director, or (iii) three months following the date the Independent Director
ceases to be an Independent Director for any other reason except death or
disability, and may be exercised by payment of cash or through the delivery of
Shares. Options granted under the Independent Director Stock Option Plan are
generally exercisable in the case of death or disability for a period of one
year after death or the disabling event, provided that the death or disabling
event occurs while the person is an Independent Director and prior to his or her
removal for cause, resignation or ceasing to be an Independent Director for any
other reason; provided however, if the Option is exercised within the first six
months after it becomes exercisable, any Shares issued pursuant to such exercise
may not be sold until the six month anniversary of the date of the grant of the
Option. Notwithstanding any other provisions of the Independent Director Stock
Option Plan to the contrary, no option issued pursuant thereto may be exercised
if such exercise would jeopardize the Company's status as a REIT under the Code.
No option may be sold, pledged, assigned or transferred by an Independent
Director in any manner otherwise than by will or by the laws of descent or
distribution.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon sale of all or substantially all of the Company's property, the
Independent Director Stock Option Plan will terminate, and any outstanding
unexercised options will terminate and be forfeited. However, holders of options
may exercise any options that are otherwise exercisable immediately prior to the
dissolution, liquidation, consolidation or merger. Notwithstanding the
foregoing, the Board may provide in writing in connection with, or in
contemplation of, any such transaction for any or all of the following
alternatives (separately or in combinations): (i) for the assumption by the
successor corporation of the Options theretofore granted or the substitution by
such corporation for such Options of options covering the stock of the successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kind of shares and exercise prices; (ii) for the continuance
of the Independent Director Stock Option Plan by such successor corporation in
which event the Independent Director Stock Option Plan and the Options will
continue in the manner and under the terms so provided; or (iii) for the payment
in cash or Shares in lieu of and in complete satisfaction of such Options.
THE ADVISOR
The Advisor, an Illinois corporation, is a wholly owned subsidiary of IREIC.
The following table sets forth information regarding the executive officers and
directors of the Advisor, all of whom have held their positions and offices with
the Advisor since its formation in 1998. The biographies of Messrs. Parks,
81
<PAGE>
Cosenza and Treonis are set forth above under "--Inland Affiliated Companies,"
and the biography of Mr. Orticelli is set forth under "--Directors and Executive
Officers of the Company," in this Section.
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH THE ADVISOR
- ------------------------------------------- ----- ------------------------------------------
<S> <C> <C>
Robert D. Parks............................ 55 Chairman of the Board and President
G. Joseph Cosenza.......................... 55 Director
Norbert J. Treonis......................... 48 Director
Patricia A. Challenger..................... 46 Vice President--Asset Management
Catherine L. Lynch......................... 40 Treasurer
Samuel A. Orticelli........................ 45 Secretary
</TABLE>
- ------------------------
* As of January 1, 1999
PATRICIA A. CHALLENGER joined Inland in 1985. Ms. Challenger is currently a
Senior Vice President of IREIC in charge of the Asset Management Department,
where she is responsible for developing operating and disposition strategies for
properties owned by IREIC related entities. She has also been Assistant
Secretary of Inland Real Estate Corporation, a REIT, since March 1995. Ms.
Challenger received her B.S. Degree from George Washington University and her
Master's Degree from Virginia Tech University. She was selected and served from
1980 to 1984 as a Presidential Management Intern, where she was part of a
special government-wide task force to eliminate waste, fraud and abuse in
government contracting, and also served as Senior Contract Specialist
responsible for capital improvements in 109 governmental properties. Ms.
Challenger is a licensed real estate broker, NASD registered securities sales
representative and is a member of the Urban Land Institute.
CATHERINE L. LYNCH joined the Inland Organization in 1989 and is the
Treasurer of Inland Real Estate Investment Corporation ("IREIC") and Inland
Securities Corporation. Ms. Lynch is responsible for managing the Corporate
Accounting Department of IREIC. Prior to joining the Inland Organization, Ms.
Lynch worked in the field of public accounting for KPMG Peat Marwick LLP since
1980. She received her B.S. Degree in Accounting from Illinois State University.
Ms. Lynch is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants and the Illinois CPA Society. She is
registered with the NASD as a Financial Operations Principal.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor generally has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Board, manages
or causes to be managed by another party, the Company's Properties and renders
other services as the Board deems appropriate. The Advisor is subject to the
supervision of the Board and has only such functions as are delegated to it by
the Board.
The Advisor bears the expenses it incurs in connection with performing its
duties under the Advisory Agreement, including employee expenses; certain travel
and other expenses of its directors, officers and employees; rent; telephone;
and equipment expenses to the extent such expenses relate to the office
maintained by both the Company and the Advisor and miscellaneous administrative
expenses incurred in supervising, monitoring and inspecting real property or
other investments of the Company or relating to its performance under the
Advisory Agreement. The Advisor is reimbursed for the cost to the Advisor and
its Affiliates of goods and services used for and by the Company and obtained
from unaffiliated parties and administrative services related thereto. The
Company bears its own expenses for functions not required to be performed by the
Advisor under the Advisory Agreement, which generally include capital raising
and financing activities, corporate governance matters and other activities not
directly related to the Company's Properties.
82
<PAGE>
The Advisory Agreement, which was entered into by the Company with the
approval of a majority of the Directors (including a majority of the Independent
Directors), has an initial term of one year and is renewable for successive
one-year terms upon the mutual consent of the parties. The Advisory Agreement
may be terminated by either party, or by mutual consent of the parties or by a
majority of the Independent Directors or the Advisor, as the case may be, upon
60 days' written notice without cause or penalty. If the Advisory Agreement is
terminated, the Advisor is required to cooperate with the Company and to take
all reasonable steps requested by the Board to assist it in making an orderly
transition of the advisory function.
The Advisory Agreement provides for the Advisor to be paid an (i) Advisor
Asset Management Fee, (ii) a Property Disposition Fee, and (iii) after the
Stockholders have first received an 7% Cumulative Return and a return of their
Invested Capital, an Incentive Advisory Fee from the net proceeds of a sale of a
Property. All of such fees are described under "Compensation Table."
If the Advisor or its Affiliates perform services that are outside of the
scope of the Advisory Agreement, the Company will compensate the Advisor or the
Affiliate at such rates and in such amounts as agreed upon by the Advisor and
the Independent Directors. See "Compensation Table."
For any year in which the Company qualifies as a REIT, the Advisor must
reimburse the Company for the amounts, if any: (i) by which the Company's Total
Operating Expenses) (Advisor Asset Management Fee plus Other Operating Expenses)
paid during the previous calendar year exceed the greater of (a) 2% of the
Company's Average Invested Assets for that calendar year or (b) 25% of the
Company's Net Income for that calendar year; PLUS (ii) an amount (subject
however, to such amount not exceeding the amount of the Advisor Asset Management
Fee for that year) equal to any deficit between the total amount of
Distributions to Stockholders for such year and the Current Return. The Advisor
is also obligated to pay Organization and Offering Expenses in excess of
specified levels. See "Compensation Table." Provided however, only so much of
the excess specified in clause (i) above will be required to be reimbursed as
the Board (including a majority of the Independent Directors) shall determine
should justifiably be reimbursed in light of such unanticipated, unusual or
non-recurring factors as may have occurred within 60 days after the end of the
quarter for which the excess occurred. In such event, the Stockholders will be
sent a written disclosure of such fact and an explanation of the factors the
Independent Directors considered in arriving at the conclusion that the higher
Total Operating Expenses were justified. The Directors shall determine that any
successor Advisor possesses sufficient qualifications to perform the advisory
function for the Company and to justify the compensation it will be entitled to
receive pursuant to its contract with the Company.
The "Property Acquisition Service Agreement" among the Company, the Advisor,
IREC, IREAS (the advisor to IREC), and Inland Real Estate Acquisitions, Inc.
("IREA"), subject to the exception described below, grants the Company the first
opportunity to purchase a prospective Property in the Company's Primary
Geographical Area of Investment placed under contract by IREA, the Advisor or
its Affiliates, provided the Company is able to close the purchase of the
Property within 60 days. Similarly, IREC is granted the first opportunity to
purchase a prospective Property in its primary geographic area of investment (a
400 mile radius of TIGI's headquarters in Oak Brook, Illinois), provided it is
able to close the purchase of the Property within 60 days. However, if the
prospective Property is located in both the Company's and IREC's primary
geographic area of investment, and both the Company and IREC have funds
available to make the purchase, the prospective Property will first be offered
to IREC. If IREC does not purchase the prospective Property, it will then be
offered to the Company.
If (i) the prospective Property is outside the primary geographic area of
investment of both the Company and IREC, (ii) both the Company, IREC and any
other real estate investment program sponsored by IREIC have funds available to
make the purchase, and (iii) the prospective Property meets each of their
respective acquisition criteria, then the prospective Property will (x) first be
offered to IREC, (y) if IREC does not purchase the prospective Property, it will
then be offered to the Company, and (z) if
83
<PAGE>
the Company does not purchase the prospective Property, it will then be offered
to such other real estate investment program.
Other factors which may be considered in connection with evaluating the
suitability of the prospective Property for investment by a particular entity
include: (i) the effect of the acquisition on the diversification of each
entity's portfolio; (ii) the amount of funds available for investment; (iii)
cash flow; and (iv) the estimated income tax effects of the purchase and
subsequent disposition.
The Company has been informed that IREC is not currently offering any of its
securities and expects to have all of its anticipated funds available for
investment from its last offering of securities (which terminated as of December
31, 1998) fully invested by September 1999. Accordingly, material conflicting
investment opportunities between IREC and the Company are not currently expected
after that date. In addition, the Company plans to initially focus its purchase
of Retail Centers in the southeastern states, primarily Florida, Georgia, North
Carolina and South Carolina, which is outside IREC's primary geographic area of
investment. However, if any conflicts do arise, they will be resolved as
provided in the Property Acquisition Service Agreement.
Many REITs which are listed on a national stock exchange or included for
quotation on a national market system are considered "self-administered," since
the employees of such a REIT perform all significant management functions. In
contrast, REITs that are not self-administered, like the Company, typically
engage a third-party, such as an advisor (like the Advisor), to perform
management functions on its behalf. If for any reason the Independent Directors
determine that the Company should become self-administered, the Advisory
Agreement permits the business conducted by the Advisor (including all of its
assets) to be acquired by or consolidated into the Company. A similar provision
is included in the Management Agreement permitting acquisition of the business
conducted by the Management Agent (including all of its assets). See paragraph
11 under "Conflicts of Interest."
If the businesses conducted by the Advisor and/or the Management Agent are
acquired by or consolidated into the Company, the Advisor and/or the Management
Agent and/or their respective stockholders will receive in connection with such
an acquisition and in exchange for terminating the Advisory Agreement and/or the
Management Agreement and the release and waiver of all fees payable under the
provisions of the Advisory Agreement and/or the Management Agreement until their
stated termination, but not paid, a determinable number of Shares. The Company
will be obligated to pay any fees accrued under such contractual arrangements
for services rendered through the closing of such acquisitions.
The number of Shares to be issued by the Company to the Advisor and/or the
Management Agent, as the case may be, shall be determined as follows. The
Company shall first send notice (the "Election Notice") to the Advisor and/or
the Management Agent, as the case may be, of its election to proceed with such a
transaction. Next, the net income of the Advisor and/or the Management Agent, as
the case may be, for the six month period immediately preceding the month in
which the Election Notice is delivered, as determined by an independent audit
conducted in accordance with generally accepted auditing standards, shall be
annualized. (The Advisor or the Management Agent, as the case may be, shall bear
the cost of any such audit.) Such amount shall then be multiplied by 90% and
then divided by the "Funds from Operations per Weighted Average Share" of the
Company. "Funds from Operations per Weighted Average Share" shall be equal to
the annualized Funds from Operations (I.E., four times the Funds from Operations
for the quarter immediately preceding the delivery of the Election Notice) per
weighted average Share for the Company for such quarter, all based upon the
quarterly report of the Company delivered to Stockholders for such quarter. The
resulting quotient shall constitute the number of Shares to be issued by the
Company to the Advisor or the Management Agent, or their respective
shareholders, as the case may be, with delivery thereof and the closing of the
transaction to occur within 90 days of delivery of the Election Notice. "Funds
from Operations" means generally net income (computed in accordance with GAAP),
excluding gains or losses from debt restructuring and sales of Properties, plus
depreciation of real property and amortization, and after adjustments for
unconsolidated partnerships and joint ventures.
84
<PAGE>
Under certain circumstances, such a transaction can be entered into and
consummated without seeking specific Stockholder approval. See paragraph 11
under "Conflicts of Interest." Any such transaction will occur, if at all, only
if the Board obtains a fairness opinion from a recognized financial advisor or
institution providing valuation services to the effect that the consideration to
be paid therefor is fair, from a financial point of view, to the Stockholders.
In the event the Advisory Agreement is terminated for any reason other than the
Company's acquisition of the business conducted by the Advisor, all obligations
of the Advisor and its Affiliates to offer Properties to the Company for
purchase will also terminate.
Under the Advisory Agreement, the Company is required to indemnify the
Advisor and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding with respect to acts or omissions of the Advisor,
provided that: (i) the Advisor determined, in good faith, that the course of
conduct which caused a loss or liability was in the best interest of the
Company; (ii) the Advisor was acting on behalf of or performing services for the
Company; (iii) such liability or loss was not the result of misconduct on the
part of the Advisor; and (iv) such indemnification or agreement to hold harmless
is recoverable only out of the Company's net assets and not from the assets of
the Stockholders.
The Company will advance amounts to persons entitled to indemnification for
legal and other expenses only if: (i) the legal action relates to acts or
omissions with respect to the performance of duties or services by the
indemnified party; (ii) the legal action is initiated by a third party and a
court of competent jurisdiction specifically approves such advancement; and
(iii) the indemnified party receiving such advances undertakes to repay the
advanced funds to the Company, together with the applicable legal rate of
interest thereon, in the event such party is found not to be entitled to
indemnification.
THE MANAGEMENT AGENT AND THE MANAGEMENT AGREEMENT
The Management Agent is a Delaware corporation, which is owned principally
by individuals who are Affiliates of Inland, some of whom are affiliated with
IPMGI. See "--Inland Affiliated Companies" above in this Section.
The Management Agent will conduct its activities initially from a satellite
office at 4812 South Tamiami in Sarasota, Florida, with supervision and
monitoring being performed from its principal executive office at 2901
Butterfield Road in Oak Brook, Illinois. The satellite office will initially be
staffed with four full-time property management personnel. The Initial
Properties are located between one and two hours driving time from the Sarasota
office.
The staff of the satellite office will be responsible for the collection and
bank deposit of rents, day-to-day maintenance of the Properties, leasing and
tenant relations, and will submit approved vendor invoices to the home office in
Oak Brook for payment. The home office will also review and pay the approved
vendor invoices, and monitor the payment of rents by tenants, as well as the
collection of reimbursements from tenants for common area maintenance, property
taxes and insurance. Data concerning payments, collections and other Property
operations will be entered into a computer data bank located in Oak Brook, which
will be linked by modem to the Sarasota office. The staff in Florida will be
supervised from the home office.
It is anticipated that additional personnel and satellite offices will be
added by the Management Agent as needed, as the Company's portfolio of
Properties grows.
The Management Agent provides property management services to the Company
pursuant to the terms of the Management Agreement. Without limiting the
generality of the following description, the Management Agent has agreed to
provide services in connection with the rental, leasing, operation and
management of the Properties. In consideration of such services, the Company has
agreed to pay the Management Agent a monthly management fee in an amount no
greater than 90% of the fee which would be payable to an unrelated party
providing such services, which fee shall initially be 4.5% of Gross Income (as
defined in the Management Agreement) from the Properties managed for the month
for which the
85
<PAGE>
payment is made. In addition, the Company has agreed to compensate the
Management Agent in the event the latter provides the Company with services
other than those specified in the Management Agreement. There will be a separate
Management Agreement for each Property for an initial term ending as of December
31 in the year in which the Property is acquired, and each Management Agreement
will be subject to three successive three-year renewals, unless either party
notifies the other in writing of its intent to terminate the Management
Agreement 30 days prior to the expiration of the initial or renewal term. The
Company's right to terminate will be limited so that the Management Agreement
will be terminable by the Company only in the event of gross negligence or
malfeasance on the part of the Management Agent. The Management Agent may in
certain instances subcontract the required property management services for less
than the management fee provided in the Management Agreement. See "Compensation
Table--Nonsubordinated Payments--Operational Stage."
See "--The Advisory Agreement" above in this Section and paragraph 11 under
"Conflicts of Interest" for a discussion of the Company's option to cause the
business conducted by the Management Agent to be acquired by or consolidated
into the Company.
The following sets forth certain information with respect to the executive
officers and directors of the Management Agent. The biography of Mr. Sanders is
set forth above under "--Directors and Executive Officers of the Company" in
this Section.
<TABLE>
<CAPTION>
POSITION AND OFFICE
NAME AGE* WITH THE MANAGEMENT AGENT
- ------------------------------------------------------------ ----- -------------------------
<S> <C> <C>
Stephen D. Sanders.......................................... 50 President
Robert M. Barg.............................................. 45 Secretary and Treasurer
D. Scott Carr............................................... 33 Director
Alan F. Kremin.............................................. 53 Director
Thomas P. McGuinness........................................ 43 Director
</TABLE>
- ------------------------
* As of January 1, 1999
ROBERT M. BARG has been the Secretary and Treasurer of the Management Agent
since its formation in 1998. Mr. Barg joined the Inland Organization in January
1986 and is currently Treasurer of IPMGI and Secretary and Treasurer of Inland
Commercial Property Management, Inc. ("ICPM"), one of the Inland Affiliated
Companies and a subsidiary of IPMGI. He is also Vice President and Treasurer of
Mid-America Management Corp., a company which is owned principally by
individuals who are Affiliates of Inland. Prior to joining the Inland
Organization, Mr. Barg was an Accounting Manager for the Charles H. Shaw Co. He
received his B.S. Degree in Business Administration from the University of
Illinois at Chicago and a Master's Degree from Western Illinois University. Mr.
Barg is a Certified Public Accountant and is a member of the Illinois CPA
Society. He holds a real estate sales license and is registered with the NASD as
a securities sales representative.
D. SCOTT CARR has been a director of the Management Agent since its
formation in 1998. Mr. Carr joined the Inland Organization in 1987. He was Vice
President and Secretary of ICPM from July 1994 until July 1995 when he was
appointed President of ICPM. Mr. Carr has responsibility for the portfolio of
commercial properties managed by ICPM, including management and leasing. ICPM is
the property manager for IREC. He is a licensed real estate broker. Mr. Carr is
a Certified Shopping Center Manager, Certified Property Manager candidate with
the Institute of Real Estate Management, and a member of the International
Council of Shopping Centers.
ALAN F. KREMIN joined the Inland Organization in 1982. Mr. Kremin was
promoted to Treasurer of Inland, IPMGI and various other Inland subsidiaries in
March 1991. In his current capacity as the Chief Financial Officer of Inland, a
position he has held since 1991, his responsibilities include preparation of
consolidated federal and state corporate tax returns, cash budgeting for the
consolidated group and serving
86
<PAGE>
as a Director for various Inland subsidiaries, which he also serves as
Treasurer. Prior to his current position, Mr. Kremin was Treasurer of IREIC from
1986 to 1990. In that capacity, he supervised the daily operations of IREIC's
accounting department which encompasses corporate accounting for the general
partner of the IREIC-sponsored limited partnership investment programs. Prior to
joining Inland, Mr. Kremin served for one year as a Controller of CMC Realty and
three years as Assistant Controller of JMB Realty Corporation. Prior to his real
estate experience, Mr. Kremin worked eight years in the field of public
accounting, including four years at Arthur Young & Company. He received his B.S.
Degree in accounting from Loyola University. Mr. Kremin is a Certified Public
Accountant, holds securities and insurance licenses and is a licensed real
estate broker.
THOMAS P. MCGUINNESS joined the Inland Organization in 1982 and became
President of Mid-America Management Corp. in July 1990 and is also President of
Inland Property Management, Inc. Mr. McGuinness is a licensed real estate
broker. He is past President of the Chicagoland Apartment Association, and past
Regional Vice President of the National Apartment Association. Mr. McGuinness is
currently on the Board of Directors of Apartment Building Owners and Managers
Association, and is a Trustee of the Service Employees' Local No. 1 Health and
Welfare Fund, as well as its Pension Fund.
INLAND SECURITIES CORPORATION
Inland Securities Corporation ("ISC"), the Dealer Manager, is one of the
Inland Affiliated Companies. It was formed in 1984, is registered under the
applicable federal and state securities laws, and is qualified to do business as
a securities broker-dealer throughout the United States. Since its formation,
ISC has provided the marketing function for distribution of the investment
products sponsored by IREIC. It does not render such services to anyone other
than the Inland Affiliated Companies, and it does not focus its efforts on the
retail sale side of the securities business. ISC is a member firm of the NASD.
The following sets forth information regarding the officers, directors and
principal employees of ISC involved in national sales and marketing activities.
The biography of Ms. Matlin is set forth above under "--Directors and Officers
of the Company," the biography of Ms. Lynch is set forth above under "--The
Advisor," and the biography of Mr. Parks is set forth above under "--Inland
Affiliated Companies," in this Section.
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH THE DEALER MANAGER
- ----------------------------------------------- ----- ----------------------------------------------------------
<S> <C> <C>
Brenda G. Gujral............................... 56 President, Chief Operating Officer and Director
Roberta S. Matlin.............................. 54 Vice President and Director
Mark Zalatoris................................. 41 Vice President, Secretary and Director
Catherine L. Lynch............................. 40 Treasurer
Robert D. Parks................................ 55 Director
Martel Day..................................... 49 Senior Vice President-National Sales and Marketing
Glenn Agnew.................................... 55 Senior Vice President
Gregory R. Hill................................ 47 Senior Vice President
Fred C. Fisher................................. 55 Senior Vice President
John Cunningham................................ 40 Regional Representative for the Western Region
Ralph Rudolph.................................. 36 Regional Representative for the Midwest Region
L.E. "Lee" Frush............................... 35 Regional Representative for the Southeast Region
</TABLE>
- ------------------------
* As of January 1, 1999
BRENDA G. GUJRAL is President and Chief Operating Officer and a Director of
Inland Real Estate Investment Corporation ("IREIC"), the parent company of the
Advisor. She is also President and Chief Operating Officer and a Director of
ISC.
Mrs. Gujral has overall responsibility for the operations of IREIC,
including the distribution of checks to over 50,000 investors, the review of
periodic communications to those investors, the filing of quarterly
87
<PAGE>
and annual reports for IREIC-sponsored publicly registered investment programs
with the SEC, compliance with other SEC and NASD securities regulations both for
IREIC and ISC, review of asset management activities, and marketing and
communications with the independent broker-dealer firms selling current and
prior IREIC-sponsored investment programs. She works with internal and outside
legal counsel in structuring IREIC's investment programs, and in connection with
the preparation of the offering documents therefor and registering the related
securities with the SEC and state securities commissions.
Mrs. Gujral has been with the Inland Organization for 18 years, becoming an
officer in 1982. Prior to joining the Inland Organization, she worked for the
Land Use Planning Commission establishing an office in Portland, Oregon, to
implement land use legislation for that state.
She is a graduate of California State University. She holds Series 7, 22, 39
and 63 licenses from the NASD and is a member of NAREIT.
MARK ZALATORIS joined the Inland Organization in 1985 and currently serves
as Vice President of Inland Real Estate Investment Corporation, the parent
company of the Advisor. He is also a Director, Vice President and Secretary of
ISC. His responsibilities include the coordination of due diligence activities
by selling broker-dealers and limited partnership asset management, with special
emphasis on the mortgage funds. Mr. Zalatoris is a graduate of the University of
Illinois where he received a Bachelor's Degree in Finance and a Master's Degree
in Accounting and Taxation. He is a Certified Public Accountant and holds a
General Securities License with ISC. Mr. Zalatoris is a member of NAREIT.
MARTEL DAY is Senior Vice President--National Sales and Marketing for Inland
Securities Corporation. He joined ISC in 1984 as a Regional Representative in
the southeast. Since then, he has served as Regional Vice President, Senior Vice
President, and as National Marketing Director. Mr. Day is currently responsible
for expanding ISC's selling group and working closely with broker-dealers in the
selling group to maximize sales.
Mr. Day has developed and presented numerous motivational and sales training
workshops over the past 20 years. He graduated with an engineering degree from
the Georgia Institute of Technology. Mr. Day holds General Securities and
Registered Investment Advisor licenses from the NASD, and is an associate member
of NAREIT. He is a Director of Inland Investment Advisors, Inc., one of the
Inland Affiliated Companies.
GLENN AGNEW is Senior Vice President of ISC. Mr. Agnew joined ISC in 1988
and is responsible for raising capital in the western part of the United States.
He has 10 years previous experience in wholesale support, including oil and gas
drilling, income, land, health care facility and real estate syndication. Mr.
Agnew received his Bachelor's Degree from East Central State University in Ada,
Oklahoma. He holds Series 7, 22, 63 and 65 licenses with the NASD.
GREGORY R. HILL is Senior Vice President of ISC. Mr. Hill joined ISC in 1986
and is responsible for the eastern region of the United States. He received his
Bachelor's Degree from Brown University. Mr. Hill has been actively involved in
the securities business since 1978, specializing in real estate exclusively
since 1981. Prior to his affiliation with ISC, he worked for a New York Stock
Exchange member company. Mr. Hill holds General Securities and Registered
Investment Advisor licenses with NASD.
FRED C. FISHER, Senior Vice President of ISC, joined ISC in 1984. Mr. Fisher
began his career with ISC as Regional Vice President for the Midwest region. In
1994, he was promoted to Senior Vice President. Mr. Fisher received his
Bachelor's Degree from John Carroll University. Before joining ISC, he spent
nine years as a regional sales manager for the S.S. Pierce Company. Mr. Fisher
holds Series 7, 22 and 63 licenses with the NASD.
JOHN CUNNINGHAM joined the Inland Affiliated Companies in January 1995 as a
commercial real estate broker. In March 1997, Mr. Cunningham was hired by ISC as
a Regional Representative for the Western Region. He graduated from Governors
State University with a B.S. Degree in Business Administration, concentrating in
marketing. Before joining the Inland Affiliated Companies, Mr. Cunningham owned
and
88
<PAGE>
operated his own business and developed real estate. He holds Series 7 and
Series 63 licenses with the NASD.
RALPH RUDOLPH joined IREIC in June 1995 as a marketing coordinator. In
December 1996, he was promoted to Regional Representative of ISC for the Midwest
region. Mr. Rudolph attended Illinois State University where he majored in
marketing. Before joining Inland, he worked as a securities broker for a
regional broker-dealer. Mr. Rudolph holds Series 7 and Series 63 licenses with
the NASD.
L.E. "LEE" FRUSH joined ISC in September 1998 as a Regional Representative
for the Southeast region. He is a graduate of Stetson University and holds a
B.B.A. degree in finance. Before joining ISC, Mr. Frush spent 10 years in the
securities industry and has experience in product marketing, recruiting, due
diligence and compliance. He holds Series 7, 63 and 24 licenses with the NASD.
OTHER SERVICES
In addition to the services described above, Affiliates of the Advisor may
provide other property-level services to the Company and may receive
compensation for such services, including sales brokerage, construction
management, loan origination and servicing, property tax reduction and risk
management services. However, under no circumstances will such compensation
exceed 90% of that which would be paid to third parties providing such services
and all such compensation must have the prior approval of a majority of the
Board, including a majority of the Independent Directors. See "Compensation
Table."
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
89
<PAGE>
CERTAIN RESPONSIBILITIES OF DIRECTORS AND
THE ADVISOR; INDEMNIFICATION
GENERAL
Consistent with the duties and obligations of, and limitations on, the
Directors as set forth in the Articles and under the laws of the State of
Maryland, the Directors are required to perform their duties in good faith and
in a manner each Director reasonably believes to be in the best interest of the
Company and its Stockholders, with such care as an ordinarily prudent person in
a like position would use under similar circumstances. The Maryland General
Corporation Law ("MGCL") and the Articles provide that a person who performs his
or her duties in accordance with such standards has no liability by reason of
being or having been a Director. In addition, the Independent Directors must
review at least annually the relationship of the Company with the Advisor and
the Advisor's performance of its duties under the Advisory Agreement, and must
determine that the compensation paid to the Advisor is reasonable in relation to
the nature and quality of the services performed. The Advisor also has a
fiduciary duty to the Company and the Stockholders.
The Articles provide that the Advisor and the Directors of the Company are
deemed to be in a fiduciary relationship to the Company and the Stockholders and
that the Directors have a fiduciary duty to the Stockholders to supervise the
relationship of the Company with the Advisor.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The liability of the Directors, officers, employees, and agents of the
Company and the Advisor and its Affiliates is limited to the fullest extent
permitted by the MGCL. Accordingly, under the Articles the Directors, officers,
employees and agents of the Company and the Advisor and its Affiliates may not
be held liable to the Company or its Stockholders for monetary damages unless:
(a) it is proven that the person actually received an improper benefit or profit
in money, property or services; and (b) to the extent that a judgment or other
final adjudication adverse to the person is entered in a proceeding based on a
finding in the proceeding that the person's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding.
The Company's Articles authorize and direct the Company, to the fullest
extent permitted by Maryland statutory or decisional law, as amended or
interpreted and, without limiting the generality of the foregoing, in accordance
with Section 2-418 of the MGCL, to indemnify and pay or reimburse reasonable
expenses to: (a) any Director, officer, employee or agent of the Company, and
(b) the Advisor and its Affiliates (each individually an "Indemnified Party"),
PROVIDED, THAT, as long as the Company qualifies as a REIT: (i) the Indemnified
Party has determined, in good faith, that the course of conduct which caused the
loss or liability was in the best interest of the Company; (ii) the Indemnified
Party was acting on behalf of or performing services on the part of the Company;
(iii) such liability or loss was not the result of negligence or misconduct on
the part of the Indemnified Party, except that in the event the Indemnified
Party is or was an Independent Director, such liability or loss shall not have
been the result of gross negligence or willful misconduct; and (iv) such
indemnification or agreement to be held harmless is recoverable only out of the
assets of the Company and not from the assets of the Stockholders.
As long as the Company qualifies as a REIT, the Company may not indemnify an
Indemnified Party for losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws by such party unless one
or more of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims and finds that indemnification of the settlement and
related costs should be made and the court considering the request has been
advised of the position of the Commission and the published
90
<PAGE>
position of any state securities regulatory authority in which securities of the
Company were offered and sold as to indemnification for securities law
violations.
The Company shall advance amounts to an Indemnified Party for legal and
other expenses and costs incurred as a result of any legal action for which
indemnification is being sought only in accordance with Section 2-418 of the
MGCL and, as long as the Company qualifies as a REIT, only if all of the
following conditions are satisfied: (i) the legal action relates to acts or
omissions with respect to the performance of duties or services by the
Indemnified Party for or on behalf of the Company; (ii) the legal action is
initiated by a third party who is not a Stockholder or the legal action is
initiated by a Stockholder acting in his or her capacity as such and a court of
competent jurisdiction specifically approves advancement; and (iii) the
Indemnified Party receiving these advances undertakes in writing to repay the
advanced funds to the Company, together with interest at the applicable legal
rate thereon, if the Indemnified Party is found not to be entitled to
indemnification.
The Company may purchase and maintain insurance or provide similar
protection on behalf of an Indemnified Party against any liability asserted
which was incurred in any such capacity with the Company or arising out of such
status; PROVIDED, HOWEVER, that the Company may not incur the costs of any
liability insurance which insures any person against liability for which he, she
or it could not be indemnified under the Articles. The Company may enter into
any contract for indemnity and advancement of expenses with any officer,
employee or agent who is not a Director to such further extent consistent with
law as may be determined by the Board. As of the date of this Prospectus, the
Company has not purchased any insurance on behalf of, nor entered into any
contract of indemnity with, an Indemnified Party.
The Company intends to enter into separate indemnification agreements with
each of the Company's Directors and certain of its executive officers. The
indemnification agreements will require, among other things, that the Company
indemnify its Directors and officers to the fullest extent permitted by law, and
advance to the Directors and officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company also must indemnify and advance all expenses incurred by
Directors and officers seeking to enforce their rights under the indemnification
agreements and cover Directors and officers under the Company's Directors' and
officers' liability insurance, if any. Although the form of indemnification
agreement offers substantially the same scope of coverage afforded by provisions
in the Articles and the Bylaws, it provides greater assurance to Directors and
officers that indemnification will be available, because as a contract, it
cannot be unilaterally modified by the Board or by the Stockholders to eliminate
the rights it provides.
The Bylaws provide that neither the amendment, nor the repeal, nor the
adoption of any other provision of the Articles or the Bylaws will apply to or
affect, in any respect, the Indemnitee's right to indemnification for actions or
failures to act which occurred prior to such amendment, repeal or adoption.
To the extent that the indemnification may apply to liabilities arising
under the Act, the Company has been advised that, in the opinion of the
Commission, such indemnification is contrary to public policy and, therefore,
unenforceable.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
91
<PAGE>
PRINCIPAL STOCKHOLDERS
As of the date of this Prospectus, no Director or executive officer of the
Company beneficially owns any Shares, and there is no Stockholder of the Company
who beneficially owns any Shares, other than the Advisor which purchased 20,000
Shares for $10 per Share, for an aggregate purchase price of $200,000, in
connection with the organization of the Company. There are 200 Shares reserved
for issuance to the Advisor upon the exercise of its right to exchange its 200
LP Common Units of the Operating Partnership therefor. The Advisor received its
200 LP Common Units for a cash contribution of $2,000 to the Operating
Partnership.
See "Management--Independent Director Stock Option Plan" for information
regarding Options to purchase an aggregate of 9,000 Shares which will be issued
to the Independent Directors when, and if, the Company has 90,000 Shares issued
and outstanding.
STRUCTURE AND FORMATION OF THE COMPANY
The Company was formed in September 1998 as a Maryland corporation. The
Operating Partnership was formed in September 1998 as an Illinois limited
partnership.
STRUCTURE OF THE COMPANY
The Company is the General Partner of the Operating Partnership. The Company
has contributed the $200,000 of proceeds from the Advisor's Company Contribution
and, as and when received, the Company will contribute the proceeds of the
Offering to the Operating Partnership. The Company is and will be the only
holder of GP Common Units in the Operating Partnership. Initially, the only
other partner in the Operating Partnership will be the Advisor, as a Limited
Partner, who holds 200 LP Common Units valued at $2,000 for its $2,000 capital
contribution. The Company currently intends to conduct substantially all of its
business, and currently intends to hold most of its interests in the Properties
through the Operating Partnership or in separate entities (the "Property
Partnerships") that will be controlled directly or indirectly by the Operating
Partnership. A REIT may conduct some of its business and hold some of its
interests in Properties in Qualified REIT Subsidiaries (each a "QRS"), which
must be owned 100% by the REIT. Although the Company does not intend to
initially have any QRSs, it may in the future decide to conduct some business or
hold some of its interests in Properties in QRSs. As the General Partner of the
Operating Partnership, the Company will have the exclusive power to manage and
conduct the business of the Operating Partnership, subject to certain exceptions
set forth in the Operating Partnership Agreement. See "Operating Partnership
Agreement."
See "Prospectus Summary--Organizational Chart" for a diagram depicting the
services to be rendered by the TIGI Affiliated Companies to the Company, as well
as the proposed organization structure of the Company and the Operating
Partnership. The following diagram depicts only the ownership structure of the
Company and the Operating Partnership upon completion of the Offering and the
Formation Transactions. Because the Company does not intend to initially have
any QRSs, none are shown on the following Ownership Chart.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
92
<PAGE>
OWNERSHIP CHART
- --------------------------------------------------------------------------------
INLAND RETAIL REAL ESTATE TRUST, INC.
(THE "COMPANY")
The Company will be principally owned by Public Investors.
Ownership will be represented by Shares of the Company.(1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INLAND RETAIL REAL ESTATE LIMITED PARTNERSHIP
(THE "OPERATING PARTNERSHIP")(2)
The Company is the General Partner of the Operating Partnership
and owner of the GP Common Units of the Operating Partnership.(3)
Inland Retail Real Estate Advisory Services, Inc. (the "Advisor")
is a Limited Partner of the Operating Partnership and owner
of LP Common Units of the Operating Partnership.(4)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
POTENTIAL FUTURE PROPERTY PARTNERSHIPS
OR LIMITED PARTNERSHIPS
OR LIMITED LIABILITY COMPANIES
(THE "PROPERTY PARTNERSHIPS")(5)
- --------------------------------------------------------------------------------
SOLID LINES INDICATE 100% OWNERSHIP, EXCEPT FOR THE
OPERATING PARTNERSHIP WHERE IT INDICATES CONTROL.(5)
(1) The Advisor has purchased from the Company 20,000 of the Company's Shares
for $10 per Share, for an aggregate purchase price of $200,000, in
connection with the organization of the Company. If only the Minimum
Offering of 200,000 Shares is sold, such Shares will represent 90.9% of the
issued and outstanding Shares, assuming no other Shares are issued and
outstanding, and the Advisor's 20,000 Shares will then represent 9.1% of the
issued and outstanding Shares. If 54,000,000 of the Shares offered by this
Prospectus are sold, such Shares will represent 99.96% of the issued and
outstanding Shares, assuming no other Shares are issued and outstanding, and
the Advisor's 20,000 Shares will then represent only 0.04% of the issued and
outstanding Shares.
(2) The Company has contributed to the Operating Partnership the proceeds from
the Advisor's purchase of 20,000 Shares from the Company and, as and when
received, the Company will contribute the proceeds of the Offering to the
Operating Partnership. The Advisor has also made a capital contribution to
the Operating Partnership of $2,000 for 200 LP Common Units. Other LP Common
Units or LP Preferred Units might be issued in the future to owners of
Properties in exchange for such Properties.
(3) GP Common Units have been issued for the Company's contribution to the
Operating Partnership of the proceeds from the Advisor's purchase of 20,000
Shares from the Company (for which the Company has received 20,000 GP Common
Units), and GP Common Units will be issued for the Company's contribution to
the Operating Partnership of the proceeds of the Offering to the Operating
Partnership. Prior to this Offering, the Company's 20,000 GP Common Units
represents 99.01%, and the Advisor's 200 LP Common Units represents 0.99%,
of the outstanding Units of the Operating Partnership. If only the Minimum
Offering of 200,000 Shares for gross offering proceeds of $2,000,000 is
sold, the Company will receive 200,000 GP Common Units for contributing such
proceeds to the Operating Partnership. Assuming no other Units are issued,
the Company's 220,000 GP Common Units will then represent 99.9%, and the
Advisor's 200 LP Common Units will then represent 0.1%, of the outstanding
Units. If 54,000,000 of the Shares offered by this Prospectus are sold for
gross offering
93
<PAGE>
proceeds of $538,000,000 as set forth on the cover page of this Prospectus,
the Company will receive 53,800,000 GP Common Units for contributing such
proceeds to the Operating Partnership. Assuming no other Units are issued,
the Company's 53,820,000 GP Common Units will then represent 99.9996%, and
the Advisor's 200 LP Common Units will then represent only 0.0004%, of the
outstanding Units.
(4) The initial LP Common Units have been issued to the Advisor for the
Advisor's $2,000 capital contribution to the Operating Partnership.
(5) Property Partnerships have been formed for the acquisition of each of the
Initial Properties. Other Property Partnership(s) may be formed for the
acquisition of additional Properties. They will be owned or controlled
directly or indirectly by the Operating Partnership. In the case of the
Initial Properties, the Property Partnerships will be effectively owned 100%
by the Operating Partnership. In other instances, there likely will be other
investor(s) who would be the former owner(s) of Properties acquired for
interests in such Property Partnerships.
FORMATION TRANSACTIONS
Except as indicated, prior to or concurrently with the effectiveness of the
Registration Statement, the Company, Affiliates of the Company, the Operating
Partnership and certain third parties will engage in the Formation Transactions
designed to enable the Company to acquire and manage its Properties, consolidate
the ownership interests in the Initial Properties, facilitate the Offering and
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1999.
The Company, Affiliates of the Company and the Operating Partnership will
engage in the following series of transactions (collectively, the "Formation
Transactions"):
- The Company was formed as a corporation in Maryland. The Operating
Partnership was formed as a limited partnership in Illinois. The Company
is the General Partner of the Operating Partnership.
- Inland Retail Real Estate Advisory Services, Inc. (the "Advisor"), an
Affiliate of TIGI, purchased 20,000 Shares in connection with the
organization of the Company for $10 per Share, an aggregate purchase price
of $200,000 (the "Advisor's Company Contribution"). The Advisor has also
contributed $2,000 to the Operating Partnership for 200 LP Common Units of
the Operating Partnership valued at $2,000 (the "Advisor's Partnership
Contribution"). The Advisor is the initial Stockholder of the Company and
the initial Limited Partner of the Operating Partnership.
- The Company has contributed the $200,000 of proceeds from the Advisor's
Company Contribution to the Operating Partnership and, as and when
received, the Company will contribute the proceeds of the sale of the
56,000,000 Shares offered pursuant to this Prospectus to the Operating
Partnership.
- The Company has acquired 20,000 GP Common Units of the Operating
Partnership in exchange for the $200,000 of proceeds from the Advisor's
Company Contribution, and the Company will acquire one additional GP
Common Unit of the Operating Partnership in exchange for the proceeds of
each of the 56,000,000 Shares sold pursuant to the Offering. The Company
will own all of the GP Common Units of the Operating Partnership.
- The Company will commence an offering on a best efforts basis to the
public of 50,000,000 Shares at $10 per Share (except for certain Special
Sales). In addition, 4,000,000 Shares will be offered by the Company at
$9.50 per Share to Stockholders who elect to participate in the Company's
DRP, and up to 2,000,000 Soliciting Dealer Warrants will be issued,
allowing the holders thereof, upon exercise of those Warrants during the
Exercise Period, to purchase up to 2,000,000 Shares for not less than $12
per Share.
94
<PAGE>
- If the Minimum Offering is fully subscribed and accepted, the Operating
Partnership will initially acquire Merchants Square, one of the Initial
Properties, with the proceeds from the Minimum Offering, along with first
mortgage debt assumption. Thereafter, if the Offering continues, provided
that the Net Proceeds of the Offering are sufficient, and subject to
certain conditions, the Operating Partnership anticipates acquiring the
other Initial Properties. The Operating Partnership's aggregate purchase
price for all the Initial Properties will be approximately $30 million in
cash and first mortgage debt assumption. Approximately $1.4 million in
cash and $4.3 million in first mortgage debt assumption will be needed to
acquire Merchants Square, the Initial Property to be acquired with Net
Proceeds from the Minimum Offering. The Initial Properties will be
acquired from the Initial Property Sellers (who are Affiliates of TIGI),
who purchased the Initial Properties from unaffiliated third parties on
behalf of the Company. The purchase prices paid for the Initial Properties
by the Initial Property Sellers were in each case negotiated in
arm's-length transactions by IREA, an Affiliate of TIGI, with unrelated
third parties (who owned those Properties) based on a multiple of the net
operating income of each of the Initial Properties and appraisals of such
Properties. See "Estimated Use of Proceeds" and "Real Property
Investments."
- When the Initial Properties were acquired by the Initial Property Sellers,
they were subject to existing mortgage debt of approximately $20.6 million
(the "Initial Mortgage Debt") (of which approximately $4.3 million relates
to Merchants Square). In addition, the Initial Property Sellers borrowed
approximately $9.4 million (of which approximately $1.4 million relates to
Merchants Square) from an Affiliate of TIGI in connection with their
acquisition of the Initial Properties (the "Affiliates' Acquisition
Debt"). Initially, if the Minimum Offering is sold, the Company will use
net proceeds therefrom to (i) pay the Initial Property Sellers the
difference between their total acquisition costs for Merchants Square and
the balance of the Initial Mortgage Debt relating to Merchants Square at
the time of its acquisition by the Company (and the Initial Property
Sellers will use such payment to retire in full, as of the date of the
Company's closing of such purchase, the Affiliates' Acquisition Debt
relating to Merchants Square) and (ii) pay Acquisition Expenses and
establish working capital reserves relating to the acquisition of
Merchants Square. Thereafter, assuming there are additional Net Proceeds
of the Offering, as to those other Initial Properties acquired, if any,
the Company will use a portion of the Net Proceeds of the Offering to (i)
pay the Initial Property Sellers the difference between their total
acquisition costs for the Initial Property being acquired and the balance
of the Initial Mortgage Debt relating to the Initial Property being
acquired at the time of its acquisition by the Company (and the Initial
Property Sellers will use such payment to retire in full, as of the date
of the Company's closing of such purchases, the Affiliates' Acquisition
Debt relating to the Initial Property being acquired), and (ii) pay
Acquisition Expenses and establish working capital reserves relating to
the acquisition of such other Initial Properties. In addition, the Company
will pay IREIC, an Affiliate of TIGI, Organization and Offering Expenses
which were advanced by IREIC ($110,000 if only the Minimum Offering is
sold and an estimated approximately $14 million if the Maximum Offering is
sold). To the extent that there are additional Net Proceeds of the
Offering available after establishing working capital reserves, such
proceeds will be used to acquire additional Properties or to reduce the
Initial Mortgage Debt on the Initial Properties. See "Estimated Use of
Proceeds."
As a result of the foregoing transactions, among other things: (i) the
Company will own all the GP Common Units in the Operating Partnership, (ii) the
Advisor will own 200 LP Common Units in the Operating Partnership, (iii) the
Company will be the General Partner of the Operating Partnership and, as General
Partner, will retain management control over the Operating Partnership, (iv) the
Advisor will be a Limited Partner in the Operating Partnership and, initially,
the only Limited Partner, and (v) the Company, through the Operating
Partnership, will acquire and own the Initial Properties.
95
<PAGE>
BENEFITS OF THE UPREIT STRUCTURE
The benefits of the Company's REIT status and UPREIT structure include the
following:
- ACCESS TO CAPITAL. The Company's structure will, in the Company's
judgment, provide it with access to capital for refinancing and growth.
Sources of capital include the Shares sold in the Offering and possible
future issuances of debt or equity through public offerings or private
placements. The anticipated financial strength of the Company should
enable it to obtain financing at advantageous rates and on acceptable
terms.
- GROWTH OF THE COMPANY. The Company's structure will allow Stockholders
through their ownership of Shares, the Limited Partners through their
ownership of LP Common Units, and the holders of Interests, an opportunity
to participate in the growth of the real estate market through an ongoing
business enterprise. In addition to the portfolio of Initial Properties,
the Company gives Stockholders an interest in all future investments in
additional Properties.
- TAX DEFERRAL. The Operating Partnership structure will provide future
Limited Partners who transfer their Properties to the Company the
opportunity to defer the tax consequences that would arise from a sale of
their Properties and other assets to the Company or to a third party. This
will allow the Company to acquire Properties without using its cash and
may allow it to acquire Properties that the owner would otherwise be
unwilling to sell because of tax considerations.
ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED
STOCKHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
Stockholders of the Company include their ability to participate, through
ownership in the Company, in the cash flow of the Initial Properties acquired by
the Company and all future Property acquisitions and developments by the
Company. The potential disadvantages of such transactions to unaffiliated
Stockholders of the Company may be several, including the impact of Shares
available for future sale, and the lack of arm's-length negotiations to
determine the terms of the transfers of certain of the Properties to the Company
and the Operating Partnership. See "Risk Factors" and "Conflicts of Interest."
See also the general benefits set forth above under "--Benefits of the UPREIT
Structure" in this Section.
BENEFITS OF THE FORMATION TRANSACTIONS AND THE OFFERING TO INLAND AND ITS
AFFILIATES
TIGI and certain of its Affiliates will receive certain material benefits in
connection with the Formation Transactions and the Offering, including the
following:
- Assuming that each LP Common Unit held by the Advisor has a value equal to
the initial offering price of a Share and all of the 200 LP Common Units
issued in the Formation Transactions to the Advisor are exchanged for
Shares, the Advisor would eventually receive 200 Shares for its $2,000
cash contribution to the Operating Partnership, in addition to the 20,000
Shares it purchased from the Company for $200,000. The Advisor initially
will be the Limited Partner of the Operating Partnership.
- Certain TIGI Affiliated Companies will no longer be liable as a general
partner of the Property Partnerships that own the Initial Properties and
other TIGI Affiliated Companies will be paid approximately $9.4 million of
advancements, represented by the Affiliates' Acquisition Debt, of which
approximately $1.4 million relates to Merchants Square.
- As each of the Initial Properties is acquired, the Initial Property
Sellers, who are Affiliates of TIGI, will be relieved of principal debt
obligations and interest costs relating to that Property. The total of
such principal debt obligations, as of the proposed dates of acquisition
of the Initial Properties, is expected to be approximately $29.7 million
(of which approximately $9.4 million is attributable to the Affilates'
Acquisition Debt) and the total of such interest costs is approximately
$215,000 per
96
<PAGE>
month (of which approximately $39,500 per month relates to Merchants
Square). In addition, certain Inland Affiliated Companies will be released
from guarantees of certain obligations (not the principal or interest)
relating to the Initial Mortgage Debt and approximately $9.4 million of
Affiliates' Acquisition Debt.
- If the Maximum Offering is sold, the Company will pay on behalf of IREIC,
or reimburse IREIC for, an estimated approximately $14 million of expenses
incurred by or on behalf of the Company in connection with the
organization of the Company and for the Offering. In the event only the
Minimum Offering is sold, the Company will reimbuse IREIC for only
$110,000 of such expenses.
- Robert D. Parks, an Affiliate of TIGI, and Barry L. Lazarus, who was
formerly an Affiliate of TIGI, each have been elected an Affiliated
Director of the Company. In addition, Mr. Parks will be Chairman and Chief
Executive Officer, and Mr. Lazarus will be President and Chief Operating
Officer, of the Company. See "Management--Compensation of Directors and
Officers" for the compensation to be paid for such services.
- The Advisor and the Management Agent will enter into the Advisory
Agreement and the Management Agreement, respectively, with the Company,
pursuant to which they will receive substantial fees from the Company for
their respective advisory and property management services. The Company
will have the option to cause the business conducted by the Advisor and/or
the Management Agent to be acquired by or consolidated into the Company
for Shares according to a prescribed formula. See paragraph 11 under
"Conflicts of Interest" and "Management--The Advisory Agreement" for an
explanation of the details of such an acquisition, including how the
number of Shares to be received by the Advisor and the Management Agent
and/or their respective shareholders will be determined.
- For serving as the Dealer Manager of the Offering, the Dealer Manager, one
of the TIGI Affiliated Companies, will receive cash selling commissions, a
Marketing Contribution, a Due Diligence Expense Allowance, and Soliciting
Dealer Warrants, which it may retain or reallow to certain Soliciting
Dealers.
For further information on the compensation and reimbursement payable to the
Advisor, the Management Agent and the Dealer Manager, and on other compensation
to be paid to other Affiliates, see "Compensation Table" and "Estimated Use of
Proceeds."
SELECTED FINANCIAL DATA
As of the date of this Prospectus, the Company has not yet had any
operations. Therefore, it has not had any income, Cash Flow, Funds from
Operations, or funds available for Distributions, nor has it declared any
Distributions or issued any Shares to public investors. The Company has sold
20,000 Shares to the Advisor for an aggregate purchase price of $200,000, and
has contributed the proceeds from that sale to the Operating Partnership, for
which the Company acquired 20,000 GP Common Units of the Operating Partnership.
The Advisor has also made a capital contribution of $2,000 to the Operating
Partnership, for which the Advisor acquired 200 LP Common Units of the Operating
Partnership. See "Management's Discussion and Analysis of the Financial
Condition of the Company," and the financial statements of the Company and
related notes thereto appearing elsewhere in this Prospectus.
97
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
1. GENERAL. The Company's investment objectives are to: (i) make regular
Distributions to the Stockholders, which may be in amounts which may exceed the
Company's taxable income due to the non-cash nature of depreciation expense and,
to such extent, will constitute a tax-deferred return of capital, but in no
event less than 95% of the Company's taxable income; (ii) provide a hedge
against inflation by entering into leases which contain clauses for scheduled
rent escalations or participation in the growth of tenant sales, permitting the
Company to increase Distributions and realize capital appreciation; and (iii)
preserve Stockholders' capital. Leases representing approximately 44% of the
total GLA of the Initial Properties provide for scheduled rent escalations. It
is the Company's policy to acquire Properties primarily for income as
distinguished from primarily for possible capital gain.
2. DISTRIBUTIONS. Federal income tax law requires that a REIT distribute
annually at least 95% of its REIT Taxable Income. See "Federal Income Tax
Considerations--Taxation of the Company--Annual Distribution Requirements."
Under certain circumstances, in order to qualify for REIT status the Company may
be required to make Distributions in excess of cash available therefor. See
"Risk Factors-- Tax Risks--Risks Regarding REIT Qualification and Consequences
of the Failure to so Qualify--Risk of Failing to Qualify as a REIT under the
Code" and "--Adverse Effects of REIT Minimum Distribution Requirements." For a
discussion of the tax treatment of Distributions to holders of Shares, see
"Federal Income Tax Considerations--Taxation of Stockholders."
The Company intends to pay regular quarterly Distributions to its
Stockholders. However, the Company reserves the right to pay Distributions on a
monthly basis out of Cash Flow, in an amount determined by the Board. The
Properties to be owned by the Company are expected to generate sufficient Cash
Flow to cover operating expenses of the Company plus pay a quarterly
Distribution. Distributions will be at the discretion of the Board. The
Company's ability to pay Distributions and the size of these Distributions will
depend upon a variety of factors. There can be no assurance that Distributions
will be made or that any particular level of Distributions established in the
future, if any, will be maintained by the Company.
To the extent possible, the Company seeks to avoid the fluctuations in
Distributions which might result if Distributions were based on actual cash
received during the Distribution period. To avoid fluctuation, the Company may
use Cash Flow received during prior periods, or Cash Flow received subsequent to
the Distribution period and prior to the payment date for such Distribution, in
order to pay annualized Distributions consistent with the Distribution level
established from time to time by the Board. The Company's ability to maintain
this policy is dependent upon the Company's Cash Flow and the applicable REIT
Requirements. There can be no assurance that there will be Cash Flow available
to pay Distributions, or that Distribution amounts will not fluctuate. Quarterly
Distributions will be calculated with daily record and Distribution declaration
dates. However, the Board could, at any time, elect to pay Distributions
monthly, and later switch back to quarterly, to reduce administrative costs. As
a matter of policy, the Company, subject to applicable REIT Requirements, seeks
to reinvest proceeds from the sale, financing, refinancing or other disposition
of its Properties through the purchase of additional Properties. See "--Sale or
Disposition of Properties" in this Section. See "Federal Income Tax
Considerations--Taxation of Stockholders" for a discussion of the federal income
tax consequences of the receipt of Distributions.
The Company believes that the foundation for growth in Cash Flow in future
years will be from a number of sources, including contractual rent escalations
in existing leases, the quality and strategic location of the Initial
Properties, the acquisition of additional Properties, the strengthening of the
economy in the Company's Primary Geographical Area of Investment, the
development of new Retail Centers when market conditions warrant such new
development and the knowledge and experience of its senior management team.
3. TYPES OF INVESTMENTS. The Company was formed to acquire and manage a
diversified (by geographical location and by types of Retail Centers) portfolio
of real estate primarily improved for use as retail
98
<PAGE>
establishments, principally multi-tenant Shopping Centers, or improved with
other commercial facilities which provide goods or services. Such real estate
will be located mainly in the states east of the Mississippi River in the United
States but initially will be focused in the southeastern states, primarily
Florida, Georgia, North Carolina and South Carolina. The Company will endeavor
to acquire multiple Properties within the markets where Properties are acquired
to facilitate efficient Property management operations. See "Real Property
Investments--General."
Most of these Properties will be subject to "net" leases. "Net" leases
typically require tenants to pay a share, either pro rata or fixed, of all or a
majority of the operating expenses, including real estate taxes, special
assessments, utilities, insurance, common area maintenance and building repairs
related to the Property, as well as base rent payments.
The Company may also acquire, among other Properties, single-user retail
properties located anywhere throughout the United States if they are leased on a
Triple-Net Lease Basis by Creditworthy Tenants (as defined below in this
paragraph). Such leases are long-term (typically 15 to 25 years, but generally
not less than 10 years) and require the lessee to pay a base minimum annual rent
with periodic increases. A "Creditworthy Tenant" is defined as a tenant with a
minimum net worth of $10 million or ten times one year's rental payments
required under the terms of the lease or, alternatively, a tenant for whom
payments under the lease are guaranteed by an affiliate of such tenant having a
minimum net worth of $10 million. The Company may enter into sale and leaseback
transactions, pursuant to which the Company will purchase a Property and lease
the Property to the seller thereof. The Company believes that it can draw upon
the extensive experience of its executives and employees to create a strategic
advantage in competing for future development and acquisition opportunities.
To provide the Company with a competitive advantage over potential
purchasers of Properties who must secure financing, the Company intends to
acquire Properties free and clear of permanent mortgage indebtedness by paying
the entire purchase price in cash or for Shares, LP Units, Interests or a
combination thereof. The Company may incur indebtedness to acquire Properties
where the Board determines that incurring such indebtedness is in the Company's
best interest. In addition, from time to time, the Company intends to acquire
certain Properties on an all-cash basis (or for Shares, LP Units, Interests, or
a combination thereof) and later incur mortgage indebtedness secured by selected
or all such Properties if favorable financing terms are available. The proceeds
from such loans will be used to acquire additional Properties. See "Borrowing"
in paragraph 7 of this Section for a further explanation of borrowing intentions
and limitations.
In some cases, the Company may commit to purchase Properties subject to
completion of construction in accordance with terms and conditions specified by
the Company. In such cases, the Company will be obligated to purchase the
Property at the completion of construction, provided the construction conforms
to definitive plans, specifications and costs approved by the Company and
embodied in the construction contract, as well as, in most instances,
satisfaction that agreed upon percentages of the Property are leased. The
Company will receive a certificate of an architect, engineer or other
appropriate party, stating that the Property complies with all plans and
specifications. The Company is permitted to construct or develop Properties, and
to render certain services in connection with such development or construction,
subject to the Company's compliance with the REIT Requirements. Construction and
development activities will expose the Company to certain risks such as cost
overruns, carrying costs of projects under construction and development,
availability and costs of materials and labor, weather conditions, and
government regulation.
Before purchasing a Property, IREA examines and evaluates the potential
value of the site, the financial condition and business history of the Property,
the demographics of the area in which the Property is located or to be located,
the proposed purchase price, geographic and market diversification and potential
sales. In evaluating a Property for acquisition, IREA requires the seller to
provide a current Phase I environmental report and, if necessary, a Phase II
environmental report. In a sale-leaseback
99
<PAGE>
situation, since the seller of the Property generally is assuming the operating
risk, the price paid for the Property by the Company may be greater than if it
was not leased back to the seller. All acquisitions from Affiliates must be
approved by a majority of the Directors, including a majority of the Independent
Directors.
The Advisor and its Affiliates may purchase Properties in their own name,
assume loans in connection therewith and temporarily hold title thereto for the
purpose of facilitating acquisition or financing by the Company, the completion
of construction of the Property or any other purpose related to the business of
the Company.
See paragraph 10 of this Section and "Summary of the Organizational
Documents--Restrictions on Investments" for certain investment limitations.
4. ACQUISITION STANDARDS. Through its experience gained through the
acquisition of approximately 755 properties by TIGI Affiliated Companies, the
Advisor believes IREA and its Affiliates have the ability to identify quality
Properties capable of meeting the Company's investment objectives. In evaluating
potential acquisitions, the Company considers a number of factors, including a
Property's: (i) geographic location and type; (ii) construction quality and
condition; (iii) current and projected cash flow; (iv) potential for capital
appreciation; (v) rent roll, including the potential for rent increases; (vi)
potential for economic growth in the tax and regulatory environment of the
community in which the Property is located; (vii) potential for expanding the
physical layout of the Property and/or the number of sites; (viii) occupancy and
demand by tenants for Properties of a similar type in the same geographic
vicinity; (ix) prospects for liquidity through sale, financing or refinancing of
the Property; (x) competition from existing properties and the potential for the
construction of new properties in the area; and (xi) treatment under applicable
federal, state and local tax and other laws and regulations.
The Company's Primary Geographical Area of Investment or target acquisition
area is the states east of the Mississippi River in the United States. However,
the Company will initially focus its Property acquisitions in the southeastern
states, primarily Florida, Georgia, North Carolina and South Carolina. That
target area for acquisitions contains a wide range of real estate markets. In
general, the Company will seek to acquire Properties in markets with growing or
stable, well-diversified local economies. By acquiring a geographically
diversified portfolio of Properties, the Company will seek to mitigate the
adverse effects which could result from an economic downturn in any single
regional market. Also, acquiring multiple Properties within the markets where
Properties are acquired should facilitate efficient Property management
operations.
The following information under this "Acquisition Standards" section is from
1998 MSA PROFILE, METROPOLITAN AREA FORECASTS TO 2020, a publication of Woods &
Poole Economics, Inc. ("Woods & Poole"), a Washington, D.C.-based independent
research firm that specializes in long-term county economic and demographic
forecasts. Woods & Poole does not guarantee the accuracy of its data, analysis,
forecasts and projections, and notes that forecasts and projections are
uncertain and future data may differ substantially from the forecasts and
projections. Woods & Poole's definition of the Southeast includes those states
falling within the Company's initial target acquisition area (Florida, Georgia,
North Carolina and South Carolina) as well as many southeastern states not
included in the Company's initial target acquisition area.
Woods & Poole expects: (i) the rate of increase in population, jobs, retail
sales and per capita income in the Southeast region of the United States will
exceed that of the nation as a whole through the year 2020; (ii) most of the
employment growth will be centered in Florida, North Carolina and Georgia; (iii)
the Southeast to create 14.1 million jobs from 1995 to 2020, and the population
of the region to increase by 19.1 million people; (iv) the population of Florida
to grow at an average annual rate of 1.5% from 1996 to 2020, a slowdown from the
1970 to 1996 growth of 2.9%, but twice the national average, and the fourth
fastest projected rate for any state; and (v) the Atlanta, Georgia Metropolitan
Statistical Area ("MSA") to generate more jobs than any other MSA in the
Southeast over the next two decades, and total employment
100
<PAGE>
in Atlanta to increase from 2.2 million in 1995 to 3.4 million in 2020, the
second largest gain projected for any MSA in the nation.
The following table, excerpted from Woods & Poole's data, shows projections
for the years 1995-2020 for the United States, the Southeast region and for
selected metropolitan areas in the Southeast where the Company may acquire
Retail Centers. All earnings, personal income and retail sales data are
presented in inflation-adjusted 1992 "constant" dollars.
<TABLE>
<CAPTION>
ANNUAL TOTAL %
POPULATION ANNUAL JOB TOTAL % GROWTH GROWTH PER
GROWTH RATE GROWTH RATE RETAIL SALES CAPITA INCOME
--------------- --------------- ------------------- -------------------
<S> <C> <C> <C> <C>
United States........................................ 0.82% 1.15% 49% 37%
Southeast............................................ 1.06% 1.35% 58% 40%
Atlanta, GA.......................................... 1.60% 1.63% 76% 35%
Naples, FL........................................... 1.97% 2.17% 98% 48%
Orlando, FL.......................................... 2.42% 2.28% 119% 39%
Sarasota/Bradenton, FL............................... 1.84% 2.23% 84% 52%
Tampa/St. Petersburg/Clearwater, FL.................. 1.49% 1.72% 70% 49%
</TABLE>
5. DESCRIPTION OF LEASES. When spaces become vacant or existing leases
expire, the Company anticipates entering into "net" leases which require lessees
to pay a share, either pro rata or fixed, of all or a majority of the operating
expenses, including real estate taxes, special assessments, insurance,
utilities, common area maintenance and building repairs related to the
Properties, as well as base rent payments. The Company intends to include
provisions which increase the amount of base rent payable at certain points
during the lease term and/or provide for the payment of additional rent
calculated as a percentage of a tenant's gross sales above predetermined
thresholds in most of its leases. The leases with most Anchor Tenants generally
have initial terms of 10 to 25 years, with one or more renewal options available
to the lessee. By contrast, smaller tenant leases typically have three- to
five-year terms.
Leases entered into on a Triple Net Lease Basis generally have a term of 15
to 25 years (typically not less than 10 years). In addition, the Creditworthy
Tenant of a lease on a Triple Net Lease Basis is responsible for the base rent
in addition to the costs and expenses in connection with and related to property
taxes, insurance, repairs and maintenance applicable to the leased space.
Each "net" lease tenant is required to pay its share of the cost of the
liability insurance covering the Property in which it is a tenant. The
third-party liability coverage insures, among others, the Company, Advisor and
the Management Agent. Typically, each tenant is required to obtain, at its own
expense, property insurance naming the Company as the insured party for fire and
other casualty losses in an amount equal to the full value of its premises and
the contents thereof. All such insurance must be approved by the Management
Agent. In general, the "net" lease may be assigned or subleased with the
Company's prior written consent, but the original tenant must remain liable
under the lease unless the assignee meets certain income and net worth tests.
In connection with sale and leaseback transactions, the tenant, which is a
Creditworthy Tenant, is responsible for paying a predetermined minimum annual
rent generally based upon the Company's cost of purchasing the land and
building. In addition to the base rent, such tenants are generally responsible
for the costs and expenses in connection with and related to property taxes,
insurance, repairs and maintenance applicable to the leased space.
6. PROPERTY ACQUISITION. The Company, through the Operating Partnership,
anticipates acquiring fee interests in Properties, although other methods of
acquiring a Property may be utilized if it is deemed to be advantageous to the
Company. For example, the Company, through the Operating Partnership, may
acquire Properties through a joint venture or the acquisition of substantially
all of the interests of an entity which in turn owns the real property. The
Company may also use separate Property Partnerships or limited
101
<PAGE>
liability companies to acquire a Property. Such Property Partnerships or limited
liability companies will be formed solely for the purpose of acquiring a
Property or Properties. See "--Joint Ventures" in this Section and "Federal
Income Tax Considerations--Taxation of the Company--Ownership of a Partnership
Interest" and "--Ownership of a Qualified REIT Subsidiary."
The Company has rights to acquire three Retail Centers, being the Initial
Properties, all of which are intended to be acquired from Affiliates who
purchased the Properties from unaffiliated third parties on behalf of the
Company. The prices to be paid for each of these Initial Properties were not the
subject of arm's-length negotiations. Under the Articles, the Company is
prohibited from purchasing a Property from an Affiliate unless a majority of the
Directors (including a majority of the Independent Directors) not interested in
the transaction approve the purchase as fair and reasonable to the Company and
at a price to the Company no greater than the cost of the asset to such
Affiliate. However, the price to the Company may be greater than such cost if a
substantial justification for the excess exists and such excess is reasonable.
The Company's policy currently provides that in no event may the cost of the
asset to the Company exceed its appraised value at the time of the acquisition
of the Property by the Company. A majority of the Directors (including a
majority of the then Independent Directors) approved the purchases of the
Initial Properties as being fair and reasonable to the Company, which Initial
Properties will be purchased at a price to the Company not in excess of the
Affiliate's acquisition cost thereof. There can be no assurance, however, that
the prices paid to the Affiliates for the Initial Properties or for future
acquisitions of Properties from Affiliates, if any, did not or would not exceed
that which would be paid by an unaffiliated buyer. See "Real Property
Investments."
If remodeling is required prior to the purchase of a Property, the Company
will pay a negotiated maximum amount either upon completion or in installments
commencing prior to completion. The price will be based on the estimated cost of
remodeling. In such instances, the Company will also have the right to review
the tenant's books during and following completion of the remodeling to verify
actual costs. In the event of substantial disparity between estimated and actual
costs, an adjustment in the purchase price may be negotiated. If remodeling is
required after the purchase of a Property, an Affiliate of the Advisor may serve
as construction manager for a fee no greater than 90% of the fee a third party
would charge for such services.
7. BORROWING. Generally, the Company intends to acquire Properties free
and clear of permanent mortgage indebtedness by paying the entire purchase price
of each Property in cash or for Shares, LP Units, Interests, or a combination of
the foregoing. However, if it is determined to be in the best interest of the
Company, the Company will, in certain instances, incur indebtedness to acquire
Properties. With respect to Properties purchased on an all-cash basis (or for
Shares, LP Units, Interests, or a combination thereof), the Company may later
incur mortgage indebtedness by obtaining loans secured by selected Properties,
if favorable financing terms are available. The proceeds from such loans would
be used to acquire additional Properties. The Company may also incur
indebtedness to finance improvements to its Properties. The Company anticipates
that, in general, aggregate borrowings secured by all of the Company's
Properties will not exceed 55% of their combined fair market value. This
anticipated amount of leverage will be achieved over time; however, initially,
the aggregate borrowings on the Initial Properties will exceed 55% of their
combined fair market value. The Articles provide that the aggregate amount of
borrowing in relation to the Company's Net Assets shall, in the absence of a
satisfactory showing that a higher level of borrowing is appropriate, not exceed
300% of Net Assets. Any excess in borrowing over such 300% of Net Assets level
shall be (i) approved by a majority of the Independent Directors, (ii) disclosed
to Stockholders in the Company's next quarterly report to Stockholders, along
with justification for such excess, and (iii) subject to approval of the
Stockholders.
If the Company does incur indebtedness secured by its Properties, it intends
to do so only on a non-recourse basis, which means that a lender's rights on
default will generally be limited to foreclosing on the Property which secured
the obligation. The Company will not borrow funds from a program sponsored by
the Advisor or its Affiliates which makes or invests in mortgage loans. The
Company also seeks to obtain
102
<PAGE>
level payment financing, meaning that the amount of debt service payable would
be substantially the same each year, although some mortgages might provide for a
so-called "balloon" payment or provide for variable interest rates. There are no
prescribed limits on the number or amount of mortgages which may be placed on
any one Property. Any mortgages secured by a Property will comply with the
restrictions set forth by the Commissioner of Corporations of the State of
California.
See "Summary of the Organizational Documents--Restrictions on Borrowing."
8. SALE OR DISPOSITION OF PROPERTIES. The Board will determine whether a
particular Property should be sold or otherwise disposed of after considering
the relevant factors, including performance or projected performance of the
Property and market conditions, with a view toward achieving the principal
investment objectives of the Company.
In general, the Company intends to hold its Properties prior to sale, for a
minimum of four years. See "Federal Income Tax Considerations--Taxation of the
Company--Prohibited Transactions." Furthermore, the Company generally intends to
reinvest proceeds from the sale, financing, refinancing or other disposition of
its Properties into additional Properties or use these proceeds to fund
maintenance or repair of existing Properties or to increase reserves for such
purposes. The objective of reinvesting the sale, financing and refinancing
proceeds in new Properties is to increase the real estate assets owned by the
Company, and the Company's Net Income, which the Board believes will enhance the
Company's chances of having the Company's Shares traded in a public trading
market. Notwithstanding this policy, the Board, in its discretion, may
distribute to Stockholders all or part of the proceeds from the sale, financing,
refinancing or other disposition of all or any of the Company's Properties. In
determining whether to distribute these proceeds to Stockholders, the Board will
consider, among other factors, the desirability of Properties available for
purchase, real estate market conditions, the likelihood of the listing of the
Company's Shares on a national stock exchange or including the Shares for
quotation on a national market system and compliance with the REIT Requirements.
Because the Company may reinvest the proceeds from the sale, financing or
refinancing of its Properties, the Company could hold Stockholders' capital
indefinitely. However, the affirmative vote of the Stockholders, controlling a
majority of the Shares, will force the Company to liquidate its assets and
dissolve. See "Summary of the Organizational Documents-- Dissolution or
Termination of the Company."
In selling a Property, the Company generally intends to seek to obtain an
all-cash sale price. However, a purchase money obligation secured by a mortgage
on the Property may be taken as partial payment, and there are no limitations or
restrictions on the Company taking such purchase money obligations. The terms of
payment to the Company will be affected by custom in the area in which the
Property being sold is located and the then prevailing economic conditions. To
the extent the Company receives notes and other property instead of cash from
sales, such proceeds (other than any interest payable thereon) will not be
available for Distributions until and to the extent the notes or other property
are actually paid, sold, refinanced or otherwise disposed of and, therefore, the
distribution of the proceeds of a sale to the Stockholders may be delayed until
such time. In such cases, the Company will receive payments (cash and other
property) in the year of sale in an amount less than the selling price and
subsequent payments will be spread over a number of years. See "Federal Income
Tax Considerations."
9. CHANGE IN INVESTMENT OBJECTIVES AND POLICIES. The Stockholders have no
voting rights with respect to implementing the investment objectives and
policies of the Company, all of which are the responsibility of the Board. The
Board may not, however, make any material changes regarding the restrictions on
investments set forth in the Articles without amending the Articles, which
requires the affirmative vote of Stockholders holding a majority of the
outstanding Shares. See "Summary of the Organizational Documents--Restrictions
on Investments."
10. CERTAIN INVESTMENT LIMITATIONS. The Company will not: (i) invest more
than 10% of its total assets in unimproved real property (and will only invest
in unimproved real property intended to be developed) or in mortgage loans on
unimproved real property; (ii) invest in commodities or commodity future
103
<PAGE>
contracts; (iii) issue redeemable Shares; (iv) issue Shares on a deferred
payment basis or other similar arrangement; and (v) operate in such a manner as
to be classified as an "investment company" for purposes of the Investment
Company Act. See "Summary of the Organizational Documents--Restrictions on
Investments" for additional investment limitations.
The Company does not engage in hedging or like activities and therefore does
not have any material exposure to risk due to financial instruments, derivative
financial instruments or derivative commodity instruments.
The Company has no plans to invest any proceeds from the Offering, or other
funds, in the securities of other issuers for the purpose of exercising control
over such other issuers.
11. APPRAISALS. All real property acquisitions made and to be made by the
Company have been or will be supported by an appraisal prepared by a competent,
independent appraiser who is a member-in-good standing of the Appraisal
Institute prior to the purchase of the Property. The Company's policy currently
provides that the purchase price of each Property will not exceed its appraised
value at the time of acquisition of the Property by the Company. Appraisals are,
however, estimates of value and should not be relied on as measures of true
worth or realizable value. The appraisal will be maintained in the Company's
records for at least five years, and copies of each appraisal will be available
for review by Stockholders upon their request.
12. RETURN OF UNINVESTED PROCEEDS. In the event the Minimum Offering is
not sold within six months from the original effective date of this Prospectus,
all funds received from subscribers will be promptly returned to them, together
with interest earned thereon. Any of the proceeds of this Offering allocable to
investments in real property which have not been invested in real property or
committed for investment within the later of: (i) 24 months from the original
effective date of this Prospectus; or (ii) 12 months from the termination of the
Offering, will be returned by the Company to the Stockholders. All funds
received by the Company out of the escrow account will be available for the
general use of the Company from the time of receipt until expiration of the
period discussed above and, in addition to acquiring Properties, may be used
for, among other purposes, (a) to fund expenses incurred to operate the
Properties which have been acquired, (b) to reimburse the Advisor for certain
expenses of the Company, to the extent allowable under the Advisory Agreement,
(c) to pay the Advisor its compensation under the Advisory Agreement, and (d) to
pay the Management Agent its Property Management Fee under the Management
Agreement; except however, if the Minimum Offering is sold within the prescribed
time period and the Escrow Agent releases the proceeds from such sales to the
Company, such proceeds will be used to acquire Merchants Square. See "Estimated
Use of Proceeds," "Plan of Distribution--Escrow Conditions" and "Real Property
Investments." Funds will not be segregated or held separate from other funds of
the Company pending investment, and interest will be payable to the Stockholders
if uninvested funds are returned to them.
13. ADDITIONAL OFFERINGS AND EXCHANGE LISTING. The Company anticipates
that within five years from the date of this Prospectus, the Board will
determine (i) when, and if, to apply to have the Shares listed for trading on a
national stock exchange or included for quotation on a national market system,
provided that the Company meets the then applicable listing requirements; and/or
(ii) whether to commence subsequent offerings after completion of this Offering.
The Company believes that an exchange listing or inclusion of the Shares in a
national market system may allow the Company to increase its size, portfolio
diversity, Stockholder liquidity, access to capital and stability, and decrease
its operating costs through economies of scale. However, there is no assurance
that such listing or inclusion will ever occur. If listing of the Shares or
their inclusion in a national market system is not feasible within five years
from the date of this Prospectus, the Board may decide to: (i) sell the
Company's assets individually; (ii) list the Shares at a future date; or (iii)
liquidate the Company within 10 years of the date thereof.
14. JOINT VENTURES. The Company is permitted to invest in joint venture
arrangements with other public real estate programs formed by the Advisor or any
of its Affiliates if a majority of Directors (including a majority of
Independent Directors) not otherwise interested in the transaction approve the
104
<PAGE>
transaction as being fair and reasonable to the Company and the investment by
each such joint venture partner is substantially on the same terms and
conditions as those received by other joint venturers.
The Company is also permitted to invest in general partnerships or joint
venture arrangements with Affiliates as co-owners of a Property. The general
partnership or joint venture agreement for such investments will provide that
the Company will be able to increase its equity participation in such entity as
additional proceeds of the Offering are received by the Company with the result
that the Company will end up with up to a 100% equity ownership of the Property;
provided however, that the affiliated general or joint venture partner will not
be entitled to any profit or other benefit on such sale of its equity
participation to the Company. Once the Company owns, directly or indirectly,
100% of the ownership interests in such general partnership or joint venture
entity, the Company will determine whether the continued existence of that
entity is necessary. For example, the Company may determine to continue the
existence of the entity in order to minimize expenses or to meet lender
requirements.
Investors should consider the potential risk of the Company and its joint
venture partner being unable to agree on a matter material to the joint venture.
Furthermore, there can be no assurance that the Company will have sufficient
financial resources to exercise any right of first refusal.
In addition, the Company may enter into joint venture or partnership
arrangements with unaffiliated third parties. Therefore, the Company may enter
into acquisitions with sellers who are desirous of transactions in tax
advantaged structures such as arrangements typically referred to as "Down
REITs." See "Risk Factors--Investment Risks--Objectives of Joint Venture
Partners May Conflict with the Company's Objectives."
The Company is unable to estimate the proportion of its assets that may be
invested in joint venture interests.
15. CONSTRUCTION AND DEVELOPMENT ACTIVITIES. From time to time, the
Company may attempt to enhance certain investment opportunities by undertaking
construction and development activities and rendering services in connection
therewith. The Advisor has advised the Company that, in its view, the Company
may be able to reduce overall purchase costs if the Company were to undertake
construction and development rather than merely being limited to purchasing
Properties subject to completion of construction by a third party. Although the
construction and development activities would expose the Company to certain
risks such as cost overruns, carrying costs of projects under construction or
development, availability and costs of materials and labor, weather conditions
and government regulation, the Company nevertheless has concluded that its
investment prospects would be enhanced by permitting it to engage in
construction and development activities so long as such activities did not cause
the Company to lose its status as a REIT under the Code. To comply with the REIT
Requirements, and until the Service changes its pronouncements with regard
thereto, the Company intends to limit its construction and development
activities to the performance of oversight and review functions, including
reviewing the construction and tenant improvement design proposals, negotiating
and contracting for feasibility studies and supervising compliance with local,
state or federal laws and regulations. The Company will retain independent
contractors to perform the actual physical construction work on tenant
improvements, the installation of HVAC systems or the development of an entirely
new project.
16. OTHER POLICIES. In determining whether to purchase a particular
Property, the Company may first obtain an option to purchase the Property. The
amount paid for the option, if any, usually would be surrendered if the Property
was not purchased and normally would be credited against the purchase price if
the Property was purchased.
The Company does not intend to invest in any primarily (i) single family or
multi-family residential properties; (ii) industrial properties; (iii) hotels or
motels; (iv) leisure home sites; (v) farms; (vi) ranches; (vii) timberlands;
(viii) unimproved properties not intended to be developed; (ix) mining
properties; (x) office properties; or (xi) Super Regional Centers (which are
defined to mean generally shopping
105
<PAGE>
centers that provide for an extensive variety in general merchandise, apparel,
furniture and home furnishings, as well as a variety of services and
recreational facilities; are built around three or more full-line department
stores of generally not less than 100,000 square feet each; and have GLA ranging
from 600,000 to more than 1,500,000 square feet); provided however, the Company
may invest in an office property or a residential property if it has a
significant retail or commercial use component as its primary purpose. The
aggregate purchase price of real property investments that are not the Company's
Primary Property Investments will not exceed 10% of the aggregate purchase price
of all of the Company's Primary Property Investments anticipated to be acquired
by the Company. Assuming the Maximum Offering is sold, the Company does not
intend to invest more than approximately 20% of the anticipated proceeds in any
one Property.
The Company holds all funds, pending investment in Properties, in assets
which will allow the Company to continue to qualify as a REIT. These investments
are highly liquid and provide for appropriate safety of principal and may
include, but are not limited to, investments such as GNMA bonds and real estate
mortgage investment conduits ("REMICs"). See "Federal Income Tax
Considerations--Taxation of the Company--REIT Qualification Tests."
The Company will not make distributions-in-kind, except for: (i)
distributions of readily marketable securities; (ii) distributions of beneficial
interests in a liquidating trust established for the dissolution of the Company
and the liquidation of its assets in accordance with the terms of the Articles;
or (iii) distributions of in-kind property which meet all of the following
conditions: (a) the Directors advise each Stockholder of the risks associated
with direct ownership of the in-kind property; (b) the Directors offer each
Stockholder the election of receiving in-kind property distributions; and (c)
the Directors distribute in-kind property only to those Stockholders who accept
the Directors' offer.
Although the Company's Organizational Documents (its Articles and Bylaws) do
not prohibit the following, the Company has no current plans to (i) make loans,
other than through the possible purchase of any publicly distributed bonds or
other debt securities, to any other Persons; (ii) underwrite the securities of
other issuers; (iii) invest in real estate mortgages; (iv) invest any of its
assets in the securities of, or interests in, other Persons engaged in real
estate activities; or (v) invest the proceeds of the Offering, other than on a
temporary basis, in non-real estate related investments. It is possible that the
Company would change such current plans as to the activities described in
clauses (iii) and (iv) if the Board determines that it would be in the best
interests of the Stockholders to engage in any such transactions.
Although the Company is authorized to issue senior securities, it has no
current plans to do so. See "Description of Securities--Preferred Stock,"
"--Issuance of Additional Securities and Debt Instruments," and "--Restrictions
on Issuance of Certain Securities."
REAL PROPERTY INVESTMENTS
GENERAL
The Company intends to acquire and manage a diversified (by geographical
location and by types of Retail Centers) portfolio of real estate primarily (i)
improved for use as retail establishments, principally multi-tenant shopping
centers that are (a) leased primarily to one or more retail tenants providing
for the sale of convenience goods and personal services for the day-to-day
living needs of the immediate neighborhood, with gross leaseable area ("GLA")
ranging from 10,000 to 100,000 square feet (a "Neighborhood Center"), or (b)
leased primarily to retail tenants providing for the sale of soft lines and hard
lines, in addition to the convenience goods and personal services provided by a
Neighborhood Center, with GLA ranging from 100,000 to 300,000 or more square
feet (a "Community Center"), but also including single-user retail facilities;
or (ii) improved with other commercial facilities which provide goods or
services (all of the foregoing, collectively "Retail Centers" or individually a
"Retail Center"). See the "Glossary" for more expansive definitions of
"Neighborhood Center," "Community Center," and "Retail Center."
106
<PAGE>
The Retail Centers will be located mainly in the states east of the
Mississippi River in the United States (the Company's "Primary Geographical Area
of Investment"). It is anticipated that the Company will initially focus on
acquiring Properties in the southeastern states, primarily Florida, Georgia,
North Carolina and South Carolina. The Company will endeavor to acquire multiple
Properties within those markets where Property acquisitions are made to
facilitate efficient Property management operations. The Company may also
acquire, among other real estate, single-user commercial properties located
anywhere throughout the United States if they are leased on a basis pursuant to
which a Creditworthy Tenant is responsible for the base rent and all costs and
expenses in connection with and related to property taxes, insurance, repairs
and maintenance applicable to the leased space (a "Triple-Net Lease Basis"),
including such Properties acquired in sale and leaseback transactions
("Triple-Net Single-User Retail Properties Outside the Primary Geographical Area
of Investment"). The Retail Centers in the Primary Geographical Area of
Investment and the Triple-Net Single-User Retail Properties Outside the Primary
Geographical Area of Investment are collectively referred to as the "Company's
Primary Property Investments."
The Company does not intend to invest in any primarily (i) single-family or
multi-family residential properties; (ii) industrial properties; (iii) hotels or
motels; (iv) leisure home sites; (v) farms; (vi) ranches; (vii) timberlands;
(viii) unimproved properties not intended to be developed; (ix) mining
properties; (x) office properties; or (xi) Super Regional Centers; provided
however, the Company may invest in an office property or a residential property
if it has a significant retail or commercial use component as its primary
purpose. Subject to compliance with the REIT Requirements, the Company may
undertake certain construction and development activities and render services in
connection therewith.
The aggregate purchase price of real property investments that are not the
Company's Primary Property Investments will not exceed 10% of the aggregate
purchase price of all of the Company's Primary Property Investments anticipated
to be acquired by the Company. Assuming the Maximum Offering is sold, the
Company does not intend to invest more than approximately 20% of the Net
Proceeds of the Offering in any one Property.
Each real property and improvements thereon acquired, or considered or
proposed to be acquired, by the Company, directly or indirectly, as described
above in this "--General" section, is referred to as a "Property" and all of
such properties are collectively referred to as the "Properties."
See "Investment Objectives and Policies" generally pertaining to the types
of Properties that the Company intends to acquire and its policies relating to
the maintenance, operation and disposition thereof.
INSURANCE COVERAGE ON PROPERTIES
The Company intends to carry comprehensive general liability coverage and
umbrella liability coverage on all of its Properties with limits of liability
which the Company deems adequate to insure against liability claims and provide
for the costs of defense. Similarly, the Company intends to be insured against
the risk of direct physical damage in amounts the Company estimates to be
adequate to reimburse the Company on a replacement cost basis for costs incurred
to repair or rebuild each Property, including loss of rental income during the
reconstruction period. In addition, the Company intends to insure its Properties
against loss caused by earthquake and flood if deemed necessary and economically
justified. The form of Management Agreement for each Property specifically
provides for the Company to procure and carry public liability, fire and
extended coverage, burglary and theft, rental interruption, flood (if
appropriate) and boiler (if appropriate) insurance. The cost of such insurance
is passed through to tenants whenever possible.
INITIAL PROPERTIES
The Company has rights to acquire three Retail Centers, being the Initial
Properties, of which two are Neighborhood Centers and one is a Community Center.
If sufficient funds are raised in the Offering, the Company, through the
Operating Partnership, intends, subject to certain conditions, to acquire the
Initial
107
<PAGE>
Properties from Affiliates of the Advisor. If the Minimum Offering is sold, the
Merchants Square Shopping Center ("Merchants Square"), one of the Initial
Properties, will be the first Property purchased with the proceeds from the
Minimum Offering. Although the Company presently intends to acquire the other
Initial Properties, it is not obligated to do so. The Company may not purchase
those Properties if it (i) determines that it is not in the best interests of
the Company to purchase any or all of those Properties due to market conditions
or tenancy matters at the time funds are available for such purchases, or (ii)
locates other Properties which the Company determines to be more suitable for
investment at the time. The Affiliates, who purchased the Initial Properties
from unaffiliated third parties on behalf of the Company, incurred financing
costs with other Affiliates in order to pay the purchase price to the sellers of
those Properties. When the Company has cash available to purchase Properties
free and clear of indebtedness, it can avoid paying the added expense of
financing costs paid to Affiliates that is part of the purchase price which will
be payable by the Company to acquire the Initial Properties. The Company's
rights to acquire Merchants Square, Lake Olympia Square and Lake Walden Square
terminate on the first to occur of: (i) February 1, 2002 or (ii) a date which is
one year following the termination of this Offering.
The Company believes that the Initial Properties are well-located, have
excellent roadway access, attract high-quality tenants, are well-maintained and
have been professionally managed. The Initial Properties will be subject to
competition from similar Retail Centers within their market areas, and their
economic performance could be affected by changes in local economic conditions.
The Initial Properties have a diverse and stable base of tenants and have
historically provided steadily increasing rents which the Company believes is
due to the quality of the Initial Properties, the existence of leases with
contractual rent escalations and the strength of the markets in which the
Initial Properties are located. As of September 30, 1998, approximately 42% of
the leases for the Initial Properties, in terms of Annualized Net Rent, had
contractual rent increases, of which approximately 25% of the Annualized Net
Rent was attributable to leases with specified contractual rent increases and
approximately 17% of the Annualized Net Rent was attributable to leases with
contractual rent increases related to the CPI. Furthermore, as of September 30,
1998, approximately 38% of the Annualized Net Rent is derived from leases
scheduled to expire during the next five years. The three largest tenants in the
Initial Properties, in terms of Annualized Net Rent, are Winn-Dixie, a
supermarket, K-Mart, a discount department store, and Kash N' Karry, a
supermarket. As of September 30, 1998, the 10 largest tenants (based upon
Annualized Net Rent) in the Initial Properties had leased their space (or other
space in the Initial Properties) for an average of 14.5 years, and accounted for
66% of Annualized Net Rent.
As will be the Company's policy with regard to the acquisition of any
Property, the Company will have received an appraisal of the fair market value
of each Initial Property prior to acquiring it. The purchase price of each of
the Initial Properties does not exceed its last appraised value and will not
exceed its appraised value as of when the Company acquires the Property.
Appraisals are, however, estimates of value and should not be relied on as a
measure of true worth or realizable value. The terms of the leases for each of
the Initial Properties vary depending upon tenant size, but in many cases
contain contractual provisions which automatically increase the amount of base
rent payable at certain points during the term of the lease. These leases may
also contain provisions which provide for the payment of additional rent
calculated as a percentage of a tenant's gross sales above pre-determined
thresholds.
Prior to the purchase of the Initial Properties, a majority of the
Directors, including a majority of the Independent Directors, will approve these
acquisitions as being fair and reasonable to the Company and at a purchase price
to the Company which does not exceed the appraised value of each Initial
Property at the time of the Company's acquisition thereof. Of the Initial
Properties, and assuming no other Properties were acquired by the Company, each
of the Initial Properties would account for more than 10% of the book value of
the Company's total assets or expected gross revenues for the Company's first
fiscal year to end December 31, 1999.
108
<PAGE>
The following tables describe the Company's Initial Properties and tenants
at those Properties:
PROPERTY MIX
(AT SEPTEMBER 30, 1998)
<TABLE>
<CAPTION>
% OF TOTAL % OF TOTAL BASE
GROSS GLA OF ALL ANNUALIZED RENTAL REVENUE OF
LEASABLE AREA INITIAL BASE RENTAL ALL INITIAL
NUMBER (SQ. FT.) PROPERTIES REVENUE PROPERTIES
------------- ------------- ----------------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Neighborhood Centers............... 2 160,625 38.54% $ 1,418,704 49.07%
Community Center................... 1 256,155 61.46% $ 1,472,216 50.93%
-
------------- ------ ------------ ------
3 416,780 100.00% $ 2,890,920 100.00%
-
-
------------- ------ ------------ ------
------------- ------ ------------ ------
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
GROSS TOTAL GLA
PROPOSED DATE AFFILIATES' LEASABLE OF ALL PERCENT OF ANNUALIZED
OF ACQUISITION YEAR AREA (SQ. INITIAL GLA LEASED AS BASE RENTAL
PROPERTY ACQUISITION(1) COST(2) BUILT FT.) PROPERTIES OF 9/30/98 REVENUE(3)
- ------------------------------ ------------- ------------ --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NEIGHBORHOOD CENTERS:
Merchants Square Shopping
Center
Zephyrhills, Florida........ 6/99 $ 5,714,401 1993 74,849 17.96% 100% $ 586,858
Lake Olympia Square
Ocoee, Florida.............. 8/99 9,710,136 1995 85,776 20.58% 95% 831,846
COMMUNITY CENTER:
Lake Walden Square
Plant City, Florida......... 9/99 14,528,757 1992 90%
------------
256,155 61.46% 1,472,216
----------- ----------- -----------
$ 29,953,294 416,780 100.00% $ 2,890,920
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
<CAPTION>
NUMBER OF
TENANTS AS MAJOR
PROPERTY OF 9/30/98 TENANTS(4)
- ------------------------------ ---------- ------------------
<S> <C> <C>
NEIGHBORHOOD CENTERS:
Merchants Square Shopping
Center
Zephyrhills, Florida........ 13 Kash N' Karry
Fashion Bug
Lake Olympia Square
Ocoee, Florida.............. 17 Winn-Dixie
Tutor Time Child
Care Systems
COMMUNITY CENTER:
Lake Walden Square
Plant City, Florida......... 27
Kash N' Karry
K-Mart
Carmike Cinemas
</TABLE>
- ------------------------
(1) Assumes that sufficient proceeds from the Minimum Offering and the Maximum
Offering will be available by the dates shown, and if not, they will be
acquired as soon thereafter as practicable when sufficient proceeds from the
Offering are available; subject however, to the conditions specified above
in the first paragraph under "--Initial Properties" in this Section.
(2) The "Affiliates' Acquisition Cost" for the Initial Properties consists of
the purchase prices paid, plus any Acquisition Expenses and, plus any
financing costs (including expenses such as loan fees or points or any fee
of a similar nature, however designated, but not including interest on any
loans) paid by the Initial Property Sellers to either Affiliates of TIGI or
to third parties.
(3) Annualized Base Rental Revenue is the annualized contractual base rent as of
January 1, 1998 under existing leases.
(4) Major Tenants only include tenants leasing more than 10% of the gross
leasable area of the Property.
As shown by the above table, the acquisition cost of the Initial Properties
to the Initial Property Sellers was approximately $30 million (the "Affiliates'
Acquisition Cost"). The Initial Properties were subject to aggregate mortgage
debt of approximately $20.6 million as of the acquisition of the Initial
Properties by the Initial Property Sellers (the "Initial Mortgage Debt").
In connection with their acquisition of the Initial Properties, the Initial
Property Sellers borrowed approximately $9.4 million from an Affiliate of TIGI
(the "Affiliates' Acquisition Debt") to pay the difference between the
Affiliates' Acquisition Cost and the Initial Mortgage Debt, of which
approximately $1.4 million was attributable to Merchants Square.
109
<PAGE>
When the Initial Properties are acquired by the Company, they will be
subject to an expected unpaid Initial Mortgage Debt (depending on when each
acquisition occurs) of approximately $20.3 million (of which approximately $4.3
million will be attributable to Merchants Square), leaving approximately $9.4
million to be paid in cash by the Company from the Net Proceeds of the Offering
to acquire the Initial Properties, approximately $1.4 million of which is to be
paid to acquire Merchants Square. The Company's approximate $9.4 million cash
payment to the Initial Property Sellers will be used by the Initial Property
Sellers to retire in full, as of the date of the Company's closing of such
purchases, the Affiliates' Acquisition Debt relating to the Initial Property
acquired. In addition, Net Proceeds of the Offering will be used to pay
Acquisition Expenses and to establish working capital reserves related to the
acquisition of the Initial Properties. See "Additional Information Regarding the
Initial Properties" for a fuller discussion of the formulation of the purchase
prices to be paid for the Initial Properties and the outstanding indebtedness
relating to the Initial Properties.
The Company will not be paying or assuming any debt incurred by Affiliates
for operational purposes. In addition, the Company will not be paying for any
expenses paid or incurred by the Initial Property Sellers during the period of
time the Initial Properties are owned by the Initial Property Sellers for
management and operation of the Initial Properties or for servicing the related
debt (E.G., interest payments on loans) represented by the Initial Mortgage Debt
and the Affiliates' Acquisition Debt. Also, the Company will not be receiving
any of the cash flow from the Initial Properties, nor will the Company reimburse
the Initial Property Sellers for any negative cash flow of the Initial
Properties, during the period of time when the Initial Properties are owned by
the Initial Property Sellers.
TENANTS
The following table sets forth, at September 30, 1998, information regarding
space leased at the Initial Properties, which, in each case, individually
account for more than 1% of the 1998 total Annualized Base Rental Revenues from
all of the Initial Properties.
<TABLE>
<CAPTION>
PERCENT OF
PERCENT OF AGGREGATE
TOTAL GLA OF ANNUALIZED ANNUALIZED
TOTAL NUMBER OF GLA (SQ. ALL INITIAL BASE RENTAL BASE RENTAL
LESSEE STORES FT.) PROPERTIES REVENUE(1) REVENUE
- -------------------------------------------------- --------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Lake Olympia Dental............................... 1 1,800 0.43% $ 33,738 1.17%
Tampa Tribune..................................... 1 6,277 1.51% 31,385 1.09%
Cici's Pizza...................................... 1 3,605 0.86% 39,294 1.36%
Dollar Tree....................................... 2 10,120 2.43% 71,092 2.46%
Home Choice....................................... 1 4,000 0.96% 32,000 1.11%
Froggers.......................................... 1 6,000 1.44% 115,175 3.98%
Curtis Mathes Home Entertainment.................. 1 3,084 0.74% 33,369 1.15%
K-Mart............................................ 1 91,266 21.90% 383,317 13.26%
Fashion Bug....................................... 1 9,040 2.17% 72,320 2.50%
Movie Gallery..................................... 1 5,000 1.20% 61,250 2.12%
AAMCO Transmissions............................... 1 4,800 1.15% 34,800 1.20%
Hao-Hao Chinese Restaurant........................ 1 3,120 0.75% 40,560 1.40%
Spec's Music and Movies........................... 1 6,000 1.44% 72,000 2.49%
Tutor Time Child Care Systems..................... 1 10,000 2.40% 120,000 4.15%
Winn-Dixie........................................ 1 44,000 10.56% 297,000 10.27%
Kash N' Karry..................................... 2 94,255 22.62% 633,824 21.92%
Carmike Cinemas................................... 1 25,899 6.21% 215,220 7.44%
--
--------- ----- ------------ -----
19 328,266 76.60% $ 2,286,344 79.09%
--
--
--------- ----- ------------ -----
--------- ----- ------------ -----
</TABLE>
- ------------------------
(1) Amounts shown reflect 1998 Annualized Base Rental Revenue. Annualized Base
Rental Revenue excludes: (a) percentage rents; (b) additional charges paid
for by tenants including common area
110
<PAGE>
maintenance, real estate taxes and other expense requirements; and (c)
future contractual rent escalations. Annualized Base Rental Revenue is the
monthly contractual base rent as of January 1, 1998 under existing leases,
multiplied by 12. See the separate description of each of the Initial
Properties below in this Section under "--Additional Information Regarding
the Initial Properties" for (i) the names of (a) each tenant that leases
more than 10% of the GLA of each of the Initial Properties and (b) each of
the tenants of each of the Initial Properties, irrespective of the amount of
space leased, and (ii) certain information regarding the lease of each
tenant.
TENANT LEASE EXPIRATIONS
The following table sets forth certain information regarding tenant lease
expirations for the next 10 years at the Initial Properties, assuming that no
renewal options are exercised.
<TABLE>
<CAPTION>
PERCENT OF
AVERAGE BASE TOTAL PERCENT OF
RENT PER PROPERTIES ANNUAL BASE
ANNUAL BASE SQUARE FOOT GLA RENT
RENT OF UNDER REPRESENTED REPRESENTED
NUMBER OF APPROX. GLA OF EXPIRING TOTAL ANNUAL EXPIRING BY EXPIRING BY EXPIRING
LEASES EXPIRING LEASES LEASES BASE RENT(1) LEASES LEASES LEASES
YEAR ENDING DECEMBER 31 EXPIRING (SQ. FT.) ($) ($) ($) (%) (%)
------------- ---------- --------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998....................... 1 2,950 21,240 2,890,920 7.20 0.71 0.73
1999....................... 7 8,017 94,677 2,878,751 11.81 1.92 3.29
2000....................... 11 21,070 217,479 2,780,138 10.32 5.06 7.82
2001....................... 11 22,391 272,601 2,611,207 12.17 5.37 10.44
2002....................... 6 20,692 195,504 2,355,332 9.45 4.96 8.30
2003....................... 9 22,764 207,319 2,166,022 9.11 5.46 9.57
2004....................... 1 9,040 72,320 1,958,703 8.00 2.17 3.69
2005....................... 2 3,100 45,900 1,886,383 14.81 0.74 2.43
2006....................... 2 7,260 134,909 1,840,482 18.58 1.74 7.33
2007....................... 2 35,899 348,170 1,705,573 9.70 8.61 20.41
</TABLE>
- ------------------------
(1) No assumptions were made regarding the releasing of expired leases. It is
the opinion of the Company's management that the space will be released at
market rates. Annualized Base Rental Revenue is the monthly contractual base
rent as of January 1, 1998 under existing leases, multiplied by 12.
ADDITIONAL INFORMATION REGARDING THE INITIAL PROPERTIES
MERCHANTS SQUARE SHOPPING CENTER, ZEPHYRHILLS, FLORIDA
The Company has identified and intends to acquire the Merchants Square
Shopping Center ("Merchants Square") by acquiring the interests of Inland
Southeast Merchants Square Investment Corporation and Inland Southeast
Acquisitions Corp. (collectively, the "Merchants Square Affiliated Partners"),
both of which are Affiliates of the Advisor, in the Property Partnership known
as Inland Southeast Merchants Square Limited Partnership (the "Merchants Square
Property Partnership"). The Merchants Square Property Partnership owns the
entire fee simple interest in Merchants Square, which is a Neighborhood Center
located at the intersection of U.S. 301 North and Pretty Pond Road in
Zephyrhills, Florida. Zephyrhills is located 25 miles north of Tampa, Florida
city limits.
The Merchants Square Property Partnership purchased Merchants Square on
October 9, 1998, from an unaffiliated third party on behalf of the Company to be
held until sufficient funds were raised by the Company to acquire the Property.
The following tables describe the formulation of the purchase price to be paid
by the Company for the interests of the Merchants Square Affiliated Partners in
the Merchants Square Property Partnership. By acquiring 100% of the interests in
the Merchants Square Property Partnership, the Company is in effect assuming the
first mortgage debt and acquiring Merchants Square.
111
<PAGE>
ACQUISITION OF MERCHANTS SQUARE BY MERCHANTS SQUARE PROPERTY PARTNERSHIP
<TABLE>
<S> <C>
Purchase price paid by Merchants Square Property Partnership.... $5,600,000
Acquisition costs paid to third parties......................... 31,693
Financing costs paid to Affiliate............................... 37,073
Financing costs paid to third parties........................... 45,635
---------
Total Affiliates' Acquisition Cost.............................. $5,714,401(1)
---------
---------
</TABLE>
- ------------------------
(1) The Merchants Square Property Partnership acquired Merchants Square for
$5,714,401 plus prorations. This purchase was financed through first
mortgage debt of $4,300,000 at the date of acquisition and certain
Affiliates' Acquisition Debt ("Acquisition Debt"). This Acquisition Debt was
evidenced by an installment note in favor of Inland Mortgage Investment
Corporation, an Inland Affiliated Company, guaranteed by IREIC and secured
by financing statements and two pledge and security agreements executed by
the Merchants Square Affiliated Partners. This Acquisition Debt is payable
at an interest rate of 10.9% per annum with a final balloon payment of the
principal and all interest due October 8, 1999. The entire balance is
prepayable in whole, or in part, at any time without penalty.
ACQUISITION OF MERCHANTS SQUARE BY THE COMPANY
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
BALANCES BALANCES
AS OF AS OF
SEPTEMBER 30, JUNE 30,
1998 1999 (1)
------------- ------------
<S> <C> <C>
Total Affiliates' Acquisition Cost............................... $ 5,714,401 $ 5,714,401
Less:
First mortgage debt at date of acquisition of Merchants Square
Property Partnership......................................... 4,300,000 4,300,000
Amortization of first mortgage debt............................ -- (22,762)
------------- ------------
Balance of assumed first mortgage debt......................... 4,300,000 4,277,238
Security deposits assumed........................................ 7,087 7,087
------------- ------------
Estimated cash amount due to Merchants Square Affiliated Partners
in conjunction with the acquisition of Merchants Square by the
Company......................................................... $ 1,407,314 $ 1,430,076
------------- ------------
------------- ------------
</TABLE>
- ------------------------
(1) Presented as of June 30, 1999, the proposed date of acquisition by the
Company.
Merchants Square was built in 1993 and is a one-story multi-user retail
facility aggregating 74,849 leasable square feet. As of September 30, 1998,
Merchants Square was 100% leased. In evaluating Merchants Square as a potential
acquisition, the Company considered a variety of factors including location,
demographics, tenant mix, price per square foot, occupancy and the fact that
overall rental rates at the shopping center are comparable to market rates. The
Company believes that the shopping center is located within a vibrant economic
area. The Company did not consider any other factors materially relevant to the
decision to acquire the Property.
The Company does not anticipate making any significant repairs and
improvements to Merchants Square over the next few years. A substantial portion
of any monies spent on repairs and improvements would be paid by the tenants,
pursuant to the terms of the existing leases.
112
<PAGE>
The Company believes that Merchants Square is well located, has excellent
roadway access, attracts high-quality tenants, is well maintained and has been
professionally managed. Merchants Square will be subject to competition from
similar Retail Centers within its market area, and its economic performance
could be affected by changes in local economic conditions.
The table below sets forth certain information with respect to the occupancy
rate at Merchants Square expressed as a percentage of total gross leasable area
and the average effective annual base rent per square foot:
<TABLE>
<CAPTION>
OCCUPANCY RATE
AS OF EFFECTIVE
DECEMBER 31, ANNUAL RENTAL
YEAR ENDING OF EACH YEAR PER SQUARE FT.
DECEMBER 31, (%) ($)
- ------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
1997......................................................... 100 7.46
1996......................................................... 100 7.36
1995......................................................... 100 7.58
1994......................................................... 100 7.56
1993......................................................... 100 4.43*
</TABLE>
- ------------------------
* Merchants Square was constructed in 1993.
Two tenants lease more than 10% of the total gross leasable area of the
Property: Kash N' Karry, a supermarket and Fashion Bug, a clothing store. The
leases require the payment of base annual rent, payable monthly as follows:
<TABLE>
<CAPTION>
BASE RENT
PER SQUARE
APPROX. % OF TOTAL FOOT PER LEASE TERM
GLA LEASED GLA OF ANNUM ----------------------
LESSEE (SQ. FT.) THE PROPERTY ($) BEGINNING TO
- ---------------------------------------------- ----------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Kash N' Karry................................. 47,955 64.07 6.70 Currently 05/27/13
Options (1)............................... 6.70 05/28/13 05/27/43
Fashion Bug................................... 9,040 12.08 8.00 Currently 01/31/04
Options (2)............................... 8.50 to 9.50 02/01/04 01/31/19
</TABLE>
- ------------------------
(1) There are six successive five-year renewal options at the same base rent per
square foot per annum.
(2) There are three successive five-year renewal options. The base rent per
square foot increases $.50 per square foot for each option.
For federal income tax purposes, the Company's depreciable basis in
Merchants Square will be approximately $4,350,000. Depreciation expense, for tax
purposes, will be computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 40 and 15
years, respectively. Real estate taxes for the tax year ended 1997 (the most
recent tax year for which information is generally available) were $97,147.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
113
<PAGE>
On September 30, 1998, a total of 74,849 square feet was leased to 13
tenants at Merchants Square. The following tables set forth certain information
with respect to the amount of and expiration of the leases at this Neighborhood
Center:
<TABLE>
<CAPTION>
CURRENT RENT PER
APPROX. ANNUAL SQUARE
GLA LEASED LEASE RENEWAL RENT (1) FOOT
LESSEE (SQ. FT.) ENDS OPTIONS ($) ($)
- ------------------------------------------------------ ----------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Kash N' Karry......................................... 47,955 05/13 6/5 yr. 321,299 6.70
Fashion Bug........................................... 9,040 01/04 3/5 yr. 72,320 8.00
Dollar Tree........................................... 3,320 06/00 4/4 yr. 33,001 9.94
Payless Shoe Source................................... 2,800 03/03 2/5 yr. 26,600 9.50
Beef O'Bradys......................................... 2,030 06/99 1/3 yr. 21,883 10.78
L.G. Edwards Insurance................................ 2,000 05/03 -- 23,500 11.75
Sally Beauty Supply................................... 1,600 04/03 -- 17,600 11.00
Cuts, Curls & Color................................... 1,200 05/99 -- 15,108 12.59
Dr. Baldridge......................................... 1,120 07/03 2/5 yr. 14,112 12.60
Postal Zone........................................... 1,197 01/01 2/3 yr. 11,970 10.00
Concire Centers....................................... 1,009 04/99 1/2 yr. 11,351 11.25
Nabers Jewelers....................................... 1,000 04/99 -- 12,600 12.60
Bingham Realty........................................ 578 04/99 1/2 yr. 5,514 9.54
</TABLE>
- ------------------------
(1) Each tenant also pays its proportionate share of real estate taxes,
insurance and common area maintenance costs. In addition, Kash N' Karry,
Fashion Bug, Dollar Tree, Payless Shoe Source, Beef O'Bradys, Sally Beauty
Supply, Cuts, Curls & Color, Postal Zone and Nabers Jewelers pay, as
additional rent, a percentage of gross sales in excess of a prescribed
amount.
<TABLE>
<CAPTION>
AVERAGE BASE PERCENT OF
RENT PER TOTAL
TOTAL SQUARE FOOT BUILDING
APPROX. GLA BASE RENT ANNUAL UNDER REPRESENTED
NUMBER OF OF EXPIRING OF EXPIRING BASE RENT EXPIRING BY EXPIRING
LEASES LEASES (SQ. LEASES (1) LEASES LEASES
YEAR ENDING DECEMBER 31, EXPIRING FT.) ($) ($) ($) ($)
- --------------------------------- ------------- ------------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1998............................. -- -- -- 586,858 -- --
1999............................. 5 5,817 66,456 586,858 11.42 7.77
2000............................. 1 3,320 33,000 520,401 9.94 4.44
2001............................. 1 1,197 11,970 487,401 10.00 1.60
2002............................. -- -- -- 475,431 -- --
2003............................. 4 7,520 81,812 475,431 10.88 10.05
2004............................. 1 9,040 72,320 393,619 8.00 12.08
2005............................. -- -- -- 321,299 -- --
2006............................. -- -- -- 321,299 -- --
2007............................. -- -- -- 321,299 -- --
<CAPTION>
PERCENT OF ANNUAL
BASE GLA RENT
REPRESENTED BY
EXPIRING LEASES
YEAR ENDING DECEMBER 31, ($)
- --------------------------------- -------------------
<S> <C>
1998............................. --
1999............................. 11.32
2000............................. 6.34
2001............................. 2.46
2002............................. --
2003............................. 17.21
2004............................. 18.37
2005............................. --
2006............................. --
2007............................. --
</TABLE>
- ------------------------
(1) No assumptions were made regarding the releasing of expired leases. It is
the opinion of the Company's management that the space will be released at
market rates at the time of releasing.
Merchants Square Property Partnership owns fee simple title to Merchants
Square subject to a first mortgage and security agreement (the "Mortgage") in
favor of First Union National Bank (the "Bank") and subject to an assignment of
rents and leases, both securing an indebtedness evidenced by a promissory note
(the "Note") in favor of the Bank in the amount of $4,300,000 as of October 9,
1998. Interest on the unpaid principal is calculated at the rate of 7.5% per
annum, with principal and interest payable in monthly installments of $30,066,
and with the unpaid principal balance of $2,061,270 due on November 1, 2008 (the
"Maturity Date"). Those items for which the Merchants Square Property
Partnership is personally liable
114
<PAGE>
under the Note and Mortgage have been indemnified and guaranteed by IREIC,
pursuant to an indemnity and guaranty agreement. The Note creates several
opportunities for the prepayment of the Note in whole or in part, with or
without a prepayment penalty, at various stages throughout the duration of the
Note. Unless the prepayment conditions described below are specifically adhered
to, the Note may not be prepaid, in whole or in part, at any time, and any
amounts accelerated through default are also subject to prepayment penalties.
The Note may be prepaid in whole, but not in part, without penalty, on any
payment date occurring within three months prior to the Maturity Date, provided
notice is timely given and all accrued interest and sums are paid. If notice is
not timely given, the Bank may assess a prepayment penalty. Partial prepayments
are permitted if they result from the Bank's election to apply insurance or
condemnation proceeds to reduce the outstanding balance. No prepayment fee is
due for such partial prepayments unless the Note is in default.
The Note also provides for a one-time right, without penalty, to either (i)
prepay a portion of the outstanding principal indebtedness or (ii) prepay the
entire outstanding principal indebtedness, provided all conditions in the Note
are satisfied to the satisfaction of the Bank. To prepay a portion of the
balance, proper written notice must be delivered to the Bank, the amount of the
prepayment must not result in a loan-to-value ratio of greater than 55% nor less
than 25%, such prepayment must occur no later than November 1, 1999, and the
loan cannot be in default. If the foregoing conditions for partial prepayment
are satisfied, the Bank will reduce the interest rate of the Note to 7.25% per
annum for the remaining term of the Note. Only interest shall be payable on each
payment date from the prepayment date through November 1, 2003, with principal
and interest again payable on each payment date after November 1, 2003, through
the Maturity Date based on a 360-month amortization schedule. In order to prepay
the entire balance, proper written notice must be delivered to the Bank, a
prepayment fee of 2% of the amount being prepaid must be paid to the Bank on or
before the prepayment date, such prepayment must occur between September 15,
1999 and November 1, 1999, and the loan cannot be in default.
Defeasance is the sole option to have the Property released from the lien of
the Mortgage. At any time after the earlier of (i) the fourth anniversary of the
first payment date of the Note or (ii) the date two years after the startup day,
within the meaning of Section 860G(a)(9) of the Internal Revenue Code of a real
estate mortgage investment conduit (a "REMIC"), and provided there is no event
of default, the Bank will cause the release of the Mortgage as a lien on the
Property, provided that proper written notice is given, all accrued and unpaid
interest is paid, and an additional sum of money is paid as provided in the
Note.
LAKE OLYMPIA SQUARE, OCOEE, FLORIDA
The Company has identified and intends to acquire the Lake Olympia Square
Shopping Center ("Lake Olympia Square") by acquiring the interests of Inland
Southeast Investment Corporation and Inland Southeast Acquisitions Corp.
(collectively, the "Lake Olympia Affiliated Partners"), both of which are
Affiliates of the Advisor, in the Property Partnerships known as Inland
Southeast Lake Olympia Limited Partnership and Inland Southeast Lake Olympia
Outparcel Limited Partnership (collectively, the "Lake Olympia Property
Partnerships"). The Lake Olympia Property Partnerships collectively own the
entire fee simple interest in Lake Olympia Square, which is a Neighborhood
Center located at the southwest intersection of Silver Star Road and Clarke Road
in Ocoee, Florida. Ocoee is located three miles west of the Orlando, Florida
city limits.
115
<PAGE>
The Lake Olympia Property Partnerships purchased Lake Olympia Square on June
24, 1998, from an unaffiliated third party on behalf of the Company to be held
until sufficient funds were raised by the Company to acquire the Property. The
following table describes the formulation of the purchase price to be paid by
the Company for the interests of the Lake Olympia Affiliated Partners in the
Lake Olympia Property Partnership. By acquiring 100% of the interests in the
Merchants Square Property Partnerships, the Company is in effect assuming the
first mortgage debt and acquiring Lake Olympia Square.
<TABLE>
<S> <C>
Purchase price paid by the Lake Olympia Property
Partnerships................................................ $9,599,145
Acquisition costs paid to third parties...................... 30,168
Financing costs paid to Affiliate............................ 53,594
Financing costs paid to third parties........................ 27,229
---------
Total Affiliates' Acquisition Cost........................... $9,710,136
Less: Expected unpaid amount of first mortgage debt at the
time of acquisition by the Company.......................... $5,932,943(1)
---------
Amount due to Lake Olympia Affiliated Partners in cash....... $$3,777,193(1)
---------
---------
</TABLE>
- ------------------------
(1) The unpaid amount of the first mortgage debt at the time of acquisition by
the Company may decrease as a result of amortization, depending on when the
acquisition occurs. A decrease in the unpaid amount of the first mortgage
debt would result in a corresponding increase in the amount due to the Lake
Olympia Affiliated Partners in cash. The terms of the first mortgage debt
are explained below.
Lake Olympia Square was built in 1995 and consists of a one-story
multi-tenant retail facility aggregating 85,776 leasable square feet and an
outparcel adjacent to the shopping center. As of September 30, 1998, Lake
Olympia Square was 95% leased (100% leased if the master lease, which lasts for
one year, is considered). In evaluating Lake Olympia Square as a potential
acquisition, the Company considered a variety of factors including location,
demographics, tenant mix, price per square foot, occupancy and the fact that
overall rental rates at the shopping center are comparable to market rates. The
Company believes that the shopping center is located within a vibrant economic
area. The Company did not consider any other factors materially relevant to the
decision to acquire the Property.
The Company does not anticipate making any significant repairs and
improvements to Lake Olympia Square over the next few years. A substantial
portion of any monies spent on repairs and improvements would be paid by the
tenants, pursuant to the terms of the existing leases.
The Company believes that Lake Olympia Square is well located, has excellent
roadway access, attracts high-quality tenants, is well maintained and has been
professionally managed. Lake Olympia Square will be subject to competition from
similar Retail Centers within its market area, and its economic performance
could be affected by changes in local economic conditions.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
116
<PAGE>
The table below sets forth certain information for the last five calendar
years with respect to the occupancy rate at Lake Olympia Square expressed as a
percentage of total gross leasable area and the average effective annual base
rent per square foot:
<TABLE>
<CAPTION>
OCCUPANCY RATE AS
OF EFFECTIVE
DECEMBER 31, ANNUAL RENTAL
YEAR ENDING OF EACH YEAR PER SQUARE FOOT
DECEMBER 31, (%) ($)
- ------------------------------------------ ----------------- -----------------
<S> <C> <C>
1997...................................... 98.7 11.03
1996...................................... 84.2 4.86
1995...................................... 62.3 1.85
1994...................................... * *
1993...................................... * *
</TABLE>
- ------------------------
* Lake Olympia Square was not built until 1995.
Two tenants lease more than 10% of the total gross leasable area of the
Property: Winn-Dixie, a supermarket, and Tutor Time Child Care Systems, a
childcare facility. The leases require the payment of base annual rent, payable
monthly as follows:
<TABLE>
<CAPTION>
BASE RENT
PER SQUARE
APPROX. GLA % OF TOTAL FOOT PER LEASE TERM
LEASED GLA OF THE ANNUM ----------------------
LESSEE (SQ. FT.) PROPERTY ($) BEGINNING TO
- -------------------------------------------------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Winn-Dixie........................................ 44,000 49.01 6.75 Currently 6/30/15
Options(1).................................... 6.75 7/1/15 6/30/40
Tutor Time Child Care Systems..................... 10,000 11.14 12.00 Currently 1/31/07
Options(2).................................... 12.00+ 2/1/07 1/31/17
</TABLE>
- ------------------------
(1) There are five successive five-year renewal options at the same base rent
per square foot per annum.
(2) There are two successive five-year renewal options with base rent per square
foot per annum increases according to increases in the CPI.
For federal income tax purposes, the Company's depreciable basis in Lake
Olympia Square will be approximately $7,814,000. Depreciation expense, for tax
purposes, will be computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 40 and 15
years, respectively. Real estate taxes for the tax year ended 1997 (the most
recent tax year for which information is generally available) were $76,569.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
117
<PAGE>
On September 30, 1998, a total of 81,250 square feet was leased to 17
tenants at Lake Olympia Square. The following tables set forth certain
information with respect to the amount of and expiration of the leases at this
Neighborhood Center:
<TABLE>
<CAPTION>
APPROX. GLA CURRENT ANNUAL RENT PER
LEASED (SQ. RENEWAL RENT(1) SQUARE FOOT
LESSEE FT.) LEASE ENDS OPTIONS ($) ($)
- ----------------------------------------------- ------------- ----------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Winn-Dixie..................................... 44,000 6/15 5/5 yr. 297,000 6.75
Beneficial Finance............................. 1,600 12/05 1/5 yr. 22,400 14.00
Froggers Restaurant............................ 6,000 10/06 2/5 yr. 115,175 19.20
Movie Gallery.................................. 5,000 8/01 2/3 yr. 61,250 12.25
Preppy Puppy................................... 900 10/01 1/3 yr. 13,500 15.00
Countrywide Home Loans......................... 2,290 10/01 2/3 yr. 28,000 12.23
Lake Olympia Dental............................ 1,800 8/00 1/5 yr. 33,738 18.74
First Choice Restaurant........................ 1,500 9/05 2/5 yr. 23,500 15.67
Sylvan Learning Center......................... 1,260 10/06 1/5 yr. 19,734 15.66
Mailboxes, Etc................................. 1,200 9/00 1/5 yr. 17,547 14.62
Harrison Chiropractic.......................... 1,200 1/02 3/5 yr. 18,000 15.00
First Class Cleaners........................... 900 9/00 2/5 yr. 14,175 15.75
Hair Cuttery................................... 900 9/01 1/5 yr. 14,700 16.33
Tan Bodies & Nails............................. 900 9/00 1/5 yr. 13,160 14.62
Orlando Sentinel............................... 900 11/99 1/5 yr. 14,155 15.73
Allstate Insurance............................. 900 7/00 2/3 yr. 13,500 15.00
Tutor Time Child Care Systems.................. 10,000 1/07 2/5 yr. 120,000 12.00
Vacant......................................... 4,526
</TABLE>
- ------------------------
(1) Each tenant also pays its proportionate share of real estate taxes,
insurance and common area maintenance costs. In addition, Winn-Dixie pays,
as additional rent, a percentage of gross sales in excess of a prescribed
amount.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
ANNUAL BASE AVERAGE BASE TOTAL BUILDING ANNUAL BASE
RENT OF RENT PER SQUARE GLA REPRESENTED RENT
NUMBER OF APPROX. GLA OF EXPIRING TOTAL ANNUAL FOOT UNDER BY EXPIRING REPRESENTED BY
YEAR ENDING LEASES EXPIRING LEASES LEASES BASE RENT(1) EXPIRING LEASES LEASES EXPIRING LEASES
DECEMBER 31, EXPIRING (SQ. FT.) ($) ($) ($) (%) (%)
- --------------- ---------- --------------- ------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998........... -- -- -- 831,846 -- -- --
1999........... 1 900 14,155 840,310 15.73 1.05 1.68
2000........... 5 5,700 79,187 814,731 13.89 1.05 9.72
2001........... 4 9,090 120,650 737,660 13.27 10.60 16.36
2002........... 1 1,200 19,200 617,010 16.00 1.40 3.11
2003........... -- -- -- 597,810 -- -- --
2004........... -- -- -- 597,810 -- -- --
2005........... 2 3,100 45,900 597,810 14.81 3.61 7.68
2006........... 2 7,260 134,909 551,909 18.58 8.46 24.44
2007........... 1 10,000 120,000 417,000 12.00 11.66 28.78
</TABLE>
- ------------------------
(1) No assumptions were made regarding the releasing of expired leases. It is
the opinion of the Company's management that the space will be released at
market rates, at the time of releasing.
The Lake Olympia Property Partnerships own fee simple title to Lake Olympia
Square subject to a first mortgage (the "Mortgage") encumbering the retail
parcel only in favor of LaSalle National Bank, as trustee for Morgan Stanley
Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 1997-WF1,
as successor (the "Bank"), and subject to a collateral assignment of leases,
both securing an indebtedness evidenced by a promissory note (the "Note") in
favor of the Bank in the principal amount of $6,200,000. Interest on the unpaid
principal of the Note accumulates at the rate of 8.25% per annum. Principal and
interest are payable on the first day of each month, beginning with May 1, 1997,
in installments of $50,978. The principal balance of the Note was $6,040,532 as
of September 30, 1998, and the balance due on April 1, 2007 (the "Maturity
Date") will be $4,669,258. At any time after the third
118
<PAGE>
anniversary of the date of the Mortgage, March 26, 2000, and upon giving the
holder of the Note 30 days prior written notice, the principal amount and
accrued interest may be prepaid with a prepayment penalty.
The Lake Olympia Property Partnerships incurred certain Affiliates'
Acquisition Debt evidenced by an installment note (the "Retail Installment
Note") in favor of Inland Mortgage Investment Corporation, an Inland Affiliated
Company, which, when incurred, was in the principal amount of $3,481,449. The
Retail Installment Note is guaranteed by IREIC and secured by financing
statements and two pledge and security agreements executed by the Lake Olympia
Affiliated Partners. The Retail Installment Note had a principal balance of
$3,339,954, as of September 30, 1998, and interest only is payable monthly at
the rate of 10.9% per annum. A final balloon payment of the principal amount and
all interest will be due on July 1, 2000. Upon each one year anniversary of the
Retail Installment Note, a loan fee equal to 1% of the outstanding principal
balance is due. The entire balance may be prepaid in whole, or in part, at any
time without penalty. The Retail Installment Note will be paid in full by the
Lake Olympia Affiliated Partners at the time of acquisition by the Company of
the interests of the Lake Olympia Affiliated Partners in the Lake Olympia
Property Partnerships.
The Lake Olympia Property Partnerships also incurred an additional
Affiliates' Acquisition Debt evidenced by an installment note in favor of Inland
Mortgage Investment Corporation (the "Outparcel Installment Note"), which, when
incurred, was in the principal amount of $154,080. The Outparcel Installment
Note is guaranteed by IREIC and secured by financing statements and two pledge
and security agreements executed by the Lake Olympia Affiliated Partners. The
Outparcel Installment Note had a principal balance of $151,714 as of September
30, 1998, and interest only is payable monthly at the rate of 10.9% per annum. A
final balloon payment of the principal amount and all interest will be due on
July 1, 2000. Upon each one year anniversary of the Outparcel Installment Note,
a loan fee equal to 1% of the outstanding principal balance is due. The entire
balance may be prepaid in whole, or in part, at any time without penalty. The
Outparcel Installment Note will be paid in full by the Lake Olympia Affiliated
Partners at the time of acquisition by the Company of the interests of the Lake
Olympia Affiliated Partners in the Lake Olympia Property Partnerships.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
119
<PAGE>
LAKE WALDEN SQUARE, PLANT CITY, FLORIDA
The Company has identified and intends to acquire the Lake Walden Square
Shopping Center ("Lake Walden Square") by acquiring the interests of Inland
Southeast Lake Walden Investment Corporation and Inland Southeast Acquisitions
Corp. (collectively, the "Lake Walden Affiliated Partners"), both of which are
Affiliates of the Advisor, in the Property Partnership known as Inland Southeast
Lake Walden Limited Partnership (the "Lake Walden Property Partnership"). The
Lake Walden Property Partnership owns the entire fee simple interest in Lake
Walden Square, which is a Community Center located at the northwest intersection
of Alexander Road and State Route 39 in Plant City, Florida. Plant City is
located 15 miles east of the Tampa, Florida city limits.
The Lake Walden Property Partnership purchased Lake Walden Square on May 6,
1998, from an unaffiliated third party on behalf of the Company to be held until
sufficient funds were raised by the Company to acquire the Property. The
following table describes the formulation of the purchase price to be paid by
the Company for the interests of the Lake Walden Affiliated Partners in the Lake
Walden Property Partnership. By acquiring 100% of the interests in the Lake
Walden Property Partnership the Company is in effect assuming the first mortgage
debt and acquiring Lake Walden Square.
<TABLE>
<S> <C>
Purchase price paid by the Lake Walden Property Partnership.... $14,388,000
Acquisition costs paid to Affiliate............................ 23,242
Acquisition costs paid to third parties........................ 12,992
Financing costs paid to Affiliate.............................. 68,760
Financing costs paid to third parties.......................... 35,763
----------
Total Affiliates' Acquisition Cost............................. $14,528,757
Less: Expected unpaid amount of first mortgage debt at the time
of acquisition by the Company................................ $10,075,592(1)
----------
Amount due to Lake Walden Affiliated Partners in cash.......... $4,453,165(1)
----------
----------
</TABLE>
- ------------------------
(1) The unpaid amount of the first mortgage debt at the time of acquisition by
the Company may decrease as a result of amortization, depending on when the
acquisition occurs. A decrease in the unpaid amount of the first mortgage
debt would result in a corresponding increase in the amount due to the Lake
Walden Affiliated Partners in cash. The terms of the first mortgage debt are
explained below.
Lake Walden Square was built in 1992 and consists of two one-story
multi-tenant retail facilities aggregating 256,155 leasable square feet and five
outparcels adjacent to the shopping center. As of September 30, 1998, Lake
Walden Square was 90% leased (100% leased if the master lease, which lasts for
one year, is considered). In evaluating Lake Walden Square as a potential
acquisition, the Company considered a variety of factors including location,
demographics, tenant mix, price per square foot, occupancy and the fact that
overall rental rates at the shopping center are comparable to market rates. The
Company believes that the shopping center is located within a vibrant economic
area. The Company did not consider any other factors materially relevant to the
decision to acquire the Property.
The Company does not anticipate making any significant repairs and
improvements to Lake Walden Square over the next few years. A substantial
portion of any monies spent on repairs and improvements would be paid by the
tenants, pursuant to the terms of the existing leases.
The Company believes that Lake Walden Square is well located, has excellent
roadway access, attracts high-quality tenants, is well maintained and has been
professionally managed. Lake Walden Square will be subject to competition from
similar Retail Centers within its market area, and its economic performance
could be affected by changes in local economic conditions.
120
<PAGE>
The table below sets forth certain information for the last five calendar
years with respect to the occupancy rate at Lake Walden Square expressed as a
percentage of total gross leasable area and the average effective annual base
rent per square foot:
<TABLE>
<CAPTION>
OCCUPANCY RATE
AS OF EFFECTIVE
DECEMBER 31, ANNUAL RENTAL
YEAR ENDING OF EACH YEAR PER SQUARE FOOT
DECEMBER 31, (%) ($)
- ---------------------------------- ----------------- -----------------
<S> <C> <C>
1997.............................. 84.5 5.89
1996.............................. 84.0 6.48
1995.............................. 87.0 6.56
1994.............................. 90.0 6.68
1993.............................. 80.0 5.76
</TABLE>
Three tenants lease more than 10% of the total gross leasable area of the
Property: Kash N' Karry, a supermarket, K-Mart, a discount department store, and
Carmike Cinemas, a movie theatre. The leases require the payment of base annual
rent, payable monthly as follows:
<TABLE>
<CAPTION>
BASE RENT
% OF TOTAL PER SQUARE
APPROX. GLA OF FOOT PER LEASE TERM
GLA LEASED THE ANNUM ----------------------
LESSEE (SQ. FT.) PROPERTY ($) BEGINNING TO
- -------------------------------- ----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Kash N' Karry................... 46,300 18.15 6.75 Currently 3/31/12
Options(1).................... 6.75 4/1/12 3/31/42
K-Mart.......................... 91,266 35.77 4.20 Currently 3/31/17
Options(2).................... 4.20 4/1/17 5/31/67
Carmike Cinemas................. 25,899 10.15 8.31 Currently 3/31/07
Option 1...................... 9.31 4/1/07 3/31/12
Option 2...................... 9.81 4/1/12 3/31/17
Option 3...................... 10.31 4/1/17 3/31/22
</TABLE>
- ------------------------
(1) There are six successive five-year renewal options at the same base rent per
square foot per annum.
(2) There are ten successive five-year renewal options at the same base rent per
square foot per annum.
For federal income tax purposes, the Company's depreciable basis in Lake
Walden Square will be approximately $10,954,000. Depreciation expense, for tax
purposes, will be computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 40 and 15
years, respectively. Real estate taxes for the tax year ended 1997 (the most
recent tax year for which information is generally available) were $169,230.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
121
<PAGE>
On September 30, 1998, a total of 230,210 square feet was leased to 27
tenants at Lake Walden Square. The following tables set forth certain
information with respect to the amount of and expiration of the leases at this
Community Center:
<TABLE>
<CAPTION>
APPROX. CURRENT RENT PER
GLA LEASED ANNUAL RENT(1) SQUARE FOOT
LESSEE (SQ. FT.) LEASE ENDS RENEWAL OPTIONS ($) ($)
- ---------------------------------------- ----------- ----------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Kash N' Karry........................... 46,300 3/12 6/5 yr. 312,525 6.75
K-Mart.................................. 91,266 3/17 10/5 yr. 383,317 4.20
Carmike Cinemas......................... 25,899 3/07 3/5 yr. 215,220 8.31
Bookland................................ 4,050 9/00 -- 25,000 6.17
Amscot Insurance........................ 1,400 6/01 1/5 yr. 14,000 10.00
Curtis Mathes Home Entertainment
Center................................ 3,084 6/01 -- 33,369 10.82
Mailboxes, Etc.......................... 1,120 7/02 1/5 yr. 15,680 14.00
Crescent Jewelers....................... 1,300 8/01 1/5 yr. 14,300 11.00
Queen Nails............................. 1,300 12/99 -- 13,520 10.40
Sally Beauty Supply..................... 1,600 2/03 -- 16,800 10.50
GTE Phone Mart.......................... 2,400 12/00 1/3 yr. 24,600 10.25
Simply Fashions......................... 2,800 5/00 -- 24,059 8.59
The Associates.......................... 1,600 7/03 1/5 yr. 14,400 9.00
Fantastic Sams.......................... 1,200 2/00 1/5 yr. 14,832 12.36
Aamco Transmissions..................... 4,800 7/02 2/5 yr. 34,800 7.25
Domino's Pizza.......................... 1,295 3/02 2/5 yr. 10,360 8.00
Spec's Music and Movies................. 6,000 2/02 1/5 yr. 72,000 12.00
Edy's Ice Cream......................... 1,244 10/03 1/5 yr. 14,928 12.00
Dr. Longabach........................... 1,600 9/00 1/3 yr. 16,800 10.50
Hao-Hao Chinese Restaurant.............. 3,120 6/01 -- 40,560 13.00
U.S. Army............................... 1,600 7/01 -- 12,000 7.50
Sam's Mens Shop......................... 2,950 12/98 -- 21,240 7.20
Tampa Tribune........................... 6,277 2/02 2/3 yr. 31,385 5.00
Cici's Pizza............................ 3,605 7/08 1/5 yr. 39,294 10.90
Dollar Tree............................. 6,800 6/03 2/5 yr. 38,091 5.60
Home Choice............................. 4,000 7/03 1/5 yr. 32,000 8.00
Advance America Cash.................... 1,600 11/01 1/3 yr. 16,000 10.00
Vacant.................................. 25,945
</TABLE>
- ------------------------
(1) Each tenant, with the exception of Bookland and Simply Fashions, also pays
its proportionate share of real estate taxes, insurance and common area
maintenance costs. In addition, Kash N' Karry, K-Mart, Crescent Jewelers,
Sally Beauty Supply and Simply Fashions pay, as additional rent, a
percentage of gross sales in excess of prescribed amounts.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
122
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BASE PERCENT OF
RENT PER PERCENT OF ANNUAL BASE
ANNUAL BASE SQUARE FOOT TOTAL PROPERTY RENT
APPROX. GLA RENT OF UNDER REPRESENTED REPRESENTED
NUMBER OF OF EXPIRING EXPIRING TOTAL ANNUAL EXPIRING BY EXPIRING BY EXPIRING
YEAR ENDING LEASES LEASES LEASES BASE RENT (1) LEASES LEASES LEASES
DECEMBER 31, EXPIRING (SQ. FT.) ($) ($) ($) (%) (%)
- -------------- --------------- ------------- ------------ ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998.......... 1 2,950 21,240 1,472,216 7.20 1.15 1.44
1999.......... 1 1,300 14,066 1,451,583 10.82 0.51 0.97
2000.......... 5 12,050 105,292 1,445,006 8.74 4.70 7.29
2001.......... 6 12,104 139,981 1,386,146 11.56 4.73 10.01
2002.......... 5 19,492 176,304 1,262,891 9.04 7.61 13.96
2003.......... 5 15,244 125,507 1,092,781 8.23 5.95 11.49
2004.......... -- -- -- 967,274 -- -- --
2005.......... -- -- -- 967,274 -- -- --
2006.......... -- -- -- 967,274 -- -- --
2007.......... 1 25,899 228,170 967,274 8.81 10.11 23.59
</TABLE>
- ------------------------
(1) No assumptions were made regarding the releasing of expired leases. It is
the opinion of the Company's management that the space will be released at
market rates, at the time of releasing.
The Lake Walden Property Partnership owns fee simple title to Lake Walden
Square subject to a first mortgage and loan agreement (the "Mortgage") in favor
of LaSalle National Bank as custodian or trustee for Amresco Commercial Mortgage
Funding L.P., as successor (the "Bank"), and subject to an assignment of leases
and rents, an environmental liabilities agreement, and financing statements, all
securing an indebtedness evidenced by a promissory note (the "Note"), in favor
of the Bank, for a principal sum of $10,250,000. The Note had a principal
balance of $10,173,731 as of September 30, 1998, and accumulates interest on
unpaid principal at the rate of 7.63% per annum, with principal and interest
payable in monthly installments of $72,584.12 and ending on October 1, 2007. The
final payment of the principal balance of $8,937,536 and interest accrued
thereon will be payable on November 1, 2007 (the "Maturity Date"). The loan
cannot be prepaid in whole or in part (except with respect to the application of
casualty or condemnation proceeds) prior to the fifth loan year. During the
fifth loan year, or at anytime thereafter, provided no event of default exists,
the Note may be prepaid in whole, but not in part, on any payment date, provided
proper notice is given and a prepayment penalty is paid. The Note may also be
prepaid in whole without penalty on any payment date during the six months
preceding the Maturity Date.
The Lake Walden Property Partnership incurred certain Affiliates'
Acquisition Debt evidenced by an installment note (the "Installment Note") in
favor of Inland Mortgage Investment Corporation, an Inland Affiliated Company,
which, when incurred, was in the principal amount of $4,287,723. The Installment
Note is guaranteed by IREIC, and secured by financing statements and two pledge
and security agreements executed by the Lake Walden Affiliated Partners. The
Installment Note had a principal balance of $4,216,579 as of September 30, 1998,
and interest only is payable monthly at the rate of 10.9% per annum. A final
balloon payment of the principal amount and all interest will be due on April
30, 2000. Upon each one year anniversary of the Installment Note, a loan fee
equal to 1% of the outstanding principal is due. The entire balance may be
prepaid in whole, or in part, at any time without penalty. The Installment Note
will be paid in full by the Lake Walden Affiliated Partners at the time of
acquisition by the Company of the interests of the Lake Walden Affiliated
Partners in the Lake Walden Property Partnership.
123
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of September 30, 1998 and the pro forma capitalization of the Company as of
that date as adjusted to give effect to the sale of the Minimum Offering as if
200,000 Shares were sold and the application of the estimated Net Proceeds
therefrom as described in "Estimated Use of Proceeds." The information set forth
in the following table should be read in conjunction with the historical
financial statements of the Company included elsewhere in this Prospectus and
the discussion set forth in "Management's Discussion and Analysis of Financial
Condition of the Company--Liquidity" and "--Capital Resources."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------
<S> <C> <C>
HISTORICAL PRO FORMA
---------- ------------
DEBT:
Mortgage notes payable................................................................ $ 0 $ 4,300,000
MINORITY INTEREST IN PARTNERSHIP........................................................ 2,000 2,000
STOCKHOLDERS' EQUITY(2):
Preferred Stock, $.01 par value, 10,000,000 authorized, none outstanding.............. -- --
Common Stock, $.01 par value, 100,000,000 authorized, 20,000 Shares issued and
outstanding historical; 220,000 Shares issued and outstanding pro forma(1).......... 200 2,200
Paid-in Capital....................................................................... 199,800 1,897,800
---------- ------------
Total stockholders' equity.......................................................... 200,000 1,900,000
---------- ------------
Total capitalization................................................................ $ 202,000 $ 6,202,000
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Does not include 200 Shares reserved for issuance on conversion of 200
outstanding LP Common Units of the Operating Partnership, or Shares issuable
upon the exercise of options which may be, but have not been, granted under
the Company's Independent Director Stock Option Plan, or Shares issuable
upon the exercise of Soliciting Dealer Warrants which may be outstanding if
the Minimum Offering is sold.
(2) The Company was originally capitalized in 1998 through the cash contribution
of $200,000 by the Advisor, for which the Advisor received 20,000 Shares,
and through the cash contribution of $2,000 by the Advisor to the Operating
Partnership, for which the Advisor received 200 LP Common Units of the
Operating Partnership.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION OF THE COMPANY
Certain statements in this "Management's Discussion and Analysis of the
Financial Condition of the Company" and elsewhere in this Prospectus constitute
"forward-looking statements". These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the Company's
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors" and "Conflicts of
Interest."
As of the date of this Prospectus, the Company has not yet had any
operations. The Company intends to utilize the proceeds of this Offering as set
forth under "Estimated Use of Proceeds," principally to acquire Properties. The
Company's primary business objective will be to enhance the performance and
value of its Properties through management strategies designed to meet the needs
of an evolving retail marketplace.
124
<PAGE>
LIQUIDITY
The Net Proceeds of the Offering will provide funds to enable the Company to
purchase Properties. It will be the policy of the Company to acquire Properties
free and clear of permanent mortgage indebtedness by paying the entire purchase
price of each Property in cash or for Shares, LP Units, Interests, or a
combination thereof, and to selectively encumber all or certain Properties, if
favorable financing terms are available, following acquisition. The proceeds
from such loans shall be used to acquire additional Properties to increase cash
flow and provide further diversity. The Company has specified three Properties
(the "Initial Properties") for acquisition, which Initial Properties will be
purchased from an Affiliate. In the event that the Offering is not fully sold,
the Company's ability to diversify its investments may be diminished. The
Advisor expects that the cash to be generated from operations of the Initial
Properties, which the Company intends to acquire if sufficient proceeds are
raised in the Offering, will be adequate to pay Total Operating Expenses and
provide Distributions to Stockholders.
Management of the Company will monitor the various qualification tests the
Company must meet to maintain its status as a REIT. Large ownership of the
Shares is tested upon purchase to determine that no more than 50% in value of
the outstanding Shares is owned, directly or indirectly, by five or fewer
persons or entities at any time. Management of the Company also determines, on a
quarterly basis, that the Gross Income, Asset and Distribution Tests as
described in the section of the Prospectus entitled "Federal Income Tax
Considerations--Taxation of the Company--REIT Qualification Tests" are met. On
an ongoing basis, as due diligence is performed by management of both the
Company and the Advisor on potential purchases of Properties or temporary
investment of uninvested capital, management of both entities will determine
that the income from the new asset will qualify for REIT purposes. The Company
intends to qualify as a REIT beginning with the year ended December 31, 1999.
RESULTS OF OPERATIONS
The Advisor is not aware of any known trends or uncertainties, other than
national economic conditions, which have had or which may be reasonably expected
to have a material impact, favorable or unfavorable, on revenues or income from
the acquisition and operation of real properties other than those
referred to herein.
INITIAL PROPERTIES
The Company has rights to acquire three Retail Centers, being the Initial
Properties, of which two are Neighborhood Centers and one is a Community Center.
If sufficient funds are raised in the Offering, the Company, through the
Operating Partnership, will, subject to certain conditions, acquire the Initial
Properties from Affiliates of the Advisor who purchased the Initial Properties
from unaffiliated third parties on behalf of the Company.
The Company believes that the Initial Properties are well-located, have
excellent roadway access, attract high-quality tenants, are well-maintained and
have been professionally managed.
The Initial Properties have a diverse and stable base of tenants and have
historically provided steadily increasing rents which the Company believes is
due to the quality of the Initial Properties, the existence of leases with
contractual rent escalations and the strength of the markets in which the
Initial Properties are located. As of September 30, 1998, approximately 42% of
the leases for the Initial Properties, in terms of Annualized Net Rent, had
contractual rent increases, of which approximately 25% of the Annualized Net
Rent was attributable to leases with specified contractual rent increases and
approximately 17% of the Annualized Net Rent was attributable to leases with
contractual rent increases related to the CPI. Furthermore, as of September 30,
1998, approximately 38% of the Annualized Net Rent is derived from leases
scheduled to expire during the next five years. The three largest tenants in the
Initial Properties, in terms of Annualized Net Rent, are Winn-Dixie, a
supermarket, K-Mart, a discount department store, and Kash N' Karry, a
supermarket. As of September 30, 1998, the 10 largest tenants (based upon
Annualized
125
<PAGE>
Net Rent) in the Initial Properties had leased their space (or other space in
the Initial Properties) for an average of 14.5 years, and accounted for 66% of
Annualized Net Rent.
The acquisition cost of the Initial Properties to the Initial Property
Sellers was approximately $30 million (the "Affiliates' Acquisition Cost"), of
which approximately $5.7 million relates to Merchants Square. The Affiliates'
Acquisition Cost includes the purchase prices paid, plus any Acquisition
Expenses (including expenses for such things as legal, accounting, appraisal,
survey, title, engineering reports and environmental audits; however, see the
Glossary for a more complete explanation of what are included as Acquisition
Expenses) and, plus any financing costs (including expenses such as loan fees or
points or any fee of a similar nature, however designated, but not including
interest on any loans) paid by the Initial Property Sellers to either Affiliates
of TIGI or to third parties. The Initial Properties were subject to aggregate
mortgage debt of approximately $20.6 million as of the acquisition of the
Initial Properties by the Initial Property Sellers (the "Initial Mortgage
Debt"), of which approximately $4.3 million relates to Merchants Square.
In connection with their acquisition of the Initial Properties, the Initial
Property Sellers borrowed approximately $9.4 million from an Affiliate of TIGI
(the "Affiliates' Acquisition Debt"), of which approximately $1.4 million
relates to Merchants Square, to pay the difference between the Affiliates'
Acquisition Cost and the Initial Mortgage Debt. As each of the Initial
Properties is acquired by the Company, the Initial Property Sellers will use the
cash payment received from the Company to retire in full, as of the date of the
Company's closing of such purchases, the Affiliates' Acquisition Debt relating
to that Initial Property.
The following is a list of approximate physical occupancy levels for the
Initial Properties as of December 31, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
GLA LEASED GLA LEASED
AS OF AS OF
PROPERTY 12/31/97 9/30/98
- ------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
NEIGHBORHOOD CENTERS:
Merchants Square Shopping Center................................... 100% 100%
Zephyrhills, Florida
Lake Olympia Square................................................ 99% 95%
Ocoee, Florida
COMMUNITY CENTER:
Lake Walden Square................................................. 84% 90%
Plant City, Florida
</TABLE>
See "Real Property Investments" for a more detailed description of the
Initial Properties.
CAPITAL RESOURCES
As of the date of this Prospectus, the Company has identified only three
Initial Properties in which to invest. If only the Minimum Offering is sold,
only Merchants Square, one of the Initial Properties, will be acquired by the
Company. The operations of the Initial Properties should provide Cash Flow to
the Company, which it intends to use to meet its investment objective of the
payment of regular Distributions to its Stockholders.
The number of Properties to be acquired will depend upon the amount of the
Net Proceeds of the Offering. The Advisor is not aware of any material trends,
favorable or unfavorable, in either capital resources or the outlook for
long-term cash generation, nor does it expect any material changes in the
availability and relative cost of such capital resources, other than as referred
to herein.
126
<PAGE>
The Advisor has guaranteed payment of all Organization and Offering Expenses
(including selling commissions and the Marketing Contribution and the Due
Diligence Expense Allowance) in excess of 15% of the Gross Offering Proceeds of
the Offering and all Organization and Offering Expenses (excluding such selling
expenses) in excess of 5.5% of the Gross Offering Proceeds. In addition, if the
Minimum Offering is not sold, neither IREIC nor the Advisor will be reimbursed
for any Organization and Offering Expenses.
As of the date of this Prospectus, no subscriptions for Shares have been
received from the public. The only funds received to date are from the Advisor's
Company Contribution of $200,000 for 20,000 Shares and the Advisor's Partnership
Contribution of $2,000 to the Operating Partnership for 200 LP Common Units in
the Operating Partnership.
IMPACT OF ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information" was issued in 1997. The
Statement is effective for fiscal years beginning after December 31, 1997. This
Statement requires the Company to report financial and descriptive information
about its reportable operating segments.
INFLATION
Inflation is likely to increase rental income from leases to new tenants and
lease renewals, subject to market conditions, for any Retail Centers acquired by
the Company. The Company's rental income and operating expenses for any
Properties to be owned and operated on a Triple-Net Lease Basis are not likely
to be directly affected by future inflation, since rents are or will be fixed
under those leases and Property expenses are the responsibility of the tenants.
The capital appreciation of Properties leased on Triple-Net Lease Basis is
likely to be influenced by interest rate fluctuations. To the extent that
inflation determines interest rates, future inflation may have an effect on the
capital appreciation of Properties leased on Triple-Net Lease Basis.
YEAR 2000 ISSUES
GENERAL. Throughout this section relating to "Year 2000 Issues," the term
"Company" shall be deemed to include the Company, the Advisor and Affiliates of
the Advisor. Many computer operating systems and software applications were
designed such that the year 1999 is the maximum date that can be processed
accurately. In conducting its business, the Company relies on computers and
operating systems provided by equipment manufacturers, and also on application
software developed internally and, to a limited extent, by outside software
vendors. The Company has assessed its vulnerability to the so-called "Year-2000
Issue" with respect to its equipment and computer systems.
STATE OF READINESS. The Company has identified the following three areas
for "Year-2000" compliance efforts:
BUSINESS COMPUTER SYSTEMS: The majority of the Company's information
technology systems were developed internally and include accounting, lease
management, investment portfolio tracking, and tax return preparation. The
Company has rights to the source code for these applications and employs
programmers who are knowledgeable regarding these systems. The Company has
conducted tests of its internal systems to determine year 2000 compliance,
and these tests have demonstrated that the Company should not experience any
significant adverse effects to its business as a result of the Year-2000
Issue. The Company does not anticipate any material costs relating to its
business computer systems regarding year 2000 compliance since the Company's
critical hardware and software systems use four digits to represent the
applicable year. Therefore, the Company is not currently planning any
independent testing of its critical systems; however, should additional
facts present themselves that would make it prudent for the Company to have
independent testing conducted, the Company will do so. The Company does use
various computers, so-called "PC's", that may run software that may not
127
<PAGE>
use four digits to represent the applicable year. The Company has tested the
PC hardware to determine year 2000 compliance, and the results of these
tests have demonstrated that the Company should not experience any
significant adverse effects to its business as a result of the Year-2000
Issue. It should be noted that such PC's are incidental to the Company's
critical systems.
TENANTS AND SUPPLIERS: The Company will survey proposed tenants,
suppliers and other parties with whom the Company intends to do a
significant amount of business to identify the Company's potential exposure
in the event such parties are not year 2000 compliant. The survey will
consist of a questionnaire, which will be sent to the significant tenants
and suppliers of the Initial Properties by the end of February 1999.
Responses to such questionnaires will be requested to be returned by the end
of March 1999. Since this method involves parties over which the Company has
no control, such as public utility companies, it is difficult, at best, to
judge the status of the outside companies' year 2000 compliance. The Company
will be working closely with all suppliers of goods and services in an
effort to minimize the impact of the failure of any supplier to become year
2000 compliant by December 31, 1999. Currently, the Company is not aware of
any material impact on its business, operations or financial condition due
to year 2000 non-compliance by any of the Company's proposed tenants or
suppliers.
NON-INFORMATION TECHNOLOGY SYSTEMS: In the operation of its Properties,
the Company will acquire equipment with embedded technology such as
microcontrollers, which operate heating, ventilation, and air conditioning
systems, fire alarms, security systems, telephones and other equipment
utilizing time-sensitive technology. The Company will evaluate its potential
exposure and costs if such non-information technology systems are not year
2000 compliant and expects to be able to complete its assessment during the
second quarter of 1999.
YEAR 2000 COSTS. As of the date of this Prospectus, the Company's Advisor
and its Affiliates estimate that costs to achieve year 2000 compliance will not
exceed $50,000 for all such Affiliates. However, as of the date of this
Prospectus, the Company's Advisor and its Affiliates anticipate that only
approximately 3% of these costs will be directly allocated to and paid by the
Company. The balance of the year 2000 compliance costs, approximately 97%, will
be paid by the Advisor and its Affiliates. Total year 2000 compliance costs
incurred by such Affiliates through September 30, 1998 are estimated at
approximately $5,000.
YEAR 2000 RISKS. The most reasonable likely worst case scenario for the
Company with respect to year 2000 non-compliance of its business computer
systems would be the inability to access information which could result in the
failure to issue financial reports. The most reasonable likely worst case
scenario for the Company with respect to year 2000 non-compliance of its tenants
is failure to receive rental income which could result in the Company being
unable to meet cash requirements for monthly expenses and distributions.
However, the Company is permitted to borrow funds to meet distribution
requirements. The most reasonable likely worst case scenario for the Company
with respect to year 2000 non-compliance of its suppliers is the failure to
supply necessary utilities; including, but not limited to heating, as a result
of a malfunctioning of non-information technology systems in some of the
Company's Properties.
CONTINGENCY PLAN. The Company is in the process of formulating a
contingency plan which will be developed by July 1999. The contingency plan may
include printing copies of all computer records during December 1999 to ensure
that such records are not lost in the event that the Company's internal computer
systems become inoperative due to year 2000 non-compliance.
DESCRIPTION OF SECURITIES
The Company was formed under the laws of the State of Maryland. Rights of
Stockholders are governed by the MGCL, the Articles and the Bylaws. The
following summary of the terms of shares of stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
128
<PAGE>
reference to the Articles and Bylaws, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus is a part.
AUTHORIZED STOCK
The Articles provide that the Company may issue up to 100,000,000 shares of
voting Common Stock, par value $.01 per share (collectively, the "Shares";
individually, a "Share"), and 10,000,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"). Upon completion of the Offering and the
consummation of the Formation Transactions, and subject to the assumptions and
exclusions set forth under "Estimated Use of Proceeds," there will be 54,020,000
Shares issued and outstanding and no Preferred Stock issued and outstanding.
As permitted by the MGCL, the Articles contain a provision permitting the
Board, without any action by the Stockholders, to classify or reclassify any
unissued Shares or Preferred Stock into one or more classes or series of shares
of stock 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 of such new class or series
of shares of stock. The Company believes that the power of the Board to issue
additional shares of stock will provide the Company with increased flexibility
in structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional Shares, including possibly Preferred
Stock, will be available for issuance without further action by the Company's
Stockholders, unless action by the Stockholders 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 upon 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 Shares and might otherwise be in the best
interests of the Stockholders.
COMMON STOCK
All of the Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other class or series
of shares of stock and to the provisions of the Articles regarding the
restriction on the transfer of shares of stock, holders of Shares will be
entitled to receive distributions on Shares if, as and when authorized and
declared by the Board out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to the
Stockholders in the event of the liquidation, dissolution or winding-up of the
Company after payment of, or adequate provision for, all known debts and
liabilities of the Company.
Subject to the provisions of the Articles regarding the restrictions on the
transfer of shares of stock, each outstanding Share entitles the holder to one
vote on all matters submitted to a vote of Stockholders, including the election
of Directors. There is no cumulative voting in the election of Directors, which
means that the holders of a majority of the outstanding Shares can elect all of
the Directors then standing for election, and the holders of the remaining
Shares will not be able to elect any Directors.
Holders of Shares have no conversion, sinking fund, redemption, exchange or
appraisal rights, and have no preemptive rights to subscribe for any securities
of the Company. Subject to the provisions of the Articles regarding the
restrictions on transfer of shares of stock, Shares have equal dividend,
distribution, liquidation and other rights.
Under the MGCL and the Articles, the Company cannot dissolve or liquidate,
amend its Articles, merge or consolidate, participate in a share exchange, or
sell all or substantially all its assets other than in the ordinary course of
business, unless approved by the affirmative vote or written consent of
Stockholders holding at least a majority of the shares of stock entitled to vote
on the matter. Notwithstanding the previous sentence, share exchanges in which
the Company is the acquiror and mergers of a 90 percent or more subsidiary into
the Company or a merger in which the Company does not (i) reclassify or change
its outstanding stock, (ii) amend its Articles, or (iii) issue in the merger
more than 20 percent of its existing
129
<PAGE>
stock, do not require Stockholder approval. The Company's Articles provide that
the election of Directors requires a plurality of all the votes cast at a
meeting of Stockholders of the Company at which a quorum is present, and that
the affirmative vote of the holders of a majority of the outstanding voting
shares of the Company may remove any Director with or without cause.
The Company will act as its own registrar and transfer agent for the Shares.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time, in one or more
series, as authorized by the Board. Prior to the issuance of shares of each
series, the Board is required by the MGCL and the Articles to fix for each
series, subject to the provisions of the Articles, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of redemption, as
permitted by Maryland law. Because the Board has the power to establish the
preferences, powers and rights of each series of Preferred Stock, it may afford
the holders of any series of Preferred Stock preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Shares. The issuance of
Preferred Stock could have the effect of delaying or preventing a change of
control of the Company that might involve a premium price for holders of Shares
or otherwise be in their best interest. The Board has no present plans to issue
any Preferred Stock.
The Company represents that it will not offer Preferred Stock to IREIC, the
Sponsor and organizer of the Company, or any of its Affiliates, except on the
same terms as it is offered to all other existing Stockholders or to new
Stockholders; or, the issuance of any such Preferred Stock will be approved by a
majority of the Company's Independent Directors who do not have an interest in
the transaction and who have access, at the Company's expense, to the Company's
or independent legal counsel.
SOLICITING DEALER WARRANTS
In certain instances, the Company has agreed to offer to sell to the Dealer
Manager, one warrant to purchase one Share for every 25 Shares sold by the
Dealer Manager (the "Soliciting Dealer Warrants"), subject to federal and state
securities laws and subject to the issuance of a maximum of 2,000,000 Soliciting
Dealer Warrants to purchase an equivalent number of Shares. The Dealer Manager
has agreed to pay the Company $0.0008 for each Soliciting Dealer Warrant or an
aggregate of $1,600 if all 2,000,000 Soliciting Dealer Warrants are issued.
These warrants will be issued on a quarterly basis commencing 60 days after the
date on which the Shares are first sold pursuant to this Offering, but not until
after the Minimum Offering is sold and the escrowed proceeds therefrom are
released to the Company. The Dealer Manager may retain or reallow Soliciting
Dealer Warrants to the Soliciting Dealers who sold the Shares, except where
prohibited by either federal or state securities laws.
The holder of a Soliciting Dealer Warrant will be entitled to purchase one
Share from the Company at a price of $12 (120% of the initial public offering
price per Share) during the time period beginning one year from the date of the
first issuance of any of the Soliciting Dealer Warrants and ending five years
from the effective date of this Offering (the "Exercise Period"). The exercise
price of the Soliciting Dealer Warrants was set at 120% of the initial public
offering price per Share because that is the minimum exercise price, for which
the Company may issue Soliciting Dealer Warrants in all states permitting the
issuance of such warrants in connection with the sale of Shares to residents of
those states. If, at the time of any exercise of a Soliciting Dealer Warrant,
the then offering price of Shares pursuant to this Prospectus for this Offering
has been increased (which is not presently anticipated), then the exercise price
of each unexercised warrant issued in connection with this Offering shall be
adjusted to be equal to 120% of the then current offering price per Share of the
Shares offered or sold pursuant to this Prospectus. Subject to certain
limitations, the Soliciting Dealer Warrants may not be transferred, assigned,
pledged or hypothecated for a period of one year following the effective date of
the Offering. In addition, no Soliciting Dealer Warrant will be exercisable
until one year from the date of issuance.
130
<PAGE>
A Soliciting Dealer Warrant may not be exercised unless the Shares to be
issued upon the exercise of the Soliciting Dealer Warrant have been registered
or are exempt from registration in the state of residence of the holder of the
Soliciting Dealer Warrant or if a prospectus required under the laws of such
state cannot be delivered to the buyer on behalf of the Company. In addition,
holders of Soliciting Dealer Warrants may not exercise the Soliciting Dealer
Warrants to the extent such exercise would jeopardize the Company's status as a
REIT under the Code. The Company has previously issued no warrants.
The terms of the Soliciting Dealer Warrants, including the exercise price
and the number and type of securities issuable upon exercise of a Soliciting
Dealer Warrant and the number of such Warrants, may be adjusted in the event of
stock dividends, certain subdivisions, combinations and reclassification of
Shares or the issuance to Stockholders of rights, options or warrants entitling
them to purchase Shares or securities convertible into Shares. The terms of the
Soliciting Dealer Warrants also may be adjusted if the Company engages in
certain merger or consolidation transactions or if all or substantially all of
the Company's assets are sold. Soliciting Dealer Warrants are not transferable
or assignable except by the Dealer Manager, the Soliciting Dealers, their
successors in interest, or to individuals who are both officers and directors of
such a Person. Exercise of these Soliciting Dealer Warrants will be under the
terms and conditions detailed in this Prospectus and in the Warrant Purchase
Agreement, which is an exhibit to the Registration Statement.
As holders of Soliciting Dealer Warrants, Persons do not have the rights of
Stockholders, may not vote on Company matters and are not entitled to receive
Distributions.
Holders of the Soliciting Dealer Warrants have, at nominal cost, the
opportunity to profit from a rise in the market price for the Shares without
assuming the risk of ownership. Exercise of these warrants will dilute the
percentage ownership interest of other security holders. Moreover, the holders
of the Soliciting Dealer Warrants might be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain needed capital by a
new offering of its securities on terms more favorable than those provided by
the Soliciting Dealer Warrants.
ISSUANCE OF ADDITIONAL SECURITIES AND DEBT INSTRUMENTS
The Directors are authorized to issue additional Shares or convertible
securities for cash, property or other consideration on such terms as they may
deem advisable and to classify or reclassify any unissued shares of capital
stock of the Company without approval of the holders of such outstanding
securities. Subject to certain restrictions, the Directors may cause the Company
to issue debt obligation, including debt with conversion privileges on more than
one class of capital stock. The Directors may issue debt obligations, including
debt with conversion privileges, on such terms and conditions as the Directors
may determine, whereby the holders thereof may acquire Shares. Subject to
certain restrictions, the Directors may also cause the Company to issue
warrants, options and rights to buy Shares on such terms as they deem advisable
(notwithstanding the possible dilution in the value of the outstanding Shares
which may result from the exercise of such warrants, options or rights to buy
Shares) as part of a ratable issue to Stockholders, as part of a financing
arrangement, or pursuant to certain stock option plans.
RESTRICTIONS ON ISSUANCE OF CERTAIN SECURITIES
The Articles provide that the Company shall not issue: (a) Shares which are
redeemable at the option of the holder; (b) debt securities unless the
historical debt service coverage (in the most recently completed fiscal year) as
adjusted for known charges is sufficient to properly service the higher level of
debt; (c) options or warrants to purchase Equity Stock to the Advisor, the
Sponsor, any Director or Affiliates thereof except on the same terms as sold to
the general public, provided that the Company may issue options or warrants to
persons not affiliated with the Company at exercise prices not less than the
fair market value of such securities on the date of grant and for consideration
(which may include securities that in the judgment of the Independent Directors
have a market value not less than the value of such option on the date of grant
and does include issuance of options to Independent Directors under the
Company's Independent Director Stock Option Plan); options or warrants issuable
to the Advisor, the
131
<PAGE>
Sponsor, any Director or Affiliates thereof shall not exceed an amount equal to
10% of the outstanding Equity Stock on the date of grant of any options or
warrants; or (d) Equity Stock on a deferred payment basis or similar
arrangement;
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things, no
more than 50% in value of its outstanding shares of stock may be beneficially
owned (applying the ownership attribution rules of Sections 542(a)(2) and 544 of
the Code, as modified by Section 856(h)(1)(B) of the Code), by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year (other than the first year for which the election to be
taxed as a REIT has been made) or during a proportionate part of a shorter
taxable year (the "Five or Fewer Requirement"). In addition, if the Company, or
an owner of 10% or more of the Company, actually or "Constructively Owns" (under
the applicable attribution rules of the Code; see the Glossary definition of
"Constructively Owns" for the relevant provisions of the Code) 10% or more of a
tenant of the Company, the rent received by the Company (either directly or
through any partnership) from such tenant will not be qualifying income for
purposes of the REIT gross income tests of the Code. A REIT's stock must also be
beneficially owned by 100 or more Persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year
(other than the first year for which an election to be treated as a REIT has
been made).
BECAUSE THE BOARD BELIEVES IT IS ESSENTIAL FOR THE COMPANY TO CONTINUE TO
QUALIFY AS A REIT, THE ARTICLES PROVIDE THAT, SUBJECT TO CERTAIN EXCEPTIONS
DESCRIBED BELOW, ON OR AFTER JULY 1, 2000, NO PERSON MAY BENEFICIALLY OWN, OR BE
DEEMED TO BENEFICIALLY OWN BY VIRTUE OF THE ATTRIBUTION PROVISIONS OF THE CODE,
SHARES OR PREFERRED STOCK IN EXCESS OF THE OWNERSHIP LIMIT (9.8% IN NUMBER OF
SHARES OR VALUE OF THE OUTSTANDING EQUITY STOCK OF THE COMPANY). THE ARTICLES
FURTHER PROVIDE THAT (A) ON OR AFTER JULY 1, 2000, ANY BENEFICIAL OWNERSHIP,
DIRECTLY OR INDIRECTLY, OF SHARES OR PREFERRED STOCK IN EXCESS OF THE OWNERSHIP
LIMIT (WHENEVER OR HOWEVER SUCH SHARES OR PREFERRED STOCK ARE ACQUIRED), SHALL
BE NULL AND VOID, AND (B) ANY TRANSFER OF SHARES OR PREFERRED STOCK THAT WOULD
(i) ON OR AFTER JULY 1, 2000, RESULT IN ANY PERSON BENEFICIALLY OWNING, DIRECTLY
OR INDIRECTLY, SHARES OR PREFERRED STOCK IN EXCESS OF THE OWNERSHIP LIMIT, (ii)
ON OR AFTER JANUARY 1, 2000, RESULT IN THE SHARES AND PREFERRED STOCK BEING
BENEFICIALLY 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
DIRECTLY OR CONSTRUCTIVELY OWN 10% OR MORE OF THE OWNERSHIP INTERESTS IN A
TENANT OF THE COMPANY'S OR THE OPERATING PARTNERSHIP'S REAL PROPERTY, WITHIN THE
MEANING OF SECTION 856(d)(2)(B) OF THE CODE, SHALL BE NULL AND VOID (EACH A
"NULL TRANSFER"), AND THE INTENDED TRANSFEREE (THE "PROHIBITED OWNER") WILL NOT
ACQUIRE ANY RIGHTS IN SUCH SHARES OR PREFERRED STOCK ATTEMPTED TO BE TRANSFERRED
IN VIOLATION OF THE ABOVE-DESCRIBED RESTRICTIONS IN THE ARTICLES (THE "EXCESS
SHARES").
SUBJECT TO THE EXCEPTIONS DESCRIBED BELOW, TO THE EXTENT THAT ON OR AFTER
JULY 1, 2000, (i) ANY PERSON BENEFICIALLY OWNS, DIRECTLY OR INDIRECTLY, SHARES
OR PREFERRED STOCK IN EXCESS OF THE OWNERSHIP LIMIT OR (ii) AN ATTEMPTED
TRANSFER OF SHARES OR PREFERRED STOCK WOULD RESULT IN A NULL TRANSFER, THE
SHARES OR PREFERRED STOCK SO BENEFICIALLY OWNED OR ATTEMPTED TO BE TRANSFERRED
IN VIOLATION OF THE RESTRICTIONS IN THE ARTICLES WOULD BE DESIGNATED AS "EXCESS
SHARES" AND AUTOMATICALLY TRANSFERRED UNDER THE PROVISIONS OF THE ARTICLES TO
THE COMPANY AS TRUSTEE OF A TRUST (THE "SHARE TRUST") FOR THE EXCLUSIVE BENEFIT
OF THE PERSON OR PERSONS TO WHOM THE SHARES OR PREFERRED STOCK COULD BE
TRANSFERRED WITHOUT CAUSING A NULL TRANSFER. THE ARTICLES REQUIRE THE HOLDER OF
THE CERTIFICATES REPRESENTING THE EXCESS SHARES TO SURRENDER SUCH CERTIFICATES
TO THE COMPANY FOR REGISTRATION IN THE NAME OF THE SHARE TRUST; PROVIDED
HOWEVER, THE FAILURE TO DO SO SHALL NOT AFFECT THE TRANSFER OF THE EXCESS SHARES
TO THE SHARE TRUST DESCRIBED IN THE PRECEDING SENTENCE.
The Excess Shares would continue as issued and outstanding Shares or
Preferred Stock of the Company. While the Excess Shares are held by the Share
Trust, they would not have any voting rights, they would not be considered for
purposes of any Stockholder vote or of determining a quorum for such a vote, and
they would not be entitled to any dividends or other periodic distributions. As
a result, the Prohibited
132
<PAGE>
Owner would be required to repay to the Company any dividends or other
distributions received on the Excess Shares.
The Prohibited Owner would have the right to direct the Share Trust to
transfer the Excess Shares to any Person or Persons to whom the Excess Shares
can be transferred without causing another Null Transfer. In addition, Excess
Shares would be deemed to have been offered for sale to the Company or its
designees for a 90-day period. The 90-day period begins on the later of the date
the Prohibited Owner notifies the Company of its purported acquisition of the
Excess Shares or the date the Board of Directors determines in good faith that a
Null Transfer occurred if no such notice is provided. In the event the Excess
Shares are purchased from the Share Trust, the Prohibited Owner is limited to
receiving payment of a price not in excess of the Prohibited Owner's cost,
whether the purchase is by a Beneficiary or the Company. In the event the Excess
Shares were received by the Prohibited Owner as a gift (or in another
transaction for no consideration), the Prohibited Owner is limited to receiving
a price not in excess of (i) the Market Price (as defined in the next paragraph)
on the date of the gift, in the case of a purchase by the Beneficiary, or (ii)
the lesser of (x) the Market Price on the date of the gift or (y) the Market
Price on the date of purchase by the Company, in the case of a purchase by the
Company.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) per Share for the five consecutive Trading Days (as defined
below) ending on such date. The "Closing Price" on any date shall mean the last
sale price, regular way (as defined below), or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the principal
national securities exchange on which the Shares are listed or admitted to
trading or, if the Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
The Nasdaq Stock Market, Inc. ("Nasdaq") or, if Nasdaq is no longer in use, the
principal automated quotation system that may then be in use or, if the Shares
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Shares selected by the Board or, if there is no professional market maker making
a market in the Shares, the average of the last 10 sales pursuant to the
Offering if the Offering has not concluded, or, if the Offering has concluded,
the average of the last 10 purchases by the Company pursuant to its Share
Repurchase Program (the "SRP"), and if there are fewer than 10 of such purchases
under the SRP, then the average of such lesser number of purchases, or, if the
SRP is not then in existence, the price at which the Company is then offering
Shares to the public if the Company is then engaged in a public offering of
Shares, or if the Company is not then offering Shares to the public, the price
at which a Stockholder may purchase Shares pursuant to the Company's
Distribution Reinvestment Program (the "DRP") if such DRP is then in existence,
or if the DRP is not then in existence, the fair market value of the Shares as
determined by the Company, in its sole discretion. "Trading Day" shall mean a
day on which the principal national securities exchange or national automated
quotation system on which the Shares are listed or admitted to trading is open
for the transaction of business or, if the Shares are not listed or admitted to
trading on any national securities exchange or national automated quotation
system, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of Illinois are authorized or obligated by law
or executive order to close. The term "regular way" means a trade that is
effected in a recognized securities market for clearance and settlement pursuant
to the rules and procedures of the National Securities Clearing Corporation, as
opposed to a trade effected "ex-clearing" for same-day or next-day settlement.
ANY PERSON WHO BENEFICIALLY ACQUIRES OR ATTEMPTS TO ACQUIRE SHARES OR
PREFERRED STOCK IN VIOLATION OF THE FOREGOING RESTRICTIONS, OR ANY PERSON WHO
BENEFICIALLY OWNED OR CONSTRUCTIVELY OWNED SHARES OR PREFERRED STOCK THAT WERE
TRANSFERRED TO A SHARE TRUST, WILL BE REQUIRED (I) TO GIVE IMMEDIATE 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.
133
<PAGE>
THE ARTICLES REQUIRE ALL PERSONS WHO BENEFICIALLY OWN, DIRECTLY OR
INDIRECTLY, MORE THAN 5% (OR SUCH LOWER PERCENTAGES AS REQUIRED PURSUANT TO
REGULATIONS UNDER THE CODE) OF THE OUTSTANDING SHARES AND PREFERRED STOCK,
WITHIN 30 DAYS AFTER JANUARY 1 OF EACH YEAR, TO PROVIDE TO THE COMPANY A WRITTEN
STATEMENT OR AFFIDAVIT STATING THE NAME AND ADDRESS OF SUCH DIRECT OR INDIRECT
BENEFICIAL OWNER, THE NUMBER OF SHARES AND PREFERRED STOCK BENEFICIALLY OWNED
DIRECTLY OR INDIRECTLY, AND A DESCRIPTION OF HOW SUCH SHARES ARE HELD. IN
ADDITION, EACH SUCH BENEFICIAL OWNER SHALL PROVIDE TO THE COMPANY SUCH
ADDITIONAL INFORMATION AS THE COMPANY MAY REQUEST IN ORDER TO DETERMINE THE
EFFECT, IF ANY, OF SUCH BENEFICIAL 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 or
Preferred Stock by an underwriter that participates in a public offering of such
Equity Stock. 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 beneficial ownership of Equity Stock of the Company in
excess of the Ownership Limit would result in the termination of the Company's
status as a REIT.
The Ownership Limit 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 Shares or otherwise be in the best interest of
the Stockholders of the Company, or of compelling a Stockholder to involuntarily
dispose of Equity Stock held in excess of the Ownership Limit.
All certificates representing any Shares or Preferred Stock will bear a
legend referring to the restrictions described above.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE ARTICLES OF INCORPORATION AND
BYLAWS
The following paragraphs summarize certain provisions of Maryland law and of
the Articles and the Bylaws of the Company. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
MGCL, the Articles and the Bylaws of the Company. The business combination
provisions and the control share acquisition provisions of the MGCL, and the
advance notice provisions of the Bylaws could have the affect of delaying,
deferring or preventing a transaction or a change in control of the Company that
might involve a premium price for holders of Shares or otherwise be in their
best interest.
BUSINESS COMBINATIONS. Under the MGCL, certain Business Combinations
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any Interested Stockholder (I.E., any Person who
beneficially owns, directly or indirectly, 10% or more of the voting power of
the Company's outstanding stock or is an affiliate or associate of the Company
who, at any time within the two-year period prior to the date in question, was
the beneficial owner, directly or indirectly, of 10% or more of such voting
power) or any affiliate of an Interested Stockholder are prohibited for five
years after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such Business Combination must be
recommended by the Board and approved by the affirmative vote of at least (a)
80% of the votes entitled to be cast by holders of the Company's outstanding
voting stock, and (b) two-thirds of the votes entitled to be cast by holders of
the Company's outstanding voting stock, other than shares held by the Interested
Stockholder with whom or with whose Affiliate the Business Combination is to be
effected, unless, among other conditions, the Company's common stockholders
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 Stockholder for its shares. These provisions of the MGCL do not
apply, however, to Business Combinations that are approved or exempted by the
Board prior to the time that the Interested Stockholder becomes an Interested
Stockholder. As permitted by the MGCL, the Articles of Incorporation exempts any
Business Combinations involving the issuance of Shares to TIGI or to any
Affiliate of TIGI. Accordingly, the five-year prohibition and the super-majority
vote requirement will not apply to any Business Combinations between any of the
TIGI Affiliated Companies and the Company. As a result, any of the TIGI
Affiliated Companies may be able to enter into Business Combinations with the
Company, which may or may not be in the best interests of the Stockholders,
without the super-majority Stockholder approval.
134
<PAGE>
CONTROL SHARE ACQUISITION. As permitted by the MGCL, the Bylaws contain a
provision exempting from the control share acquisition statute any and all
acquisitions by TIGI or any Affiliate of TIGI. There can be no assurance that
such provision will not be amended or eliminated at any point in the future.
With certain exceptions, the MGCL provides that "Control Shares" of a Maryland
corporation acquired in a Control Share Acquisition have no voting rights except
to the extent approved by a vote of two-thirds of the votes entitled to be cast
on the matter, excluding shares owned by the acquiring Person (the "Acquiror")
or by officers or trustees who are employees of the Company, and may be redeemed
by the Company. "Control Shares" are voting shares which, if aggregated with all
other such shares owned by the Acquiror or in respect of which the Acquiror is
able to exercise or direct the exercise of voting power, would entitle the
Acquiror to exercise voting power in electing Directors 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 Acquiror is then
entitled to vote as a result of having previously obtained Stockholder approval.
A Control Share Acquisition means, subject to certain exceptions, the
acquisition, directly or indirectly, by any Person of ownership of, or the power
to direct the exercise of voting power with respect to, issued and outstanding
Control Shares. 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 to call a special meeting of Stockholders
to be held within 50 days of demand to consider the voting rights of such
Control Shares. If no request for a meeting is made, the Company may itself
present the question at any Stockholders' meeting.
MEETINGS OF STOCKHOLDERS. The Articles and Bylaws provide for annual
meetings of Stockholders, commencing with the year 2000, to elect the Board and
transact such other business as may properly be brought before the meeting.
Special meetings of Stockholders may be called by the President, a majority of
the Directors or a majority of the Independent Directors, and shall be called at
the request in writing of the holders of 10% or more of the outstanding shares
of the Company entitled to vote. See "Summary of the Organizational
Documents--Stockholders' Meetings" for additional information regarding
Stockholders' meetings, including notice requirements and certain costs payable
by a Stockholder calling a special meeting. See "Summary of the Organizational
Documents--Advance Notice of Director Nominations and New Business" for
information concerning the advance notice provisions in the Bylaws.
The Bylaws provide that any action required or permitted to be taken at a
meeting of Stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
Stockholder entitled to vote on the matter and a written waiver of any right to
dissent is signed by each Stockholder entitled to notice of the meeting but not
entitled to vote at such meeting.
CERTAIN RESPONSIBILITIES AND INDEMNIFICATION. See "Certain Responsibilities
of Directors and The Advisor; Indemnification" above for an explanation of
certain responsibilities of Directors and the Advisor and limitations on their
liability and indemnification.
SHARES ELIGIBLE FOR FUTURE SALE
SHARES TO BE OUTSTANDING OR ISSUABLE UPON EXERCISE OR CONVERSION OF OTHER
OUTSTANDING SECURITIES
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have outstanding 54,020,000 Shares, assuming all
50,000,000 Shares offered on a best efforts basis and all 4,000,000 Shares to be
issued pursuant to the DRP are sold and that there is no exercise of options or
warrants expected to be outstanding and exercisable. In addition, the Company
has reserved (i) 2,000,000 Shares for issuance upon exercise of up to 2,000,000
Soliciting Dealer Warrants, (ii) 75,000 Shares for issuance upon exercise of
options which may be granted pursuant to the Company's Independent Director
Stock Option Plan, and (iii) 200 Shares for issuance upon the exchange of 200 LP
Common Units of the Operating Partnership issued to the Advisor for the
Advisor's Partnership Contribution. Subject to the provisions of the Articles,
including the number of authorized shares of Equity Stock, the
135
<PAGE>
Company could issue an undetermined number of Shares or Preferred Stock (i)
directly for equity interests in Properties or (ii) upon exchange of any LP
Units (other than the Advisor's 200 LP Common Units) in the Operating
Partnership, or of any Interests in Property Partnerships, which might be issued
for equity interests in Properties. All of the Shares sold in the Offering
offered hereby will be freely tradable in the public market, if any, by persons
other than "Affiliates" of the Company and Soliciting Dealers considered
underwriters without restriction or limitation under the Securities Act of 1933,
as amended (the "Act"), except however, they will be subject to the restrictions
explained under "Description of Securities-- Restrictions on Ownership and
Transfer."
SECURITIES ACT RESTRICTIONS
The Shares owned by "Affiliates" of the Company and the Shares issuable upon
exchange of LP Units (other than those issued pursuant to registration rights,
as described below), will be subject to Rule 144 ("Rule 144") promulgated under
the Act (if Rule 144 is then applicable to the proposed transactions involving
the Shares) and may not be sold in the absence of registration under the 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) for at least one year,
and including the holding period of any prior owner unless such prior owner is
an Affiliate, would be entitled to sell within any three-month period a number
of Shares that does not exceed the greater of 1% of the then-outstanding number
of Shares or the average weekly reported trading volume of the Shares on a
national securities exchange or market 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, for purposes of the Act, is a
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or under common control with, the Company.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
The Company has established the Independent Director Stock Option Plan for
the purpose of attracting and retaining Independent Directors. See
"Management--Independent Director Stock Option Plan." The Company will issue in
the aggregate options to purchase 9,000 Shares to the Independent Directors
(options to purchase 3,000 Shares as to each of the three Independent Directors)
at the exercise price of $9.05 per Share, when, and if, the Company has 90,000
Shares issued and outstanding, one-third of which will be exercisable upon their
grant. An additional 66,000 Shares will be available for future option grants
under the Independent Director Stock Option Plan. See "Management--Independent
Director Stock Option Plan" for additional information regarding the Independent
Director Stock Option Plan. Rule 701 under the Act provides that Shares acquired
on the exercise of outstanding options by Affiliates may be resold by them
beginning 90 days after the date of this Prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. The Company intends to
register the Shares to be issued under the Independent Director Stock Option
Plan in a registration statement or statements on Form S-8.
136
<PAGE>
SOLICITING DEALER WARRANTS
The Company will issue up to 2,000,000 Soliciting Dealer Warrants in
connection with the Offering, which will allow the holders to purchase up to
2,000,000 Shares upon the terms specified in the Soliciting Dealer Warrants. See
"Description of Securities--Soliciting Dealer Warrants" for a description of the
Soliciting Dealer Warrants.
EFFECT OF AVAILABILITY OF SHARES ON MARKET PRICE OF SHARES
Prior to the date of this Prospectus, there has been no public market for
the Shares. No assurance can be given that a public market for the Shares will
develop. No prediction can be made as to the effect, if any, that future sales
of Shares (including sales pursuant to Rule 144) or the availability of Shares
for future sale will have on the market price, if any, prevailing from time to
time. Sales of substantial amounts of Shares (including Shares issued upon the
exercise of options or the exchange of LP Units or Interests), or the perception
that such sales could occur, could adversely affect prevailing market prices of
the Shares and impair the Company's ability to obtain additional capital through
the sale of equity securities. See "Risk Factors--Investment Risks--Possible
Adverse Effects on Share Price Arising from Shares Eligible for Future Sale."
For a description of certain restrictions on transfers of Shares, see
"Description of Securities--Restrictions on Ownership and Transfer." Also, see
the following two paragraphs regarding conversion, redemption and registration
rights pertaining to LP Common Units.
CONVERSION AND REDEMPTION RIGHTS
Pursuant to the terms of the Operating Partnership Agreement and subject to
certain conditions, each LP Common Unit may be converted into that number of
Shares which shall have a Market Price as of the date of conversion equal to the
"Net Equity Value" of the Property or Properties (such Net Equity Value being as
of the date of contribution of the Property or Properties) contributed by such
holder divided by the total number of Units received by such holder for such
Property or Properties (the "Conversion Shares"); provided, however, that at the
option of the Company, the Company may satisfy the conversion right with respect
to all or any portion of the Conversion Shares by delivering cash in lieu of
such Conversion Shares in an amount equal to the Market Price on the date of
conversion of such Conversion Shares. The decision to exercise this right shall
be made by the Company on a case by case basis in its sole and absolute
discretion. The "Net Equity Value" of a Property as of the date of contribution
of the Property to the Operating Partnership, generally, will be the purchase
price of the Property to the Operating Partnership (I.E., its fair market
value), less the amount, as of the date of such contribution, of any liabilities
(E.G., mortgages or other monetary encumbrances) to which the Property is
subject or which are assumed by the Operating Partnership in connection with
such contribution. It is contemplated that the Limited Partner contributing such
Property and the General Partner of the Operating Partnership will agree upon
the amount of the Net Equity Value at the time of such contribution.
Pursuant to the terms of the Operating Partnership Agreement and subject to
certain conditions, each holder of an LP Common Unit will have the right to have
all or any portion of his LP Common Units redeemed. The redemption price for
each LP Common Unit shall be equal to the Net Equity Value of the Property or
Properties (on the date of contribution of the Property or Properties)
contributed by such holder divided by the total number of Units received by such
holder for such Property or Properties; provided, however, at the option of the
Company, the Company may satisfy the redemption right with respect to all or any
portion of the Units being offered for redemption by delivering Shares having a
Market Price as of the date the holder exercises such redemption right equal to
the amount of the redemption price for such Units. The decision to exercise this
right shall be made by the Company on a case by case basis in its sole and
absolute discretion.
In order to protect the Company's status as a REIT, the Company and each
holder of LP Units are prohibited from exchanging LP Units for Shares under
certain circumstances. See "Operating Partnership
137
<PAGE>
Agreement--Limited Partner Conversion Rights "--Limited Partner Redemption
Rights" for an explanation of those circumstances. See also "Operating
Partnership Agreement--Extraordinary Transactions" for a discussion of
conversion rights triggered by mergers and other major transactions.
Similar conversion and redemption rights may be given to holders of other
classes of Units in the Partnership and to holders of Interests in the Property
Partnerships, if any.
REGISTRATION RIGHTS
Although there are no current agreements to do so, in the future the Company
may grant Stockholders, if any, receiving Shares directly for their equity
interests in Properties, Persons, if any, receiving Interests in any Property
Partnership for their interests in Properties, and Limited Partners, if any,
receiving LP Units in the Operating Partnership for their interests in
Properties, certain "demand" and/or "piggyback" registration rights
(collectively, the "Registration Rights") for registration under the Act of any
Shares acquired by them directly or pursuant to the terms and conditions of the
applicable Operating Partnership Agreement or Property Partnership agreement
upon exchange of their Units in the Operating Partnership or their Interests in
Property Partnerships. The terms and conditions of any agreements for
Registration Rights will be negotiated and determined at such future time as the
Company determines advisable in connection with the acquisition of one or more
Properties.
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS
Each Stockholder is bound by and deemed to have agreed to the terms of the
Organizational Documents by his, her or its election to become a Stockholder.
The Organizational Documents, consisting of the Articles and Bylaws, were
reviewed and ratified unanimously by the Directors (including all of the
Independent Directors) at the first meeting of the Board. The following is a
summary of certain provisions of the Organizational Documents and does not
purport to be complete. This summary is qualified in its entirety by specific
reference to the Organizational Documents filed as exhibits to the Company's
Registration Statement of which this Prospectus is a part. See "Additional
Information."
The Articles in their present form became operative on February 3, 1999,
when they were filed in Maryland, and provide for the Company to have perpetual
existence. The Bylaws in their present form became operative on January 25,
1999, when the Board approved them. Neither the Articles nor the Bylaws have an
expiration date. Accordingly, they will remain operative in their current form
throughout the Company's existence, unless and until (i) the dissolution or
termination of the Company pursuant to the procedures in the MGCL (see
"--Dissolution or Termination of the Company" in this Section) or (ii) their
amendment (see "--Amendment of the Organizational Documents" in this Section).
CERTAIN ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
Stockholders' rights and related matters are governed by the Maryland
General Corporation Law ("MGCL"), the Articles and Bylaws. Certain provisions of
the Articles and Bylaws, which are summarized below, may make it more difficult
to change the composition of the Board and may discourage or make more difficult
any attempt by a Person or group to obtain control of the Company.
STOCKHOLDERS' MEETINGS
As provided in the Bylaws, an annual meeting of the Stockholders shall be
held on the first Tuesday in May of each year or on such other day in May as the
Board may determine; provided however, such meeting shall not be held less than
30 days after the delivery of the Company's annual report to the Stockholders.
The purpose of each annual meeting of the Stockholders is to elect Directors and
to transact such other business as may properly come before the meeting. A
special meeting of the Stockholders may be called by the Chairman, the
President, a majority of the Directors or a majority of the Independent
Directors, and shall be called by the Secretary or another officer of the
Company upon written request of
138
<PAGE>
the Stockholders holding in the aggregate not less than 10% of the outstanding
shares entitled to vote. Upon receipt of such a written request, either in
person or by mail, stating the purpose(s) of the meeting and the matters to be
acted upon, the Company shall inform the Stockholders making the request of the
reasonably estimated cost of preparing and mailing a notice of such meeting.
Upon payment to the Company of such costs, the Company shall provide all
Stockholders, written notice, either in person or by mail, of a meeting and the
purpose of such meeting to be held on a date not less than 15 nor more than 60
days after the distribution of such notice, at a time and place specified in the
request. Except as provided in the preceding sentence, notice of any annual or
special meeting of Stockholders shall be given not less than 10 nor more than 90
days before the meeting and shall state the purpose of the meeting and the
matters to be acted upon. At any meeting of the Stockholders, each Stockholder
is entitled to one vote for each Share owned of record on the applicable record
date. In general, the presence in person or by proxy of a majority of the
outstanding Shares shall constitute a quorum, and the majority vote of the
Stockholders will be binding on all Stockholders of the Company.
BOARD OF DIRECTORS
The Articles and Bylaws provide that the number of Directors of the Company
may not be fewer than three nor more than eleven, a majority of which will be
Independent Directors. A vacancy in the Board caused by the death, resignation
or incapacity of a Director or by an increase in the number of Directors (within
the limits described above) may be filled by the vote of a majority of the
remaining Directors. With respect to a vacancy created by the death, resignation
or incapacity of an Independent Director, the remaining Independent Directors
must nominate a replacement. Vacancies occurring as a result of the removal of a
Director by Stockholders must be filled by a majority vote of the Stockholders.
Any Director may resign at any time and may be removed with or without cause by
the Stockholders owning at least a majority of the outstanding Shares.
A Director must have at least three years of relevant experience and
demonstrate the knowledge required to successfully acquire and manage the type
of assets being acquired by the Company. At least one of the Independent
Directors shall have three years of relevant real estate experience.
STOCKHOLDER VOTING RIGHTS
Each Share has one vote on each matter submitted to a vote of Stockholders.
Shares do not have cumulative voting rights nor preemptive rights. Stockholders
may vote in person or by proxy.
All elections for Directors are decided by the affirmative vote of a
majority of votes cast at a meeting, provided that a quorum was present when the
meeting commenced (defined as a majority of the aggregate number of votes
entitled to be cast thereon). Any or all Directors may be removed, with or
without cause, by the affirmative vote of the holders of at least a majority of
the outstanding voting shares of Equity Stock entitled to vote at an annual or
special meeting. All other questions must be decided by a majority of the votes
cast at a meeting. The MGCL provides that any action required or permitted to be
taken at a meeting of Stockholders may be taken without a meeting by the
unanimous written consent of all Stockholders.
Without approval of a majority of the outstanding voting shares of Equity
Stock, the Directors may not: (a) amend the Articles, (b) sell all or
substantially all of the Company's assets other than in the ordinary course of
the Company's business or in connection with liquidation and dissolution; (c)
cause certain mergers, consolidations or share exchanges of the Company; or (d)
dissolve or liquidate the Company. The Company shall deem, and the Articles
provide, that a sale of two-thirds or more of the Company's assets, based on the
total number of Properties and mortgages owned by the Company, or the current
fair market value of such Properties and mortgages, as a sale of "substantially
all of the Company's assets." See "Description of Securities--Common Stock" for
an explanation of certain instances where Stockholder approval is not required.
139
<PAGE>
With respect to voting shares of Equity Stock owned by the Advisor, the
Sponsor, the Directors or any Affiliate, neither the Advisor, the Sponsor, the
Directors, nor any Affiliate may vote or consent on matters submitted to the
Stockholders regarding the removal of the Advisor, the Sponsor, the Directors or
any Affiliate or any transaction between the Company and any of them. In
determining the requisite percentage and interest of Shares necessary to approve
a matter on which the Advisor, the Sponsor, the Directors and any Affiliate may
not vote or consent, any Shares owned by them shall not be included.
STOCKHOLDER LISTS; INSPECTION OF BOOKS AND RECORDS
Any Stockholder and any designated representative thereof shall be permitted
access to all records of the Company at all reasonable times, and may inspect
and copy any of them for the purposes specified below. An alphabetical list of
names, record addresses and business telephone numbers (if any) of all
Stockholders with the number of Shares held by each (the "Stockholder List"), is
maintained as part of the books and records of the Company at the Company's
principal office. The Stockholder List is updated at least quarterly and is open
for inspection by a Stockholder or his designated agent upon such Stockholder's
request. The purposes for which a Stockholder may request a copy of the
Stockholder List include: matters relating to the Stockholder's voting rights
and the exercise of the Stockholder's rights under federal proxy laws. The
Stockholder List will also be mailed to any Stockholder requesting the list
within 10 days of receipt of a request. The Company may impose a reasonable
charge for expenses incurred in reproducing the Stockholder List.
If the Advisor or the Directors of the Company neglect or refuse to exhibit,
produce or mail a copy of the Stockholder List as requested in accordance with
and as required by applicable law and the Articles, the Advisor and the
Directors shall be liable to any Stockholder requesting the Stockholder List,
for the costs, including reasonable attorneys' fees, incurred by that
Stockholder for compelling the production of the Stockholder List, and for
actual damages suffered by any Stockholder by reason of such refusal or neglect.
It shall be a defense to such liability that the actual purpose and reason for
the requests for inspection or for a copy of the Stockholder List is to secure
such list of Stockholders or other information for the purpose of selling such
Stockholder List or copies thereof, or of using the same for a commercial
purpose or other purpose not in the interest of the applicant as a Stockholder
relative to the affairs of the Company. The Company may require the Stockholder
requesting the Stockholder List to represent that the Stockholder List is not
requested for a commercial purpose unrelated to the Stockholder's interest in
the Company. The remedies provided hereunder to Stockholders requesting copies
of the Stockholder List are in addition to, and shall not in any way limit,
other remedies available to the Stockholders under federal law, or the laws of
any state.
In addition, the books and records of the Company are open for inspection by
state securities administrators upon reasonable notice and during normal
business hours at the principal place of business of the Company.
AMENDMENT OF THE ORGANIZATIONAL DOCUMENTS
The Articles may be amended by the affirmative vote of a majority of the
then outstanding voting shares of Equity Stock. The Bylaws may be amended in a
manner not inconsistent with the Articles by a majority vote of the Directors.
DISSOLUTION OR TERMINATION OF THE COMPANY
The Company is a Maryland corporation which may be dissolved pursuant to the
procedures set forth in the MGCL at any time with the approval of a majority of
the outstanding shares of stock. However, the Company anticipates that, within
five years of the date of this Prospectus, the Board will determine whether to:
(i) apply to have the Shares listed for trading on a national stock exchange or
included for
140
<PAGE>
quotation on a national market system, provided the Company meets the then
applicable listing requirements; and/or (ii) commence subsequent offerings after
completion of this Offering. If listing of the Shares is not feasible by that
time, the Board may decide to: (i) sell the Company's assets individually; (ii)
list the Shares at a future date; or (iii) liquidate the Company within 10 years
of the date thereof.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that: (a) with respect to an annual meeting of
Stockholders, nominations of persons for election to the Board and the proposal
of business to be considered by Stockholders may be made only: (i) pursuant to
the Company's notice of the meeting; (ii) by or at the direction of the Board;
or (iii) by a Stockholder who is entitled to vote at the meeting and has
delivered proper notice to the Secretary of the Company at the Company's
principal executive offices, not less than 45 days before the date on which the
Company first mailed its notice of meeting and any accompanying proxy materials
for the prior year's annual meeting of Stockholders; and (b) with respect to
special meetings of Stockholders, only the business specified in the Company's
notice of meeting may be brought before the meeting of Stockholders, and
nominations of persons for election to the Board may be made only: (i) pursuant
to the Company's notice of the meeting; (ii) by or at the direction of the
Board; or (iii) provided that the Board has determined that Directors shall be
elected at such meeting, by a Stockholder who is entitled to vote at the meeting
and has delivered proper notice to the Secretary of the Company at the Company's
principal executive offices, not earlier than the 90th day prior to such special
meeting, and not later than the close of business on the later of the 60th day
prior to the special meeting or the tenth day following the first public
announcement of the date of the special meeting and of the nominees for
Directors proposed by the Board.
RESTRICTIONS ON CERTAIN CONVERSION TRANSACTIONS AND ROLL-UPS
The Articles require that, until the Board determines that it is no longer
in the best interests of the Company to attempt, or continue, to qualify as a
REIT, certain transactions involving the acquisition, merger, conversion or
consolidation, directly or indirectly, of the Company in which the Stockholders
receive securities in a surviving entity, called a "Roll-Up Entity," shall be
approved by the holders of a majority of the Shares, except for any such
transaction effected because of changes in applicable law, or to preserve tax
advantages for a majority in interest of the Stockholders.
In connection with a proposed Roll-Up, as defined below, an appraisal of all
of the Company's assets must be obtained from a Person with no current or prior
business or personal relationship with the Advisor or the Directors. Further,
such Person must be engaged, to a substantial extent, in the business of
rendering valuation opinions of assets held by the Company (an "Independent
Expert"). The appraisal will be included in a prospectus used to offer the
securities of a Roll-Up Entity, as defined below, and filed with the Commission
and the state regulatory commissions as an exhibit to the registration statement
for the offering of the Roll-Up Entity's shares. Accordingly, an issuer using
the appraisal will be subject to liability for violation of Section 11 of the
Act and comparable provisions under state laws for any material
misrepresentations or material omissions in the appraisal. The Company's assets
shall be appraised in a consistent manner and the appraisal shall: (i) be based
on an evaluation of all relevant information, (ii) indicate the value of the
Company's assets as of a date immediately prior to the announcement of the
proposed Roll-Up transaction, and (iii) assume an orderly liquidation of the
Company's assets over a 12-month period. The terms of the engagement of the
Independent Expert shall clearly state that the engagement is for the benefit of
the Company and its Stockholders. A summary of the independent appraisal,
indicating all material assumptions underlying the appraisal, shall be included
in a report to the Stockholders in connection with a proposed Roll-Up. A
"Roll-Up" is a transaction involving the acquisition, merger, conversion or
consolidation, either directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity, as defined below. A "Roll-Up" does not include:
(i) a transaction involving securities of the Company that have been listed on a
national securities exchange or traded through The
141
<PAGE>
Nasdaq Stock Market--Nasdaq National Market for at least 12 months; or (ii) a
transaction involving the conversion of the Company to trust or association form
if, as a consequence of the transaction, there will be no significant adverse
change in any of the following: (a) Stockholders' voting rights; (b) the term
and existence of the Company; (c) Sponsor or Advisor compensation; or (d) the
Company's investment objectives. A "Roll-Up Entity" is a partnership, REIT,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
Notwithstanding the foregoing, the Company may not participate in any
proposed Roll-Up which would:
(i) result in the Stockholders having rights to meetings less frequently or
which are more restrictive to Stockholders than those provided in the
Articles;
(ii) result in the Stockholders having voting rights that are less than
those provided in the Articles;
(iii) result in the Stockholders having greater liability than as provided
in the Articles;
(iv) result in the Stockholders having rights to receive reports that are
less than those provided in the Articles;
(v) result in the Stockholders having access to records that are more
limited than those provided in the Articles;
(vi) include provisions which would operate to materially impede or
frustrate the accumulation of Shares by any purchaser of the
securities of the Roll-Up Entity, except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity;
(vii) limit the ability of an investor to exercise the voting rights of its
securities in the Roll-Up Entity on the basis of the number of the
Shares held by that investor;
(viii) result in investors in the Roll-Up Entity having rights of access to
the records of the Roll-Up Entity that are less than those provided in
the Articles; or
(ix) place any of the costs of the transaction on the Company if the
Roll-Up is not approved by the Stockholders;
provided, however, that the Company may participate in a proposed Roll-Up if the
Stockholders would have rights and be subject to restrictions comparable to
those contained in the Articles, with the prior approval of a majority of the
Stockholders.
Stockholders who vote "no" on the proposed Roll-Up shall have the choice of:
(i) accepting the securities of the Roll-Up Entity offered in the proposed
Roll-Up; or
(ii) one of either:
(a) remaining as Stockholders of the Company and preserving their
interests therein on the same terms and conditions as previously
existed; or
(b) receiving cash in an amount equal to the Stockholders' pro rata share
of the appraised value of the net assets of the Company.
The foregoing provisions in the Articles, Bylaws and the MGCL could have the
effect of discouraging a takeover or other transaction in which holders of some,
or a majority, of the Shares might receive a premium for their Shares over the
then prevailing market price or which these holders might believe to be
otherwise in their best interests.
142
<PAGE>
The limitations and restrictions set forth below under "--Limitation on
Total Operating Expenses," "--Transactions with Affiliates," and "--Restrictions
on Borrowing" in this Section shall be effective until such time as the Board
shall determine that it is no longer in the best interests of the Company or its
Stockholders that the Company continue to operate as a REIT, or until such time
as the Company shall fail to qualify as a REIT.
LIMITATION ON TOTAL OPERATING EXPENSES
The Articles provides that, subject to the conditions described in the
following paragraph, the annual Total Operating Expenses of the Company shall
not exceed in any fiscal year the greater of 2% of the Average Invested Assets
of the Company or 25% of the Company's Net Income. The Independent Directors
have a fiduciary responsibility to limit the Company's annual Total Operating
Expenses to amounts that do not exceed the limitations described above. The
Independent Directors may, however, determine that a higher level of Total
Operating Expenses is justified for such period because of unusual and
non-recurring expenses. Any such finding by the Independent Directors and the
reasons in support thereof shall be recorded in the minutes of the meeting of
Directors. Within 60 days after the end of any fiscal quarter of the Company for
which Total Operating Expenses (for the 12 months then ended) exceed 2% of
Average Invested Assets or 25% of Net Income, whichever is greater, as described
above, there shall be sent to the Stockholders a written disclosure of such
fact. If the Independent Directors determine that such higher Total Operating
Expenses are justified, such disclosure will also contain an explanation of the
Independent Directors' conclusion. In the event the Total Operating Expenses
exceed the limitations described above and if the Independent Directors are
unable to conclude that such excess was justified then, within 60 days after the
end of the Company's fiscal year, the Advisor shall reimburse the Company the
amount by which the aggregate annual Total Operating Expenses paid or incurred
by the Company exceed the limitation.
TRANSACTIONS WITH AFFILIATES
The Articles impose certain restrictions on transactions between the Company
and the Advisor, the Sponsor, any Director or Affiliates thereof, as follows:
(i) SALES AND LEASES TO COMPANY. The Company shall not purchase
Property from the Sponsor, Advisor, Directors or any Affiliate thereof,
unless a majority of Directors (including a majority of Independent
Directors) not otherwise interested in such transaction approve the
transaction as being fair and reasonable to the Company and at a price to
the Company no greater than the cost of the asset to such Sponsor, Adviser,
Director or any Affiliate thereof, or if the price to the Company is in
excess of such cost, that substantial justification for such excess exists
and such excess is reasonable. In no event shall the cost of such Property
to the Company exceed its appraised value at the time of its acquisition by
the Company.
(ii) SALES AND LEASES TO SPONSOR, ADVISOR, DIRECTOR OR ANY
AFFILIATE. A Sponsor, Advisor, Director or any Affiliate thereof shall not
acquire assets from the Company unless approved by a majority of Directors
(including a majority of Independent Directors), not otherwise interested in
such transaction, as being fair and reasonable to the Company. The Company
may lease assets to a Sponsor, Advisor, Director or any Affiliate thereof
only if approved by a majority of the Directors (including a majority of
Independent Directors), not otherwise interested in such transaction, as
being fair and reasonable to the Company.
(iii) LOANS. No loans may be made by the Company to the Sponsor,
Advisor, Director or any Affiliate thereof except as provided in clauses
(iv) and (vi) under "--Restrictions on Investments" below in this Section,
or to wholly owned subsidiaries of the Company. The Company may not borrow
money from the Sponsor, Advisor, Director or any Affiliate thereof, unless a
majority of Directors (including a majority of Independent Directors) not
otherwise interested in such transactions, approve
143
<PAGE>
the transaction as being fair, competitive and commercially reasonable and
no less favorable to the Company than loans between unaffiliated parties
under the same circumstances.
(iv) INVESTMENTS. The Company shall not invest in joint ventures with
the Sponsor, Advisor, Director or any Affiliate thereof, unless a majority
of Directors (including a majority of Independent Directors) not otherwise
interested in such transactions, approve the transaction as being fair and
reasonable to the Company and on substantially the same terms and conditions
as those received by the other joint ventures. The Company shall not invest
in equity securities unless a majority of Directors (including a majority of
Independent Directors) not otherwise interested in such transaction approve
the transaction as being fair, competitive, and commercially reasonable.
(v) OTHER TRANSACTIONS. All other transactions between the Company and
the Sponsor, Advisor, Director or any Affiliate thereof, shall require
approval by a majority of the Directors (including a majority of Independent
Directors) not otherwise interested in such transactions as being fair and
reasonable to the Company and on terms and conditions not less favorable to
the Company than those available from unaffiliated third parties.
RESTRICTIONS ON BORROWING
The Company may not incur indebtedness to enable it to make Distributions
except as necessary to satisfy the requirement that the Company distribute at
least 95% of its REIT Taxable Income, or otherwise as necessary or advisable to
ensure that the Company maintains its qualification as a REIT for federal income
tax purposes. The aggregate borrowings of the Company, secured and unsecured,
shall be reasonable in relation to the Net Assets of the Company and reviewed by
the Board at least quarterly. The Company anticipates that, in general,
aggregate borrowings secured by all of the Company's Properties will not exceed
55% of their combined fair market value. This anticipated amount of leverage
will be achieved over time; however, initially the aggregate borrowings on the
Initial Properties will exceed 55% of their combined fair market value. The
Articles provide that the aggregate amount of borrowing in relation to the
Company's Net Assets shall, in the absence of a satisfactory showing that a
higher level of borrowing is appropriate, not exceed 300% of Net Assets. Any
excess in borrowing over such 300% of Net Assets level shall be (i) approved by
a majority of the Independent Directors, (ii) disclosed to Stockholders in the
Company's next quarterly report to Stockholders, along with justification for
such excess, and (iii) subject to approval of the Stockholders. See "Investment
Objectives and Policies--Borrowing."
RESTRICTIONS ON INVESTMENTS
The investment policies set forth in the Articles have been approved by a
majority of Independent Directors. The Articles prohibits investments in: (i)
any foreign currency or bullion; (ii) short sales; and (iii) any security in any
entity holding investments or engaging in activities prohibited by the Articles.
In addition to other investment restrictions imposed by the Directors from
time to time consistent with the Company's objective to qualify as a REIT, the
Company observes the following restrictions on its investments as set forth in
its Articles:
(i) Not more than 10% of the Company's total assets will be invested in
unimproved real property or mortgage loans on unimproved real property.
For purposes of this paragraph, "unimproved real properties" does not
include properties under construction, under contract for development
or plan for development within one year. The Company does not intend to
invest in any unimproved real property which is not intended to be
developed;
(ii) The Company shall not invest in commodities or commodity future
contracts. This limitation does not apply to interest rate futures
when used solely for hedging purposes;
(iii) The Company shall not invest in contracts for the sale of real estate;
144
<PAGE>
(iv) The Company shall not invest in or make mortgage loans unless an
appraisal of the underlying Property is obtained. Mortgage
indebtedness on any Property shall not exceed the Property's appraised
value. In cases in which the majority of Independent Directors so
determine, and in all cases in which the mortgage loan involves the
Advisor, the Sponsor, the Directors or any Affiliates, the appraisal
must be obtained from an Independent Expert. The appraisal shall be
maintained in the Company's records for at least five years, and shall
be available for inspection and duplication by any Stockholder. In
addition to the appraisal, a mortgagee's or owner's title insurance
policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real
estate contracts of sale otherwise known as land sale contracts;
(v) The Company shall not make or invest in mortgage loans, including
construction loans, on any one Property if the aggregate amount of all
mortgage loans outstanding secured by the Property, including the loans
of the Company, would exceed an amount equal to 85% of the appraised
value of the Property as determined by appraisal unless substantial
justification exists because of the presence of other underwriting
criteria provided that such loans would in no event exceed the
appraised value of the Property at the date of the loans;
(vi) The Company shall not make or invest in any mortgage loans that are
subordinate to any mortgage or equity interest of the Advisor, the
Sponsor, any Director or Affiliates thereof;
(vii) The Company shall not invest in equity securities unless a majority of
the Directors (including a majority of the Independent Directors) not
otherwise interested in the transaction approves the transaction as
being fair, competitive and commercially reasonable. Investments in
entities affiliated with the Advisor, the Sponsor, any Director or
Affiliates thereof are subject to the restrictions on joint venture
investments. Notwithstanding these restrictions, the Company may
purchase its own securities, when traded on a national securities
exchange or market, if a majority of the Directors (including a
majority of the Independent Directors) determine such purchase to be
in the best interests of the Company;
(viii) The Company shall not engage in any short sale or borrow on an
unsecured basis, if such borrowing will result in an asset coverage of
less than 300%;
(ix) To the extent the Company invests in Properties, a majority of the
Directors (including a majority of the Independent Directors) shall
determine that the consideration paid for such Properties is equal to
fair market value of such Properties. If any Property is acquired from
the Sponsor, the Advisor, any Director, or any Affiliate thereof, such
fair market value shall be determined by a qualified independent real
estate appraiser selected by the Independent Directors;
(x) The Company shall not invest in indebtedness (herein called "Junior
Debt") secured by a mortgage on real property which is subordinate to
the lien of other indebtedness (herein called "Senior Debt"), except
where the amount of the Junior Debt, plus the outstanding amount of the
Senior Debt, does not exceed 90% of the appraised value of such real
property, if after giving effect thereto, the value of all such
investments of the Company (as shown on the books of the Company in
accordance with generally accepted accounting principles, after all
reasonable reserves but before provision for depreciation) would not
then exceed 25% of the Company's tangible assets. The value of all
investments in Junior Debt of the Company which does not meet these
requirements shall be limited to 10% of the Company's tangible assets
(which would be included within the 25% limitation);
(xi) The Company shall not engage in trading, as compared with investment,
activities; and
(xii) The Company shall not engage in underwriting or the agency
distribution of securities issued by others;
145
<PAGE>
(xiii) The Company shall not acquire securities in any entity holding
investments or engaging in activities prohibited by the restrictions
on investments set forth in the foregoing clauses (i) through (xii).
Subject to the above restrictions and so long as the Company qualifies as a
REIT, a majority of the Directors (including a majority of the Independent
Directors) may alter the investment policies if they determine that a change is
in the best interests of the Company.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
146
<PAGE>
OPERATING PARTNERSHIP AGREEMENT
The following summary of the Agreement of Limited Partnership of Inland
Retail Real Estate Limited Partnership (the "Operating Partnership Agreement"),
and the descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, are qualified in their entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Company's
Registration Statement of which this Prospectus is a part. See "Additional
Information."
Conducting the Company's operations through the Operating Partnership allows
the sellers of Properties (each a "Seller") to contribute their respective
Property interests to the Operating Partnership in exchange for LP Common Units
rather than for cash or Shares, with the result that the Seller is able to defer
some or all of the potential taxable gain on the transfer. There are also
certain differences to the Sellers between the ownership of Shares and Units,
some of which differences may be material to investors, including the form of
business organization, distribution rights, voting rights, transferability of
the equity interests received and federal income taxation.
DESCRIPTION OF PARTNERSHIP UNITS
Partnership interests in the Operating Partnership are evidenced by "Units."
Initially, the Operating Partnership will have two classes of Units: GP Common
Units and LP Common Units. GP Common Units represent an interest as a General
Partner in the Operating Partnership and will be held by the Company as General
Partner of the Operating Partnership. LP Common Units represent an interest as a
Limited Partner in the Operating Partnership. The General Partner may issue
additional Units and classes of Units with rights different from and superior to
those of GP Common Units or LP Common Units without the consent of the Limited
Partners. LP Common Unit holders do not have any preemptive rights with respect
to the issuance of additional Units.
LP Common Unit holders generally will be required to contribute money or a
Property with a net equity value equal to the Market Price of one Share on the
date of contribution (subject to adjustment in the event of stock splits or
other changes in the capital structure of the Company) for each LP Common Unit
received. "Market Price" has the same meaning in the Operating Partnership
Agreement as in the Articles. See "Description of Securities--Restrictions on
Ownership and Transfer" for that definition. LP Common Unit holders will not be
obligated to make additional capital contributions to the Operating Partnership.
LP Common Unit holders will not have the right to make additional capital
contributions to the Operating Partnership or to purchase additional Units
without the consent of the General Partner. For further information on capital
contributions, see "-- Capital Contributions" in this Section. Limited Partners
who do not participate in the management of the Operating Partnership generally
are not liable for the debts and liabilities of the Operating Partnership beyond
the amount of their capital contributions by virtue of their status as Limited
Partners. However, the Company, as the General Partner of the Operating
Partnership, is liable for any such unpaid debts and liabilities.
Limited Partners do not have the right to participate in the management of
the Company. The voting rights of the Limited Partners are generally limited to
approval of certain specific types of amendments to the Operating Partnership
Agreement. With respect to such transactions, each LP Common Unit has one vote.
See "--Management of the Operating Partnership" in this Section for a more
detailed discussion of this subject.
In general, each LP Common Unit will share equally in distributions from the
Operating Partnership when and as such distributions may be declared by the
General Partner in its sole discretion and will share equally in the assets of
the Operating Partnership legally available for distribution upon liquidation of
the Operating Partnership, in each case after payment of all liabilities and
establishment of reserves, and after payment of the preferred return owed to
holders of LP Preferred Units, if any. In addition, each LP Common Unit will be
allocated a portion of the items of income, gain, loss and deduction of the
Operating Partnership for federal income tax purposes, regardless of whether any
distributions are made by the
147
<PAGE>
Operating Partnership. See "Federal Income Tax Considerations--Income Taxation
of the Partnerships and Their Partners--Partnership Allocations" for a
description of the manner in which income, gain, loss and deduction are
allocated under the Operating Partnership Agreement. There can be no assurance
that cash distributions to an LP Common Unit holder will equal the amount of
income allocated to such holder in any period or that such distributions, if
any, will be sufficient to pay the taxes imposed on the income allocated to such
holder. The General Partner may amend the allocation and distribution sections
of the Operating Partnership Agreement to reflect the issuance of additional
Units and classes of Units (which may have rights different from and superior to
those of GP Common Units or LP Common Units) without the consent of the LP
Common Unit holders. See "--Issuance of Additional Units" and "--Distributions"
in this Section; and also see "Federal Income Tax Considerations--Income
Taxation of the Partnerships and Their Partners--Partners, Not Partnership,
Subject to Tax" for a more detailed explanation of these matters.
LP Common Units generally may not be transferred without the consent of the
General Partner. See "--Transferability of Interests" in this Section for a
discussion of additional restrictions imposed by the Operating Partnership
Agreement on such transfers. After owning an LP Common Unit for one year and
subject to certain restrictions, an LP Common Unit holder generally may convert
LP Common Units into Shares or require the Operating Partnership to redeem such
Units for cash. See "--Limited Partner Conversion Rights" and "--Limited Partner
Redemption Rights" in this Section for a description of these rights and the
amount and types of consideration a Limited Partner is entitled to receive upon
their exercise. Such conversion rights are accelerated in the case of certain
extraordinary transactions. See "--Extraordinary Transactions" in this Section
for an explanation of the conversion rights under those circumstances. For a
description of registration rights which may in the future be granted to holders
of LP Common Units, see "Shares Eligible for Future Sale--Registration Rights."
MANAGEMENT OF THE OPERATING PARTNERSHIP
The Operating Partnership is organized as an Illinois limited partnership
pursuant to the terms of the Operating Partnership Agreement. The Company is the
General Partner of the Operating Partnership. The Company anticipates that it
will conduct substantially all of its business through the Operating
Partnership, except for certain development, leasing and property management
services, which will be conducted through Affiliates of TIGI in order to
preserve the Company's REIT status and to minimize liabilities. Generally,
pursuant to the Operating Partnership Agreement, the Company, as the General
Partner of the Operating Partnership, will have full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, including the ability to cause the Operating Partnership 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. The General Partner may, without the consent
of the Limited Partners, (i) file a voluntary petition seeking liquidation,
reorganization, arrangement or readjustment, in any form, of the Operating
Partnership's debts under the United States Bankruptcy Code Title 11 of the
United States Code (or corresponding provisions of future laws) or any other
federal or state insolvency law, or file an answer consenting to or acquiescing
in any such petition; or (ii) cause the Operating Partnership to make an
assignment for the benefit of its creditors or admit in writing its inability to
pay its debts as they mature.
The Limited Partners in their capacities as limited partners of the
Operating Partnership will have no authority to transact business for, or
participate in the management or decisions of, the Operating Partnership, except
as provided in the Operating Partnership Agreement and as required by applicable
law.
The Company, as General Partner of the Operating Partnership, may amend the
Operating Partnership Agreement without the consent of the Limited Partner;
provided however, that any amendment which (i) subject to certain exceptions
discussed below under "--Distributions" in this Section, alters or changes the
distribution rights of any Limited Partners, (ii) alters or changes a Limited
Partner's redemption rights or conversion rights, (iii) imposes on the Limited
Partners any obligation to make additional capital
148
<PAGE>
contributions, or (iv) alters the terms of the Operating Partnership Agreement
regarding the rights of the Limited Partners with respect to certain
extraordinary transactions or the indemnification provisions of the Operating
Partnership Agreement, shall require the unanimous written consent of the
affected Limited Partners holding more than 50% of the voting power in the
Operating Partnership held by such affected Limited Partners. The Limited
Partners have no right to remove the Company as the General Partner of the
Operation Partnership.
INDEMNIFICATION
To the extent permitted by law, the Operating Partnership Agreement provides
for indemnification of the Company, as General Partner, and its directors,
officers and such other Persons as the Company may designate against damages and
other liabilities under the same conditions and subject to the same restrictions
applicable to the indemnification of officers, directors, employees and
Stockholders under the Articles. See "Certain Responsibilities of Directors and
the Advisor; Indemnification."
TRANSFERABILITY OF INTERESTS
The Operating Partnership Agreement provides that the Company may not
withdraw from the Operating Partnership or transfer or assign all (but may
assign less than all) of its general partnership interest in the Operating
Partnership. Subject to certain limited exceptions, LP Common Unit holders may
withdraw from the Operating Partnership and may transfer or encumber all or any
part of their Units in the Operating Partnership only with the written consent
of the General Partner and upon satisfaction of the other conditions set forth
in the Operating Partnership Agreement. In addition, LP Common Units are not
registered under the federal or state securities laws. As a result, the ability
of a holder to transfer such Units may be restricted under such laws.
EXTRAORDINARY TRANSACTIONS
The Operating Partnership Agreement generally provides that either the
Company or the Operating Partnership may engage in any authorized Business
Combination without the consent of the Limited Partners. For this purpose, a
Business Combination is any merger, consolidation or other combination with or
into another Person, or the sale of all or substantially all of the assets of
any entity, or any liquidation, or any reclassification, recapitalization or
change in the terms of the Equity Stock into which a Unit may be converted. In
the event of a proposed Business Combination, the Company is required to send to
each LP Common Unit holder notice of the proposed Business Combination at least
30 days prior to the record date for the Stockholder vote on such Business
Combination, if any, and at least 90 days before the effective date of such
Business Combination. Generally, a Limited Partner may not exercise his or her
conversion rights until the Limited Partner has held his or her Units for at
least one year. However, in the case of a proposed Business Combination, each
holder of an LP Common Unit in the Operating Partnership shall have the right to
exercise the Limited Partner's conversion right prior to the Stockholder vote on
the transaction, even if the Limited Partner has held his or her Units for less
than one year. See "--Limited Partner Conversion Rights" in this Section for a
description of such rights. Upon the Limited Partner's exercise of the
conversion right in the case of a Business Combination, the Company has the
right to pay the LP Common Unit holder in cash rather than in Shares only if the
issuance of Shares to such holder would (i) violate the Ownership Limit, (ii)
result in the Company being "closely held" within the meaning of Section 856(h)
of the Code, (iii) cause the Company to own, directly or constructively, 10% or
more of the ownership interests in a tenant of the Company's or the Operating
Partnership's real property within the meaning of Section 856(d)(2)(B) of the
Code, (iv) cause, in the opinion of counsel to the Company, the Company to no
longer qualify (or, if in the opinion of counsel to the Company, there is a
material risk that the Company would no longer qualify) as a REIT, or (v) cause
the acquisition of Shares by such Limited Partner to be "integrated" with any
other distribution of Shares for purposes of complying with the registration
provisions of the Act. LP Common Unit holders who timely convert their Units
prior
149
<PAGE>
to the record date for the Stockholder vote on such Business Combination, if
any, shall be entitled to vote their Shares in any Stockholder vote on the
Business Combination. LP Common Unit holders who convert their Units after such
record date shall not be entitled to vote their Shares in any Stockholder vote
on the proposed Business Combination. The right of the LP Common Unit holders to
exercise their right to convert without regard to whether such holder has held
the Units for more than a year shall terminate upon the first to occur of the
disapproval of the Business Combination by the Board of the Company, the
disapproval of the Business Combination by the Stockholders, the abandonment of
the Business Combination by any of the parties to the Business Combination, or
the effective date of the Business Combination.
ISSUANCE OF ADDITIONAL UNITS
As General Partner of the Operating Partnership, the Company has the
ability, without the consent of the Limited Partners, to cause the Operating
Partnership to issue additional Units representing general or limited
partnership interests in the Operating Partnership, including Preferred Units,
which may have rights which are different and/or superior to those of GP Common
Units and LP Common Units.
CAPITAL CONTRIBUTIONS
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from borrowings or prior capital
contributions, the General Partner shall also have the right to raise additional
funds required by the Operating Partnership by causing the Operating Partnership
to borrow the necessary funds from third parties on such terms and conditions as
the General Partner shall deem appropriate. As an alternative to borrowing funds
required by the Operating Partnership, the Company may contribute the amount of
such required funds as an additional capital contribution to the Operating
Partnership. The Operating Partnership Agreement also provides that the Company
will contribute cash or other property received in exchange for the issuance of
Equity Stock to the Operating Partnership in exchange for Units. Upon the
contribution of the cash or other property received in exchange for the issuance
of a Share, the Company will receive one GP Common Unit. Upon the contribution
of the cash or other property received in exchange for the issuance of each
share of Equity Stock other than a Share, the Company shall receive one Unit
with rights and preferences respecting distributions corresponding to the rights
and preferences of such Equity Stock. If the Company so contributes additional
capital to the Operating Partnership, the Company's partnership interest in the
Operating Partnership will be increased on a proportionate basis. Conversely,
the partnership interests of the Limited Partners will be decreased on a
proportionate basis in the event of additional capital contributions by the
Company.
DISTRIBUTIONS
The Operating Partnership Agreement sets forth the manner in which
distributions from the Operating Partnership will be made to Unit holders.
Distributions from the Operating Partnership are made at the times and in the
amounts determined by the Company as the General Partner. Pursuant to the
Operating Partnership Agreement, Preferred Units, if any, may entitle the holder
of the Preferred Unit to distributions prior to the payment of distributions
with respect to the Common Units. The Operating Partnership Agreement further
provides that remaining amounts available for distribution after distributions
on Preferred Units, if any, shall be distributed, at the times and in the
amounts determined by the General Partner in its sole discretion, PARI PASSU, to
the holders of the Common Units (and to the holders of Preferred Units, if any,
which are entitled to share in the net profits of the Operating Partnership
beyond, or in lieu of, the receipt of any preferred return). Liquidating
distributions will generally be made in the same manner and amounts as operating
distributions. The Operating Partnership Agreement also provides that the
General Partner shall have the right to amend the distribution provisions of the
Operating Partnership Agreement to reflect the issuance of additional classes of
Units with rights different from, and possibly superior to, the rights of the
holders of Common Units.
150
<PAGE>
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income or excise tax
liability, unless the Company otherwise ceases to qualify as a REIT and to
ensure that the Partnership will not be classified as a publicly traded
partnership under the Code. Pursuant to the Operating Partnership Agreement, the
Operating Partnership will assume and pay when due, or reimburse the Company for
payment of, all administrative and operating costs and expenses incurred by the
Operating Partnership and those administrative costs and expenses of the Company
that are incurred by the Company on behalf of, or for the benefit of, the
Operating Partnership.
LIMITED PARTNER CONVERSION RIGHTS
Pursuant to the terms of the Operating Partnership Agreement and subject to
certain conditions, each holder of an LP Common Unit will have the right to have
all or any portion of his or her LP Common Units converted into that number of
Shares which shall have an aggregate Market Price as of the date of conversion
equal to the Net Equity Value of the Property or Properties (such Net Equity
Value being as of the date of contribution of the Property or Properties)
contributed by such holder (the "Conversion Shares"); provided, however, at the
option of the Company (except only in limited circumstances, generally to
protect the Company's qualification as a REIT, where the Limited Partner has
elected to exercise his or her accelerated conversion rights in the case of a
Business Combination), the Company may satisfy the conversion right by
delivering cash in lieu of such Conversion Shares in an amount equal to the
aggregate Market Price on the date of conversion of the Conversion Shares. Such
decision to exercise the Company's right to satisfy the conversion right by
delivering cash in lieu of the Conversion Shares shall be made by the Company on
a case by case basis in the Company's sole and absolute discretion. The LP
Common Units exchanged for cash or Shares will augment the General Partner's
ownership percentage interest in the Operating Partnership. See "--Extraordinary
Transactions" in this Section for a description of conversion rights in
connection with mergers and other major transactions. However, no Limited
Partner may convert any LP Common Units for Shares during the first year
following the issuance of such Units (except in connection with a Business
Combination) and no Limited Partner may convert any LP Common Units at any time
if such Limited Partner's actual or constructive ownership of such Shares would
(i) violate the Ownership Limit, (ii) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code, (iii) cause the Company to
own, directly or constructively, 10% or more of the ownership interests in a
tenant of the Company's or of the Operating Partnership's real property, within
the meaning of Section 856(d)(2)(B) of the Code, (iv) cause, in the opinion of
counsel to the Company, the Company to no longer qualify (or if in the opinion
of counsel to the Company there is a material risk that the Company no longer
would qualify) as a REIT, or (v) cause the acquisition of Shares by such Limited
Partner to be "integrated" with any other distribution of Shares for purposes of
complying with the registration provisions of the Act. In addition, the General
Partner shall not have the right to satisfy the conversion right by paying the
Limited Partner seeking conversion, in lieu of the Conversion Shares, the amount
of cash equal to the Market Price on the date of conversion of the Conversion
Shares if, in the opinion of counsel to the General Partner, the General Partner
would, as a result thereof, no longer qualify (or if there is a material risk
that the General Partner no longer would qualify) as a REIT. See "Description of
Securities--Restrictions on Ownership and Transfer." Any Shares issued to the
Limited Partners upon exchange of their respective LP Common Units may be sold
only pursuant to any effective registration under the Act or pursuant to any
available exemption from such registration. See "Shares Eligible for Future
Sale--Conversion and Redemption Rights" and "--Registration Rights."
The General Partner shall have the right to grant similar conversion rights
to holders of other classes of Units, if any, in the Operating Partnership, and
to holders of equity interests in the Property Partnerships, if any.
151
<PAGE>
Exercise of conversion rights will be a taxable transaction in which gain or
loss will be recognized by the Limited Partner exercising its right to convert
its Units into Shares to the extent that the amount realized exceeds the Limited
Partner's adjusted basis in the Units converted. See "Federal Income Tax
Considerations--Income Taxation of Partnerships and their Partners--Tax
Consequences of Exercise of Conversion Right."
LIMITED PARTNER REDEMPTION RIGHTS
Pursuant to the terms of the Operating Partnership Agreement and subject to
certain conditions, each holder of an LP Common Unit will have the right to have
all or any portion of his or her LP Common Units redeemed. The cash redemption
price for each LP Common Unit shall be equal to the Net Equity Value (on the
date of contribution) of the Property or Properties contributed by such holder
divided by the total number of Units received by such holder for such Property
or Properties; provided, however, at the option of the Company, the Company may
satisfy the redemption right with respect to all or any portion of the Shares
offered for redemption (i) on behalf of the Operating Partnership or (ii) may
satisfy the redemption right by delivering Shares having an aggregate Market
Price as of the date the holder exercises such redemption right equal to the
amount of the redemption price for all Units being redeemed by the holder in
lieu of cash equal to the value of such Shares. The holder may not exercise this
redemption right during the first year following the receipt of the LP Common
Units (except in connection with a Business Combination), or if in the opinion
of counsel to the Company, the Company would, as a result thereof, no longer
qualify (or if in the opinion of counsel to the General Partner there is a
material risk that the Company no longer would qualify) as a REIT. The Company
may not exchange any Shares for Units if the Limited Partner's actual or
constructive ownership of such Shares would (i) violate the Ownership Limit,
(ii) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, (iii) cause the Company to own, directly or constructively,
10% or more of the ownership interests in a tenant of the Company's or of the
Operating Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Code, (iv) cause, in the opinion of counsel to the Company,
the Company to no longer qualify (or that there is a material risk that the
Company no longer would qualify) as a REIT, or (v) cause the acquisition of
Shares by such Limited Partner to be "integrated" with any other distribution of
Shares for purposes of complying with the registration provisions of the Act.
See "Description of Securities--Restrictions on Ownership and Transfer." Any
Shares issued to the Limited Partners upon redemption of their Units may be sold
only pursuant to any effective registration under the Act or pursuant to any
available exemption from such registration. See "Shares Eligible for Future
Sale-- Conversion and Redemption Rights" and "--Registration Rights." The
interest represented by the LP Common Units exchanged for cash or Shares will
augment the General Partner's ownership percentage interest in the Operating
Partnership. The cash necessary to redeem LP Common Units will come from any
funds legally available to the Operating Partnership or the Company for such
purposes. However, specific funds will not be specially set aside for such
purposes, nor will an accounting reserve be established therefor. The necessary
cash to satisfy the redemption right could come from Cash Flow not required to
be distributed to Stockholders to maintain the Company's REIT status, fund
operations, or acquire new Properties, or could come from borrowings. However,
as explained above, the Company always has the option to satisfy the redemption
right by the issuance of Shares, and the Company intends to reserve Shares for
that purpose. The decision to exercise the Company's right to satisfy the
redemption right by paying to the holder the redemption price or Shares having
an aggregate Market Price on the date the holder exercises such redemption right
equal to the redemption price for all Units being redeemed shall be made by the
Company on a case by case basis in the Company's sole and absolute discretion.
The General Partner shall have the right to grant similar redemption rights
to holders of other classes of Units, if any, in the Operating Partnership, and
to holders of equity interests in the Property Partnerships, if any.
152
<PAGE>
Exercise of redemption rights will be a taxable transaction in which gain or
loss will be recognized by the Limited Partner exercising its right to have its
LP Common Units redeemed to the extent that the amount realized exceeds the
Limited Partner's adjusted basis in the LP Common Units redeemed. See "Federal
Income Tax Considerations--Income Taxation of Partnerships and their
Partners--Tax Consequences of Exercise of Redemption Right."
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the Company will be the
"tax matters partner" of the Operating Partnership and, as such, will have
authority to make certain tax decisions under the Code on behalf of the
Operating Partnership. For a description of the allocation of the income and
loss of the Operating Partnership, for federal income tax purposes, and other
tax consequences stemming from the Company's investment in the Operating
Partnership, see "Federal Income Tax Considerations--Taxation of Partnerships
and Their Partners."
DUTIES AND CONFLICTS
Except as otherwise set forth under "Conflicts of Interest" and
"Management," any Limited Partner may engage in other business activities
outside the Operating Partnership, including business activities that directly
compete with the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2040 or until sooner dissolved and terminated upon the dissolution,
bankruptcy, insolvency or termination of the Company, the election of the
Company, the passage of 60 days after the sale or other disposition of all or
substantially all of the assets of the Operating Partnership or by operation of
law.
LOCK OUT POLICY
See "Risk Factors--Risks of Real Estate Ownership--the Company May Acquire
Properties with Lock-Out Provisions" for an explanation of potential lock-out
provisions that may, under certain circumstances, prohibit the Company from
selling or reducing the debt level on a Property acquired and the possible
consequences thereof. The Company will not permit the General Partner to acquire
Properties containing lock-out provisions if the lock-out period exceeds three
years.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
153
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax considerations
that may be relevant to a prospective holder of Shares who purchases such Shares
in the Offering. This summary should not be construed as tax advice. The summary
does not address all aspects of federal income taxation that may be relevant to
particular holders in light of their personal investment or tax circumstances,
or to certain types of holders (including, without limitation, insurance
companies, financial institutions, broker-dealers, Stockholders who hold an
interest in the Company as part of a straddle, hedging or tax conversion
transaction or, except as specifically described herein, tax-exempt entities and
foreign persons) who are subject to special treatment under the federal income
tax laws. In addition, this summary is generally limited to investors who will
hold Shares in the Company as "capital assets" (generally property held for
investment) within the meaning of Section 1221 of the Code.
THE STATEMENTS IN THIS SUMMARY ARE BASED ON CURRENT PROVISIONS OF THE CODE,
THE TREASURY REGULATIONS PROMULGATED THEREUNDER AND ADMINISTRATIVE AND JUDICIAL
INTERPRETATIONS THEREOF, AS OF THE DATE HEREOF, ALL OF WHICH ARE SUBJECT TO
CHANGE, POSSIBLY WITH RETROACTIVE EFFECT. THE REQUIREMENTS FOR QUALIFICATION AS
A REIT ARE HIGHLY TECHNICAL AND COMPLEX, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY THE APPLICABLE REIT QUALIFICATION PROVISIONS CONTAINED IN THE CODE,
THE TREASURY REGULATIONS PROMULGATED THEREUNDER, AND ADMINISTRATIVE AND JUDICIAL
INTERPRETATIONS THEREOF. NO ASSURANCE CAN BE GIVEN THAT FUTURE LEGISLATIVE,
JUDICIAL, OR ADMINISTRATIVE ACTIONS OR DECISIONS WILL NOT AFFECT THE ACCURACY OF
ANY STATEMENTS IN THIS SUMMARY.
For a discussion of pending legislative developments that may impact the
federal income tax consequences of an investment in the Company. See "--Other
Tax Considerations--Legislative Developments" in this Section.
No ruling will be sought from the Internal Revenue Service (the "Service")
with respect to any matter discussed herein, and there can be no assurance that
the Service or a court will agree with the statements made herein.
EACH PROSPECTIVE PURCHASER OF SHARES, THEREFORE, IS URGED TO CONSULT HIS TAX
ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES WHICH MAY BE
APPLICABLE TO HIS OR HER PARTICULAR TAX SITUATION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company has been organized and intends to operate in a manner that will
permit it to qualify as a REIT under the applicable provisions of the Code and
Treasury Regulations (the "REIT Requirements") and to receive the beneficial tax
treatment described below beginning with its taxable year ending December 31,
1999. However, no assurance can be given that the activities and operations of
the Company will allow it to meet the REIT Requirements or continue to meet the
REIT Requirements in future years.
In general, a corporation that invests primarily in real estate can qualify
as a REIT if it complies with the detailed REIT Requirements in Code Sections
856-860. As a REIT, a corporation can generally claim tax deductions for the
dividends it pays to its stockholders. Such a corporation is, therefore,
generally not taxed on its "REIT Taxable Income" to the extent such income is
currently distributed to stockholders, thereby substantially eliminating the
"double taxation" to which an ordinary corporation is generally subject.
However, as discussed in greater detail below, the Company could be subject to
tax in certain circumstances even if it qualifies as a REIT, and would likely
suffer adverse consequences as a result, including a reduction in cash available
for Distributions to its Stockholders. See "--Taxation of the Company--Failure
to Qualify" in this Section for a discussion of those consequences. The Company
represents that it will file the election to be recognized as a REIT with its
tax return for its taxable year ending December 31, 1999, which tax return will
be filed on a timely basis. The Company intends to
154
<PAGE>
operate in a manner that will permit it to elect REIT status beginning with its
taxable year ending December 31, 1999, and to continue to maintain this status
in each taxable year thereafter so long as REIT status remains advantageous to
the Company and the Stockholders. Management of the Company and the Advisor
currently expect that the Company will operate in a manner that permits the
Company to elect REIT status for its taxable year ending December 31, 1999, and
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's ability to continue to satisfy numerous asset, income and distribution
tests described below, which in turn will be dependent in part on the Company's
operating results.
OPINION OF TAX COUNSEL
Wildman, Harrold, Allen & Dixon ("Counsel") has acted as special tax counsel
to the Company and is of the opinion, based on the assumptions and
representations described in this Section and throughout the Prospectus, and on
various factual representations made by the Company and the Advisor to Counsel
as to certain factual matters, that as of the date of this Prospectus: (i) the
Company has been organized in conformity with the requirements for qualification
as a REIT beginning with its taxable year ending December 31, 1999, and that its
prior, current and anticipated methods of operation have enabled and will enable
the Company to satisfy the REIT Requirements; and (ii) Distributions to a
Stockholder which is a Tax-Exempt Entity (other than certain Tax-Exempt Entities
described in paragraphs (7), (9), (17) or (20) of Section 501(c) of the Code and
organizations described in Section 501(c)(2) of the Code that support such
organizations) will not constitute unrelated business taxable income ("UBTI")
under current law, unless: (a) such Stockholder has financed the acquisition of
its Shares with "acquisition indebtedness" (within the meaning of the Code); or
(b) a Qualified Trust owns more than 10% of the Equity Stock (by value) of the
Company and the Company is a "Pension-Held REIT." This opinion has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part, and
is based and conditioned on various assumptions and representations as to
certain factual matters made by the Company and the Advisor to Counsel. The
Company's qualification and taxation as a REIT will depend upon the Company's
ability to meet the REIT Requirements through the operation of the Properties it
acquires. Counsel has not independently verified the Company's representations
and will not review compliance with these tests on a continuing basis after the
initial effective date of the Registration Statement or issue additional
opinions unless expressly requested to do so by the Company. Accordingly, no
assurance can be given that the actual operating results of the Company will
allow the Company to satisfy the REIT Requirements or to continue to satisfy the
REIT Requirements, or would not result in the recognition of UBTI by Tax-Exempt
Entities. See "--Taxation of the Company--Failure to Qualify" in this Section.
In addition, these opinions represent counsel's legal judgment. An opinion of
counsel is not binding on the Service or a court and there can be no assurance
that the Service or a court will not take a position different from that
expressed by these opinions. These opinions are based on the Code and Treasury
Regulations, and judicial and administrative interpretations thereof, in effect
as of the date of this Prospectus, any of which are subject to change, possibly
with retroactive effect.
TAXATION OF THE COMPANY
OVERVIEW. In any taxable year in which the Company qualifies as a REIT and
has a valid election to be taxed as a REIT in effect, it would be entitled to
claim a deduction for the dividends it pays to its Stockholders. As a result,
the Company would generally not be subject to federal income tax on that portion
of its ordinary income and net capital gain which are distributed to its
Stockholders. The Company would be subject to federal income tax on any ordinary
income and on any net capital gain which are not distributed. Accordingly, the
Company generally should be able to eliminate or substantially reduce its
federal income tax liability for any taxable year in which it qualifies as a
REIT and has a valid election to be taxed as a REIT in effect by distributing
its ordinary income and net capital gain to its Stockholders.
155
<PAGE>
Even if the Company maintains its status as a REIT, however, it could be
subject to federal income tax in certain circumstances. First, if the Company
fails to satisfy either the 95% Gross Income Test or the 75% Gross Income Test
(both of which are discussed below in this Section under "--Taxation of the
Company-- Gross Income Tests"), but nonetheless maintains its REIT qualification
because certain other requirements are met, the Company would be subject to a
100% tax on the greater of the amount by which it failed the 95% Gross Income
Test or the amount by which it failed the 75% Gross Income Test multiplied by a
fraction meant to reflect the Company's profitability. Second, the Company would
be subject to a 100% tax on its net income from any "Prohibited Transaction."
See "--Taxation of the Company-- Prohibited Transactions" in this Section.
Third, if the Company fails to distribute annually at least the sum of: (i) 85%
of its ordinary income for such year; (ii) 95% of its capital gain net income
for such year; and (iii) any undistributed taxable income from prior years, it
would be subject to an excise tax equal to 4% of the difference between the
amount required to be distributed under such formula and the amount actually
distributed or deemed to have been distributed. Fourth, the Company may be
subject to the corporate alternative minimum tax. Fifth, the Company would be
subject to tax at the highest corporate rate on any non-qualifying income from
"Foreclosure Property." Any tax the Company pays due to any of the
aforementioned provisions would reduce the cash available to make Distributions
to the Stockholders.
In addition, if the Company acquires any asset from a C corporation
(generally, a corporation subject to full corporate-level tax) in a transaction
in which the basis of the asset in the Company's hands is determined by
reference to the basis of the asset (or any other property) in the hands of the
transferor corporation, and the Company recognizes gain on the disposition of
such an asset during the 10-year period beginning on the date on which such
asset was acquired by the Company (the "Recognition Period"), then, pursuant to
guidelines issued by the Service, the excess of the fair market value of the
assets as of the beginning of the applicable Recognition Period over the
Company's adjusted basis in such assets (the "Net Built-in Gain") at the
beginning of such Recognition Period would be subject to tax at the highest
regular corporate tax rates (currently 35%). Under Regulations which the Service
has been instructed to issue, the Company would also be subject to tax on the
Net Built-in Gain of any acquired corporation that becomes a qualified REIT
subsidiary ("QRS") at the time the acquired corporation becomes a QRS. As
discussed in more detail below under "--Taxation of the Company--Ownership of a
Qualified REIT Subsidiary" in this Section, a QRS is generally any corporation
that is wholly-owned by a REIT.
If the Company invests in Properties in foreign countries, the Company's
profits from such investments will generally be subject to tax in the countries
where such Properties are located. The precise nature and amount of any such
taxation would depend on the laws of the countries where the Properties are
located. If the Company satisfies the Distribution Test for qualification as a
REIT (discussed below) and is therefore not subject to federal corporate income
tax on that portion of its ordinary income and capital gain that is currently
distributed to its Stockholders, the Company will generally not be able to
recover the cost of any foreign tax imposed on profits from its foreign
investments by claiming foreign tax credits against its U.S. tax liability on
such profits. See "--Taxation of the Company--Annual Distribution Requirements"
in this Section. Moreover, a REIT is not able to pass foreign tax credits
through to its stockholders. Accordingly, the Company and its Stockholders may
be subject to effective double taxation on all or a portion of the Company's
income from investments in Properties in foreign countries. Such foreign
taxation would reduce the amount of cash the Company has available to make
Distributions to its Stockholders. The Company does not currently intend to
invest in Properties in foreign countries.
REIT QUALIFICATION TESTS. The Code defines a REIT as a corporation, trust
or association:
(i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(iii) that would be taxable as a domestic corporation but for its status as
a REIT;
156
<PAGE>
(iv) that is neither a financial institution nor an insurance company;
(v) the beneficial ownership of which is held by 100 or more persons on at
least 335 days in each full taxable year, proportionately adjusted for a
partial taxable year;
(vi) at all times during the second half of each taxable year, no more than
50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (defined to include certain
types of entities); and
(vii) with respect to which the Gross Income Tests, Asset Tests and
Distribution Tests, described in greater detail below, are met.
Conditions (i) through (iv) and (vii) above must be met during each taxable
year for which REIT status is sought while conditions (v) and (vi) above do not
have to be met until after the first taxable year for which a REIT election is
made.
OWNERSHIP OF A PARTNERSHIP INTEREST. The Company may in the future hold
direct or indirect interests in one or more partnerships or joint ventures. For
example, the Company will be the General Partner of the Operating Partnership.
To satisfy the REIT Requirements, the Company will have to meet certain Asset
Tests and Gross Income Tests. These tests are described in detail below in this
Section under "--Taxation of the Company--Gross Income Tests," and "--Taxation
of the Company--Asset Tests." For purposes of satisfying these Asset Tests and
Gross Income Tests, the Company will be deemed to own directly an undivided
interest in each asset and a share of each item of income, gain, loss, deduction
and credit of a partnership corresponding to the Company's capital interest in
the partnership. The assets and income of the partnership will have the same
character as if the Company had held them or realized them directly rather than
through the partnership. Accordingly, to the extent that any partnership owned
by the Company is treated as a partnership for federal income tax purposes, the
Company must take into account its proportionate share of the assets,
liabilities, and items of income, gain, loss, deduction and credit of the
partnership for purposes of the Asset Tests and Gross Income Tests. See
"--Taxation of the Company--Tax Aspects of the Company's Investments in
Partnerships" and "--Taxation of the Company--Partnership Classification" in
this Section.
OWNERSHIP OF A QUALIFIED REIT SUBSIDIARY. A QRS is disregarded for federal
income tax purposes, but may be subject to state and local tax in some
jurisdictions. All of the assets, liabilities, and items of income, deduction
and credit of a QRS are treated as assets, liabilities, and items of income,
deduction and credit of the REIT. Accordingly, the assets, liabilities, and
items of income, deduction and credit of any QRS must be taken into account in
determining whether the Company satisfies the REIT Requirements.
If the Company were to acquire a QRS by acquiring all of the stock of an
existing corporation, the acquired corporation would be treated as if it had
liquidated at the time of acquisition and then reincorporated. Under Regulations
which the Service has been instructed to issue, the corporation's Net Built-in
Gain would be subject to tax at the time the acquired corporation becomes a QRS.
See "--Taxation of the Company--Overview" in this Section. In addition, all
earnings and profits of the corporation that were accumulated before it was
acquired by the Company would have to be distributed before the end of the
Company's taxable year in which it acquired the corporation.
In the event that a corporation that is a QRS ceases to meet the
requirements for qualification as a QRS, the corporation is deemed to have
liquidated and is treated as a new corporation that acquired all of its assets
from the REIT in exchange for its stock.
The Company does not intend to acquire or form a QRS, but may do so if it
determines that ownership of a QRS would be in the Company's best interests.
157
<PAGE>
The Company, in satisfying the REIT qualification tests set forth above,
must meet, among others, the following requirements:
SHARE OWNERSHIP TESTS. The Shares and any other Equity Stock the Company
issues must be held by at least 100 persons (determined without attribution to
the owners of any entity owning Equity Stock) for at least 335 days in each full
taxable year, proportionately adjusted for partial taxable years. In addition,
at all times during the second half of each taxable year, no more than 50% in
value of the Equity Stock may be owned, directly or indirectly, by five or fewer
individuals (defined to include certain types of entities and determined with
attribution to the owners of any entity owning Equity Stock) (the "Five or Fewer
Requirement"). However, these two requirements do not apply until after the
first taxable year an entity seeks REIT status. In addition, the Five or Fewer
Requirement will be treated as having been met if: (i) the Company maintains
records which disclose the actual ownership of the outstanding Equity Stock, and
demands written statements each year from the record holders of 5% or more of
the Equity Stock disclosing the beneficial owners thereof; and (ii) the Company
does not know, or by exercising reasonable diligence would not have known, that
it did not satisfy this requirement.
The Company represents that it: (i) will issue sufficient Equity Stock
pursuant to the Offering to allow the Company to satisfy these requirements;
(ii) will not admit investors as Stockholders until the admission will allow
there to be sufficient Stockholders to meet these requirements; and (iii) will
thereafter admit only those Stockholders that allow the Company to continue to
meet these requirements. In addition, the Company's Articles contain provisions
restricting the transfer of Equity Stock, which provisions are intended to
assist the Company in satisfying these requirements. The Company will also
utilize computerized systems designed to prevent violations of these
requirements. Furthermore, the Company's Distribution Reinvestment Program
contains provisions that are intended to prevent its operations from causing a
violation of these tests as do the terms of the options granted to the
Independent Directors and the terms of the Soliciting Dealer Warrants. See
"Distribution Reinvestment and Share Repurchase Programs." Moreover, the Company
will maintain records which disclose the actual ownership of the outstanding
Equity Stock, and the Company will demand written statements each year from each
record holder of 5% or more of the Equity Stock disclosing the beneficial owners
thereof. Those Stockholders failing or refusing to comply with the Company's
written demand are required by the Code and the Articles to submit, with their
tax returns, a similar statement disclosing the actual ownership of Equity Stock
and certain other information. See "Description of Securities--Restrictions on
Ownership and Transfer." These restrictions are intended to allow the Company to
satisfy the Five or Fewer Requirement. However, there can be no assurance that
these provisions will allow the Company to satisfy the Share ownership tests
described above in any year. If the Company fails to satisfy the Share ownership
tests described above, the Company's status as a REIT would terminate, and the
Company would not be able to prevent such termination. See "--Taxation of the
Company--Failure to Qualify" in this Section.
ASSET TESTS. The Company must satisfy, on the last day of each calendar
quarter, two tests based on the composition of its assets (the "Asset Tests").
After initially meeting the Asset Tests at the close of any quarter, the Company
will not lose its status as a REIT for failure to satisfy the Asset Tests at the
end of a later quarter if it did not acquire any additional assets and the
failure is due solely to changes in the value of its existing assets. In
addition, if the failure to satisfy the Asset Tests results from an acquisition
during a quarter, the failure can be cured by disposing of non-qualifying assets
within 30 days after the close of that quarter. The Company intends to maintain
adequate records of the value of its assets to insure compliance with the Asset
Tests, and will take such other actions as may be required to cure any
non-compliance. However, there can be no assurance that these measures will be
sufficient to guarantee satisfaction of the Asset Tests. Failure to satisfy the
Asset Tests would cause the Company's status as a REIT to terminate. See
"--Taxation of the Company--Failure to Qualify" in this Section.
- 75% ASSET TEST. At least 75% of the value of the Company's total assets
must be represented by "Real Estate Assets," cash, cash items (including
receivables from the operations of the Company) and
158
<PAGE>
government securities (the "75% Asset Test"). "Real Estate Assets" include
Interests in Real Property (including undivided interests in real property,
leaseholds of land and improvements thereon, and options to acquire land and
leaseholds of land and improvements thereon), interests in mortgages on real
property (including interests in mortgages on leaseholds or improvements
thereon), shares in other qualifying REITs and property attributable to certain
temporary investments of new capital for a one-year period beginning on the date
the REIT receives the new capital. Property will qualify as attributable to the
temporary investment of new capital if the property is stock or a debt
instrument and the money used to purchase such stock or debt instrument is
received by the REIT in exchange for stock in the REIT (other than amounts
received pursuant to a dividend reinvestment plan) or in a public offering of
debt obligations which have a maturity of at least five years. In addition,
regular and residual interests in a real estate mortgage investment conduit
("REMIC") and regular interests in financial asset securitization investment
trusts ("FASIT") are considered "Real Estate Assets." However, if less than 95%
of a REMIC's assets are Real Estate Assets, a REIT is treated as if it held its
proportionate share of the assets and income of the REMIC directly.
The Company represents that the purchase contracts for the Properties it
will own will apportion in the aggregate no more than 5% of the purchase price
of all Properties to property other than "real property," as defined in the
Code, to reflect the fair market value of such non-real estate assets. The
Company will maintain depreciation schedules to corroborate these
representations. In addition, the Company has and will invest funds not used to
acquire Properties in cash sources, GNMA certificates, REMIC interests, "new
capital" investments (as defined below in this Section under "--Taxation of the
Company--Gross Income Tests--75% Gross Income Test (the "75% Gross Income
Test")") or other liquid investments which will allow it to qualify under the
75% Asset Test. Therefore, the Company's investment in the Properties will
constitute "Real Estate Assets" and should allow the Company to meet the 75%
Asset Test.
- 25% ASSET TEST. The remaining 25% of the Company's assets generally may
be invested without restriction, although if invested in securities other than
Real Estate Assets, such securities may not exceed either: (i) 5% of the value
of the Company's total assets as to any one non-government issuer; or (ii) 10%
of the outstanding voting securities of any one non-governmental issuer. A
partnership interest held by a REIT and an interest in a QRS are not considered
"securities" for purposes of these tests. The Company represents that as of the
date hereof, it does not own any stock or securities of any other company, and
will not acquire securities which would cause the Company to violate these
limitations.
GROSS INCOME TESTS. The Company must satisfy for each calendar year two
separate tests based on the composition of its gross income, as determined under
its method of accounting (the "Gross Income Tests"). There can be no assurance
that the actual operating results of the Company will allow it to satisfy these
tests. For purposes of determining whether the Company complies with the 75%
Gross Income Test and 95% Gross Income Test, gross income does not include
income from Prohibited Transactions. Failure to satisfy the Gross Income Tests
would generally result in the loss of REIT status. See "--Taxation of the
Company--Failure to Qualify" in this Section.
- 75% GROSS INCOME TEST (THE "75% GROSS INCOME TEST"). At least 75% of the
Company's gross income for the taxable year must constitute "Rents from Real
Property" (as discussed below and as defined in the Glossary), interest on
obligations secured by real property mortgages, gains from the sale of Interests
in Real Property and real property mortgages (other than gain from property held
primarily for sale to customers in the ordinary course of the Company's trade or
business), dividends from other qualifying REITs, refunds and abatements of real
property taxes, income and gain from the sale of Foreclosure Property (as
discussed below and as defined in the Glossary), certain other investments
relating to real property or mortgages thereon, and, for a limited time, income
from the investment of new capital.
159
<PAGE>
Income attributable to a lease of real property will generally qualify as
"Rents from Real Property" under the 75% Gross Income Test (and the 95% Gross
Income Test described below) subject to the following rules:
(i) Rent from a particular tenant will not qualify if the Company, or an
owner of 10% or more of the stock of the Company, directly or indirectly
owns 10% or more of the stock, assets or net profits of the tenant.
(ii) The portion of rent attributable to personal property rented with real
property will not qualify unless the portion attributable to personal
property is 15% or less of the total rent received under the lease.
(iii) Rent will not qualify if it is based in whole, or in part, on the
income or profits of any person. However, rent will not fail to qualify
if it is based on a fixed percentage (or designated varying percentages)
of receipts or sales, including amounts above a base amount so long as
the base amount is fixed at the time the lease is entered into, the
provisions are in accordance with normal business practice and the
arrangement is not an indirect method for basing rent on income or
profits.
(iv) Rental income will not qualify if the Company furnishes or renders more
than DE MINIMIS services to tenants, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, 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, and are not otherwise considered
"rendered to the occupant."
The Company has represented that:
(i) The leases of tenants in the Initial Properties provided to Counsel
represent the only arrangements between the Company and tenants with
regard to the rental of the Initial Properties or any portion thereof;
(ii) It has not and will not directly or indirectly own 10% or more of any
tenant that leases space in the Properties, and no person who owns more
than 10% of the Equity Stock of the Company will own, directly or
indirectly, 10% or more of any tenant that leases space in the
Properties;
(iii) The portion of any payments received under each lease which are
attributable to personal property constitutes less than 15% of the total
rent received under such lease, and the depreciation schedules maintained
for each Property will corroborate this representation;
(iv) It has not and will not charge rent that is based on the income or
profits of any person in certain Properties and that the percentage rent
clauses, if any, in its current and future leases are not intended to
provide the Company with a prohibited share of income or profits;
(v) In the case of any lease providing for rents based on a fixed percentage
of receipts, such percentage will be fixed at the time the lease is
entered into, the provisions will be consistent with normal business
practices, and the arrangement will not be intended to provide the
Company with a prohibited share of income or profits; and
(vi) Services received by tenants in connection with their leases of the
Properties are usually or customarily rendered in connection with the
rental of space, and therefore the provision of these services will not
cause the rents received with respect to the Properties to fail to
qualify as Rents from Real Property for purposes of the 75% Gross Income
Test and the 95% Gross Income Test. The Company intends to hire
"independent contractors" to render services which it believes are not
"usually or customarily rendered" in connection with the rental of space,
including physical development or redevelopment activities. The Company
will not derive any revenue from such independent contractors. See
"Investment Objectives and Policies--Construction and Development
Activities."
160
<PAGE>
Income will qualify as attributable to the temporary investment of "new
capital" if the income is attributable to the ownership of a stock or debt
instrument, but only during the one year period beginning on the date the REIT
receives such new capital. "New capital" is defined as amounts received in
exchange for the issuance of stock (other than amounts received pursuant to a
dividend reinvestment plan) or a public offering of debt obligations which have
a maturity of at least five years. The Company represents that it will invest
funds not otherwise invested in Properties in cash sources, GNMA certificates,
REMIC interests, "new capital" investments or other liquid investments which
will allow the Company to satisfy the 75% Gross Income Test.
- 95% GROSS INCOME TEST (THE "95% GROSS INCOME TEST"). At least 95% of the
Company's gross income for the taxable year must be derived from income that
satisfies the 75% Gross Income Test, or from dividends, interest or gains from
the sale of securities other than securities held as Dealer Property. Dividends
and interest on obligations not collateralized by an interest in real property
qualify under the 95% Gross Income Test, but not under the 75% Gross Income
Test. The Company will invest funds not otherwise invested in Properties in cash
sources, GNMA certificates, REMIC interests, "new capital" investments or other
liquid investments which will allow the Company to qualify under the 95% Gross
Income Test.
Based upon the foregoing representations, the Company's share of income from
the Properties will primarily give rise to rental income qualifying under the
75% Gross Income Test and the 95% Gross Income Test, and gains on sales of the
Properties, substantially all of which should qualify under the 75% Gross Income
Test and the 95% Gross Income Test. The Company's anticipated operations
indicate that it is unlikely that the Company will have sufficient, if any,
non-qualifying income to cause adverse consequences. However, no assurance can
be given that the actual operations of the Company would allow it to satisfy the
Gross Income Tests.
If the Company fails to satisfy either the 75% Gross Income Test or the 95%
Gross Income Test for any taxable year, it may retain its status as a REIT for
such year if the failure was due to reasonable cause and not due to willful
neglect, the Company attached to its return a schedule of the sources of its
income, and any incorrect information on the schedules was not due to fraud. If
this relief provision was available, the Company would remain subject to a 100%
tax with respect to the greater of the excess net income that caused it not to
comply with the 75% Gross Income Test or the 95% Gross Income Test.
Should the potential amount of non-qualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid not qualifying as a REIT. However, there can be no
assurance that such action would be successful in maintaining the Company's
status as a REIT. In addition, such action could reduce the amount of cash
available for Distributions to the Stockholders. See "--Taxation of the
Company--Failure to Qualify" in this Section.
ANNUAL DISTRIBUTION REQUIREMENTS (THE "DISTRIBUTION TEST"). To qualify as a
REIT, the Company is required to distribute dividends (other than capital gain
dividends) to the Stockholders each year in an amount at least equal to the
difference between: (i) the sum of: (a) 95% of the Company's REIT Taxable Income
(computed without regard to the dividends paid deduction and the Company's net
capital gain); and (b) 95% of the net income (after tax), if any, from
Foreclosure Property; and (ii) the sum of certain items of non-cash income.
Subject to two exceptions, whether sufficient amounts have been distributed is
based on amounts paid in the taxable year to which they relate. Under the first
exception, dividends declared by the Company in October, November or December
will be treated as having been paid on December 31 of such year so long as the
dividends are actually paid during January of the following year. Under the
second exception, a dividend is treated as paid in the prior taxable year if the
Company declares the dividend and files an election before it timely files its
tax return for such prior taxable year and the dividend is paid within the
12-month period following the close of the prior taxable year and not later than
the date of the first regular dividend payment made after such declaration. A
distribution which is not pro rata within a class of Equity Stock or which is
not consistent with the rights to distributions between classes
161
<PAGE>
of Equity Stock is not taken into consideration for purposes of satisfying the
Distribution Test. If the Company fails to meet the Distribution Test as a
result of an adjustment to the Company's tax return by the Service, the Company
may cure the failure by paying a "deficiency dividend" (plus penalties and
interest to the Service) within a specified period. 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 portion. Further, to the extent that the
Company fails to distribute at least the sum of 85% of its REIT Taxable Income
for such year, 95% of its capital gain net income, and any undistributed taxable
income from prior taxable years, the Company would be subject to a 4% excise
tax.
A REIT is subject to tax on its net capital gain, but can reduce its capital
gain tax liability by paying capital gain dividends to its stockholders. The
amount of capital gain dividends that a REIT may pay for the year is limited to
its net capital gain, calculated without taking into account any current net
operating loss or net operating loss carryover. To the extent that a REIT elects
to pay capital gain dividends in excess of its net income for the taxable year,
it must increase its net operating loss carryover by such amount. In the
alternative, a REIT may declare a capital gain dividend but elect to retain and
pay tax on its net long-term capital gains. If the Company were to make such an
election, the Stockholders would be required to report the amount of the capital
gain dividend on their income tax returns, but would be entitled to claim a
credit or refund for a proportionate amount of the tax paid by the Company and
to increase their basis in the Shares by the excess of the amount of the capital
gain they must report over the tax on that capital gain the Stockholder would be
deemed to have paid.
The Company intends to pay sufficient dividends each year to satisfy the
Distribution Test. See "Investment Objectives and Policies--Distributions." It
is possible that the Company may not have sufficient cash or other liquid assets
to meet the Distribution Test due to tax accounting rules and other timing
differences. The Company will closely monitor the relationship between its REIT
Taxable Income and cash flow and, if necessary to comply with the Distribution
Test, will borrow funds to provide cash flow needed to satisfy the Distribution
Test. However, there can be no assurance that the Company's actual operations
will generate sufficient liquid assets, or would allow it to borrow, sufficient
cash to satisfy this requirement in any taxable year.
FAILURE TO QUALIFY. If the Company fails to qualify as a REIT in any
taxable year and the relief provisions are not available or cannot be met, the
Company will not be able to deduct its dividends and will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing cash available for Distributions.
Unless entitled to relief under specific statutory provisions, the Company will
not be eligible to elect REIT status for the four taxable years following the
year during which qualification was lost. The loss of REIT status may also
affect the character of Distributions received by the Stockholders because the
Company will no longer be able to designate a portion of its Distributions as
capital gain Distributions or be able to make deemed Distributions of its
capital gain income. As a result, all Distributions to Stockholders will be
treated as dividends and taxed as ordinary income to the extent that the Company
has current or accumulated earnings and profits, and Stockholders will no longer
be entitled to claim a credit for taxes paid by the Company on corporate capital
gains deemed distributed to the Stockholders.
PROHIBITED TRANSACTIONS. The Company will be subject to a 100% tax on any
net income from "Prohibited Transactions." Net income from a Prohibited
Transaction arises from the sale or exchange by a REIT of Dealer Property unless
such property is Foreclosure Property. In addition, there is an exception for
certain sales of Dealer Property so long as the property sold: (i) is a Real
Estate Asset under the 75% Asset Test; (ii) has been held for at least four
years, (iii) has capitalized expenditures not in excess of 30% of the net sales
price, (iv) was held for production of rental income for at least four years;
and (v) when combined with other sales in the year, does not cause the REIT to
have made more than seven sales of Dealer Property during the taxable year.
Although the Company may eventually sell each of the Properties
162
<PAGE>
it acquires, its primary intention in acquiring and operating the Properties is
the production of rental income and it does not expect to hold any Property as
Dealer Property.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS. The Company may
hold direct or indirect interests in the one or more partnerships (the
"Partnerships"), including the Operating Partnership. The Company anticipates
that it will operate as an Umbrella Partnership Real Estate Investment Trust (an
"UPREIT") holding an interest in the Operating Partnership directly and
interests in one or more Property Partnerships through the Operating
Partnership. The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investments in the
Partnerships. The discussion does not address state or local tax laws or any
federal tax laws other than income tax laws.
PARTNERSHIP CLASSIFICATION. The Company is entitled to include in its
income its distributive share of the income, and to deduct its distributive
share of the losses, of each of the Partnerships only to the extent that each
such Partnership is classified for federal income tax purposes as a partnership
rather than as an association (or publicly-traded partnership) taxable as a
corporation.
Prior to January 1, 1997, an organization formed as a partnership was
treated as a partnership for federal income tax purposes rather than a
corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. Under final
Treasury Regulations which became effective January 1, 1997, the four factor
test has been eliminated, and an entity with two or more members formed as a
partnership or limited liability company under relevant state law will be taxed
as a partnership for federal income tax purposes unless it specifically elects
otherwise. The final Treasury Regulations also provide that the Service will not
challenge the classification of an existing partnership for tax periods prior to
January 1, 1997 so long as (i) the entity had a reasonable basis for its claimed
classification, (ii) the entity and all its members recognized the federal
income tax consequences of any changes in the entity's classification within the
60 months prior to January 1, 1997, and (iii) neither the entity nor any member
of the entity had been notified in writing on or before May 8, 1996, that the
classification of the entity was under examination by the Service.
The Company believes that the Operating Partnership will be treated as a
partnership for federal income tax purposes because it was formed as a
partnership under state law after January 1, 1997, and will have two or more
partners. Further, for each Property Partnership acquired by the Company that
was formed prior to January 1, 1997, if any, the Company expects to determine
prior to such acquisition that such Property Partnership was treated as a
partnership for federal income tax purposes for the periods before January 1,
1997, and that such Partnership had a reasonable basis for its claimed
classification.
Additionally, the Company believes that none of the Partnerships will be
treated as publicly traded partnerships within the meaning of Section 7704 of
the Code, which are taxed as corporations for federal income tax purposes. The
Company represents that none of the interests in the Partnerships are or will be
registered under the Securities Act or traded on an established securities
market and none of the Partnerships have more than 100 partners for purposes of
Section 7704 of the Code (or will otherwise fall within one of the other "safe
harbors" for the Partnership to avoid being treated as having interests which
are "readily tradable on a secondary market (or the substantial equivalent
thereof)." The Company further believes that none of the Partnerships will be
treated as a publicly traded partnership on the basis that 90% or more of the
annual gross income of such Partnerships will be from certain passive sources,
such as Rents from Real Property, interest, and the sale or disposition of real
property and capital assets, and that none of the Partnerships would be
described as an investment company if it were a domestic corporation. However,
the ability to satisfy the requirements of these safe harbors and avoid
treatment as a publicly traded partnership will depend on the results of the
actual operations of the Partnerships.
If for any reason any of the Partnerships were taxable as a corporation or
as a publicly traded partnership rather than as a partnership for federal income
tax purposes, the character of the Company's
163
<PAGE>
assets and items of gross income would change, and, as a result, the Company
would most likely be unable to satisfy the Gross Income Tests and Asset Tests,
which would thus prevent the Company from qualifying as a REIT. See "--Taxation
of the Company--Failure to Qualify" in this Section. In addition, any change in
the status for tax purposes of any of the Partnerships might be treated as a
taxable event, in which case the Company could incur a tax liability without any
related cash distribution. Further, if any of the Partnerships were treated as
an association taxable as a corporation or as a publicly traded partnership,
items of income, gain, loss, deduction and credit of such Partnership would be
subject to corporate tax. The partners of any such Partnership would be treated
for federal income tax purposes as stockholders, with distributions to such
partners being treated as dividends. Finally, to the extent that the Company
owned more than 10% of the interests of such Partnership, the Company would no
longer satisfy the 25% Asset Test and therefore would no longer qualify as a
REIT. See "--Taxation of the Company--Gross Income Tests" and "--Asset Tests" in
this Section.
PARTNERSHIP ANTI-ABUSE REGULATIONS. The Service has issued final anti-abuse
Treasury Regulations under the partnership provisions of the Code (the
"Partnership Provisions") that authorize the Service, in certain abusive
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
anti-abuse regulations apply where a partnership is formed or utilized in
connection with a transaction (or series of related transactions) with a
principal purpose of substantially reducing the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The anti-abuse regulations state that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities though a flexible arrangement that accurately reflects
the partners' economic agreement and clearly reflects the partners' income
without incurring any entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The anti-abuse regulations contain an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partnership
interest. The limited partners of that partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate basis in such property. In addition, some of the limited partners have
the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the Service.
However, the redemption rights associated with the LP Common Units of the
Operating Partnership will not conform in all respects to the redemption rights
contained in the foregoing example. See "Operating Partnership
Agreement--Limited Partner Redemption Rights" for a description of the
redemption rights of holders of LP Common Units. Moreover, the anti-abuse
regulations are extraordinarily broad in scope and are applied based on an
analysis of all of the facts and circumstances. As a result, there can be no
assurance that the Service will not attempt to apply the anti-abuse regulations
to the Company. If the conditions of the anti-abuse regulations are met, the
Service is authorized to take appropriate enforcement action, including
disregarding the Operating Partnership for federal tax purposes or treating one
or more of the partners as nonpartners. Any such action potentially could
jeopardize the Company's status as a REIT and materially affect the tax
consequences and economic return resulting from an investment in the Company.
164
<PAGE>
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
The following is a summary of the federal income tax consequences of the
Company's investment in the Operating Partnership. This discussion should also
generally be relevant to an investment by the Company in a Property Partnership.
CONTRIBUTIONS OF PROPERTY. In general, no gain or loss will be recognized
either by the contributing partner or by the Operating Partnership on the
transfer of a Property in exchange for Units in the Operating Partnership. Gain
(but not loss) may be recognized by the partner transferring the Property to the
Operating Partnership if the partner receives consideration other than Units in
exchange for the Property, if liabilities of the partner are assumed in
connection with the transfer of the Property, if the transfer of the Property is
treated as a disguised sale, and in certain other circumstances.
DETERMINATION OF INITIAL BASIS AND ADJUSTED BASIS IN UNITS. The initial
basis of Units received in exchange for a contribution to the Operating
Partnership is equal to the sum of (i) the amount of money contributed (or
deemed contributed); (ii) the adjusted basis of any Property contributed; less
(iii) the amount of any money distributed (or deemed distributed) by the
Operating Partnership in connection with such contribution. Basis in Units
acquired through other means is determined under other rules. In addition, other
rules, such as the disguised sale rules, may affect the basis of the partner's
Units. In general, and assuming that the Operating Partnership does not own any
depletable property, the adjusted basis of the Units of a partner is increased
to reflect (i) the partner's distributive share of the taxable income of the
Operating Partnership, and (ii) the amount of any additional capital
contributions made by such Partner. The adjusted basis of the Units of a partner
is reduced to reflect (i) the amount of cash distributed to the partner (or
deemed distributed); (ii) the adjusted basis of any partnership property
distributed to the partner; and (iii) the partner's distributive share of the
losses, deductions and nondeductible expenditures of the partnership not
properly chargeable to capital account. For this purpose, the assumption of a
partnership liability by a partner is treated as a deemed cash contribution by
the partner and the assumption of a partner's liability by the partnership is
treated as a deemed cash distribution to the partner. Finally, the basis of a
Unit is adjusted to reflect the partner's share of the liabilities of the
partnership under federal tax regulations that allocate liabilities to partners
in a partnership. Allocations of partnership liabilities are solely for tax
purposes and do not affect the limited liability of Limited Partners in the
Operating Partnership.
The adjusted basis of a partner in the Operating Partnership is important
for a number of reasons. The amount of losses and deductions which can be
allocated to a partner cannot exceed the partner's adjusted basis in the
partner's Unit. Any excess loss or deduction allocated to a partner is suspended
indefinitely until the partner has sufficient additional basis. In addition, the
amount of gain or loss recognized on distributions to the partner, the adjusted
basis of property distributed to the partner from the partnership, and the gain
or loss recognized by a partner on the sale or other disposition of Units are
all calculated based on the adjusted basis of the partner's interest in the
partnership.
PARTNERS, NOT PARTNERSHIP, SUBJECT TO TAX. A partnership (that is not a
publicly traded partnership) is not subject to tax as an entity for federal
income tax purposes. Rather, partners are allocated their proportionate share of
the items of income, gain, loss, deduction and credit of the partnership, and
are potentially subject to tax thereon, without regard to whether the partners
receive any distributions from the partnership. There can be no assurance that
distributions from the Operating Partnership in any period will be sufficient to
pay the tax liabilities of partners resulting from an investment in the
Operating Partnership. The Company will be required to take into account its
allocable share of the foregoing items of the Partnerships for purposes of the
various REIT Gross Income Tests and Asset Tests, and in the computation of its
REIT Taxable Income and federal income tax liability. See "--Taxation of the
Company--Ownership of a Partnership Interest" in this Section.
165
<PAGE>
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of a partnership's income and losses among the
partners, such allocations may be disregarded for tax purposes under Section
704(b) of the Code and the Treasury Regulations promulgated thereunder. If any
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. The Company believes that the allocations of taxable
income and loss contained in the Operating Partnership Agreement comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
The net profits of the Operating Partnership generally will be allocated for
federal income tax purposes among the partners in the following order and
priority. First, net profits shall be allocated to the holders of the LP
Preferred Units, if any, until the amount of such net profits allocated to each
such holder for the current and all prior taxable years equals the preferred
return, if any, distributed to such holder for the current and all prior taxable
years. Second, net profits shall be allocated to the holders of GP Common Units
and LP Common Units (and to the holders of LP Preferred Units, if any, which are
entitled to share in the profits of the Operating Partnership beyond, or in lieu
of, the receipt of any preferred return), PARI PASSU, until the amount of such
net profits allocated for the current year and all prior taxable years to each
such holder equals the cumulative amount distributed to each such holder (other
than distributions of the preferred return) for the current and all prior
taxable years. Third, net profits shall be allocated to the holders of the LP
Preferred Units, if any, until the amount of such net profits equals the amount
of any accrued but unpaid preferred return, if any, for the current and all
prior taxable years for which net profits have not been allocated previously.
Fourth, any remaining amounts of net profits shall be allocated to the holders
of the GP Common Units and the LP Common Units (and to the holders of LP
Preferred Units, if any, which are entitled to share in the profits of the
Operating Partnership beyond, or in lieu of, the receipt of any preferred
return) in proportion to the number of Units owned by each such holder.
Any net loss of the Operating Partnership generally will be allocated among
the partners in accordance with their relative positive capital account
balances. Losses in excess of such positive capital account balances will be
allocated to the Company as the General Partner.
In some cases, special allocations of net profits and net losses will be
required to comply with the federal income tax principles governing tax
allocations.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated Property that is contributed to the Operating Partnership in
exchange for Units in the Operating Partnership must be allocated for federal
income tax purposes 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 basis of the Property at the time of contribution. These
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners.
The Partnerships will be formed by way of contributions, including
contributions of appreciated Property by certain Limited Partners. Consequently,
the Operating Partnership Agreement requires allocations of income, gain, loss
and deduction attributable to such contributed Property to be made in a manner
that is consistent with Section 704(c) of the Code.
In general, these allocations tend to eliminate the book-tax differences
over the life of the Partnerships by allocating to the Limited Partners who
contribute appreciated Properties to the Operating Partnership, solely for tax
purposes, lower amounts of depreciation deductions and increased taxable income
and gain on the sale by the Partnerships of the Properties than would ordinarily
be the case for
166
<PAGE>
economic or book purposes. However, these allocations may not always entirely
rectify book-tax differences on an annual basis or with respect to a specific
taxable transaction such as a sale. As a result of the application of Section
704(c) of the Code, it is possible that the Company (i) may be allocated lower
amounts of depreciation deductions for tax purposes with respect to contributed
Properties than if such Properties had a tax basis equal to their fair market
value at the time of contribution, and (ii) may be allocated taxable gain in the
event of a sale of such contributed Properties in excess of the economic profit
allocated to the Company from such sale. This may cause the Company to recognize
taxable income in excess of such proceeds and may affect the calculation of the
Company's earnings and profits for purposes of determining whether a
Distribution is a dividend. This may increase the portion of the Company's
Distribution treated as a dividend and taxed as ordinary income to Stockholders.
Moreover, the application of the principles of Section 704(c) of the Code in
tiered partnership arrangements is not entirely clear. Accordingly, the Service
may assert that a different allocation method than the one selected by the
Operating Partnership should be used to eliminate any such book-tax differences.
With respect to any Property purchased by any of the Partnerships subsequent
to the formation of the Company, such Property will initially have a tax basis
equal to its fair market value and Section 704(c) of the Code will not apply.
DEPRECIATION DEDUCTIONS AVAILABLE TO THE OPERATING PARTNERSHIP. For federal
income tax purposes, depreciation deductions will be computed using the
straight-line method. Buildings, structural components and improvements thereto
generally will be depreciated over 40 years. Certain improvements to land are
depreciated over 15 years.
Depreciation deductions with respect to Properties transferred to the
Operating Partnership in exchange for LP Common Units must be calculated using
the transferor's basis, recovery period and method of depreciation. Property
acquired by a transferor prior to May 13, 1993, may be subject to depreciation
using different methods and recovery periods. The effect of this rule is to
continue the historical basis, placed in service dates and depreciation methods
with respect to Property contributed to a partnership. In general, this will
result in the Operating Partnership and the Property Partnerships claiming less
depreciation than if the contributed Properties were purchased in a taxable
transaction. Generally, the burden of lower depreciation deductions will fall
first on the contributing partner, but may also reduce the depreciation
allocated to the other partners.
Gain on the sale or other disposition of depreciable property is
characterized as ordinary income rather than as capital gain to the extent of
any applicable depreciation recapture. Buildings and improvements depreciated
using the straight-line method of depreciation generally are not subject to
depreciation recapture unless held for less than one year. However, individuals,
trusts and estates who hold Shares either directly or through one or more pass
through entities may be subject to tax on long-term capital gain recognized on
the disposition of such assets at a rate of 25%, rather than at the 20% rate
normally applicable to capital gains of such Stockholders, to the extent that
such assets have been depreciated. See "--Taxation of Stockholders" in this
Section for a description of the tax consequences of distributions to
Stockholders.
OTHER DEDUCTIBLE EXPENSES OF THE OPERATING PARTNERSHIP. Certain expenses
incurred in the conduct of the Operating Partnership's activities may not be
deductible in the year paid. To the extent that this occurs, the taxable income
of the Operating Partnership may exceed its cash receipts for the year in which
the expense is paid. As discussed above, the costs of acquiring Properties must
generally be recovered through depreciation deductions over a number of years.
The following are examples of other types of material expenses which may not be
deductible in the year paid. To the extent that the Operating Partnership incurs
expenses for prepaid interest in connection with a loan, such interest will be
deducted in the year to which it relates rather than in the year in which it was
paid. To the extent the Operating Partnership incurs other loan fees, such fees
generally will have to be amortized over the term of the loan rather than
deducted in
167
<PAGE>
the year paid. To the extent that the Operating Partnership prepays management
fees, such fees generally will be deductible in the year services are provided
rather than in the year the payments are made.
TAX CONSEQUENCES OF DISTRIBUTIONS. A partner will recognize gain on
distributions from the Operating Partnership only to the extent that the amount
of any cash or marketable securities distributed to the partner exceeds the
partner's adjusted basis in his or her Units. For this purpose, a reduction in
the liabilities of the Operating Partnership allocated to such Unit holder for
federal income tax purposes is treated as a deemed distribution of cash on which
gain or loss may be recognized. See "--Income Taxation of the Partnerships and
Their Partners--Determination of Initial Basis and Adjusted Basis in Units" in
this Section for a discussion of the calculation of adjusted basis.
In general, no gain is recognized on the distribution of property other than
money or marketable securities to a partner. In the case of a distribution other
than in complete liquidation of the partner's interest in the Operating
Partnership, the partner's adjusted basis in such property is equal to the
lesser of the Operating Partnership's adjusted basis in such property
immediately before the distribution and the partner's adjusted basis in his or
her Units, reduced by the amount of any money or marketable securities
distributed to the partner. In the case of a distribution in complete
liquidation of a partner's Units, the partner's aggregate adjusted basis in such
property or properties distributed is equal to the partner's adjusted basis in
his or her Units, reduced by the amount of any money or marketable securities
distributed to such partner.
A partner will not recognize loss as the result of a distribution except on
the complete liquidation of his or her Units in which the partner receives only
money, unrealized receivables and/or inventory, and then only to the extent the
money and the adjusted basis of the property received exceed the partner's
adjusted basis in his or her Units immediately before the distribution. See
"--Income Taxation of the Partnerships and Their Partners--Determination of
Initial Basis and Adjusted Basis in Units" in this Section for an explanation of
the calculation of a partner's adjusted basis in his or her Units.
Any gain or loss recognized as the result of a distribution to a partner
will generally be capital gain or loss, but may be recharacterized as ordinary
gain or loss to the extent that the Operating Partnership holds "unrealized
receivables" or inventory. "Unrealized receivables" include rights to payment
for services rendered or to be rendered (to the extent not previously included
in the income of the Operating Partnership), as well as amounts that would be
subject to recapture if the Operating Partnership had sold its assets at their
fair market value at the time of a transfer of the Unit, such as unrecaptured
prior depreciation deductions. See "--Income Taxation of the Partnerships and
Their Partners--Depreciation Deductions Available to the Operating Partnership"
in this Section for an explanation of depreciation recapture.
TAX CONSEQUENCES OF DISPOSITIONS OF UNITS GENERALLY. If a Unit is sold or
disposed of in a manner that is treated as a sale for federal income tax
purposes, the holder of the Unit will generally recognize gain or loss based on
the difference between the amount realized for tax purposes and the holder's
adjusted basis in such Unit. See "--Income Taxation of the Partnerships and
Their Partners--Determination of Initial Basis and Adjusted Basis in Units" in
this Section for a description of the calculation of adjusted basis. The amount
realized will be equal to the sum of the cash and the fair market value of other
property received plus the amount of any liabilities of the Operating
Partnership which are allocated to the Unit holder for federal income tax
purposes. It is possible that the amount of gain recognized or the tax imposed
on the disposition could exceed the amount of cash and/or value of any property
received upon such disposition.
In general, gain recognized on the sale or other taxable disposition of a
Unit will be treated as gain from the sale or disposition of a capital asset and
taxed as capital gain. To the extent that the amount realized on the sale or
disposition is attributable to the Unit holder's share of substantially
appreciated inventory or unrealized receivables of the Operating Partnership,
such portion may be recharacterized as ordinary income.
168
<PAGE>
TAX CONSEQUENCES OF EXERCISE OF CONVERSION RIGHT. Subject to certain
restrictions, the Operating Partnership gives holders of LP Common Units the
right to convert their Units into Shares of the Company under certain
circumstances, subject to the Company's right to elect (except in certain
limited circumstances) to acquire such Units for cash rather than for Shares.
See "Operating Partnership Agreement-- Limited Partner Conversion Rights" for a
further explanation of such rights. The conversion of LP Common Units into
Shares is treated as a taxable sale of the Units to the Company on which gain or
loss is recognized by the LP Common Unit holder. The Company's adjusted basis in
its Units will be increased by the amount of cash and the Market Price of the
Shares used to acquire the Units, and will be adjusted to reflect changes in the
liabilities of the Operating Partnership allocated to the Company for federal
income tax purposes. See "--Income Taxation of the Partnerships and Their
Partners--Determination of Initial Basis and Adjusted Basis in Units" in this
Section for a discussion of how allocations of partnership liabilities affect a
partner's adjusted basis in such partner's Units.
TAX CONSEQUENCES OF EXERCISE OF REDEMPTION RIGHT. Subject to certain
restrictions, the Operating Partnership Agreement gives holders of LP Common
Units the right to demand that their Units be redeemed by the Operating
Partnership. Upon exercise of this right, the Company has the option of
acquiring the LP Common Units to be redeemed either for Shares or for cash in
lieu of having the Operating Partnership redeem such LP Common Units. See
"Operating Partnership Agreement--Limited Partner Redemption Rights" for a
fuller explanation of such rights.
Exercise of the redemption right is a taxable transaction in which gain or
loss is recognized by the LP Common Unit holder. No gain or loss will be
recognized by the Operating Partnership (or by the Company in the event the
Company exercises its right to acquire the Units for cash or for Shares). If the
Company acquires the Units for cash or for Shares, its adjusted basis in its
Units will be increased by the amount of cash and the Market Price of the Shares
used to acquire the Units, and will be adjusted to reflect changes in the
liabilities of the Operating Partnership allocated to the Company for federal
income tax purposes. See "--Income Taxation of the Partnerships and Their
Partners--Determination of Initial Basis and Adjusted Basis in Units" in this
Section for a discussion of how allocations of partnership liabilities affect a
partner's adjusted basis in such partner's Units.
A redemption of Units by the Operating Partnership using funds contributed
by the Company may be recharacterized by the Service as a sale of such Units to
the Company with the tax consequences to the Company described in the preceding
paragraph. In the event the transaction is not recharacterized by the Service as
a sale of the Units to the Company, or in the event that the Operating
Partnership redeems the LP Common Units for cash that is not contributed by the
Company to the Operating Partnership for such purpose, the original transfer of
a Property to the Partnership in exchange for the Units to be redeemed may be
recharacterized as a disguised sale of such Property. The LP Common Unit holder
would not be entitled to recognize loss on the transaction unless there was a
complete redemption of all the holder's Units and the holder did not receive any
property in the disposition other than cash, unrealized receivables or
inventory. The amount and character of any gain or loss recognized on the
redemption of the holder's LP Common Units are discussed under "--Income
Taxation of the Partnerships and Their Partners--Tax Consequences of
Dispositions of Units Generally" in this Section.
If the Company contributes cash to enable the Operating Partnership to
redeem the LP Common Units, the transaction may be recharacterized by the
Service as a sale of such Units to the Company. If the transaction is not
recharacterized as a sale of the LP Common Units, the tax consequences would be
as described in the preceding paragraph. If the transaction is recharacterized
by the Service as a sale of the LP Common Units to the Company, the tax
consequences would be as described under "--Income Taxation of the Partnerships
and Their Partners--Tax Consequences of Exercise of Conversion Right" in this
Section. Recharacterization of the contribution of the Property in this manner
could have a number of tax consequences for the Operating Partnership and for
the Company and its Stockholders. First, items of income, gain, loss and
deduction might have to be reallocated among the partners, including the
Company, for federal income tax purposes. Second, the Operating Partnership's
adjusted basis in the Property would
169
<PAGE>
have to be recalculated which could have the effect of either increasing or
decreasing the Operating Partnership's depreciation deductions with respect to
the Property. Third, the transaction could be subject to the installment sale
and original discount rules which could affect the amount and timing of the
Company's deductions.
TAX CONSEQUENCES OF TERMINATION OF THE OPERATING PARTNERSHIP. The Operating
Partnership will be considered as having terminated for federal income tax
purposes if either (i) no part of any business of the Operating Partnership
continues to be carried on, or (ii) within a 12 month period there is a sale or
exchange of Units representing 50 percent or more of the total ownership in the
Operating Partnership. The Operating Partnership would be considered as having
terminated solely for tax purposes and termination would not result in an actual
liquidation of the Operating Partnership or dissolution of the Operating
Partnership for state law purposes.
The termination of the Operating Partnership will cause its taxable year to
close. This may result in a bunching of income if the Operating Partnership's
taxable year is different from that of its partners. Both the Operating
Partnership and the Company intend to use the calendar year as its taxable year.
Additional tax consequences may result if the termination of the Operating
Partnership does not incur in connection with its liquidation. The Operating
Partnership would be deemed to have distributed its Properties to its partners
and immediately thereafter the partners would be deemed to have contributed the
assets to a new partnership. See "--Income Taxation of the Partnerships and
Their Partners-- Contributions of Property" and "--Tax Consequences of
Distributions" in this Section for a discussion of the potential tax
consequences of contributions and distributions . Because no actual cash would
be distributed as a result of the termination, the tax on any gain recognized by
the Company and the other Unit holders would have to be paid out of funds from
other sources. The deemed distribution and recontribution resulting from a
termination of the Operating Partnership may also impact the capital accounts of
the partners, the adjusted basis of the Properties, and the adjusted basis of
the partners' Units, all of which could result in further tax consequences
following the termination.
It is unlikely that the Operating Partnership would terminate as a result of
a sale or exchange of Units representing 50 percent or more of the total
ownership in the Operating Partnership. Provisions in the Operating Partnership
Agreement specifically prohibit transfers of Units and any exercise of
redemption or conversion rights that would cause a termination of the Operating
Partnership.
TAX CONSEQUENCES OF THE LIQUIDATION OF THE OPERATING PARTNERSHIP. For a
discussion of the tax consequences of liquidating distributions to partners in
the Operating Partnership, see "--Income Taxation of the Partnerships and Their
Partners--Tax Consequences of Distributions" in this Section.
TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as the Company qualifies
as a REIT, Distributions paid to the Company's taxable domestic Stockholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends or retained capital gains) will be ordinary dividend income to
the Stockholder. Distributions in excess of current and accumulated earnings and
profits are treated first as a tax-deferred return of capital to the
Stockholder, reducing the Stockholder's tax basis in its Equity Stock by the
amount of such Distribution. The adjustment to tax basis will result in
increased gain or a reduced loss on sales of the Stockholder's Equity Stock.
Because earnings and profits are reduced for depreciation and other non-cash
items, it is possible that a portion of each Distribution will constitute a
tax-deferred return of capital. Distributions in excess of the Stockholder's tax
basis are taxable as capital gains.
Dividend income is characterized as "portfolio" income under the passive
loss rules and cannot be offset by a Stockholder's current or suspended passive
losses. Corporate Stockholders cannot claim the dividends received deduction for
such dividends as long as the Company qualifies as a REIT. Distributions that
are designated as capital gain dividends will be taxed as long-term capital
gains (to the extent they do
170
<PAGE>
not exceed the Company's actual net capital gain for the taxable year). However,
corporate Stockholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Although Stockholders generally recognize
taxable income in the year that a Distribution is received, any Distribution
declared by the Company in October, November or December of any year and payable
to a Stockholder of record on a specific date in any such month shall be treated
as both paid by the Company and received by the Stockholder on December 31 of
the year it was declared if paid by the Company during January of the following
calendar year. Because the Company is not a pass-through entity for tax
purposes, Stockholders may not use any operating or capital losses, or foreign
tax credits, of the Company to reduce their tax liabilities.
In addition, taxable Distributions from the Company will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Shares (or Distributions treated as such),
however, will be treated as investment income only if the Stockholder so elects,
in which case such capital gains will be taxed at ordinary income rates.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to U.S. Stockholders as
long-term capital gain for the taxable year (to the extent they do not exceed
the Company's actual net capital gain for the taxable year) without regard to
the period for which the U.S. Stockholders has held its Shares or other Equity
Stock. U.S. Stockholders that are corporations may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
The Company may elect to designate amounts retained as long-term capital
gain income. As discussed above, the Company would be taxed at regular corporate
capital gains tax rates on such amounts. See "--Taxation of the Company--Annual
Distribution Requirements (the "Distribution Test")" in this Section. In that
case, each Stockholder would include in income as long-term capital gain their
proportionate share of the Company's long-term capital gain and would increase
the adjusted basis in its Shares by the amount of the allocable long-term
capital gains retained by the Company and would also receive a credit for a
proportionate share of the tax paid by the Company. Each Stockholder would
increase the adjusted basis in the Equity Stock owned by the Stockholder by the
amount of the allocable long-term capital gain.
In general, the sale of Equity Stock held for more than 12 months will
produce long-term capital gain or loss, while all other sales will produce
short-term gain or loss, in each case with the gain or loss equal to the
difference between the amount of cash received from the sale and the
Stockholder's adjusted tax basis in the Equity Stock sold. Sales of Equity Stock
held directly or indirectly through one or more partnerships, S corporations, or
other pass through entities, by individuals, estates or trusts for more than 12
months, may qualify for the 20% reduced capital gains rate. However, any loss
from a sale or exchange of Equity Stock by a Stockholder who has held such
Equity Stock for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss, to the extent of any
Distributions from the Company that the Stockholder treated as long-term capital
gain. In addition, Distributions to Stockholders in excess of earnings and
profits that reduce a Stockholder's basis will increase the gain or reduce the
loss recognized upon the sale of the Equity Stock. Distributions received by
Stockholders upon the complete liquidation of the Company are treated as
received from the sale of their Equity Stock and will generally result in the
tax consequences described in the preceding paragraph.
CAPITAL GAINS AND LOSSES. A capital asset generally must be held for more
than one year in order for gain or loss derived from its sale or exchange to be
treated as long-term capital gain or loss. The highest marginal individual
income tax rate is 39.6% (as of January 1, 1999). The maximum tax rate on net
capital gains applicable to noncorporate taxpayers is 20% (as of January 1,
1999) for sales and exchanges of assets held for more than 12 months. The
maximum tax rate applicable to noncorporate taxpayers on long-term capital gain
from the sale of "Section 1250 property" (depreciable real property) is 25% (as
of January 1, 1999) to the extent such gain would have been treated as ordinary
income if the property were "Section
171
<PAGE>
1245 property." With respect to Distributions designated by the Company as
capital gain dividends and deemed distributions of retained capital gains, the
Company may designate (subject to certain limits) whether such a Distribution is
taxable to Stockholders at a 20% or 25% rate. Thus, the tax rate differential
between capital gain and ordinary income for individuals may be significant. In
addition, the characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. Capital losses not offset by capital
gains may be deducted against an individual's ordinary income only up to a
maximum annual amount of $3,000. Unused capital losses may be carried forward.
All net capital gain of a corporate taxpayer is subject to tax at ordinary
corporate rates. A corporate taxpayer can deduct capital losses only to the
extent of capital gains, with unused losses being carried back three years and
forward five years.
TERMINATION OF REIT STATUS. If the Company fails to qualify as a REIT in
any taxable year and the relief provisions are not available or cannot be met,
the Company will not be able to deduct its dividends and will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing cash available for Distributions.
Unless entitled to relief under specific statutory provisions, the Company will
not be eligible to elect REIT status for the four taxable years following the
year during which qualification was lost. The loss of REIT status may also
affect the character of Distributions received by the Stockholders because the
Company will no longer be able to designate a portion of its Distributions as
capital gain Distributions or be able to make deemed Distributions of its
capital gain income. As a result, all Distributions to Stockholders will be
treated as dividends and taxed as ordinary income to the extent that the Company
has current or accumulated earnings and profits, and Stockholders will no longer
be entitled to claim a credit for taxes paid by the Company on corporate capital
gains deemed distributed to the Stockholders.
BACKUP WITHHOLDING. The Company will report to its domestic Stockholders
and to the Service the amount of dividends paid during each calendar year, and
the amount (if any) of tax it withheld. A Stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such
Stockholder: (a) is a corporation or comes within other exempt categories; or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption, and otherwise complies with applicable requirements. A Stockholder
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 can be credited against the Stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distributions made to any Stockholders who fail to certify their
non-foreign status to the Company. See "--Taxation of Stockholders--Taxation of
Foreign Stockholders" in this Section.
TAXATION OF TAX-EXEMPT STOCKHOLDERS. Distributions by the Company to a
Stockholder that is a Tax-Exempt Entity should not constitute UBTI unless the
Tax-Exempt Entity borrows funds to acquire its Shares (or otherwise incurs
acquisition indebtedness within the meaning of the Code with respect to its
acquisition of the Equity Stock), or the Shares are otherwise used in an
unrelated trade or business of the Tax-Exempt Entity. However, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal service plans that are exempt from taxation
under paragraphs (7), (9), (17) and (20), respectively, of Code Section 501(c),
and organizations described in Section 501(c)(2) of the Code that support such
organizations, are subject to different UBTI rules, which generally will require
them to characterize Distributions from the Company as UBTI.
Notwithstanding the foregoing, if the Company constitutes a "Pension-Held
REIT," qualified plans exempt from tax under Section 401(a) of the Code
("Qualified Plans") that hold 10% or more of the Equity Stock (by value) could
recognize UBTI. The Company will constitute a Pension-Held REIT if either: (i)
at least one Qualified Plan holds more than 25% (by value) of the Equity Stock;
or (ii) one or more Qualified Plans (each of which owns more than 10% by value
of the Equity Stock) hold an aggregate of more than 50% (by value) of the Equity
Stock. If the Company were a Pension-Held REIT, then a
172
<PAGE>
portion of the dividends received by any Qualified Plan that holds 10% or more
of the Shares will constitute UBTI based on the ratio that the Company's gross
income (less allowable deductions) which would be considered UBTI if the REIT
were a Qualified Plan bears to the Company's total gross income (less certain
allowable deductions). The Ownership Limit contained in the Articles provides
that no Stockholder, whether a Qualified Plan or otherwise, is permitted to own
more than 9.8% (by number or by value) of the Shares without requesting and
obtaining prior Board approval. The Ownership Limit should prevent the Company
from unintentionally becoming a Pension-Held REIT; however, there can be no
assurance that the Company will not be a Pension-Held REIT. The Company
represents that the Board of Directors will not consent to allow anyone to
acquire more than 9.8% of the Shares if doing so would cause the Company to be a
Pension-Held REIT.
In connection with the offering of the Shares pursuant to this Prospectus,
Counsel has given its Opinion, based on the assumptions and representations made
in this Section and throughout this Prospectus, and on various representations
made by the Company and the Advisor to Counsel as to certain factual matters,
that, as of the date of this Prospectus, Distributions to a Stockholder which is
a Tax-Exempt Entity (other than certain Tax-Exempt Entities described in
paragraphs (7), (9), (17), and (20) of Code Section 501(c) and organizations
described in Section 501(c)(2) of the Code that support such organizations) will
not constitute UBTI under current law, unless: (a) such Stockholder has financed
the acquisition of its Shares with "acquisition indebtedness" (within the
meaning of the Code); or (b) a Qualified Trust owns more than 10% of the Equity
Stock and the Company is a Pension-Held REIT. The Opinion is subject to certain
limitations and qualifications. See "Risk Factors--Tax Risks--Risks Regarding
REIT Qualification and Consequences of Failure to So Qualify" and "--Limitations
on Opinion of Counsel"; and "--Opinion of Tax Counsel" in this Section.
TAXATION OF FOREIGN STOCKHOLDERS. The following discussion is intended only
as a summary of the rules governing income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Foreign Stockholders").
PROSPECTIVE FOREIGN STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF UNITED STATES, STATE AND LOCAL INCOME TAX LAWS ON AN
INVESTMENT IN THE COMPANY, INCLUDING ANY REPORTING REQUIREMENTS, AS WELL AS THE
TAX CONSEQUENCES IN OTHER COUNTRIES IN WHICH THEY ARE SUBJECT TO TAX.
In general, Foreign Stockholders will be subject to regular U.S. income tax
with respect to their investment in the Company if the investment is
"effectively connected" with the conduct of a trade or business in the United
States. A corporate Foreign Stockholder that receives income that is treated as
effectively connected with a U.S. trade or business may also be subject to the
"branch profits tax" under Section 884 of the Code. The following discussion
applies to Foreign Stockholders whose investment in the Company is not
considered "effectively connected."
Generally, any Distribution that constitutes ordinary income for tax
purposes will be subject to a U.S. tax equal to the lesser of 30% of the
dividend or the rate in an applicable tax treaty, which tax will be withheld by
the Company. A distribution in excess of the Company's earnings and profits is
treated first as a return of capital that will reduce a Foreign Stockholder's
basis in its Shares (but not below zero) and then as gain from the disposition
of such Shares, subject to the rules discussed below for dispositions.
Distributions by the Company that are attributable to gain from the sale or
exchange of a United States real property interest (a "USRPI") are taxed to a
Foreign Stockholder as if the Distributions were gains "effectively connected"
with a United States trade or business. Accordingly, a Foreign Stockholder will
be taxed at the capital gain rates applicable to a U.S. Stockholder (subject to
any applicable alternative minimum tax and a special alternative minimum tax in
the case of non-resident alien individuals). In addition, such Distributions may
also be subject to branch profits tax when made to a corporate Foreign
Stockholder that is not entitled to treaty exemptions.
173
<PAGE>
Although tax treaties may reduce the Company's withholding obligations, the
Company will generally be required to withhold from dividends to Foreign
Stockholders, and remit to the Service, 35% of designated capital gain dividends
and 30% of ordinary dividends paid out of earnings and profits. The Company
expects to withhold U.S. income tax at such rates unless (i) a lower treaty rate
applies and any required form evidencing eligibility for the reduced rate is
filed with the Company; (ii) the Foreign Stockholder files an IRS Form 4224 with
the Company claiming that the Distribution is effectively connected income; or
(iii) another exception applies and any required form evidencing eligibility for
the exception is filed with the Company. Solely for purposes of calculating the
applicable withholding tax rate, the Company will be deemed to have designated
the largest portion of a distribution that could be designated as a capital gain
dividend under the Code, regardless of the amount actually designated by the
Company. Thus, the 35% withholding rate may apply to a portion of ordinary
dividends in some cases. In addition, if the Company designates prior dividends
as capital gain dividends, subsequent dividends, up to the amount of such prior
dividends, will be treated as capital gain dividends for purposes of
withholding. If the amount of tax withheld by the Company with respect to a
distribution to a Foreign Stockholder exceeds its U.S. tax liability with
respect to such distribution, the Foreign Stockholder may file for a refund of
such excess from the Service. The 35% withholding tax rate on capital gain
dividends currently corresponds to the maximum income tax rate applicable to
corporations, but is higher than the 28% maximum rate on capital gains of
individuals.
Unless the Shares constitute a USRPI under Section 897 of the Code, a sale
of Shares by a Foreign Stockholder generally will not be subject to U.S. income
taxation. The Shares will not constitute a USRPI 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 Foreign Stockholders. It is
currently anticipated that the Company will be a Domestically Controlled REIT,
and therefore that the sale of Shares will not be subject to such taxation.
However, because the Shares may be (but are not guaranteed to be) publicly
traded, no assurance can be given that the Company will continue to be a
Domestically Controlled REIT. Notwithstanding the foregoing, capital gain which
is not subject to U.S. income taxation under these rules will be taxable to a
Foreign Stockholder if the Foreign Stockholder is a non-resident alien
individual who is present in the U.S. for 183 days or more during the taxable
year and certain other conditions apply, in which case the non-resident alien
individual will be subject to a 30% tax on his or her U.S. source capital gains.
If the Company does not constitute a Domestically Controlled REIT, whether a
Foreign Stockholder's sale of his or her Shares would be subject to tax as a
sale of a U.S. real property interest would depend on whether the Shares were
"regularly traded" on an established securities market and on the size of the
selling Stockholder's interest in the Company. If the gain on the sale of Shares
was subject to taxation under these rules, the Foreign Stockholder would be
subject to the same treatment as a U.S. Stockholder with respect to the gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). In addition, Distributions
that are treated as gain from the disposition of Shares and are subject to tax
under Section 897 of the Code may also be subject to a 30% branch profits tax
when made to a corporate Foreign Stockholder that is not entitled to treaty
exemptions. In the case of a sale of Shares by a Foreign Stockholder (or a
Distribution treated as a sale), the purchaser will not be required to withhold
on the purchase price if the purchased Shares are "regularly traded" on an
established securities market or if the Company is a Domestically Controlled
REIT. Otherwise, the purchaser of the Shares may be required to withhold 10% of
the purchase price and remit this amount to the Service.
If the proceeds of a disposition of Shares are paid by or through a U.S.
office of a broker-dealer, the payment is subject to information reporting and
to backup withholding unless the disposing Foreign Stockholder certifies as to
his name, address and non-U.S. status or otherwise establishes an exemption.
Generally, U.S. information reporting and backup withholding will not apply to a
payment of disposition proceeds if the payment is made outside the U.S. through
a non-U.S. office of a non-U.S. broker-dealer. U.S. information reporting
requirements (but not backup withholding) will apply, however, to a payment of
disposition proceeds outside the U.S. if (i) the payment is made through an
office outside the U.S. of a
174
<PAGE>
broker-dealer that is either (a) a U.S. person, (b) a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the U.S. or (c) a "controlled foreign corporation" for
U.S. federal income tax purposes, and (ii) the broker-dealer fails to initiate
documentary evidence that the Stockholder is a Foreign Stockholder and that
certain conditions are met or that the Foreign Stockholder otherwise is entitled
to an exemption.
OTHER TAX CONSIDERATIONS
COMPANY'S PURCHASE OF PROPERTIES WITH SHARES. If the Company acquires
Properties with Equity Stock, the Company will not have any gain or loss on the
issuance of its Equity Stock in exchange for such Properties, regardless of the
tax consequences for the seller. If the transaction is structured as a tax-free
transaction for the seller, such as a merger, the Company will take a carry-over
basis for tax purposes in the Property. Such a carry-over basis will produce a
lower basis for purposes of depreciation then would arise if the Company
acquired the Property in a taxable transaction, in which event, the Company's
basis in the acquired Property would be the same as if the Property was
purchased outright. This lower basis will result in lower depreciation
deductions on an annual basis which, all things equal, will increase the
Company's income, and, therefore, increase the amount of Distributions the
Company must pay in order to maintain its status as a REIT as compared to the
effects on income and Distributions had the Property been acquired in a taxable
transaction. In addition, if the Company acquires the Property in a tax-free
transaction, the built-in gain on the asset will be subject to tax at the
highest effective corporate rates if the Company sells such asset during the
10-year Recognition Period. See "--Taxation of the Company-- Overview" in this
Section. The Company represents that it will acquire only those Properties which
it intends to hold for more than 10 years.
DISTRIBUTION REINVESTMENT PROGRAM. Stockholders who purchase Shares in the
Offering and participate in the Distribution Reinvestment Program will recognize
taxable dividend income on the amount they would have received as Distributions
had they not elected to participate, even though they receive no cash. These
deemed dividends will be treated as actual dividends from the Company to the
participating Stockholders and will retain the character and tax effects
applicable to all dividends. In addition, the discount applicable to purchases
under the DRP (and discounted purchases of Equity Stock under other programs
operated by the Company) may constitute additional taxable income to the
purchaser. See "--Taxation of Stockholders" in this Section. Shares received
under the DRP will have a holding period beginning with the day after purchase,
and a tax basis equal to their cost, which is the gross amount of the deemed
Distribution.
STATE AND LOCAL TAXES. The Company and its Stockholders may be subject to
state or local taxation 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 Stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective Stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on a investment in the Shares.
LEGISLATIVE DEVELOPMENTS. On February 2, 1998, President Clinton introduced
his Fiscal Year 1999 Budget Proposals. Those budget proposals contained a number
of provisions which, if enacted, would affect the federal income tax treatment
of REITs.
First, the budget proposals provided for a freeze on the grandfathered
status of "stapled" or "paired share" REITs. This proposal was enacted as part
of the Internal Revenue Service Restructuring and Reform Act of 1998. The
Company will not have stapled or paired shares and therefore will not be
affected by this provision.
Second, the budget proposals would amend the 25% Asset Test to prohibit a
REIT from holding stock possessing more than 10% of the voting power or value of
all classes of stock of a corporation. This proposal was not enacted but could
be reproposed in future legislation.
175
<PAGE>
Third, the budget proposals included a provision that would impose an
additional requirement for REIT qualification. The provision would specify that
no person may own stock of a REIT possessing more than 50% of the total combined
voting power of all classes of voting stock, or more than 50% of the total value
of shares of all classes of stock. Certain attribution rules would be applied to
determine a person's stock ownership. This proposal was not enacted but could be
reproposed in future legislation. The restrictions on share ownership described
above should prevent the Company from violating this requirement, if it should
be enacted in the future. See "--Taxation of the Company--Share Ownership Tests"
in this Section. However, there can be no assurance that these restrictions
would permit the Company to satisfy this requirement. In the event that this
provision is enacted in the future and the Company failed to satisfy its
requirements, the Company would not qualify as a REIT. See "--Taxation of the
Company-- Failure to Qualify" in this Section.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
176
<PAGE>
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of ERISA and of Section 4975 of the
Code that may be relevant to a prospective purchaser of the Shares. This
discussion does not deal with all aspects of ERISA or Section 4975 of the Code
or, to the extent not preempted, state law that may be relevant to particular
employee benefit plan Stockholders (including plans subject to Title I of ERISA,
other employee benefit plans and IRAs subject to the prohibited transaction
provisions of Section 4975 of the Code, and governmental plans and church plans
that are exempt from ERISA and Section 4975 of the Code but that may be subject
to state law requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN,
AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975
OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP, OR SALE OF SHARES BY SUCH PLAN OR IRA. PLANS SHOULD ALSO
CONSIDER THE ENTIRE DISCUSSION UNDER THE PRECEDING SECTION ENTITLED "FEDERAL
INCOME TAX CONSIDERATIONS," AS MATERIAL CONTAINED THEREIN IS RELEVANT TO ANY
DECISION BY A PLAN TO PURCHASE THE SHARES.
In considering whether to invest a portion of the assets of a pension,
profit-sharing, retirement, IRA or other employee benefit plan ("Plan") in
Shares, fiduciaries of the Plan should consider, among other things, whether the
investment: (i) will be in accordance with the governing documents of the Plan
and is authorized and consistent with their fiduciary responsibilities under
ERISA; (ii) will allow the Plan to satisfy the diversification requirements of
ERISA, if applicable; (iii) will result in UBTI to the Plan (see "Federal Income
Tax Considerations--Taxation of Stockholders--Taxation of Tax-Exempt
Stockholders"); (iv) will be sufficiently liquid; and (v) is prudent and in the
best interests of the Plan, its participants and beneficiaries under ERISA
standards.
The fiduciary of an IRA, or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a "Non-ERISA Plan"), should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
In addition to imposing general fiduciary standards of investment prudence
and diversification, ERISA and the corresponding provisions of the Code prohibit
a wide range of transactions involving the assets of the Plan and persons who
have certain specified relationships to the Plan ("parties in interest" within
the meaning of ERISA, "disqualified persons" within the meaning of the Code).
A Prohibited Transaction may occur if the assets of the Company are deemed
to be assets of a Plan (I.E., the "look-through rule") which invests in Shares
and thereafter a "party in interest" or a "disqualified person" deals with the
assets in a manner not permitted under ERISA or the Code. Under such
circumstances, any person that exercises authority or control with respect to
the management or disposition of Plan assets is a Plan fiduciary and, therefore,
is a "party in interest" and a "disqualified person" capable of participating in
a Prohibited Transaction with the Plan. Thus, the action of an employee of the
Company in dealing with the assets of the Company can, under certain
circumstances, cause a Plan which invests in the Shares to be a participant in a
Prohibited Transaction. While "Plan assets" are not defined in ERISA or the
Code, the United States Department of Labor ("DOL") has issued regulations (the
"DOL Regulations") that provide guidance on the circumstances under which a
Plan's investment in Shares will be subject to the "look-through rule" and thus
turn the Company's assets into Plan assets. The DOL Regulations provide an
exception to the "look-through rule" for a Plan which invests in a
"publicly-offered security." This exception would apply to the Shares, if they
are part of a class of securities that is "widely- held," "freely-transferable,"
and either registered under Section 12(b) or 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective
registration statement
177
<PAGE>
under the Act, provided the class of securities of which the security is a part
are registered under the Exchange Act within 120 days or such longer period as
is allowed by the SEC after the end of the fiscal year of the issuer during
which the offering occurred. The Shares are being sold in an offering registered
under the Act and the Company represents that the class of securities of which
the Shares are a part will be registered under the Exchange Act within
applicable time limits.
The DOL Regulations indicate that a security is "widely-held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely-held"
because the number of independent investors falls below 100 subsequent to the
initial offering as a result of events beyond the issuer's control. The Company
represents that the Shares will be held by over 100 independent investors upon
conclusion of the Offering and, therefore should be considered "widely-held."
The DOL Regulations further provide that whether a security is
"freely-transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations state that generally, when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this Offering, certain restrictions ordinarily will
not, alone or in combination, affect the determination of the finding that such
securities are "freely-transferable." The DOL Regulations indicate that a
restriction or prohibition against a transfer or assignment which would result
in a termination or reclassification of an entity for federal or state income
tax purposes will not affect the determination of whether securities are "freely
transferable." The Company believes that the Ownership Limits imposed under the
Articles on the transfer of the Shares are designed to prevent violations of the
Five or Fewer Requirement (which would cause a termination of REIT status for
tax purposes) or are otherwise permitted under the DOL Regulations and,
therefore, will not cause the Shares to not be "freely-transferable."
The DOL Regulations are interpretive in nature and, therefore, no assurance
can be given that the DOL and the United States Department of the Treasury will
not conclude that the Shares are not "freely-transferable," or not
"widely-held". However, the Company believes that the Shares will be "publicly
offered securities" for purposes of the DOL Regulations and that (i) the assets
of the Company will not be deemed to be "plan assets" of any Plan that invests
in the Shares and (ii) any person who exercises authority or control with
respect to the Company's assets should not be treated as a Plan fiduciary of any
Plan that invests in the Shares, for purposes of the prohibited transaction
rules of ERISA and Section 4975 of the Code.
See "Risk Factors--ERISA Risks--Annual Statement of Value is an Estimate"
for an explanation of the annual statement of value to be provided by the
Company to Stockholders subject to ERISA.
PLAN OF DISTRIBUTION
GENERAL
Of the 56,000,000 Shares offered by this Prospectus, except for certain
Special Sales, the Company is offering 50,000,000 Shares through the Dealer
Manager to the public on a best efforts basis at a purchase price of $10 per
Share with a minimum initial investment of $3,000 ($1,000 in the case of
Tax-Exempt Entities, except for Iowa where the minimum investment for IRAs will
be $3,000 and for Minnesota where the minimum investment for IRAs and qualified
plan accounts will be $2,000); 4,000,000 Shares at a purchase price of $9.50 per
Share are being offered for issuance through the Distribution Reinvestment
Program; 2,000,000 Soliciting Dealer Warrants to purchase 2,000,000 Shares and
the 2,000,000 Shares underlying the Soliciting Dealer Warrants are also being
offered. See "Description of Securities--Soliciting Dealer Warrants." A "best
efforts" offering means that neither the Dealer Manager nor the Soliciting
Dealers are under any obligation to purchase any of the Shares being offered
and, therefore no specified number of Shares are guaranteed to be sold and no
specified amount of money is guaranteed to be raised from the Offering. The
Offering will commence as of the date of this Prospectus and if the Minimum
178
<PAGE>
Offering is sold and if this Offering continues thereafter, the Offering will
terminate on or before February 11, 2000, unless the Company elects to extend it
to a date no later than February 11, 2001, in states that permit such extension.
The Company reserves the right to terminate the Offering at any time.
See "Compensation Table--Nonsubordinated Payments--For and in Connection
With the Offering" and "--Volume Discounts" and "--Other Discounts" in this
Section for an explanation of certain permitted sales of Shares for less than
$10 per Share.
See "Management--Inland Securities Corporation" for a description of the
past activities of the Dealer Manager and of its key personnel.
ESCROW CONDITIONS
Subscription proceeds for qualified subscriptions will be deposited in a
segregated escrow account with the LaSalle National Bank, N.A., 120 South
LaSalle Street, Chicago, Illinois (the "Escrow Agent"), and will be held in
trust for the benefit of the subscribers pending release to the Company, and
will not be commingled. None of the Shares offered by this Prospectus will be
sold by the Company, no commissions or fees will be paid by it for any such
sales, and the initial admission of investors as Stockholders will not take
place unless paid subscriptions have been received and accepted for at least
200,000 Shares or $2,000,000 (the "Minimum Offering") within six months from the
initial date of this Prospectus. If subscriptions for at least the Minimum
Offering have not been received, accepted, and paid for within six months from
the initial date of this Prospectus, all funds received will be promptly
refunded in full, together with their pro rata share of any interest earned
thereon. If such refund is made, IREIC will pay any escrow fees.
The Escrow Agreement among the Company, the Dealer Manager, and the Escrow
Agent provides that escrowed funds will be invested by the Escrow Agent in an
interest-bearing account with the power of investment in short-term, highly
liquid securities issued or guaranteed by the U.S. Government or other
investments permitted under Rule 15c2-4 of the Securities Exchange Act of 1934,
as amended, or upon receipt of subscription proceeds for at least 200,000
Shares, in other short-term, highly liquid investments with appropriate safety
of principal. After the Minimum Offering has been raised, subscription proceeds
are expected to be released to the Company as subscriptions are accepted. All
subscriptions will be accepted or rejected within 10 days (and generally within
24 hours) after receipt by the Company, subject to the terms of the Escrow
Agreement.
The interest, if any, earned on subscription proceeds relating to the
Minimum Offering prior to their release to the Company from escrow will be
distributed to subscribers on a pro rata basis within 30 days after the end of
the quarter during which the subscriber was admitted as a Stockholder. After the
initial admission of Stockholders in connection with the sale of at least
200,000 Shares, Stockholders will not be entitled to interest earned on Company
funds or to receive interest on their Invested Capital.
ADVISOR'S COMPANY CONTRIBUTION AND ADVISOR'S PARTNERSHIP CONTRIBUTION
The Advisor purchased 20,000 Shares in connection with the organization of
the Company for $10 per Share, an aggregate purchase price of $200,000. The
Advisor also made a capital contribution in the amount of $2,000 prior to the
offering of Shares by the Company pursuant to this Prospectus, for which the
Advisor received 200 LP Common Units in the Operating Partnership valued at
$2,000. The Advisor may not sell or otherwise transfer these 20,000 Shares or
the 200 LP Common Units (or the Shares for which they may be exchanged) while it
remains the Advisor except to an Affiliate. The Advisor and its Affiliates may
purchase Shares for their own accounts. However, at no time on or after July 1,
2000 will the Advisor own 9.8% or more of the total number or value of the
Company's outstanding Shares. Any purchases of Shares by the Advisor during the
Offering will be for investment purposes only and not with a view toward
distribution.
179
<PAGE>
SUBSCRIPTION PROCESS
Except for certain Special Sales, the Shares are being offered to the public
through the Dealer Manager and the Soliciting Dealers. The form of Soliciting
Dealers Agreement between the Dealer Manager and the Soliciting Dealers requires
the Soliciting Dealers to make diligent inquiries, as required by law, of all
prospective purchasers in order to ascertain whether a purchase of Shares is
suitable for the person and to transmit promptly to the Company the completed
subscription documentation and any supporting documentation reasonably required
by the Company.
The Shares are being sold when, as and if subscriptions therefor are
received and accepted by the Company, subject to the satisfaction by the Company
of certain other conditions (including the escrow conditions described above
under "--Escrow Conditions" in this Section) and approval by counsel of certain
legal matters. The Company has the unconditional right to accept or reject any
subscription. A subscription will be accepted or rejected within 10 days (and
generally within 24 hours) after the receipt by the Company of a copy of the
Subscription Agreement, fully completed, and payment in good funds for the
number of subscribed Shares and, until the Minimum Offering is fully subscribed,
subject to the terms of the Escrow Agreement. If the subscription is accepted, a
confirmation will be mailed not more than three business days after acceptance
by the Company. A sale of the Shares may not be completed until at least five
business days after the date the subscriber receives a Prospectus and, as may be
required by certain state regulatory authorities, a copy of the Organizational
Documents. If for any reason the subscription is rejected, the check and
Subscription Agreement will be returned to the subscriber, without interest or
deduction, within 10 days after receipt.
REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT
The Subscription Agreement requires each Stockholder to make certain factual
representations, including the following:
(i) The Stockholder's tax identification number set forth in the
Subscription Agreement is accurate and the Stockholder is not subject to
backup withholding;
(ii) The Stockholder has received a copy of the Prospectus not less than
five business days prior to signing the Subscription Agreement, wherein
restrictions on ownership and transfer of Shares are described;
(iii) The Stockholder meets the minimum income and net worth and any other
applicable suitability standards established for investors in the
Company;
(iv) The Stockholder is purchasing the Shares for his or her own account;
and
(v) The Stockholder acknowledges that the Shares are not liquid.
Each of the above representations is included in the Subscription Agreement
in order to help satisfy the Company's responsibility to make every reasonable
effort to determine that the purchase of the Shares is a suitable and
appropriate investment for each Stockholder and that appropriate income tax
reporting information is obtained. The Company shall not sell any Shares to a
potential investor, unless such investor agrees to the above factual
representations by executing the Subscription Agreement. The Company would
likely assert the above representations as a defense to claims that it had not
made every reasonable effort to determine that the purchase of the Shares was a
suitable and appropriate investment for each Stockholder and that appropriate
income tax reporting information was obtained.
In addition to the above representations, any Affiliate of the Company must
represent that the Shares being purchased by such Affiliate are being purchased
for investment purposes only and not with a view toward immediate resale, in
order to comply with the federal and state securities laws.
180
<PAGE>
By executing the Subscription Agreement, the investor will not be waiving
any rights under the federal securities laws.
DETERMINATION OF INVESTOR SUITABILITY
The Company, the Dealer Manager and each Soliciting Dealer will make
reasonable efforts to determine that those persons being offered or sold the
Shares satisfy the suitability standards set forth herein and that an investment
in the Shares is an appropriate investment for the investor. The Soliciting
Dealers must ascertain that the investors can reasonably benefit from an
investment in the Company. In making the determination, the Soliciting Dealers
will consider whether: (i) the investor has the capability of understanding the
fundamental aspects of the Company based on the investor's employment
experience, education, access to advice from qualified sources such as
attorneys, accountants and tax advisors and prior experience with investments of
a similar nature; (ii) the investor has apparent understanding of: (a) the
fundamental risks and possible financial hazards of this type of investment; (b)
the lack of liquidity of this investment; (c) the Advisor's role in directing or
managing the investment; and (d) the tax consequences of the investment; and
(iii) the investor has the financial capability to invest in the Company.
By executing the Subscription Agreement, each Soliciting Dealer acknowledges
its determination that the Shares are a suitable investment for the investor.
Each Soliciting Dealer is required to represent and warrant that it has complied
with all applicable laws in determining the suitability of the Shares as an
investment for the subscriber. The Company and its Affiliates will coordinate
the processes and procedures utilized by the Dealer Manager and Soliciting
Dealers and, where necessary, implement such additional reviews and procedures
deemed necessary to determine that investors meet the suitability standards set
forth herein. The Dealer Manager and/or the Soliciting Dealers must maintain,
for at least six years, a record of the information obtained to determine that
an investor meets the suitability standards and a representation of the investor
that the investor is investing for the investor's own account or, in lieu of
such representation, information indicating that the investor for whose account
the investment was made met the suitability standards.
COMPENSATION PAYABLE BY THE COMPANY FOR THE SALE OF THE SHARES
Except for Special Sales, the Company will pay the Dealer Manager cash
selling commissions of 7% on all of the 50,000,000 Shares sold on a best efforts
basis for serving as the Dealer Manager of the Offering and for the sale of
Shares through its efforts. A portion of these selling commissions may, at the
discretion of the Dealer Manager, be retained or reallowed to Soliciting
Dealers, as compensation for their services in soliciting and obtaining
subscribers for the purchase of Shares. Except for certain Special Sales, an
additional 2% of the Gross Offering Proceeds from the 50,000,000 Shares sold on
a best efforts basis shall be paid to the Dealer Manager as a Marketing
Contribution in lieu of reimbursement of certain expenses associated with
marketing. In addition, except for certain Special Sales, the Dealer Manager may
be reimbursed by the Company for BONA FIDE due diligence expenses of the Dealer
Manager and the Soliciting Dealers not to exceed a maximum of 0.5% of the Gross
Offering Proceeds from the 50,000,000 Shares sold on a best efforts basis (the
Due Diligence Expense Allowance). All or any portion of the Marketing
Contribution and Due Diligence Expense Allowance may, at the discretion of the
Dealer Manager, be retained or reallowed to Soliciting Dealers. Generally, no
portion of the Marketing Contribution will be reallowed to Soliciting Dealers
unless they have a prescribed minimum annual sales volume of Shares. Marketing
and due diligence costs paid by the Dealer Manager on behalf of, or to, the
Soliciting Dealers, will be deducted from any Marketing Contribution or Due
Diligence Expense Allowance otherwise payable to the Soliciting Dealers.
The Company will offer to sell to the Dealer Manager one Soliciting Dealer
Warrant (for a price of $.0008 per Soliciting Dealer Warrant) for each 25 Shares
sold during the Offering, subject to federal and state securities laws and
subject to the issuance of a maximum of 2,000,000 Soliciting Dealer Warrants.
The Dealer Manager may retain or reallow the Soliciting Dealer Warrants to the
Soliciting Dealer who sold the
181
<PAGE>
Shares. The holder of a Soliciting Dealer Warrant will be entitled to purchase
one Share from the Company at a price of $12.00 per Share for each Soliciting
Dealer Warrant during the period commencing one year from the first date upon
which any of the Soliciting Dealer Warrants are issued and ending five years
after the effective date of the offering (the "Exercise Period"). See
"Description of Securities-- Soliciting Dealer Warrants" for additional
information regarding these warrants.
The maximum compensation to be paid by the Company in connection with the
Offering (assuming that there are no Special Sales) will not exceed: (i) a total
of 7% of the Gross Offering Proceeds for selling commissions from the sale of
the 50,000,000 Shares sold on a best efforts basis; and (ii) a total of 2% of
the Gross Offering Proceeds as the Marketing Contribution from the sale of the
50,000,000 Shares sold on a best efforts basis. The aggregate of these
commissions and expenses plus the value attributable to the Soliciting Dealer
Warrants that may be issued to the Dealer Manager and the Soliciting Dealers
will not exceed 10% of the Gross Offering Proceeds. The value attributable to
the Soliciting Dealer Warrants is approximately $0.90 per warrant or an
aggregate of approximately $1,800,000 for all the Soliciting Dealer Warrants,
assuming the best efforts offering of 50,000,000 Shares is fully subscribed and
the maximum of 2,000,000 Soliciting Dealer Warrants are issued. In addition, the
Dealer Manager and the Soliciting Dealers may be reimbursed by the Company for
BONA FIDE due diligence expenses not to exceed a maximum of 0.5% of the Gross
Offering Proceeds from the sale of the 50,000,000 Shares sold on a best efforts
basis, except for certain Special Sales.
No selling commissions, marketing contribution or due diligence expense
allowance will be paid in connection with (i) the sale of Shares, in connection
with the performance of services, to employees, Directors and associates of the
Company and its Affiliates, the Advisor, Affiliates of the Advisor, the Dealer
Manager or their respective officers and employees and certain their affiliates,
(ii) the purchase of Shares under the DRP, and (iii) the issuance of the
Soliciting Dealer Warrants or the Shares issuable upon exercise thereof. Reduced
selling commissions are payable on purchases of at least 25,000 Shares. No
selling commissions will be paid in connection with (i) the sale of Shares to
one or more Soliciting Dealers and to their respective officers and employees
and certain of their respective affiliates who request and are entitled to
purchase Shares net of selling commissions, (ii) the sale of Shares to certain
investors whose contracts for investment advisory and related brokerage services
include a fixed or "wrap" fee feature, and (iii) the Shares credited to an
investor as a result of a volume discount. All of the transactions mentioned in
this paragraph are collectively referred to as the "Special Sales."
The Company may not pay or award, directly or indirectly, any commissions or
other compensation to any person engaged by a potential investor for investment
advice as an inducement to such advisor to advise the investor to purchase
Shares; provided that nothing herein shall prohibit the registered broker-dealer
or other properly licensed person from earning a sales commission in connection
with a sale of the Shares.
VOLUME DISCOUNTS
Subject to certain conditions and exceptions explained below, investors
making an initial purchase of at least $250,010 worth of Shares (25,001 Shares)
through the same Soliciting Dealer will be entitled to a
182
<PAGE>
reduction of the customary 7% selling commission payable in connection with the
purchase of those Shares in accordance with the following schedule:
<TABLE>
<CAPTION>
AMOUNT OF PURCHASER'S
INVESTMENT
- ---------------------------- MAXIMUM SELLING AMOUNT OF VOLUME
FROM TO COMMISSION PER SHARE DISCOUNT
- ------------- ------------- ----------------------- -----------------
<S> <C> <C> <C>
$ 250,010 $ 500,000 6% 1%
500,010 1,000,000 5% 2%
1,000,010 2,500,000 4% 3%
2,500,010 5,000,000 3% 4%
5,000,010 10,000,000 2% 5%
10,000,010 and over 1% 6%
</TABLE>
Any reduction in the amount of the selling commission in respect of volume
discounts will be credited to the investor in the form of additional whole
Shares or fractional Shares. As to sales of Shares which are entitled to volume
discounts, the Company will pay the maximum selling commissions per Share set
forth above.
Certain purchases may be combined for the purpose of qualifying for a volume
discount and crediting an investor with additional Shares for the volume
discount, and for determining commissions payable to the Dealer Manager and
reallowable to Soliciting Dealers so long as all such combined purchases are
made through the same Soliciting Dealer. Purchases by spouses may be combined
and purchases by any investor may be combined with other purchases of Shares to
be held as a joint tenant or as tenant-in-common by such investor with others
for purposes of computing amounts invested. Purchases by Tax-Exempt Entities may
only be combined with purchases by other Tax-Exempt Entities for purposes of
computing amounts invested if investment decisions are made by the same Person,
provided that if the investment decisions are made by an independent investment
adviser, that investment adviser may not have any direct or indirect beneficial
interest in any of the Tax-Exempt Entities whose purchases are sought to be
combined. The investor must mark the "Additional Investment" space on the
Subscription Agreement Signature Page in order for purchases to be combined. The
Company is not responsible for failing to combine purchases, where the investor
fails to mark the "Additional Investment" space.
If the Subscription Agreements for the purchases to be combined are
submitted at the same time, then the additional Shares to be credited to the
purchasers as a result of such combined purchases will be credited on a pro rata
basis. If the Subscription Agreements for the purchases to be combined are not
submitted at the same time, then any additional Shares to be credited as a
result of such combined purchases will be credited to the last component
purchase, unless the Company is otherwise directed in writing at the time of
such submission; except however, the additional Shares to be credited to any
Tax-Exempt Entities whose purchases are combined for purposes of the volume
discount will be credited only on a pro rata basis based on the amount of the
investment of each Tax-Exempt Entity and their combined purchases.
Notwithstanding the preceding paragraphs, in no event shall any investor
receive a discount greater than 5% on any purchase of Shares if such investor
already owns, or may be deemed to already own, any Shares. This restriction may
limit the amount of the volume discount available to a purchaser after the
purchaser's initial purchase and the amount of additional Shares that may be
credited to a purchaser as a result of the combination of purchases.
In the event the dollar amount of commissions paid for such combined
purchases exceeds the maximum commissions for such combined purchases (taking
the volume discount into effect), the Dealer Manager will be obligated to
forthwith return to the Company (and Soliciting Dealers will be obligated to
return to the Dealer Manager) any excess commissions received. The Company (as
to the Dealer Manager) and the Dealer Manager (as to the Soliciting Dealers) may
adjust any future commissions due for any such excess commissions that have not
been returned.
183
<PAGE>
OTHER DISCOUNTS
Due to lower administrative costs and in connection with the performance of
services, employees, Directors and associates of the Company and its Affiliates,
the Advisor, Affiliates of the Advisor, the Dealer Manager or their respective
officers and employees and certain of their affiliates will be permitted to make
initial and subsequent purchases of Shares directly from the Company net of
selling commissions and the Marketing Contribution and Due Diligence Expense
Allowance or for $9.05 per Share (based on the initial Offering price of $10 per
Share). Any Shares purchased by the Advisor or its Affiliates will be purchased
for investment purposes only and not with a view toward distribution.
In consideration of the services rendered by the Soliciting Dealers and
their registered representatives, the Soliciting Dealers and their respective
officers and employees (E.G., registered representatives) and certain of their
respective affiliates who request and are entitled to purchase Shares net of
selling commissions will be permitted to make an initial purchase of Shares
directly from the Company net of selling commissions or for $9.30 per Share
(based on the initial Offering price of $10 per Share). Also, investors who have
contracts for investment advisory and related brokerage services that include a
fixed or "wrap" fee feature, may make an initial purchase of Shares through the
Dealer Manager or a Soliciting Dealer net of selling commissions or for $9.30
per Share (based on the initial Offering price of $10 per Share). The Marketing
Contribution and Due Diligence Expense Allowance will be allowed and paid with
respect to the sales mentioned in this paragraph.
However, any subsequent purchases of Shares made by (i) Soliciting Dealers
and their respective officers and employees and certain of their respective
affiliates who purchase Shares directly from the Company net of the 7% selling
commission, and (ii) investors who have contracts for investment advisory and
related brokerage services which include a fixed or "wrap" fee feature and who
purchase Shares net of the 7% selling commission, are limited to a maximum
discount of 5%.
Any request to purchase Shares at a discount pursuant to the discounts which
are discussed in this paragraph shall, upon the request of the Company, be in
writing and set forth the basis for the request. Any such request will be
subject to verification by the Company.
Participants in the Company's DRP may purchase Shares for a reduced price of
$9.50 per Share (based on the initial Offering price of $10 per Share) due to
lower administrative costs.
TRANSFER OF SHARES
A Stockholder may assign all or some of his Shares, subject to certain
restrictions contained in the Articles. See "Description of
Securities--Restrictions on Ownership and Transfer." An assignment will confer
upon the assignee, the right to become a Stockholder in the following manner and
subject to certain conditions, including the following: (i) an instrument of
assignment executed by both the assignor and assignee of the Shares satisfactory
in form to the Company must be delivered to the Company; (ii) reimbursement of
the Company for reasonable expenses and filing costs incurred in connection with
such transfer not to exceed $100; (iii) no assignment will be effective until
the first day of the month following the month in which the Company actually
receives the instrument of assignment which complies with the requirements of
(i) and (ii) above; (iv) no assignment will be effective if such assignment
would, in the opinion of counsel to the Company, result in the termination of
the Company's status as a REIT under the Code; (v) an assignment may be rejected
if it would cause 25% or more of the issued and outstanding Shares to be held by
Tax-Exempt Entities that are considered "benefit plan investors" under ERISA or
otherwise cause the assets of the Company to be Plan Assets; and (vi) no
assignment will be effected if the assignment would, to the knowledge of the
Company, violate the provisions of any applicable federal or state securities
laws.
The Shares will not initially be listed on a national stock exchange or
included for quotation on a national market system. The Company will determine
when and if to apply to have the Shares listed for
184
<PAGE>
trading on a national stock exchange or included for quotation on a national
market system, provided the Company meets the then applicable listing
requirements. There is no assurance that the Company will apply for such listing
or inclusion, even if it satisfies the appropriate listing or inclusion
standards.
INDEMNIFICATION
The Company will indemnify the Dealer Manager and the Soliciting Dealers
against certain liabilities, including liabilities under the Act; provided,
however, that the Company will not indemnify the Dealer Manager or any
Soliciting Dealer from any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee and a court of competent jurisdiction
has approved indemnification of the litigation costs; or (ii) the claims have
been dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee and the court has approved indemnification of
the litigation costs; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular indemnitee and approves
indemnification of the settlement and related costs after being advised of the
position of the Commission and the published opinions of any state securities
regulatory authority in which securities of the Company were offered and sold
respecting the availability and/or propriety of indemnification for securities
law violations. The Soliciting Dealer will be required to indemnify the Company
and the Advisor against certain such liabilities. In the opinion of the
Commission, indemnification for liabilities arising under the Act is against
public policy and, therefore, unenforceable. The Dealer Manager and each of the
Soliciting Dealers may be deemed to be an "underwriter" as that term is defined
in the Act.
HOW TO SUBSCRIBE
Shares may be purchased by investors who meet the suitability standards
described above under "Who May Invest" and "Plan of Distribution--Determination
of Investor Suitability" by proceeding as follows:
1. Read the entire Prospectus and the current supplement(s), if any,
accompanying the Prospectus.
2. Complete the execution copy of the Subscription Agreement. A
specimen copy of the Subscription Agreement, including instructions for
completing the Subscription Agreement, is included in the Prospectus as
Appendix C.
3. Deliver a check for the full purchase price of the Shares being
subscribed for, payable to "LNB/Escrow Agent for IRRET along with the
completed Subscription Agreement to the Soliciting Dealer whose name appears
on the Subscription Agreement.
4. By executing the Subscription Agreement and by paying the full
purchase price for the Shares subscribed for, each investor attests that he
or she meets the suitability standards as stated in the Subscription
Agreement and agrees to be bound by all of the terms of the Subscription
Agreement.
A sale of the Shares may not be completed until at least five business days
after receipt by the subscriber of the Prospectus. Within 10 days (and generally
within 24 hours) of the Company's receipt of each completed Subscription
Agreement, the Company will accept or reject the subscription. If the
subscription is accepted, a confirmation will be mailed within three days. If
for any reason the subscription is rejected, the check and Subscription
Agreement will be promptly returned to the subscriber, without interest or
deduction, within 10 days after receipt.
Subscriptions made through IRAs, Keogh plans and 401(k) plans must be
processed through and forwarded to the Company by an approved trustee. In the
case of IRA, Keogh plans and 401(k) plan Stockholders, the confirmation will be
sent to the trustee.
185
<PAGE>
SALES LITERATURE
In addition to and apart from this Prospectus, the Company may use certain
supplemental sales material in connection with the Offering. This material,
prepared by the Advisor, may consist of a brochure describing the Advisor and
its Affiliates and the objectives of the Company and may contain pictures and
summary descriptions of properties similar to those to be acquired by the
Company that Affiliates of the Company have previously acquired. This material
may also include audiovisual materials and taped presentations highlighting and
explaining various features of the Offering, properties of prior real estate
programs and real estate investments in general; and articles and publications
concerning real estate. Business reply cards, introductory letters and seminar
invitation forms may be sent to Soliciting Dealers and prospective investors. No
person has been authorized to prepare for, or furnish to, a prospective investor
any sales literature other than: (i) that described herein; and (ii) "tombstone"
newspaper advertisements or solicitations of interest limited to identifying the
Offering and the location of sources of further information.
The use of any sales materials is conditioned upon filing with and, if
required, clearance by appropriate regulatory agencies. Such clearance (if
provided), however, does not indicate that the regulatory agency allowing the
use of the materials has passed on the merits of the Offering or the adequacy or
accuracy of the materials.
This Offering is made only by means of this Prospectus. Except as described
herein, the Company has not authorized the use of other supplemental literature
or sales material in connection with this Offering.
DISTRIBUTION REINVESTMENT AND SHARE REPURCHASE PROGRAMS
DISTRIBUTION REINVESTMENT PROGRAM
The Distribution Reinvestment Program (the "DRP") provides the Company's
Stockholders with an opportunity to purchase additional Shares by reinvesting
Distributions. Stockholders who elect to take part in the DRP ("Participants")
will authorize the Company to use Distributions payable to them to purchase
additional Shares. A Participant will not be able to acquire Shares under the
DRP to the extent such purchase would cause it to exceed the Ownership Limit or
would violate any of the other Share ownership restrictions imposed by the
Company's Articles.
As further explained below, purchases under the DRP are made at a price
(which initially will be $9.50 per Share) equal to 95% of the Market Price of a
Share on the date of purchase until such time as the Company's Shares are listed
on a national stock exchange or included for quotation on a national market
system. This reduced price reflects a decrease in costs associated with these
issuances. Participants in the DRP may also purchase fractional Shares, so that
100% of Distributions will be used to acquire Shares. Shares will be purchased
under the DRP on the record date for the Distribution used to purchase the
Shares. Distributions on Shares acquired under the DRP will be paid at the same
time as Distributions are paid on Shares purchased outside the DRP and are
calculated with a daily record and Distribution declaration date. Each
Participant agrees that if, at any time prior to listing of the Shares on a
national stock exchange or inclusion of the Shares for quotation on a national
market system, he or she fails to meet the suitability requirements for making
an investment in the Company or cannot make the other representations or
warranties set forth in the Subscription Agreement, he or she will promptly so
notify the Company in writing.
Commencing with the first Distribution paid after the effective date of the
Offering and continuing until the public offering price per Share in the
Offering is increased from $10 per Share (if it is ever increased) or until the
termination of the Offering, whichever first occurs, Participants will acquire
Shares from the Company at a fixed price of $9.50 per Share. Thereafter,
participants may acquire Shares from the Company at a price equal to 95% of the
Market Price of a Share on the date of purchase until such time as the Company's
Shares are listed on a national stock exchange or included for quotation on a
186
<PAGE>
national market system. In the event of such listing or inclusion, Shares
purchased by the Company for the DRP will be purchased on such exchange or
market, at the prevailing market price, and will be sold to Stockholders at such
price. The discount from the public offering price per Share is never intended
to exceed 5% of the Market Price of a Share on the date of purchase. It is
possible that a secondary market will develop for the Shares, and that Shares
may be bought and sold on the secondary market at prices lower or higher than
the price at which Shares may be purchased through the DRP. Neither the Company
nor its Affiliates will receive a fee for selling Shares under the DRP. The
Company does not warrant or guarantee that Participants will be acquiring Shares
at the lowest possible price. A Participant may terminate participation in the
DRP at any time without penalty, by delivering written notice to the Company.
Prior to listing of the Shares on a national securities exchange or including
the Shares for quotation on a national market system, any transfer of Shares by
a Participant to a non-Participant will terminate participation in the DRP with
respect to the transferred Shares. Within 90 days after the end of the Company's
fiscal year, the Company will: (i) issue certificates evidencing ownership of
Shares purchased through the DRP during the prior fiscal year (ownership of
these Shares will be in book-entry form prior to the issuance of certificates);
and (ii) provide each Participant with an individualized report on his or her
investment, including the purchase date(s), purchase price and number of Shares
owned, as well as the dates of distribution and amount of Distributions received
during the prior fiscal year. The individualized statement to Participants will
include receipts and purchases relating to each Participant's participation in
the DRP including the tax consequences relative thereto. The Directors by
majority vote (including a majority of Independent Directors) may amend or
terminate the DRP upon 30 days notice to Participants.
Stockholders who participate in the DRP will recognize dividend income,
taxable to the extent of the Company's current or accumulated earnings and
profits, in the amount and as though they had received the cash rather than
purchased Shares through the DRP. These deemed dividends will be treated as
actual dividends from the Company to the participating Stockholders and will
retain the character and tax effects applicable to all dividends. In addition,
the 5% discount applicable to Shares purchased under the DRP will itself be
treated as a deemed distribution to the purchaser. Shares received under the DRP
will have a holding period, for tax purposes, beginning with the day after
purchase, and a tax basis equal to their cost, which is the gross amount of the
deemed Distribution. See "Federal Income Tax Considerations--Taxation of
Stockholders--Taxation of Taxable Domestic Stockholders" for a full discussion
of the tax effects of dividend distributions.
As explained under "Description of Securities--Restrictions on Ownership and
Transfer," the certificates representing Shares purchased through the DRP will
bear a legend referring to the restrictions on their ownership and transfer.
SHARE REPURCHASE PROGRAM
The Share Repurchase Program ("SRP") may, subject to certain restrictions,
provide eligible Stockholders with limited, interim liquidity by enabling them
to sell Shares back to the Company at a price of $9.05 per Share (a reduction of
$.95 from the $10 Offering price per Share, reflecting the elimination of
selling commissions and the Marketing Contribution and Due Diligence Expense
Allowance). In the event the Company changes such repurchase price (which is not
presently anticipated), the Company will send a letter to Stockholders informing
them of the change, and will disclose the change in quarterly reports filed with
the Commission on Form 10-Q. The repurchase price is contemplated to be changed
only if the Company is offering Shares to the public at a price different than
$10 per Share. In such event, the repurchase price would likely be set at such
public offering price, less the then applicable selling commissions, marketing
contribution, due diligence expense allowance or similar types of offering
expenses; however, the Company is not guaranteeing that it will ever increase
the repurchase price.
Repurchases under the SRP will be made quarterly by the Company on a
first-come, first-served basis, and will be limited in the following manner: (i)
not more than $500,000 worth of the outstanding Shares
187
<PAGE>
may be repurchased in any given year; and (ii) the funds available for
repurchase are limited to available proceeds received by the Company from the
sale of Shares under the DRP. The determination of available funds from sales
under the DRP will be made at the sole discretion of the Board. In making this
determination, the Board will consider the need to use proceeds from the Share
sales under the DRP for investment in additional Properties, or for maintenance
or repair of existing Properties. Such Property-related uses are given priority
over the need to allocate funds to the SRP. To be eligible to offer Shares for
purchase to the SRP, the Stockholder must have beneficially held the Shares for
at least one year.
The Company cannot guarantee that funds will be available for repurchase. If
no funds are available for the SRP at the time when repurchase is requested, the
Stockholder could: (i) withdraw his or her request for repurchase; or (ii) ask
that the Company honor the request at such time, if any, when funds are
available. Such pending requests will be honored on a first come, first served
basis. There is no requirement that Stockholders sell their Shares to the
Company. The SRP is only intended to provide interim liquidity for Stockholders
until a secondary market develops for the Shares. No such market presently
exists and no assurance can be given that one will develop. The SRP will exist
during the Offering period and will be terminated following the close of the
Offering period: (i) at such time as a secondary market-maker quotes a bid and
ask price for at least 30 continuous trading days; or (ii) upon the listing of
the Shares on a national securities exchange or the inclusion of the Shares for
quotation on a national market system.
Shares purchased by the Company under the SRP will be canceled, and will
have the status of authorized but unissued Shares. Shares acquired by the
Company through the SRP will not be reissued unless they are first registered
with the Commission under the Act and under appropriate state securities laws or
otherwise issued in compliance with such laws.
REPORTS TO STOCKHOLDERS
The Advisor will keep, or cause to be kept, full and true books of account
on an accrual basis of accounting, in accordance with GAAP. All of such books of
account, together with a copy of the Articles and any amendments thereto, will
at all times be maintained at the principal office of the Company, and will be
open to inspection, examination and duplication at reasonable times by the
Stockholders or their agents.
The Advisor will submit to each Stockholder audited annual reports of the
Company within 120 days following the close of each fiscal year. The annual
reports will contain the following: (i) audited financial statements; (ii) the
ratio of the costs of raising capital during the period to the capital raised;
(iii) the aggregate amount of advisory fees and the aggregate amount of fees
paid to the Advisor and any Affiliate of the Advisor by the Company and
including fees or charges paid to the Advisor and to any Affiliate of the
Advisor by third parties doing business with the Company; (iv) the Total
Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets and as a percentage of Net Income; (v) a report from the
Independent Directors that the policies being followed by the Company are in the
best interests of its Stockholders and the basis for such determination; and
(vi) separately stated, full disclosure of all material terms, factors and
circumstances surrounding any and all transactions involving the Company, the
Directors, the Advisor and any Affiliate thereof occurring in the year for which
the Annual Report is made. Independent Directors shall be specifically charged
with the duty to examine and comment in the report on the fairness of such
transactions.
In addition, unaudited quarterly reports containing the information required
by Form 10-Q will be submitted to each Stockholder within 60 days after the end
of the first three fiscal quarters of each fiscal year.
Concurrently with any Distribution, the Company shall provide Stockholders
with a statement disclosing the source of the funds distributed. If such
information is not available concurrently with the making of a Distribution, a
statement setting forth the reasons why such information is not available shall
188
<PAGE>
be provided concurrently. In no event shall such information be provided to
Stockholders more than 60 days after making such Distribution.
Within 60 days following the end of any calendar quarter during the period
of the Offering in which the Company has closed an acquisition of a Property, a
report will be submitted to each Stockholder containing: (i) the location and a
description of the general character of the Property acquired during the
quarter; (ii) the present or proposed use of such Property and its suitability
and adequacy for such use; (iii) the terms of any material leases affecting the
Property; (iv) the proposed method of financing, if any, including estimated
down payment, leverage ratio, prepaid interest, balloon payment(s), prepayment
penalties, "due-on-sale" or encumbrance clauses and possible adverse effects
thereof and similar details of the proposed financing plan; and (v) a statement
that title insurance has been or will be obtained on the Property acquired. In
addition, a report will be sent to each Stockholder and submitted to prospective
investors at such time as the Advisor believes a reasonable probability exists
that a Property will be acquired: (i) on specified terms (I.E., upon completion
of due diligence which includes review of the title insurance commitment,
appraisal and environmental analysis); and (ii) involving the use of 10% or
more, on a cumulative basis, of the Net Proceeds of the Offering.
After the completion of the last acquisition, the Advisor shall, upon
request, send to the Commissioner of Corporations of the State of California a
schedule, verified under the penalty of perjury, reflecting: (i) each
acquisition made; (ii) the purchase price paid for the Property; (iii) the
aggregate of all Acquisition Expenses paid on each transaction; and (iv) a
computation showing compliance with the Articles. The Company shall, upon
request, submit to the Commissioner of Corporations of the State of California
or to any of the various state securities administrators any report or statement
required to be distributed to Stockholders pursuant to the Articles or any
applicable law or regulation.
The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the Stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
Stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested Stockholder.
Concurrent with the dissemination of appropriate tax information to
Stockholders, the Company will annually provide each Stockholder with an
individualized report on his or her investment, including the purchase date(s),
purchase price and number of Shares owned, as well as the dates of distribution
and amounts of Distributions received during the prior fiscal year. The
individualized statement to Stockholders will include any purchases of Shares
under the DRP. Stockholders requiring individualized reports on a more frequent
basis may request such reports. The Company will make every reasonable effort to
supply more frequent reports, as requested, but the Company, at its sole
discretion, may require payment of an administrative charge to be paid: (i)
directly by the Stockholder; or (ii) through pre-authorized deductions from
Distributions payable to the Stockholder making the request.
See "Risk Factors--ERISA Risks--Annual Statement of Value is an Estimate"
for an explanation of the annual statement of value to be provided by the
Company to Stockholders subject to ERISA.
LEGAL MATTERS
Legal matters in connection with the Company's status as a REIT for federal
income tax purposes have been passed upon, on behalf of the Company, by Wildman,
Harrold, Allen & Dixon, Chicago, Illinois (legal counsel to the Company).
Wildman, Harrold, Allen & Dixon does not purport to represent Stockholders or
potential investors who should consult their own legal counsel. See "Conflicts
of Interest--The Company and the Advisor have the Same Legal Counsel." The
legality of the Shares offered hereby will be passed upon for the Company by
Brown & Wood LLP, Washington, D.C.
189
<PAGE>
The statements in the Section of the Prospectus titled "Federal Income Tax
Considerations" and elsewhere as they relate to federal income tax matters and
the statements in the section of the Prospectus titled "ERISA Considerations"
have been reviewed by Wildman, Harrold, Allen & Dixon.
EXPERTS
The balance sheet of Inland Retail Real Estate Trust, Inc. as of September
18, 1998, the Historical Summary of Gross Income and Direct Operating Expenses
of Lake Walden Square for the year ended December 31, 1997, the Historical
Summary of Gross Income and Direct Operating Expenses of Lake Olympia Square for
the year ended December 31, 1997, and the Historical Summary of Gross Income and
Direct Operating Expenses of Merchants Square Shopping Center for the year ended
December 31, 1997, have been included herein and in the Registration Statement
in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of that firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Act, with respect to the 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 and financial statements thereto. For further information with respect
to the Company and the Shares, reference is made to the Registration Statement
and such exhibits filed therewith. Any statements contained herein concerning
the provisions of any contract or other document are not necessarily complete,
and in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by such
reference and the exhibits and schedules thereto.
For further information with respect to the Company and the Shares,
reference is made to the Registration Statement and such exhibits and 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 which will also be
available for inspection and copying at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. The Commission also maintains a web site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding registrants that file documents electronically with the Commission,
including the Company, and the address is http:// www.sec.gov.
Following the closing of the Offering, the Company will be subject to the
informational requirements of 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) of the
Exchange Act, in addition to any other legal requirements. Such reports,
statements and information can also be inspected and copied at the Commission's
offices and web site referred to above.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
190
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ACT" means the Securities Act of 1933, as amended, and the Rules and
Regulations promulgated thereunder.
"ACQUISITION EXPENSES" means expenses related to the Company's selection,
evaluation and acquisition of, and investment in, Properties, whether or not
acquired or made, including but not limited to legal fees and expenses, travel
and communications expenses, cost of appraisals and surveys, non-refundable
option payments on Property not acquired, accounting fees and expenses, computer
use related expenses, architectural and engineering reports, environmental and
asbestos audits, title insurance and escrow fees, loan fees or points or any fee
of a similar nature, however designated, and personnel and miscellaneous
expenses related to the selection and acquisition of Properties. Acquisition
Expenses will accrue and be paid on Properties purchased with the Gross Offering
Proceeds, proceeds of Shares sold via the Company's Distribution Reinvestment
Program and proceeds received from the issuance and exercise of the Soliciting
Dealer Warrants issued by the Company in connection with the Offering, as well
as on the entire purchase price of all Properties including any acquisition
financing related thereto.
"ADA" means the Americans with Disabilities Act of 1990, as amended, and the
Regulations promulgated under the authority conferred thereby.
"ADVISOR" means the Person(s) responsible for directing or performing the
day-to-day business affairs of the Company, including a Person to which an
Advisor subcontracts substantially all such functions. The Advisor is Inland
Retail Real Estate Advisory Services, Inc. or anyone which succeeds it in such
capacity.
"ADVISOR ASSET MANAGEMENT FEE" means an amount equal to 1% of the Average
Invested Assets, as provided in the Advisory Agreement.
"ADVISOR'S COMPANY CONTRIBUTION" means the $200,000 the Advisor paid to the
Company for the purchase of 20,000 Shares in connection with the organization of
the Company for a purchase price of $10 per Share.
"ADVISOR'S PARTNERSHIP CONTRIBUTION" means the $2,000 contributed to the
Operating Partnership by the Advisor for 200 LP Common Units in the Operating
Partnership valued at $2,000.
"ADVISORY AGREEMENT" means the agreement between the Company and the Advisor
pursuant to which the Advisor will perform certain specified services to the
Company.
"AFFILIATE" means, with respect to any other Person: (i) any Person directly
or indirectly owning, controlling or holding, with the power to vote 10% or more
of the outstanding voting securities of such other Person; (ii) any Person 10%
or more of whose outstanding voting securities are directly or indirectly owned,
controlled or held, with the power to vote, by such other Person; (iii) any
Person directly or indirectly controlling, controlled by or under common control
with such other Person; (iv) any executive officer, director, trustee or general
partner of such other Person; and (v) any legal entity for which such Person
acts as an executive officer, director, trustee or general partner.
"AFFILIATED DIRECTORS" means those Directors of the Company who are
affiliated with the Company or its Affiliates.
"AFFILIATES' ACQUISITION COST" means the cost of the Initial Properties to
the Initial Property Sellers consisting of the purchase prices paid, plus any
Acquisition Expenses, including any financing costs (excluding interest on any
loans) paid by the Initial Property Sellers to either Affiliates of TIGI or to
third parties.
191
<PAGE>
"AFFILIATES' ACQUISITION DEBT" means the amount borrowed by the Initial
Property Sellers from an Affiliate of TIGI to pay the difference between the
Affiliates' Acquisition Cost and the Initial Mortgage Debt for the Initial
Properties.
"ANCHOR TENANT" means tenants generally occupying approximately 30% or more
of the GLA of a Retail Property, or the tenant of any single-user property.
"ANNUALIZED BASE RENTAL REVENUE" is the annualized contractual base rent for
all leases in effect as of January 1, 1998, which is determined by multiplying
by 12 the monthly contractual base rents as of January 1, 1998 under existing
leases. Base rent excludes: (a) percentage rents; (b) additional charges paid
for by tenants including common maintenance, real estate taxes and other expense
reimbursements; and (c) future contractual rent escalations.
"ANNUALIZED NET RENT" means with respect to a lease, the monthly net rent
due under the lease as determined in accordance with GAAP, annualized for all
leases in effect as of January 1, 1998.
"ARTICLES" means the Company's Articles of Incorporation, as amended.
"ASSET TESTS" means the 75% Asset Test and the 25% Asset Test.
"AVERAGE INVESTED ASSETS" means, for any period, the average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests and in loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"BOARD" means the Board of Directors 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 Shares.
"BYLAWS" means the Bylaws of the Company, as amended.
"CASH FLOW" means, with respect to any period: (i) all cash receipts derived
from investments made by the Company; plus (ii) cash receipts from operations
(including any interest from temporary investments of the Company) without
deduction for depreciation or amortization; less (iii) cash receipts used to pay
operating expenses (including the Advisor Asset Management Fee).
"CMSAS" means consolidated metropolitan statistical areas as defined by the
United States Office of Management and Budget.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
Regulations promulgated thereunder (sometimes referred to as the "Treasury
Regulations") or corresponding provisions of subsequent revenue laws.
"COMMISSION" or "SEC" means the United States Securities and Exchange
Commission.
"COMMON UNITS" means the LP Common Units and the GP Common Units of the
Operating Partnership collectively.
"COMMUNITY CENTER" means any Shopping Center leased primarily to one or more
retail tenants providing for the sale of soft lines (wearing apparel for men,
women and children) and hard lines (hardware and appliances) in addition to the
convenience goods and personal services provided by a Neighborhood Center, with
GLA ranging from 100,000 to 300,000 or more square feet. A Community Center
makes a greater variety of merchandise available--in sizes, styles, colors and
prices--than a Neighborhood Center. Many are built around a junior department
store, variety store or discount department store as the major tenant, in
addition to a supermarket. Others are built around multiple
192
<PAGE>
Anchor Tenants such as large superstores and off-price stores. A Community
Center does not have a full line department store, though it may have a strong
specialty store or stores.
"COMPANY" means Inland Retail Real Estate Trust, Inc., a Maryland
corporation.
"COMPETITIVE REAL ESTATE COMMISSION" means the real estate or brokerage
commission paid for the purchase or sale of a Property which is reasonable,
customary and competitive in light of the size, type and location of such
Property.
"CONSTRUCTIVELY OWN" shall mean ownership of Equity Stock or options to
acquire Equity Stock by a Person who would be treated as the owner of such
Equity Stock either directly or indirectly through the application of Section
318 of the Code, as modified by Section 856(d)(5) of the Code.
"CONTRACT PRICE FOR THE PROPERTY" means the amount actually paid or
allocated to the purchase, development, construction or improvement of a
Property exclusive of Acquisition Expenses.
"CONTROL SHARES" means voting shares of stock of a Maryland corporation
which, if aggregated with all other such shares of stock previously acquired by
the acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by revocable proxy) would entitle
the acquiror to exercise voting power in electing Directors within one of the
following ranges of voting power: (i) 1/5 or more but less than 1/3; (ii) 1/3 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 Stockholder approval.
"CONTROL SHARE ACQUISITION" means the acquisition of Control Shares, subject
to certain exceptions.
"COUNSEL" means the Chicago, Illinois law firm of Wildman, Harrold, Allen &
Dixon.
"CPI" means the Consumer Price Index, the economic index issued by the
United States Department of Labor indicating price increases or decreases for
the United States economy.
"CREDITWORTHY TENANT" means a tenant with a minimum net worth of $10 million
or ten times one year's rental payments required under the lease or whose lease
payments have been guaranteed by an Affiliate of such tenant (a "Guarantor")
with a minimum net worth of $10 million.
"CUMULATIVE RETURN" means a cumulative, non-compounded return, equal to 7%
per annum on Invested Capital commencing upon acceptance of the investor's
subscription.
"CURRENT RETURN" means a non-cumulative, non-compounded return, equal to 7%
per annum on Invested Capital.
"DEALER MANAGER" means Inland Securities Corporation, one of the TIGI
Affiliated Companies.
"DEALER PROPERTY" means stock in trade of a taxpayer or other property of a
kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business,
as described in Section 1221(1) of the Code.
"DIRECTORS" means the members of the Board of Directors of the Company
(including the Independent Directors).
"DISTRIBUTIONS" means any cash distributed to Stockholders arising from
their interest in the Company.
"DISTRIBUTION TEST" means the REIT Requirement that a REIT distribute
annually to its Stockholders an amount at least equal to (i) the sum of (A) 95%
of its REIT Taxable Income for the year (determined without regard to the
dividends paid deduction and by excluding any net capital gain) and (B) 95% of
the excess of its net income from Foreclosure Property over the taxes imposed on
such income; minus (ii) certain excess non-cash items.
193
<PAGE>
"DOL" means the United States Department of Labor.
"DOL REGULATIONS" means final, temporary and proposed regulations
promulgated by the DOL.
"DOMESTICALLY CONTROLLED REIT" means, generally, a REIT in which at all
times during a specific testing period less than 50% in value of its shares are
held directly or indirectly by Foreign Stockholders.
"DRP" means the Company's Distribution Reinvestment Plan.
"DUE DILIGENCE EXPENSE ALLOWANCE" means an amount up to 0.5% of the Gross
Offering Proceeds from the sale of 50,000,000 Shares offered on a "best efforts"
basis (except for certain Special Sales) paid to the Dealer Manager, a portion
of which may, at the discretion of the Dealer Manager, be reallowed to
Soliciting Dealers, to reimburse the Dealer Manager or Soliciting Dealers for
BONA FIDE due diligence expenses.
"EQUITY STOCK" means stock that is either Shares and/or Preferred Stock of
the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AGENT" means LaSalle National Bank, N.A., pursuant to that certain
Escrow Agreement between the Company, the Escrow Agent and the Dealer Manager.
"EXCESS SHARES" means Shares or Preferred Stock of the Company which are
automatically converted into an equal number of Excess Shares and transferred
automatically to the Share Trust upon a purported transfer of such Shares or
Preferred Stock which is violative of the applicable restrictions on transfer.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations promulgated thereunder.
"EXERCISE PERIOD" means the period commencing one year after the first
issuance of any of the Soliciting Dealer Warrants and ending five years after
such first issuance, during which period the Soliciting Dealer Warrants may be
exercised.
"FASIT" means a financial asset securitization investment trust.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"FIVE OR FEWER REQUIREMENT" means the REIT Requirement that, at all times
during the second half of each taxable year (other than its first taxable year),
no more than 50% in value of the shares of a REIT may be owned, directly,
indirectly, or by attribution, by five or fewer individuals (defined in the Code
to include certain types of entities).
"FORECLOSURE PROPERTY" means any real property or Interests in Real
Property, and any personal property incident to such property, acquired by a
REIT as a result of the REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default or default was imminent, on a lease
of such property or on an indebtedness which such property secured. "Foreclosure
Property" does not include property acquired by a REIT as the result of
indebtedness arising from the sale or other disposition of Dealer Property of
the REIT which was not originally acquired as Foreclosure Property.
"FOREIGN STOCKHOLDERS" means non-resident alien individuals, foreign
corporations, foreign partnerships, and foreign trusts and estates, as such
terms are defined in the Code.
"FORMATION TRANSACTIONS" means those transactions relating to the
organization and formation of the Company and the Operating Partnership,
including (i) the formation of the Company and the Operating Partnership, (ii)
the Advisor making the Advisor's Company Contribution and the Advisor's
Partnership Contribution, (iii) the commencement of the Offering, (iv) the
contribution of the proceeds from the Advisor's Company Contribution and the
proceeds of the Offering by the Company to the Operating Partnership, (v) the
issuance of the GP Common Units to the Company in exchange for its contribution
of
194
<PAGE>
the proceeds from the Advisor's Company Contribution and the proceeds of the
Offering, (vi) the acquisition of the Initial Properties, provided that the Net
Proceeds of the Offering are sufficient to make such acquisitions, (vii) the
retirement in full of the Affiliates' Acquisition Debt, and the payment of other
debt incurred in connection with organization of the Company, the payment of the
expenses of the Offering and the reservation of funds for general working
capital purposes and, to the extent that there are additional Net Proceeds of
the Offering available, the acquisition of additional Properties or further
reduction of the Initial Mortgage Debt on the Initial Properties, and (viii) the
qualification of the Company as a REIT for federal income tax purposes for the
taxable year ending December 31, 1999, all as described under "Structure and
Formation of the Company--Formation Transactions."
"FUNDS FROM OPERATIONS" means net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of Property, plus depreciation of real property and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations on the same basis.
"GAAP" means generally accepted accounting principles in the United States.
"GENERAL PARTNER" means the Company as the General Partner of the Operating
Partnership.
"GLA" means gross leasable area, which is that area in Shopping Centers for
which tenants pay rent, and is the total floor area designed for tenants'
occupancy and exclusive use, expressed in square feet.
"GNMA" means Government National Mortgage Association.
"GP COMMON UNITS" means Common Units representing the general partnership
interest in the common equity of the Operating Partnership held by the Company.
"GROSS INCOME TESTS" means the 95% Gross Income Test and the 75% Gross
Income Test.
"GROSS OFFERING PROCEEDS" means the total proceeds from the sale of
50,000,000 Shares in the Offering during the public offering period before
deductions for Organization and Offering Expenses. For purposes of calculating
Gross Offering Proceeds, the purchase price for all Shares, including those for
which volume discounts apply and other Special Sales, shall be deemed to be
$10.00 per Share. Unless specifically included, Gross Offering Proceeds does not
include any proceeds from the sale of up to 4,000,000 Shares under the DRP
during the public offering period, the purchase price for which shall be $9.50
per Share, nor any proceeds from the issuance and exercise of the Soliciting
Dealer Warrants.
"GUARANTOR" means a Person with a minimum net worth of $10 million which has
guaranteed the lease payments of a tenant which is an Affiliate.
"ICPM" means Inland Commercial Property Management, Inc., a subsidiary of
IPMGI, and one of the TIGI Affiliated Companies.
"IMC" means Inland Mortgage Corporation, one of the TIGI Affiliated
Companies.
"IMIC" means Inland Mortgage Investment Corporation, one of the TIGI
Affiliated Companies.
"IMSC" means Inland Mortgage Servicing Corporation, one of the TIGI
Affiliated Companies.
"INCENTIVE ADVISORY FEE" means an amount equal to 15% of the net proceeds
from the sale of a Property after the Stockholders have first received: (i)
their Cumulative Return; and (ii) a return of their Invested Capital.
"INDEPENDENT DIRECTORS" means the Directors who: (i) are not affiliated and
have not been affiliated within the two years prior to their becoming an
Independent Director, directly or indirectly, with the Company, the Sponsor, or
the Advisor, whether by ownership of, ownership interest in, employment by, any
material business or professional relationship with, or as an officer or
director of the Company, the
195
<PAGE>
Sponsor, the Advisor or any of their Affiliates; (ii) do not serve as a director
or trustee for more than two other REITs organized by the Company or the Advisor
or advised by the Advisor; and (iii) perform no other services for the Company,
except as Directors. For this purpose, an indirect relationship shall include
circumstances in which a member of the immediate family of a Director has one of
the foregoing relationships with the Company, the Sponsor, the Advisor or any of
their Affiliates. For purposes of determining whether or not the business or
professional relationship is material, the aggregate gross revenue derived by
the prospective Independent Director from the Company, the Sponsor, the Advisor
and their Affiliates shall be deemed material PER SE if it exceeds 5% of the
prospective Independent Directors: (i) annual gross revenue, derived from all
sources, during either of the last two years; or (ii) net worth, on a fair
market value basis.
"INDEPENDENT DIRECTOR STOCK OPTION PLAN" means the Company's stock option
plan for the benefit of its Independent Directors.
"INDEPENDENT EXPERT" means a Person with no material current or prior
business or personal relationship with the Advisor or the Directors and who is
engaged, to a substantial extent, in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"INITIAL MORTGAGE DEBT" means the aggregate mortgage debt to which the
Initial Properties were subject as of the acquisition thereof by the Initial
Property Sellers.
"INITIAL PROPERTIES" means the four Retail Centers that the Company has
rights to and intends to acquire, provided that the Net Proceeds of the Offering
are sufficient to make such acquisitions.
"INITIAL PROPERTY SELLERS" means the Affiliates of TIGI which will sell
their ownership interests in the Initial Properties to the Operating Partnership
in the Formation Transactions.
"INLAND" or "TIGI" means The Inland Group, Inc., a Delaware corporation.
"INLAND AFFILIATED COMPANIES" or the "INLAND ORGANIZATION" or "TIGI
AFFILIATED COMPANIES" means Inland and its subsidiaries and its and their
Affiliates.
"INTERESTED STOCKHOLDER" means any Person (other than the Company or any
subsidiary of the Company) that (a) is the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the outstanding Equity Stock
of the Company after the date on which the Company has 100 or more beneficial
owners of its Equity Stock, or (b) is an Affiliate or associate of the Company
and was the beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding Equity Stock of the Company at any time
within the two-year period immediately prior to the date in question and after
the date on which the Company had 100 or more beneficial owners of its Equity
Stock.
"INTERESTS" means equity interests in Property Partnerships, which might be
issued to Persons for equity interests in Properties.
"INTERESTS IN REAL PROPERTY" means and includes fee ownership and
co-ownership of undivided interests in land or improvements thereon, leaseholds
of land or improvements thereon, options to acquire land or improvements
thereon, and options to acquire leaseholds of land or improvements thereon, but
does not include mineral, oil, or gas royalty interests
"INVESTED CAPITAL" means the original issue price paid for the Shares
reduced by prior Distributions from the sale or financing of the Company's
Properties.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended.
"IPMGI" means The Inland Property Management Group, Inc., one of the TIGI
Affiliated Companies.
"IRA" means an individual retirement account established pursuant to Section
408 of the Code.
196
<PAGE>
"IREA" means Inland Real Estate Acquisitions, Inc., one of the TIGI
Affiliated Companies.
"IREAS" means Inland Real Estate Advisory Services, Inc., the advisor to
IREC, one of the TIGI Affiliated Companies.
"IREC" means Inland Real Estate Corporation, an IREIC-sponsored REIT.
"IREIC" means Inland Real Estate Investment Corporation, Sponsor of the
Company, and one of the TIGI Affiliated Companies.
"ISC" means Inland Securities Corporation, the Dealer Manager, one of the
TIGI Affiliated Companies.
"LIMITED PARTNER" means a limited partner of the Operating Partnership.
"LP COMMON UNITS" means common units representing limited partnership
interests in the common equity of the Operating Partnership.
"LP PREFERRED UNITS" means preferred units representing limited partnership
interests in the common equity of the Operating Partnership.
"LP UNITS" means LP Common Units and LP Preferred Units of the Operating
Partnership collectively.
"MANAGEMENT AGENT" means an entity which provides Property rental, leasing,
operation and management services to the Company pursuant to the Management
Agreement. The Management Agent is Inland Southeast Property Management Corp.,
which is owned principally by individuals who are Affiliates of Inland, or
anyone which succeeds it in such capacity.
"MANAGEMENT AGREEMENT" means the agreement between the Company and the
Management Agent for the rental, leasing, operation and management of the
Company's Properties.
"MARKETING CONTRIBUTION" means the amount of 2% of the Gross Offering
Proceeds from the sale of the 50,000,000 Shares offered on a "best efforts"
basis (except for certain Special Sales) paid to the Dealer Manager, in lieu of
reimbursement of specific expenses associated with marketing, a portion of which
may, at the discretion of the Dealer Manager, be reallowed to Soliciting
Dealers.
"MARKET PRICE" means on any date the average of the Closing Price (as
defined below) per Share for the five consecutive Trading Days (as defined
below) ending on such date. The "Closing Price" on any date means the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the principal national securities
exchange on which the Shares are listed or admitted to trading or, if the Shares
are not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by The Nasdaq Stock
Market, Inc. ("Nasdaq"), or, if Nasdaq is no longer in use, the principal
automated quotation system that may then be in use or, if the Shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Shares
selected by the Board, or if there is no professional market maker making a
market in the Shares, the average of the last ten (10) sales pursuant to the
Offering if the Offering has not concluded, or if the Offering has concluded,
the average of the last ten (10) purchases by the Company pursuant to its Share
Repurchase Program (the "SRP"), and if there are fewer than ten (10) of such
purchases under the SRP, then the average of such lesser number of purchases,
or, if the SRP is not then in existence, the price at which the Company is then
offering Shares to the public if the Company is then engaged in a public
offering of Shares, or if the Company is not then offering Shares to the public,
the price at which a Stockholder may purchase Shares pursuant to the Company's
Distribution Reinvestment Program (the "DRP") if such DRP is then in existence,
or if the DRP is not then in existence, the fair market value of the Shares as
determined by the Company, in its sole discretion. "Trading Day" shall mean a
day on which
197
<PAGE>
the principal national securities exchange or national automated quotation
system on which the Shares are listed or admitted to trading is open for the
transaction of business or, if the Shares are not listed or admitted to trading
on any national securities exchange or national automated quotation system,
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of Illinois are authorized or obligated by law or
executive order to close. The term "regular way" means a trade that is effected
in a recognized securities market for clearance and settlement pursuant to the
rules and procedures of the National Securities Clearing Corporation, as opposed
to a trade effected "ex-clearing" for same-day or next-day settlement.
"MARYLAND GENERAL CORPORATION LAW" or "MGCL" means the General Corporation
Law of Maryland, as amended from time to time.
"MAXIMUM OFFERING" means 50,000,000 Shares offered for sale on a best
efforts basis, including any Special Sales (plus, where applicable and
specified, 4,000,000 Shares available for sale under the DRP pursuant to this
Prospectus, and plus only where applicable and specified, the 2,000,000
Soliciting Dealer Warrants and 2,000,000 Shares which may be issued upon the
exercise of the Soliciting Dealer Warrants which may be issued and sold to the
Dealer Manager, and which may, at the discretion of the Dealer Manager, be
reallowed to Soliciting Dealers).
"MINIMUM INITIAL PURCHASE" means the minimum amount which must be purchased
by a Person who is not a Stockholder at the time of purchase.
"MINIMUM OFFERING" means the sale of 200,000 Shares offered for sale on a
best efforts basis for $2,000,000.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means The Nasdaq Stock Market, Inc.
"NEIGHBORHOOD CENTER" means any Shopping Center which is leased primarily to
one or more retail tenants providing for the sale of convenience goods (foods,
drugs and sundries) and personal services (laundry, dry cleaning, barbering,
shoe repair, etc.) for the day-to-day living needs of the immediate
neighborhood, with GLA ranging from 10,000 to 100,000 square feet.
"NET ASSETS" or "NET ASSET VALUE" means the total assets of the Company
(other than intangibles) at cost before deducting depreciation or other non-cash
reserves less total liabilities of the Company, calculated at least quarterly on
a basis consistently applied.
"NET BUILT-IN GAIN" means (i) the excess of the fair market value of an
asset acquired by a REIT from a C corporation in a transaction in which the
basis of such asset in the REIT's hands is determined by reference to the basis
of the asset (or any other property) in the hand of the transferor corporation,
over the basis of such asset; (ii) the excess of the fair market value of the
assets of a REIT on the first day it first qualifies as a REIT over the adjusted
basis of such assets; (iii) the excess of the fair market value of the assets of
an acquired QRS over the adjusted basis of such assets on the date of
acquisition.
"NET EQUITY VALUE" of a Property as of the date of contribution of the
Property to the Operating Partnership, generally, will be the purchase price of
the Property to the Operating Partnership (I.E., its fair market value), less
the amount, as of the date of such contribution, of any liabilities (E.G.,
mortgages or other monetary encumbrances) to which the Property is subject or
which are assumed by the Operating Partnership in connection with such
contribution.
"NET INCOME" means, for any period, total revenues applicable to such
period, less the expenses applicable to such period other than additions to or
allowances for reserves for depreciation, amortization or bad debts or other
similar non-cash reserves; provided, however, that Net Income shall not include
the gain from the sale of the Company's assets.
198
<PAGE>
"NET PROCEEDS OF THE OFFERING" means the proceeds received by the Company
with respect to the sale of Shares less Organization and Offering Expenses.
"95% GROSS INCOME TEST" means the REIT Requirement that at least 95% of a
REIT's gross income, excluding gross income from prohibited transactions, be
derived from:
(A) dividends;
(B) interest;
(C) Rents from Real Property;
(D) gain from the sale or other disposition of stock, securities, and real
property (including interests in real property and interests in mortgages
on real property) which is not Dealer Property;
(E) abatements and refunds of taxes on real property;
(F) income and gain derived from Foreclosure Property;
(G) amounts (other than amounts the determination of which depends in whole
or in part on the income or profits of any person) received or accrued as
consideration for entering into agreements (i) to make loans secured by
mortgages on real property or on Interests in Real Property or (ii) to
purchase or lease real property (including Interests in Real Property and
interests in mortgages on real property); and
(H) gain from the sale or other disposition of a real estate asset which is
not a prohibited transaction solely by reason of section 857(b)(6) of the
Code.
"NON-ERISA PLAN" means a Plan which is not subject to Title I of ERISA
because it is a governmental or church plan or because it does not cover common
law employees.
"NON-U.S. STOCKHOLDER" means a holder of Shares who is a nonresident alien
individual, foreign corporation, foreign partnership, foreign trust or estate or
other foreign stockholder.
"NULL TRANSFER" means a purported transfer of Shares or Preferred Stock
which is violative of the applicable restrictions on transfer and which results
in the Shares or Preferred Stock becoming Excess Shares.
"OFFERING" means the offering of 50,000,000 Shares of the Company offered
for sale on a best efforts basis, including any Special Sales and, unless the
context requires otherwise, plus 4,000,000 Shares offered for sale under the DRP
pursuant to this Prospectus, and unless the context requires otherwise, plus the
2,000,000 Soliciting Dealer Warrants and 2,000,000 Shares which may be issued
upon the exercise of the Soliciting Dealer Warrants which may be granted to the
Dealer Manager and, at its discretion, reallowed to the Soliciting Dealers.
"OPERATING PARTNERSHIP" means Inland Retail Real Estate Limited Partnership,
an Illinois limited partnership.
"OPERATING PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership
of Inland Retail Real Estate Limited Partnership.
"ORGANIZATION AND OFFERING EXPENSES" means all those expenses incurred by
and to be paid from the assets of the Company in connection with and in
preparing the Company for registration and subsequently offering and
distributing Shares to the public, including, but not limited to, total
underwriting and brokerage discounts and commissions (including fees and
expenses of underwriters and their accountants and attorneys paid by the
Company), expenses for printing, engraving, mailing, salaries of the Company's
employees while engaged in sales activity, charges of transfer agents,
registrars, trustees, escrow holders, depositaries, experts, expenses of
qualification of the sale of the securities under federal and state laws,
including taxes and fees, and accountants' and attorneys' fees and expenses.
199
<PAGE>
"ORGANIZATION DOCUMENTS" means the Articles and Bylaws of the Company.
"OTHER OPERATING EXPENSES" means Total Operating Expenses less the Advisor
Asset Management Fee.
"OWNERSHIP LIMIT" means the prohibition on beneficial ownership of no more
than 9.8%, in number of shares or value, of outstanding Equity Stock of the
Company.
"PARTICIPANT" means a Stockholder who elects to participate in the DRP.
"PARTNERSHIPS" or "PROGRAMS" means the prior public or private real estate
equity or private placement mortgage and note limited partnerships which were
sponsored by one of the TIGI Affiliated Companies.
"PENSION-HELD REIT" means any REIT in which either (i) at least one
Qualified Plan holds more than 25% (by value) of the outstanding capital stock
of the REIT; or (ii) one or more Qualified Plans (each of which owns more than
10% (by value) of the outstanding capital stock of the REIT) hold an aggregate
of more than 50% (by value) of outstanding capital stock of the REIT.
"PERSON" means any individual, corporation, business trust, estate, trust,
partnership, limited liability company, association, two or more persons having
a joint or common interest, or any other legal or commercial entity.
"PLAN" means pension, profit-sharing, retirement, IRA or other employee
benefit Plan.
"PREFERRED UNITS" means Units of the Operating Partnership on which a
preferred return is paid or which provides for some other preference over Common
Units of the Operating Partnership.
"PRIMARY GEOGRAPHICAL AREA OF INVESTMENT" means the states east of the
Mississippi River in the United States.
"PRIMARY PROPERTY INVESTMENTS" means collectively, the Retail Centers in the
Primary Geographical Area of Investment and the Triple-Net Single-User
Properties Outside the Primary Geographical Area of Investment.
"PROHIBITED OWNER" means any purported beneficial owner (applying the
ownership attribution rules of Sections 542(a)(2) and 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code) of Shares who would otherwise
violate the Ownership Limit or such other limit as provided in the Articles of
Incorporation.
"PROHIBITED TRANSACTION" means a sale or other disposition of Dealer
Property which is not Foreclosure Property.
"PROPERTY ACQUISITION SERVICE AGREEMENT" means that certain agreement among
the Company, the Advisor, IREC, IREAS and IREA which resolves, among the
Company, IREC and any other real estate investment program sponsored by IREIC,
conflicting investment opportunities in connection with the acquisition of
Properties.
"PROPERTY" or "PROPERTIES" means any, or all, respectively, of the real
property and improvements thereon owned or to be owned by the Company, directly
or indirectly.
"PROPERTY DISPOSITION FEE" means a real estate disposition fee, payable
(under certain conditions) to the Advisor and its Affiliates upon the sale of
the Company's Property in an amount equal to the lesser of: (i) 3% of the
contracted for sales price of the Property; or (ii) 50% of the commission paid
to third parties which is reasonable, customary and competitive in light of the
size, type and location of such Property.
"PROPERTY MANAGEMENT FEE" means any fee paid to an Affiliate or third party
as compensation for management of the Company's Properties. The Property
Management Fee shall be a percentage of the aggregate gross revenues from the
Properties, and if paid to an Affiliate of the Advisor shall be equal to
200
<PAGE>
not more than 90% of the fee which would be payable to an unrelated party
providing such services. Initially, such fee shall be 4.5% of the gross revenues
from the Properties.
"PROPERTY PARTNERSHIPS" means those entities (other than the Operating
Partnership) such as limited liability companies, general and limited
partnerships and trusts that own one or more of the Properties.
"PROSPECTUS" means the final prospectus of the Company dated February 11,
1999 as it may be supplemented in connection with the registration of the Shares
offered hereby.
"QRS" means a "Qualified REIT Subsidiary" within the meaning of the Code.
"QUALIFIED PLAN" means a Plan which satisfies the requirements for
qualification under Section 401 of the Code.
"QUALIFIED REIT SUBSIDIARY" means any corporation 100% of the stock of which
is owned by a REIT.
"REAL ESTATE ASSETS" means Interests in Real Property (including undivided
interests in real property, leaseholds of land and improvements thereon, and
options to acquire land and leaseholds of land and improvements thereon),
interests in mortgages on real property (including interests in mortgages on
leaseholds or improvements thereon), shares in other qualifying REITs and
property attributable to certain temporary investments of new capital for a
one-year period beginning on the date the REIT received the new capital.
Property will qualify as attributable to the temporary investment of new capital
if the property is stock or a debt instrument and the money used to purchase
such stock or debt instrument is received by the REIT in exchange for stock in
the REIT (other than amounts received pursuant to a dividend reinvestment plan)
or in a public offering of debt obligations which have a maturity of at least
five years. In addition, regular and residual interests in a real estate
mortgage investment conduit ("REMIC") and regular interests in financial asset
securitization investment trusts ("FASIT") are considered "Real Estate Assets."
However, if less than 95% of a REMIC's assets are Real Estate Assets, a REIT is
treated as if it held its proportionate share of the assets and income of the
REMIC directly.
"RECOGNITION PERIOD" means the ten-year period beginning on the date that a
REIT (i) first qualifies as a REIT; (ii) acquires any asset from a C corporation
in a transaction in which the basis of such asset in the REIT's hands is
determined by reference to the basis of the asset (or any other property) in the
hand of the transferor corporation; or (iii) acquires the stock of an existing
corporation which becomes a QRS.
"REGIONAL CENTER" means any Shopping Center that provides for general
merchandise, apparel, furniture and home furnishings in depth and variety, as
well as a range of services and recreational facilities. It is built around one
or two full-line department stores of generally not less than 75,000 square feet
each. A Regional Center may have GLA ranging from 250,000 to more than 900,000
square feet, and provides services typical of a business district yet not as
extensive as those of a Super Regional Center.
"REGISTRATION RIGHTS" means the "demand" and "piggyback" registration rights
that the Company may grant to the Limited Partners of the Operating Partnership
and/or Property Partnerships with respect to the Shares acquired by them upon
conversion of their LP Units issued for their equity interests in Properties, or
that the Company may grant with respect to Shares issued directly for equity
interests in Properties.
"REGISTRATION STATEMENT" means the registration statement on Form S-11 and
related exhibits, as amended, filed by the Company with the Commission in
connection with the Offering, of which this Prospectus is a part thereof.
"REIMBURSABLE EXPENSES" means those certain expenses of the Advisor and its
Affiliates which will be reimbursed by the Company.
"REIT" means a real estate investment trust as defined by the Code and the
applicable Treasury Regulations.
201
<PAGE>
"REIT REQUIREMENTS" means the requirements for qualifying as a REIT as
contained in Sections 856 through 860 of the Code and the Regulations
promulgated thereunder.
"REIT TAXABLE INCOME" means the taxable income as computed for a corporation
which is not a REIT: (i) without the deductions allowed by Sections 241 through
247, 249 and 250 of the Code (relating generally to the deduction for dividends
received); (ii) excluding amounts equal to: (a) the net income from Foreclosure
Property; and (b) the net income derived from Prohibited Transactions; (iii)
deducting amounts equal to: (x) any net loss derived from Prohibited
Transactions; and (y) the tax imposed by Section 857(b)(5) of the Code upon a
failure to meet the 95% Gross Income Test and/or the 75% Gross Income Test; and
(iv) disregarding the dividends paid, computed without regard to the amount of
the net income from Foreclosure Property which is excluded from REIT Taxable
Income.
"REMIC" means a real estate mortgage investment conduit.
"RENTS FROM REAL PROPERTY" means, generally, (i) rents from Interests in
Real Property, (ii) charges for services customarily furnished or rendered in
connection with the rental of real property, whether or not such charges are
separately stated, and (iii) rent attributable to personal property which is
leased under, or in connection with, a lease of real property, but only if the
rent attributable to such personal property for the taxable year does not exceed
15 percent of the total rent for the taxable year attributable to both the real
and personal property leased under, or in connection with, such lease. Rents
from Real Property generally does not include (i) any amount received or
accrued, directly or indirectly, with respect to any real or personal property,
if the determination of such amount depends in whole or in part on the income or
profits derived by any person from such property (except that any amount so
received or accrued shall not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales); (ii) any amount received or accrued directly or
indirectly from any person if the REIT owns, directly or indirectly (A) in the
case of any person which is a corporation, stock of such person possessing 10
percent or more of the total combined voting power of all classes of stock
entitled to vote, or 10 percent or more of the total number of shares of all
classes of stock of such person; or (B) in the case of any person which is not a
corporation, an interest of 10 percent or more in the assets or net profits of
such person; and (iii) any amount received or accrued, directly or indirectly,
with respect to any real or personal property if the REIT furnishes or renders
services to the tenants of such property, or manages or operates such property,
other than through an independent contractor from whom the trust itself does not
derive or receive any income.
"RETAIL CENTER" means real estate primarily improved for use as retail
establishments, principally a multi-tenant Neighborhood Center or Community
Center (but also including a Regional Center or single-user retail facilities)
or improved with other commercial facilities which provide goods or services.
"ROLL-UP" means a transaction involving the acquisition, merger, conversion
or consolidation either directly or indirectly of the Company and a Roll-Up
Entity and the issuance of securities of a Roll-Up Entity to the Stockholders of
the Company. Such term does not include:
(i) a transaction involving securities of the Company that have been for at
least 12 months listed on a national securities exchange or traded
through the National Market System of Nasdaq; or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Company if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(a) Stockholders' voting rights;
(b) the term and existence of the Company;
(c) Sponsor or Advisor compensation; or
(d) the Company's investment objectives.
202
<PAGE>
"ROLL-UP ENTITY" means a partnership, REIT, corporation, trust or other
entity that would be created or would survive after the successful completion of
a proposed Roll-Up transaction.
"RULE 144" means Rule 144 promulgated under the Act.
"SEC" or "COMMISSION" means the United States Securities and Exchange
Commission.
"SELLING COMMISSION" means the amount of 7% of the Gross Offering Proceeds
from the sale of 50,000,000 Shares on a best efforts basis (except for Special
Sales) pursuant to this Prospectus, payable to the Dealer Manager which may, at
the discretion of the Dealer Manager, be retained or reallowed to Soliciting
Dealers for each Share sold.
"SERVICE" means the Internal Revenue Service of the United States of
America.
"75% ASSET TEST" means the REIT Requirement that, at the close of each
quarter, at least 75 percent of the value of the total assets of the REIT is
represented by Real Estate Assets, cash and cash items (including receivables),
and Government securities.
"75% GROSS INCOME TEST" means the REIT Requirement that a REIT derive at
least 75% of its gross income, excluding gross income from Prohibited
Transactions, from:
(A) Rents from Real Property;
(B) interest on obligations secured by mortgages on real property or on
Interests in Real Property;
(C) gain from the sale or other disposition of real property (including
interests in real property and interests in mortgages on real property)
which is not Dealer Property;
(D) dividends or other distributions on, and gain (other than gain from
Prohibited Transactions) from the sale or other disposition of,
transferable shares (or transferable certificates of beneficial interest)
in other real estate investment trusts;
(E) abatements and refunds of taxes on real property;
(F) income and gain derived from Foreclosure Property;
(G) amounts (other than amounts the determination of which depends in whole
or in part on the income or profits of any person) received or accrued as
consideration for entering into agreements (i) to make loans secured by
mortgages on real property or on interests in real property or (ii) to
purchase or lease real property (including interests in real property and
interests in mortgages on real property);
(H) gain from the sale or other disposition of a real estate asset which is
not a Prohibited Transaction solely by reason of section 857(b)(6) of the
Code; and
(I) qualified temporary investment income;
"SHARES" means the shares of voting common stock, par value $.01 per share,
of the Company, and "SHARE" means one of those Shares.
"SHARE TRUST" means a trust which holds Shares or Preferred Stock of the
Company which have been designated as Excess Shares.
"SHARE DIRECTOR" means the trustee of the Share Trust.
"SHOPPING CENTER" means a group of commercial establishments planned,
developed, owned and managed as a unit related in location, size and type of
shops to the trade area the unit serves. It provides on-site parking in definite
relationship to the types and sizes of stores.
"SOLICITING DEALER WARRANTS" means the warrants issuable by the Company to
the Dealer Manager, one warrant to purchase one Share during the Exercise Period
for $12.00 per Share for every 25 Shares sold by
203
<PAGE>
the Dealer Manager up to a maximum of 2,000,000 warrants to purchase an
equivalent number of Shares. If, at the time of any exercise of the Soliciting
Dealer Warrant, the then offering price of Shares pursuant to this Prospectus
for this Offering has been increased, then the exercise price of each
unexercised warrant issued in connection with this Offering shall be adjusted to
be equal to 120% of the then current offering price per Share of the Shares
offered or sold pursuant to this Prospectus.
"SOLICITING DEALERS" means the dealer members of the NASD, designated by the
Dealer Manager.
"SPECIAL SALES" means: (A)(i) the sales of Shares, in connection with the
performance of services, to employees, Directors and associates of the Company
and its Affiliates, the Advisor, Affiliates of the Advisor, the Dealer Manager
or their respective officers and employees and certain of their affiliates, (ii)
the sales of Shares pursuant to the Company's DRP, and (iii) the issuance of the
Soliciting Dealer Warrants or the Shares underlying the Soliciting Dealer
Warrants issuable upon the exercise thereof, with respect to which no selling
commissions or Marketing Contribution or Due Diligence Expense Allowance will be
paid; (B)(i) the Sales of Shares to one or more Soliciting Dealers and to their
respective officers and employees and certain of their respective affiliates who
request and are entitled to purchase Shares net of selling commissions and (ii)
the Sale of Shares to certain investors whose contracts for investment advisory
and related brokerage services include a fixed or "wrap" fee feature, with
respect to which no selling commissions will be paid (but with respect to which
the Marketing Contribution and Due Diligence Expense Allowance will be paid);
and (C) the sales of Shares which are entitled to volume discount, with respect
to which reduced selling commissions will be paid (except however, no selling
commissions will be paid for the Shares credited to an investor as a result of a
volume discount; and with respect to all such volume discount Shares, including
the Shares credited to an investor as a result of a volume discount, the
Marketing Contribution and Due Diligence Expense Allowance will be paid).
"SPONSOR" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company, or any Person who will control,
manage or participate in the management of the Company, and any Affiliate of any
such Person. Not included is any Person whose only relationship with the Company
is as that of an independent property manager of the Company's assets, and whose
only compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. A Person may also be deemed a Sponsor of the
Company by:
i. taking the initiative, directly or indirectly, in founding or organizing
the business or enterprise of the Company, either alone or in conjunction
with one or more other Persons;
ii. receiving a material participation in the Company in connection with
the founding or organizing of the business of the Company, in
consideration of services or property, or both services and property;
iii. having a substantial number of relationships and contacts with the
Company;
iv. possessing significant rights to control Company Properties;
v. receiving fees for providing services to the Company which are paid on a
basis that is not customary in the industry; or
vi. providing goods or services to the Company on a basis which was not
negotiated at arm's-length with the Company.
"SRP" means the Share Repurchase Program of the Company.
"STOCKHOLDERS" means the holders of Shares.
"SUPER REGIONAL CENTER" means any Shopping Center that provides for
extensive variety in general merchandise, apparel, furniture and home
furnishings, as well as a variety of services and recreational facilities. It is
built around three or more full-line department stores of generally not less
than 100,000
204
<PAGE>
square feet each. A Super Regional Center may have GLA ranging from 600,000 to
more than 1,500,000 square feet.
"TAX-EXEMPT ENTITIES" means any investor that is exempt from federal income
taxation, including without limitation a Qualified Plan, an endowment fund or a
charitable, religious, scientific or education organization.
"TERMINATION DATE" means if the Minimum Offering is sold and the escrowed
subscription funds therefrom are released to the Company and if the Offering
continues thereafter, February 11, 2000, unless the Company elects to extend it
to a date no later than February 11, 2001, in states that permit such extension.
If the Minimum Offering is not sold within six months of the initial date of
this Prospectus, then "Termination Date" means such earlier date as the Offering
may be abandoned by the Company. However, the Company reserves the right to
terminate the Offering at any time.
"TIGI" or "INLAND" means The Inland Group, Inc., a Delaware corporation.
"TIGI AFFILIATED COMPANIES" or "INLAND AFFILIATED COMPANIES" or the "INLAND
ORGANIZATION" means TIGI and its subsidiaries and its and their Affiliates.
"TOTAL OPERATING EXPENSES" means the aggregate expenses of every character
paid or incurred by the Company as determined under generally accepted
accounting principles, including Advisor Asset Management Fees, but excluding:
a. the expenses of raising capital such as Organization and Offering
Expenses, legal, audit, accounting, underwriting, brokerage, listing,
registration and other fees, printing and other such expenses, and taxes
incurred in connection with the issuance, distribution, transfer,
registration and stock exchange listing of the Shares;
b. interest payments;
c. taxes;
d. non-cash expenditures such as depreciation, amortization and bad debt
reserves;
e. incentive fees payable to the Advisor; and
f. Acquisition Expenses, real estate commissions on resale of real property
and other expenses connected with the acquisition, disposition and
ownership of real estate interests, mortgage loans or other property
(such as the costs of foreclosure, insurance premiums, legal services,
maintenance, repair and improvement of real property).
"TREASURY REGULATIONS" means the Regulations promulgated by the United
States Department of the Treasury under the Code.
"TRIPLE-NET LEASE BASIS" means a lease pursuant to which a Creditworthy
Tenant is responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance, repairs and
maintenance applicable to the leased space.
"TRIPLE-NET SINGLE-USER RETAIL PROPERTIES OUTSIDE THE PRIMARY GEOGRAPHICAL
AREA OF INVESTMENT" means all Single-User Retail Properties leased on a
Triple-Net Lease Basis to a Creditworthy Tenant that are not located in the
Company's Primary Geographical Area of Investment.
"25% ASSET TEST" means the REIT Requirement that, at the end of each
quarter, not more than 25 percent of the value of a REIT's total assets is
represented by securities (other than securities qualifying under the 75% Asset
Test). In addition, the value of the securities of any one issuer held by a REIT
may not exceed 5 percent of the value of the total assets of the REIT and the
REIT may not own more than 10 percent of the outstanding voting securities of
such issuer.
"UBTI" means Unrelated Business Taxable Income as described in the Code.
205
<PAGE>
"UMBRELLA PARTNERSHIP REAL ESTATE INVESTMENT TRUST" means a REIT that owns
and operates its properties, directly or indirectly, through an operating
partnership.
"UNITS" means all the units of partnership interests representing the equity
in the Operating Partnership, being the LP Units and the GP Common Units
collectively.
"UNRELATED BUSINESS TAXABLE INCOME" or "UBTI" as defined in Section 512 of
the Code, means generally the gross income derived by any organization from any
unrelated trade or business regularly carried on by it, less certain permitted
deductions which are directly connected with the carrying on of such trade or
business, both computed with certain modifications set forth in the Code.
Generally, Section 513 of the Code defines an unrelated trade or business as any
trade or business the conduct of which is not substantially related (apart from
the need to generate income or funds) to the exercise or performance of an
organization's exempt purpose or function.
"UPREIT" means an Umbrella Partnership Real Estate Investment Trust.
"USRPI" means a United States real property interest described in Section
897 of the Code. Generally, such an interest would be a direct interest in real
property located in the United States or an interest in a domestic corporation
which owns other USRPIs with a fair market value equal to at least 50% of the
sum of the fair market value of its USRPIs, foreign real property and assets
used in a trade or business.
"U.S." means the United States of America.
206
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENTS
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................ F- 1
Consolidated Balance Sheet at September 18, 1998.................... F- 2
Notes to Consolidated Balance Sheet................................. F- 3
Independent Auditors' Report - Lake Olympia Square.................. F- 5
Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1997 of Lake Olympia Square....... F- 6
Notes to Historical Summary of Gross Income and Direct Operating
Expenses for the year ended December 31, 1997 of Lake
Olympia Square.................................................... F- 7
Historical Summary of Gross Income and Direct Operating Expenses
(unaudited) for the nine months ended September 30, 1998 of Lake
Olympia Square.................................................... F- 9
Notes to Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the nine months ended September 30, 1998
of Lake Olympia Square............................................ F-10
Independent Auditors' Report - Lake Walden Square................... F-11
Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1997 of Lake Walden Square........ F-12
Notes to Historical Summary of Gross Income and Direct Operating
Expenses for the year ended December 31, 1997 of Lake Walden
Square............................................................ F-13
Historical Summary of Gross Income and Direct Operating Expenses
(unaudited) for the nine months ended September 30, 1998 of Lake
Walden Square..................................................... F-15
Notes to Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the nine months ended September 30, 1998
of Lake Walden Square............................................. F-16
</TABLE>
Index to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report - Merchants Square Shopping Center..... F-17
Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1997 of Merchants Square
Shopping Center................................................... F-18
Notes to Historical Summary of Gross Income and Direct Operating
Expenses for the year ended December 31, 1997 of Merchants
Square Shopping Center............................................ F-19
Historical Summary of Gross Income and Direct Operating Expenses
(unaudited) for the nine months ended September 30, 1998 of
Merchants Square Shopping Center.................................. F-21
Notes to Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the nine months ended September 30, 1998
of Merchants Square Shopping Center............................... F-22
Pro Forma Consolidated Balance Sheet (unaudited) at September 30,
1998.............................................................. F-23
Notes to Pro Forma Consolidated Balance Sheet (unaudited) at
September 30, 1998................................................ F-25
Pro Forma Statement of Operations (unaudited) for the nine
months ended September 30, 1998................................... F-26
Notes to Pro Forma Statement of Operations (unaudited) for the
nine months ended September 30, 1998.............................. F-28
Pro Forma Statement of Operations (unaudited) for the year
ended December 31, 1997........................................... F-29
Notes to Pro Forma Statement of Operations (unaudited) for
the year ended December 31, 1997.................................. F-31
</TABLE>
<PAGE>
Independent Auditors' Report
Board of Directors
Inland Retail Real Estate Trust, Inc.
We have audited the accompanying consolidated balance sheet of Inland Retail
Real Estate Trust, Inc. (the "Company") as of September 18, 1998. 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 of a balance sheet includes examining, on a test basis, evidence
supporting the amounts and disclosures in that balance sheet. An audit of a
balance sheet 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 provides a reasonable
basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Inland Retail Real
Estate Trust, Inc. as of September 18, 1998, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
September 18, 1998
F-1
<PAGE>
Inland Retail Real Estate Trust, Inc.
(A Maryland Corporation)
CONSOLIDATED BALANCE SHEET
September 18, 1998
ASSETS
<TABLE>
<S> <C>
Cash.............................................. $ 202,000
-------------
$ 202,000
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Minority interest in partnership................ $ 2,000
Commitments and contingencies (Note 4)............
Stockholder's Equity:
Preferred Stock, $.01 par value, 10,000,000
shares authorized, none outstanding........... -
Common stock, $.01 par value, 100,000,000
shares authorized, 20,000 shares issued and
outstanding................................... 200
Additional Paid-in Capital...................... 199,800
-------------
$ 202,000
=============
</TABLE>
See accompanying notes to consolidated balance sheet.
F-2
<PAGE>
Inland Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO CONSOLIDATED BALANCE SHEET
September 18, 1998
(1) Organization
Inland Retail Real Estate Trust, Inc. (the "Company") was formed on September 3,
1998 to acquire and manage a diversified portfolio of real estate, primarily
multi-tenant shopping centers and has not commenced operations. The Advisory
Agreement (the "Agreement") provides for Inland Retail Real Estate Advisory
Services, Inc. (the "Advisor"), an Affiliate of the Company, to be the Advisor
to the Company. The Company contemplates the sale of up to 50,000,000 shares of
common stock ("Shares") at $10 each in an initial public offering (the
"Offering") to be registered with the Securities and Exchange Commission (the
"Registration Statement") and the issuance of 4,000,000 shares at $9.05 each
which may be distributed pursuant to the Company's distribution reinvestment
program. No shares will be sold unless subscriptions for at least 200,000 shares
(the minimum offering) have been obtained within six months after commencement
of the Offering. The Company will be the general partner of Inland Retail Real
Estate Limited Partnership (the "Operating Partnership"). See "Investment
Objectives and Policies," "Plan of Distribution" and "Distribution Reinvestment
and Share Repurchase Programs" elsewhere in this Prospectus.
The Company intends to qualify as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1999. If the Company qualifies
for taxation as a REIT, the Company generally will not be subject to federal
income tax to the extent it distributes its REIT taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal income tax on its taxable income at regular
corporate tax rates. Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain state and local taxes on its income and
property and federal income and excise taxes on its undistributed income.
(2) Basis of Presentation
The accompanying Consolidated Balance Sheet includes the accounts of the
Company, as well as the accounts of the Operating Partnership, in which the
Company has an approximately 99% controlling general partner interest. The
Advisor owns the remaining approximately 1% limited partner common units in the
Operating Partnership for which it paid $2,000 and which is reflected as a
minority interest in the accompanying consolidated balance sheet. The effect of
all significant intercompany transactions have been eliminated.
F-3
<PAGE>
Inland Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO CONSOLIDATED BALANCE SHEET
(continued)
September 18, 1998
(3) Transactions with Affiliates
The Advisor contributed $200,000 to the capital of the Company for which it
received 20,000 shares of common stock.
In the event that the minimum offering is not successful, an Affiliate of the
Advisor will bear the related costs of the Offering.
Certain compensation and fees payable to the Advisor for services to be provided
to the Company are limited to maximum amounts. See "Compensation Table"
elsewhere in this Prospectus for a description of such compensation and fees.
(4) Commitments
The Company plans to adopt an Independent Director Stock Option Plan which will
provide for the initial grant of options to purchase 3,000 shares to each of the
Independent Directors of the Company at $9.05 per share. See "Management-
Independent Director Stock Option Plan" described elsewhere in this Prospectus.
The Company anticipates that the aggregate borrowings related to all of the
Company's properties will be limited to certain maximum amounts. See "Investment
Objectives and Policies" elsewhere in this Prospectus for a description of such
maximum borrowing amounts.
The Company has rights to purchase three investment properties from an
Affiliate, who purchased the properties from an unaffiliated third party on
behalf of the Company. The Company expects to purchase these properties from the
Affiliate at their cost upon receipt of proceeds from the Offering.
F-4
<PAGE>
Independent Auditors' Report
The Board of Directors
Inland Retail Real Estate Trust, Inc.:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of Lake Olympia Square for the year
ended December 31, 1997. This Historical Summary is the responsibility of the
management of Inland Retail Real Estate Trust, Inc. Our responsibility is to
express an opinion on the Historical Summary 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 Historical Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Historical Summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Retail Real
Estate Trust, Inc., as described in note 2. The presentation is not intended to
be a complete presentation of Lake Olympia Square's revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses described in
note 2 of Lake Olympia Square for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
April 30, 1998
F-5
<PAGE>
Lake Olympia Square
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $ 848,197
Operating expense and real estate
tax recoveries................................ 163,446
-----------
Total Gross Income.............................. 1,011,643
-----------
Direct operating expenses:
Real estate taxes............................... 81,106
Operating expenses.............................. 74,124
Management fees................................. 47,171
Insurance....................................... 22,255
Utilities....................................... 17,558
Interest expense................................ 343,788
-----------
Total Direct Operating Expenses................. 586,002
-----------
Excess of Gross Income over
Direct Operating Expenses..................... $ 425,641
===========
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-6
<PAGE>
Lake Olympia Square
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
1. Business
Lake Olympia Square (Lake Olympia) is located in Ocoee, Florida. It consists
of approximately 85,800 square feet of gross leasable area and was 99%
leased and occupied at December 31, 1997. Approximately 51% of Lake Olympia
is leased to one tenant representing approximately 35% of base rental
income. An Affiliate of Inland Retail Real Estate Trust, Inc. purchased Lake
Olympia from an unaffiliated third party on behalf of Inland Retail Real
Estate Trust, Inc. Inland Retail Real Estate Trust, Inc. will acquire Lake
Olympia from this Affiliate at their cost upon receipt of proceeds from an
equity offering.
2. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses
(Historical Summary) has been prepared for the purpose of complying with
Rule 3-14 of the Securities and Exchange Commission Regulation S-X and for
inclusion in the Registration Statement on Form S-11 of Inland Retail Real
Estate Trust, Inc. and is not intended to be a complete presentation of Lake
Olympia's revenues and expenses. The Historical Summary has been prepared on
the accrual basis of accounting and requires management of Lake Olympia to
make estimates and assumptions that affect the reported amounts of the
revenues and expenses during the reporting period. Actual results may differ
from those estimates.
3. Gross Income
Lake Olympia leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. The leases
include provisions under which Lake Olympia is reimbursed for common area,
real estate, and insurance costs.
Base rentals are reported as income over the lease term as they become
receivable under the lease provisions. However, when rentals vary from a
straight-line basis due to short-term rent abatements or escalating rents
during the lease term, the income is recognized based on effective rental
rates. Related adjustments increased base rental income by $61,371 for the
year ended December 31, 1997.
F-7
<PAGE>
Lake Olympia Square
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 870,375
1999 876,597
2000 840,419
2001 758,460
2002 650,739
Thereafter 4,989,716
-----------
$ 8,986,306
===========
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be comparable
to the proposed future operations of Lake Olympia. Costs such as
depreciation, amortization and professional fees are excluded from the
Historical Summary.
Lake Olympia is managed pursuant to the terms of a verbal management
agreement for an annual fee of 5% of gross revenue (as defined). Subsequent
to the sale of Lake Olympia (note 1), the current management agreement will
cease. Any new management agreement may cause future management fees to
differ from the amounts reflected in the Historical Summary.
Inland Retail Real Estate Trust, Inc. will assume the outstanding mortgage
debt related to Lake Olympia Square of approximately $6,078,000 in
connection with the acquisition. The assumed debt, which originated March
26, 1997, has an annual interest rate of 8.25% and requires monthly interest
payments.
5. Pro Forma Adjustments (unaudited)
The interest expense associated with the assumed debt discussed in note 4,
would have approximated $501,435 if the related debt had been in existence
since January 1, 1997.
F-8
<PAGE>
Lake Olympia Square
Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Gross income:
Base rental income.............................. $ 634,892
Operating expense and real estate
tax recoveries................................ 192,785
-----------
Total Gross Income.............................. 827,677
-----------
Direct operating expenses:
Real estate taxes............................... 57,578
Operating expenses.............................. 140,099
Insurance....................................... 13,788
Utilities....................................... 16,783
Interest expense................................ 375,289
-----------
Total Direct Operating Expenses................. 603,537
-----------
Excess of Gross Income over
Direct Operating Expenses..................... $ 224,140
===========
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-9
<PAGE>
Lake Olympia Square
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 1998
(unaudited)
1. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses for the
period ended September 30, 1998 has been prepared from operating statements
provided by the owners of the property during that period and requires
management of Lake Olympia to make estimates and assumptions that affect the
amounts of the revenues and expenses during that period. Actual results may
differ from those estimates.
In the opinion of management, all normal recurring adjustments necessary for
a fair presentation of results for the unaudited interim period presented
have been reflected. Certain information in footnote disclosures included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
F-10
<PAGE>
Independent Auditors' Report
The Board of Directors
Inland Retail Real Estate Trust, Inc.:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of Lake Walden Square for the year ended
December 31, 1997. This Historical Summary is the responsibility of the
management of Inland Retail Real Estate Trust, Inc. Our responsibility is to
express an opinion on the Historical Summary 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 Historical Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Historical Summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Retail Real
Estate Trust, Inc., as described in note 2. The presentation is not intended to
be a complete presentation of Lake Walden Square's revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses described in
note 2 of Lake Walden Square for the year ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
April 30, 1998
F-11
<PAGE>
Lake Walden Square
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $1,537,855
Operating expense and real estate
tax recoveries................................ 267,044
Other income.................................... 149,736
-----------
Total Gross Income.............................. 1,954,635
-----------
Direct operating expenses:
Operating expenses.............................. 151,456
Management fees................................. 72,592
Real estate taxes............................... 159,637
Utilities....................................... 23,425
Insurance....................................... 28,594
Interest expense................................ 136,816
-----------
Total Direct Operating Expenses................. 572,520
-----------
Excess of Gross Income over
Direct Operating Expenses..................... $1,382,115
===========
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-12
<PAGE>
Lake Walden Square
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
1. Business
Lake Walden Square is located in Plant City, Florida. It consists of
approximately 263,000 square feet of gross leasable area and was 83% leased
and occupied at December 31, 1997. Approximately 62% of Lake Walden Square
is leased to three tenants representing approximately 40% of base rental
income. An Affiliate of Inland Retail Real Estate Trust, Inc. purchased Lake
Walden Square from an unaffiliated third party on behalf of Inland Retail
Real Estate Trust, Inc. Inland Retail Real Estate Trust, Inc. will acquire
Lake Walden Square from this Affiliate at their cost upon receipt of
proceeds from an equity offering.
2. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses
(Historical Summary) has been prepared for the purpose of complying with
Rule 3-14 of the Securities and Exchange Commission Regulation S-X and for
inclusion in the Registration Statement on Form S-11 of Inland Retail Real
Estate Trust, Inc. and is not intended to be a complete presentation of Lake
Walden Square's revenues and expenses. The Historical Summary has been
prepared on the accrual basis of accounting and requires management of Lake
Walden Square to make estimates and assumptions that affect the reported
amounts of the revenues and expenses during the reporting period.
Actual results may differ from those estimates.
3. Gross Income
Lake Walden Square leases retail space under various lease agreements with
its tenants. All leases are accounted for as operating leases. The leases
include provisions under which Lake Walden Square is reimbursed for common
area, real estate taxes, and insurance costs.
Base rentals are reported as income over the lease term as they become
receivable under the lease provisions. However, when rentals vary from a
straight-line basis due to short-term rent abatements or escalating rents
during the lease term, the income is recognized based on effective rental
rates. Related adjustments increased base rental income by $34,613 for the
year ended December 31, 1997.
F-13
<PAGE>
Lake Walden Square
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 1,599,767
1999 1,579,403
2000 1,533,075
2001 1,411,984
2002 1,202,908
Thereafter 10,945,790
-----------
$18,272,927
===========
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be comparable
to the proposed future operations of Lake Walden Square. Costs such as
depreciation, amortization and professional fees are excluded from the
Historical Summary.
Real estate tax expense is based upon bills for 1997.
Lake Walden Square is managed pursuant to the terms of a management
agreement for an annual fee of 4% of rental revenue and tenant expense
reimbursements. Any new management agreement may cause future management
fees to differ from the amounts reflected in the Historical Summary.
Inland Retail Real Estate Trust, Inc. will assume the outstanding mortgage
debt related to Lake Walden Square of approximately $10,205,000 in
connection with the acquisition. The assumed debt, which originated
October 30, 1997, has an annual interest rate of 7.63% and requires monthly
interest payments.
5. Pro Forma Adjustments (unaudited)
The interest expense associated with the assumed debt discussed in note 4,
would have approximated $778,642 if the related debt had been in existence
since January 1, 1997.
F-14
<PAGE>
Lake Walden Square
Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $1,186,034
Operating expense and real estate
tax recoveries................................ 192,072
-----------
Total Gross Income.............................. 1,378,106
-----------
Direct operating expenses:
Operating expenses.............................. 134,764
Real estate taxes............................... 133,267
Utilities....................................... 16,812
Insurance....................................... 30,279
Interest expense................................ 583,378
-----------
Total Direct Operating Expenses................. 898,500
-----------
Excess of Gross Income over
Direct Operating Expenses..................... $ 479,606
===========
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-15
<PAGE>
Lake Walden Square
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 1998
(unaudited)
1. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses for the
period ended September 30, 1998 has been prepared from operating statements
provided by the owners of the property during that period and requires
management of Lake Walden to make estimates and assumptions that affect the
amounts of the revenues and expenses during that period. Actual results may
differ from those estimates.
In the opinion of management, all normal recurring adjustments necessary for
a fair presentation of results for the unaudited interim period presented
have been reflected. Certain information in footnote disclosures included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
F-16
<PAGE>
Independent Auditors' Report
The Board of Directors
Inland Retail Real Estate Trust, Inc.:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of Merchants Square Shopping Center for
the year ended December 31, 1997. This Historical Summary is the responsibility
of the management of Inland Retail Real Estate Trust, Inc. Our responsibility is
to express an opinion on the Historical Summary 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 Historical Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Historical Summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Retail Real
Estate Trust, Inc., as described in note 2. The presentation is not intended to
be a complete presentation of Merchants Square Shopping Center's revenues and
expenses.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses described in
note 2 of Merchants Square Shopping Center for the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
October 20, 1998
F-17
<PAGE>
Merchants Square Shopping Center
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Gross income:
Base rental income.............................. $ 567,470
Operating expense and real estate
tax and insurance recoveries.................. 144,729
Percentage rent................................. 7,053
-----------
Total Gross Income.............................. 719,252
-----------
Direct operating expenses:
Operating expenses.............................. 51,290
Real estate taxes............................... 97,147
Insurance....................................... 8,782
Management fees................................. 36,546
Other........................................... 737
-----------
Total Direct Operating Expenses................. 194,502
-----------
Excess of Gross Income over
Direct Operating Expenses..................... $ 524,750
===========
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-18
<PAGE>
Merchants Square Shopping Center
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
1. Business
Merchants Square Shopping Center (Merchants Square) is located in
Zephyrhills, Florida. It consists of approximately 74,850 square feet of
gross leasable area. As of the end of the year, Merchants Square was 100%
occupied, 64% of which is occupied by one major tenant, Kash N' Karry. An
Affiliate of Inland Retail Real Estate Trust, Inc. purchased Merchants
Square from an unaffiliated third party on behalf of Inland Retail Real
Estate Trust, Inc. Inland Retail Real Estate Trust, Inc. will acquire
Merchants Square from this Affiliate at their cost upon receipt of
proceeds from an equity offering.
2. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses
(Historical Summary) has been prepared for the purpose of complying with
Rule 3-14 of the Securities and Exchange Commission Regulation S-X and for
inclusion in the Registration Statement on Form S-11 of Inland Retail Real
Estate Trust, Inc. and is not intended to be a complete presentation of
Merchants Square's revenues and expenses. The Historical Summary has been
prepared on the accrual basis of accounting and requires management of
Merchants Square to make estimates and assumptions that affect the reported
amounts of the revenues and expenses during the reporting period. Actual
results may differ from those estimates.
3. Gross Income
Merchants Square leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. The leases
include provisions under which Merchants Square is reimbursed for common
area, real estate, and insurance costs. Certain of the leases contain
renewal options for various periods at various rental rates.
Base rentals are reported as income over the lease term as they become
receivable under the lease provisions. However, when rentals vary from a
straight-line basis due to short-term rent abatements or escalating rents
during the lease term, the income is recognized based on effective rental
rates. Related adjustments increased base rental income by approximately
$1,900 for the year ended December 31, 1997.
F-19
<PAGE>
Merchants Square Shopping Center
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1997
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 578,443
1999 541,240
2000 500,241
2001 471,771
2002 471,771
Thereafter 3,449,105
-----------
$6,012,570
===========
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be comparable
to the proposed future operations of Merchants Square. Costs such as
mortgage interest, depreciation, amortization and professional fees are
excluded from the Historical Summary.
The Seller provides management services for Merchants Square for an annual
fee of 4% to 6% of gross revenues (as defined). Subsequent to the sale of
Merchants Square (note 1), the current management agreement will cease. Any
new management agreement may cause future management fees to differ from the
amounts reflected in the Historical Summary.
F-20
<PAGE>
Merchants Square Shopping Center
Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $ 425,602
Operating expense and real estate
tax and insurance recoveries.................. 120,297
-----------
Total Gross Income.............................. 545,899
-----------
Direct operating expenses:
Operating expenses.............................. 42,671
Management fee.................................. 24,565
Real estate taxes............................... 72,860
Insurance....................................... 6,586
-----------
Total Direct Operating Expenses................. 146,682
-----------
Excess of Gross Income over
Direct Operating Expenses..................... $ 399,217
===========
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-21
<PAGE>
Merchants Square Shopping Center
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 1998
(unaudited)
1. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses for the
period ended September 30, 1998 has been prepared from operating statements
provided by the owners of the property during that period and requires
management of Merchants Square to make estimates and assumptions that affect
the amounts of the revenues and expenses during that period. Actual results
may differ from those estimates.
In the opinion of management, all normal recurring adjustments necessary for
a fair presentation of results for the unaudited interim period presented
have been reflected. Certain information in footnote disclosures included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
2. Direct Operating Expenses
Inland Retail Real Estate Trust, Inc. will assume the outstanding mortgage
debt related to Merchants Square Shopping Center of approximately $4,300,000
in connection with the acquisition. The assumed debt, which originated
October 1998, has an annual interest rate of 7.5% and requires monthly
principal and interest payments.
F-22
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1998
(unaudited)
The following unaudited Pro Forma Consolidated Balance Sheet is presented as if
1) proceeds of $2,000,000 from the Minimum Offering were received, and 2) the
acquisition of Merchants Square Shopping Center had occurred
on September 30, 1998.
This unaudited Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been at
September 30, 1998, nor does it purport to represent the future financial
position of the Company. Unless otherwise defined, capitalized terms used
herein shall have the same meaning as in the Prospectus.
F-23
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------
(A) Minimum Pro Forma
Historical Offering Acquisition as adjusted
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
- ------
Net investment in
properties............. $ - - 5,714,401 5,714,401(C,D)
Cash..................... 202,000 1,700,000 (1,407,314) 494,686(D)
Accounts and rents
receivable............. - - 72,860 72,860(D)
------------ ------------- ------------- -----------
Total assets............. $ 202,000 1,700,000 4,379,947 6,281,947
============ ============= ============= ===========
Liabilities and Stockholder's Equity
- ------------------------------------
Accrued real estate taxes - - 72,860 72,860(D)
Security deposits........ - - 7,087 7,087(D)
Mortgages payable........ - - 4,300,000 4,300,000(F)
------------ ------------- ------------- -----------
Total liabilities........ - - 4,379,947 4,379,947
------------ ------------- ------------- -----------
Minority interest in
partnership............ 2,000 - - 2,000(E)
Common Stock............. 200 2,000 - 2,200
Additional paid in
capital (net of
Offering costs)........ 199,800 1,698,000 - 1,897,800
------------ ------------- ------------- -----------
Total Stockholder's
equity................. 200,000 1,700,000(B) - 1,900,000
------------ ------------- ------------- -----------
Total liabilities and
Stockholder's equity... $ 202,000 1,700,000 4,379,947 6,281,947
============ ============= ============= ===========
</TABLE>
See accompanying notes to pro forma consolidated balance sheet.
F-24
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Balance Sheet
September 30, 1998
(unaudited)
The pro forma consolidated balance sheet reflects the completion of the Minimum
Offering and the use of the proceeds to purchase Merchants Square Shopping
Center subject to $4,300,000 of third party debt.
(A) The historical column represents the Consolidated Balance Sheet of the
Company which was formed on September 3, 1998. On September 18, 1998 the
Advisor contributed $200,000 in exchange for 20,000 shares of stock. The
Company had no results of operations for the period from September 19, 1998
to September 30, 1998.
(B) Minimum Offering proceeds:
<TABLE>
<S> <C>
Common stock - 200,000 shares @ $.01 per share $ 2,000
Additional paid-in capital @ $9.99 per share 1,998,000
----------
$2,000,000 (1)
Net of Offering costs or Total Public Offering Expenses
calculated as 15% of Minimum Offering proceeds of
$2,000,000) (300,000)(1)
----------
$1,700,000
==========
</TABLE>
(C) Merchants Square Shopping Center was purchased by Merchants Square
Property Partnership, an Affiliate of the Advisor, in contemplation of
the Offering, to be held until sufficient Net Proceeds of the Offering are
raised by the Company to acquire the property.
The Company is expected to use the proceeds of the Minimum Offering to
acquire Merchange Square Shopping Center for a cash payment of $1,407,314
and subject to the existing first mortgage loan with a balance of
approximately $4,300,000 as of September 30, 1998 (See Note F).
(D) The pro forma adjusted cash balance consists of:
<TABLE>
<S> <C> <C>
Historical Balance of the Company $ 202,000
Minimum Offering proceeds 2,000,000 (1)
Offering costs (300,000)(1)
Net purchase price of Merchants Square:
Gross purchase price (5,714,401)
Proceeds from assumption of debt (See Note F) 4,300,000
Security deposits 7,087
Accounts and rents receivable (See Note G) 72,860
Accrued real estate taxes (72,860)
----------
(1,407,314)(Note C)
-----------
Pro forma adjusted cash $ 494,686
===========
</TABLE>
(E) The Pro Forma Consolidated Balance Sheet includes the accounts of the
Operating Partnership in which the Company has an approximately 99%
controlling general partner interest. The Advisor owns the remaining
approximately 1% limited partnership common units in the Operating
Partnership for which it paid $2,000 and which is reflected as a minority
interest.
F-25
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Balance Sheet
September 30, 1998
(unaudited)
(continued)
(F) Represents the first mortgage loan assumed in conjunction with the
acquisition of Merchants Square Shopping Center by the Company. This
mortgage loan with a principal balance of approximately $4,300,000 as
of September 30, 1998 is payable to a third party at an interest rate
of 7.5% per annum.
(G) Accounts and rents receivable as of September 30, 1998 of $72,860
represent amounts due from tenants for accrued real estate taxes.
F-26
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Statement of Operations
For the nine months ended September 30, 1998
(unaudited)
The following unaudited Pro Forma Statement of Operations of the Company is
presented to effect the acquisition of the property indicated in Note C of the
Notes to the Pro Forma Statement of Operations as though it occurred on January
1, 1997.
This unaudited Pro Forma Statement of Operations is not necessarily indicative
of what the actual results of operations would have been for the nine months
ended September 30, 1998, nor does it purport to represent the future financial
position of the Company. Unless otherwise defined, capitalized terms used herein
shall have the same meaning as in the Prospectus.
F-27
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Statement of Operations
For the nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Historical
---------------------------
Company Merchants Pro Forma
(A) Square Adjustment Pro Forma
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Rental income.................. $ - 425,602 - 425,602
Operating expense and real
estate tax recoveries........ - 120,297 - 120,297
------------ ------------- ---------- -------------
Total income................... - 545,899 - 545,899
------------ ------------- ---------- -------------
Advisor asset management
fee.......................... - - 42,858(B) 42,858
Property operating expenses.... - 122,117 - 122,117
Management fee................. - 24,565(G) - 24,565
Interest expense............... - - 238,861(C) 238,861
Depreciation................... - - 107,500(D) 107,500
------------ ------------- ---------- -------------
Total expenses................. - 146,682 389,219 535,901
-------------
Net income applicable to
common shareholders (F)...... $ 9,998
=============
Weighted average number of
shares of common stock
outstanding (E).............. 220,000
=============
Basic and diluted net income
per weighted average
shares of common stock
outstanding (E).............. $ .05
=============
</TABLE>
See accompanying notes to pro forma statement of operations.
F-28
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Statement of Operations
For the nine months ended September 30, 1998
(unaudited)
(A) Historical information is not applicable as the Company had no operations
through September 30, 1998.
(B) The advisor asset management fee has been calculated as 1% of the cost of
acquisition of Merchants Square calculated as follows:
<TABLE>
<S> <C>
Cash paid $1,407,314 (see note C)
Mortgage loan assumed 4,300,000
Security deposits 7,087
----------
Total purchase price $5,714,401
x 1%
----------
Total annual fee $ 57,144
----------
Nine months ended September 30, 1998 $ 42,858
==========
</TABLE>
(C) The pro forma adjustment for the nine months ended September 30, 1998 is as
though the acquisition of Merchants Square Shopping Center occurred on
January 1, 1997. This property proposed to be acquired was purchased by
Merchant Square Property Partnership, an Affiliate of the Advisor, in
contemplation of the offering, to be held until sufficient net offering
proceeds are raised by the Company to acquire the property.
The Company is expected to use the proceeds of the Minimum Offering to
acquire Merchants Square Shopping Center for a cash payment of
$1,407,314 and subject to the existing first mortgage loan with a
balance of approximately $4,300,000 as of September 30, 1998. The first
mortgage loan has an interest rate of 7.5% per annum and is payable in
installments of principal and interest. Principal and interest payments
total $270,594 for the nine months ended September 30, 1998, of which
$238,861 represents interest expense and $31,733 represents principal
amortization. The pro forma adjustment for interest expense on this
property is based on the terms stated above.
(D) Depreciation expense is computed using the straight-line method, based upon
an estimated useful life of thirty years for buildings and is calculated
as follows:
<TABLE>
<S> <C>
Total purchase price 5,714,401
Estimated percentage of purchase price
attributable to buildings (1) 75.3%
----------
Depreciable base 4,303,000
==========
Depreciation expense based on 30 year
estimated useful life for nine months $ 107,500
==========
</TABLE>
(1) The estimated percentage of purchase price attributable to buildings is a
preliminary estimate and is not expected to change significantly.
F-29
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Statement of Operations
For the nine months ended September 30, 1998
(unaudited)
(E) The pro forma weighted average shares of common stock outstanding for the
nine months ended September 30, 1998 was calculated using the Minimum
Offering of 200,000 shares plus the 20,000 shares purchased by the
Advisor in connection with the organization of the Company.
(F) The net income (loss) allocable to the minority interest is immaterial, and
therefore, has been not included.
(G) Property management fees are calculated as 4.5% of gross revenues, in
accordance with the management agreement expected to be entered into upon
the acquisition of Merchants Square by the Company.
F-30
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Statement of Operations
For the year ended December 31, 1997
(unaudited)
The following unaudited Pro Forma Statement of Operations of the Company is
presented to effect the acquisition of the property indicated in Note B of the
Notes to the Pro Forma Statement of Operations as though it occurred on January
1, 1997.
This unaudited Pro Forma Statement of Operations is not necessarily indicative
of what the actual results of operations would have been for the year ended
December 31, 1997, nor does it purport to represent the future financial
position of the Company. Unless otherwise defined, capitalized terms used herein
shall have the same meaning as in the Prospectus.
F-31
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Statement of Operations
For the year ended December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Historical
---------------------------
Company Merchants Pro Forma
(A) Square Adjustment Pro Forma
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Rental income................... $ - 567,470 - 567,470
Operating expense and real
estate tax recoveries......... - 151,782 - 151,782
------------- ------------- ------------ -----------
Total income.................... - 719,252 - 719,252
------------- ------------- ------------ -----------
Advisor asset management fee ... - - 57,144(E) 57,144
Property operating expenses..... - 157,956 - 157,956
Management fee.................. - 36,546 (4,180)(G) 32,366
Interest expense................ - - 321,155(B) 321,155
Depreciation ................... - - 143,333(C) 143,333
------------ ------------- ------------ -----------
Total expenses.................. - 194,502 517,452 711,954
-----------
Net income applicable to
common shareholders (F)....... $ 7,298
===========
Weighted average number of
shares of common stock
outstanding (D)........ 220,000
===========
Basic and diluted net income
per weighted average
shares of common stock
outstanding (D)......... $ .03
===========
</TABLE>
See accompanying notes to pro forma statement of operations.
F-32
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Statement of Operations
For the year ended December 31, 1997
(unaudited)
(A) Historical information is not applicable as the Company was not formed as of
December 31, 1997.
(B) The pro forma adjustment for the year ended December 31, 1997 is as though
the acquisition of Merchants Square Shopping Center occurred on January 1,
1997. This property proposed to be acquired by the Company was purchased
by Merchant Square Property Partnership, an Affiliate of the Advisor, in
contemplation of the offering, to be held until sufficient net offering
proceeds are raised by the Company to acquire the property.
The Company is expected to use the proceeds of the Minimum Offering to
acquire Merchants Square Shopping Center for a cash payment of
$1,407,314 and subject to the existing first mortgage loan with a
balance of approximately $4,300,000 as of September 30, 1998. The first
mortgage loan has an interest rate of 7.5% per annum and is payable in
installments of principal and interest. Principal and interest payments
total $360,792 for the twelve months ended December 31, 1997, of which
$321,155 represents interest expense and $39,733 represents principal
amortization. The pro forma adjustment for interest expense on this
property is based on the terms stated above.
(C) Depreciation expense is computed using the straight-line method, based upon
an estimated useful life of thirty years for buildings and is calculated
as follows:
<TABLE>
<CAPTION>
<S> <C>
Total purchase price 5,714,401 (See Note E)
Estimated percentage of purchase price
attributable to buildings (1) 75.3%
---------
Depreciable base 4,303,000
---------
---------
Depreciation expense based on 30 year use $ 143,333
---------
---------
</TABLE>
(1) The estimate percentage of purchase price attributable to buildings is a
preliminary estimate and is not expected to change significantly.
(D) The pro forma weighted average shares of common stock for the year ended
December 31, 1997 was calculated by using the minimum offering of 200,000
shares plus the 20,000 shares purchased by the Advisor in connection with
the organization of the Company.
F-33
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Statement of Operations (Continued)
For the year ended December 31, 1997
(unaudited)
(E) The Advisor Asset Management Fees has been calculated as 1% of the cost
of acquisition of Merchants Square calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash paid $1,407,314
Mortgage loan assumed 4,300,000
Security deposits 7,087
----------
Total purchase price $5,714,401
x 1%
----------
$ 57,144
----------
</TABLE>
(F) The net income (loss) allocable to the minority interest is immaterial, and
therefore, has been not included.
(G) The pro forma adjustment of $4,180 represents the adjustment required to
present the historical management fees at 4.5% of gross revenues in
accordance with the management agreement expected to be entered into upon
the acquisition of Merchants Square by the Company.
F-34
<PAGE>
APPENDIX A
INLAND RETAIL REAL ESTATE TRUST, INC.
PRIOR PERFORMANCE TABLES
<PAGE>
APPENDIX A
PRIOR PERFORMANCE TABLES
The following prior performance tables contain information concerning public
real estate limited partnerships sponsored by Affiliates of the Advisor
(collectively, the "Partnerships" or the "Programs", and individually, the
"Partnership" or the "Program"). This information has been summarized, in part,
in narrative form in this Prospectus under "Prior Performance of the Company's
Affiliates." The purpose of the tables is to provide information on the
performance of those Partnerships to assist in evaluating the experience of the
Affiliates of the Advisor as sponsors of such Programs. However, the inclusion
of these tables does not imply that the Company will make investments comparable
to those reflected in the tables or that investors in the Company will
experience returns comparable to those experienced in the Programs referred to
in these tables. Persons who purchase Shares in the Company will not thereby
acquire any ownership in any of the Partnerships to which these tables relate.
The tables consist of:
<TABLE>
<S> <C>
Table I Experience in Raising and Investing Funds
Table II Compensation to IREIC and Affiliates
Table III Operating Results of Prior Programs
Table IV Results of Completed Programs
Table V Sales or Disposals of Properties
Table VI Acquisition of Properties by Programs*
</TABLE>
* Prospective investors in the Company may obtain copies of Table VI by
contacting the Advisor.
Table VI is included in Part II of the Registration Statement filed with the
Commission of which this Prospectus is a part. Upon written request to the
Company or the Advisor, any prospective investor may obtain, without charge, a
copy of Table VI. See also "Additional Information" for information on examining
at, or obtaining copies from, offices of the Commission.
Upon written request to the Company, any potential investor may obtain,
without charge, the most recent Annual Report on Form 10-K filed with the
Commission by any public program sponsored by any of the Inland Affiliated
Companies which has reported to the Commission within the last 24 months. Copies
of any exhibits to such Annual Reports shall be provided, upon request, for a
reasonable fee.
Except with respect to Inland Land Appreciation Fund, L.P., Inland Land
Appreciation Fund II, L.P., and Inland Capital Fund, L.P., the Partnerships
presented in the tables are public real estate limited partnerships formed
primarily to acquire, operate and sell existing residential and commercial real
properties. Generally, the investment objectives of those Partnerships were as
follows:
(1) Capital appreciation; and
(2) Cash distributions for limited partners.
The Company's investment objectives are to: (i) provide regular
Distributions to Stockholders in amounts which may exceed the Company's taxable
income due to the non-cash nature of depreciation expense and, to such extent,
will constitute a tax-deferred return of capital, but in no event less than 95%
of the Company's taxable income, pursuant to the REIT Requirements; (ii) provide
a hedge against inflation by entering into leases which contain clauses for
scheduled rent escalations or participation in the growth of tenant sales,
permitting the Company to increase Distributions and provide capital
appreciation; and (iii) preserve Stockholders' capital.
A-1
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I is intended to present information on a dollar and percentage basis
showing the experience of Inland Real Estate Investment Corporation ("IREIC"),
of which the Advisor is a wholly owned subsidiary, in raising and investing
funds in prior Partnerships where the offering closed in the three years prior
to December 31, 1997. The Table is intended to particularly focus upon the
dollar amount available for investment in properties expressed as a percentage
of total dollars raised. However, since the offerings of the Partnerships closed
prior to the three years ended December 31, 1997, Table I is not included.
TABLE II
COMPENSATION TO IREIC AND AFFILIATES (A)
Table II summarizes the amount and type of compensation paid to IREIC and
its Affiliates in connection with the Programs.
Some of the Partnerships acquired their properties from Affiliates of the
Advisor which had purchased such properties from unaffiliated third parties.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
A-2
<PAGE>
TABLE II
COMPENSATION TO IREIC AND AFFILIATES (A)
(000'S OMITTED)
<TABLE>
<CAPTION>
PUBLIC
PROGRAMS
---------------
<S> <C>
6 PROGRAMS
---------------
Date offering commenced.......................................................................... --
Dollar amount raised............................................................................. $ 172,241
---------------
---------------
Amounts paid or payable to general partner of the Partnerships or affiliates from proceeds of
offerings:
Selling commissions and underwriting fees (B).................................................. $ 5,885
Other offering expenses (C).................................................................... 2,310
Acquisition cost and expense (D)............................................................... 10,088
Dollar amount of cash available (deficiency) from operations before deducting (adding) payments
to (from) general partner of the Partnerships or affiliates (E)................................ $ 16,025
---------------
---------------
Amounts paid to (received from) general partner of the Partnerships or affiliates related to
operations:
Property management fees (F)................................................................... $ 845
Partnership subsidies received............................................................... 0
Accounting services.......................................................................... 228
Data processing service...................................................................... 158
Legal services............................................................................... 239
Other administrative services................................................................ 855
Property upgrades............................................................................ 848
Property operating expenses.................................................................. 0
Dollar amount of property sales and refinancings before payments to general partner of the
Partnerships and affiliates (G):
Cash......................................................................................... $ 15,529
Equity in notes and undistributed sales proceeds............................................. 5,960
Dollar amounts paid or payable to general partner of the Partnerships or affiliates from sales
and refinancings (H):
Sales commissions............................................................................ $ 267
Property upgrade............................................................................. 8
Mortgage brokerage fee....................................................................... 0
Participation in cash distributions.......................................................... 0
</TABLE>
NOTES TO TABLE II
(A) The figures in this Table II relating to proceeds of the offerings are
cumulative and are as of December 31, 1997 and the figures relating to cash
available from operations are for the three years ending December 31, 1997.
The dollar amount raised represents the cash proceeds collected by the
Partnerships. Amounts paid or payable to IREIC or affiliates from proceeds
of the offerings represent payments made or to be made to IREIC and
affiliates from investor capital contributions.
(B) The total amount of selling commissions paid to an affiliate of the general
partner of the Partnerships include $2,711,791, which was in turn paid to
third party soliciting dealers.
(C) Consists of legal, accounting, printing and other offering expenses,
including amounts to be paid to Inland Securities Corporation to be used as
incentive compensation to its regional marketing
A-3
<PAGE>
representatives and amounts for reimbursement of the general partner of the
Partnerships for marketing, salaries and direct expenses of its employees
while directly engaged in registering and marketing the units in the
Partnerships and other marketing and organization expenses.
(D) Represents initial cash down payments and future principal payments and
prepaid items and fees paid to IREIC and its affiliates in connection with
the acquisition of properties less amounts paid to unaffiliated third
parties to acquire such properties. Cash down payments include amounts
received at closing.
<TABLE>
<CAPTION>
PUBLIC
PROGRAMS
---------------
<S> <C>
6 PROGRAMS
---------------
Acquisition fees................................................................................. $ 9,975
Reimbursement (at cost) for upgrades and acquisition due diligence............................... 113
Partnership down payments........................................................................ 38,745
Inland down payments............................................................................. (38,745)
---------------
Acquisition cost and expense..................................................................... $ 10,088
---------------
---------------
</TABLE>
(E) See Note (B) to Table III.
(F) An Affiliate of the Advisor provides property management services for all
properties acquired by the Partnerships. Management fees have not exceeded
6% of the gross receipts from the properties managed. With respect to Inland
Capital Fund, L.P., Inland Land Appreciation Fund II, L.P. and Inland Land
Appreciation Fund, L.P., IREIC receives an annual asset management fee equal
to one-quarter of 1% of the original cost to the Partnership of undeveloped
land, limited to a cumulative total over the life of the Partnership of 2%
of the land's original cost to the Partnership.
(G) See Table V and Notes thereto regarding sales and disposals of properties.
(H) Real estate sales commissions and participations in cash distributions are
paid or payable to IREIC and/or its affiliates in connection with the sales
of properties. Payments of all amounts shown are subordinated to the receipt
by the limited partners of the Partnerships of their original capital
investment. See Table V and Notes thereto.
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents operating results for the only one of the Partnerships
whose offering closed during each of the five years ended prior to December 31,
1997. The operating results consist of:
- The components of taxable income (loss);
- Taxable income or loss from operations and property sales;
- Cash available and source, before and after cash distributions to
investors; and
- Tax and distribution data per $1,000 invested.
A-4
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
<TABLE>
<CAPTION>
INLAND CAPITAL
FUND, L.P.
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Gross revenues................................................. $ 388 411 457 744 564
Profit on sale of properties................................... 1,003 0 229 0 0
Less:
Operating expenses........................................... 150 145 146 64 4
Interest expense............................................. 0 0 0 0 0
Partnership expenses......................................... 174 170 167 175 86
Depreciation & amortization.................................. 0 2 5 4 3
--------- --- --- --- ---
Net income (loss)-GAAP basis................................... $ 1,067 94 368 501 471
--------- --- --- --- ---
--------- --- --- --- ---
Taxable income (loss) (A):
Allocated to investors from operations....................... 62 93 137 495 466
Allocated to general partner from operations................. 1 1 1 5 5
--------- --- --- --- ---
Total from operations.......................................... 63 94 138 500 471
From gain on sale:
Capital (alloc. to investors)................................ 1,004 0 231 0 0
Capital (alloc. to general partner).......................... 0 0 0 0 0
Ordinary (recapture)......................................... 0 0 0 0 0
--------- --- --- --- ---
$ 1,067 94 369 500 471
--------- --- --- --- ---
--------- --- --- --- ---
Cash available (deficiency) from operations (B)................ (408) 130 172 633 397
Cash available from sales (C).................................. 1,328 0 646 0 0
Cash (deficiency) from refinancings............................ 0 0 0 0 0
--------- --- --- --- ---
Total cash available before distributions and special items.... 920 130 818 633 397
<CAPTION>
1992 1991
----- -----
<S> <C> <C>
Gross revenues................................................. 104 0
Profit on sale of properties................................... 0 0
Less:
Operating expenses........................................... 1 0
Interest expense............................................. 0 0
Partnership expenses......................................... 1 0
Depreciation & amortization.................................. 3 1
--- ---
Net income (loss)-GAAP basis................................... 99 (1)
--- ---
--- ---
Taxable income (loss) (A):
Allocated to investors from operations....................... 100 (1)
Allocated to general partner from operations................. 1 0
--- ---
Total from operations.......................................... 101 (1)
From gain on sale:
Capital (alloc. to investors)................................ 0 0
Capital (alloc. to general partner).......................... 0 0
Ordinary (recapture)......................................... 0 0
--- ---
101 (1)
--- ---
--- ---
Cash available (deficiency) from operations (B)................ 94 0
Cash available from sales (C).................................. 0 0
Cash (deficiency) from refinancings............................ 0 0
--- ---
Total cash available before distributions and special items.... 94 0
</TABLE>
A-5
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED) (CONTINUED)
<TABLE>
<CAPTION>
INLAND CAPITAL
FUND, L.P.
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Less distributions to investors:
From operations.............................................. 0 0 0 0 0
From sales and refinancings.................................. 1,000 0 646 0 0
From return of capital....................................... 0 0 0 0 0
From supplemental capital contribution (return on capital)... 0 0 0 0 0
Less distributions to general partner:
From operations.............................................. 0 0 0 0 0
From sales and refinancings.................................. 0 0 0 0 0
--------- --- --- --- ---
Cash available after distributions before special items........ (80) 130 172 633 397
Special items:
Fixed asset additions (D).................................... 0 0 0 0 0
Advances (repayments) from (to) general partner or
affiliates................................................. 4 (20) 23 2 1
Repurchase of units (E)...................................... (24) (20) 0 (2) 0
Use of partnership reserves.................................. 0 0 0 2 0
Use of cash available for offering purposes.................. 0 0 0 0 0
Cash available after distributions and special items........... $ (100) 90 195 635 398
--------- --- --- --- ---
--------- --- --- --- ---
Tax and distribution data per $1,000 invested (F):
Federal income tax results:
Ordinary income (loss):
From operations............................................ 2 0 4 15 14
From recapture............................................. 0 0 0 0 0
Capital gain............................................... 31 0 7 0 0
<CAPTION>
1992 1991
----- -----
<S> <C> <C>
Less distributions to investors:
From operations.............................................. 0 0
From sales and refinancings.................................. 0 0
From return of capital....................................... 0 0
From supplemental capital contribution (return on capital)... 0 0
Less distributions to general partner:
From operations.............................................. 0 0
From sales and refinancings.................................. 0 0
--- ---
Cash available after distributions before special items........ 94 0
Special items:
Fixed asset additions (D).................................... 0 0
Advances (repayments) from (to) general partner or
affiliates................................................. (85) 85
Repurchase of units (E)...................................... 0 0
Use of partnership reserves.................................. 0 0
Use of cash available for offering purposes.................. 0 0
Cash available after distributions and special items........... 9 85
--- ---
--- ---
Tax and distribution data per $1,000 invested (F):
Federal income tax results:
Ordinary income (loss):
From operations............................................ 3 0
From recapture............................................. 0 0
Capital gain............................................... 0 0
</TABLE>
A-6
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED) (CONTINUED)
<TABLE>
<CAPTION>
INLAND CAPITAL
FUND, L.P.
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cash distributions to investors:
Source (on GAAP basis):
Investment income.......................................... 0 0 0 0 0
Return of capital.......................................... 31 0 20 0 0
Supplemental capital contributions (return on capital)..... 0 0 0 0 0
Source (on cash basis):
Sales...................................................... 31 0 20 0 0
Refinancings............................................... 0 0 0 0 0
Operations................................................. 0 0 0 0 0
Return of capital.......................................... 0 0 0 0 0
Supplemental capital contributions (return on capital)..... 0 0 0 0 0
Percent of properties remaining unsold (G)..................... 97.81%
---------
<CAPTION>
1992 1991
----- -----
<S> <C> <C>
Cash distributions to investors:
Source (on GAAP basis):
Investment income.......................................... 0 0
Return of capital.......................................... 0 0
Supplemental capital contributions (return on capital)..... 0 0
Source (on cash basis):
Sales...................................................... 0 0
Refinancings............................................... 0 0
Operations................................................. 0 0
Return of capital.......................................... 0 0
Supplemental capital contributions (return on capital)..... 0 0
Percent of properties remaining unsold (G).....................
</TABLE>
NOTES TO TABLE III
(A) "Taxable income (loss)" represents the aggregate amounts shown on the
Partnership's tax returns for such years. One of the principal differences
between the tax basis of reporting and generally accepted accounting
principles (GAAP) is that depreciation is based upon the rates established
by the Accelerated Cost Recovery System (ACRS) for property placed in
service after January 1, 1981. Use of ACRS usually results in a higher
charge against operations than would be the result if the depreciation rate
was based upon the economic useful life as required by GAAP. Further, under
GAAP, to the extent that interest rates on notes received in connection with
the sale of a property are deemed to be below market interest rates at the
date of sale, such notes would be required to be discounted based upon
market interest rates.
(B) "Cash Available (Deficiency) from Operations," represents all cash revenues
and funds received by the Partnerships, including but not limited to
operating income less operating expenses, and interest income. These amounts
do not include payments made by the Partnerships from offering proceeds nor
do they include proceeds from sales or refinancings. These amounts also
exclude advances from or repayments to IREIC and affiliates which are
disclosed elsewhere in the table and include principal payments on long-term
debt. For example:
<TABLE>
<CAPTION>
INLAND CAPITAL
FUND, L.P.
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities per the
Form 10-K annual report or 10-Q quarterly report.............. $ (404) 110 195 635 398
Payments to (from) general partner and affiliates.............. (4) 20 (23) (2) (1)
Principal payments on long-term debt........................... 0 0 0 0 0
Payments for deferred loan fees................................ 0 0 0 0 0
--------- --- --- --- ---
$ (408) 130 172 633 397
--------- --- --- --- ---
--------- --- --- --- ---
<CAPTION>
1992 1991
----- -----
<S> <C> <C>
Net cash provided by operating activities per the
Form 10-K annual report or 10-Q quarterly report.............. 9 85
Payments to (from) general partner and affiliates.............. 85 (85)
Principal payments on long-term debt........................... 0 0
Payments for deferred loan fees................................ 0 0
--- ---
94 0
--- ---
--- ---
</TABLE>
A-7
<PAGE>
(C) See Table V and Notes thereto regarding sales and disposals of properties.
(D) Fixed asset additions represent betterments and improvements to properties
which have been paid for from the operations of the respective properties.
(E) Each Partnership established a unit repurchase program which provides
limited liquidity to eligible investors who have suffered severe adverse
financial conditions or who have died or become legally incapacitated. These
funds were utilized by the Partnerships to repurchase units, on a limited
basis, for pre-determined amounts pursuant to the terms of the prospectus
for such Partnership.
(F) Tax data per $1,000 is based on the income (loss) allocated to investors for
federal income tax purposes. Tax and distribution data per $1,000 invested
is based on total capital raised.
(G) Percent of properties remaining unsold represents original total acquisition
costs of properties retained divided by original total acquisition cost of
all properties in the program, plus the total of uninvested offering
proceeds (if any).
TABLE IV
RESULTS OF COMPLETED PROGRAMS
Table IV is a summary of operating and disposition results of the
Partnerships sponsored by Affiliates of the Advisor, which during the five years
ended prior to December 31, 1997 have sold their properties and either hold
notes with respect to such sales or have liquidated. None of the Partnerships
disposed of all its properties during the five years ended prior to December 31,
1997.
TABLE V
SALES OR DISPOSALS OF PROPERTIES
Table V presents information on the results of the sales or disposals of the
properties of the Partnerships during the three years ended prior to December
31, 1997. Since January 1, 1995, Partnerships sponsored by Affiliates of the
Advisor had 21 sales transactions. The table provides certain information to
evaluate property performance over the holding period such as:
- Sales proceeds received by the Partnerships in the form of cash down
payments at the time of sale after expenses of sale and secured notes
received at sale;
- Cash invested in properties;
- Cash flow (deficiency) generated by the property;
- Taxable gain (ordinary and total); and
- Terms of notes received at sale.
A-8
<PAGE>
TABLE V (CONTINUED)
SALES OR DISPOSALS OF PROPERTIES (A)
(000'S OMITTED)
<TABLE>
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS
----------------------------------------------------------
CASH
RECEIVED, SECURED
NET OF SELLING COMMISSIONS MORTGAGE AT NOTES
DATE DATE OF CLOSING PAID OR PAYABLE TO TIME OF RECEIVED AT
ACQUIRED SALE COSTS (B) INLAND SALE SALE (C)
----------- --------- ----------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Land I 3.44 Acres of Parcel #23.......... 05/08/90 Var 95 139 0 0 0
Monthly Income Fund I - Schaumburg
Terrace, 16 Buildings.................. 06/24/88 Var 95 409 0 0 3,790(F)
Land II 60 Acres of Parcel #23........... 10/30/92 Var 95 4,196 0 0 0
Land II Parcel #25....................... 01/28/93 10/31/95 3,292 0 0 0
Capital Fund 7.039 Ac. of Parcel #10..... 09/16/94 04/21/95 286 0 0 0
Capital Fund 17.742 Ac. of Parcel #2..... 11/09/93 08/02/95 361 0 0 0
Land I 27.575 Acres of Parcel #4......... 04/18/89 08/25/95 542 0 9 0
Land II 5.538 Acres of Parcel #22........ 10/30/92 01/05/96 154 0 0 0
Land I 4.629 Acres of Parcel #24......... 05/23/90 04/01/96 53 0 0 0
Land II .87 Acres of Parcel #8........... 06/14/91 04/03/96 10 0 0 0
Land I 3.52 Acres of Parcel #1........... 01/19/89 12/24/96 501 0 0 0
Land I 10.53 Acres of Parcel #15......... 01/03/90 Var 96 533 0 0 0
Land II 8.25 Acres of Parcel #23......... 10/30/92 Var 96 1,527 0 0 0
Monthly Income Fund I - Yorkville Living
Center, Lot #11........................ 01/29/88 09/12/97 40 0 0 0
Land I 2.081 Acres of Parcel #13......... 11/07/89 09/18/97 26 0 0 0
(3,580)
Land I 81.216 Acres of Parcel #1......... 01/19/89 Var 97 31 0 (G) 2,170(H)
Land I 5.468 Acres of Parcel #15......... 01/03/90 Var 97 491 0 0 0
Land II 12.6506 Acres of Parcel #7....... 04/22/91 Var 97 1,133 0 0 0
Land II 2.61 Acres of Parcel #23......... 10/30/92 Var 97 477 0 0 0
Capital Fund 8.6806 Ac. of Parcel #2..... 11/09/93 Var 97 686 0 0 0
Capital Fund 2.305 Ac. of Parcel #4...... 03/30/94 Var 97 642 0 0 0
<CAPTION>
COST OF PROPERTIES INCLUDING CLOSING COSTS
AND OTHER CASH EXPENDITURES
-------------------------------------------
ORIGINAL PARTNERSHIP
NET SELLING MORTGAGE CAPITAL
PRICE FINANCING INVESTED (D) TOTAL
----------- --------------- --------------- ---------
<S> <C> <C> <C> <C>
Land I 3.44 Acres of Parcel #23.......... 139 0 98 98
Monthly Income Fund I - Schaumburg
Terrace, 16 Buildings.................. 4,199 0 3,683 3,683
Land II 60 Acres of Parcel #23........... 4,196 0 2,900 2.900
Land II Parcel #25....................... 3,292 0 1,730 1,730
Capital Fund 7.039 Ac. of Parcel #10..... 286 0 221 221
Capital Fund 17.742 Ac. of Parcel #2..... 361 0 196 196
Land I 27.575 Acres of Parcel #4......... 542 0 231 231
Land II 5.538 Acres of Parcel #22........ 154 0 60 60
Land I 4.629 Acres of Parcel #24......... 53 0 23 23
Land II .87 Acres of Parcel #8........... 10 0 10 10
Land I 3.52 Acres of Parcel #1........... 501 0 281 281
Land I 10.53 Acres of Parcel #15......... 533 0 265 265
Land II 8.25 Acres of Parcel #23......... 1,527 0 1,104 1,104
Monthly Income Fund I - Yorkville Living
Center, Lot #11........................ 40 0 25 25
Land I 2.081 Acres of Parcel #13......... 26 0 6 6
Land I 81.216 Acres of Parcel #1......... 5,781 0 5,668 5,668
Land I 5.468 Acres of Parcel #15......... 491 0 173 173
Land II 12.6506 Acres of Parcel #7....... 1,027 0 746 746
Land II 2.61 Acres of Parcel #23......... 477 0 352 352
Capital Fund 8.6806 Ac. of Parcel #2..... 686 0 255 255
Capital Fund 2.305 Ac. of Parcel #4...... 642 0 70 70
</TABLE>
A-9
<PAGE>
TABLE V (CONTINUED)
SALES OR DISPOSALS OF PROPERTIES (A)
(000'S OMITTED)
<TABLE>
<CAPTION>
EXCESS (DEFICIENCY) OF
PROPERTY OPERATING CASH AMOUNT OF SUBSIDIES
RECEIPTS OVER CASH INCLUDED IN OPERATING TOTAL TAXABLE
EXPENDITURES (E) CASH RECEIPTS GAIN FROM SALE
----------------------- ------------------------- -----------------
<S> <C> <C> <C>
Land I 3.44 Acres of Parcel #23............................. 0 0 33
Monthly Income Fund I - Schaumburg Terrace, 16 Buildings.... 1,152 0 1,398
Land II 60 Acres of Parcel #23.............................. (80) 0 1,100
Land II Parcel #25.......................................... 60 0 1,562
Capital Fund 7.039 Ac. of Parcel #10........................ (9) 0 67
Capital Fund 17.742 Ac. of Parcel #2........................ 1 0 164
Land I 27.575 Acres of Parcel #4............................ 14 0 311
Land II 5.538 Acres of Parcel #22........................... 0 0 94
Land I 4.629 Acres of Parcel #24............................ 0 0 30
Land II .87 Acres of Parcel #8.............................. 0 0 0
Land I 3.52 Acres of Parcel #1.............................. 0 0 220
Land I 10.53 Acres of Parcel #15............................ 0 0 268
Land II 8.25 Acres of Parcel #23............................ 0 0 423
Monthly Income Fund I - Yorkville Living Center, Lot #11.... (23) 0 15
Land I 2.081 Acres of Parcel #13............................ 0 0 20
Land I 81.216 Acres of Parcel #1............................ 0 0 (193)
Land I 5.468 Acres of Parcel #15............................ 0 0 309
Land II 12.6506 Acres of Parcel #7.......................... 0 0 387
Land II 2.61 Acres of Parcel #23............................ 0 0 125
Capital Fund 8.6806 Ac. of Parcel #2........................ 0 0 431
Capital Fund 2.305 Ac. of Parcel #4......................... 0 0 572
<CAPTION>
ORDINARY INCOME
FROM SALE CAPITAL GAIN
------------------- ---------------
<S> <C> <C>
Land I 3.44 Acres of Parcel #23............................. 33 0
Monthly Income Fund I - Schaumburg Terrace, 16 Buildings.... 0 1,398
Land II 60 Acres of Parcel #23.............................. 1,100 0
Land II Parcel #25.......................................... 0 1,562
Capital Fund 7.039 Ac. of Parcel #10........................ 67 0
Capital Fund 17.742 Ac. of Parcel #2........................ 0 164
Land I 27.575 Acres of Parcel #4............................ 0 311
Land II 5.538 Acres of Parcel #22........................... 0 94
Land I 4.629 Acres of Parcel #24............................ 0 30
Land II .87 Acres of Parcel #8.............................. 0 0
Land I 3.52 Acres of Parcel #1.............................. 0 220
Land I 10.53 Acres of Parcel #15............................ 0 268
Land II 8.25 Acres of Parcel #23............................ 0 423
Monthly Income Fund I - Yorkville Living Center, Lot #11.... 0 15
Land I 2.081 Acres of Parcel #13............................ 0 20
Land I 81.216 Acres of Parcel #1............................ 0 (193)
Land I 5.468 Acres of Parcel #15............................ 0 309
Land II 12.6506 Acres of Parcel #7.......................... 0 387
Land II 2.61 Acres of Parcel #23............................ 0 125
Capital Fund 8.6806 Ac. of Parcel #2........................ 0 431
Capital Fund 2.305 Ac. of Parcel #4......................... 0 572
</TABLE>
A-10
<PAGE>
NOTES TO TABLE V
(A) The table includes all sales of properties by the Partnerships during the
three years ended December 31, 1997. All sales were made to parties
unaffiliated with the Partnerships.
(B) Consists of cash payments received from the buyers and the assumption of
certain liabilities by the buyers at the date of sale, less expenses of
sale.
(C) The stated principal amount of the notes is shown in the table under
"Secured Notes Received at Sale." All sales with notes received at sale are
being reported for tax purposes on the installment basis.
(D) Amounts represent the dollar amount raised from the offerings of limited
partnership units, less sales commissions and other offering expenses.
(E) Represents "Cash Available (Deficiency) from Operations (including
subsidies)" as adjusted for applicable "Fixed Asset Additions" through the
year of sale.
(F) As of December 31, 1995, this Partnership sold the remaining 16 six-unit
condominium buildings comprising the Schaumburg Terrace condominium complex
to unaffiliated third parties. The principal balances of these loans range
from approximately $211,000 to $256,000. These loans require monthly
principal and interest payments totaling $67,763 with an interest rate of
8.625% per annum for 10 years (based on a 30 year amortization) and payment
of all remaining principal at the end of that period.
(G) As a result of the sale of the remaining approximately 81 acres of Parcel 1
on December 29, 1997, the buyer assumed the current mortgage note held by
this Partnership which had a balance of $3,325,515 at that time.
(H) As a result of the sale of the remaining approximately 81 acres of Parcel 1
on December 29, 1997, this Partnership received mortgage loans receivable
totaling $2,170,089, of which $575,000 accrues interest at 9% per annum and
has a maturity date of July 1, 1998. The remaining $1,595,089 accrues
interest at 9% per annum and has a maturity date of December 30, 2000.
A-11
<PAGE>
APPENDIX B
INLAND RETAIL REAL ESTATE TRUST, INC.
DISTRIBUTION REINVESTMENT PROGRAM
<PAGE>
APPENDIX B
INLAND RETAIL REAL ESTATE TRUST, INC.
DISTRIBUTION REINVESTMENT PROGRAM
Inland Retail Real Estate Trust, Inc., a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation (the "Articles") has
adopted a Distribution Reinvestment Program (the "DRP"), the terms and
conditions of which are set forth below. Capitalized terms shall have the same
meaning as set forth in the Company's Prospectus dated February 11, 1999 (as the
same may be supplemented or modified from time to time) unless otherwise defined
herein.
i. As agent for the Stockholders who purchase Shares from the Company
pursuant to the prospectus dated February 11, 1999 (the "Offering") and
elect to participate in the DRP (the "Participants"), the Company will apply
all distributions, paid with respect to the Shares held by each Participant
(the "Distributions"), including Distributions paid with respect to any full
or fractional Shares acquired under the DRP, to the purchase of the Shares
for said Participants directly, if permitted under state securities laws
and, if not, through the Dealer Manager or Soliciting Dealers registered in
the Participant's state of residence. Neither the Company nor its Affiliates
will receive a fee for selling Shares under the DRP.
ii. PROCEDURE FOR PARTICIPATION. Any Stockholder who purchases Shares
pursuant to the Company's Offering may elect to become a Participant by
completing and executing the Subscription Agreement or other appropriate
authorization form as may be available from the Company, the Dealer Manager
or the Soliciting Dealer. Participation in the DRP will begin with the next
Distribution payable after receipt of a Participant's subscription or
authorization. Shares will be purchased under the DRP on the record date for
the Distribution used to purchase the Shares. Distributions for Shares
acquired under the DRP will be paid at the same time as Distributions are
paid on Shares purchased outside the DRP and are calculated with a daily
record and Distribution declaration date. Each Participant agrees that if,
at any time prior to listing of the Shares on a national stock exchange or
inclusion of the Shares for quotation on a national market system, he or she
fails to meet the suitability requirements for making an investment in the
Company or cannot make the other representations or warranties set forth in
the Subscription Agreement, he or she will promptly so notify the Company in
writing.
iii. PURCHASE OF SHARES. Participants will acquire Shares from the
Company at a fixed price of $9.50 per Share until the first to occur of (i)
the termination of the Offering, or (ii) the public offering price per Share
in the Offering is increased above $10 per share. Thereafter, Participants
will acquire Shares from the Company at a price equal to 95% of the Market
Price of a Share on the date of purchase until such time as the Company's
Shares are listed on a national stock exchange or included for quotation on
a national market system. In the event of such listing or inclusion, Shares
purchased by the Company for the DRP will be purchased on such exchange or
market, at the prevailing market price, and will be sold to Stockholders at
such price. The discount per Share is never intended to exceed 5% of the
current Market Price of a Share on the date of purchase. Participants in the
DRP may also purchase fractional Shares so that 100% of the Distributions
will be used to acquire Shares. However, a Participant will not be able to
acquire Shares under the DRP to the extent such purchase would cause it to
exceed the Ownership Limit or other Share ownership restrictions imposed by
the Articles.
It is possible that a secondary market will develop for the Shares, and that
the Shares may be bought and sold on the secondary market at prices lower or
higher than the $9.50 per Share price which will be paid under the DRP.
The Company shall endeavor to acquire Shares on behalf of Participants at
the lowest price then available. However, the Company does not guarantee or
warrant that the Participant will be acquiring Shares at the lowest possible
price.
B-1
<PAGE>
If the Company's Shares are listed on a national stock exchange or included
for quotation on a national market system, the reservation of any Shares from
the Offering for issuance under the DRP, which have not been issued as of the
date of such listing or inclusion, will be canceled, and such Shares will
continue to have the status of authorized but unissued Shares. Those unissued
Shares will not be issued unless they are first registered with the Securities
and Exchange Commission (the "Commission") under the Act and under appropriate
state securities laws or are otherwise issued in compliance with such laws.
It is understood that reinvestment of Distributions does not relieve a
Participant of any income tax liability which may be payable on the
Distributions.
iv. SHARE CERTIFICATES. Within 90 days after the end of the Company's
fiscal year, the Company will issue certificates evidencing ownership of
Shares purchased through the DRP during the prior fiscal year. The ownership
of the Shares will be in book-entry form prior to the issuance of such
certificates.
v. REPORTS. Within 90 days after the end of the Company's fiscal year,
the Company will provide each Participant with an individualized report on
his or her investment, including the purchase date(s), purchase price and
number of Shares owned, as well as the dates of distribution and amounts of
Distributions received during the prior fiscal year. The individualized
statement to Stockholders will include receipts and purchases relating to
each Participant's participation in the DRP including the tax consequences
relative thereto.
vi. TERMINATION BY PARTICIPANT. A Participant may terminate
participation in the DRP at any time, without penalty, by delivering to the
Company a written notice. Prior to listing of the Shares on a national stock
exchange or inclusion of the Shares for quotation on a national market
system, any transfer of Shares by a Participant to a non-Participant will
terminate participation in the DRP with respect to the transferred Shares.
If a Participant terminates DRP participation, the Company will provide the
terminating Participant with a certificate evidencing the whole shares in
his or her account and a check for the cash value of any fractional share in
such account. Upon termination of DRP participation, Distributions will be
distributed to the Stockholder in cash.
vii. AMENDMENT OR TERMINATION OF DRP BY THE COMPANY. The Directors of
the Company may by majority vote (including a majority of the Independent
Directors) amend or terminate the DRP for any reason upon 30 days' written
notice to the Participants.
viii. LIABILITY OF THE COMPANY. The Company shall not be liable for any
act done in good faith, or for any good faith omission to act, including,
without limitation, any claims or liability: (a) arising out of failure to
terminate a Participant's account upon such Participant's death prior to
receipt of notice in writing of such death; and (b) with respect to the time
and the prices at which Shares are purchased or sold for a Participant's
account. To the extent that indemnification may apply to liabilities arising
under the Act or the securities laws of a state, the Company has been
advised that, in the opinion of the Commission and certain state securities
commissioners, such indemnification is contrary to public policy and,
therefore, unenforceable.
ix. GOVERNING LAW. This DRP shall be governed by the laws of the State
of Maryland.
B-2
<PAGE>
APPENDIX C
INLAND RETAIL REAL ESTATE TRUST, INC.
SUBSCRIPTION AGREEMENT
<PAGE>
[LOGO]
SPECIMEN
PLEASE MAIL THE PINK COPY, THE WHITE COPY, AND YOUR CHECK MADE PAYABLE TO
"LNB/ESCROW AGENT FOR IRRET" TO: Inland Securities Corporation, 2901 Butterfield
Road, Oak Brook, Illinois 60523, Attn: Investor Services. Please use ballpoint
pen or type the information.
- --------------------------------------------------------------------------------
INLAND RETAIL REAL ESTATE TRUST, INC., INSTRUCTIONS TO PURCHASERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTRUCTIONS Any Person desiring to subscribe for Shares should
carefully read and review the Prospectus and, if
he/she desires to subscribe for Shares, complete the
Subscription Agreement/ Signature Page which follows
these instructions. Follow the appropriate
instruction listed below for the items indicated.
Please print in ink or type the information.
- -------------------------------------------------------------------------------------------
INVESTMENT Item 1--Enter the number of Shares to be purchased
A and the dollars and cents amount of the purchase.
Minimum purchase 300 Shares ($3,000). Qualified Plans
100 Shares ($1,000). (Iowa requires 300 Shares
($3,000) for IRA accounts; Minnesota requires 200
Shares ($2,000) for IRA and qualified accounts).
<S> <C>
Check the box to indicate whether this is an initial
or an additional investment. The "Additional
Investment" box must be checked in order for this
subscription to be combined with another subscription
for purposes of a volume discount.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
B Item 2--Check if you desire to participate in
Distribution Reinvestment Program.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
REGISTRATION INFORMATION Item 3--Enter the exact name in which the Shares are
C to be held. For co-owners enter the names of all
owners. For investments by qualified plans, include
the exact name of the plan. For investments by
qualified plans, enter the name of the custodian or
trustee on the first line and FBO the name of the
investor on the second line. IF THIS IS AN ADDITIONAL
PURCHASE BY A QUALIFIED PLAN, PLEASE USE THE SAME
EXACT PLAN NAME AS PREVIOUSLY USED.
Item 4--Enter the mailing address, state of residence
and telephone number of the owner. For qualified
investments please enter the mailing address of the
custodian or trustee.
Item 5--Enter the birth date(s) or date of
incorporation.
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
Item 6--Check the appropriate box. If the owner is a
non-resident alien, he must apply to the United
States Internal Revenue Service for an identification
number via Form SS-4 for an individual or SS-5 for a
corporation, and supply the number to the Company as
soon as it is available.
Item 7--Check this box if the owner is an employee of
Inland or an individual who has been continuously
affiliated with Inland as an independent contractor.
Item 8--Enter the Social Security number or Taxpayer
I.D. number. The owner is certifying that this number
is correct. For qualified investments, please enter
both the investor's social security number (for
identification purposes) and the custodian or
trustee's Taxpayer I.D. number (for tax purposes).
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
D Item 9--Enter the residence address if different than
the mailing address. For qualified investments,
please enter the residence address of the investor.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
E Item 10--Check the appropriate box to indicate the
type of entity which is subscribing. If this is an
additional purchase, this should be completed exactly
the same as the previous investment. If the
subscriber is a pension or profit sharing plan,
indicate whether it is taxable or exempt from
taxation under Section 501A of the Internal Revenue
Code.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
SIGNATURE Item 11--The Subscription Agreement/Signature Page
F MUST BE EXECUTED by the owner(s), and if applicable,
the trustee or custodian.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
ALTERNATE ADDRESS FOR Item 12--If owners desire direct deposit of
DISTRIBUTIONS (OPTIONAL) his/her/their cash distributions to an account or
G address other than as set forth in the Subscription
Agreement/Signature Page, please complete. PLEASE
MAKE SURE THAT THE ACCOUNT HAS BEEN OPENED AND THE
ACCOUNT NUMBER IS PROVIDED, AS WELL AS INFORMING
RECIPIENT THAT DISTRIBUTION WILL BE FORTHCOMING AND
IS AN ASSET TRANSFER.
<CAPTION>
- -------------------------------------------------------------------------------------------
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C>
BROKER/DEALER REGISTERED Item 13--Enter the name of the Broker/Dealer and the
REPRESENTATIVE name of the Registered Representative, along with the
H street address, city, state, zip code, telephone
number, fax and email of the Registered
Representative. By executing the Subscription
Agreement/Signature Page, the Registered Representa-
tive substantiates compliance with the conduct rules
of the NASD, by certifying that the Registered
Representative has reasonable grounds to believe,
based on information obtained from the investor
concerning his, her or its investment objectives,
other investments, financial situation and needs and
any other information known by such Registered
Representative, that investment in the Company is
suitable for such investor in light of his, her or
its financial position, net worth and other
suitability characteristics and that the Registered
Representative has informed the investor of all
pertinent facts relating to the liability, liquidity
and marketability of an investment in the Company
during its term. The Registered Representative
(authorized signature) should sign where provided.
Check the box to indicate whether this subscription
was solicited or recommended by an investment
advisor/broker-dealer whose agreement with the
subscriber includes a fixed or "wrap" fee feature for
advisory and related brokerage services, and,
accordingly, may not charge the regular selling
commission. That box must be checked in order for
such subscribers to purchase Shares net of the
selling commissions.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
SUBMISSION OF SUBSCRIPTION The properly completed and executed Pink and White
copies of the Subscription Agreement/Signature Page
together with a CHECK MADE PAYABLE TO "LNB/ESCROW
AGENT FOR IRRET" should be returned to the owner's
Registered Representative or the offices of Inland
Securities Corporation, 2901 Butterfield Road, Oak
Brook, Illinois 60523.
</TABLE>
NOTE: If a Person other than the Person in whose name the Shares will be held
is reporting the income received from the Company, you must notify the Company
in writing of that Person's name, address and Social Security number.
ALL INVESTORS AND THEIR REGISTERED REPRESENTATIVES MUST SIGN THE SUBSCRIPTION
AGREEMENT/SIGNATURE PAGE PRIOR TO TENDERING ANY FUNDS FOR INVESTMENT IN SHARES.
CALIFORNIA INVESTORS:
All Certificates representing Shares which are sold in the State of California
will bear the following legend conditions: IT IS UNLAWFUL TO CONSUMMATE A SALE
OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
Any subscriber seeking to purchase Shares pursuant to a discount offered by the
Company must submit such request in writing and set forth the basis for the
request. Any such request will be subject to verification by the Company.
C-3
<PAGE>
SPECIMEN OF INLAND RETAIL REAL ESTATE TRUST, INC. SUBSCRIPTION
AGREEMENT/SIGNATURE PAGE WITH INLAND LOGO
C-4
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
SPECIMEN
(REVERSE SIDE OF)
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
Certain states have imposed special financial suitability standards for
investors who purchase Shares.
If the investor is a resident of Maine, the investor must have either: (i) a
minimum net worth (excluding home, home furnishings and automobiles) of
$200,000; or (ii) a minimum annual gross income of $50,000 and a minimum net
worth (exclusive of home, home furnishings and automobiles) of $50,000.
If the investor is a resident of Massachusetts, Missouri or Tennessee, the
investor must have either: (i) a minimum net worth (excluding home, home
furnishings and automobiles) of $225,000; or (ii) a minimum annual gross income
of $60,000 and a minimum net worth (exclusive of home, home furnishings and
automobiles) of $60,000.
In addition, if the investor is a resident of Ohio or Pennsylvania, the
investment may not exceed 10% of the investor's liquid net worth.
The Company intends to assert the foregoing representations as a defense in
any subsequent litigation where such assertion would be relevant. The Company
shall have the right to accept or reject this Subscription in whole or in part,
so long as such partial acceptance or rejection does not result in an investment
of less than the minimum amount specified in the Prospectus. As used above, the
singular includes the plural in all respects if Shares are being acquired by
more than one Person. As used in this Agreement, "Inland" refers to The Inland
Group, Inc. and its Affiliates. This Agreement and all rights hereunder shall be
governed by, and interpreted in accordance with, the laws of the State of
Illinois.
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTOR CHECK DATE
OFFICE USE ONLY _______ -----------
INVESTOR CHECK # _______ Owner Account / / / / / /
CHECK AMOUNT # _______ Number
-----------
Broker/Dealer Co-Owner / / / / / /
/ / / / / / / / / / / /
Number / Account Number
---------- -
</TABLE>
- --------------------------------------------------------------------------------
C-5
<PAGE>
APPENDIX C
INLAND RETAIL REAL ESTATE TRUST, INC.
SUBSCRIPTION AGREEMENT
FOR RESIDENTS OF PENNSYLVANIA ONLY
<PAGE>
[LOGO]
SPECIMEN
PLEASE MAIL THE PINK COPY, THE WHITE COPY, AND YOUR CHECK MADE PAYABLE TO
"LNB/ESCROW AGENT FOR IRRET" TO: Inland Securities Corporation, 2901 Butterfield
Road, Oak Brook, Illinois 60523, Attn: Investor Services. Please use ballpoint
pen or type the information.
- --------------------------------------------------------------------------------
INLAND RETAIL REAL ESTATE TRUST, INC., INSTRUCTIONS TO PURCHASERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTRUCTIONS Any Person desiring to subscribe for Shares should
carefully read and review the Prospectus and, if
he/she desires to subscribe for Shares, complete the
Subscription Agreement/ Signature Page which follows
these instructions. Follow the appropriate
instruction listed below for the items indicated.
Please print in ink or type the information.
- -------------------------------------------------------------------------------------------
INVESTMENT Item 1--Enter the number of Shares to be purchased
A and the dollars and cents amount of the purchase.
Minimum purchase 300 Shares ($3,000). Qualified Plans
100 Shares ($1,000). (Iowa requires 300 Shares
($3,000) for IRA accounts; Minnesota requires 200
Shares ($2,000) for IRA and qualified accounts).
<S> <C>
Check the box to indicate whether this is an initial
or an additional investment. The "Additional
Investment" box must be checked in order for this
subscription to be combined with another subscription
for purposes of a volume discount.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
B Item 2--Check if you desire to participate in
Distribution Reinvestment Program.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
REGISTRATION INFORMATION Item 3--Enter the exact name in which the Shares are
C to be held. For co-owners enter the names of all
owners. For investments by qualified plans, include
the exact name of the plan. For investments by
qualified plans, enter the name of the custodian or
trustee on the first line and FBO the name of the
investor on the second line. IF THIS IS AN ADDITIONAL
PURCHASE BY A QUALIFIED PLAN, PLEASE USE THE SAME
EXACT PLAN NAME AS PREVIOUSLY USED.
Item 4--Enter the mailing address, state of residence
and telephone number of the owner. For qualified
investments please enter the mailing address of the
custodian or trustee.
Item 5--Enter the birth date(s) or date of
incorporation.
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
Item 6--Check the appropriate box. If the owner is a
non-resident alien, he must apply to the United
States Internal Revenue Service for an identification
number via Form SS-4 for an individual or SS-5 for a
corporation, and supply the number to the Company as
soon as it is available.
Item 7--Check this box if the owner is an employee of
Inland or an individual who has been continuously
affiliated with Inland as an independent contractor.
Item 8--Enter the Social Security number or Taxpayer
I.D. number. The owner is certifying that this number
is correct. For qualified investments, please enter
both the investor's social security number (for
identification purposes) and the custodian or
trustee's Taxpayer I.D. number (for tax purposes).
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
D Item 9--Enter the residence address if different than
the mailing address. For qualified investments,
please enter the residence address of the investor.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
E Item 10--Check the appropriate box to indicate the
type of entity which is subscribing. If this is an
additional purchase, this should be completed exactly
the same as the previous investment. If the
subscriber is a pension or profit sharing plan,
indicate whether it is taxable or exempt from
taxation under Section 501A of the Internal Revenue
Code.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
SIGNATURE Item 11--The Subscription Agreement/Signature Page
F MUST BE EXECUTED by the owner(s), and if applicable,
the trustee or custodian.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
ALTERNATE ADDRESS FOR Item 12--If owners desire direct deposit of
DISTRIBUTIONS (OPTIONAL) his/her/their cash distributions to an account or
G address other than as set forth in the Subscription
Agreement/Signature Page, please complete. PLEASE
MAKE SURE THAT THE ACCOUNT HAS BEEN OPENED AND THE
ACCOUNT NUMBER IS PROVIDED, AS WELL AS INFORMING
RECIPIENT THAT DISTRIBUTION WILL BE FORTHCOMING AND
IS AN ASSET TRANSFER.
<CAPTION>
- -------------------------------------------------------------------------------------------
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C>
BROKER/DEALER REGISTERED Item 13--Enter the name of the Broker/Dealer and the
REPRESENTATIVE name of the Registered Representative, along with the
H street address, city, state, zip code, telephone
number, fax and email of the Registered
Representative. By executing the Subscription
Agreement/Signature Page, the Registered Representa-
tive substantiates compliance with the conduct rules
of the NASD, by certifying that the Registered
Representative has reasonable grounds to believe,
based on information obtained from the investor
concerning his, her or its investment objectives,
other investments, financial situation and needs and
any other information known by such Registered
Representative, that investment in the Company is
suitable for such investor in light of his, her or
its financial position, net worth and other
suitability characteristics and that the Registered
Representative has informed the investor of all
pertinent facts relating to the liability, liquidity
and marketability of an investment in the Company
during its term. The Registered Representative
(authorized signature) should sign where provided.
Check the box to indicate whether this subscription
was solicited or recommended by an investment
advisor/broker-dealer whose agreement with the
subscriber includes a fixed or "wrap" fee feature for
advisory and related brokerage services, and,
accordingly, may not charge the regular selling
commission. That box must be checked in order for
such subscribers to purchase Shares net of the
selling commissions.
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
SUBMISSION OF SUBSCRIPTION The properly completed and executed Pink and White
copies of the Subscription Agreement/Signature Page
together with a CHECK MADE PAYABLE TO "LNB/ESCROW
AGENT FOR IRRET" should be returned to the owner's
Registered Representative or the offices of Inland
Securities Corporation, 2901 Butterfield Road, Oak
Brook, Illinois 60523.
</TABLE>
NOTE: If a Person other than the Person in whose name the Shares will be held
is reporting the income received from the Company, you must notify the Company
in writing of that Person's name, address and Social Security number.
ALL INVESTORS AND THEIR REGISTERED REPRESENTATIVES MUST SIGN THE SUBSCRIPTION
AGREEMENT/SIGNATURE PAGE PRIOR TO TENDERING ANY FUNDS FOR INVESTMENT IN SHARES.
CALIFORNIA INVESTORS:
All Certificates representing Shares which are sold in the State of California
will bear the following legend conditions: IT IS UNLAWFUL TO CONSUMMATE A SALE
OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
Any subscriber seeking to purchase Shares pursuant to a discount offered by the
Company must submit such request in writing and set forth the basis for the
request. Any such request will be subject to verification by the Company.
C-3
<PAGE>
SPECIMEN OF INLAND RETAIL REAL ESTATE TRUST, INC. SUBSCRIPTION
AGREEMENT/SIGNATURE PAGE WITH INLAND LOGO
FOR RESIDENTS OF PENNSYLVANIA ONLY
C-4
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
SPECIMEN
(REVERSE SIDE OF)
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
Certain states have imposed special financial suitability standards for
investors who purchase Shares.
If the investor is a resident of Maine, the investor must have either: (i) a
minimum net worth (excluding home, home furnishings and automobiles) of
$200,000; or (ii) a minimum annual gross income of $50,000 and a minimum net
worth (exclusive of home, home furnishings and automobiles) of $50,000.
If the investor is a resident of Massachusetts, Missouri or Tennessee, the
investor must have either: (i) a minimum net worth (excluding home, home
furnishings and automobiles) of $225,000; or (ii) a minimum annual gross income
of $60,000 and a minimum net worth (exclusive of home, home furnishings and
automobiles) of $60,000.
In addition, if the investor is a resident of Ohio or Pennsylvania, the
investment may not exceed 10% of the investor's liquid net worth.
The Company intends to assert the foregoing representations as a defense in
any subsequent litigation where such assertion would be relevant. The Company
shall have the right to accept or reject this Subscription in whole or in part,
so long as such partial acceptance or rejection does not result in an investment
of less than the minimum amount specified in the Prospectus. As used above, the
singular includes the plural in all respects if Shares are being acquired by
more than one Person. As used in this Agreement, "Inland" refers to The Inland
Group, Inc. and its Affiliates. This Agreement and all rights hereunder shall be
governed by, and interpreted in accordance with, the laws of the State of
Illinois.
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTOR CHECK DATE
OFFICE USE ONLY _______ -----------
INVESTOR CHECK # _______ Owner Account / / / / / /
CHECK AMOUNT # _______ Number
-----------
Broker/Dealer Co-Owner / / / / / /
/ / / / / / / / / / / /
Number / Account Number
---------- -
</TABLE>
- --------------------------------------------------------------------------------
C-5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND SUPPLEMENTAL LITERATURE AUTHORIZED BY THE COMPANY AND REFERRED TO
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE RESPECTIVE DATES AT WHICH INFORMATION IS GIVEN
HEREIN, OR THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE IN THE AFFAIRS OF
THE COMPANY SHALL OCCUR DURING THE TIME WHEN A COPY OF THIS PROSPECTUS IS
REQUIRED TO BE DELIVERED, THE COMPANY WILL AMEND OR SUPPLEMENT THIS PROSPECTUS
TO REFLECT SUCH CHANGE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Who May Invest............................................................ iii
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 19
Conflicts of Interest..................................................... 41
Compensation Table........................................................ 46
Estimated Use of Proceeds................................................. 55
Prior Performance of the Company's Affiliates............................. 58
Management................................................................ 72
Certain Responsibilities of Directors and the Advisor; Indemnification.... 90
Principal Stockholders.................................................... 92
Structure and Formation of the Company.................................... 92
Selected Financial Data................................................... 97
Investment Objectives and Policies........................................ 98
Real Property Investments................................................. 106
Capitalization............................................................ 124
Management's Discussion and Analysis of the Financial Condition of the
Company................................................................. 124
Description of Securities................................................. 128
Shares Eligible for Future Sale........................................... 135
Summary of the Organizational Documents................................... 138
Operating Partnership Agreement........................................... 147
Federal Income Tax Considerations......................................... 154
ERISA Considerations...................................................... 177
Plan of Distribution...................................................... 178
How to Subscribe.......................................................... 185
Sales Literature.......................................................... 186
Distribution Reinvestment and Share Repurchase Programs................... 186
Reports to Stockholders................................................... 188
Legal Matters............................................................. 189
Experts................................................................... 190
Additional Information.................................................... 190
Glossary.................................................................. 191
Index to Financial Statements and Financial Statements.................... F-i
APPENDICES:
Prior Performance Tables.................................................. A-1
Distribution Reinvestment Program......................................... B-1
Subscription Agreement.................................................... C-1
</TABLE>
--------------------------
UNTIL MARCH 23, 1999, 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 PROSPECTUSES WHEN ACTING AS SOLICITING DEALERS WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS AND SUBSCRIPTIONS.
INLAND RETAIL
REAL ESTATE TRUST, INC.
56,000,000 SHARES
---------------------
PROSPECTUS
---------------------
FEBRUARY 11, 1999
INLAND SECURITIES
CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
