<PAGE>
As filed with the Securities and Exchange Commission on ________________, 2000
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
INLAND RETAIL REAL ESTATE TRUST, INC.
(Exact name of registrant as specified in governing instruments)
-------------------------
2901 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
(Address of principal executive offices)
-------------------------
ROBERT H. BAUM, ESQ.
VICE CHAIRMAN, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
THE INLAND GROUP, INC.
2901 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60523
(630) 218-8000
(Name, address, including zip code and telephone number, including area code
of agent for service)
-------------------------
WITH A COPY TO:
DAVID KAUFMAN, ESQ.
KATTEN MUCHIN ZAVIS
525 WEST MONROE STREET
SUITE 1600
CHICAGO, ILLINOIS 60661-3693
-------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
--------------------------------------------------------------------------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /_/_________
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. /_/_________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. /_/_________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. /_/_________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of Each Class of Proposed Maximum Amount of
Securities Being Amount Being Maximum Offering Aggregate Offering Registration
Registered Registered Price Per Share Price Fee
<S> <C> <C> <C> <C>
Common Stock, $.01
parvalue..................... 50,000,000 $10.00 $500,000,000 $132,000.00
Common Stock, $.01
parvalue (1)................. 2,000,000 12.00 24,000,000 $ 6,336.00
Common Stock, $.01
parvalue (2)................. 4,000,000 9.50 38,000,000 $ 10,032.00
Soliciting Dealer
Warrants (3).................. 2,000,000 .0008 1,600 $ 0.42
-----------
TOTAL $148,368.42
</TABLE>
(1) Represents Shares which are issuable upon exercise of warrants issuable
to Inland Securities Corporation (the "Dealer Manager") or its
assignees pursuant to that certain Warrant Purchase Agreement between
the registrant and the Dealer Manager (the "Warrant Purchase
Agreement"), a copy of the form of which is filed as Exhibit 1.3 to the
registration statement.
(2) Represents Shares issuable pursuant to the registrant's Distribution
Reinvestment Program.
(3) Represents warrants issuable to the Dealer Manager to purchase
2,000,000 Shares pursuant to the Warrant Purchase Agreement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OF HEADING IN PROSPECTUS
<S> <C>
1. Forepart of Registration Statement and Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover Page
Prospectus
3. Summary Information, Risk Factors and Ratio Cover Page; Prospectus Summary; Risk Factors;
of Earnings to Fixed Charges Conflicts of Interest; Compensation Table;
Summary of our Organizational Documents; Plan
of Distribution
4. Determination of Offering Price Risk Factors
5. Dilution Not Applicable
6. Selling Security Holders Not Applicable
7. Plan of Distribution Cover Page; Prospectus Summary; Compensation
Table; Who May Invest; Plan of Distribution; How
to Subscribe; Distribution Reinvestment and Share
Repurchase Programs
8. Use of Proceeds Prospectus Summary; Our Structure and
Formation; Estimated Use of Proceeds of Offering
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Analysis of Management's Discussion and Analysis of the
Financial Condition and Results of Operations Financial Condition
11. General Information as to Registrant Cover Page; Prospectus Summary; Risk Factors;
Management; Our Structure and Formation;
Summary of Our Organizational Documents
12. Policy with Respect to Certain Activities Prospectus Summary; Investment Objectives and
Policies; Real Property Investments; Summary of
Our Organizational Documents; Reports to
Stockholders
13. Investment Policies of Registrant Cover Page; Prospectus Summary; Risk Factors;
Conflicts of Interest; Investment Objectives and
Policies; Real Property Investments; Summary of
Our Organizational Documents
14. Description of Real Estate Cover Page; Prospectus Summary; Investment
Objectives and Policies; Real Property Investments
3
<PAGE>
ITEM NUMBER AND CAPTION LOCATION OF HEADING IN PROSPECTUS
15. Operating Data Real Property Investments
16. Tax Treatment of Registrant and Its Security Prospectus Summary; Risk Factors; Federal Income
Holders Tax Considerations; ERISA Considerations
17. Market Price of and Distributions on the Prospectus Summary; Risk Factors; Principal
Registrant's Common Equity and Related Stockholders; Investment Objectives and Policies;
Stockholder Matters Operating Partnership Agreement; Federal Income
Tax Considerations
18. Description of Registrant's Securities Investment Objectives and Policies; Description of
Securities; Summary of Our Organizational
Documents
19. Legal Proceedings Litigation
20. Security Ownership of Certain Beneficial Prospectus Summary; Principal Stockholders; Our
Owners and Management Structure and Formation
21. Directors and Executive Officers Management
22. Executive Compensation Management
23. Certain Relationships and Related Prospectus Summary; Risk Factors; Conflicts of
Transactions Interest; Management; Our Structure and
Formation; Investment Objectives and Policies;
Real Property Investments; Summary of Our
Organizational Documents; Operating Partnership
Agreement
24. Selection, Management and Custody of Prospectus Summary; Conflicts of Interest;
Registrant's Investments Compensation Table; Management; Investment
Objectives and Policies; Real Property Investments
25. Policies with Respect to Certain Transactions Conflicts of Interest; Investment Objectives and
Policies; Summary of Our Organizational
Documents
26. Limitations of Liability Limitation of Liability and Indemnification of
Directors, Officers and the Advisor; Operating
Partnership Agreement; Plan of Distribution
27. Financial Statements and Information Appendix F - Index to Financial Statements and
Financial Statements
28. Interests of Named Experts and Counsel Not Applicable
29. Disclosure of Commission Position on Limitation of Liability and Indemnification of
Indemnification for Securities Act Liabilities Directors, Officers and the Advisor
30. Quantitative and Qualitative Disclosures Quantitative and Qualitative Disclosures about
About Market Risk Market Risks
</TABLE>
4
<PAGE>
SUBJECT TO COMPLETION, NOVEMBER 28, 2000
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
--------------------------------------------------------------------------------
5
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 28, 2000
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)
We are a Maryland real estate investment trust, or REIT,
incorporated in 1998 to acquire and manage properties related to retail
centers which are located mainly in states east of the Mississippi River.
We are offering:
- 50,000,000 shares of common stock to investors who meet our
suitability standards;
- up to 4,000,000 shares of common stock to participants in our
reinvestment plan;*
- up to 2,000,000 warrants that may be issued to our managing dealer
as part of its compensation for selling our common stock to the
public; and
- up to 2,000,000 shares issuable upon the exercise of the warrants
that may be issued to our managing dealer.
No public market currently exists for our shares of common stock and our
shares cannot be readily sold.
A minimum of 200,000 shares of common stock must be sold within six
months from the date of this prospectus, unless extended, or we will
terminate this offering and we will return your subscription payments, with
interest. Prior to the sale of the minimum offering, your subscription
payments will be placed in an escrow account held by the escrow agent,
LaSalle Bank National Association. The managing dealer of the offering,
Inland Securities Corporation, is our affiliate. The managing dealer is not
required to sell any specific number or dollar amount of shares but will use
its best efforts to sell 50,000,000 of our shares. If subscriptions for at
least the minimum offering have not been received, accepted and paid for
within six months from the initial date of the prospectus, all funds received
will be promptly refunded in full, together with their pro rata share of any
interest earned. If a refund is made for this reason, our sponsor will pay
any escrow fees. This offering will end no later than , 2002, unless
we elect to extend it to a date no later than , 2003 in states that
permit us to make this extension.
INVESTING IN US INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 FOR A DISCUSSION OF THE RISKS WHICH SHOULD BE CONSIDERED
IN CONNECTION WITH YOUR INVESTMENT IN OUR COMMON STOCK.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
<TABLE>
<CAPTION>
PER SHARE MIN. OFFERING MAX. OFFERING
--------- ------------- -------------
<S> <C> <C> <C>
Public offering price...... $ 10.00* $ 2,000,000 $ 538,000,000
Selling commissions........ $ 0.95 $ 190,000 $ 47,500,000
Proceeds, before expenses,
to us...................... $ 9.05 $ 1,810,000 $ 490,500,000
</TABLE>
INLAND RETAIL REAL ESTATE TRUST, INC.
THE DATE OF THIS PROSPECTUS IS , 2001.
*Offering price per share of common stock issuable pursuant to distribution
reinvestment program is $9.50.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY........................................................................1
Inland Retail Real Estate Trust, Inc.................................................1
The types of real estate that we acquire and manage..................................1
Risk factors.........................................................................1
Conflicts of interest................................................................2
Compensation to be paid to our advisor and affiliates................................2
Primary business objective and strategies............................................2
Terms of the offering................................................................3
Suitability Standards................................................................4
Shares to be sold upon completion of the offering....................................4
Is an investment in us appropriate for you?..........................................4
RISK FACTORS..............................................................................6
Risks Related to the Offering........................................................6
Risks Related to our Organization and Structure.....................................14
Risks of Real Estate Ownership......................................................15
Tax Risks...........................................................................21
Employee Benefit Plan Risks.........................................................22
HOW WE OPERATE...........................................................................24
CONFLICTS OF INTEREST....................................................................26
COMPENSATION TABLE.......................................................................29
Nonsubordinated Payments............................................................29
Subordinated Payments...............................................................33
Compensation to officers and directors..............................................34
ESTIMATED USE OF PROCEEDS................................................................36
PRIOR PERFORMANCE OF OUR AFFILIATES......................................................37
Prior Investment Programs...........................................................37
Summary Information.................................................................37
Publicly Registered REIT............................................................39
Publicly Registered Limited Partnerships............................................40
Private Partnerships................................................................41
Private Placement Real Estate Equity Program........................................42
Private Placement Mortgage and Note Programs........................................42
Loan Modifications and Work-Outs....................................................44
Effects of Property Exchanges on Investors..........................................48
Additional Information..............................................................48
Summary Tables......................................................................48
MANAGEMENT...............................................................................50
Our General Management..............................................................54
Our Directors and Executive Officers................................................55
Committees of Our Board of Directors................................................58
Compensation of Directors and Officers..............................................59
ii
<PAGE>
Executive Compensation..............................................................59
Independent Director Stock Option Plan..............................................59
Our Advisor.........................................................................60
Our Advisory Agreement..............................................................61
The Property Manager and the Management Agreement...................................64
Inland Securities Corporation.......................................................67
LIMITATION OF LIABILITY AND INDEMNIFICATION OF
DIRECTORS, OFFICERS AND OUR ADVISOR.................................................70
PRINCIPAL STOCKHOLDERS...................................................................72
OUR STRUCTURE AND FORMATION..............................................................73
Structure...........................................................................73
Benefits of the UPREIT Structure....................................................75
SELECTED FINANCIAL DATA..................................................................75
INVESTMENT OBJECTIVES AND POLICIES.......................................................76
REAL PROPERTY INVESTMENTS................................................................88
General.............................................................................88
Insurance Coverage on Properties....................................................89
Properties..........................................................................90
Tenant Lease Renewal Options........................................................94
Gateway Market Center, St. Petersburg, Florida......................................94
Pleasant Hill Square, Duluth, Georgia...............................................95
Conway Plaza, Orlando, Florida......................................................96
Casselberry Commons, Casselberry, Florida...........................................96
Countryside Shopping Center, Naples, Florida........................................97
Bartow Marketplace, Cartersville, Georgia...........................................98
Bridgewater Marketplace, Orlando, Florida...........................................98
Lake Olympia Square, Ocoee, Florida.................................................99
Boynton Commons, Boynton Beach, Florida.............................................99
Town Center Commons, Kennesaw, Georgia.............................................100
Merchants Square Shopping Center, Zephyrhills, Florida.............................101
Lake Walden Square, Plant City, Florida............................................101
Taxes and Occupancy Rates..........................................................102
Base Rent..........................................................................103
Potential Property Acquisitions....................................................103
Columbia Promenade, Kissimmee, Florida.............................................103
CAPITALIZATION..........................................................................109
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATION...............................................................110
Overview...........................................................................110
Liquidity and Capital Resources....................................................110
Capital Resources..................................................................112
Cash Flows From Operating Activities...............................................112
Cash Flows From Investing Activities...............................................113
iii
<PAGE>
Cash Flows From Financing Activities...............................................113
Results of Operations..............................................................113
Funds from Operations..............................................................114
New Accounting Literature..........................................................116
Subsequent Events..................................................................117
Inflation..........................................................................117
Quantitative and Qualitative Disclosures About Market Risk.........................117
DESCRIPTION OF SECURITIES...............................................................119
Authorized Stock...................................................................119
Common Stock.......................................................................119
Preferred Stock....................................................................120
Warrants...........................................................................120
Issuance of Additional Securities and Debt Instruments.............................122
Restrictions on Issuance of Securities.............................................122
Restrictions on Ownership and Transfer.............................................122
Provisions of Maryland Law and of our Charter and Bylaws...........................124
SHARES ELIGIBLE FOR FUTURE SALE.........................................................127
Shares to be Outstanding or Issuable upon Exercise or Conversion
of Other Outstanding Securities............................................127
Securities Act Restrictions........................................................128
Independent Director Stock Option Plan.............................................128
Warrants...........................................................................128
Effect of Availability of Shares on Market Price of Shares.........................128
Conversion and Redemption Rights...................................................129
Registration Rights................................................................129
SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS.................................................130
Charter and Bylaw Provisions.......................................................130
Stockholders' Meetings.............................................................130
Board of Directors.................................................................131
Stockholder Voting Rights..........................................................131
Stockholder Lists; Inspection of Books and Records.................................132
Amendment of the Organizational Documents..........................................132
Dissolution or Termination.........................................................132
Advance Notice of Director Nominations and New Business............................133
Restrictions on Conversion Transactions and Roll-Ups...............................134
Limitation on Total Operating Expenses.............................................136
Transactions with Affiliates.......................................................136
Restrictions on Borrowing..........................................................137
Restrictions on Investments........................................................138
OPERATING PARTNERSHIP AGREEMENT.........................................................141
Description of Partnership Units...................................................141
Management of the Operating Partnership............................................142
Indemnification....................................................................143
Transferability of Interests.......................................................143
Extraordinary Transactions.........................................................144
Issuance of Additional Units.......................................................144
Capital Contributions..............................................................145
iv
<PAGE>
Distributions......................................................................145
Operations.........................................................................145
Limited Partner Conversion Rights..................................................146
Limited Partner Redemption Rights..................................................147
Tax Matters........................................................................148
Duties and Conflicts...............................................................148
Term...............................................................................149
FEDERAL INCOME TAX CONSIDERATIONS.......................................................150
Taxation...........................................................................150
Tax Aspects of Investments in Partnerships .......................................157
Federal Income Taxation of Stockholders ...........................................163
Other Tax Considerations ..........................................................166
ERISA CONSIDERATIONS....................................................................168
PLAN OF DISTRIBUTION....................................................................171
General............................................................................171
Escrow Conditions..................................................................171
Subscription Process...............................................................172
Representations and Warranties in the Subscription Agreement.......................173
Determination of Your Suitability as an Investor...................................173
Compensation We Will Pay for the Sale of our Shares................................174
Volume Discounts...................................................................175
Deferred Commission Option.........................................................177
Indemnification....................................................................179
WHO MAY INVEST..........................................................................179
Suitability Standards..............................................................180
Minimum Purchase...................................................................180
HOW TO SUBSCRIBE........................................................................182
SALES LITERATURE........................................................................183
DISTRIBUTION REINVESTMENT AND SHARE REPURCHASE PROGRAMS.................................183
Distribution Reinvestment Program..................................................183
Share Repurchase Program...........................................................185
REPORTS TO STOCKHOLDERS.................................................................186
LITIGATION..............................................................................188
RELATIONSHIPS AND RELATED TRANSACTIONS..................................................188
LEGAL MATTERS...........................................................................188
EXPERTS.................................................................................188
WHERE YOU CAN FIND MORE INFORMATION.....................................................189
v
<PAGE>
INDEX TO FINANCIAL STATEMENTS...........................................................F-i
Appendix A
Prior Performance Tables...........................................................A-1
Appendix B
Distribution Reinvestment Plan.....................................................B-1
Appendix C
Subscription Agreement.............................................................C-1
Appendix D
Transfer on Death Designation......................................................D-1
</TABLE>
vi
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS.
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 OUR SHARES OF COMMON
STOCK.
INLAND RETAIL REAL ESTATE TRUST, INC.
We are a Maryland corporation incorporated in September 1998. We have
been operating and intend to continue operating as a real estate investment
trust, or a REIT, for federal and state income tax purposes.
Our principal executive offices are located at 2901 Butterfield Road,
Oak Brook, Illinois 60523 and our telephone number is (630) 218-8000.
THE TYPES OF REAL ESTATE THAT WE ACQUIRE AND MANAGE
We acquire and manage retail centers located primarily in states east of
the Mississippi River. We have initially focused our acquisition of these
neighborhood community centers in the southeastern states, primarily Florida,
Georgia, North Carolina and South Carolina. We may also acquire commercial
properties located anywhere throughout the United States if we lease them on
a triple-net-lease basis to a single tenant. We may acquire and manage any of
our properties through entities that we own directly or indirectly. A
triple-net-lease means that the tenant is required by its lease to pay the
base rent as well as all costs and expenses related to ownership and
operation of the leased property, including taxes, insurance, repairs and
maintenance.
We may also invest in equity and equity-related securities of other
REITs and other companies.
OUR SPONSOR, ADVISOR, MANAGING DEALER AND THE INLAND GROUP
Our sponsor is Inland Real Estate Investment Corporation, which is owned
by The Inland Group, Inc. The Inland Group, together with its subsidiaries
and affiliates, 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 Retail Real Estate Advisory Services, Inc., is a
wholly owned subsidiary of our sponsor and is our advisor. Inland Securities
Corporation, another affiliate of The Inland Group, is the managing dealer of
this offering. Our property manager is Inland Southeast Property Management
Corp., an entity owned principally by individuals who are affiliates of The
Inland Group. The principal executive offices of The Inland Group, our
sponsor and our advisor are located at 2901 Butterfield Road, Oak Brook,
Illinois 60523 and their telephone number is (630) 218-8000.
RISK FACTORS
Investment in shares of our common stock involves risks which are
described in detail under "Risk Factors." If we are unable to effectively
manage the impact of these risks, we may not meet our investment objectives
and, therefore, you may lose some or all of your investment.
<PAGE>
CONFLICTS OF INTEREST
Conflicts of interest exist between us and some of our affiliates,
including our advisor. Some of these conflicts include:
- competition for the time and services of personnel that work for us
and our affiliates;
- substantial compensation payable by us to our advisor and affiliates
for their various services which may not be on market terms and is
payable, in most cases, whether or not our stockholders receive
distributions;
- acquisition of properties from our affiliates; and
- the possibility that we may do business with entities that have
pre-existing relationships with our affiliates which may result in a
conflict between our business and the ongoing business relationships
our affiliates have with each other.
Conflicts of interest may also arise in connection with the potential sale or
refinancing of our properties or the enforcement of agreements.
We have an option to acquire or consolidate into us the business
conducted by the advisor and/or the property manager at any time after
February 11, 2002, for shares in an amount determined in accordance with a
formula explained below.
See "Conflicts of Interest" for more details of these and other
conflicts of interest.
COMPENSATION TO BE PAID TO OUR ADVISOR AND AFFILIATES
We pay our advisor and affiliates substantial fees for managing our
business.
We will also pay the advisor and other affiliates of our sponsor a
number of other fees for services or expense reimbursements during our
offering, operational and liquidation stage. See generally "Compensation
Table," and "Plan of Distribution -- Compensation We Will Pay for the Sale of
Our Shares" for details of these and other fees and reimbursements paid to
our advisor and other affiliates.
PRIMARY BUSINESS OBJECTIVE AND STRATEGIES
Our primary business objective is to enhance the performance and value
of our properties through active management. Key elements of our strategy are:
ACQUISITIONS:
- To selectively acquire real properties that are diversified types and
well-located.
- To selectively acquire properties on an all-cash basis if we deem it
advantageous to provide us a competitive advantage over potential
purchasers who must secure financing. We may, however, acquire
properties subject to existing indebtedness and
2
<PAGE>
we may place indebtedness on a property if we believe this is in our
best interest. The properties we initially acquired were acquired
subject to existing first mortgage debt. We may acquire properties
free and clear of permanent mortgage debt by paying the entire
purchase price of each property in cash or for shares, limited
partnership common units, interests in entities that own one or more
of our properties or a combination of these.
- To diversify geographically by acquiring properties primarily located
in major metropolitan areas to minimize the potential adverse impact
of economic downturns in local markets.
- To use our UPREIT structure to acquire properties in a way that allows
sellers of properties to defer some or all of the seller's potential
taxable gain. This enhances our ability to consummate transactions and
to structure more competitive acquisitions than competitors that may
lack the UPREIT structure.
OPERATIONS:
- To continue to actively manage costs and minimize operating expenses
by centralizing all management, leasing, marketing, financing,
accounting, renovation and data processing activities.
- To continue to improve rental income and cash flow by aggressively
marketing rentable space.
- To continue to emphasize regular maintenance and periodic renovation
to meet the needs of tenants and to maximize long-term returns.
- To continue to maintain a diversified tenant base at our retail
centers, consisting primarily of retail tenants providing consumer
goods and services.
- To actively monitor and analyze our securities portfolio.
TERMS OF THE OFFERING
We are offering a minimum of 200,000 shares of our common stock and a
maximum of 56,000,000 shares of our common stock in this offering. We are
offering 50,000,000 shares on a best efforts basis through the managing
dealer at $10.00 per share, subject to discounts in some cases. 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.
We are also offering up to 4,000,000 shares of our common stock at a
purchase price of $9.50 per share to stockholders who elect to participate in
our distribution reinvestment program. We will offer to sell to the managing
dealer one warrant, at a price of $0.0008 per warrant for each 25 shares of
common stock sold during this offering, up to a maximum of 2,000,000 warrants
and we may issue up to 2,000,000 shares which are issuable upon the exercise of
these warrants.
3
<PAGE>
See the "Plan of Distribution" for information on the escrow and for a
description of the terms of the offering.
SUITABILITY STANDARDS
In order to purchase shares, you must meet the financial suitability
standards we have established for this offering. In general you must have
either $45,000 in annual gross income and net worth or $150,000 minimum net
worth. Residents of Maine, Massachusetts, Missouri, Ohio, Pennsylvania and
Tennessee must meet higher financial standards, however. Employee benefit
plans covered by ERISA must consider additional factors before investing.
SHARES TO BE SOLD UPON COMPLETION OF THE OFFERING
As of October 18, 2000, there are 10,744,198 shares of our common stock
outstanding. The number of shares of our common stock outstanding prior to
this date does not include shares issuable:
- upon exercise of any outstanding warrants;
- upon exercise of options granted and which may be granted under our
independent director stock option plan;
- upon the conversion of the 200 limited partnership common units issued
by the operating partnership to the advisor; and
- upon conversion of any limited partnership common units (other than
the 200 limited partnership common units issued to the advisor) of the
operating partnership which might be issued for equity interests in
properties.
IS AN INVESTMENT IN US APPROPRIATE FOR YOU?
An investment in us might be appropriate as part of your investment
portfolio if:
- YOU ARE LOOKING FOR REGULAR DISTRIBUTIONS. We have been paying regular
monthly distributions to our stockholders. The maximum time that you
should have to wait to receive the first distribution is 30 days
following the end of the month in which we accept your subscription.
- YOU ARE LOOKING FOR A HEDGE AGAINST INFLATION. We hedge against
inflation by entering into leases with tenants which provide for
scheduled rent escalations or participation in the growth of tenant
sales. This is designed to provide increased distributions and capital
appreciation.
4
<PAGE>
- YOU ARE LOOKING FOR CAPITAL PRESERVATION AND APPRECIATION. We acquire a
portfolio of diverse properties that are well located. After acquiring
these properties, we may finance them, but we anticipate that aggregate
borrowings secured by our properties will not exceed 55% of their
combined fair market value.
We cannot guarantee that we will achieve these objectives.
5
<PAGE>
RISK FACTORS
An investment in our shares involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences
and who are able to bear the risk of loss of their investment. You should
consider the following risks in addition to other information set forth
elsewhere in this prospectus before making your investment decisions.
We also caution you that this prospectus contains forward-looking
terminology such as "may," "intent," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
expectations reflected in the forward-looking statements are based on
reasonable assumptions, these expectations may not prove to be correct.
Important factors that could cause our actual results to differ materially
from the expectations reflected in these forward-looking statements include
those set forth below, as well as general economic, business and market
conditions, changes in federal and local laws and regulations and increased
competitive pressures.
RISKS RELATED TO THE OFFERING
THE PRICE OF OUR COMMON STOCK IS SUBJECTIVE AND MAY NOT BEAR ANY
RELATIONSHIP TO WHAT A STOCKHOLDER COULD RECEIVE IF IT WAS SOLD. Our board of
directors determined the offering price of our shares of common stock based
on the following factors:
- the offering price of our common stock in our initial public offering
in February 1999;
- the offering price of the earlier REIT organized by our sponsor;
- the range of offering prices of other REITs that do not have a public
trading market; and
- the recommendation of the managing dealer based on its consultations
with likely soliciting dealers.
However, the offering price of our shares of common stock may not be the same
as the price at which the 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 we were liquidated or dissolved.
OUR COMMON STOCK IS NOT CURRENTLY LISTED ON AN EXCHANGE OR TRADING
MARKET AND CANNOT BE READILY SOLD. There is currently no public trading
market for the shares and we cannot assure you that one will develop in the
near term. We may never list the shares for trading on a national stock
exchange or include the shares for quotation on a national market system. The
absence of an active public market for our shares could impair your ability
to sell our stock at a profit or at all. By February 11, 2004, our board of
directors will determine whether it is in our best interests to apply to have
the shares listed on a national stock exchange or included for quotation on a
national market system if we meet the applicable listing requirements at that
time.
YOU DO NOT KNOW WHAT REAL PROPERTIES AND OTHER ASSETS WE MAY ACQUIRE IN
THE FUTURE, AND MUST RELY ON OUR ADVISOR, OUR BOARD OF DIRECTORS AND OFFICERS
TO SELECT THEM. We have acquired twelve commercial retail properties. You can
read the section of the prospectus entitled "Real Property Investments" for a
description of them. However, no information is available as to the
identification, location, operating histories, lease terms or other relevant
economic and financial data of any real
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properties, securities or other assets we may purchase in the future. As a
result, you must rely on us to locate and acquire suitable investment
properties and assets. In addition, our board of directors may approve future
equity offerings or obtain financing, the proceeds of which may be invested
in additional properties; therefore, you will not have an opportunity to
evaluate all of the properties that will be in our portfolio. You can read
the section "Investment Objectives and Policies" if you want information
about the types of properties in which we plan to invest and our criteria for
evaluating properties. Nonetheless, you will be unable to evaluate the manner
in which we invest the proceeds of this offering or the economic merit of
particular properties prior to their acquisition. This prospectus only
describes the parameters we will use to acquire additional real properties
and other assets.
COMPETITION WITH THIRD PARTIES IN ACQUIRING PROPERTIES MAY REDUCE OUR
PROFITABILITY AND THE RETURN ON YOUR INVESTMENT. We compete with many other
entities engaged in real estate investment activities, many of which have
greater resources than we do. Larger REITs may enjoy significant competitive
advantages that result from, among other things, a lower cost of capital and
enhanced operating efficiencies. In addition, the number of entities and the
amount of funds competing for suitable investment properties may increase.
This will result in increased demand for these assets and therefore increased
prices paid for them. If we pay higher prices for properties, our
profitability is reduced and you will experience a lower return on your
investment.
WE WILL COMPETE WITH REAL ESTATE INVESTMENT PROGRAMS SPONSORED BY
COMPANIES AFFILIATED WITH US FOR THE ACQUISITION OF PROPERTIES AND FOR THE
TIME AND SERVICES OF PERSONNEL. Affiliated companies have previously
sponsored another REIT, private real estate equity programs and private
placement mortgage and note programs, and affiliated companies in the future
may sponsor other real estate investment programs. We will compete with these
existing and future real estate investment programs for the acquisition of
properties of a type suitable for our investment, for the time and services
of personnel of our advisor and affiliates of our advisor in connection with
our operation and the management of our assets, and for obtaining and
retaining investors for our common stock.
WE PLAN TO INCUR MORTGAGE INDEBTEDNESS AND OTHER BORROWINGS, WHICH MAY
INCREASE OUR BUSINESS RISKS. We may acquire real properties free and clear of
permanent mortgage debt by paying the entire purchase price of each property
in cash, or with common stock, limited partnership common units in the
operating partnership, interests in entities that own one or more of our
properties, or a combination of these means. However, if it is determined to
be in our best interests, we may, in some instances, use either existing
financing or borrow new funds to acquire properties. In addition, we intend
to incur or increase our mortgage debt by obtaining loans secured by selected
or all of the real properties to obtain funds to acquire additional real
properties. We may also borrow funds if necessary to satisfy the requirement
that we distribute to stockholders as dividends at least 90% of our annual
REIT taxable income, or otherwise as is necessary or advisable to assure that
we maintain our qualification as a REIT for federal income tax purposes.
We do not intend to incur mortgage debt on a particular real property
unless the property's projected cash flow is sufficient to service the
mortgage debt. However, if there is a shortfall in cash flow, requiring us to
use cash from other sources to make the mortgage payments on the property,
then the amount available for distributions to stockholders may be affected.
In addition, incurring mortgage debt increases the risk of loss since
defaults on indebtedness secured by properties may result in foreclosure
actions initiated by lenders and our loss of the property securing the loan
which is in default. For tax purposes, a foreclosure of any of our properties
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 our tax basis in the
property, we
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would recognize taxable income on foreclosure, but would not receive any cash
proceeds. If any mortgages contain cross- collateralization or cross-default
provisions, there is a risk that more than one real property may be affected
by a default.
If mortgage debt is unavailable at reasonable rates, we will not be able
to place financing on the properties, which could reduce the number of
properties we can acquire and the amount of distributions per share. If we
place mortgage debt on the properties, we run the risk of being unable to
refinance the properties when the loans come due, or of being unable to
refinance on favorable terms. If interest rates are higher when the
properties are refinanced, our income could be reduced, which would reduce
cash available for distribution to stockholders and may prevent us from
raising capital by issuing more stock and may prevent us from borrowing more
money.
IF WE HAVE INSUFFICIENT WORKING CAPITAL RESERVES, WE WILL HAVE TO OBTAIN
FINANCING FROM OTHER SOURCES. We have established working capital reserves
which we believe are adequate to cover our cash needs. However, if these
reserves are insufficient to meet our cash needs, we may have to obtain
financing from either affiliated or unaffiliated sources to fund our cash
requirements. We cannot assure you that sufficient financing will be
available or, if available, will be available on economically feasible terms
or on terms acceptable to us. Additional borrowing for working capital
purposes will increase our interest expense, and therefore our financial
condition and our ability to pay distributions may be adversely affected.
THE TYPES OF PROPERTIES WHICH WE INTEND TO ACQUIRE AND THE AREA IN WHICH
WE MAY ACQUIRE RETAIL CENTERS IS LIMITED. We primarily acquire and manage
retail centers. Our acquisition of retail centers is limited primarily to
states east of the Mississippi River and is focused in the southeastern
states, primarily Florida, Georgia, North Carolina and South Carolina.
Adverse economic conditions affecting that area could adversely affect our
profitability to a greater degree than if we had diversified our investments
to include other types of real estate over a larger geographic region.
THE AGGREGATE AMOUNT WE MAY BORROW IS LIMITED UNDER OUR CHARTER. Our
charter limits the aggregate amount we may borrow, absent a satisfactory
showing that a higher level is appropriate, to 300% of our net assets. That
limitation could have adverse business consequences such as:
- freezing our ability to purchase additional properties;
- causing us to lose our REIT status if additional borrowing was
necessary to pay the required minimum amount of cash distributions to
our stockholders to maintain our status as a REIT;
- causing operational problems if there are cash flow shortfalls for
working capital purposes; and
- resulting in the loss of a property if, for example, financing was
necessary to repay a default on a mortgage.
In order to change this limitation, we must obtain stockholder approval.
There will be a delay before 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 additional funding when it is needed.
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BECAUSE OF THE WAY WE ARE ORGANIZED, WE WOULD BE A DIFFICULT TAKEOVER
TARGET. THIS COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT A MANAGEMENT
CHANGE. Provisions which may have an anti-takeover effect and inhibit a
change in our management include:
- THERE ARE OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFERABILITY AND
OWNERSHIP IN OUR CHARTER. In order for us to qualify as a REIT, no
more than 50% of the outstanding shares of our stock may be
beneficially owned, directly or indirectly, by five or fewer
individuals at any time during the last half of each taxable year.
To make sure that we will not fail to qualify as a REIT under this
test, our charter provides that, commencing July 1, 2000, subject to
some exceptions, no person may beneficially own more than 9.8% in
number of shares or value of our common stock. Our board of directors
did permit a stockholder to acquire more than 9.8% of the number of
shares outstanding. Our board of directors may exempt a person from
the 9.8% ownership limit upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel as to the lack of adverse
consequences and upon any other conditions as the board of directors
may direct. However, our board of directors may not grant an exemption
from the 9.8% ownership limit to any proposed transferee if it would
result in the termination of our status as a REIT.
This restriction may:
- discourage a tender offer or other transactions or a change in
management or control that might involve a premium price for
our shares or otherwise be in the best interests of our
stockholders; or
- compel a stockholder who had acquired more than 9.8% of our
stock to dispose of the additional shares and, as a result, to
forfeit the benefits of owning the additional shares.
- OUR CHARTER PERMITS OUR BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK
WITH TERMS THAT MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING US. Our
charter permits our board of directors to issue up to 10 million
shares of preferred stock. The board of directors may classify or
reclassify any unissued preferred stock and establish the preferences,
conversion or other rights, voting powers, restrictions, limitations
as to dividends, qualifications, or terms or conditions of redemption
of any preferred stock. Thus, our board of directors 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 the
shares.
- THE OPERATING PARTNERSHIP AGREEMENT CONTAINS PROVISIONS THAT MAY
DISCOURAGE A THIRD PARTY FROM ACQUIRING US. A limited partner in
Inland Retail Real Estate Limited Partnership, an Illinois limited
partnership and our operating partnership, has the option to convert
his or her limited partnership common units into shares of our common
stock, subject to our right to deliver cash instead of common stock
under circumstances described in the operating partnership agreement.
Those conversion rights are generally not exercisable until the
limited partner has held those limited partnership units for more than
one year. However, if we or the operating partnership propose to
engage in any merger, consolidation or other combination with or into
another person
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or a sale of all or substantially all of our assets, or a liquidation,
or any reclassification, recapitalization or change of common and
preferred stock into which a limited partnership common unit may be
converted, each holder of a limited partnership unit will have the
right to convert the partnership unit into common stock prior to the
stockholder vote on the transaction. As a result, limited partnership
unit holders who timely convert their units prior to the record date
for the stockholder vote on any transaction will be entitled to vote
their shares of common stock with respect to the transaction. The
additional shares that might be outstanding as a result of these
conversions of limited partnership common units may deter an
acquisition proposal. See "Operating Partnership Agreement --
Extraordinary Transactions" for a description of these rights.
- MARYLAND LAW MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING US. Maryland
law restricts mergers and other business combinations between us and
an interested stockholder. An interested stockholder is defined as
any person who is the beneficial owner of 10% or more of the voting
power of our common stock and also includes any of our affiliates or
associates which, at any time within the two-year period prior to the
date of a proposed merger or other business combination, was the
beneficial owner of 10% or more of our voting power. A person is not
an interested stockholder if, prior to the most recent time at which
the person would otherwise have become an interested stockholder, the
board of directors of the corporation approved the transaction which
otherwise would have resulted in the person becoming an interested
stockholder. For a period of five years after the most recent
acquisition of stock by an interested stockholder, we may not engage
in any merger or other business combination with such interested
stockholder or any affiliate of such interested stockholder. After the
five-year period, any merger or other business combination must be
approved by our board of directors and by at least 80% of all the
votes entitled to be cast by holders of outstanding shares of our
voting stock and two-thirds of all the votes entitled to be cast by
holders of outstanding shares of our voting stock other than the
interested stockholder or any affiliate or associate of the interested
stockholder unless, among other things, the interested stockholder
receives a minimum price for its common stock and the consideration is
received in cash or in the same form as previously paid by the
interested stockholder for its common stock. However, our charter
provides that the business combination provisions of Maryland law do
not apply to any business combination involving us and our affiliates.
As a result, the five-year prohibition and the super-majority
stockholder vote requirements will not apply to any business
combinations between us and our affiliates. In addition, these
provisions of the business combination statute do not apply to
business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the interested
stockholder becomes an interested stockholder. However, the business
combination statute could have the effect of discouraging offers from
third parties to acquire us and increasing the difficulty of
successfully completing this type of offer. See "Description of
Securities -- Provisions of Maryland Law and of our Charter and
Bylaws -- BUSINESS COMBINATIONS."
- MARYLAND LAW ALSO LIMITS THE ABILITY OF A THIRD PARTY TO BUY A MORE
THAN 10% STAKE IN US AND EXERCISE VOTING POWER IN ELECTING DIRECTORS.
Maryland law 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 a two-thirds of the
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votes entitled to be cast on the matter, excluding shares of stock
owned by the acquiror, by officers or by directors who are employees of
the corporation. "Control shares" are voting shares of stock 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 virtue of a
revocable proxy), would entitle the acquiror to exercise voting power
in electing directors within one of the following ranges of voting
power: (i) one-tenth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more of all
voting power. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. The
control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a
party to the transaction or (ii) to acquisitions approved or exempted
by the charter or bylaws of the corporation. Our Bylaws exempt our
affiliates from the control share acquisition statute. This statute
could have the effect of discouraging offers from third parties to
acquire us and increasing the difficulty of successfully completing
this type of offer by anyone other than our affiliates or any of their
affiliates. See "Description of Securities -- Provisions of Maryland
Law and of our Charter and Bylaws -- CONTROL SHARE ACQUISITION."
YOUR INVESTMENT RETURN MAY BE REDUCED IF WE ARE REQUIRED TO REGISTER AS
AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT. Under the Investment
Company Act of 1940, we are not registered as an investment company. If we
were obligated to register as an investment company, we would have to comply
with a variety of substantive requirements under the Investment Company Act.
These requirements include:
- limitations on capital structure;
- restrictions on specified investments;
- prohibitions on transactions with affiliates; and
- compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations that would significantly change our
operations.
In order to maintain our exemption from regulation under the Investment
Company Act, we must engage primarily in the business of buying real estate,
and these investments must be made within a year after the offering ends. If
we are unable to invest a significant portion of the proceeds of this
offering in properties within one year of the termination of the offering, we
may avoid being required to register as an investment company by temporarily
investing any unused proceeds in government securities with low returns. This
would reduce the cash available for distribution to investors and possibly
lower your returns.
To maintain compliance with the Investment Company Act exemption, we may
be unable to sell assets we would otherwise want to sell and may need to sell
assets we would otherwise wish to retain. In addition, we may have to acquire
additional income or loss generating assets that we might not otherwise have
acquired or may have to forgo opportunities to acquire interests in companies
that we would otherwise want to acquire and would be important to our
strategy.
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If we were required to register as an investment company but failed to do
so, we would be prohibited from engaging in our business, and criminal and civil
actions could be brought against us. In addition, our contracts would be
unenforceable unless a court were to require enforcement, and a court could
appoint a receiver to take control of us and liquidate our business.
THERE ARE MANY FACTORS WHICH CAN AFFECT DISTRIBUTIONS TO STOCKHOLDERS.
Distributions will be based principally on cash available from our properties,
real estate securities, and other investments. The amount of cash available for
distributions will be affected by many factors, such as our ability to buy
properties as offering proceeds become available, the yields on securities of
other REITs which we invest in, and our operating expense levels, as well as
many other variables. Actual cash available for distributions may vary
substantially from estimates. We can give no assurance that we will be able to
pay or maintain distributions or that distributions will increase over time. Nor
can we give any assurance that rents from the properties will increase, that the
securities we buy will increase in value or provide constant or increased
dividends over time, or that future acquisitions of real properties or our
investments in securities will increase our cash available for distributions to
stockholders. Our actual results may differ from the assumptions used by our
board of directors in establishing the initial distribution rate to
stockholders. Some of these factors are beyond our control, and a change in any
one factor could adversely affect our ability to pay future distributions:
- If one or more tenants defaults or terminates their lease, there could
be a decrease or cessation of rental payments which would mean less
cash available for distributions.
- Cash available for distributions may be reduced if we are required to
spend money to correct defects or to make improvements to properties.
- Cash available to make distributions may decrease if the assets we
acquire have lower yields than expected.
- There may be a delay between the sale of the common stock through this
offering and our purchase of real properties. During that time, we may
invest in lower yielding short term instruments, which could result in
a lower yield on your investment.
- Federal income tax laws require REITs to distribute at least 90% of
their taxable income to stockholders. This limits the earnings which we
may retain for corporate growth, such as property acquisition,
development or expansion and makes us more dependent upon additional
debt or equity financing than corporations which are not REITs. If we
borrow more funds in the future, more of our operating cash will be
needed to make debt payments and cash available for distributions may
therefore decrease.
- In connection with future property acquisitions, we may issue
additional shares of common stock, operating partnership units or
interests in other entities that own our properties. We cannot predict
the number of shares of common stock, units or interests which we may
issue, or the effect that these additional shares might have on cash
available for distributions to you. If we issue additional shares, they
could reduce the cash available for distributions to you.
- We make distributions to our stockholders to comply with the
distribution requirements of the Internal Revenue Code and to
eliminate, or at least minimize, exposure to federal
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income taxes and the nondeductible REIT excise tax. Differences in
timing between the receipt of income and the payment of expenses,
and the effect of required debt payments, could require us 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.
WE COULD ISSUE MORE SHARES IN THE FUTURE, WHICH COULD REDUCE THE PRICE OF
OUTSTANDING SHARES. We have the power to issue more shares of common stock in
the future. We cannot predict the effect on the market price of our outstanding
common stock, if any, of future sales of shares of our common stock, or the
availability of shares for future sales through the exercise of options granted
to independent directors under the independent director stock option plan or
through the exercise of outstanding warrants. The issuance of these additional
shares, or the perception that these shares could be issued, may adversely
affect the prevailing market prices, if any, for our common stock.
STOCKHOLDERS HAVE LIMITED CONTROL OVER CHANGES IN OUR POLICIES. Our board
of directors determines our major policies, including our investment objectives,
financing, growth, debt capitalization, REIT qualification and distributions.
Our board of directors may amend or revise these and other policies without a
vote of the stockholders. This means that stockholders will have limited control
over changes in our policies.
IF WE INVEST IN JOINT VENTURES, THE OBJECTIVES OF OUR PARTNERS MAY CONFLICT
WITH OUR OBJECTIVES. We may make investments in joint ventures or other
partnership arrangements between us and affiliates of our sponsor or with
unaffiliated third parties. Investments in joint ventures which own real
properties may involve risks otherwise not present when we purchase real
properties directly. For example, our co-venturer may file for bankruptcy
protection, may have economic or business interests or goals which are
inconsistent with our interests or goals, or may take actions contrary to our
instructions, requests, policies or objectives. Among other things, actions by a
co-venturer might subject real properties owned by the joint venture to
liabilities greater than those contemplated by the terms of the joint venture or
other adverse consequences.
IF WE SELL PROPERTIES BY PROVIDING FINANCING TO PURCHASERS, WE WILL BEAR
THE RISK OF DEFAULT BY THE PURCHASER. If we decide to sell any of our
properties, we will use our best efforts to sell for cash. However, we may sell
our properties by providing financing to purchasers. When we provide financing
to purchasers, we will bear the risk of default by the purchaser and will be
subject to remedies provided by law. There are no limitations or restrictions on
our ability to take purchase money obligations. We may therefore take a purchase
money obligation secured by a mortgage as part payment for the purchase price.
The terms of payment to us will be affected by custom in the area where the
property being sold is located and the then-prevailing economic conditions. If
we receive promissory notes or other property in lieu of cash from property
sales, the distribution of the proceeds of sales to our stockholders, or their
reinvestment in other properties, will be delayed until the promissory notes or
other property are actually paid, sold, refinanced or otherwise disposed of. In
some cases, we may receive initial down payments in 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.
IF WE DO NOT RAISE SUFFICIENT FUNDS, WE MAY NOT FULFILL OUR INVESTMENT
OBJECTIVES, INCLUDING ASSET DIVERSIFICATION. We are making this offering on a
best efforts basis and it is conditioned on the sale of at least 200,000 shares
of common stock for $2,000,000. Because this offering will be made on a best
efforts basis, our potential profitability and our ability to continue to
diversify our investments, both geographically and by type of properties
purchased, will be limited by the amount of funds we raise.
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We will be able to purchase additional properties only as additional funds
are raised through this offering or invested through the distribution
reinvestment program. We cannot guarantee that we will sell the minimum
number of shares and, if we do not, all proceeds from subscribers will be
returned to them together with the interest earned on the proceeds.
RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE
WE DEPEND ON OUR BOARD OF DIRECTORS AND ADVISOR AND LOSING THOSE
RELATIONSHIPS COULD NEGATIVELY AFFECT OUR OPERATIONS. Our board of directors has
supervisory control over all aspects of our operations. Our ability to achieve
our 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
property manager, their affiliates and employees for day-to-day operations.
Therefore, we depend heavily 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 material
adverse effect on us.
Our advisor must reimburse us for operational stage expenses as described
in "Compensation Table -- Subordinated Payments -- Operational Stage." In the
event our advisor's net worth or cash flow is not sufficient to cover these
expenses, we will not be reimbursed.
THERE ARE CONFLICTS OF INTEREST BETWEEN US AND OUR AFFILIATES. Our
operation and management may be influenced or affected by conflicts of interest
arising out of our relationship with our affiliates. Our advisor and its
affiliates are or will be engaged in other activities that will result in
potential conflicts of interest with the services that the advisor and
affiliates will provide to us. Those officers could take actions that are more
favorable to other entities than to us. The resolution of conflicts in favor of
other entities could have a negative impact on our financial performance. See
"Conflicts of Interests" for a discussion of various conflicts of interests.
THE MANAGING DEALER HAS NOT MADE AN INDEPENDENT REVIEW OF US OR THE
PROSPECTUS. The managing dealer, Inland Securities Corporation, is one of our
affiliates and will not make an independent review of us or the offering.
Accordingly, you do not have the benefit of an independent review of the terms
of this offering. Further, the due diligence investigation of us by the managing
dealer, also an affiliate, cannot be considered to be an independent review and,
therefore, may not be as meaningful as a review conducted by an unaffiliated
broker-dealer or investment banker. In addition, a substantial portion of the
proceeds of the offering will be paid to the managing dealer for managing the
offering, including cash selling commissions, a marketing contribution and a due
diligence expense allowance as described under "Plan of Distribution."
OUR RIGHTS AND THE RIGHTS OF OUR STOCKHOLDERS TO TAKE ACTION AGAINST THE
DIRECTORS AND THE ADVISOR ARE LIMITED. Maryland law provides that a director
has no liability in that capacity if he performs his duties in good faith, in
a manner he reasonably believes to be in our best interests and with the care
that an ordinary prudent person in a like position would use under similar
circumstances. Our charter, in the case of our directors, officers, employees
and agents, and the advisory agreement, in the case of the advisor, require
us to indemnify our directors, officers, employees and agents and the advisor
for actions taken by them in good faith and without negligence or misconduct.
As a result, we and the stockholders may have more limited rights against our
directors, officers, employees and agents, and the advisor than might
otherwise exist under common law. In addition, we may be obligated to fund
the defense costs incurred by our directors, officers, employees and agents
or the advisor in some cases. See "Limitation of Liability and
Indemnification of Directors, Officers and the Advisor."
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YOUR PERCENTAGE OF OWNERSHIP MAY BECOME DILUTED IF WE ISSUE NEW SHARES OF
STOCK. Stockholders have no rights to buy additional shares of stock in the
event we issue new shares of stock, known as preemptive rights. We may issue
common stock, convertible debt or preferred stock pursuant to a subsequent
public offering or a private placement, upon exercise of warrants or options, or
to sellers of properties we directly or indirectly acquire instead of, or in
addition to, cash consideration. Investors purchasing common stock in this
offering who do not participate in any future stock issues will experience
dilution in the percentage of the issued and outstanding stock they own. Your
investment will not be diluted as a result of any future stock issues if we sell
any subsequently issued common stock for cash or property having a value of not
less than $10 per share. Warrants to be issued to the managing dealer in
connection with this offering, options to purchase common stock to be issued to
independent directors under our independent director stock option plan, and/or
convertible securities, if any, likely will be exercised or converted at a time
when we seek to obtain needed capital through a new offering of our securities
and on terms more favorable than those provided by the offered securities. As
long as options on convertible securities remain unexercised or unconverted, the
terms on which we could raise additional capital may be adversely affected,
increasing the likelihood of your ownership percentage being diluted.
THE UNKNOWN IMPACT OF ELECTRONIC COMMERCE MAY REDUCE RETAIL SALES AT RETAIL
CENTERS WHICH MAY AFFECT OUR CASH AVAILABLE FOR DISTRIBUTIONS AND THE AMOUNT OF
DISTRIBUTIONS. The electronic sale of goods and services over the internet,
often referred to as e-tailing or e-commerce, is a new and growing trend. At
this point in time, it is uncertain how the future growth of e-tailing or
e-commerce will affect our tenants and, in turn, our operations. If e-tailing or
e-commerce causes a material reduction in retail sales at shopping centers, it
may adversely affect our cash available for distributions and thus affect the
amount of distributions.
RISKS OF REAL ESTATE OWNERSHIP
THERE ARE INHERENT RISKS WITH REAL ESTATE INVESTMENTS. All real property
investments are subject to some degree of risk. Equity real estate investments
cannot be quickly converted to cash. This limits our ability to promptly vary
our portfolio in response to changing economic, financial and investment
conditions. Real property investments are also subject to adverse changes in
general economic conditions or local conditions which reduce the demand for
apartments and other rental space. Other factors also affect real estate values,
including:
- possible federal, state or local regulations and controls affecting
rents, prices of goods, fuel and energy consumption and prices, water
and environmental restrictions;
- increasing labor and material costs; and
- 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, as well as property operating
expenses and other costs we incur. If our properties do not generate revenues
sufficient to meet operating expenses, we may have to borrow amounts to cover
fixed costs, and our cash available for distributions may be adversely affected.
Prior investment programs of our sponsor experienced mortgage defaults and
restructuring of debt. The principal real estate related adverse effects
experienced by prior investment programs sponsored by The Inland Group and its
affiliates were mortgage defaults and restructuring of debt. For
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a more detailed discussion of these adverse events, see "Prior Performance of
Our Affiliates -- Loan Modifications and Work-Outs," "-- Effects of Property
Exchanges on Investors" and "-- Additional Information."
ADVERSE ECONOMIC CONDITIONS IN OUR PRIMARY GEOGRAPHIC REGION AND IN THE
MARKET FOR RETAIL SPACE COULD REDUCE OUR INCOME AND DISTRIBUTIONS TO YOU. Our
properties will be located mainly in states east of the Mississippi River in the
United States, and have been initially focused in the southeastern states,
primarily Florida, Georgia, North Carolina and South Carolina. Our properties
are primarily retail centers. The economic performance of our properties could
be affected by changes in local economic conditions. Our performance is
therefore 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 our income and cash available for distributions and thus affect the
amount of distributions we can make to you.
In addition, we intend to predominantly own and operate 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 our common stock may be
negatively impacted, thereby resulting in the shares trading at a discount below
the inherent value of our assets as a whole.
RISING EXPENSES COULD REDUCE CASH FLOW AND FUNDS AVAILABLE FOR FUTURE
ACQUISITIONS. Our properties and any properties we buy in the future are and
will be subject to operating risks common to real estate in general, any or all
of which may negatively affect us. If any property is not fully occupied or if
rents are being paid in an amount that is insufficient to cover operating
expenses, then we could be required to expend funds for that property's
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 our properties may be leased on a triple-net-lease basis or
require the tenants to pay a portion of the expenses, renewals of leases or
future leases may not be negotiated on that basis, in which event we will have
to pay those costs. If we are unable to lease properties on a triple-net-lease
basis or on a basis requiring the tenants to pay all or some of the expenses, or
if tenants fail to pay required tax, utility and other impositions, we could be
required to pay those costs which could adversely affect funds available for
future acquisitions or cash available for distributions.
IF OUR TENANTS ARE UNABLE TO MAKE RENTAL PAYMENTS, THEIR RENTAL PAYMENTS
ARE REDUCED, OR IF THEY TERMINATE A LEASE, OUR FINANCIAL CONDITION AND
ABILITY TO PAY DISTRIBUTIONS WILL BE ADVERSELY AFFECTED. We are subject to
the risk that tenants, as well as lease guarantors, 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 have an adverse effect on
our financial condition and our ability to pay distributions. See "Prior
Performance of our Affiliates -- Loan Modifications and Work-Outs."
OUR FINANCIAL CONDITION AND ABILITY TO MAKE DISTRIBUTIONS MAY BE ADVERSELY
AFFECTED BY THE BANKRUPTCY OR INSOLVENCY, A DOWNTURN IN THE BUSINESS, OR A LEASE
TERMINATION OF A TENANT THAT OCCUPIES A LARGE AREA OF THE RETAIL CENTER OR AN
ANCHOR TENANT. Generally, any tenant occupying a large portion of the gross
leasable area of a retail center, a tenant of any of the triple-net single-user
retail properties outside the primary geographical area of investment, commonly
referred to as an anchor tenant, or a
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tenant that is our anchor tenant at more than one retail center, may become
insolvent, may suffer a downturn in business, or may decide not to renew its
lease. Any of these events would result in a reduction or cessation in rental
payments to us and would adversely affect our financial condition. A lease
termination by an anchor tenant could result in lease terminations or
reductions in rent by other tenants whose leases permit cancellation or rent
reduction if an anchor tenant's lease is terminated. In such event, we may be
unable to re-lease the vacated space. Similarly, the leases of some anchor
tenants may permit the anchor tenant to transfer its lease to another
retailer. The transfer to a new anchor tenant could cause customer traffic in
the retail center to decrease and thereby reduce the income generated by that
retail center. A transfer lease to a new anchor tenant could also allow other
tenants to make reduced rental payments or to terminate their leases at the
retail center.
IF A TENANT CLAIMS BANKRUPTCY, WE MAY BE UNABLE TO COLLECT BALANCES DUE
UNDER RELEVANT LEASES. Any or all of the tenants, or a guarantor of a tenant's
lease obligations, could be subject to a bankruptcy proceeding pursuant to Title
11 of the bankruptcy laws of the United States. Such a bankruptcy filing would
bar all efforts by us to collect pre-bankruptcy debts from these entities or
their properties, unless we receive an enabling order from the bankruptcy court.
Post-bankruptcy debts would be paid currently. If a lease is assumed, all
pre-bankruptcy balances owing under it must be paid in full. If a lease is
rejected by a tenant in bankruptcy, we would have a general unsecured claim for
damages. If a lease is rejected, it is unlikely we would receive any payments
from the tenant because our claim is capped at the rent reserved under the
lease, without acceleration, for the greater of one year or 15% of the remaining
term of the lease, but not greater than three years, plus rent already due but
unpaid. This claim could be paid only in the event funds were available, and
then only in the same percentage as that realized on other unsecured claims.
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 decrease or cessation of
rental payments which would mean a reduction in our cash flow and the amount
available for distributions to you. In the event of a bankruptcy, we cannot
assure you that the tenant or its trustee will assume our lease. If a given
lease, or guaranty of a lease, is not assumed, our cash flow and the amounts
available for distributions to you may be adversely affected.
WE MAY INCUR ADDITIONAL COSTS IN ACQUIRING OR RE-LEASING SINGLE USER RETAIL
PROPERTIES. Some of the properties we own or will acquire may be designed or
built primarily for a particular tenant or a specific type of use. If that
tenant fails to renew its lease or defaults on its lease obligations, we may not
be able to readily market the property to a new tenant without substantial
capital improvements or remodeling, which may adversely affect our results of
operation and financial condition.
OUR PROPERTIES WILL BE SUBJECT TO COMPETITION FOR TENANTS AND CUSTOMERS.
Our properties are and will be located in developed areas. Therefore, there are
and will undoubtedly be numerous other retail properties within the market area
of each of our properties which will compete with our properties and which will
compete with us for tenants. The number of competitive properties could have a
material effect on our ability to rent space at our properties and the amount of
rents charged. We could be adversely affected if additional competitive
properties are built in locations competitive with our properties, causing
increased competition for customer traffic and creditworthy tenants. This could
result in decreased cash flow from tenants and may require us to make capital
improvements to properties which we would not have otherwise made, thus
affecting cash available for distributions to you.
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OUR PROPERTIES WILL FACE COMPETITION WHICH MAY AFFECT TENANTS' ABILITY TO
PAY RENT AND THE AMOUNT OF RENT PAID TO US AND IN TURN AFFECT THE CASH AVAILABLE
FOR DISTRIBUTIONS AND THE AMOUNT OF DISTRIBUTIONS. Each of our properties is
subject to competition from similar retail centers within their respective
market areas. Other retail centers within the market area of our properties will
compete with our properties for customers affecting their tenants' cash flows
and thus affecting their ability to pay rent. In addition, some of our tenants'
rent payments may be based on the amount of sales revenue generated by them. If
these tenants experience competition, the amount of their rent may decrease and
our cash flow will decrease.
WE MAY BE RESTRICTED FROM RE-LEASING SPACE. In many cases, tenant leases
contain provisions giving the tenant the exclusive right to sell particular
types of merchandise or provide specific 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 is required, 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 our income, funds from operations and cash available for
distributions and thus affect the amount of distributions to you.
WE MAY BE UNABLE TO SELL A PROPERTY IF OR WHEN WE DECIDE TO DO SO. The real
estate market is affected by many factors, such as general economic conditions,
availability of financing, interest rates and other factors, including supply
and demand, that are beyond our control. We cannot predict whether we will be
able to sell any property for the price or on the terms set by us, or whether
any price or other terms offered by a prospective purchaser would be acceptable
to us. We cannot predict the length of time needed to find a willing purchaser
and to close the sale of a property.
We may be required to expend funds to correct defects or to make
improvements before a property can be sold. We cannot assure you that we will
have funds available to correct such defects or to make such improvements.
In acquiring a property, we 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. These provisions would restrict our ability to sell a property.
IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR THAT ARE IN
EXCESS OF INSURANCE COVERAGE, WE COULD LOSE INVESTED CAPITAL AND ANTICIPATED
PROFITS. Each tenant is responsible for insuring its goods and premises and,
in some circumstances, may be required to reimburse us 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 our 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. Material losses may occur in excess of
insurance proceeds with respect to any property as insurance may not have
sufficient resources to fund the losses. However, there are 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
limitations, such as large deductibles or copayments. If such an event
occurred to, or caused the destruction of, one or more of our properties, we
could lose both our invested capital and anticipated profits from such
property. See "Investment Objectives and Policies -- Description of Leases"
and "Real Property Investments -- Insurance Coverage on Properties."
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REAL ESTATE RELATED TAXES MAY INCREASE AND IF THESE INCREASES ARE NOT
PASSED ON TO TENANTS, OUR INCOME WILL BE REDUCED. Some local real property tax
assessors may seek to reassess some of our properties as a result of our
acquisition of the property. Generally, from time to time our property taxes
increase 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 us 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 our income,
cash available for distributions, and the amount of distributions to you.
THE COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND OTHER GOVERNMENTAL LAWS
AND REGULATIONS MAY ADVERSELY AFFECT OUR INCOME AND THE CASH AVAILABLE FOR ANY
DISTRIBUTIONS. 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. These laws and regulations
generally govern 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 disposals. Some of these laws and
regulations may impose joint and several liability on 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 hazardous or toxic substances at, on, under or in
its property. The costs of removal or remediation could be substantial. In
addition, the presence of these substances, or the failure to properly remediate
these substances, may adversely affect our ability to sell or rent such property
or to use the property as collateral for future borrowing.
Some of these laws and regulations 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
material expenditures by us. We cannot assure that future laws, ordinances or
regulations will not impose any material environmental liability, or that the
current environmental condition of our properties will not be affected by the
operations of the tenants, by the existing condition of the land, 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 we may be required to comply with, and which may
subject us to liability in the form of fines or damages for noncompliance.
OUR COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT MAY AFFECT CASH AVAILABLE FOR DISTRIBUTIONS. Our properties are subject to
the Americans with Disabilities Act of 1990. Under the Disabilities Act, all
places of public accommodation are required to comply with federal requirements
related to access and use by disabled persons. The Disabilities Act has separate
compliance requirements for "public accommodations" and "commercial facilities"
that generally require that buildings and services, including restaurants and
retail stores, be made accessible and available to people with disabilities. The
Disabilities Act's 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. We will attempt to acquire properties which
comply with the Disabilities
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Act or place the burden on the seller or other third party, such as a tenant,
to ensure compliance with the Disabilities Act. However, we cannot assure
that we will be able to acquire properties or allocate responsibilities in
this manner. If we cannot, our funds used for Disabilities Act compliance may
affect cash available for distributions and the amount of distributions to
you.
IF A SALE AND LEASEBACK TRANSACTION IS RECHARACTERIZED, OUR FINANCIAL
CONDITION COULD BE ADVERSELY AFFECTED. We may enter into sale and leaseback
transactions, where we would purchase a property and then lease the same
property back to the person from whom we purchased it. In the event of the
bankruptcy of a tenant, a transaction structured as a sale and leaseback may be
recharacterized as either a financing or a joint venture, either of which
outcomes could adversely affect our business.
If the sale and leaseback were recharacterized as a financing, we might not
be considered the owner of the property, and as a result would have the status
of a creditor in relation to the tenant. In that event, we would no longer have
the right to sell or encumber our ownership interest in the property. Instead,
we would have a claim against the tenant for the amounts owed under the lease,
with the claim arguably secured by the property. The tenant/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, we could be bound by the new terms, and prevented from foreclosing our
lien on the property. These outcomes could adversely affect our cash flow and
the amount available for distributions to you.
If the sale and leaseback were recharacterized as a joint venture, we and
our lessee could be treated as co-venturers with regard to the property. As a
result, we could be held liable, under some circumstances, for debts incurred by
the lessee relating to the property. The imposition of liability on us could
adversely affect our cash flow and the amount available for distributions to our
stockholders.
WE MAY INCUR ADDITIONAL COSTS IN ACQUIRING NEWLY CONSTRUCTED PROPERTIES
WHICH MAY ADVERSELY AFFECT CASH AVAILABLE FOR DISTRIBUTIONS TO YOU. We intend to
primarily acquire existing or newly constructed properties. Although we
presently intend to only acquire newly constructed buildings for operation and
occupancy, the builder's failure to perform may necessitate legal action by us
to rescind our purchase of a property, to compel performance or to sue for
damages. Any such legal action may result in increased costs to us.
OUR INVESTMENTS IN UNIMPROVED REAL PROPERTY MAY RESULT IN ADDITIONAL
COST TO US TO COMPLY WITH RE-ZONING RESTRICTIONS OR ENVIRONMENTAL
REGULATIONS. We may invest up to 10% of our assets in properties other than
retail centers, which may include unimproved real property. Investments in
unimproved properties are subject to the risks of real estate investments in
general. They 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. We do not intend to invest
in any unimproved property which is not intended to be developed.
CONSTRUCTION AND DEVELOPMENT ACTIVITIES WILL EXPOSE US TO 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 we elect to engage in construction and development
activities, in accordance with current pronouncements of the Internal Revenue
Service, we intend to have our employees only perform oversight and review
functions. These functions may include selecting sites, reviewing construction
and tenant improvement design proposals, negotiating and contracting for
feasibility studies and supervising compliance with local, state or federal laws
and regulations. We will retain an independent general contractor to perform the
actual physical
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construction work on tenant improvements or the installation of heating
ventilation and air conditioning systems.
WE MAY ACQUIRE PROPERTIES WITH LOCK-OUT PROVISIONS WHICH MAY PROHIBIT US
FROM SELLING A PROPERTY, OR MAY REQUIRE US TO MAINTAIN SPECIFIED DEBT LEVELS FOR
A PERIOD OF YEARS ON SOME PROPERTIES. Lock-out provisions could materially
restrict us from selling or otherwise disposing of or refinancing properties.
This would affect our ability to turn our investments into cash and thus affect
cash available for distributions to you. Lock-out provisions may apply even if
it would reduce the outstanding indebtedness with respect to any properties or
not refinance such indebtedness on a nonrecourse basis at maturity, or increase
the amount of indebtedness with respect to such properties.
Lock-out provisions could impair our ability to take actions during the
lock-out period that would otherwise be in the best interests of our
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, lock-out provisions could preclude us from
participating in major transactions that could result in a disposition of our
assets or a change in control even though that disposition or change in control
might be in the best interests of our stockholders.
TAX RISKS
YOUR INVESTMENT HAS VARIOUS FEDERAL INCOME TAX RISKS. Although the
provisions of the Internal Revenue Code relevant to your investment are
generally described in the section of the prospectus titled "Federal Income Tax
Considerations," we strongly urge you to consult your own tax advisor concerning
the effects of federal, state and local income tax law on an investment and on
your individual tax situation.
IF WE FAIL TO QUALIFY AS A REIT OR TO MAINTAIN OUR REIT STATUS, OUR
DIVIDENDS WILL NOT BE DEDUCTIBLE TO US, AND OUR INCOME WILL BE SUBJECT TO
TAXATION. We intend to qualify as a REIT under the Internal Revenue Code which
will afford us significant tax advantages. The requirements for this
qualification, however, are complex. If we fail to meet these requirements, our
dividends will not be deductible to us and we will have to pay a corporate level
tax on our income. This would substantially reduce our cash available to pay
distributions and your yield on your investment. In addition, tax liability
might cause us to borrow funds, liquidate some of our investments or take other
steps which could negatively affect our operating results. Moreover, if our REIT
status is terminated because of our failure to meet a technical REIT test or if
we voluntarily revoke our election, we would be disqualified from electing
treatment as a REIT for the four taxable years following the year in which REIT
status is lost.
YOU MAY HAVE TAX LIABILITY ON DISTRIBUTIONS YOU ELECT TO REINVEST IN
COMMON STOCK. If you participate in our distribution reinvestment program,
you will be deemed to have received, and for income tax purposes will be
taxed on, the amount reinvested in common stock. As a result, unless you are
a tax-exempt entity, you may have to use funds from other sources to pay your
tax liability on the value of the common stock received.
THE OPINION OF KATTEN MUCHIN ZAVIS REGARDING OUR STATUS AS A REIT DOES NOT
GUARANTEE OUR ABILITY TO REMAIN A REIT. Our legal counsel, Katten Muchin Zavis,
will render its opinion upon commencement of this offering that we will qualify
as a REIT, based upon our representations as to the manner in which we are and
will be owned, invest in assets and operate, among other things. Our
qualification as a REIT depends upon our ability to meet, through investments,
actual operating results,
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distributions and satisfaction of specific stockholder rules, the various
tests imposed by the Internal Revenue Code. Katten Muchin Zavis will not
review these operating results or compliance with the qualification
standards. This means that we cannot assure you that we will satisfy the REIT
requirements in the future. Also, this opinion represents Katten Muchin
Zavis' legal judgment based on the law in effect as of the date of this
prospectus and is not binding on the Internal Revenue Service or the courts,
and could be subject to modification or withdrawal based on future
legislative, judicial or administrative changes to the federal income tax
laws, any of which could be applied retroactively.
IF THE OPERATING PARTNERSHIP FAILS TO MAINTAIN ITS STATUS AS A PARTNERSHIP,
ITS INCOME MAY BE SUBJECT TO TAXATION. We intend to maintain the status of the
operating partnership as a partnership for federal income tax purposes. However,
if the Internal Revenue Service were to successfully challenge the status of the
operating partnership as a partnership, it would be taxable as a corporation. In
such event, this would reduce the amount of distributions that the operating
partnership could make to us. This would also result in our losing REIT status,
and becoming subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and the yield on
your investment. In addition, if any of the partnerships or limited liability
companies through which the operating partnership owns its properties, in whole
or in part, loses its characterization as a partnership for federal income tax
purposes, it would be subject to taxation as a corporation, thereby reducing
distributions to the operating partnership. Such a recharacterization of an
underlying property owner could also threaten our ability to maintain REIT
status. See "Federal Income Tax Considerations--Tax Aspects of Investments in
Partnerships."
EVEN REITS ARE SUBJECT TO FEDERAL AND STATE INCOME TAXES. Even if we
qualify and maintain our status as a REIT, we may become subject to federal
income taxes and related state taxes. For example, if we have net income from a
"prohibited transaction," such income will be subject to a 100% tax. We may not
be able to make sufficient distributions to avoid excise taxes applicable to
REITs. We may also decide to retain income we earn from the sale or other
disposition of our property and pay income tax directly on such income. In that
event, our stockholders would be treated as if they earned that income and paid
the tax on it directly. However, stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed
payment of such tax liability. We may also be subject to state and local taxes
on our income or property, either directly or at the level of the operating
partnership or at the level of the other companies through which we indirectly
own our assets.
We cannot assure you that we will be able to continue to satisfy the REIT
requirements, or that it will be in our best interests to continue to do so.
IN VIEW OF THE COMPLEXITY OF THE TAX ASPECTS OF THE OFFERING,
PARTICULARLY IN LIGHT OF THE FACT THAT SOME 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 AN INVESTMENT IN SHARES OF OUR COMMON STOCK.
EMPLOYEE BENEFIT PLAN RISKS
AN INVESTMENT IN OUR COMMON STOCK MAY NOT BE SUITABLE FOR EVERY EMPLOYEE
BENEFIT PLAN. When considering an investment in our common stock, an individual
with investment discretion over assets of any pension plan, profit-sharing plan,
retirement plan, IRA or other employee benefit plan covered by ERISA should
consider whether the investment satisfies the requirements of Section 404 of
ERISA or other applicable laws. In particular, attention should be paid to the
diversification requirements of
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Section 404(a)(3) of ERISA in light of all the facts and circumstances,
including the portion of the plan's portfolio of which the investment will be
a part. All plan investors should also consider 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 our common stock, and whether
the investment is permissible under the plan's governing instrument. We have
not, and will not, evaluate whether an investment in our common stock is
suitable for any particular plan. Rather, we will accept entities as
stockholders if an entity otherwise meets the suitability standards. See
"ERISA Considerations."
THE ANNUAL STATEMENT OF VALUE THAT WE WILL BE SENDING TO STOCKHOLDERS
SUBJECT TO ERISA AND TO OTHER PLAN STOCKHOLDERS IS ONLY AN ESTIMATE AND MAY NOT
REFLECT THE ACTUAL VALUE OF OUR SHARES. The annual statement of value will
report the value of each common share as of the close of our fiscal year. The
value will be based upon an estimated amount we determine would be received if
our properties and other assets were sold as of the close of our fiscal year and
if such proceeds, together with our other funds, were distributed pursuant to a
liquidation. However, the net asset value of each share of common stock will be
deemed to be $10 during this offering. Because this is only an estimate, we may
subsequently revise any annual valuation that is provided. We cannot assure
that:
- a value included in the annual statement could actually be realized by
us or by our stockholders upon liquidation;
- stockholders could realize that value if they were to attempt to sell
their common stock; or
- an annual statement of value would comply with any reporting and
disclosure or annual valuation requirements under ERISA or other
applicable law. We will stop providing annual statements of value if
the common stock becomes listed for trading on a national stock
exchange or included for quotation on a national market system.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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HOW WE OPERATE
We have been operating and intend to continue operating as a REIT for
federal and state income tax purposes. Our sponsor is Inland Real Estate
Investment Corporation. Our sponsor was instrumental in our organization.
We contract with Inland Retail Real Estate Advisory Services, Inc. for
its services as our advisor. Our advisor has the responsibility for our
day-to-day operations and the management of our assets.
In addition to the services of our advisor, we contract with Inland
Southeast Property Management Corp. for its services as our property manager.
Our property manager provides the day-to-day property management services for
our properties.
Our sponsor, Inland Real Estate Investment Corporation, is owned by The
Inland Group, Inc. Our advisor, Inland Retail Real Estate Advisory Services,
Inc., is owned by our sponsor, and thus is indirectly controlled by The
Inland Group. In addition, our property manager, Inland Southeast Property
Management Corp. is owned principally by individuals who are affiliates of
The Inland Group. The Inland Group, together with its subsidiaries and
affiliates, is a fully-integrated real estate company providing the following
and other related services:
property management leasing
marketing acquisition
disposition development
redevelopment syndication
renovation construction
finance
We operate our business using what is commonly known as an UPREIT
structure. This means that we have formed a partnership, called the operating
partnership, to own all of our assets, either directly or indirectly. We are
the general partner of the operating partnership. We conduct substantially
all of our business and hold most of our property interests through the
operating partnership.
The following organizational chart depicts the services that affiliates
or our sponsor will render to us and our organizational structure.
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[GRAPHIC DISPLAYING ORGANIZATION OF THE INLAND GROUP, INC. ENTITIES]
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CONFLICTS OF INTEREST
We are subject to conflicts of interest arising out of our relationship
with our sponsor, our advisor and their affiliates. All of our agreements and
arrangements with our advisor and its affiliates, including those relating to
compensation, are not the result of arm's-length negotiations. Some of the
conflicts inherent in our transactions with our advisor and its affiliates,
and the limitations on our advisor adopted to address these conflicts, are
described below. Our advisor and its affiliates will try to balance our
interests with their own. However, to the extent that our advisor or its
affiliates take actions that are more favorable to other entities than to us,
these actions could have a negative impact on our financial performance and,
consequently, on distributions to you and the value of our stock.
THERE MAY BE CONFLICTING INVESTMENT OPPORTUNITIES AMONG AFFILIATES OF
OUR ADVISOR AND THE INLAND GROUP. Affiliates of our advisor and The Inland
Group have sponsored multiple previous investment programs. Our sponsor may
also sponsor other programs which may have investment objectives similar to
ours. Therefore, our sponsor, our advisor and their affiliates could face
conflicts of interest in determining which investment programs will acquire
real properties and other assets as they become available. We, however, will
have the first opportunity to acquire any assets that become available to the
advisor, the property manager and their affiliates.
Factors which may be considered in connection with evaluating the
suitability of the prospective property or other asset for investment by a
particular investment program include:
- the effect of the acquisition on the diversification of each
program's portfolio;
- the amount of funds available for investment;
- cash flow; and
- the estimated income tax effects of the purchase and its subsequent
disposition.
All actions taken by our advisor or its affiliates which present potential
conflicts with us are approved by a majority of our independent directors.
WE ACQUIRED SOME OF OUR PROPERTIES FROM OUR AFFILIATES AND MAY ACQUIRE
OTHER PROPERTIES FROM THEM. The prices we pay to affiliates of our sponsor
for these properties will be equal to the prices paid by them, plus the costs
incurred by them relating to the acquisition and financing of the properties.
These prices will not be the subject of arm's-length negotiations, which
could mean that the acquisitions may be on terms less favorable to us than
those negotiated in an arm's-length transaction. However, our charter
provides that the purchase price of any property acquired from an affiliate
may not exceed its fair market value as determined by a competent independent
appraiser. In addition, the price must be approved by a majority of our
directors who have no financial interest in the transaction. If the price to
us exceeds the cost paid by our affiliate, there must be substantial
justification for the excess cost.
WE MAY PURCHASE REAL PROPERTIES FROM PERSONS WITH WHOM AFFILIATES OF OUR
ADVISOR HAVE PRIOR BUSINESS RELATIONSHIPS. We may purchase properties from
third parties who have sold properties in the past, or who may sell
properties in the future, to our advisor or its affiliates. If we purchase
properties from these third parties, our advisor will experience a conflict
between our current interests and its
26
<PAGE>
interest in preserving any ongoing business relationship with these sellers.
Nevertheless, our advisor has a fiduciary obligation to us.
PROPERTY MANAGEMENT SERVICES ARE BEING PROVIDED BY A COMPANY OWNED
PRINCIPALLY BY AFFILIATES OF THE INLAND GROUP. Our property manager, which is
owned principally by individuals who are our affiliates, provides property
management services to us pursuant to management services agreements which we
can terminate only in the event of gross negligence or willful misconduct on
the part of the property manager. However, our property management services
agreements provide that we pay our property manager a monthly management fee
of no greater than 90% of the fee which would be payable to an unrelated
third party providing such services. In addition, the advisor and the
property manager believe that the property manager has sufficient personnel
and other required resources to discharge all responsibilities to us.
OUR ADVISOR AND ITS AFFILIATES RECEIVE COMMISSIONS, FEES AND OTHER
COMPENSATION BASED UPON OUR INVESTMENTS. We believe that the compensation we
pay to our advisor and its affiliates is no more than what we would pay for
similar services performed by independent firms. Some compensation is payable
whether or not there is cash available to make distributions to our
stockholders. To the extent this occurs, our advisor and its affiliates
benefit from us retaining ownership of our assets and leveraging our assets,
while our stockholders may be better served by sale or disposition or not
leveraging the assets. In addition, the advisor's ability to receive fees and
reimbursements depends on our continued investment in properties and in other
assets which generate fees. Therefore, the interest of the advisor and its
affiliates in receiving fees may conflict with the interest of our
stockholders in earning income on their investment in our common stock. Our
advisor and its affiliates recognize that they have a fiduciary duty to us
and our stockholders, and have represented to us that their actions and
decisions will be made in the manner most favorable to us and our
stockholders.
While we will not make loans to our advisor or its affiliates, we may
borrow money from them for various purposes, including funding working
capital requirements. If we do, the terms, such as the interest rate,
security, fees and other charges, will be at least as favorable to us as
those which would be charged by unaffiliated lending institutions in the same
locality on comparable loans. Any money borrowed from an affiliate of The
Inland Group is expected to be repaid within 180 days.
Our advisor and its affiliates may do business with others who also do
business with us, although presently there are no instances of this. However,
our advisor or its affiliates may not receive rebates or participate in any
reciprocal business arrangements which would have the effect of circumventing
our agreement with our advisor.
OUR ADVISOR MAY HAVE CONFLICTING FIDUCIARY OBLIGATIONS IF WE ACQUIRE
PROPERTIES WITH ITS AFFILIATES. Our advisor may cause us to acquire an
interest in a property through a joint venture with its affiliates. In these
circumstances, our advisor will have a fiduciary duty to both us and its
affiliates 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,
our charter requires a majority of our disinterested directors to determine
that the transaction is fair and reasonable to us and is on terms and
conditions no less favorable than from unaffiliated third parties entering
into the venture.
THERE IS COMPETITION FOR THE TIME AND SERVICES OF OUR ADVISOR. We rely
on our advisor and its affiliates for our daily operation and the management
of our assets. Personnel of our advisor and its affiliates have conflicts in
allocating their management time, services and functions among the real
27
<PAGE>
estate investment programs they currently service and any future real estate
investment programs or other business ventures which they may organize or
serve. Our advisor and its affiliates believe they have enough staff to
perform their responsibilities in connection with all of the real estate
programs and other business ventures in which they are involved.
INLAND SECURITIES CORPORATION IS PARTICIPATING AS MANAGING DEALER IN THE
SALE OF THE SHARES. Inland Securities Corporation is the managing dealer of
the offering and is affiliated with The Inland Group. The managing dealer is
entitled to selling commissions, reimbursement for marketing and due
diligence expenses, and the receipt of warrants. The managing dealer may be
subject to a conflict of interest arising out of its participation in this
offering and its affiliation with The Inland Group in performing its "due
diligence" obligations which arise under the Securities Act of 1933. However,
the managing dealer believes it has and will continue to properly perform
these "due diligence" activities.
WE MAY ACQUIRE THE BUSINESS OF OUR ADVISOR AND OUR PROPERTY MANAGER
WITHOUT FURTHER ACTION BY OUR STOCKHOLDERS. During the term of our agreements
with our advisor and our property manager, we have the option to acquire or
consolidate the business conducted by them without any consent of our
stockholders, our advisor or our property manager. We may elect to exercise
this right at any time after February 11, 2002. Our decision to exercise this
right will be determined by a vote of a majority of our disinterested
directors. Our advisor and our property manager and their stockholders will
receive shares of our common stock in the acquisition. The transaction will
occur, if at all, only if the board of directors obtains a fairness opinion
from a recognized financial valuation service provider to the effect that the
consideration to be paid is fair, from a financial point of view, to our
stockholders. We will be obligated to pay any fees accrued under any
contractual arrangements we have with the advisor and/or the property manager
for services rendered through the closing of such acquisitions.
WE DO NOT HAVE ARM'S-LENGTH AGREEMENTS. As we have noted, our
agreements and arrangements with our advisor or any of its affiliates,
including those relating to compensation, are not the result of arm's-length
negotiations. However, we believe these agreements and arrangements
approximate the terms of arm's-length transactions.
WE HAVE THE SAME LEGAL COUNSEL AS OUR ADVISOR. Katten Muchin Zavis
serves as our general legal counsel, as well as counsel to our advisor. The
interests of our advisor may become adverse to ours in the future. Under the
legal ethics rules, Katten Muchin Zavis may be precluded from representing us
due to any conflict of interest between us and our advisor. If any situation
arises in which our interests appear to be in conflict with those of our
advisor or its affiliates, additional counsel may be retained to assure
adequate protection of our interests.
28
<PAGE>
COMPENSATION TABLE
The compensation arrangements between us and our advisor, The Inland
Group and its affiliates were not determined by arm's-length negotiations.
See "Conflicts of Interest." The following table discloses the compensation
which we may pay our advisor and its affiliates. In those instances in which
there are maximum amounts or ceilings on the compensation which may be
received, our advisor and its affiliates may not recover any excess amounts
for those services by reclassifying them under a different compensation or
fee category.
We define net income as total revenues less expenses other than
additions to reserves for depreciation or bad debts or other similar non-cash
reserves. When we use the term "net income" for purposes of calculating some
expenses and fees, it excludes the gain from the sale of our assets. This
definition of net income is prescribed by the Statement of Policy Regarding
REITs adopted by the North American Securities Administrators Association,
Inc., or NASAA; but it is not in accordance with generally accepted
accounting principles in the United States, because depreciation and other
non-cash reserves are not deducted in determining net income under the NASAA
REIT Statement.
NONSUBORDINATED PAYMENTS
The following aggregate amounts of compensation, allowances and fees we
may pay to our advisor and its affiliates are not subordinated to the returns
on net investments that we are required to pay to our stockholders.
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OFFERING STAGE
Selling commissions payable to the We will pay a selling commission of Through September 30, 2000, we have
managing dealer and dealers 7% of the sale price for each share, incurred $6,746,659 in selling
designated by the managing dealer subject to reduction for special sales commissions in connection with our
referred to as soliciting dealers. under the circumstances as described initial public offering, of which
in the "Plan of Distribution." $49,667 remains unpaid. The managing
dealer has reallowed all of these
For each 25 shares sold, we will selling commissions to the soliciting
offer to the managing dealer one dealers. The actual amount of selling
warrant for $.0008, though we will commissions in connection with this
not issue more than 2,000,000 of offering will depend upon the amount
them. Each warrant grants its of shares sold. We will not pay
holder a right to purchase one selling commissions if the minimum
share of common stock at $12.00 per offering is not sold. If only the
share during the period beginning minimum offering is sold and there
one year after the date on which are no special sales, a total of
that warrant is issued and ending $140,000 in selling commissions will
five years from the effective date be paid. A total of $35,000,000 in
of this offering. If only the selling commissions will be paid if
minimum offering is sold, we will the maximum offering is sold and
not issue more than 8,000 warrants. there are no special sales.
The managing dealer may give the
warrants to soliciting dealers for
each share they sell, subject to
applicable federal and state
securities laws.
29
<PAGE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marketing contribution and due We will pay an amount equal to 2% Through September 30, 2000, we have
diligence expense allowance paid of the gross offering proceeds to incurred $2,042,040 in marketing
to the managing dealer and the managing dealer, all or a portion contributions and due diligence
soliciting dealers. of which may be passed on to expense allowance in connection with
soliciting dealers, in lieu of our initial public offering, of
reimbursement of specific expenses which $10,642 remained unpaid and
associated with marketing. We may pay $301,667 has been reallowed by the
an additional 0.5% of the gross managing dealer to the soliciting
offering proceeds to the managing dealers. The actual amount of
dealer, which may be passed on to the marketing contribution and due
soliciting dealers, for due diligence diligence expense allowance in
expenses. We will not pay the connection with this offering will
marketing contribution and due depend on the number of shares sold.
diligence expense allowance in If there are no special sales,
connection with any special sales, approximately the following amounts
except those receiving volume will be paid for the marketing
discounts and those described in contribution and the due diligence
"Plan of Distribution." expense allowance:
- $50,000 if we sell the minimum
number of shares; or
- $12,500,000 if we sell the maximum
number of shares.
Reimbursable expenses payable to We will reimburse our sponsor for Through September 30, 2000, we have
our advisor, our sponsor and its actual costs incurred in connection incurred $813,839 of reimbursable
affiliates for offering expenses. with the offering on our behalf. expenses to our advisor, of which
However, if the aggregate of all $756,658 remained unpaid. In
offering expenses, including selling addition, as of September 30, 2000
commissions, the marketing our sponsor had advanced approximately
contribution and due diligence $2,000,000 for the payment of offering
expense allowance, exceeds 15% of expenses in connection with our
the gross offering proceeds, or if initial public offering to
the aggregate of all offering non-affiliated third parties, all of
expenses, excluding the selling which remained unpaid.
expenses, exceeds 5.5% of the gross
offering proceeds, our advisor or Our sponsor has not advanced any
its affiliates will promptly pay the reimbursable expenses in connection
excess and we will have no liability with this offering. We may reimburse
for these expenses at any time for offering expenses advanced:
afterward.
30
<PAGE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- $110,000 if we sell the minimum
offering; or
- $27,500,000 if we sell the maximum
offering.
If the offering is not successful,
then our sponsor will be solely
responsible for the organization and
offering expenses to the extent it
has not been reimbursed.
ACQUISITION STAGE
Acquisition expenses paid to our We will pay an amount, estimated to We may pay the following amounts for
advisor and its affiliates. be up to 0.5% of the total of (1) the reimbursement of acquisition
the gross offering proceeds from the expenses:
sale of 50,000,000 shares, (2) the
gross proceeds from the sale of up - no more than $10,000 if the
to 4,000,000 shares pursuant to the minimum number of shares are sold;
distribution reinvestment programs, or
and (3) the gross proceeds from the
issuance and exercise of the - no more than $2,810,000 if the
2,000,000 warrants of the managing maximum number of shares are sold,
dealer. The acquisition expenses for all of the 4,000,000 shares are
any particular property will not sold pursuant to the distribution
exceed 6% of the gross purchase reinvestment program, and all of
price of the property. the 2,000,000 soliciting dealer
warrants are issued and exercised.
However, if we request additional
services, the compensation will be However, the actual amounts cannot be
provided on separate agreed-upon determined at the present time.
terms and the rate will be approved
by a majority of disinterested
directors, including a majority of
the disinterested independent
directors, as fair and reasonable
for us.
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONAL STAGE
Property management fee paid to our We will pay a monthly fee of 4.5% of The actual amounts are dependent
property manager, Inland Southeast the gross income from the properties. upon results of operations and,
Property Management Corp. We will We will also pay a monthly fee for therefore, cannot be determined at
pay the fee for services in any extra services equal to no more the present time. For the nine months
connection with the rental, leasing, than 90% of that which would be ended September 30, 2000, we have
operation and management of the payable to an unrelated party incurred and paid property management
properties. providing the services. The property fees of $670,916, of which $655,720
manager may subcontract its duties were retained by our
for a fee that may be less than the
fee provided for in the management
31
<PAGE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
services agreements. property manager. If we acquire the
businesses of our advisor and/or our
property manager, the property
management fees will cease.
Compensation for other property- An affiliate of the advisor will The actual amounts are dependent
level services. provide loan servicing to us for a upon the amount of loans serviced
monthly fee. The fee for each full and, therefore, cannot be determined
year will be equal to no more than at the present time.
.05% of the total principal amount
of the loans it is servicing for us
during that year up to the first
$100 million in total principal loan
balances. After that, the fee will
be a lesser percentage on a sliding
scale basis. In addition, we may pay
our affiliates for providing other
property-level services to us as
described in "Management."
Reimbursable expenses to our advisor We will reimburse some expenses of The actual amounts of reimbursable
and its affiliates. These may the advisor. The compensation and expenses in connection with this
include costs of goods and services, reimbursements to our advisor and its offering are dependent upon results
administrative services and non- affiliates will be approved by a of operations and, therefore,
supervisory services performed majority of our directors and a cannot be determined at the present
directly for us by independent majority of our independent directors time.
parties. as fair and reasonable for us.
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIQUIDATION STAGE
Property disposition fee payable to We may pay a property disposition fee The actual amounts to be received
our advisor and its affiliates. to our advisor and its affiliates if depend upon the sale price of our
we sell any of our real property in properties and, therefore, cannot be
an amount equal to the lesser of: determined at the present time. If
we acquire the advisor, the property
(1) 3% of the contract sales price disposition fee will cease.
of the property; or
(2) 50% of the customary commission
which would be paid to a third
party broker for the sale of a
comparable property.
The amount paid, when added to the
sums paid to unaffiliated parties,
will not exceed either the customary
commission or an amount equal to 6%
of the contracted for sales price.
Payment of such fees will be made
32
<PAGE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
only if the advisor provides a
substantial service in connection
with the sale of the property. See
"Management -- The Advisory Agreement."
</TABLE>
SUBORDINATED PAYMENTS
We may pay the following additional fees to our advisor after returns on net
investment have been paid to the stockholders:
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONAL STAGE
Advisor asset management fee payable We will pay an advisor asset Through September 30, 2000, we have
to our advisor. management fee of not more than 1% of accrued $90,000 in advisor asset
our average invested assets. Average management fees, all of which remain
invested assets means the average of unpaid. If we acquire the advisor,
the total book value of our assets the property disposition fee will
invested in equity interest and loans cease. The amount of the fee depends
secured by real estate, before on value of the average invested
reserves for depreciation or bad assets at the time the fee is
debts or other similar non-cash payable and, therefore, cannot be
reserves. We will compute the average determined now.
invested assets by taking the average
of these values at the end of each
month during the quarter for which we
are calculating the fee. The fee will
be payable quarterly in an amount
equal to 1/4 of 1% of average
invested assets as of the last day of
the immediately preceding quarter.
For any year in which we qualify as a
REIT, our advisor must reimburse us
for the following amounts if any:
(1) the amounts by which our total
operating expenses, the sum of
the advisor asset management fee
plus other operating expenses,
paid during the previous fiscal
year exceed the greater of:
- 2% of our average invested assets
for that fiscal year, or
- 25% of our net income for that
fiscal year; PLUS
33
<PAGE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(2) an amount, which will not exceed
the advisor asset management fee
for that year, equal to any
difference between the total
amount of distributions to
stockholders for that year and
the 7% annual return on the net
investment of stockholders.
Items such as organization and
offering expenses, interest payments,
taxes, non-cash expenditures, the
incentive advisory fee and
acquisition expenses are excluded
from the definition of total
operating expenses.
See "Management -- The Advisory
Agreement" for an explanation of
circumstances where the excess amount
specified in clause (1) may not need
to be reimbursed.
LIQUIDATION STAGE
Incentive advisory fee payable to We will pay to the advisor an amount The actual amounts to be received
our advisor. equal to 15% of the net proceeds depend upon the sale price of our
from the sale of a property after properties and, therefore, cannot
the stockholders have first received: be determined at the present time.
If we acquire or consolidate with
the business conducted by our
(1) a cumulative non-compounded advisor, the incentive advisory
return equal to 7% a year on fee will terminate.
their net investment; and
(2) their net investment.
</TABLE>
COMPENSATION TO OFFICERS AND DIRECTORS
We expect to pay the following to our officers and directors:
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Salaries Only one officer receives We will pay an annual salary of
compensation for services as an $35,000.
officer, and reimbursement for his
out-of-pocket expenses incurred on
our behalf.
Director fees Independent directors receive an We will pay the three independent
annual fee of $1,000, a fee of $250 directors $3,000 in the aggregate,
for attending each meeting of the plus fees for attending meetings.
board or one of its committees, and The actual
34
<PAGE>
<CAPTION>
ESTIMATED MAXIMUM DOLLAR
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION AMOUNT
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
reimbursement of their out-of-pocket amounts to be received for meetings
expenses incurred. Our officers who depends upon the number of meetings
are also our directors do not and their attendance and, therefore,
receive director fees. cannot be determined at the present
time.
Stock options to independent Each independent director receives This form of compensation is not paid
directors in cash.
- an initial option to purchase
3,000 shares of common stock at
a price of $9.05 per share,
when they become an independent
director, subject to some
conditions; and
- each year on the date of the
stockholders' annual meeting,
an additional option to purchase
500 shares of common stock at an
exercise price equal to the then
fair market value per share. For
additional information on this
option plan, see "Management--
Independent Director Stock
Option Plan."
</TABLE>
35
<PAGE>
ESTIMATED USE OF PROCEEDS
The amounts listed in the table below represent our current estimates
concerning the use of the offering proceeds. Since these are estimates, they may
not accurately reflect the actual receipt or application of the offering
proceeds. This first scenario assumes we sell the minimum number of 200,000
shares of common stock in this offering. The second scenario assumes:
- we sell the maximum of 50,000,000 shares in this offering
at $10 per share; and
- we sell the maximum of 4,000,000 shares in our distribution
reinvestment program at $9.50 per share.
Under both scenarios we have not given effect to the following:
- any special sales or volume discounts which could reduce
selling commissions; or
- the sale and exercise of any warrants issued to the managing
dealer, which would increase our proceeds by a maximum of
$24,001,600 if we sold all 2,000,000 warrants and they were
exercised at a price of $12 per share.
<TABLE>
<CAPTION>
MAXIMUM OFFERING
(INCLUDING SHARES SOLD
MINIMUM OFFERING UNDER THE DISTRIBUTION
200,000 SHARES REINVESTMENT PROGRAM)
--------------------- ----------------------
Amount Percent Amount Percent
---------- ----- ------------ ------
<S> <C> <C> <C> <C>
Gross offering proceeds.................. $2,000,000 100.0% $538,000,000 100.00%
---------- ----- ------------ ------
Less expenses:
Selling commission.................. 140,000 7.0% 35,000,000 6.51%
Marketing contribution and due
diligence expense allowance....... 50,000 2.5% 12,500,000 2.32%
Organization and offering
expenses.......................... 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......... 10,000 0.5% 2,690,000 0.50%
Less: working capital reserve...... 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>
We estimate that total public offering expenses will aggregate
approximately 11.43% of the gross offering proceeds if the maximum offering is
sold. However, these expenses may total up to 15% of the gross offering
proceeds.
36
<PAGE>
PRIOR PERFORMANCE OF OUR AFFILIATES
PRIOR INVESTMENT PROGRAMS
During the 10-year period ending September 30, 2000, The Inland Group
and its affiliates have sponsored one other REIT, three other public real estate
equity programs, one private real estate equity program and nine private
placement mortgage and note programs, which altogether have raised more than
$689,000,000 from over 28,000 investors. During that period, the public real
estate equity programs raised $85,712,701 from 8,019 investors; the private real
estate equity program raised $2,275,000 from 80 investors; and the private
placement mortgage and note programs raised $22,231,000 from 500 investors. In
addition, Inland Real Estate Corporation has raised $578,834,000 from over
20,000 investors. Inland Real Estate Investment Corporation has investment
objectives and policies similar to ours and has invested principally in shopping
centers that provide sales of convenience goods and personal services to
neighboring communities in the Oakbrook, Illinois area. However, Inland Real
Estate Corporation is now a self-administered REIT and is no longer affiliated
with The Inland Group. Our investment objectives and policies are similar to
those of several of the other prior investment programs sponsored by our
affiliates which have owned and operated retail properties. However, the vast
majority of the other investment programs sponsored by our affiliates were
dissimilar from our operation in that the prior 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 our affiliates. The purpose is to
provide information on the prior performance of these programs so that you may
evaluate the experience of the affiliated companies in sponsoring similar
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 summarized information concerning prior
programs sponsored by our affiliates for the 10-year period ending September 30,
2000, and is qualified in its entirety by reference to the introductory
discussion above and the detailed information appearing in the Prior Performance
Tables in Appendix A of this prospectus. You should not construe inclusion of
the succeeding tables as implying in any manner that we will have results
comparable to those reflected in the tables because the yield and cash available
and other factors could be substantially different for our properties. You
should note that by acquiring our shares, you will not be acquiring any
interests in any prior programs.
37
<PAGE>
<TABLE>
<CAPTION>
PRIOR PRIVATE
REAL ESTATE
EQUITY AND
PRIOR PUBLIC REAL MORTGAGE
PRIOR REIT ESTATE EQUITY AND NOTE
PROGRAM AS OF PROGRAMS AS OF PROGRAMS AS OF
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000(3) 2000 2000
------------- ----------------- --------------
<S> <C> <C> <C>
Number of programs sponsored...................... 1 3 9
Aggregate amount raised from investors............ $649,184,000 $85,712,701 $24,506,000
Approximate aggregate number of investors......... 20,000 8,019 580
Number of properties purchased.................... 119 45 7
Aggregate cost of properties(1)................... $974,247,000 $67,260,290 $ 1,951,930
Number of mortgages/notes......................... 0 7 463
Principal amount of mortgages/notes............... 0 $ 2,302,064 $22,231,000
Principal of properties (based on cost) that were:
Commercial --
Retail....................................... 85.60% 3.25% 0.00%
Single-user retail net-lease................. 14.40% 12.64% 0.00%
Nursing homes................................ 0.00% 11.18% 0.00%
Offices...................................... 0.00% 0.00% 0.00%
Industrial................................... 0.00% 0.00% 0.00%
Health clubs................................. 0.00% 4.48% 0.00%
Mini-storage................................. 0.00% 0.00% 0.00%
Total commercial.......................... 100.00% 31.55% 0.00%
Multi-family residential..................... 0.00% 0.00% 0.00%
Land 31.7%(2)................................ 0.00% 100.00% 100.00%
Percentage of properties (based on cost) that were:
Newly constructed (within a year of acquisition).. 17.80% 0.00% 0.00%
Existing..................................... 82.20% 100.00% 0.00%
Construction................................. 0.00% 0.00% 0.00%
Number of properties sold......................... 0 15 5
32.90%
Number of properties exchanged.................... 0 0 0
Number of mortgages/notes repaid.................. 0 7 383
</TABLE>
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(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, 2000, not including portions of land
parcels.
(3) On July 1, 2000, the prior REIT program, Inland Real Estate
Corporation, became a separate, self-managed entity.
Of the programs included in the above table, the REIT has investment
objectives similar to ours. This program represents approximately 84% of the
aggregate amount raised from investors, approximately 70% of the aggregate
number of investors, approximately 70% of the properties purchased, and
approximately 93% of the aggregate cost of the properties.
During the three years prior to December 31, 1999, Inland Real Estate
Corporation purchased 93 commercial properties. Upon written request, you may
obtain, without charge, a copy of Table VI
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filed with the Securities and Exchange Commission in Part II of our registration
statement. The table provides more information about these acquisitions.
PUBLICLY REGISTERED REIT
INLAND REAL ESTATE CORPORATION. On October 14, 1994, Inland Real Estate
Corporation commenced an initial public offering of 5,000,000 shares of common
stock at $10 per share. As of July 24, 1996, it had received subscriptions for a
total of 5,000,000 shares, thereby completing the initial offering. On July 24,
1996, it commenced an offering of an additional 10,000,000 shares of common
stock at $10 per share. As of July 10, 1997, it had received subscriptions for a
total of 10,000,000 shares, thereby completing its second offering. On July 14,
1997, Inland Real Estate Corporation commenced a third offering of an additional
20,000,000 shares of common stock at $10 per share. As of March 19, 1998, Inland
Real Estate Corporation had received subscriptions for a total of 20,000,000
shares, thereby completing the third offering. On April 7, 1998, Inland Real
Estate Corporation commenced a fourth offering of an additional 25,000,000
shares at $11 per share. As of December 31, 1998, Inland Real Estate Corporation
had received subscriptions for a total of 16,642,397 shares from the fourth
offering, thereby completing the fourth offering. In addition, as of September
30, 2000, Inland Real Estate Corporation had distributed 5,967,506 shares of
common stock through its distribution reinvestment program. As of September 30,
2000, it had repurchased 1,432,670 shares of common stock through its share
repurchase program for an aggregate amount of $12,968,414. As a result, Inland
Real Estate Corporation's gross offering proceeds totaled approximately
$649,184,226 for all of such offerings, as of September 30, 2000. Inland Real
Estate Corporation's objective is to purchase shopping centers that provide
convenience goods, personal services, wearing apparel and hardware and
appliances located within an approximate 400-mile radius of its headquarters in
Oak Brook, Illinois, and to provide, at a minimum, cash distributions on a
quarterly basis and a hedge against inflation through capital appreciation. It
may also acquire single-user retail properties throughout the United States. As
of September 30, 2000, the properties owned by Inland Real Estate Corporation
were generating sufficient cash flow to cover operating expenses plus pay a
monthly cash distribution of $0.89 per share.
As of September 30, 2000, Inland Real Estate Corporation has placed
financing totaling approximately $456,393,000 on 111 of its 119 properties.
Its 119 properties, a total investment of $974,247,000 at September 30, 2000,
were purchased with proceeds received from the above described offerings of
shares of its common stock and financings. Through September 30, 2000, cash
distributions have totaled $143,659,102, all of which were from operating cash
flow.
On July 1, 2000, Inland Real Estate Corporation became a
self-administered REIT by completing its acquisition of Inland Real Estate
Advisory Service, Inc., its advisor, and Inland Commercial Property Management,
Inc., its property manager. The acquisition was accomplished by a merger in
which two wholly owned subsidiaries of Inland Real Estate Corporation were
merged with and into its advisor and its property manager, respectively. Its
advisor and its property manager were the surviving entities. As a result of the
merger, Inland Real Estate Corporation issued to our sponsor, the sole
shareholder of the advisor, and The Inland Property Management Group, Inc., the
sole shareholder of its property manager, an aggregate of 6,181,818 shares of
Inland Real Estate Corporation's common stock at $11 per share, or approximately
9.008% of its common stock.
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PUBLICLY REGISTERED LIMITED PARTNERSHIPS
INLAND LAND APPRECIATION FUND II, L.P. -- The offering period for this
fund 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
the land upon resale.
The fund 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, 2000, this fund has had multiple sales
transactions involving all or portions of eleven parcels which generated
$27,203,000 in net sales proceeds, including notes receivable of $2,978,000. Its
cost basis in the land parcels sold was $18,046,000 resulting in a gain, net of
selling expenses and commissions, of $9,157,000 for financial reporting
purposes.
In the opinion of our sponsor, 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, 2000 totaled $13,793,106, including
$13,072,106 from sales and $721,000 from operations.
INLAND CAPITAL FUND, L.P. -- The offering period for this fund 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.
Inland Capital Fund 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, 2000, this fund has had multiple sales
transactions involving the house and portions of eight parcels which generated
$11,642,000 in net sales proceeds, including notes receivable of $1,083,366. Its
cost basis in the land parcels sold was $6,958,000 resulting in a gain, net of
selling expenses and commissions, of $4,684,000 for financial reporting
purposes.
In the opinion of Inland Real Estate Investment Corporation, 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, 2000
totaled $10,831,124, all from the sale of land parcels.
INLAND MORTGAGE INVESTORS FUND III, L.P. -- The offering period for this
fund 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.
This fund raised $2,837,249 from 281 investors and originally funded
seven mortgages totaling $2,302,064 between October 1990 and June 1992. Cash
distributions to limited partners through December 31, 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 $2,420,751 as a return of capital from the
repayment of mortgage loans receivable and prepayment penalties. This
partnership was completed in December 2000.
40
<PAGE>
PRIVATE PARTNERSHIPS
Since inception and through September 30, 2000, including the
programs described below under " -- Private Placement Real Estate Equity
Program," and " -- Private Placement Mortgage and Note Programs" in this
section, our affiliates 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, 306 partnerships have sold their
original property investments. Officers and employees of our sponsor and its
affiliates invested more than $17,000,000 in these private placement limited
partnerships.
From 1990 and through September 30, 2000, investors in The Inland Group
private partnerships have received total distributions in excess of
$228,590,000, 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 The Inland Group, investors in 301 private partnerships voted in
1990 to make our sponsor 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 our sponsor is the
general partner received letters from it informing them of the possible
opportunity to sell the 66 apartment properties owned by those partnerships to a
to-be-formed REIT in which affiliates of our sponsor would receive stock and
cash and the limited partners would receive cash. The underwriters of this
apartment REIT subsequently advised our sponsor 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. Those
not selling their apartment properties constituted approximately 30% of the
Inland-sponsored limited partnerships owning apartment buildings. The
prospective third-party buyers of our sponsor's interests in the remaining
partnerships, however, would make no assurance to support those partnerships
financially. As a result, in a March 1994 letter, our sponsor informed investors
of its 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 our sponsor 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 our sponsor as general partner of the
partnerships that would have participated in the sale of properties. In August
1994, the court granted our sponsor's motion to dismiss, finding that the
plaintiffs lacked standing to bring the case individually. The 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 our
sponsor is the general partner. The derivative counts sought damages from our
sponsor for alleged breach of fiduciary duty and breach of contract, and assert
a right to an accounting. Our sponsor 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
41
<PAGE>
were heard by the Appellate Court in February 1997. In September 1997, the
Appellate Court affirmed the trial court decision in favor of our sponsor.
PRIVATE PLACEMENT REAL ESTATE EQUITY PROGRAM
WISCONSIN CAPITAL LAND FUND, L.P., an Illinois limited partnership, 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 the
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. This fund bought seven parcels of land in the
Madison, Wisconsin with the proceeds of the offering.
Parcel 5, which consists of 63 improved lots in the Village of Mount
Horeb, Wisconsin, has had 59 lot sales since 1995 for total gross sales proceeds
of $2,137,250. Four 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. Investors received a $375,000
distribution from this sale.
On March 19, 1998, the fund sold parcels 3 and 7 for a total of
$2,150,000, of which $1,900,000 was returned in cash to investors. On January 5,
1999, parcels 1 and 4 were sold for $1,325,000 and investors received a
$1,137,500 cash distribution. On April 4, 2000, $227,500 was distributed to
investors from lot sale proceeds from parcel 5. To date, investors have received
$1,600 for every $1,000 invested.
As of September 30, 2000, the partnership's remaining assets consists of
parcel 2 and the 4 remaining lots in parcel 5.
Intervest Midwest Real Estate Corporation currently provides property
zoning, development and disposition services to this partnership. Barry L.
Lazarus, our president, chief operating officer and affiliated director, is
president of Intervest. See "Management -- Our Directors and Executive
Officers."
PRIVATE PLACEMENT MORTGAGE AND NOTE PROGRAMS
During 1992 and in 1993, Inland Real Estate Investment Corporation or
its affiliates sponsored nine private placement securities offerings, including
seven mortgage and note programs. These 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
our sponsor and return investors' capital within five years. In addition, the
partnership aimed 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 our sponsor. 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, of which $1,226,419 was from operations,
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<PAGE>
$67,797 was subsidy income from Inland Real Estate Investment Corporation,
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
completed 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 our sponsor. This fund invested in loans made
to an affiliate of our sponsor, 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 completed in 1996.
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 our sponsor. 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 invested 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 October 30, 1998 totaled $1,512,765, of which
$512,765 was interest earnings and $1,000,000 was a return of capital. This
partnership was completed in 1998.
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. This fund only offered
notes to Illinois residents who were employees of our sponsor and its
affiliates. The partnership issued notes with a term of four years and providing
10% annual interest. Our sponsor guaranteed the return of capital to noteholders
and the specified annual return. This fund invested in a loan made to an
affiliate of our sponsor 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 our sponsor, pursuant to the guarantee for that program.
The balance of $400,000 was a return of capital. This partnership was completed
in 1996.
9% MONTHLY CASH FUND, L.P., an Illinois limited partnership offering
investments in promissory notes to accredited investors, was sponsored by our
sponsor 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. The partnership issued notes maturing August 1, 1999 and providing a 9%
annual return. This fund invested in loans made to an affiliate of our sponsor
secured by collateral assignments of third party mortgage loans owned by the
affiliate. Our sponsor guarantees the return of capital to noteholders and the
9% annual return. Cash distributions through September 30,
43
<PAGE>
1999 totaled $6,291,146, of which $2,291,146 was interest earnings and
$4,000,000 was a return of capital. This partnership was completed in August
1999.
9% MONTHLY CASH FUND II, L.P., was 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. Our
sponsor sponsored it 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. The partnership issued notes maturing February 1, 2000 that provided a
9% annual return. The partnership invested in a loan made to an affiliate of our
sponsor secured by collateral assignments of third-party mortgage loans owned by
the affiliate. Our sponsor guarantees the return of capital to noteholders and
the 9% annual return. Cash distributions through March 31, 2000 totaled
$6,417,653, of which $2,417,653 was interest earnings and $4,000,000 was a
return of capital. This partnership was completed in February 2000.
IMC NOTE ISSUE #2 1993, offering investments in promissory notes was
sponsored by Inland Mortgage Corporation, an Illinois corporation and an
affiliate of our sponsor, in July 1993. The offering period for this program
began August 25, 1993 and closed on June 13, 1994 after raising $6,800,000.
Inland Mortgage Corporation issued notes maturing December 31, 2003, providing
for interest at the rate of 8% per annum with 100% return of principal
guaranteed by our sponsor. 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 our sponsor. Investors may also receive additional
interest, dependent on the future sale of the property. Inland Mortgage
Corporation made an initial distribution to investors of escrow interest,
totaling $13,685 in November 1993. Cash distributions through September 30, 2000
totaled $3,654,050, of which $3,634,594 was interest earnings and $19,456 was
subsidy income from our sponsor pursuant to the guarantee for that program.
INLAND CONDOMINIUM FINANCING FUND, L.P., an Illinois limited partnership
offering investment in promissory notes, was sponsored by our sponsor 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 our sponsor. The proceeds of the
offering were used to make unsecured loans to limited partnerships which are
affiliates of our sponsor, 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 completed in 1997.
LOAN MODIFICATIONS AND WORK-OUTS
Between 1990 and December 31, 1997, 37 Inland-sponsored partnerships
owning 24 properties ceased making debt service payments to unaffiliated lenders
which held the underlying financing on the properties. The objective was to
reduce or restructure the debt to levels commensurate with the levels of
performance of the operating properties. 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, transferred their
original asset to a new partnership which was 100% owned by the old partnership.
Our sponsor believed that the new partnerships were better positioned to
accomplish a
44
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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. The lender withdrew the complaint as part of a final
settlement reached in February 1993.
Each of these new partnerships, and 1036 N. Dearborn Limited
Partnership, filed for financial reorganization in federal court. These filings
were extensions 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 filings 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, its
affiliates and 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 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.
The lender for the new partnership owned by the 14 W. Elm Limited
Partnership 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 the amount of debt on
the 14 W. Elm property. The goal of this transaction was to avoid 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. Therefore, there is no possibility of cash
flow distributions to the limited partners. However, the partnership expects
equity accumulation through the amortization of the loan and, therefore, a
distribution to the limited partners upon the disposition of the exchange
property. Our sponsor 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.
The lender for the new partnership owned by the Oak Brook Commons
Limited Partnership acquired the property through foreclosure. 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.
The lender of the new partnership owned by the 6030 Sheridan Limited
Partnership agreed to permit a tax-deferred exchange of the partnership's
property, similar to that completed by the 14 W.
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Elm Limited Partnership. 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, and the property was conveyed to the 6030 Sheridan
Limited Partnership.
Of the original partnerships discussed above, Mr. Daniel L. Goodwin, a
director and chairman and president of The Inland Group, and a director of our
sponsor, served as individual general partner of all but the Oak Brook Commons
Limited Partnership. Mr. G. Joseph Cosenza, a director and a vice chairman of
The Inland Group, served as individual general partner for Oak Brook Commons
Limited Partnership. Prior to the filing for reorganization, and as part of the
reorganization strategy, Mr. Cosenza left his position as individual general
partner of the Oak Brook Commons Limited Partnership. Mr. Goodwin did the same
for all the others except the 1036 N. Dearborn Limited Partnership, for which he
continues to serve as individual general partner. Counsel recommended these
actions to reduce delay in the reorganization efforts. The corporate general
partner of each partnership has continued the business of each of the
partnerships which the individual general partners left.
Four of the 37 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. These 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. In 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 to transfer to each of the 21
partnerships ownership interests in five net-lease commercial properties that
had long-term leases with creditworthy tenants. The debt service on the
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. Therefore, there is no possibility of cash flow
distributions to the limited partners in the 21 partnerships. 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. Our sponsor 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.
Tax-deferred exchanges of the partnerships' properties were accomplished
as described above for the 900 DeWitt and the Hoffman Ridge Limited
Partnerships, two of the 37 limited partnerships mentioned in the first
paragraph of this section. 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.
The Park Colony Limited Partnership, one of the 37 limited partnerships
mentioned in the first paragraph of this section, 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. Our sponsor believes that this
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debt reduction is a 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 at a substantial discount the bonds
and the interests of two savings and loan associations which had acted as
bond credit-enhancers. 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 they could not reach an agreement. The lender and the general partner
completed a tax-deferred exchange 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 first mortgage lender acquired the Covington
Associates and Westbrooke Limited Partnerships' tax-deferred exchange property,
Townsgate II. The two partnerships acquired net-lease commercial properties via
second tax-deferred exchanges. In the case of the Bensenville Industrial Limited
Partnership, after the acquisition of a replacement net-lease commercial
property, the first mortgage lender whose loan was secured by the property
acquired the Bensenville property.
In addition, the corporate general partner of the Walton Place Limited
Partnership and the Barrington Lakes Limited Partnership settled litigation with
the lenders for those properties which resulted in the transfer of the
properties and an agreement by the partnerships to make cash settlements 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 stopped making
payments on the first mortgage loan for that partnership's property. Our sponsor
attempted to negotiate with the lender to modify the terms of the loan to a
level appropriate to the operating performance of the Timberlake property, but
they could not reach an agreement. In August 1996, Inland Real Estate Investment
Corporation initiated a tax-deferred exchange whereby first the partnership
acquired an interest in a net-lease commercial property and then the lender,
whose loan is secured by a first mortgage against the commercial property,
acquired the Timberlake property.
In October 1996, two limited partnerships owning contiguous apartment
buildings in south suburban Chicago stopped making payments on their respective
Housing and Urban Development-insured first mortgage loans. The Chateaux
Versailles and Marseilles Limited Partnerships, through their general partner,
were trying to negotiate with Housing and Urban Development, as mortgagee, to
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<PAGE>
modify the terms of the loans to levels appropriate to the operating performance
of the properties. As of June 30, 1999, an agreement had been reached and the
partnerships have started making mortgage payments again.
EFFECTS OF PROPERTY EXCHANGES ON INVESTORS
The Inland Group and its affiliates have 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 as well as the investors in those partnerships. Otherwise,
the loss of deficit-producing properties to foreclosure would have resulted in
the loss of investors' capital, in addition to 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, by means
of 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.
The Inland Group and its affiliates continue to defer tax liability, one of the
primary investment objectives of these tax-shelter partnerships. However, the
investors in these partnerships are not receiving any cash flow. In addition,
the tax-deferred exchanges have lengthened the expected term of these
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
Except for re-acquisitions of previously owned properties upon default
by the purchaser, the transfer of a defaulted loan, the tax-deferred property
exchange 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 our shares.
Upon written request, you may obtain, without charge, the most recent
annual report on Form 10-K filed with the Securities and Exchange Commission by
any public program sponsored by any affiliate of The Inland Group which has
reported to the Securities and Exchange Commission within the last 24 months.
Copies of any exhibits to such annual reports will be provided, upon request,
for a reasonable fee.
SUMMARY TABLES
The following summary tables describe information concerning the prior
programs discussed above through December 31, 1999.
Affiliates of The Inland Group formed Inland Land Appreciation Fund II,
L.P., Inland Capital Fund, L.P. and Wisconsin Capital Land Fund, L.P. as pure
capital appreciation investments. No current return from rents or interest was
contemplated or available because capital was invested in non-income producing
vacant land parcels. Limited partners receive distributions 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
48
<PAGE>
price, or allocated capital. The method of measuring return on investment to
date is on a sold parcel-by-parcel basis, as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
FULLY LOADED RETURN ON ALLOCATED
NET SALE PURCHASE PRICE GROSS RETURN CAPITAL (GROSS RETURN
PRICES OF (ALLOCATED CAPITAL NET PROFITS ON % (NET PROFIT/ %/AVERAGE NUMBER OF
PARCELS SOLD OF PARCELS SOLD TO PARCELS SOLD TO ALLOCATED YEARS OF CAPITAL
FUND TO DATE LESS DATE) = DATE CAPITAL) INVESTED)
---------------- ------------ ---- ------------------ --------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Inland Land
Appreciation
Fund II, L.P...... $ 20,803,616 $ 14,528,644 $ 6,274,972 43 % 4.32 %
Inland Capital
Fund, L.P......... 11,636,067 6,954,889 4,681,178 67 % 8.4% %
Wisconsin Capital
Land Fund, L.P.... 4,041,597 1,917,263 2,124,344 111 % 15.80 %
</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>
Inland Mortgage Investors Fund III, L.P............ $2,837,249 $3,601,917 $2,420,751 $1,181,166 6.25 %
Triple Security Fund, L.P.......................... 3,000,000 4,294,216 3,000,000 1,294,216 10.00 %
Inland Employee Appreciation Fund,
L.P.*.............................................. 400,000 502,198 400,000 102,198 10.00 %
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 1,512,708 1,000,000 512,708 9.00 %
9% Monthly Cash Fund, L.P.......................... 4,000,000 6,291,146 4,000,000 2,291,146 9.00 %
9% Monthly Cash Fund II, L.P....................... 4,000,000 6,417,653 4,000,000 2,417,653 9.00 %
IMC Note Issue #2 1993............................. 6,800,000 3,380,562 0 3,380,562 8.00 %
----------------------------------------
* Returns of Capital prior to Final Distribution.
</TABLE>
49
<PAGE>
MANAGEMENT
INLAND AFFILIATED COMPANIES
The Inland Group companies make up 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 Inland
Group was started by a group of Chicago school teachers in 1967, and
incorporated the following year. The founders of The Inland Group all remain
actively involved in overseeing these companies. The businesses of The Inland
Group and its affiliates are still centered in the Chicago metropolitan area.
Over the past 30 years, The Inland Group and its affiliates have experienced
significant growth. Inland in the aggregate was ranked by CRAIN'S CHICAGO
BUSINESS as the 43rd largest privately held business group headquartered in
the Chicago area in April 2000. Among the affiliates of The Inland Group 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 Group and its affiliates have over 600 employees. The senior
management includes executives of The Inland Group and its affiliates. Our
management personnel have substantial experience in a full range of real
estate services. Our top seven senior executives have an average of over 25
years experience in the real estate industry.
The advisor and the dealer manager are affiliates of The Inland Group.
The relevant skills and experience of each of The Inland Group affiliated
companies, developed over the course of over 30 years in business, primarily
in the Chicago metropolitan area, is available to us in the conduct of our
business.
As of September 30, 2000, our sponsor, Inland Real Estate Investment
Corporation, is the general partner of limited partnerships which 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 Group affiliated companies developed expertise in real estate
financing as they bought and sold properties over the years. Since its
incorporation in 1977, Inland Mortgage Corporation has originated more than
$1.5 billion in financing, including loans to third parties and affiliated
entities.
Inland Mortgage Investment Corporation and Inland Mortgage Servicing
Corporation were incorporated in 1990, delineating the functions and duties
associated with financing. As of September 30, 2000, Inland Mortgage
Investment Corporation owned a $65,963,100 loan portfolio, and Inland
Mortgage Servicing Corporation serviced a loan portfolio of 433 loans
exceeding $1,800,932,386.
As of September 30, 2000, The Inland Property Management Group, Inc. and
its affiliates manage approximately 14,000 multi-family units, principally
located in the Chicago metropolitan area. Inland Property Management Group
believes this is more than any other firm in that market. In December 1999,
they were ranked by CRAIN'S CHICAGO BUSINESS as the 10th largest commercial
property management firm in the six-county Chicago area based on its 9.5
million square feet of commercial properties managed at the end of 1999. The
management agent was incorporated in
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1998 to segregate responsibility for management of our properties from Inland
Property Management Group's growing management portfolio of commercial
properties. The management agent will be responsible for collecting rent,
leasing and maintaining the commercial properties it manages. These
properties are primarily intended to be our properties in our primary
geographical area of investment. The management agent is owned primarily by
individuals who are affiliates of The Inland Group.
Currently, Southeast Property Management Company manages 2.3 million
square feet of retail property, of which approximately 2.1 million square
feet are our properties and 200,000 square feet are properties belonging to
affiliates.
Inland Property Management Group and its affiliates are responsible for
collecting rent and leasing and maintaining the commercial properties which
they manage. As of September 30, 2000, a substantial portion of the portfolio
of Inland Property Management Group and its affiliates, approximately 6.8
million square feet, consists of properties leased on a triple-net lease
basis to creditworthy tenants. This means that 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., another company affiliated with
The Inland Group, has extensive experience in acquiring real estate for
investment. Over the years, it and its affiliates have acquired approximately
785 properties.
See also "Prior Performance of our Affiliates" and Appendix A -- "Prior
Performance Tables" for information concerning over $680 million raised from
over 28,000 investors in connection with one other REIT, three public real
estate equity programs, one private real estate equity program and eight
private placement mortgage and note programs sponsored by The Inland Group
affiliated companies during the 10-year period ending September 30, 2000, and
the prior performance of those programs.
The following sets forth information with respect to the directors and
principal executive officers of The Inland Group:
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH THE INLAND GROUP
------ ------ -------------------------------------------
<S> <C> <C>
Daniel L. Goodwin..... 57 Chairman, president and director
Robert H. Baum........ 57 Vice chairman, executive vice
president-general counsel and director
G. Joseph Cosenza..... 57 Vice chairman and director
Robert D. Parks....... 57 Director
Norbert J. Treonis.... 49 Director
</TABLE>
---------------------------
*As of January 1, 2001
Messrs. Goodwin, Baum, Cosenza and Parks were the founders of Inland.
DANIEL L. GOODWIN is a director, chairman of the board and president of
Inland. He has been with The Inland Group and its affiliates since 1968 and
is one of our 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
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National Bank of DuPage. Currently, he is the chairman of the board of Inland
Mortgage Investment Corporation, one of The Inland Group's 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 and was recently appointed to serve
once again by Governor George Ryan. 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 Counsel. He was
appointed chairman of the Housing Production Committee for the Illinois State
Affordable Housing Conference by former Governor Jim Edgar. 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 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 the affordable housing 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
the disabled 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 vice-chairman of the board of trustees of Benedictine
University. He was elected chairman of the Northeastern Illinois University
Board of Trustees in January 1996.
ACKNOWLEDGMENTS. 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
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<PAGE>
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. The
Ray Graham Associates for People with Disabilities honored Mr. Goodwin as the
1999 Employer of the Year. Also in 1999, the YWCA DuPage District bestowed
the Corporate Recognition Award for Inland's policies and practices that
demonstrated a commitment to the advancement of women in the workplace.
ROBERT H. BAUM has been with The Inland Group and its affiliates since
1968 and is one of the four original principals. Mr. Baum is vice chairman
and executive vice president-general counsel of The Inland Group. In his
capacity as general counsel, Mr. Baum is responsible for the supervision of
the legal activities of The Inland Group affiliated companies. This
responsibility includes the supervision of The Inland Group 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 is also an Illinois licensed real estate broker. He has served
as a director of American National Bank of DuPage and currently services 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 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 and oversees, coordinates and
directs The Inland Group organization's many enterprises. In addition, Mr.
Cosenza 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 LaGrange 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,
Hillside and Lombard, Illinois.
ROBERT D. PARKS has been with The Inland Group and its affiliates since
1968 and is one of the four original principals. He has been our chairman,
chief executive officer, and an affiliated director since our formation in
1998. He is a director of The Inland Group as well as chairman and president
of our sponsor. Mr. Parks was president, chief executive officer, chief
operating officer and a director of Inland Real Estate Corporation from
October 1994 to July 2000. He is still a director of Inland Real Estate
Corporation. He is a director of Inland Real Estate Advisory Services, Inc.,
Inland Investment Advisors, Inc., Partnership Ownership Corp., Inland
Southern
53
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Acquisitions, Inc. and Inland Southeast Investment Corp. He is a director of
our advisor and a director of Inland Securities Corporation.
Mr. Parks is responsible for the ongoing administration of existing
investment programs, corporate budgeting and administration for our sponsor.
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, the Financial Planning Association, the
Foundation for Financial Planning, as well as a member of the National
Association of Real Estate Investment Trusts, Inc.
NORBERT J. TREONIS joined The Inland Group and its affiliates in 1975.
He is currently a director of The Inland Group 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.
On July 1, 2000, Mr. Treonis became president, chief executive officer
and a member of the board of directors of Inland Real Estate Corporation, a
self-administered real estate investment trust which owns and operates 119
retail properties - $1 billion in assets - in the Chicago and Minneapolis
metropolitan areas and other Midwest markets.
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 Associations of Illinois, the National Apartment
Association and the Chicagoland Apartment Association.
OUR GENERAL MANAGEMENT
We operate under the direction of our board of directors. Our board is
responsible for the overall management and control of our affairs.
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<PAGE>
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors
and executive officers. The biography of Mr. Parks, who has been our
chairman, chief executive officer and an affiliated director since our
formation, is set forth above under "--Inland Affiliated Companies" in this
section:
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH US
------ ------ -------------------------------------------
<S> <C> <C>
Robert D. Parks...... 57 Chairman, chief executive officer and affiliated
director
Barry L. Lazarus..... 54 President, chief operating officer, affiliated
director, treasurer and chief financial officer
Roberta S. Matlin.... 56 Vice president -- administration
Steven D. Sanders.... 51 Vice president -- acquisitions
Scott W. Wilton...... 40 Secretary
Daniel K. Deighan.... 60 Independent director
Michael S. Rosenthal. 43 Independent director
Kenneth E. Masick.... 55 Independent director
</TABLE>
---------------------------
*as of January 1, 2001
BARRY L. LAZARUS has been our president, chief operating officer and an
affiliated director since our formation. He has been our treasurer and chief
financial officer since June, 1999. After a brief career in public
accounting, Mr. Lazarus joined The Inland Group 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 The Inland Group. 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 20th largest home builder in the United
States. 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, then an affiliate of The Inland
Group. 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 the 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 also has its office in
Atlanta, Georgia, is a holding company that acquired Intervest from The
Inland Group in 1994. Intervest, pursuant to a service agreement, currently
provides property zoning, development and disposition services to Wisconsin
Capital Land Fund, L.P., a private placement real estate equity program
sponsored by our sponsor. Intervest anticipates that it will have earned a
total of $250,000 of compensation for services rendered and to be rendered to
Wisconsin Capital Land Fund, since its inception. See "Prior Performance of
Our Affiliates -- Private Placement Real Estate Equity Program." Mr. Lazarus
continues to serve as president of Intervest.
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<PAGE>
Mr. Lazarus is president of Inland Shelter Group, LLC, Atlanta, Georgia,
which has been 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.
ROBERTA S. MATLIN has been our vice president of administration since
our formation in 1998. Ms. Matlin joined Inland in 1984 as director of
investor administration and currently serves as senior vice president of
investments of our sponsor, directing its day-to-day internal operations. She
was also vice president of administration of Inland Real Estate Corporation
from March 1995 to July 2000. Ms. Matlin is a director of our sponsor and of
our managing dealer. She is president and director of Inland Investment
Advisors, Inc. and Intervest Southern Real Estate Corporation. She is a
director of Partnership Ownership Corporation and Inland Apartment
Acquisitions, 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 National
Association of Securities Dealers, Inc. as a general securities principal and
investment advisor.
STEVEN D. SANDERS has been our vice president of acquisitions since our
formation. Mr. Sanders has been an officer of Inland Real Estate Acquisition,
Inc., one of our affiliates, since 1993 and its senior vice president since
1997. He was president of our property manager between May of 1998 and March
of 2000. He 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 Inland Real Estate Corporation.
SCOTT W. WILTON has been our secretary since August 2000. Mr. Wilton
joined The Inland Group in January 1995. He is assistant vice president of
The Inland Real Estate Group, Inc. and assistant counsel with The Inland Real
Estate Group law department. Mr. Wilton is involved in all aspects of our
business, including real estate acquisitions and financing, securities law
and corporate governance matters, leasing and tenant matters, and litigation
management. He received B.S. degrees in economics and history from the
University of Illinois at Champaign in 1982 and his law degree from Loyola
University of Chicago, Illinois in 1985. Prior to joining The Inland Group,
Mr.
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<PAGE>
Wilton worked for the Chicago law firm of Williams, Rutstein, Goldfarb,
Sibrava and Midura, Ltd., specializing in real estate and corporate
transactions and litigation.
DANIEL K. DEIGHAN has been one of our independent directors since
September, 1998. He is an appraiser, who holds the MAI designation from the
American Institute of Real Estate Appraisers (the predecessor to the
Appraisal Institute), and has over 25 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 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.
Since February 1996, he has been vice-president of Southern Property
Consultants, Inc., a firm which specializes in real estate tax appeals.
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 past
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 has been one of our independent directors since
October, 1998. He 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 one of our independent directors since
December, 1998. He 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.
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<PAGE>
COMMITTEES OF OUR BOARD OF DIRECTORS
AUDIT COMMITTEE. Our bylaws provide for our board to designate an audit
committee consisting of at least two independent directors. Our board has
designated the three current independent directors as the members of the
audit committee. This committee met three times during 1999. 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 our internal
accounting controls.
EXECUTIVE COMMITTEE. Our 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 our charter or bylaws or under applicable law.
EXECUTIVE COMPENSATION COMMITTEE. Our board may establish an executive
compensation committee consisting of three directors, including two
independent directors, to establish compensation policies and programs for
our executive officers. The executive compensation committee will exercise
all powers of our board in connection with establishing and implementing
compensation matters, including incentive compensation and benefit plans.
DEVELOPMENT COMMITTEE. In connection with our desire to engage in the
development of properties, we have formed a development committee. This
committee consists of our principal executive officers and an independent
director, as well as officers of other companies which are affiliates of our
advisor. The development committee will examine and discuss the development
of various properties.
The Development Committee consists of the following:
<TABLE>
<S> <C>
Barry L. Lazarus Our president, chief operating officer, chief
financial officer and affiliated director
G. Joseph Cosenza Vice chairman and director of The Inland
Group, Inc.
Daniel K. Deighan One of our independent directors
Robert D. Parks Our chairman, chief executive officer and affiliated
director
Brenda Gujral President, chief operating officer and director of Inland
Securities Corporation and president, chief operating officer
and director of Inland Real Estate Investment Corporation
Steve Sanders Vice president of acquisitions
</TABLE>
58
<PAGE>
COMPENSATION OF DIRECTORS AND OFFICERS
We pay our independent directors an annual fee of $1,000 plus $250 for
each meeting of the board or a committee of the board attended in person or
by telephone, and reimbursement of their out-of-pocket expenses incurred. Our
three independent directors, Daniel K. Dieghan, Kenneth E. Masick and Michael
S. Rosenthal, were each paid fees of $3,000 in 1999 for their services as
independent directors. Our two other directors, Robert D. Parks and Barry L.
Lazarus, do not receive any fees or other remuneration for serving as
directors.
EXECUTIVE COMPENSATION
With the exception of Barry L. Lazarus, our executive officers will not
receive any compensation from us for their services as such officers. Other
than Mr. Lazarus, our executive officers are officers of one or more of our
affiliates and are compensated by those entities, in part, for their services
rendered to us.
Mr. Lazarus will receive an annual salary of $35,000 from us, and
reimbursement for his out-of-pocket expenses incurred on our behalf. His "at
will" employment is based on an oral agreement. Mr. Lazarus will devote most
of his time to our business; however, he will continue to devote some time to
Intervest Midwest Real Estate Corporation, of which he is President. Mr.
Lazarus was paid $26,250 in 1999 for his services as our President, Chief
Operating Officer, Treasurer and Chief Financial Officer.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
We have an independent director stock option plan under which
non-employee directors, as defined under Rule 16b-3 of the Securities
Exchange Act of 1934, are eligible to participate.
We have authorized and reserved a total of 75,000 shares of our common
stock for issuance under our independent director stock option plan. The
number and type of shares which could be issued under the plan may be
adjusted if we are the surviving entity after a reorganization or merger or
if our stock splits, is consolidated or we are recapitalized. If this occurs,
the exercise price of the options will be correspondingly adjusted.
The independent director stock option plan provides for the grant of
non-qualified stock options to purchase 3,000 shares to each independent
director upon his or her appointment if they meet the conditions in the plan.
The plan also provides 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. 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 our issued and outstanding shares.
We have granted options to purchase 3,500 shares at $9.05 per share to each
of our three independent directors. 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. The option price will be fixed
at $9.05 per share until the earlier of the termination of our initial public
offering or February 11, 2001.
One-third of the options granted following an individual initially
becoming an independent director are exercisable beginning on the date of
their grant, one-third will first become exercisable on the first anniversary
of the date of their grant, and the remaining one-third will first become
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<PAGE>
exercisable on the second anniversary of the date of their grant. All other
options granted under the independent director stock option plan will become
fully exercisable on the second anniversary of their date of grant.
Options granted under the independent director stock option plan are
exercisable until the first to occur of :
- the tenth anniversary of the date of grant;
- the removal for cause of the independent director as an independent
director; or
- three months following the date the independent director ceases to be
an independent director for any other reason except death or
disability.
The options may be exercised by payment of cash or through the delivery of
common stock. They 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. 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 our status as a REIT under
the Internal Revenue 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 our dissolution, liquidation, reorganization, merger or
consolidation as a result of which we are not the surviving corporation, or
upon sale of all or substantially all of our 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. Additionally, our board
may provide for any or all of the following alternatives:
- for the assumption by the successor corporation of the options
previously granted or the substitution by the corporation for
the 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;
- 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
- for the payment in cash or common stock in lieu of and in complete
satisfaction of the options.
OUR ADVISOR
Our advisor is an Illinois corporation and a wholly owned subsidiary of
our sponsor. The following table sets forth information regarding the executive
officers and directors of our advisor.
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The biography of Messrs. Parks, Cosenza and Treonis is set forth above under
"Inland Affiliated Companies" and the biography of Mr. Wilton is set forth
under "-- Our Directors and Executive Officers."
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH OUR ADVISOR
------ ------ -------------------------------------------
<S> <C> <C>
Robert D. Parks....... 57 Director and president
G. Joseph Cosenza..... 57 Director
Norbert J. Treonis.... 49 Director
Patricia A. Del Rosso. 47 Vice president -- asset management
Catherine L. Lynch.... 41 Treasurer
Scott W. Wilton....... 40 Secretary
</TABLE>
---------------------------
*as of January 1, 2001
PATRICIA A. DEL ROSSO joined The Inland Group in 1985. Ms. Del Rosso is
currently a senior vice president of our sponsor in charge of the asset
management department, where she is responsible for developing operating and
disposition strategies for properties owned by entities related to our
sponsor. She has also been assistant secretary of Inland Real Estate
Corporation since March 1995. Ms. Del Rosso 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. Del Rosso is a licensed real estate broker
and National Association of Securities Dealers, Inc. 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 our sponsor and our managing dealer. Ms. Lynch is responsible
for managing the corporate accounting department of our sponsor. Prior to
joining the Inland organization, Ms. Lynch worked in the field of public
accounting for KPMG LLP since 1980. She is also treasurer of Inland Real
Estate Investment Corporation, our sponsor, and director and treasurer of
Inland Securities Corporation. 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 National Association of
Securities Dealers, Inc. as a financial operations principal.
OUR ADVISORY AGREEMENT
DUTIES OF OUR ADVISOR. Under the terms of our advisory agreement, our
advisor generally has responsibility for our day-to-day operations. This
includes the following:
- administering our bookkeeping and accounting functions;
- serving as our consultant in connection with policy decisions to be
made by our board, managing our properties or causing them to be
managed by another party; and
- rendering other services as our board deems appropriate.
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Our advisor is subject to the supervision of its board and has only such
functions as are delegated to it by its board.
TERM OF THE ADVISORY AGREEMENT. The advisory agreement has an initial
term of one year and is renewable for successive one-year terms upon the
mutual consent of the parties. It may be terminated by either party, 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. If the
advisory agreement is terminated, the advisor must cooperate with us and take
all reasonable steps requested by our board to assist it in making an orderly
transition of the advisory function.
COMPENSATION TO ADVISOR. The advisory agreement provides for the advisor
to be paid:
- a property disposition fee; and
- after the stockholders have first received a 7% cumulative return and
a return of their net investment:
- an advisor asset management fee; and
- an incentive advisory fee from the net proceeds of a sale of a
property.
If the advisor or its affiliates perform services that are outside of
the scope of the advisory agreement, we will compensate them at rates and in
amounts agreed upon by the advisor and the independent directors.
The advisor bears the expenses it incurs in connection with performing
its duties under the advisory agreement. These include:
- employee expenses;
- travel and other expenses of its directors, officers and employees;
- rent;
- telephone;
- equipment expenses to the extent they relate to the office maintained
by both us and the advisor; and
- miscellaneous administrative expenses incurred in supervising,
monitoring and inspecting real property or our other investments or
relating to its performance under the advisory agreement. The advisor
is reimbursed for the cost to it and its affiliates of goods and
services used for and by us and obtained from unaffiliated parties.
It is also reimbursed for related administrative services. We bear our
own expenses for functions the advisor is not required to perform
under the advisory agreement. These generally include capital raising
and financing activities, corporate governance matters and other
activities not directly related to our properties.
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REIMBURSEMENT BY ADVISOR. For any year in which we qualify as a REIT,
our advisor must reimburse us for the amounts, if any:
(1) by which our total operating expenses paid during the previous
fiscal year exceed the greater of
- 2% of our average invested assets for that fiscal year or
- 25% of our net income for that fiscal year;
(2) PLUS an amount, so long as it does not exceed 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
fiscal year and the current return. Current return refers to a
cumulative, non-compounded return, equal to 7% per annum on net
investments.
The advisor is also obligated to pay organization and offering expenses in
excess of specified levels. See "Compensation Table" for a description of the
fees and reimbursements to which the advisor is entitled. Provided however,
only so much of the excess specified in clause (1) above will be required to
be reimbursed as the board, including a majority of the independent
directors, determines should justifiably be reimbursed in light of such
unanticipated, unusual or non-recurring factors which may have occurred
within 60 days after the end of the quarter for which the excess occurred. In
this event, the stockholders will be sent a written disclosure and
explanation of the factors the independent directors considered in arriving
at the conclusion that the higher total operating expenses were justified.
Inland Real Estate Corporation is not currently offering any of its
securities and had fully invested all of its anticipated funds available for
investment from its last offering of securities, which terminated as of
December 31, 1998. In addition, Inland Real Estate Corporation is now a
self-administered REIT as a consequence of its acquisition of its advisor and
property manager. Accordingly, material conflicting investment opportunities
between them and us are not currently expected.
BUSINESS COMBINATION BETWEEN US AND THE ADVISOR. Many REITs that are
listed on a national stock exchange or included for quotation on a national
market system are considered self-administered, because their employees
perform all significant management functions. In contrast, those that are not
self-administered, like us, typically engage a third-party, such as our
advisor, to perform management functions on its behalf. If for any reason the
independent directors determine that we 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 us. A similar
provision is included in the management agreement permitting acquisition of
the business conducted by the property manager, including all of its assets.
If the businesses conducted by the advisor and/or the property manager
are acquired by or consolidated into us, the advisor and/or the property manager
and/or their respective stockholders will receive a number of shares in exchange
for terminating the agreements and the release and waiver of all fees payable
under them. We will be obligated to pay any fees accrued under such contractual
arrangements for services rendered through the closing of the acquisitions.
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The number of shares we will issue to the advisor and/or the property
manager, as the case may be, will be determined as follows:
- We will first send an election notice to the advisor and/or the
property manager, as the case may be, of its election to
proceed with such a transaction.
- Next, the net income of the advisor and/or the property
manager, 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, will be
annualized. The advisor or the property manager will bear the
cost of the audit.
- The annualized net income will then be multiplied by 90% and
divided by our funds from operations per weighted average
share. Funds from operations per weighted average share will be
equal to our annualized funds from operations per weighted
average share for the quarter, all based upon our quarterly
report delivered to stockholders.
Funds from operations means generally net income in accordance with
generally accepted accounting principles, 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.
The resulting quotient will constitute the number of shares to be issued
by us to the advisor or the property manager, or their respective
shareholders, as the case may be. Delivery of the shares and the closing of
the transaction must occur within 90 days of delivery of the election notice.
Under some circumstances, this kind of transaction can be entered into
and consummated without seeking specific stockholder approval. See "Conflicts
of Interest." Any transaction like this will occur, if at all, only if our
board obtains a fairness opinion from a recognized financial advisor or
institution providing valuation services to the effect that the consideration
to be paid is fair to the stockholders from a financial point of view. If the
advisory agreement is terminated for any reason other than our acquisition of
the business conducted by the advisor, then all obligations of the advisor
and its affiliates to offer properties to us will also terminate.
LIABILITY AND INDEMNIFICATION OF ADVISOR. Under the advisory agreement,
we are also required to indemnify the advisor and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding with
respect to the advisor's acts or omissions. For details of circumstances
under which we are required to indemnify the advisor and to advance expenses
to the advisor, see "Limitation of Liability and Indemnification of
Directors, Offices and Our Advisor."
THE PROPERTY MANAGER AND THE MANAGEMENT AGREEMENT
Our property manager, Inland Southeast Property Management Corp.,
provides property management services to us under the terms of the management
agreement. Our property manager was incorporated in 1998 to segregate
responsibility for management of our properties for Inland Property
Management Group's growing management portfolio of commercial properties. The
property manager provides services in connection with the rental, leasing,
operation and management of our properties. Our property manager is a
Delaware corporation, owned principally
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by individuals who are affiliates of The Inland Group. We have agreed to pay
the property manager 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 will initially be 4.5% of gross income, as defined in the
management agreement from the properties managed for the month for which the
payment is made. In addition, we have agreed to compensate the property
manager if it provides us 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 between 60 and 90 days prior to the
expiration of the initial or renewal term. We may terminate with 30 days
prior written notice in the event of gross negligence or malfeasance by the
property manager. The property manager may subcontract the required property
management services for less than the management fee provided in the
management agreement. See "Compensation Table -- Nonsubordinated Payments --
Operational Stage."
The property manager conducts its activities from a satellite office at
1455 Semoran Blvd., #149, Casselberry, Florida 32707, with supervision and
monitoring being performed from its principal executive office at 2901
Butterfield Road in Oak Brook, Illinois.
See "-- The Advisory Agreement" above in this section and "Conflicts of
Interest" for a discussion of our option to acquire or consolidate with the
business conducted by the property manager.
The following sets forth information with respect to the executive
officers and directors of the property manager.
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH OUR PROPERTY MANAGER
------ ------ -------------------------------------------
<S> <C> <C>
Thomas P. McGuinness.... 44 President, director, chairman
James Neubauer.......... 59 Vice president
Christine A. Alexander.. 35 Assistant vice president
Robert M. Barg.......... 45 Secretary and treasurer
D. Scott Carr........... 33 Director
Alan F. Kremin.......... 53 Director
</TABLE>
---------------------------
*As of January 1, 2001
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 the Apartment Building
Owners and Managers Association and is a trustee of both the Service
Employees' Local No. 1 Health and Welfare Fund and its pension fund.
JAMES NEUBAUER joined Inland Property Management in 1978 as an on site
manager. In 1981, he was promoted to the position of director of purchasing.
Subsequently, in 1983, he became an on site property manager and, in 1984, he
became the president of InlandWestern Property Management. From 1985 to 1996,
Mr. Neubauer was president and senior vice president of Mid-
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America Management where he was responsible for all rental property
operations outside the Chicagoland metropolitan area, which included New
Hampshire, Arizona, Indiana, Wisconsin and Peoria, Moline and Danville,
Illinois. He left Inland in 1996 to pursue other opportunities and re-joined
Inland in 1999 as senior vice president of Inland Southeast Property
Management Corporation. He is a licensed real estate broker in Florida and
holds a B.A. from the University of Maryland, a M.A. from Ball State
University and a M.B.A. from Benedictine College.
CHRISTINE A. ALEXANDER joined Inland Property Management in July of
1984. Mrs. Alexander started as a leasing consultant and in 1994 was
promoted to regional property manager. In July 1995, Mrs. Alexander became
an assistant vice president of Mid-America Management Corporation. Mrs.
Alexander is currently continuing her 16-year tenure as assistant vice
president of Inland Southeast Property Management Corporation, located in
Florida.
ROBERT M. BARG has been the secretary and treasurer of our property
manager since its formation in 1998. Mr. Barg joined the Inland organization
in January 1986 and is currently treasurer of Inland Property Management
Group, Inc. and secretary and treasurer of Inland Commercial Property
Management, Inc., its subsidiary and one of our affiliates. He is also vice
president and treasurer of Mid-America Management Corp., a company that is
owned principally by individuals who are our affiliates. 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 National Association of Securities Dealers, Inc. as a securities
sales representative.
D. SCOTT CARR has been a director of our property manager since its
formation in 1998. Mr. Carr joined the Inland organization in 1987. He was
vice president and secretary of Inland Commercial Property Management, Inc.
from July 1994 until July 1995 when he was appointed its president. Mr. Carr
has responsibility for the portfolio of commercial properties it manages,
including management and leasing. Inland Commercial Property Management, Inc.
is the property manager for Inland Real Estate Corporation. He is a licensed
real estate broker. Mr. Carr is a certified shopping center manager, a
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, Inland Commercial Property Management, Inc.
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
as a director for various Inland subsidiaries, which he also serves as
treasurer. Prior to his current position, Mr. Kremin was treasurer of our
sponsor from 1986 to 1990, when he supervised the daily operations of its
accounting department. That department encompasses corporate accounting for
the general partner of the Inland Real Estate Investment Corporation-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.
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INLAND SECURITIES CORPORATION
Inland Securities Corporation, our managing dealer, was formed in 1984.
It 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, the managing dealer has provided the
marketing function for distribution of the investment products sponsored by
our sponsor. It does not render these services to anyone other than
affiliates of The Inland Group, and it does not focus its efforts on the
retail sale side of the securities business. It is a member firm of the
National Association of Securities Dealers, Inc.
The following table sets forth information with respect to the
directors, officers and principal employees of Inland Securities Corporation
involved in national sales and marketing activities of Inland Securities
Corporation. The biography of Mr. Parks is set forth above under "--Inland
Affiliated Companies" in this section and the biography of Ms. Matlin is set
forth above under "--Our Directors and Executive Officers" in this section.
The biography of Ms. Lynch is also set forth above under "--Our Advisor."
<TABLE>
<CAPTION>
NAME AGE* POSITION AND OFFICE WITH OUR MANAGING DEALER
------ ------ -------------------------------------------
<S> <C> <C>
Brenda G. Gujral..... 58 President, chief operating officer and director
Roberta S. Matlin.... 56 Vice president and director
Catherine L. Lynch... 41 Treasurer, secretary and director
Robert D. Parks...... 57 Director
Brian Conlon......... 42 Executive vice president
R. Martel Day........ 51 Executive vice president - national
sales and marketing
Fred C. Fisher....... 56 Senior vice president
John Cunningham...... 42 Vice president
Tomas Giardino....... 26 Vice president
Curtis Shoch......... 28 Vice president
Shawn Vaughan........ 29 Vice president
</TABLE>
---------------------------
*As of January 1, 2001
BRENDA G. GUJRAL is president, chief operating officer and a director of
Inland Real Estate Investment Corporation, the parent company of our advisor.
She is also president, chief operating officer and a director of Inland
Securities Corporation.
Mrs. Gujral has overall responsibility for the operations of Inland Real
Estate Investment Corporation, including the distribution of checks to over
50,000 investors, the review of periodic communications to those investors,
the filing of quarterly and annual reports for Inland Real Estate Investment
Corporation-sponsored publicly registered investment programs with the
Securities and Exchange Commission, compliance with other Securities and
Exchange Commission and National Association of Securities Dealers securities
regulations both for Inland Real Estate Investment Corporation and Inland
Securities Corporation, review of asset management activities and marketing
and communications with the independent broker-dealer firms selling current
and prior Inland Real Estate Investment Corporation-sponsored investment
programs. She works with internal and outside legal counsel in structuring
Inland Real Estate Investment Corporation's investment programs and in
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connection with the preparation of its offering documents and registering the
related securities with the Securities and Exchange Commission 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 National Association of Securities Dealers
and is a member of The National Association of Real Estate Investment Trusts.
BRIAN M. CONLON joined Inland Securities Corporation as executive vice
president in September 1999. Prior to joining Inland, Mr. Conlon was
executive vice president and chief operating officer of Wells Real Estate
Funds, where he was responsible for overseeing day to day operations of the
firm's real estate investment and capital raising initiatives. Mr. Conlon is
a General Securities Principal, is licensed as a real estate broker in
Georgia, and has earned the Certified Financial Planner and Certified
Commercial Investment Member designations. Mr. Conlon holds Series 7, 24 and
63 licenses with the National Association of Securities Dealers, Inc.
R. MARTEL DAY is senior vice president-national sales and marketing for
Inland Securities Corporation. He joined Inland Securities Corporation in
1984 as a regional representative in the southeast. Since then, he has served
as regional vice president, senior vice president, and national marketing
director. Mr. Day is currently responsible for expanding Inland Securities
Corporation'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 National
Association of Securities Dealers, and is an associate member of The National
Association of Real Estate Investment Trusts. He is a director of Inland
Investment Advisors, Inc., an Inland affiliated company.
FRED C. FISHER is a senior vice president of Inland Securities
Corporation, which he joined in 1984. Mr. Fisher began his career with
Inland Securities Corporation 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
Inland Securities Corporation, 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 National Association of Securities Dealers.
JOHN CUNNINGHAM is a vice president of Inland Securities Corporation. He
joined an affiliate of The Inland Group in January 1995 as a commercial real
estate broker. In March 1997, Mr. Cunningham was hired by Inland Securities
Corporation as a regional representative for the western region, and he was
promoted to a vice president in 1999. He graduated from Governors State
University with a B.S. degree in business administration, concentrating in
marketing. Before joining the Inland organization, Mr. Cunningham owned and
operated his own business and developed real estate. He holds Series 7 and
Series 63 licenses with the National Association of Securities Dealers.
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TOMAS GIARDINO joined Inland Securities Corporation as vice president in
September 2000. Prior to joining Inland, Mr. Giardino was the director of
mutual fund sales at SunAmerica Securities, where he was responsible for
increasing the market share of nine focus firms at the broker dealer. Mr.
Giardino entered the securities industry in January 1999. Prior to entering
the securities industry, Mr. Giardino was in the advertising field for four
years. Mr. Giardino received his B.A. in political science from Arizona
State University in May 1998. He holds a Series 7 license with the NASD.
CURTIS SHOCH joined Inland Securities Corporation as vice president in
January 2000. Prior to joining Inland, Mr. Shoch was assistant vice president
at Wells Real Estate Funds, where he was responsible for launching new real
estate investment alternatives in the southeastern United States. Mr. Shoch
began his career in 1994 with Keogler Investment Advisory Services. Mr. Shoch
graduated from Lynchburg College in Lynchburg, Virginia in 1994 with a major
in marketing and an emphasis in finance. He is a Registered Representative as
well as a Registered Investment Advisor. Mr. Shoch holds Series 7, 63 and 65
licenses with the National Association of Securities Dealers, Inc.
SHAWN VAUGHAN joined Inland Securities Corporation as vice president in
August 2000. Prior to joining Inland, Mr. Vaughan was assistant vice
president at Wells Real Estate Funds, where he was responsible for marketing
real estate investments in the mid-Atlantic region. Mr. Vaughan started his
career in financial services in 1994 on the retail side of the business with
a highly successful financial planning firm. During this time, he was
responsible for handling every aspect of the financial planning process. Mr.
Vaughan holds Series 7 and 63 licenses with the National Association of
Securities Dealers, Inc.
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LIMITATION OF LIABILITY AND INDEMNIFICATION OF
DIRECTORS, OFFICERS AND OUR ADVISOR
Our charter provides that our advisor and directors are deemed to be in a
fiduciary relationship to us and our stockholders and that our directors have a
fiduciary duty to the stockholders to supervise our relationship with the
advisor.
The liability of our directors, officers, employees, and agents and our
advisor and its affiliates is limited to the fullest extent permitted by
Maryland law. As a result, our directors, officers, employees and agents and
our advisor and its affiliates will not be liable for monetary damages unless:
- the person actually received an improper benefit or profit in money,
property or services; and
- the person is adjudged to be liable based on a finding 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.
Except as described below, our charter authorizes and directs us to
indemnify and to pay or reimburse reasonable expenses to any director, officer,
employee or agent we employ, and the advisor and its affiliates, to the fullest
extent permitted by Maryland law. As long as we qualify as a REIT we will not
indemnify any director, officer, employee, agent or the advisor or its
affiliates unless:
- the person seeking indemnification has determined, in good faith, that
the course of conduct which caused the loss or liability was in our
best interests;
- the person seeking indemnification was acting on our behalf or
performing services for us;
- the liability or loss was not the result of negligence or misconduct
on the part of the person seeking indemnification, except that if the
person seeking indemnification is or was an independent director, the
liability or loss will not have been the result of gross negligence or
willful misconduct; and
- the indemnification or agreement to be held harmless is recoverable
only out of our assets and not from the assets of the stockholders.
As long as we qualify as a REIT, we will not indemnify any director,
officer, employee, agent or the advisor or its affiliates for 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:
- there has been a successful adjudication on the merits of each count
involving alleged securities law violations;
- the claims have been dismissed with prejudice on the merits by a court
of competent jurisdiction; or
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- 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 Securities and Exchange Commission and the
published position of any state securities regulatory authority in
which our securities were offered and sold as to indemnification for
securities law violations.
We will advance amounts to a person entitled to indemnification 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 Maryland law and, as
long as we are subject to the NASAA REIT Statement, only if all of the
following conditions are satisfied:
- the legal action relates to acts or omissions relating to the
performance of duties or services for us or on our behalf by the
person seeking indemnification;
- 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
- the person seeking indemnification undertakes in writing to repay us
the advanced funds, together with interest at the applicable legal rate
of interest, if the person seeking indemnification is found not to be
entitled to indemnification.
We may purchase and maintain insurance or provide similar protection on
behalf of any director, officer, employee, agent or the advisor or its
affiliates against any liability asserted which was incurred in any such
capacity with us or arising out of such status; PROVIDED, HOWEVER, that we 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 our charter.
We may enter into any contract for indemnity and advancement of expenses with
any officer, employee or agent who is not a director as may be determined by
the board of directors and as permitted by law. As of the date of this
prospectus, we have not purchased any insurance on behalf of, nor entered into
any contract of indemnity with, any person.
We have entered into separate indemnification agreements with each of our
directors and some of our executive officers. The indemnification agreements
require that we indemnify our directors and officers to the fullest extent
permitted by law. We also may indemnify and advance expenses incurred by
directors and officers seeking to enforce their rights under the
indemnification agreements and cover directors and officers under our
directors' and officers' liability insurance, if any. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in our charter and 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 of directors or by
the stockholders to eliminate the rights it provides.
We have been advised that, in the opinion of the Securities and Exchange
Commission, any indemnification that applies to liabilities arising under the
Securities Act is contrary to public policy and, therefore, unenforceable.
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PRINCIPAL STOCKHOLDERS
The following table provides information as of October 18, 2000 regarding
the number and percentage of shares beneficially owned by each director, each
executive officer, all directors and executive officers as a group and any
person known to us to be the beneficial owner of more than 5% of our
outstanding shares. As of October 18, 2000, only Macomb County Retirement
System beneficially owned more than 5% of our outstanding shares. Our board has
exempted Macomb County Retirement System from the 9.8% ownership limitation. As
of October 18, 2000, we had 2,904 stockholders of record and 10,764,799 shares
of common stock outstanding. Beneficial ownership includes outstanding shares
and shares which are not outstanding that any person has the right to acquire
within 60 days after the date of this table. However any such shares which are
not outstanding are not deemed to be outstanding for the purpose of computing
the percentage of outstanding shares beneficially owned by any other person.
Except as indicated, the persons named in the table have sole voting and
investing power with respect to all shares beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
-------------------------- ---------------------- --------------------
<S> <C> <C>
Robert D. Parks 23,002.0597 (1) *
Barry L. Lazarus 11,049.7240 *
Daniel K. Deighan 1,000 (2) *
Kenneth E. Masick 3,340.7105 (2) *
Michael S. Rosenthal 1,000 (2) *
Roberta S. Matlin - -
Steven D. Sanders - -
Scott W. Wilton - -
All Directors and Executive Officers 39,392.4942 (1) *
as a group (8 persons)
Macomb County Retirement System 1,374,580.067 12.79%
10 North Main
12th Floor, County Building
Mt. Clemens, MI 48043
</TABLE>
-----------------------
*Less than 1%
(1) Includes 20,000 shares owned by our advisor. Our advisor is a
wholly-owned subsidiary of our sponsor, which is an affiliate of The
Inland Group. Mr. Parks is a control person of The Inland Group and
disclaims beneficial ownership of these shares owned by our advisor.
(2) Includes 1,000 shares issuable upon exercise of options granted to each
independent director under our independent director stock option plan, to
the extent that such options are currently exercisable or will become
exercisable within 60 days after the date of this table.
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OUR STRUCTURE AND FORMATION
We were formed in September 1998 as a Maryland corporation. The operating
partnership was formed in September 1998 as an Illinois limited partnership.
STRUCTURE
We operate our business using what is commonly known as an UPREIT
structure. This means that we have formed the operating partnership to own all
of our assets, either directly or indirectly. Our advisor contributed $200,000
to us for 20,000 shares of our common stock to form us. We have contributed the
$200,000 of proceeds we received from the advisor in exchange for 20,000
general partnership common units in the operating partnership. As a result, we
are the general partner of the operating partnership. We have also contributed
approximately $83,659,000 of proceeds from our initial public offering in
exchange for approximately 8,365,900 additional general partnership common
units. We will contribute the net proceeds of this offering to the operating
partnership. We are and will be the only holder of general partnership common
units in the operating partnership. The advisor holds 200 limited partnership
common units valued at $2,000 for its $2,000 capital contribution. As a result,
the advisor is a limited partner in the operating partnership. We conduct
substantially all of our business, and hold most of our interests in the
properties, directly or indirectly, through the operating partnership. A REIT
may conduct some of its business and hold some of its interests in properties
in "qualified REIT subsidiaries," which must be owned 100% by the REIT or
(beginning in 2001) through "taxable REIT subsidiaries" which may be wholly or
partially owned. Although we currently do not intend to have any qualified REIT
subsidiaries or taxable REIT subsidiaries, we may in the future decide to
conduct some business or hold some of our interests in properties in such
subsidiaries. As the general partner of the operating partnership, we will have
the exclusive power to manage and conduct the business of the operating
partnership, subject to 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 our affiliates to us, as well as our
organizational structure and the organizational structure of the operating
partnership. The following diagram depicts our ownership structure and the
organizational structure of the operating partnership. Because we do not
currently have any qualified REIT subsidiaries, none are shown on the following
ownership chart.
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OWNERSHIP CHART
INLAND RETAIL REAL ESTATE TRUST, INC.
We are principally owned by public investors. Ownership will be
represented by our shares of common stock.
INLAND RETAIL REAL ESTATE LIMITED PARTNERSHIP
We are the general partner of the operating partnership and
owner of the general partnership common units of the operating
partnership. Our advisor, Inland Retail Real Estate Advisory
Services, Inc., is a limited partner of the operating partnership
and owner of limited partnership common units.
LIMITED PARTNERSHIPS OR
LIMITED LIABILITY COMPANIES
THAT OWN OUR PROPERTIES
SOLID LINES INDICATE 100% OWNERSHIP, EXCEPT
FOR THE OPERATING PARTNERSHIP WHERE IT
INDICATES CONTROL.
If only the minimum offering of 200,000 shares is sold, the advisor's
20,000 shares will then represent 0.19% of the issued and outstanding shares.
If 54,000,000 of the shares offered by this prospectus are sold, the advisor's
20,000 shares will then represent only 0.03% of the issued and outstanding
shares.
Prior to this offering, our 8,385,900 general partnership common units
represent 99.99762%, and the advisor's 200 limited partnership common units
represent 0.00238%, 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, we will receive 170,000 general partnership common units
for contributing such proceeds to the operating partnership. Assuming no other
units are issued, our 8,555,900 general partnership common units will then
represent 99.99766%, and the advisor's 200 limited partnership common units
will then represent 0.00234% of the outstanding units. If 54,000,000 of the
shares offered by this prospectus are sold for gross offering proceeds of
$500,500,000 as set forth on the cover page of this prospectus, we will receive
50,050,000 general partnership common units for contributing such proceeds to
the operating partnership. Assuming no
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other units are issued, our 58,435,900 general partnership common units will
then represent 99.99966%, and the advisor's 200 limited partnership common
units will then represent only 0.00034%, of the outstanding units.
We have formed entities to acquire each of the properties currently owned
by us. We may form entities to acquire additional properties. They will be
owned or controlled directly or indirectly by the operating partnership. In the
case of the properties currently owned by us, the entities that own our
properties are all directly or indirectly owned by the operating partnership.
In other instances, there likely will be other investors in the entities that
own our properties, in addition to the operating partnership. These investors
would be the former owners of properties that we acquired from them in exchange
for interests in such entities.
BENEFITS OF THE UPREIT STRUCTURE
The benefits of our REIT status and UPREIT structure include the
following:
- ACCESS TO CAPITAL. We believe our structure will provide us with
access to capital for refinancing and growth. Sources of capital
include the common stock sold in this offering and possible future
issuances of debt or equity through public offerings or private
placements. Our anticipated financial strength should enable us to
obtain financing at advantageous rates and on acceptable terms;
- GROWTH. Our structure will allow stockholders through their ownership
of common stock and the limited partners through their ownership of
limited partnership units, an opportunity to participate in the growth
of the real estate market through an ongoing business enterprise. In
addition to the portfolio of initial real properties, we give
stockholders an interest in all future investments in additional
properties; and
- TAX DEFERRAL. The UPREIT structure will provide property owners who
transfer their real properties to us in exchange for limited
partnership units the opportunity to defer the tax consequences that
would arise from a sale of their real properties and other assets to
us or to a third party. This will allow us to acquire assets without
using as much of our cash and may allow us to acquire assets that the
owner would otherwise be unwilling to sell because of tax
considerations.
SELECTED FINANCIAL DATA
The following table sets forth selected financial information about us,
and should be read in conjunction with the "Management's Discussion and
Analysis of Our Financial Condition and Results of Operation" and the financial
statements and related notes included elsewhere in this prospectus.
The following net income and distributions per share are based upon the
weighted average number of shares outstanding. The weighted average
distribution of $.72 per share for the year ended December 31, 1999,
represented 99.97% of our funds from operations and 96.39% of funds available
for distribution for that period. For the year ended December 31, 1999,
$1,078,377 (or 77.2% of the $1,396,861 distributions declared for 1999)
represented a return of capital. The balance of the distributions constitute
ordinary income.
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<TABLE>
<CAPTION>
For the nine
For the year months ended
ended December September 30,
31, 1999 2000
<S> <C> <C>
Total assets..................................... $ 143,988,136 202,688,897
Mortgages payable................................ $ 93,099,852 106,361,082
Total income..................................... $ 6,030,093 15,733,118
Net income....................................... $ 167,996 1,373,126
Net income per common share, basic and diluted... $ .07 .18
Distributions declared........................... $ 1,396,861 4,325,494
Distributions per common share................... $ .72 .76
Funds from operations............................ $ 1,397,319 4,693,547
Funds available for distribution................. $ 1,449,161 4,679,881
Cash flows provided by operating activities...... $ 2,647,680 6,512,851
Cash flows used in investing activities.......... $ 34,426,975 61,280,498
Cash flows provided by financing activities...... $ 46,446,459 51,263,594
Weighted average number of common shares
outstanding, basic and diluted............... 2,522,628 7,595,911
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Our investment objectives are to:
- make regular distributions to the stockholders, which may be in
amounts which may exceed our 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 90% of our
taxable income;
- 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 us to increase distributions and
realize capital appreciation; and
- preserve stockholders' capital.
Some of our leases provide for scheduled rent escalations. It is our policy to
acquire properties primarily for income as distinguished from primarily for
possible capital gain.
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DISTRIBUTIONS
Federal income tax law requires that a REIT distribute annually at least
90% of its REIT taxable income. See "Federal Income Tax Considerations --
Taxation -- Annual Distribution Requirements." In order to qualify for REIT
status we may be required to make distributions in excess of cash available.
For a discussion of the tax treatment of distributions to you, see "Federal
Income Tax Considerations."
We have decided to begin paying distributions on a monthly basis.
Distributions were paid at the level of $.70 per share per annum through June
1999.
The distribution level was increased to:
- $.73 per share per annum, effective July 1, 1999, beginning with the
distribution paid on August 7, 1999;
- $.75 per share per annum, effective November 1, 1999, beginning with
the distribution paid on December 7, 1999;
- $.76 per share per annum, effective April 1, 2000, beginning with the
distribution paid on May 7, 2000;
- $.77 per share per annum, effective August 1, 2000, beginning with the
distribution paid on September 7, 2000;
- $.78 per share per annum, effective October 1, 2000, beginning with
the distribution paid on November 7, 2000; and
- $.80 per share per annum, effective December 1, 2000, beginning with
the distribution paid January 7, 2001.
Distributions will be at the discretion of the board of directors. Our
ability to pay distributions and the size of these distributions will depend
upon a variety of factors. We cannot assure that distributions will continue to
be made or that any particular level of distributions established in the
future, if any, will be maintained by us.
TYPES OF INVESTMENTS
We were formed to acquire and manage a portfolio of real estate which is
diversified by geographical location and by type of retail centers. Our
properties consist of real estate primarily improved for use as retail
establishments, principally multi-tenant shopping centers, or improved with
other commercial facilities which provide goods or services. Our real estate
will be located mainly in the states east of the Mississippi River in the
United States but has initially been focused in the southeastern states,
primarily Florida, Georgia, North Carolina and South Carolina. We will endeavor
to acquire multiple properties within the same markets 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.
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Operating expenses include real estate taxes, special assessments, utilities,
insurance, common area maintenance and building repairs related to the
property, as well as base rent payments.
We may also acquire single-user retail properties located anywhere
throughout the United States if they are leased on a triple-net-lease basis by
creditworthy tenants. Triple-net-leases are long-term leases with a typical
term of 15 to 25 years, but generally not less than 10 years. Triple-net-
leases also require the tenant to pay a base minimum annual rent with periodic
increases. A creditworthy tenant is a tenant with a minimum net worth of $10
million or ten times one year's rental payments required under the lease.
Alternatively, a creditworthy tenant is also a tenant for whom payments under
the lease are guaranteed by an affiliate of the tenant having a minimum net
worth of $10 million. We may enter into sale and leaseback transactions in
which we will purchase a property and lease the property to the seller of the
property.
To provide us with a competitive advantage over potential purchasers of
properties who must secure financing, we may acquire properties free and clear
of permanent mortgage debt. We will do this by paying the entire purchase price
of property in cash, shares, limited partnership units of the operating
partnership, interest in entities that own our properties or a combination of
any of these. We may incur debt of a property to acquire properties where our
board of directors determines that incurring such debt is in our best interest.
In addition, from time to time, we intend to acquire some properties without
financing and later incur mortgage debt secured by selected or all such
properties if favorable financing terms are available. We will use the proceeds
from such loans to acquire additional properties. See "Borrowing" under this
section for a more detailed explanation of our borrowing intentions and
limitations.
We may purchase properties subject to completion of construction in
accordance with terms and conditions we specify. In these cases, we will be
obligated to purchase the property at the completion of construction, if
construction conforms to definitive plans, specifications and costs approved by
us and embodied in the construction contract, as well as, in most instances,
satisfaction that agreed upon percentages of the property are leased. We will
receive a certificate of an architect, engineer or other appropriate party,
stating that the property complies with all plans and specifications. We may
construct or develop properties, and render services in connection with the
development or construction, subject to compliance with applicable requirements
under federal income tax laws. Construction and development activities will
expose us to 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.
In connection with our desire to engage in the development of properties,
we have employed a consultant on a part-time basis and have formed a
development committee to examine and discuss our development of various
properties. Although this development committee has examined a number of
possible sites for development, we have not made a decision to commence the
development of any of these sites.
See "Investment Limitations" under this section and "Summary of the
Organizational Documents -- Restrictions on Investments" for investment
limitations.
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PROPERTY ACQUISITION STANDARDS
We have signed a property acquisition service agreement with Inland
Real Estate Acquisitions, Inc. Under that agreement, Inland Real Estate
Acquisitions has agreed to seek properties for us and to perform due diligence
on the properties and negotiate the terms of the purchase. Through its
experience with the acquisition of over 785 real properties by our affiliates,
the advisor believes Inland Real Estate Acquisitions has the ability to identify
quality real properties capable of meeting our investment objectives. When
evaluating property, Inland Real Estate Acquisitions will consider a number of
factors, including a real property's:
- geographic location and type;
- construction quality and condition;
- current and projected cash flow;
- potential for capital appreciation;
- lease rent roll, including the potential for rent increases;
- potential for economic growth in the tax and regulatory
environment of the community in which the property is
located;
- potential for expanding the physical layout of the property
and/or the number of sites;
- occupancy and demand by tenants for properties of a similar
type in the same geographic vicinity;
- prospects for liquidity through sale, financing or
refinancing of the property;
- competition from existing properties and the potential for
the construction of new properties in the area; and
- treatment under applicable federal, state and local tax and
other laws and regulations.
Inland Real Estate Acquisitions also requires the seller of a property
to provide a current Phase I environmental report and, if necessary, a Phase II
environmental report.
Before purchasing a property, Inland Real Estate Acquisitions 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 a sale-leaseback situation,
since the seller of the property generally is assuming the operating risk, the
price paid for the property by us may be greater than if it was not leased back
to the seller. All acquisitions from our affiliates must be approved by a
majority of our directors, including a majority of the independent directors.
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DESCRIPTION OF LEASES
When spaces become vacant or existing leases expire, we anticipate
entering into "net" leases. Net leases 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, insurance, utilities, common area
maintenance and building repairs related to the properties, as well as base rent
payments. We intend to include provisions which increase the amount of base rent
payable at various 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 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 tenant. By contrast, smaller tenant leases typically have
three- to five-year terms.
Triple net leases generally have a term of 15 to 25 years and are
typically not less than 10 years. In addition, the tenant of a triple-net-lease
is responsible for the base rent in addition to the costs and expenses 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, us, our advisor and our
property manager. Typically, each tenant is required to obtain, at its own
expense, property insurance naming us as the insured party for fire and other
casualty losses in an amount equal to the full value of its premises and the
contents of the premises. All property insurance must be approved by the
property manager. In general, the net lease may be assigned or subleased with
our prior written consent, but the original tenant must remain liable under the
lease unless the assignee meets income and net worth tests.
In connection with sale and leaseback transactions, the tenant is
responsible for paying a predetermined minimum annual rent generally based upon
our cost of purchasing the land and building. In addition to the base rent,
these tenants are generally responsible for the costs and expenses related to
property taxes, insurance, repairs and maintenance applicable to the leased
space.
PROPERTY ACQUISITION
We anticipate acquiring fee interests in properties, although other
methods of acquiring a property may be utilized if we deem it to be
advantageous. For example, we 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. We may also use separate entities to acquire a property.
Such entities 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 -- Ownership of a Partnership Interest" and "--
Ownership of a Qualified REIT Subsidiary."
Our advisor and its affiliates may purchase properties in their own
name, assume loans in connection with the purchase or loan and temporarily hold
title to the properties for the purpose of facilitating acquisition or financing
by us, the completion of construction of the property or any other purpose
related to our business.
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We have acquired twelve retail centers. We have acquired some of these
retail centers from our affiliates who purchased the properties from
unaffiliated third parties on our behalf. The prices for these properties were
not the subject of arm's-length negotiations.
Under our charter, we are prohibited from purchasing a property from an
affiliate unless a majority of the directors not interested in the transaction
and a majority of our independent directors approve the purchase as fair and
reasonable to us and at a cost to us no greater than the cost of the asset to
our affiliate. However, the cost to us may be greater than the cost to our
affiliate if a substantial justification for the excess exists and such excess
is reasonable. Our policy currently provides that in no event may the cost to us
of the asset exceed its appraised value at the time we acquire the property. A
majority of our directors, including a majority of our independent directors,
approved the purchases of the properties we have purchased as being fair and
reasonable to us. The properties were purchased at a cost to us that was not
greater than the cost of acquisition to our affiliate. We cannot guarantee that
the prices paid to our affiliates for the properties we have acquired or for
future acquisitions of properties from our affiliates, if any, did not or would
not exceed the price which would be paid by an unaffiliated buyer.
If remodeling is required prior to the purchase of a property, we 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, we will also have the right to review the
tenant's books during and following completion of the remodeling to verify
actual costs. If substantial disparity exists 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 our advisor may serve
as construction manager for a fee no greater than 90% of the fee a third party
would charge for such services.
BORROWING
We may acquire properties free and clear of permanent mortgage debt by
paying the entire purchase price in cash or for shares, limited partnership
units in the operating partnership, interests in our subsidiaries that own our
properties or a combination of any of these. However, we may incur indebtedness
to acquire properties where our board of directors determines that it is in our
best interest. On properties purchased without financing, we may later incur
mortgage debt by obtaining loans secured by selected properties, if favorable
financing terms are available. We will use the proceeds from such loans to
acquire additional properties. We may also incur debt to finance improvements to
our properties. Aggregate borrowings secured by all of our properties will not
exceed 55% of their combined fair market value. Our charter provides that the
aggregate amount of borrowing in relation to the net assets, in the absence of a
satisfactory showing that a higher level is appropriate may not exceed 300% of
net assets. Net assets means our total assets, other than intangibles, at cost
before deducting depreciation or other non-cash reserves less our total
liabilities, calculated at least quarterly on a basis consistently applied. Any
excess in borrowing over such 300% of net assets level must be approved by a
majority of our independent directors, disclosed to our stockholders in our next
quarterly report to stockholders, along with justification for such excess, and
approved by the stockholders.
We have incurred debt secured by our properties, a majority of which is
on a non-recourse basis. This means that a lender's rights on default will
generally be limited to foreclosing on the property. We may secure recourse
financing or provide a guarantee to lenders if we believe this may result in
more favorable terms. We do not borrow funds from a program sponsored by our
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advisor or its affiliates which makes or invests in mortgage loans. We also
seek to obtain level payment financing, meaning that the amount of debt
service payable would be substantially the same each year. However, if it is
in our best interests, we might make use of some mortgages that 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.
SALE OR DISPOSITION OF PROPERTIES
Our board of directors 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 our principal investment objectives.
We intend to hold our properties for a minimum of four years prior to
selling them. See "Federal Income Tax Considerations -- Taxation -- Prohibited
Transactions." We also intend to reinvest the proceeds from the sale, financing,
refinancing or other disposition of our properties into additional properties.
Alternatively, we may 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 our real estate assets, and our net income, which our board of
directors believes will enhance our chances of having our shares traded in a
public trading market. Notwithstanding this policy, the board of directors, in
its discretion, may distribute all or part of the proceeds from the sale,
financing, refinancing or other disposition of all or any of our properties to
our stockholders. In determining whether to distribute these proceeds to
stockholders, the board of directors will consider, among other factors, the
desirability of properties available for purchase, real estate market
conditions, the likelihood of the listing of our shares on a national stock
exchange or including the shares for quotation on a national market system and
compliance with the applicable requirements under federal income tax laws.
Because we may reinvest the proceeds from the sale, financing or refinancing of
our properties, we could hold stockholders' capital indefinitely. However, upon
the affirmative vote of a majority of the shares of common stock, we will be
forced to liquidate our assets and dissolve.
When we sell a property, we intend to obtain an all-cash sale price.
However, we may take a purchase money obligation secured by a mortgage on the
property as partial payment, and there are no limitations or restrictions on our
ability to take such purchase money obligations. The terms of payment to us will
be affected by custom in the area in which the property being sold is located
and the then prevailing economic conditions. If we receive notes and other
property instead of cash from sales, these proceeds, other than any interest
payable on these proceeds, will not be available for distributions until and to
the extent the notes or other property are actually paid, sold, refinanced or
otherwise disposed. Therefore, the distribution of the proceeds of a sale to the
stockholders may be delayed until that time. In these cases, we will receive
payments in 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."
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CHANGE IN INVESTMENT OBJECTIVES AND POLICIES
Our stockholders have no voting rights to implement our investment
objectives and policies. Our board of directors has the responsibility for our
investment objectives and policies. Our board of directors may not, however,
make any material changes regarding the restrictions on investments set forth in
our charter without amending the charter. Any such amendment to our charter
requires the affirmative vote of a majority of our outstanding shares of common
stock. See "Summary of the Organizational Documents -- Restrictions on
Investments."
INVESTMENT LIMITATIONS
We will not:
- invest more than 10% of our 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;
- invest in commodities or commodity future contracts;
- issue redeemable shares of common stock;
- issue shares on a deferred payment basis or other similar
arrangement; and
- 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.
We do not engage in hedging or similar activities for speculative
purposes.
We have no plans to invest any proceeds from this offering, or other
funds, in the securities of other issuers for the purpose of exercising control
over such other issuers.
OTHER INVESTMENTS
Consistent with our investment limitations, we have invested, and may
from time to time invest, limited amounts of money in the securities of other
companies that may not be REITs or companies related to real estate to seek
superior returns on those investments. In addition, we currently intend to make
a loan to an unaffiliated third party in connection with a retail center we
intend to purchase and may make loans for such purposes from time to time. For a
description of this loan, see "Real Property Investments -- Universal Plaza,
Lauderhill, Florida."
APPRAISALS
All real property acquisitions made and to be made by us 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. Our policy currently provides that the purchase price
of each property will not exceed its appraised value at the time of our
acquisition of the property. Appraisals are, however, estimates of value and
should not be relied on as measures of
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true worth or realizable value. We will maintain the appraisal in our records
for at least five years, and copies of each appraisal will be available for
review by stockholders upon their request.
RETURN OF UNINVESTED PROCEEDS
If at least 200,000 shares are 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 any interest earned on the
funds. 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 24 months from the original effective date of
this prospectus or 12 months from the termination of the offering, will be
distributed to the stockholders. All funds we receive out of the escrow account
will be available for our general use from the time we receive them until
expiration of the period discussed in the prior sentence. We may use these funds
to:
- fund expenses incurred to operate the properties which have
been acquired;
- reimburse the advisor for our expenses, to the extent
allowable under the advisory agreement;
- pay the advisor its compensation under the advisory agreement;
and
- pay the property manager its property management fee under the
management agreement.
See "Estimated Use of Proceeds" and "Plan of Distribution -- Escrow
Conditions." We will not segregate funds separate from our other funds pending
investment, and interest will be payable to the stockholders if uninvested funds
are returned to them.
ADDITIONAL OFFERINGS AND EXCHANGE LISTING
We anticipate that by February 11, 2004, our board of directors will
determine when, and if, to apply to have our shares of common stock listed for
trading on a national stock exchange or included for quotation on a national
market system, if we meet the then applicable listing requirements; and/or
whether to commence subsequent offerings after completion of this offering. We
believe that an exchange listing or inclusion of our shares in a national market
system may allow us to increase our size, portfolio diversity, stockholder
liquidity and access to capital and stability, and to decrease our operating
costs through economies of scale. However, we cannot assure that such listing or
inclusion will ever occur. If it is not feasible to list shares or include them
in a national market system by February 11, 2004, our board of directors may
decide to sell our assets individually, list our shares at a future date, or
liquidate us by February 11, 2009.
JOINT VENTURES
We may invest in joint venture arrangements with other public real
estate programs formed by our advisor or any of its affiliates if a majority of
our directors not otherwise interested in the transaction and a majority of our
independent directors approve the transaction as being fair and reasonable. In
addition, the investment by each joint venture partner must be substantially on
the same terms and conditions as those received by other joint venturers.
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We may also invest in general partnerships or joint venture
arrangements with our affiliates as co-owners of a property. The general
partnership or joint venture agreement for these investments will provide that
we will be able to increase our equity participation in such entity as we
receive additional proceeds of the offering. As a result, we will ultimately
have 100% equity ownership of the property and the affiliated general or joint
venture partner will not be entitled to any profit or other benefit on the sale
of its equity participation to us. Once we own, directly or indirectly, 100% of
the ownership interests in the general partnership or joint venture entity, we
will determine whether the continued existence of that entity is necessary. For
example, we may determine to continue the existence of the entity to minimize
expenses, facilitate state tax reporting or meet lender requirements.
In addition, we may enter into joint venture or partnership
arrangements with unaffiliated third parties. Therefore, we may enter into
acquisitions with sellers who are desirous of transactions in tax advantaged
structures such as arrangements typically referred to as "Down REITs." You
should consider the potential risk that our non-affiliated joint venture partner
may be unable to agree with us on a matter material to the joint venture. See
"Risk Factors -- Investment Risks."
We are unable to estimate the proportion of our assets that may be
invested in joint venture interests.
CONSTRUCTION AND DEVELOPMENT ACTIVITIES
From time to time, we may attempt to enhance investment opportunities
by undertaking construction and development activities and rendering services in
connection with them. Our advisor has advised us that, in its view, we may be
able to reduce overall purchase costs if we were to undertake construction and
development rather than merely being limited to purchasing properties subject to
completion of construction by a third party. The construction and development
activities would expose us to such risks as cost overruns, carrying costs of
projects under construction or development, availability and costs of materials
and labor, weather conditions and government regulation. We nevertheless have
concluded that our investment prospects would be enhanced by permitting us to
engage in construction and development activities so long as such activities did
not cause us to lose our status as a REIT. To comply with the applicable
requirements under federal income tax law, and until the Internal Revenue
Service changes its pronouncements with regard to these requirements, we intend
to limit our 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. We will retain an independent general contractor to perform the
actual physical construction work on tenant improvements or the installation of
heating, ventilation and air conditioning systems. See "Real Property
Investments - General" for a detailed description of the types of properties we
may invest in.
In addition to using independent contractors to provide services in
connection with the operation of our properties, we may also use "taxable REIT
subsidiaries" to carry out these functions. See "Federal Income Tax
Considerations - Asset Test - 25% Asset Test" for a discussion of a "taxable
REIT subsidiary."
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OTHER POLICIES
Before we purchase a particular property, we may 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. See "Real Property
Investments - General" for a detailed description of the types of properties we
may invest in.
We hold all funds, pending investment in properties, in assets which
will allow us 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 bonds issued by the Government National
Mortgage Association, or GNMA, and real estate mortgage investment conduits also
known as REMICs. See "Federal Income Tax Considerations -- Taxation -- REIT
Qualification Tests."
We will not make distributions-in-kind, except for:
- distributions of readily marketable securities;
- distributions of beneficial interests in a liquidating trust
established for our dissolution and the liquidation of our
assets in accordance with the terms of our charter; or
- distributions of in-kind property which meet all of the
following conditions:
- our board of directors advises each stockholder of
the risks associated with direct ownership of the
in-kind property;
- our board of directors offers each stockholder the
election of receiving in-kind property distributions;
and the directors distribute in-kind property only to
those stockholders who accept the directors' offer.
Althoughour charter and bylaws do not prohibit the following, we have
no current plans to
- underwrite the securities of other issuers;
- invest in real estate mortgages; or
- invest the proceeds of the offering, other than on a temporary
basis, in non-real estate related investments.
We may change our current plans, without stockholder approval, if our board of
directors determines that it would be in the best interests of our stockholders
to engage in any such transactions.
Our board of directors has determined that it would be in our best
interest to invest approximately $3 million in publicly traded cumulative
preferred stocks of other REITs and other companies with a market value in
excess of $5 million. As permitted by the board's authorization,
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we intend to leverage such investments by purchasing the cumulative preferred
stocks on margin of no greater than 40%.
Although we are authorized to issue senior securities, we have no
current plans to do so. See "Description of Securities -- Preferred Stock," "--
Issuance of Additional Securities and Debt Instruments," and "-- Restrictions
on Issuance of Securities."
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REAL PROPERTY INVESTMENTS
GENERAL
We acquire and manage a diversified (by geographical location and by
types of retail centers) portfolio of real estate primarily:
- improved for use as retail establishments, principally multi-
tenant 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 gross leasable area
ranging from 10,000 to 100,000 square feet, sometimes
referred to as a neighborhood center; or
- leased primarily to retail tenants providing for the
sale of wearing apparel and hardware and appliances,
in addition to convenience goods and personal
services, with gross leasable area ranging from
100,000 to 300,000 or more square feet, sometimes
referred to as a community center, but also including
single-user retail facilities; or
- improved with other commercial facilities which provide goods
or services.
The retail centers will be located mainly in states east of the
Mississippi River in the United States. We have initially focused our
acquisition of properties in the southeastern states, primarily Florida,
Georgia, North Carolina and South Carolina. We will endeavor to acquire multiple
properties within the same markets where the acquisitions result in efficient
property management operations. We may also acquire, among other real estate,
single-user commercial properties located anywhere throughout the United States
if they are triple-net-leased properties, including such properties acquired in
sale and leaseback transactions. A triple-net-leased property is one which is
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.
We do not intend to invest in any primarily:
- single-family or multi-family residential properties;
- industrial properties;
- hotels or motels;
- leisure home sites;
- farms;
- ranches;
- timberlands;
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- unimproved properties not intended to be developed;
- mining properties;
- office properties; or
- shopping centers that:
- provide for extensive variety in general merchandise,
apparel, furniture and home furnishings, as well as a
variety of services and recreational facilities which;
- are built around three or more full-line
department stores of generally not less than
100,000 square feet each; and
- have gross leasable areas ranging from
600,000 to more than 1,500,000 square feet.
We may, however, 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 retail
centers or triple-net-leased properties, will not exceed 10% of the aggregate
purchase price of all of the retail centers or triple-net-leased properties that
we acquire or anticipate to acquire. If we sell 54,000,000 shares in this
offering, we do not intend to invest more than approximately 20% of the
anticipated proceeds from this offering in any one property.
Subject to compliance with the applicable requirement under the federal
income tax laws, we may also undertake construction and development activities
and render services in connection with such activities.
See "Investment Objectives and Policies" generally pertaining to our
policies relating to the maintenance, operation and disposition of our
properties.
INSURANCE COVERAGE ON PROPERTIES
We carry comprehensive general liability coverage and umbrella
liability coverage on all of our properties with limits of liability which we
deem adequate to insure against liability claims and provide for the costs of
defense. Similarly, we are insured against the risk of direct physical damage in
amounts we estimate to be adequate to reimburse us 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, we intend to insure our
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 us 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.
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PROPERTIES
The tables set forth below describe our properties and the tenants at
those properties. In evaluating each of the following properties as a potential
acquisition, we considered a variety of factors including location,
demographics, tenant mix, price per square foot, occupancy and the fact that
overall rental rates at each shopping center are comparable to market rates. We
believe that each shopping center is located within a vibrant economic area. We
believe that each of the following properties is well-located, has acceptable
roadway access, attracts high quality tenants, is well-maintained and has been
professionally managed. Nonetheless, each property will be subject to
competition from similar shopping centers within its market area, and its
economic performance could be affected by changes in local economic conditions.
We did not consider any other factors materially relevant to the decision to
acquire each of the following properties.
We do not anticipate making any significant repairs and improvements to
any of the following properties over the next few years except Conway Plaza. We
anticipate expending not more than $350,000 for roof repairs and parking lot and
landscaping improvements over the next one to two years.
When we calculate depreciation expense for tax purposes, we use the
straight-line method. We depreciate buildings and improvements based upon
estimated useful lives of 40 and 20 years, respectively.
In general, each tenant pays its proportionate share of real estate
taxes, insurance and common area maintenance costs, although the leases with
some tenants provide that the tenant's liability for such expenses is limited in
some way, usually so that their liability for such expenses does not exceed a
specified amount.
We received an appraisal for each of the following properties which
states that it was prepared in conformity with the Code of Professional Ethics
Standards of Professional Appraisal Practice of the Appraisal Institute and the
Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation
by an independent appraiser who is a member of the Appraisal Institute.
Appraisals are estimates of value and should not be relied on as a measure of
true worth or realizable value.
Our directors, including the independent directors, have approved
acquisitions of properties from our affiliates as being fair and reasonable.
The following tables describe our properties and tenants at those
properties.
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As of September 30, 2000, we, through separate limited partnerships or
limited liability companies, have acquired fee ownership of 12 shopping centers
containing an aggregate of approximately 2,019,000 gross leasable square feet
located in Florida and Georgia.
<TABLE>
<CAPTION>
Percent
Percent of gross
of leasable
Amount of total area Number
mortgages Gross gross leased of tenants
Approximate payable at leasable leasable as of as of
Year built/ Date purchase 9/30/00 area area 9/30/00 9/30/00 Major
Property renovated acquired price ($) ($) (Sq Ft) (%) (%) (%) tenants
--------------------- ----------- -------- ----------- ---------- -------- -------- -------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lake Walden Square
Plant City, FL 1992 05/99 14,539,000 9,969,698 262,451 13 93 31 Kash N' Karry Foods
K-Mart
Carmike Cinemas
Merchants Square
Zephyrhills, FL 1993 06/99 5,740,000 3,167,437 74,849 4 100 13 Kash N' Karry Foods
Fashion Bug
Town Center Commons
Kennesaw, GA 1998 07/99 9,656,000 4,750,000 72,108 4 93 10 JC Penney Home Store
Baptist Book Store
Boynton Commons
Boynton Beach, FL 1998 07/99 30,563,000 15,125,000 210,488 10 98 18 Sports Authority
Bed, Bath & Beyond
Barnes & Noble
Petsmart
Lake Olympia Square
Ocoee, FL 1995 09/99 9,873,000 5,805,946 85,776 4 94 18 Winn-Dixie
Tutor Time Child
Care Systems
Bridgewater
Marketplace
Orlando, FL 1998 09/99 6,094,000 2,987,500 58,050 3 98 11 Winn-Dixie
Bartow Marketplace
Cartersville, GA 1995 09/99 24,496,000 13,475,000 375,067 19 100 17 Wal-Mart
Lowe's Home Center
Countryside
Shopping Center
Naples, FL 1997 10/99 8,600,000 6,720,000 73,965 4 97 6 Winn-Dixie
Promedco of
Southwest Florida
</TABLE>
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<TABLE>
<CAPTION>
Percent
Percent of gross
of leasable
Amount of total area Number
mortgages Gross gross leased of tenants
Approximate payable at leasable leasable as of as of
Year built/ Date purchase 9/30/00 area area 9/30/00 9/30/00 Major
Property renovated acquired price ($) ($) (Sq Ft) (%) (%) (%) tenants
--------------------- ----------- -------- ----------- ---------- -------- -------- -------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Casselberry Commons
Casselberry, FL 1973/ 12/99 17,766,000 8,703,000 227,664 11 96 36 Ross Stores
1998 Publix
Conway Plaza
Orlando, FL 1985/ 02/00 8,540,000 5,000,000 119,123 6 98 21 Beall's
1999 Publix
Pleasant Hill Square
Duluth, GA 1997/ 05/00 34,480,000 17,120,000 228,137 11 99 20 JC Penney
2000 Toys R Us
JoAnn Fabrics
Gateway Market Center
St. Petersburg, FL 1997/ 07/00 21,130,000 13,537,500 231,326 11 100 15 Beall's
2000 Publix
TJ Maxx
Office Depot
Home Place of
America
</TABLE>
Major tenants include tenants leasing more than 10% of the gross leasable area
of a property.
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TENANTS
The following table sets forth information regarding the largest
tenants at our properties and includes any tenant leasing more than 3% of the
total gross leasable area of our properties or any tenant whose annualized base
rent represents 3% or more of our 2001 annualized base rent based on the
properties owned as of November 1, 2000.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
TOTAL GROSS TOTAL GROSS TOTAL
NUMBER LEASEABLE LEASEABLE ANNUALIZED ANNUALIZED
OF AREA AREA BASE RENT BASE RENT
TENANT STORES (SQ. FT.) (%) ($) (%)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Barnes & Noble 2 52,000 2.58% 862,500 4.68%
Beall's 2 72,000 3.57% 302,174 1.64%
JC Penney 2 92,728 4.59% 898,644 4.88%
Kash N' Karry 2 94,255 4.67% 633,824 3.44%
K-Mart 1 91,266 4.52% 383,317 2.08%
Lowes Home Center 1 130,497 6.46% 786,897 4.27%
Publix 3 111,706 5.53% 795,330 4.32%
Wal-Mart 1 204,170 10.11% 1,104,560 5.99%
Winn-Dixie(1) 3 139,261 6.90% 1,072,200 5.82%
</TABLE>
(1) Winn-Dixie, an anchor tenant in three of the properties owned by us, whose
gross rental income from its three stores in our properties represents 6% of our
total base rental income from all of our properties, is currently under going a
restructuring. We were assured by management of Winn-Dixie that the stores
located in our specific properties were not closing as part of the
restructuring. In October 2000, Winn-Dixie announced that the process of closing
stores was done. The stores that were closed were generally of the smaller
format and underperforming. The Winn-Dixie stores in our properties are of the
larger, more modern format which they now prefer.
In addition, two smaller tenants, Service Merchandise and Carmike
Cinemas, have filed for protection under Chapter 11 of the federal bankruptcy
laws in order to reorganize their businesses. Each of these companies is a
tenant in one of our properties. We do not know whether they intend to close
their stores in our properties. Also, The Sports Authority has closed a
number of its stores in connection with a restructuring. We believe it
unlikely that its store at our property will close; however, we have not been
informed by management of The Sports Authority as to whether it intends to
close this store as part of its restructuring. These three tenants
collectively represent 5% of our total base rental income from all of our
properties as of September 30, 2000.
TENANT LEASE EXPIRATION
The following table sets forth lease expirations for the next ten years
at our properties, assuming that no renewal options are exercised. This should
not be deemed indicative of or a prediction of future actual results. It is the
opinion of our management that the space for expiring leases will be released at
market rates existing at the time of the expiration of those leases.
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<TABLE>
<CAPTION>
APPROX. AVERAGE PERCENT OF PERCENT OF
GROSS ANNUAL BASE RENT TOTAL BUILDING ANNUAL
LEASABLE BASE TOTAL PER SQUARE GROSS LEASABLE BASE RENT
NUMBER AREA RENT ANNUAL FOOT UNDER AREA REPRESENTED REPRESENTED
YEAR OF OF EXPIRING EXPIRING BASE EXPIRING BY EXPIRING BY EXPIRING
ENDING LEASES LEASES LEASES RENT LEASES LEASES LEASES
DECEMBER 31 EXPIRING (SQ. FT.) ($) ($) ($) ($) (%)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2000 8 10,150 111,899 18,499,569 11.02 0.50 0.60
2001 32 86,068 932,941 18,425,981 10.84 4.26 5.06
2002 21 49,169 770,844 17,631,874 15.68 2.44 4.37
2003 34 159,196 1,344,430 17,098,542 8.45 7.88 7.86
2004 35 83,097 1,305,962 15,890,986 15.72 4.12 8.22
2005 22 86,363 1,049,883 14,678,031 12.16 4.28 7.15
2006 6 28,560 377,200 3,692,856 13.21 1.41 2.75
2007 6 102,524 1,166,192 13,347,627 11.37 5.08 8.74
2008 11 172,292 2,019,445 12,249,683 11.72 8.53 16.49
2009 7 47,522 595,780 10,275,499 12.54 2.35 5.80
</TABLE>
For purposes of the above table, the "total annual base rent" column
represents annualized base rent of each tenant as of January 1 of each year. We
have not made any assumptions regarding the releasing of expiring leases.
Therefore, as each lease expires, no amount is included in this column for any
subsequent year for that lease.
TENANT LEASE RENEWAL OPTIONS
The following tables provide information regarding the renewal option
terms for the tenants that occupy more than 10% of the total gross leasable area
of each of the respective properties.
GATEWAY MARKET CENTER, ST. PETERSBURG, FLORIDA
Five tenants, Beall's (a discount department clothing store), Publix (a
grocery store), Home Place of America (a housewares store), Office Depot (an
office supply store) and TJ Maxx (a discount clothing store), each lease more
than 10% of the total gross leasable area of the property. The leases with these
tenants require the tenants to pay base annual rent on a monthly basis as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING TO
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beall's 60,000 26 4.04 04/99 01/21
Option 1 9.75 02/21 01/26
Option 2 9.75 02/26 01/31
Publix 37,888 16 8.50 08/99 10/19
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING TO
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Option 1 8.50 11/19 10/24
Option 2 8.50 11/24 10/29
Option 3 8.50 11/29 10/34
Option 4 8.50 11/34 10/39
Option 5 8.50 11/39 10/44
Home Place of
America 35,000 15 9.50 08/00 07/05
10.00 08/05 07/10
Option 1 10.50 08/10 07/15
Option 2 11.00 08/15 07/20
Option 3 11.50 08/20 07/25
Option 4 12.00 08/25 07/30
Office Depot 30,000 13 10.25 12/99 11/09
11.00 12/09 11/14
Option 1 11.75 12/14 11/19
Option 2 12.50 12/19 11/24
Option 3 13.25 12/24 11/29
TJ Maxx 30,000 13 8.00 10/98 10/03
8.50 11/03 10/08
Option 1 8.50 11/08 10/13
Option 2 8.50 11/13 10/18
Option 3 8.50 11/18 10/23
</TABLE>
PLEASANT HILL SQUARE, DULUTH, GEORGIA
Three tenants, JCPenney Home Store (a home furnishings store), Toys "R"
Us (a retailer of toys) and JoAnn Fabrics & Crafts (a retailer of fabrics and
craft supplies), each lease more than 10% of the total gross leasable area of
the property. The leases with these tenants require the tenants to pay base
annual rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING TO
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JC Penney Home 50,000 18 9.00 08/97 08/02
Store 9.90 09/02 08/07
Option 1 10.89 09/07 08/12
Option 2 11.98 09/12 08/17
Option 3 13.18 09/17 08/22
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING TO
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Toys R Us 48,134 17 9.00 09/97 01/08
Option 1 10.00 02/08 01/13
Option 2 10.50 02/13 01/18
Option 3 11.00 02/18 01/23
JoAnn Fabrics & 45,970 16 11.00 05/00 04/06
Crafts 11.50 05/06 04/10
Option 1 12.00 05/10 04/15
Option 2 12.50 05/15 04/20
Option 3 13.00 05/20 04/25
Option 4 13.50 05/25 04/30
</TABLE>
CONWAY PLAZA, ORLANDO, FLORIDA
Two tenants, Publix (a supermarket) and Beall's Outlet Store (a
discount department clothing store), each lease more than 10% of the total gross
leasable area of the property. The leases with these tenants require the tenants
to pay base annual rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING LEASE TERM TO
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Publix 37,888 32 7.75 10/99 10/19
Options 7.75 11/19 10/49
Beall's Outlet
Store 12,000 10 5.00 05/97 04/01
Options 5.25 to 7.00 05/97 04/25
</TABLE>
The Publix lease has six successive five-year renewal options at the
same base rent per square foot per annum.
The Beall's Outlet Store lease has eight successive three-year renewal
options. The base rent per square foot increases by $.25 per square foot for
each option.
CASSELBERRY COMMONS, CASSELBERRY, FLORIDA
Two tenants, Publix (a supermarket) and Ross Stores, Inc. (a discount
department clothing store), each lease more than 10% of the gross leasable area
of the property. The leases with these tenants require the tenants to pay base
annual rent on a monthly basis as follows:
96
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ross Stores 42,862 19 3.75 05/83 05/90
4.69 05/90 05/00
3.75 05/00 02/03
Options 3.75 02/03 02/18
Publix 35,930 16 5.00 02/73 01/12
Options 5.00 01/12 01/32
</TABLE>
The Ross Stores lease contains three successive five-year renewal
options at the same base rent per square foot per annum.
The Publix lease contains four successive five-year renewal options at
the same base rent per square foot per annum.
COUNTRYSIDE SHOPPING CENTER, NAPLES, FLORIDA
Two tenants, Winn-Dixie (a supermarket) and Promedco of Southwest
Florida, Inc. (a medical and health care center), each lease more than 10% of
the total gross leasable area of the property. The leases with these tenants
require the tenants to pay base annual rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Winn-Dixie 51,261 69 8.00 05/97 04/17
Options 8.00 05/17 04/42
Promedco of
Southwest
Florida 10,725 15 18.00 08/97 07/02
19.00 08/02 07/04
20.00 08/04 07/07
Option 1 20.50 08/07 07/12
Option 2 21.00 08/12 07/17
</TABLE>
The Winn-Dixie lease contains five successive five-year renewal options
at the same base rent per square foot per annum.
97
<PAGE>
BARTOW MARKETPLACE, CARTERSVILLE, GEORGIA
Two tenants, Wal-Mart (a discount department store) and Lowe's Home
Centers (a home furnishing store), each lease more than 10% of the total gross
leasable area of the property. The leases with these tenants require them to pay
base annual rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING LEASE TERM TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wal-Mart 204,170 54 5.41 10/95 10/15
Options 5.41 11/15 10/35
Lowe's Home
Centers 130,497 35 6.03 10/95 10/15
Option 1 6.63 11/15 10/20
Option 2 7.30 11/20 10/25
Option 3 8.03 11/25 10/30
Option 4 8.83 11/30 10/35
Option 5 9.71 11/35 10/40
Option 6 10.68 11/40 10/45
</TABLE>
The Wal-Mart lease contains four successive five-year renewal options
at the same base rent per square foot per annum.
BRIDGEWATER MARKETPLACE, ORLANDO, FLORIDA
One tenant, Winn-Dixie (a supermarket), leases more than 10% of the
total gross leasable area of the property. The lease with this tenant requires
the tenant to pay base annual rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING LEASE TERM TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Winn-Dixie 44,000 76 8.30 12/98 12/18
Options 8.30 01/19 12/21
</TABLE>
The Winn-Dixie lease contains five successive 20 year renewal options
at the same base rent per square foot per annum.
98
<PAGE>
LAKE OLYMPIA SQUARE, OCOEE, FLORIDA
Two tenants, Winn-Dixie (a supermarket) and Tutor Time Child Care
Systems (a childcare facility), each lease more than 10% of the total gross
leasable area of the property. The leases with these tenants require the tenants
to pay base annual rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS LEASABLE % OF TOTAL BASE RENT PER
AREA LEASED GROSS LEASABLE SQUARE FOOT LEASE TERM
LESSEE (SQ. FT.) AREA PER ANNUM ($) BEGINNING LEASE TERM TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Winn-Dixie 44,000 51 6.75 06/95 06/15
Options 6.75 07/15 06/40
Tutor Time
Child Care
Systems 10,000 12 12.00 01/97 01/07
Options 12.00+ 02/07 01/17
</TABLE>
The Winn-Dixie lease contains five successive five-year renewal options
at the same base rent per square foot per annum.
The Tutor Time Child Care Systems lease contains two successive
five-year renewal options with the base rent per square foot per annum
increasing according to increases in the Consumer Price Index.
BOYNTON COMMONS, BOYNTON BEACH, FLORIDA
Four tenants, The Sports Authority (a sporting goods store), Bed, Bath
& Beyond (a home furnishings store), Barnes & Noble (a display and retail sale
and/or rental of books, magazines and other media store) and PetSmart (a pet and
pet accessory retail store), each lease more than 10% of the total gross
leasable area of the property. The leases with these tenants require the tenants
to pay base annual rent on a monthly basis as follows:
99
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE BASE RENT
GROSS % OF TOTAL PER SQUARE
LEASABLE GROSS FOOT PER
AREA LEASED LEASABLE ANNUM LEASE TERM LEASE TERM
LESSEE (SQ. FT.) AREA ($) BEGINNING TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Sports
Authority 42,972 20 8.00 03/98 03/13
Option 1 10.00 04/13 03/18
Option 2 11.00 04/18 03/23
Option 3 12.00 04/23 03/28
Bed, Bath & 37,559 18 10.50 05/98 04/08
Beyond 11.50 05/08 01/14
Option 1 12.50 02/14 01/19
Option 2 13.50 02/19 01/24
Option 3 14.50 02/24 01/29
Barnes & Noble 27,000 13 15.00 10/97 12/02
16.25 01/03 12/07
17.50 01/08 02/13
Option 1 19.00 03/13 02/18
Option 2 21.00 03/18 02/23
Option 3 23.00 03/23 02/28
PetSmart 22,486 11 10.75 06/98 02/04
11.00 03/04 02/09
11.50 03/09 01/14
Option 1 12.25 02/14 01/19
Option 2 13.00 02/19 01/24
Option 3 13.75 02/24 01/29
Option 4 14.50 02/29 01/34
Option 5 15.25 02/34 01/39
</TABLE>
TOWN CENTER COMMONS, KENNESAW, GEORGIA
Two tenants, JC Penney Home Store (a home furnishings store) and
Baptist Book Store (a religious retail store), each lease more than 10% of the
total gross leasable area of the property. The leases with these tenants require
the tenants to pay base annual rent on a monthly basis as follows:
100
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE BASE RENT
GROSS % OF TOTAL PER SQUARE
LEASABLE GROSS FOOT PER
AREA LEASED LEASABLE ANNUM LEASE TERM LEASE TERM
LESSEE (SQ. FT.) AREA ($) BEGINNING TO
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JC Penney Home
Store 42,728 59 10.50 11/98 10/03
11.50 11/03 10/08
Option 1 12.75 11/08 10/13
Option 2 14.00 11/13 10/18
Option 3 15.25 11/18 10/23
Baptist Book Store 7,800 11 16.00 01/99 07/03
17.25 08/03 09/08
Option 1 18.57 10/08 09/13
Option 2 20.03 10/13 09/18
</TABLE>
MERCHANTS SQUARE SHOPPING CENTER, ZEPHYRHILLS, FLORIDA
Two tenants, Kash N' Karry (a supermarket) and Fashion Bug (a clothing
store), each lease more than 10% of the total gross leasable area of the
property. The leases with these tenants require the tenants to pay base annual
rent on a monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE BASE RENT
GROSS % OF TOTAL PER SQUARE
LEASABLE GROSS FOOT PER
AREA LEASED LEASABLE ANNUM LEASE TERM LEASE TERM
LESSEE (SQ. FT.) AREA ($) BEGINNING TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kash N' Karry 47,955 64 6.70 05/93 05/13
Options 6.70 05/13 05/43
Fashion Bug 9,040 12 8.00 04/93 01/04
Option 1 8.50 02/04 01/09
Option 2 9.00 02/09 01/14
Option 3 9.50 02/14 01/19
</TABLE>
The Kash N' Karry lease contains six successive five-year renewal
options at the same base rent per square foot per annum.
LAKE WALDEN SQUARE, PLANT CITY, FLORIDA
Three tenants, Kash N' Karry (a supermarket), K-Mart (a discount
department store) and Carmike Cinemas (a movie theater), each lease more than
10% of the total gross leasable area of the property. The leases with these
tenants require the tenants to pay base annual rent on a monthly basis as
follows:
101
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE BASE RENT
GROSS % OF TOTAL PER SQUARE
LEASABLE GROSS FOOT PER
AREA LEASED LEASABLE ANNUM LEASE TERM LEASE TERM
LESSEE (SQ. FT.) AREA ($) BEGINNING TO
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kash N' Karry 46,300 18 6.75 03/92 03/12
Options 6.75 04/12 03/42
K-Mart 91,266 36 4.20 03/82 03/17
Options 4.20 04/17 05/67
Carmike Cinemas 25,899 10 8.31 03/92 03/07
Option 1 9.31 04/07 03/12
Option 2 9.81 04/12 03/17
Option 3 10.31 04/17 03/22
</TABLE>
The Kash N' Karry lease contains six successive five-year renewal
options at the same base rent per square foot per annum.
The K-Mart lease contains ten successive five-year renewal options at
the same base rent per square foot per annum.
TAXES AND OCCUPANCY RATES
The following table provides information regarding our tax basis, real
estate taxes and occupancy rates at each of our properties.
<TABLE>
<CAPTION>
APPROXIMATE OCCUPANCY
DEPRECIABLE TAX 1999 REAL 2000 REAL PERCENTAGE
BASIS ESTATE TAXES ESTATE TAXES 12/31/99
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lake Walden 11,575,000 168,656 163,777 94
Merchants Square 4,762,000 126,955 124,621 100
Town Center 6,375,000 72,179 89,094 100
Boynton Commons 21,940,000 464,046 598,092 95
Lake Olympia 7,271,000 130,372 134,459 100
Bridgewater 5,240,000 70,269 78,882 92
Bartow 18,308,000 22,300 22,374 100
Countryside 7,485,000 67,968 70,162 98
Casselberry 11,169,000 222,091 265,013 97
Conway Plaza 6,394,000 77,772 132,567 n/a
Pleasant Hill 29,631,000 266,331 328,103 n/a
Gateway 15,000,000 168,116 368,913 n/a
</TABLE>
N/A indicates that the property was not owned by us as of 12/31/99. All
properties were acquired in 1999 or 2000; therefore, prior occupancy
rates are not available.
102
<PAGE>
BASE RENT
The following table provides information regarding the annual base
rent at each of our properties for the years 1999 and 2000. For purposes of
this table, the annual base rent columns represent annualized base rent as of
January 1 of the respective period.
<TABLE>
<CAPTION>
2000 ANNUAL 2000 EFFECTIVE 1999 ANNUAL 1999 EFFECTIVE
BASE RENT ANNUAL BASE BASE RENT ANNUAL BASE
SQUARE FEET ($) RENT ($) ($) (1) RENT ($)
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Lake Walden 262,451 1,697,621 6.47 1,653,453 6.30
Merchants Square 74,849 588,632 7.86 587,406 7.85
Town Center 72,108 873,564 12.11 942,464 13.07
Boynton Commons 210,488 2,768,053 13.15 2,322,651 11.03
Lake Olympia 85,776 875,887 10.21 853,280 9.95
Bridgewater 58,050 563,050 9.70 489,925 8.44
Bartow 375,067 2,361,427 6.30 2,349,211 6.26
Countryside 73,965 772,485 10.44 790,007 10.68
Casselberry 227,664 1,706,989 7.50 1,608,930 7.07
Conway Plaza 119,123 868,208 7.29 n/a
Pleasant Hill 228,137 3,390,643 14.86 n/a
Gateway 231,326 2,033,010 8.79 n/a
</TABLE>
n/a indicates that the property was not owned by us during the year.
POTENTIAL PROPERTY ACQUISITIONS
We are currently considering acquiring two potential properties. Our
decision to acquire each of these properties will generally depend upon:
- no material adverse change occurring in the respective
property, the respective tenants or in the respective local
economic conditions; and
- our receipt of sufficient net proceeds from this offering
to make these acquisitions.
Other properties may be identified in the future that we may acquire
before or instead of either of these properties. We cannot guarantee that we
will complete either acquisition. A description of each property being
considered follows:
COLUMBIA PROMENADE, KISSIMMEE, FLORIDA
Columbia Promenade is a newly constructed shopping center located on
approximately 10 acres and containing 65,870 gross leaseable square feet. The
center is located on the northwest corner of Columbia Street and Bermuda
Avenue in Kissimmee, Florida, a southern suburb of Orlando, in northern
Osceola County.
Our total acquisition cost, including expenses, is expected to be
approximately $7,300,000. This amount may increase or decrease as a result of
our agreement, as contained in the purchase
103
<PAGE>
contract, to adjust the purchase price up or down based upon lease rates
achieved if and when stores which were vacant at the time the purchase
contract was signed, become leased and the new tenants begin paying rent. Any
adjustment is intended to maintain a minimum capitalization rate of 9.25% on
the purchase based on a $15.50 minimum rent per square foot. This amount may
increase by other additional costs which have not yet been finally
determined. We expect any of such other additional costs to be insignificant.
Our acquisition cost is approximately $110.00 per square foot of leasable
space, which consists of the following:
<TABLE>
<CAPTION>
<S> <C>
* Purchase price $ 7,206,900
* Acquisition costs to an Inland affiliate 11,000
* Acquisition costs to third parties 16,000
* Financing costs to third parties 27,000
---------
Total $ 7,260,900
=========
</TABLE>
We anticipate purchasing this property from an unaffiliated third
party in November 2000, with our own funds and with the proceeds of a new
mortgage from Allstate Life Insurance Company in the aggregate amount of
$5,400,000, which will secure two promissory notes. The first promissory
note, in the principal amount of $3,600,000, will require monthly payments of
interest only at a fixed rate of 7.61% per annum and will be due in five
years. This loan may not be prepaid for the first 30 months. Thereafter,
there is a prepayment penalty based on the then interest rate differentials,
but in any event, the prepayment penalty will not be less than 1% of the
amount prepaid. The second promissory note, in the principal amount of
$1,800,000, will require monthly payments of interest only at a floating rate
equal to 190 basis points over the 30-day LIBOR (which currently equates to
approximately 8.52% per annum) and will be due in one year. This loan may be
prepaid at any time without penalty or premium. The financing costs to third
parties noted above consists of a $27,000 loan fee which will be paid to the
lender for this loan.
The property surrounds a church, which is east of the property along
Bermuda Avenue, and which we will not own. There are five other outparcels
surrounding the property. Two of these have been developed by the seller and
sold to third parties. The seller intends to develop the remaining three
outparcels. If the seller leases a building planned to be constructed on
those outparcels, we will have an option to purchase the first outparcel
developed. Our first option must be exercised within 15 days after receiving
notice that the seller has executed a lease for a building to be constructed
on the ourparcel. The purchase price for that outparcel will be the amount
equal to the quotient obtained by dividing the amount of the annual fixed
rent due by 9%. We will have a right of first refusal with regard to any of
the remaining outparcels for one year from the closing of the exercise of the
first option on the same terms and with the purchase price being calculated
in the same manner. If the seller elects to sell an outparcel to a third
party, rather than lease a new building on such outparcel to a third party,
we will not have any option to purchase that outparcel.
Columbia Promenade was completed in October 2000. It is comprised of
two one-story, multi-tenant, retail buildings. As of October 18, 2000, this
property was approximately 84% leased.
One tenant, Publix (a supermarket), leases more than 10% of the
total gross leasable area of the property. The lease with this tenant
requires the tenant to pay annual rent on a monthly basis as follows:
104
<PAGE>
<TABLE>
<CAPTION>
BASE RENT PER
APPROXIMATE SQUARE FOOT LEASE TERM
GLA LEASED % OF TOTAL PER ANNUM ----------------------
LESSEE (SQ. FT.) GLA ($) BEGINNING TO
------ ----------- ---------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Publix 44,270 67 9.00 10/05/00 08/31/20
Options 9.00 09/01/20 08/31/50
</TABLE>
The options are for six successive five-year terms at the same base rent per
square foot per annum.
For federal income tax purposes, the depreciable basis in this
property will be approximately $5,400,000. As Columbia Promenade was under
development in 1999 and 2000, the property is subject to reassessment for
real estate taxes for subsequent years.
As of October 18, 2000, a total 55,070 square feet was leased to
nine tenants at this property. The following table sets forth information
with respect to those leases:
<TABLE>
<CAPTION>
BASE RENT
APPROXIMATE CURRENT PER SQUARE
GLA LEASED RENEWAL ANNUAL FOOT PER
LESSEE (SQ. FT.) LEASE ENDS OPTIONS RENT ($) ANNUM ($)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dollar Store 2,400 11/05 1/5 yr. 37,200 15.50
Beauty Supply 1,600 12/05 - 26,400 16.50
Glamour Nails 800 12/05 1/5 yr. 12,800 16.00
Artisan's Gallery 800 12/05 - 13,200 16.50
Super Cuts 1,400 12/05 2/5 yr. 23,100 16.50
Esquire Menswear 1,200 12/05 - 19,800 16.50
Americlean Dry Cleaners 1,400 01/06 1/5 yr. 23,100 16.50
Shang Hai Restaurant 1,200 12/10 2/5 yr. 19,800 16.50
Publix 44,270 08/20 6/5 yr. 398,430 9.00
Master Lease 9,180
Vacant 1,620
</TABLE>
Publix, is required to pay, as additional rent, a percentage of
gross sales if gross sales exceed a prescribed amount.
At the closing of our purchase of this property an escrow will be
established which will be available to disburse to us on a monthly basis an
amount equal to the rent, common area maintenance charges, real estate taxes
and insurance relating to the 9,180 square feet of space that, based on
current leases, will be master leased at the time of closing, including space
for which a tenant has executed a lease and with respect to which, as of the
closing, such tenant will not have yet moved in or commenced paying rent. The
amount deposited in the escrow will be 24 months of estimated rent and cost
reimbursements for the vacant, unleased space at the time of closing and a
lesser amount for space which is leased but not yet occupied. In addition,
the escrow will include an amount for the estimated costs of tenant
improvements and lease commissions for a portion of the master leased space
which will be available to us to cover such costs.
105
<PAGE>
<TABLE>
<CAPTION>
AVERAGE
BASE
RENT PER PERCENT OF
SQUARE TOTAL PERCENT OF
APPROX. ANNUAL FOOT BUILDING ANNUAL BASE
YEAR GLA OF BASE RENT TOTAL UNDER GLA RENT
ENDING NUMBER EXPIRING OF ANNUAL EXPIRING REPRESENTED REPRESENTED
DECEMBER OF LEASES LEASES EXPIRING BASE LEASES BY EXPIRING BY EXPIRING
31, EXPIRING (SQ. FT.) LEASES ($) RENT ($) ($) LEASES (%) LEASES (%)
---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
2000 - - - 573,830 - - -
2001 - - - 573,830 - - -
2002 - - - 575,522 - - -
2003 - - - 578,838 - - -
2004 - - - 583,154 - - -
2005 6 8,200 141,000 586,212 17.20 12.45 24.05
2006 1 1,400 25,900 446,734 18.50 2.13 5.80
2007 - - - 421,386 - - -
2008 - - - 421,962 - - -
2009 - - - 422,550 - -
</TABLE>
For purposes of the above table the "total annual base rent" column
represents annualized base rent. For purposes of this column, we made no
assumptions regarding the re-leasing of expiring leases. Therefore, as each
lease expires, no amount is included in this column for any subsequent year
for that lease. In view of the assumption made with regard to total annual
base rent, the percent of annual base rent represented by expiring leases may
not be reflective of the expected actual percentages. This should not be
deemed indicative of or a prediction of future actual results. It is the
opinion of our management that the space for expiring leases will be
re-leased at market rates existing at the time of the expiration of those
leases.
UNIVERSAL PLAZA, LAUDERHILL, FLORIDA
This property, which originally consisted of 18.48 acres, is
currently being reconfigured and redeveloped. Approximately 13.68 acres of
the original property was sold by the seller to Target Corporation for the
construction of a new 184,000 square foot Super Target Store. The balance of
the acreage, approximately 4.8 acres is being redeveloped as a shopping
center to be known as Universal Plaza, containing 49,749 gross leasable
square feet. The site is located on the southwest corner of University Drive
and Commercial Boulevard.
Upon completion of the redevelopment, we anticipate purchasing
Universal Plaza from the unaffiliated third party. Our total acquisition
cost, including expenses, is expected to be approximately $9,000,000. This
amount may increase or decrease as a result of our agreement, as contained in
the purchase contract, to adjust the purchase price based upon lease rates
achieved if and when stores, which were vacant at the time the purchase
contract was signed, become leased and the new tenants begin paying rent. Any
adjustment is intended to maintain a minimum capitalization rate of
approximately 10%. This amount may also increase by additional costs which
have not yet been finally determined. We expect any of such other additional
costs to be insignificant. Our acquisition cost is expected to be
approximately $180 per square foot of leaseable space.
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<PAGE>
Prior to our acquisition of this property, we intend to fund a loan
to the seller in the principal amount of $1,100,000, to be secured by a
second mortgage on The property, subject to the approval of the first
mortgage holder. The note will bear an interest rate of 10% per annum and
will mature August 31, 2002. The seller will be required to deposit $192,500
to an escrow account for the payment of the first year's interest. If the
note is not paid within one year of funding, the payment of a fee of $50,000
is required and the deposit of an additional amount into the escrow for the
payment of interest during the extension term must be made. We will obtain
personal guaranties from the seller/developer with regards to the obligations
of this loan.
In evaluating this property as a potential acquisition, we
considered a variety of factors including location, demographics, price per
square foot, projected tenant mix and the fact that overall rental rates for
the spaces currently signed at the shopping center are comparable to market
rates. We believe that the shopping center is well-located within a vibrant
economic area. We believe that this property has acceptable roadway access
and will attract high-quality tenants. This property will be subject to
competition from similar shopping centers within its market area, and its
economic performance could be affected to changes in local economic
conditions. We did not consider any other factors materially relevant to the
decision to acquire this property.
As of November 1, 2000, leases have been signed for approximately
35% of the center. Currently, one tenant, Eckerds (a retail drug store), will
lease more than 10% of the total gross leaseable area of the property. The
lease with this tenant requires the tenants to pay base annual rent on a
monthly basis as follows:
<TABLE>
<CAPTION>
APPROXIMATE
GROSS % OF TOTAL
LEASEABLE AREA GROSS BASE RENT PER LEASE TERM
LEASED LEASEABLE SQUARE FOOT PER ------------------------------
LESSEE (SQ. FT.) AREA ANNUM ($) BEGINNING TO
---------- -------------- ---------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Eckerds 13,050 26 yrs. 14.40 Upon Completion 20 yrs.
</TABLE>
The Eckerds lease also includes four successive five year options.
For federal income tax purposes, the depreciable basis in this
property will be approximately $6,700,000. When we calculate depreciation
expense for tax purposes, we will use the straight-line method. We depreciate
buildings and improvements based upon estimated useful lives of 40 and 20
years, respectively.
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As of November 1, 2000, a total of 21,823 square feet was leased to
seven tenants at this property. The following table provides information with
respect to those leases.
<TABLE>
<CAPTION>
APPROXIMATE
GROSS CURRENT BASE RENT PER
LEASEABLE RENEWAL ANNUAL RENT SQUARE FOOT
LESSEE AREA (SQ. FT.) LEASE ENDS OPTIONS ($) PER ANNUM ($)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SIGNED LEASES
Eckerds 13,050 20 yrs. 4/5 yr. 187,920 14.40
Hair Cuttery 1,110 5 yrs. 1/5 yr. 25,530 23.00
Willy's Ice Cream 885 5 yrs. 1/5 yr. 20,355 23.00
Moe's Bagels 2,146 03/05 2/5 yr. 48,955 22.81
PENDING LEASES
Ace Formal Wear 1,500 5 yrs. 1/5 yr. 23,736 15.82
Radio Shack 2,520 5 yrs. 2/5 yr. 50,400 20.00
Domino's Pizza 1,100 5 yrs. 2/5 yr. 25,300 23.00
Cheeburger 1,600 5 yrs. 2/5 yr. 36,800 23.00
Batteries Plus 1,950 5 yrs. 1/5 yr. 44,850 23.00
Vacant 23,888
</TABLE>
In general, each tenant will pay its proportionate share of real estate
taxes, insurance and common area maintenance costs, although the leases with
some tenants may provide that the tenant's liability for such expenses is
limited in some way, usually so that their liability for such expenses does
not exceed a specified amount.
At the closing of our purchase of this property, an escrow will be
established which will be available to disburse to us on a monthly basis an
amount equal to the rent, common area maintenance charges, real estate taxes
and insurance relating to the space that is vacant at the time of closing,
including space for which a tenant has executed a lease and as of the closing
has not yet moved in or commenced paying rent. The amount to be deposited in
the escrow will be 24 months of estimated rent and cost reimbursements for
the vacant, unleased space at the time of closing and a lesser amount for
space that is leased but not yet occupied.
We received a limited appraisal dated August 10, 2000 which is an
update of a complete appraisal dated December 6, 1999, which states that it
was prepared in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation by an independent appraiser
who is a member of the Appraisal Institute. The appraiser reported a
prospective market value of the leased fee interest upon completion and upon
stabilized operations for Universal Plaza, as of September 2001 to be
$10,000,000. Appraisals are estimates of value and should not be relied on as
a measure of true worth or realizable value.
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CAPITALIZATION
The following table sets forth our historical capitalization as of
September 30, 2000 and our pro forma capitalization as of that date as
adjusted to give effect to the sale of 200,000 shares of common stock and the
application of the estimated net proceeds therefrom as described in
"Estimated Use of Proceeds." We were originally capitalized in September 1998
through the cash contribution of $200,000 by the advisor, for which the
advisor received 20,000 shares. As of September 30, 2000, we have sold
10,245,307 shares in our initial public offering resulting in gross proceeds
of $102,035,147. An additional 184,015 shares have been sold pursuant to our
distribution reinvestment program as of September 30, 2000, for which we have
received additional net proceeds of $1,748,142. As of September 30, 2000, we
had repurchased 39,523 shares through our share repurchase program resulting
in disbursements totaling $357,683. Additionally, the advisor made a cash
contribution of $2,000 to the operating partnership, for which the advisor
received 200 limited partnership common units. The table does not include the
200 shares of common stock reserved for issuance on conversion of the
advisor's 200 limited partnership common units. Additionally, the table does
not include shares of common stock issuable upon the exercise of options
which may be, but have not been, granted under our independent director stock
option plan or shares issuable upon the exercise of warrants which may be
outstanding if the minimum offering is sold. The information set forth in the
following table should be read in conjunction with our historical financial
statements included elsewhere in this prospectus and the discussion set forth
in "Management's Discussion and Analysis of Our Financial Condition --
Liquidity and -- Capital Resources."
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------------------
HISTORICAL PRO FORMA
----------------- -------------
<S> <C> <C>
Debt:
Mortgage notes payable $106,361,082 $106,361,082
Minority interest in partnership 2,000 2,000
Stockholders' equity:
Preferred Stock, $.01 par value,
10,000,000 authorized, none outstanding 0 0
Common Stock, $.01 par value,
100,000,000 authorized, 10,409,799
shares issued and outstanding historical;
10,609,799 shares issued and outstanding
pro forma 104,098 106,098
Paid in Capital 89,759,025 91,457,025
Accumulated distributions in excess of net
income (4,181,232) (4,181,232)
Accumulated other comprehensive
income 212 212
----------------- -------------
Total stockholders' equity $ 85,682,103 87,382,103
----------------- -------------
Total capitalization $192,045,185 $193,745,185
================= =============
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OUR
FINANCIAL CONDITION AND RESULTS OF OPERATION
Some statements contained in this "Management's Discussion and
Analysis of Our Financial Condition and Results of Operation" and elsewhere
in this prospectus constitute "forward-looking statements" within the meaning
of the Federal Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements
to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things:
- limitations on the area in which we may acquire properties;
- risks associated with borrowings secured by our properties;
- competition for tenants and customers;
- federal, state or local regulations;
- adverse changes in general economic or local conditions;
- competition for property acquisitions with third parties
that have greater financial resources than ours;
- inability of lessees to meet financial obligations;
- uninsured losses;
- risks of failing to maintain our qualification as a REIT; and
- potential conflicts of interest between ourselves and our
affiliates, including the advisor.
You should read the following discussion along with our financial statements
and the related notes included in this prospectus.
OVERVIEW
We were incorporated on September 3, 1998 to acquire and manage a
diversified portfolio of real estate, primarily multi-tenant shopping centers
located in states east of the Mississippi River. We initially focused on
acquiring properties in the southeastern states, primarily Florida, Georgia,
North Carolina and South Carolina. We may also acquire single-user retail
properties in locations throughout the United States, some of which may be
sale and leaseback transactions, leased on a triple-net-lease basis to
creditworthy tenants.
LIQUIDITY AND CAPITAL RESOURCES
On February 11, 1999, we commenced our initial public offering of
50,000,000 shares at a price of $10 per share and of 4,000,000 shares at a
price of $9.50 per share which may be distributed
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pursuant to our distribution reinvestment program. As of September 30, 2000
and December 31, 1999, we had received, subscriptions for a total of
10,265,307 and 5,390,632 shares, respectively, from the public, which
includes 20,000 shares issued to the advisor. In addition, we have
distributed 184,015 and 43,207 shares, respectively, pursuant to our
distribution reinvestment program as of September 30, 2000 and December 31,
1999. As of September 30, 2000, we have repurchased 39,523 shares and have
sold 409,290 soliciting dealer warrants. As a result of such sales and
repurchases, we have received a net total of $103,625,606 of gross offering
proceeds as of September 30, 2000. The advisor has guaranteed payment of all
public offering expenses (excluding selling commissions and other fees
payable to the managing dealer) in excess of 5.5% of the gross offering
proceeds or all organization and offering expenses (including such selling
expenses) which together exceeds 15% of the gross offering proceeds. As of
September 30, 2000, organizational and offering costs totaled $13,762,482
compared to $8,057,059 as of December 31, 1999. These organizational and
offering costs did not exceed 15% of the gross offering proceeds from our
initial public offering, and we anticipate that these costs will not exceed
these limitations upon completion of our initial public offering. Any excess
amounts at the completion of the initial public offering will be reimbursed
by the advisor. If we do not sell the minimum offering in this offering,
neither our sponsor nor our advisor will be reimbursed for any offering
expenses.
We will provide the following programs to facilitate investment in
the shares and to provide limited liquidity for stockholders until such time
as a market for the shares develops:
The distribution reinvestment program will allow stockholders who
purchase shares pursuant to this offering to automatically reinvest
distributions by purchasing additional shares from us. Such purchases will
not be subject to selling commissions or the marketing contribution and due
diligence expense allowance and will be sold at a price of $9.50 per share.
The share repurchase program will provide existing stockholders with
limited, interim liquidity by enabling them to sell shares back to us. The
prices at which shares may be sold back to us are as follows:
- During the offering period at $9.05 per share;
- During the 12 months following the end of the offering
period at $9.25 per share;
- During the next 12 months at $9.50 per share;
- During the next 12 months at $9.75 per share; and
- Thereafter, at the greater of:
- $10 per share; or
- a price equal to 10 times our "funds
available for distribution" per weighted
average share outstanding for the prior
calendar year.
Shares purchased by us will not be available for resale. As of
September 30, 2000, 39,523 shares had been repurchased at the cost of
$357,683.
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<PAGE>
The net proceeds of the offering will enable us to purchase
properties. We may acquire properties free and clear of permanent mortgage
indebtedness by paying the entire purchase price of each property in cash or
for shares, limited partnership units, interests in entities that own our
properties, or a combination of these means, and to encumber all or some
properties. Following acquisition, the proceeds from such loans will be used
to acquire additional properties to increase cash flow and provide further
diversity. If the offering is not fully sold, our ability to diversify our
investments may be diminished. Our advisor expects that the cash to be
generated from operations of the properties identified for acquisition, which
we intend to acquire if sufficient proceeds are raised in the offering, will
be adequate to pay our operating expenses and provide distributions to
stockholders.
Our management will monitor the various qualification tests we must
meet to maintain our status as a REIT. We test large ownership of the shares
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. Our management also determines, on a quarterly basis, whether
the gross income, asset and distribution tests described in the section
entitled "Federal Income Tax Considerations -- Taxation -- REIT Qualification
Tests" are met. On an ongoing basis, as we and the advisor perform due
diligence 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.
CAPITAL RESOURCES
As of the date of this prospectus, we have acquired twelve
properties and have identified two properties to acquire.
The number of properties we will acquire 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.
The properties owned by us were generating sufficient cash flow to
cover our operating expenses plus pay a monthly distribution on weighted
average shares. Distributions are determined by our board of directors and
are dependent on a number of factors, including the amount of funds available
for distribution, our financial condition, any decision by our board of
directors to reinvest funds rather than to distribute the funds, our capital
expenditures, the annual distribution required to maintain REIT status under
the Internal Revenue Code and other factors our board of directors may deem
relevant.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities generated $6,512,851 and
$1,257,373 for the nine months ended September 30, 2000, and 1999,
respectively. This is due primarily to the operations of the nine properties
acquired during 1999 and three additional properties acquired during the nine
months ended September 30, 2000. Included in additional rental income for the
three and nine months ended September 30, 2000 was $57,588 received from a
tenant who canceled the remainder of its lease which had one year remaining.
Also, included in other income for the three and nine months ended September
30, 2000 is a $64,000 net settlement from a developer who mutually canceled a
sales agreement with us for a shopping center project near Atlanta, Georgia.
112
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows used in investing activities were utilized primarily for the
purchase of three and nine properties in the nine month periods ended September
30, 2000 and 1999, respectively. We purchased investment securities in the third
quarter of 2000 in the amount of $660,066, of which $155,165 was on margin.
CASH FLOWS FROM FINANCING ACTIVITIES
For the nine months ended September 30, 2000 and 1999, we generated
$51,263,594 and $29,138,575, respectively, of cash flows from financing
activities. This was due primarily to proceeds raised of $49,683,499 and
$31,941,910 from the sale of our shares for the nine months ended September 30,
2000 and 1999, respectively. Our cash flow from financing activities was
partially offset by the cash used to pay costs associated with selling our
shares for the nine months ended September 30, 2000 and 1999. For the nine
months ended September 30, 2000 and 1999, we paid offering costs totaling
$6,795,332 and $2,797,095, respectively. We also obtained debt totaling
$35,657,500. In addition, for the nine months ended September 30, 2000, we also
paid distributions of $4,030,862 and loan fees of $497,258. For the nine months
ended September 30, 1999, we also paid distributions of $367,472 and loan fees
of $131,350.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
Since inception, we have incurred a total of $13,762,482 and $5,650,869
for costs incurred with our initial public offering, of which $1,773,995 and
$2,853,774 remained unpaid through September 30, 2000 and 1999, respectively.
Rental income, additional rental income, property operating expenses,
mortgage interest and depreciation are all a result of the operations from the
nine properties acquired during 1999 and three additional properties acquired in
2000.
Winn-Dixie, an anchor tenant in three of our properties owned, whose
gross rental income from its three stores in our properties represents 6% of our
total gross rental income from all of our properties as of September 30, 2000,
is currently undergoing a restructuring. We have been assured by management of
Winn-Dixie that the stores located in our specific properties are not closing as
part of the restructuring.
Sports Authority, a tenant in one of our properties has also undergone
a restructuring, closing some of its unprofitable stores. However, it is our
understanding that there are no current plans to close the store which occupies
space in our property. Store closings do not relieve tenants of their
obligations under existing leases.
Two tenants, Service Merchandise and Carmike Cinema, each occupy one
space in our properties and have recently filed for bankruptcy protection under
federal law. These tenants have the right under bankruptcy laws to terminate
their leases with us, but these tenants have neither assumed nor rejected their
leases with us. The Service Merchandise store is based on a smaller, newer
format which Service Merchandise has indicated it intends to continue to operate
and has been paying rent on a current basis. At closing, a master lease was
established with the seller of this property escrowing
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<PAGE>
funds to assure rent and reimbursements for two years, as well as payment of
estimated tenant improvements and leasing commissions. The space leased by
Carmike Cinema has no other local competition. Representatives of Carmike
have approached us to discuss a possible reduction in rental rates; however
there is no current indication that they intend to cease operating at this
location.
In 2000, we purchased two properties in Florida with environmental
concerns. Based on research we have done, the potential availability of state
funds for cleanup purposes and private insurance coverage we purchased, we
believe we are adequately protected against losses related to these matters.
FOR THE YEAR ENDED DECEMBER 31, 1999
Through December 31, 1999, we had incurred a total of $8,057,059 for
costs incurred with our initial public offering, of which $2,863,904 remained
unpaid.
Rental income, additional rental income, property operating expenses,
mortgage interest and depreciation are all a result of the operations from the
nine properties acquired during the second, third and fourth quarters of 1999.
FUNDS FROM OPERATIONS
One of our objectives is to provide cash distributions to our
stockholders from cash generated by our operations. Cash generated from
operations is not equivalent to our net operating income as determined under
GAAP. Due to unique operating characteristics of real estate companies, the
National Association of Real Estate Investment Trusts, or NAREIT, an industry
trade group, has promulgated a standard known as "Funds from Operations" or
"FFO" for short, which it believes more accurately reflects the operating
performance of a REIT such as us. As defined by NAREIT, FFO means net income
computed in accordance with GAAP excluding gains, or losses, from debt
restructuring and sales of properties plus depreciation and amortization and
after adjustments for unconsolidated partnership and joint ventures in which the
REIT holds an interest. We have adopted the NAREIT definition for computing FFO
because our management believes that, subject to the following limitations, FFO
provides a basis for comparing our performance and operations to those of other
REITs. The calculation of FFO may vary from entity to entity since
capitalization and expense policies tend to vary from entity to entity. Items
which are capitalized do not impact FFO, whereas items that are expensed reduce
FFO. Consequently, our presentation of FFO may not be comparable to other
similarly titled measures presented by other REITs. FFO is not intended to be an
alternative to "net income" as an indicator of our performance nor to "cash
flows from operating activities" as determined by GAAP as a measure of our
capacity to pay distributions. FFO and funds available for distribution are
calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net income $1,373,126 $ 69,967
Depreciation 3,320,421 479,183
------------ -------------
Funds from operations (1) 4,693,547 549,150
-------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Principal amortization of debt (176,391) (50,042)
Straight-line rent receivable (2) (340,799) (35,809)
Income received under master lease
Agreements and other escrows(4) $ 393,491 $ 62,042
Acquisition costs and expenses (3) 110,033 25,281
------- ------
Funds available for distribution $ 4,679,881 $550,622
=========== ========
</TABLE>
(1) FFO does not represent cash generated from operating activities
calculated in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs. FFO should not be considered as an alternative
to net income as a indicator of our operating performance or as an
alternative to cash flow as a measure of liquidity.
(2) Some of our tenant leases contain provisions providing for stepped rent
increases. GAAP requires us to record rental income for the period of
occupancy using the effective monthly rent, which is the average monthly rent
for the entire period of occupancy during the term of the lease.
(3) Acquisition costs and expenses include some costs and expenses relating
to the acquisition of properties. These costs are estimated to be up to .5%
of the gross offering proceeds and are paid from the proceeds of the offering.
(4) As part of several purchases, we receive payments under master lease
agreements on some of the space which was vacant at the time of the purchase
for periods ranging from one to two years from the date of the purchase or
until the spaces are leased. In addition, we received payments from other
escrow arrangements. GAAP requires that as these payments are received, they
be recorded as a reduction in the purchase price of the properties rather
than as rental income.
The following table lists the approximate physical occupancy levels for
our properties as of the end of each quarter during 2000 and 1999. N/A indicates
that we did not own the property at the end of the quarter.
<TABLE>
<CAPTION>
2000 1999
------------------------- --------------------------
at at at at at at at at
03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES: (%) (%) (%) (%) (%) (%) (%) (%)
Lake Walden Square
Plant City, FL 94 84 95 N/A 93 93 94
Merchants Square
Zephyrhills, FL 100 100 100 N/A 100 100 100
----------------------------------------------------------------------------------
</TABLE>
115
<PAGE>
<TABLE>
<CAPTION>
2000 1999
------------------------- --------------------------
at at at at at at at at
03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES: (%) (%) (%) (%) (%) (%) (%) (%)
Town Center Commons
Kennesaw, GA 93 93* 93* N/A N/A 100 100
Boynton Commons
Boynton Beach, FL 97* 96* 96* N/A N/A 95* 95*
Lake Olympia Square
Ocoee, FL 100 85 85 N/A N/A 96 100
Bridgewater Marketplace
Orlando, FL 97* 98* 98* N/A N/A 97* 92*
Bartow Marketplace
Cartersville, GA 100 100 100 N/A N/A 100 100
Countryside
Naples, FL 98 98 97 N/A N/A N/A 98
Casselberry Commons
Casselberry, FL 97* 95* 95* N/A N/A N/A 97*
Conway Plaza
Orlando, FL 97* 97* 97* N/A N/A N/A N/A
Pleasant Hill
Duluth, GA N/A 92* 94 N/A N/A N/A N/A
Gateway Marketplace
St. Petersburg, FL N/A N/A 98 N/A N/A N/A N/A
</TABLE>
* As part of the purchase of some of the properties, we received payments
under master lease agreements of some of the space which was vacant at the
time of purchase, which results in economic occupancy ranging from 99% to 100%
at September 30, 2000 for each of these shopping centers. The master lease
agreements are for periods ranging from one to two years from the purchase
date or until the spaces are leased. The percentage in the above table do not
include unleased space covered by master lease agreements.
NEW ACCOUNTING LITERATURE
On December 2, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
(SAB 101). The staff determined that a lessor should defer recognition of
contingent rental income such as percentage/excess rent until the
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specified breakpoint that triggers the contingent rental income is achieved. We
record percentage rental revenue in accordance with the SAB 101.
FASB Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," effective for fiscal years
beginning after June 15, 2000, establishes accounting and reporting standards
requiring that every derivative instrument, including derivative instruments
imbedded in other contracts, be reported in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that the
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. Currently, the pronouncement has no impact on
us, as we have not utilized derivative instruments or entered into any hedging
activities.
SUBSEQUENT EVENTS
We have paid distributions of $626,099 and $707,975 to our stockholders
in October and November 2000, respectively.
On July 18, 2000, we purchased Gateway Market Center in St. Petersburg,
Florida for $20,850,000. A portion of the purchase was financed with debt
totaling $15,370,500. Our debt subsequently increased by $2,100,000 as a result
of arrangements that we made with the seller of that retail center prior to
closing. One of our new tenants at Gateway Market Center, Home Place of America,
took possession of its space and, as a result of this event, pursuant to a
provision in our contract with the seller, a payment of $2,800,000 to the seller
became due. On October 26, 2000, we satisfied this obligation by paying $700,000
from our own cash, and borrowing the additional funds from our lender. These
additional funds were secured by two notes, one in the amount of $1,400,000 due
in August of 2005, and the other in the amount of $700,000 due in August of
2001.
One of our tenants at Pleasant Hill, Hit or Miss, recently filed for
bankruptcy protection. The Hit or Miss lease was executed recently by both the
tenant and our seller, but as of the bankruptcy filing, Hit or Miss had not
moved into the space. Hit or Miss has notified us that is intends to reject its
lease with regard to Pleasant Hill.
INFLATION
Inflation is likely to increase rental income from leases to new
tenants and lease renewals, subject to market conditions, for any retail centers
we acquire. Our 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 a triple-net-lease basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes primarily as a result of our
long-term debt used to maintain liquidity and fund capital expenditures and
expansion of our real estate investment portfolio and operations. Our interest
rate risk management objectives are to limit the impact of interest rate changes
on earnings and cash flows and to lower our overall borrowing costs. To achieve
our
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objectives we borrow primarily at fixed rates or variable rates with the
lowest margins available and in some cases, with the ability to convert
variable rates to fixed rates. We may enter into derivative financial
instruments such as interest rate swaps, caps and Treasury locks in order to
mitigate our interest rate risk on a related financial instrument. We do not
enter into derivative or interest rate transactions for speculative purposes.
Our interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts and weighted average interest rates
by year of expected maturity to evaluate the expected cash flows and sensitivity
to interest rate changes.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed rate debt $61,180 257,199 278,462 303,957 353,316
Average interest rate
on maturing debt - - - - -
Variable rate debt - 11,232,500 - - 13,475,000
Average interest rate
on maturing debt 8.43% 8.43% - - 8.12%
</TABLE>
The fair value of our debt approximates its carrying amount.
Approximately $49,815,000, or 47% of our mortgages payable at September
30, 2000, have variable interest rates averaging 8.19%. An increase in the
variable interest rate on some mortgages payable constitutes a market risk.
See "Real Property Investments" for a more detailed description of our
properties.
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DESCRIPTION OF SECURITIES
We were incorporated under the laws of the State of Maryland. Your
rights are governed by Maryland law, our charter and our bylaws. The
following summary of the terms of our stock is only a summary and you should
refer to our charter and bylaws for a full description. Copies of our charter
and bylaws are filed as part of the registration statement of which this
prospectus is a part.
AUTHORIZED STOCK
Our charter provides that we may issue up to 100,000,000 shares of
common stock and 10,000,000 shares of preferred stock. As of October 18,
2000, we had 10,744,198 shares of common stock outstanding and no preferred
stock outstanding.
As permitted by Maryland law, our charter contains a provision
permitting our board of directors, without any action by the stockholders, to
classify or reclassify any unissued common stock or preferred stock into one
or more classes or series by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such stock. We believe
that the power of the board of directors to issue additional authorized but
unissued shares of common stock or preferred stock and to classify or
reclassify unissued shares of common stock or preferred stock and thereafter
to cause us to issue such classified or reclassified shares of stock will
provide us with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs which might arise. The
additional common stock or preferred stock will generally be available for
issuance without further action by our stockholders.
COMMON STOCK
All of the common stock we are offering will be duly authorized,
fully paid and nonassessable. Subject to the preferential rights of any other
class or series of stock and to the provisions of our charter regarding the
restriction on the ownership and transfer of shares of our stock, holders of
our common stock will be entitled to receive distributions if authorized by
our board of directors and to share ratably in our assets available for
distribution to the stockholders in the event of a liquidation, dissolution
or winding-up.
Each outstanding share of our common stock 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
common stock can elect all of the directors then standing for election, and
the holders of the remaining common stock will not be able to elect any
directors.
Holders of our common stock have no conversion, sinking fund,
redemption, exchange or appraisal rights, and have no preemptive rights to
subscribe for any of our securities. However, because our common stock is not
currently listed on a national securities exchange, Maryland law provides
that holders of our common stock do have appraisal rights in connection with
some transactions. Shares of our common stock have equal dividend,
distribution, liquidation and other rights.
Under Maryland law and our charter, we cannot make some material
changes to our business form or operations without the approval of
stockholders holding at least a majority of the shares of
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stock entitled to vote on the matter. The following events, however, do not
require stockholder approval:
- share exchanges in which we are the acquiror;
- mergers with or into a 90 percent or more owned subsidiary;
- mergers in which we do not:
(1) reclassify or change the terms of any of our stock
that is outstanding immediately before the effective
time of the merger;
(2) amend our charter; or
(3) issue in the merger more than 20 percent of the
number of shares of stock outstanding immediately
before the merger; and
- transfers of less than substantially all of our assets (as
defined in our charter).
Our charter provides that the election of directors requires a majority of
all the votes present in person or by proxy at a meeting of our stockholders
at which a quorum is present. Our charter also provides that the affirmative
vote of the holders of a majority of our outstanding common stock may remove
any director with or without cause.
We will act as our own registrar and transfer agent for our common
stock.
PREFERRED STOCK
Shares of preferred stock may be issued in the future in one or more
series as authorized by our board of directors. Prior to the issuance of
shares of any series, the board of directors is required by Maryland law and
our charter to fix the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms
or conditions of redemption for each series. Because our board of directors
has the power to establish the preferences, powers and rights of each series
of preferred stock, it may provide the holders of any series of preferred
stock with preferences, powers and rights, voting or otherwise, senior to the
rights of holders of our common stock. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of
us, including an extraordinary transaction (such as a merger, tender offer or
sale of all or substantially all of our assets) that might provide a premium
price for holders of our common stock. Our board of directors has no present
plans to issue any preferred stock.
We will only offer preferred stock to our sponsor or any of its
affiliates on the same terms as we offer it to all other existing or new
stockholders unless the issuance is approved by a majority of our independent
directors who do not have an interest in the transaction and who have the
opportunity to consult, at our expense, with our counsel or with independent
legal counsel.
WARRANTS
We have agreed in some instances to offer the managing dealer one
warrant to purchase one share of our common stock for every 25 shares of
common stock sold by the managing dealer. Our
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offer is subject to the issuance of a maximum of 2,000,000 warrants. The
managing dealer has agreed to pay us $0.0008 for each warrant or an aggregate
of $1,600 if all 2,000,000 warrants are issued. We will issue these warrants
on a quarterly basis commencing on the later to occur of:
(1) 60 days after the date on which the common
stock is first sold pursuant to this
offering; or
(2) the date as of which the minimum offering of
200,000 shares of common stock is sold and
the escrowed proceeds are released to us.
The managing dealer may retain the warrants or transfer them to the
soliciting dealers who sold the common stock, except where prohibited by
either federal or state securities laws.
The holder of a warrant will be entitled to purchase one share of
our common stock from us at a price of $12 during the time period beginning
one year after the date on which that warrant is issued and ending five years
from the effective date of this offering. We set the exercise price of the
warrants at 120% of the offering price per share because that is the minimum
exercise price at which some states permit us to issue warrants in connection
with the sale of shares to residents of those states. If the offering price
of the shares pursuant to this prospectus is increased at any time prior to
the exercise of any warrant, then the exercise price of each unexercised
warrant issued in connection with this offering will 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. We do not presently anticipate an increase
in the offering price of the shares. Subject to some limitations, the
warrants may not be transferred, assigned, pledged or hypothecated for a
period of one year following the effective date of this offering. In
addition, no warrant will be exercisable until one year from the date it is
issued.
A warrant may not be exercised unless the shares to be issued upon
its exercise have been registered or are exempt from registration in the
state of residence of the holder of the warrant or a prospectus required
under the laws of the state cannot be delivered to the buyer on our behalf.
In addition, holders of warrants may not exercise them to the extent the
exercise would jeopardize our status as a REIT under the Internal Revenue
Code.
We have issued, and may continue to issue, similar warrants to the
managing dealer in connection with our initial public offering of common
stock. As of September 30, 2000, the managing dealer has purchased
409,290.3608 warrants.
The terms of all of the warrants, including the exercise price and
the number and type of securities issuable upon their exercise, may be
adjusted in the event of stock dividends, subdivisions, combinations and
reclassification of our common stock or the issuance to our stockholders of
rights, options or warrants entitling them to purchase our common stock or
securities convertible into our common stock. The terms of the warrants also
may be adjusted if we engage in merger or consolidation transactions or if
all or substantially all of our assets are sold. The warrants are not
transferable or assignable except in limited circumstances. Exercise of these
warrants will be under the terms and conditions detailed in this prospectus
and in the warrant purchase agreement, which is an exhibit to our
registration statement for this offering.
Holders of the warrants do not have the rights of stockholders, do
not have voting rights and are not entitled to receive distributions.
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At nominal cost, holders of the warrants have the opportunity to
profit from a rise in the price of our common stock without assuming the risk
of ownership. Exercise of these warrants will dilute the percentage ownership
interest of our other stockholders. Moreover, the holders of the warrants
might exercise them at a time when we would be able to obtain needed capital
by a new offering of our securities on terms more favorable than those
provided by the warrants.
ISSUANCE OF ADDITIONAL SECURITIES AND DEBT INSTRUMENTS
Our directors are authorized to issue additional stock or other
convertible securities for cash, property or other consideration on such
terms as they may deem advisable. Our directors are also authorized to
classify or reclassify any unissued shares of our stock without approval of
the holders of our outstanding securities. Subject to some restrictions, our
directors may cause us to issue debt obligations, including debt with
conversion privileges on more than one class of our stock. Our directors may
issue debt obligations on such terms and conditions as they may determine,
including debt with the right to convert into stock. Subject to some
restrictions, our directors may also cause us to issue warrants, options and
rights to buy our common stock on such terms as they deem advisable to our
stockholders, as part of a financing arrangement, or pursuant to stock option
plans. Our directors may cause us to issue warrants, options and rights to
buy our common stock even though their exercise could result in dilution in
the value of our outstanding common stock.
RESTRICTIONS ON ISSUANCE OF SECURITIES
Our charter provides that we will not issue:
- common stock which is redeemable at the option of the holder;
- debt securities unless the historical debt service coverage in
the most recently completed fiscal year is sufficient to
properly service the higher level of debt;
- options or warrants to purchase stock to our advisor, sponsor,
director(s) or any affiliates of our advisor, sponsor or
directors except on the same terms as sold to the general
public and in an amount not to exceed 10% of our outstanding
common or preferred stock on the date of grant of any options
or warrants; or
- stock on a deferred payment basis or similar arrangement.
The charter also provides that we will not issue non-voting or
assessable common stock or warrants, options or similar evidences of a right
to buy stock unless they are issued to all holders of stock ratably, as part
of a financing arrangement or as part of a stock option plan to our
directors, officers or employees.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order to qualify as a REIT under the Internal Revenue Code, among
other things, our charter provides that, subject to exceptions described
below, no person may beneficially own, or be deemed to beneficially own by
virtue of the attribution provisions of the Internal Revenue Code, more than
9.8%, in number of shares or value, of our outstanding common or preferred
stock. Our charter further provides that the following will be null and void:
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- any direct or indirect beneficial ownership of our common
stock or preferred stock in excess of the 9.8% ownership limit
regardless of when and how the common stock or preferred stock
is acquired; and
- any transfer of our common stock or preferred stock that
would:
(1) result in any person beneficially owning, directly or
indirectly, our common stock or preferred stock in
excess of the 9.8% ownership limit;
(2) result in our common stock and preferred stock being
beneficially owned by fewer than 100 persons;
(3) result in us being "closely held" within the meaning
of Section 856(h) of the Internal Revenue Code; or
(4) result in us failing to qualify as a REIT, including
by causing us to directly or constructively own 10%
or more of the ownership interests in a tenant of our
or the operating partnership's real property.
Any intended transferee described above will not acquire any rights in our
common stock or preferred stock attempted to be transferred in violation of
the above-described restrictions.
Subject to the exceptions described below, to the extent that any
person beneficially owns our common or preferred stock in excess of the 9.8%
ownership limit or an attempted transfer of stock would result in a null and
void transfer described above, the common stock or preferred stock so
beneficially owned or attempted to be transferred in violation of the
restrictions in our charter would be designated as excess shares and
automatically transferred under the provisions of our charter to us as
trustee of a trust for the exclusive benefit of a person or persons to whom
the common stock or preferred stock could be transferred without causing a
violation of our charter. Our charter requires the holder of the certificates
representing the excess shares to surrender the certificates to us for
registration in the name of the trust.
These shares would continue as issued and outstanding common stock
or preferred stock. While these shares are held by the trust, they would not
have any voting rights, they would not be considered for purposes of any
stockholder vote or determining a quorum for such a vote, and they would not
be entitled to any dividends or other periodic distributions. As a result,
the owner of these shares would be required to repay to us any dividends or
other distributions received on them.
The owner of any excess shares would have the right to direct the
trust to transfer the shares to any person or persons to whom the shares can
be transferred without causing another violation of our charter. In addition,
these shares would be deemed to have been offered for sale to us or our
designees for a 90-day period. The 90-day period begins on the later of the
date the owner of the shares notifies us of their purported acquisition or
the date our board of directors determines in good faith that a transfer
which results in a violation of our charter described above occurred if no
notice is provided. In the event the shares are purchased from the trust, the
owner of the shares is limited to receiving payment of a price not in excess
of the owner's cost. In the event the shares were received by the owner as a
gift or in another transaction for no consideration, the owner is limited to
receiving a price not in excess of (1) the market price on the date of the
gift, in the case of a purchase by a beneficiary, or (2) the lesser of the
market price on the date of the gift or the market price on the date of our
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purchase of the shares, in the case of a purchase by us. The method for
determining the market price is set forth in our charter.
Any person who beneficially acquires or attempts to acquire our
common or preferred stock in violation of the restrictions just discussed, or
any person who beneficially owned or constructively owned shares of common or
preferred stock that were transferred to a trust described above, will be
required to give us immediate written notice of that event and to provide to
us any other information as we may request in order to determine the effect,
if any, of the transfer on our status as a REIT.
Our charter requires all persons who directly or indirectly
beneficially own more than 5%, or any lower percentages as required pursuant
to regulations under the Internal Revenue Code, of our outstanding common and
preferred stock, within 30 days after January 1 of each year, to provide to
us a written statement or affidavit stating their name and address, the
number of shares of common and preferred stock they beneficially own directly
or indirectly, and a description of how the shares are held. In addition,
each beneficial owner must provide to us any additional information as we may
request in order to determine the effect, if any, of their beneficial
ownership on our status as a REIT and to ensure compliance with the 9.8%
ownership limit.
Our board of directors may exempt a person from the 9.8% ownership
limit upon receipt of a ruling from the Internal Revenue Service or an
opinion of counsel as to the lack of an adverse impact on our continued
qualification as a REIT, and upon any other conditions as the board of
directors may direct. However, our board of directors may not grant an
exemption from the 9.8% ownership limit to any proposed transferee whose
beneficial ownership of our common and preferred stock in excess of the
ownership limit would result in the termination of our status as a REIT.
Our board of directors waived this 9.8% ownership limit in the case
of Macomb County Retirement System which beneficially owned more than 9.8% of
our issued and outstanding shares when it purchased its shares. As of October
18, 2000, Macomb County Retirement System owned 12.79% of our issued and
outstanding shares.
All certificates representing any shares of our common or preferred
stock will bear a legend referring to the restrictions described above.
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The following paragraphs summarize material provisions of Maryland
law and of our charter and bylaws. The following summary does not purport to
be complete and is subject to and qualified in its entirety by reference to
Maryland law and our charter and bylaws, copies of which are exhibits to the
registration statement of which this prospectus is part.
BUSINESS COMBINATIONS. Under Maryland law, some business
combinations (including a merger, consolidation, share exchange or an asset
transfer or issuance or reclassification of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or more
of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of ten percent or more of the voting power
of the then-outstanding voting stock of the corporation (an interested
stockholder) or an affiliate of such an interested stockholder are prohibited
for five years after the most recent date on which the interested stockholder
becomes an interested stockholder. A person is not an interested stockholder
if, prior to the most recent time at which the person would otherwise have
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become an interested stockholder, the board of directors of the corporation
approved the transaction which otherwise would have resulted in the person
becoming an interested stockholder. Thereafter, any such business combination
must be recommended by the board of directors of such corporation and
approved by the affirmative vote of at least:
- 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
- two-thirds of the votes entitled to be cast by holders of
voting stock of the corporation other than shares held by the
interested stockholder with whom (or with whose affiliate) the
business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a
minimum price (as defined in the Maryland business combination
statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the interested
stockholder for its shares.
These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by our board of directors prior to
the time that the interested stockholder becomes an interested stockholder.
As permitted under Maryland law, our charter exempts any business
combinations involving us and The Inland Group or any of its affiliates. As a
result, the five-year prohibition and the super-majority vote requirement
will not apply to any business combinations between any affiliate of The
Inland Group and us. As a result, any affiliate of The Inland Group may be
able to enter into business combinations with us, which may or may not be in
the best interests of the stockholders.
CONTROL SHARE ACQUISITION. With some exceptions, Maryland law
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 (1) owned by the acquiring person, (2) owned by officers, and (3)
owned by employees who are also directors. Control shares mean voting shares
which, if aggregated with all other voting shares owned by an acquiring
person or which the acquiring person can exercise or direct the exercise of
voting power, would entitle the acquiring person to exercise voting power in
electing directors within one of the following ranges of voting power:
- one-tenth or more but less than one-third;
- one-third or more but less than a majority; or
- a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
control share acquisition occurs when, subject to some exceptions, a person
directly or indirectly acquires ownership or the power to direct the exercise
of voting power (except solely by virtue of a revocable proxy) of issued and
outstanding control shares. A person who has made or proposes to make a
control share acquisition, upon satisfaction of some specific conditions,
including an undertaking to pay expenses, may compel our board of directors
to call a special meeting of stockholders to be held within 50 days of demand
to consider the voting rights
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of the control shares. If no request for a meeting is made, we may present
the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to some conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without
regard to the absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction or to acquisitions approved or exempted by the
charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by The Inland Group or any
affiliate of The Inland Group of our shares of stock. We cannot assure that
such provision will not be amended or eliminated at any time in the future.
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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, we expect to have outstanding 64,744,198 shares of
common stock. This includes:
- the 20,000 shares issued to our advisor;
- the 10,568,378 shares sold as of September 30, 2000 in our
initial public offering;
- the 205,343 shares sold pursuant to our distribution
reinvestment program; and
- the 49,523 shares repurchased pursuant to our share
repurchase program
and assumes that:
- we sell all 50,000,000 shares of common stock offered on a
best efforts basis in this offering;
- we sell all 4,000,000 shares to be issued pursuant to our
distribution reinvestment program; and
- there is no exercise of options or warrants which are
expected to be outstanding and exercisable.
In addition, we have reserved:
- 2,000,000 shares for issuance upon exercise of up to
2,000,000 warrants; and
- 75,000 shares for issuance upon exercise of options which may
be granted pursuant to our independent director stock option
plan.
Subject to the provisions of our charter, we could issue an undetermined
number of shares of common or preferred stock:
- directly for equity interests in real properties;
- upon exchange of any units of limited partnership interest in
the operating partnership; or
- upon exchange of any interests in entities that own our
properties or in other companies we control, which might be
issued for equity interests in real properties.
All of the common stock we are offering by this prospectus will be freely
tradable in the public market, if any, without restriction or limitation
under the Securities Act of 1933 by persons other than our affiliates and
soliciting dealers considered underwriters. However, the common stock will be
subject to the restrictions explained under "Description Of Securities --
Restrictions on Ownership and Transfer."
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SECURITIES ACT RESTRICTIONS
The common stock owned by our affiliates and the common stock
issuable upon exchange of limited partnership units will be subject to Rule
144 promulgated under the Securities Act and may not be sold in the absence
of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144.
In general, under Rule 144, a person, or persons whose common stock
is aggregated with them in accordance with Rule 144, who has beneficially
owned securities acquired from an issuer or an affiliate of the issuer for at
least one year, would be entitled, within any three-month period, to sell a
number of shares of common stock that does not exceed the greater of (1) 1%
of the then-outstanding number of shares or (2) the average weekly reported
trading volume of the common stock on a national securities exchange or
market during the four calendar weeks preceding each sale. Sales under Rule
144 must be transacted in a specific manner and must meet requirements for
public notice as well as public information about us. Any person who (1) is
not deemed to have been our affiliate at any time during the three months
preceding a sale, and (2) has beneficially owned our common stock for at
least two years, would be entitled to sell the common stock under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, notice
requirements or public information requirements. An affiliate, for purposes
of the Securities Act, is a person that directly, or indirectly, through one
or more intermediaries, controls, or is controlled by, or under common
control with, us.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
We have established an independent director stock option plan for
the purpose of attracting and retaining independent directors. See
"Management -- Independent Director Stock Option Plan." We have issued in the
aggregate options to purchase 10,500 shares of our common stock to our
independent directors, at the exercise price of $9.05 per share. An
additional 64,500 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 Securities Act
provides that common stock acquired on the exercise of outstanding options by
affiliates may be resold by them subject to all provisions of Rule 144 except
its one-year minimum holding period. We intend to register the common stock
to be issued under the independent director stock option plan in a
registration statement or statements on Form S-8.
WARRANTS
We will issue up to 2,000,000 warrants in connection with the
offering, which will allow the holders to purchase up to 2,000,000 shares of
our common stock upon the terms specified in the warrants. The managing
dealer has purchased 409,290.3608 warrants. See "Description of Securities --
Warrants" for a description of the 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 our common stock. No assurance can be given that a public market
for our common stock will develop. No prediction can be made as to the
effect, if any, that future sales of common stock, including sales pursuant
to Rule 144, or the availability of common stock for future sale will have on
the market price, if any, prevailing from time to time. Sales of substantial
amounts of our common stock, including shares issued upon the exercise of
options or the exchange of limited partnership units or other interests, or
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the perception that these sales could occur, could adversely affect
prevailing market prices of our common stock and impair our ability to obtain
additional capital through the sale of equity securities. See "Risk Factors
-- Investment Risks." For a description of restrictions on transfer of common
stock, see "Description of Securities -- Restrictions on Ownership and
Transfer." Also, see the following two paragraphs regarding conversion,
redemption and registration rights pertaining to limited partnership units.
CONVERSION AND REDEMPTION RIGHTS
Limited partners in the operating partnership will have the ability
to convert their limited partnership units into shares of our common stock.
Limited partners will also have the ability to redeem their limited
partnership units for cash or our common stock at our option. See "Operating
Partnership Agreement -- Limited Partner Conversion Rights" and "-- Limited
Partner Redemption Rights."
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 operating partnership and to holders of
interests in other companies we control, if any.
Any common stock issued to a limited partner upon conversion or
redemption of limited partnership units may be sold only pursuant to an
effective registration under the Securities Act or pursuant to any available
exemption from such registration.
REGISTRATION RIGHTS
In the future we may grant "demand" and/or "piggyback" registration
rights to (1) stockholders receiving our common stock directly for their
equity interests in our assets, (2) limited partners receiving units of
limited partnership interest in the operating partnership for their interests
in properties, and (3) persons receiving interests in any real property
partnership for their interests in real properties. These rights will be for
registration under the Securities Act of any of our common stock acquired by
them directly or upon exchange of their units or interests in the applicable
partnership. The terms and conditions of any agreements for registration
rights will be negotiated and determined at such future time as we determine
advisable in connection with the acquisition of one or more properties.
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SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS
Each stockholder is bound by and deemed to have agreed to the terms of
our organizational documents by his, her or its election to become a
stockholder. Our organizational documents consist of our charter and bylaws. Our
directors, including all the independent directors, reviewed and unanimously
ratified our charter and bylaws at our first board of directors meeting. The
following is a summary of pertinent provisions of our 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 our
registration statement of which this prospectus is part. See "Where You Can Find
More Information."
Our charter in its present form was filed with the State Department of
Assessments and Taxation of Maryland and became effective on February 3, 1999.
The bylaws in their present form became operative when our board of directors
approved them on January 25, 1999. Neither our charter nor bylaws have an
expiration date. As a result, they will remain effective in their current form
throughout our existence, unless they are amended or we are dissolved.
CHARTER AND BYLAW PROVISIONS
The stockholders' rights and related matters are governed by our
charter and bylaws and Maryland law. Some provisions of the charter and bylaws,
summarized below, may make it more difficult to change the composition of our
board of directors and could have the effect of delaying, deferring or
preventing a change in control of us, including an extraordinary transaction
(such as a merger, tender offer or sale of all or substantially all of our
assets) that might provide a premium price for holders of our common stock.
STOCKHOLDERS' MEETINGS
Our bylaws provide that an annual meeting of the stockholders will be
held on the first Tuesday in May of each year or on a day in May that the board
of directors may determine. However, the meeting will not be held less than 30
days after the delivery of our annual report to stockholders. The purpose of
each annual meeting of the stockholders is to elect directors and to transact
any other proper business. The chairman, the president, a majority of the
directors or a majority of the independent directors may call a special meeting
of the stockholders. The secretary or some other officer must call a special
meeting when the stockholders holding 10% or more of the outstanding shares
entitled to vote make a written request for a meeting. The written request may
be in person or by mail and must state the purpose(s) of the meeting and the
matters to be acted upon. We have entered into an agreement with Inland Real
Estate Investment Corporation, our sponsor, which provides that it will pay for
the reasonably estimated cost to prepare and mail a notice of any special
meeting of stockholders requested by the stockholders. This will make it
unnecessary for our stockholders or us to pay for such cost. The meeting will be
held on a date not less than 15 nor more than 60 days after the distribution of
the notice, at the time and place specified in the notice. Except as provided in
the preceding sentence, we will give notice of any annual or special meeting of
stockholders not less than 10 nor more than 90 days before the meeting. The
notice will 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 will
constitute a quorum. The majority vote of the stockholders will be binding on
all our stockholders.
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BOARD OF DIRECTORS
Our charter and bylaws provide that we may not have less than three nor
more than eleven directors. A majority of the directors must be independent
directors. Independent directors are directors who are not and have not been
affiliated with us, our sponsor or our advisor within the two years prior to
their becoming our independent director. A vacancy on the board of directors
caused by the death, resignation or incapacity of a director within the limits
described above may be filled by the vote of a majority of the remaining
directors, whether or not the remaining directors constitute a quorum. Upon a
vacancy created by the death, resignation or incapacity of an independent
director, the remaining independent directors must nominate a replacement. A
vacancy on the board of directors caused by an increase in the number of
directors may be filled by a majority of the entire board of directors. When a
vacancy occurs as a result of the removal of a director by stockholders, the
vacancy 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 affirmative
vote of the holders of not less than 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 we are acquiring. At least one of the independent directors must have
three years of relevant real estate experience.
STOCKHOLDER VOTING RIGHTS
Each share of our common stock has one vote on each matter submitted to
a vote of stockholders. Shares of common stock do not have cumulative voting
rights or preemptive rights. Stockholders may vote in person or by proxy.
Directors are elected when they receive a majority of the votes of
holders of shares of stock present in person or by proxy at a stockholders'
meeting, provided there was a quorum when the meeting commenced. A quorum is
obtained when the stockholders holding a majority of the aggregate number of
shares entitled to be voted are present. Any or all directors may be removed,
with or without cause, by the affirmative vote of the holders of not less than a
majority of the outstanding shares. All other questions must be decided by the
affirmative vote of the holders of a majority of shares of stock present in
person or by proxy at a meeting at which a quorum is present. Maryland law
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 (which may be impracticable for a publicly held corporation).
The approval of our board of directors and of holders of at least a
majority of the outstanding voting shares of equity stock is necessary for us to
do any of the following:
- amend our charter;
- transfer all or substantially all of our assets other than
in the ordinary course of business or in connection with
liquidation and dissolution;
- engage in mergers, consolidations or share exchanges; or
- dissolve or liquidate.
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Our charter provides that a sale of two-thirds or more of our assets, based on
the total number or the current fair market value of properties and mortgages we
own, is a sale of substantially all of our assets. See "Description of
Securities -- Common Stock" for an explanation of instances where stockholder
approval is not required.
Neither the advisor, the sponsor, the directors, nor any affiliate may
vote their shares of stock 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 us and any of them. For purposes of
determining the necessary percentage and interest of shares needed to approve a
matter on which the advisor, the sponsor, the directors and any affiliate may
not vote or consent, the shares of our common stock owned by them will not be
included.
STOCKHOLDER LISTS; INSPECTION OF BOOKS AND RECORDS
Any stockholder or his designated representative will be permitted
access to all of our records at all reasonable times and may inspect and copy
any of them for the purposes specified below. We maintain an alphabetical list
of names, record addresses and business telephone numbers, if any, of all
stockholders with the number of shares held by each at our principal office. The
stockholder list is updated at least quarterly and is open for inspection by a
stockholder or his designated agent at the stockholder's request. A stockholder
may request a copy of the stockholder list to find out about matters relating to
the stockholder's voting rights and their exercise under federal proxy laws. We
will mail the stockholder list to any stockholder requesting it within 10 days
of receiving the request. We may impose a reasonable charge for expenses
incurred in reproducing the list.
If our advisor or directors neglect or refuse to produce or mail a copy
of the stockholder list as requested, then in accordance with applicable law and
our charter, the advisor and the directors will be liable to the stockholder who
requested the list. Their liability will include the costs, including reasonable
attorneys' fees, incurred by the stockholder in compelling the production of the
list and actual damages suffered by the stockholder because of the refusal or
neglect. However, the fact that the actual purpose of the request is to secure
the list for the purpose of selling it, or using it for a commercial or other
purpose is a defense against liability for refusal to supply the list. We may
require the stockholder requesting the list to represent that the stockholder
list is not requested for a commercial purpose unrelated to the stockholder's
interest in us.
In addition, our books and records are open for inspection by state
securities administrators upon reasonable notice and during normal business
hours at our principal place of business.
AMENDMENT OF THE ORGANIZATIONAL DOCUMENTS
Our charter may be amended, after approval by the board of directors,
by the affirmative vote of holders of a majority of the then outstanding voting
shares of stock. Our bylaws may be amended in a manner not inconsistent with the
charter by a majority vote of the directors.
DISSOLUTION OR TERMINATION
As a Maryland corporation, we may be dissolved under Maryland law,
after approval by the board of directors, at any time with the approval of a
majority of the outstanding shares of stock. However, we anticipate that by
February 11, 2004, the board of directors will determine whether to:
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- apply to have our shares of common stock listed for trading on
a national stock exchange or included for quotation on a
national market system, provided we meet the then applicable
listing requirements; and/or
- commence subsequent offerings after completion of the
offering.
If listing our shares of common stock is not feasible by that time, our board of
directors may decide to:
- sell our assets individually;
- list our shares of common stock at a future date; or
- liquidate us by 10 years of such date.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Our bylaws provide that, with respect to our annual meeting of
stockholders, nominations for election to our board of directors and the
proposal of business to be considered by stockholders may be made only:
- pursuant to our notice of the meeting;
- by or at the direction of our board of directors; or
- by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth
in the bylaws.
Our bylaws also provide that, with respect to special meetings of stockholders,
only the business specified in our notice of meeting may be brought before the
meeting of stockholders and nominations for election to the board of directors
may be made only:
- pursuant to our notice of the meeting;
- by or at the direction of the board of directors; or
- provided that the board of directors has determined that
directors will be elected at the meeting, by a stockholder
who is entitled to vote at the meeting and who complied with
the advance notice procedures set forth in the bylaws.
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A stockholder's notice for a special meeting must be delivered to our principal
executive offices:
- not earlier than the ninetieth day prior to the special
meeting; and
- not later than the close of business on the later of:
- the sixtieth day prior to the special meeting; or
- the tenth day following the first public announcement
of the special meeting and the nominees proposed by
the board of directors to be elected at the meeting.
RESTRICTIONS ON CONVERSION TRANSACTIONS AND ROLL-UPS
Our charter requires that some transactions involving an acquisition,
merger, conversion or consolidation in which our stockholders receive securities
in a surviving entity, a roll-up entity, must be approved by the holders of a
majority of the shares. Approval of a majority of shares for a transaction
resulting in a roll-up entity is only required, however, until the board
determines that it is no longer in our best interest to attempt or continue to
qualify as a REIT. The holders of a majority of the shares do not need to
approve any such transaction effected because of changes in applicable law, or
to preserve tax advantages for a majority in interest of the stockholders.
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. A roll-up does not include (1) a transaction
involving securities that have been listed on a national securities exchange or
traded through The Nasdaq Stock Market -- Nasdaq National Market for at least 12
months, or (2) a transaction involving our conversion to a trust or association
form if, as a consequence of the transaction, there will be no significant
adverse change in any of the following:
- stockholders' voting rights;
- our term and existence;
- sponsor or advisor compensation; or
- our investment objectives.
In the event of a proposed roll-up, an appraisal of all our assets must
be obtained from a person with no current or prior business or personal
relationship with our advisor or directors. Further, that person must be
substantially engaged in the business of rendering valuation opinions of assets
of the kind we hold. The appraisal will be included in a prospectus used to
offer the securities of a roll-up entity. It will also be filed with the
Securities and Exchange Commission and the state regulatory commissions as an
exhibit to the registration statement for the offering of the roll-up entity's
shares. As a result, an issuer using the appraisal will be subject to liability
for violation of Section 11 of the Securities Act and comparable provisions
under state laws for any material misrepresentations or material omissions in
the appraisal. Our assets shall be appraised in a consistent manner and the
appraisal will:
- be based on an evaluation of all relevant information;
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- indicate the value of the assets as of a date immediately
prior to the announcement of the proposed roll-up
transaction; and
- assume an orderly liquidation of the assets over a 12-month
period.
The terms of the engagement of the appraiser will clearly state that the
engagement is for the benefit of us and our stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying it, will
be included in a report to the stockholders in the event of a proposed roll-up.
We may not participate in any proposed roll-up which would:
- result in the stockholders having rights which are more
restrictive to stockholders than those provided in our
charter, including any restriction on the frequency of
meetings;
- result in the stockholders having less comprehensive voting
rights than are provided in our charter;
- result in the stockholders having greater liability than
provided in our charter;
- result in the stockholders having fewer rights to receive
reports than those provided in our charter;
- result in the stockholders having access to records that are
more limited than those provided for in our charter;
- 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;
- limit the ability of an investor to exercise its voting rights
in the roll-up entity on the basis of the number of the shares
held by that investor;
- result in investors in the roll-up having less comprehensive
rights of access to the records of the roll-up than those
provided in our charter; or
- place any of the costs of the transaction on us if the roll-up
is not approved by the stockholders.
However, with the prior approval of a majority of the stockholders, we may
participate in a proposed roll-up if the stockholders would have rights and be
subject to restrictions comparable to those contained in our charter.
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Stockholders who vote "no" on the proposed roll-up will have the choice
of:
- accepting the securities of the roll-up entity offered; or
- one of either:
(a) remaining as our stockholders and preserving their
interests on the same terms and conditions as
previously existed; or
(b) receiving cash in an amount equal to their pro rata
share of the appraised value of our net assets.
These provisions in our charter, our bylaws and Maryland law could have the
effect of delaying, deferring or preventing a change in control of us, including
an extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price for holders
of our common stock.
The limitations and restrictions set forth below under "-- Limitation
on Total Operating Expenses," "-- Transactions with Affiliates," and "--
Restrictions on Borrowing" in this section will be effective until our board of
directors determines that it is no longer in our or our stockholders' best
interests that we continue to operate as a REIT, or until such time as we fail
to qualify as a REIT.
LIMITATION ON TOTAL OPERATING EXPENSES
Our charter provides that, subject to the conditions described in the
following paragraph, our annual total operating expenses in any fiscal year
shall not exceed the greater of 2% of our average invested assets or 25% of our
net income. Our independent directors have a fiduciary responsibility to limit
our annual total operating expenses to amounts that do not exceed these limits.
Our 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. Such a finding by our independent directors and the
reasons supporting it shall be recorded in our minutes of meetings of our board
of directors. If at the end of any fiscal quarter our total operating expenses
for the 12 months then ended are more than 2% of average invested assets or more
than 25% of net income, whichever is greater, as described above, we will
disclose this in writing to the stockholders within 60 days of the end of the
fiscal quarter. If our independent directors conclude that higher total
operating expenses are justified, the disclosure will also contain an
explanation of the conclusion. If total operating expenses exceed the
limitations described above and if our directors are unable to conclude that the
excess was justified, then the advisor will reimburse us the amount by which the
aggregate annual total operating expenses we paid or incurred exceed the
limitation. We must make the reimbursement within 60 days after the end of the
fiscal year.
TRANSACTIONS WITH AFFILIATES
Our charter imposes restrictions on transactions between us and our
advisor, sponsor and any director or their affiliates as follows:
(1) SALES AND LEASES TO US. We will not purchase property from
our sponsor, advisor, directors or any of their affiliates, unless a
majority of disinterested directors, including a majority of
disinterested independent directors, approves it as fair and reasonable
to
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us. The price to us can be no greater than the cost of the asset to
our sponsor, advisor, director or their affiliate. If the price to us
is greater than such cost, there must be substantial, reasonable
justification for the excess cost. In no event will the cost of the
property to us exceed its appraised value at the time we acquired it.
(2) SALES AND LEASES TO SPONSOR, ADVISOR, DIRECTOR OR ANY
AFFILIATE. Our sponsor, advisor, director or any of their affiliates
will not acquire assets from us unless a majority of disinterested
directors, including a majority of disinterested independent directors,
approves the transaction as being fair and reasonable to us. We may
lease assets to our sponsor, advisor, director or any of their
affiliates, but still only if a majority of the disinterested
directors, including a majority of disinterested independent directors,
approves it as fair and reasonable to us.
(3) LOANS. We will not make loans to our sponsor, advisor,
director or any of their affiliates except as provided in clauses (4)
and (6) under "-- Restrictions on Investments" below in this section,
or to our wholly owned subsidiaries. Also, we may not borrow money from
our sponsor, advisor, director or any of their affiliates, unless a
majority of disinterested directors, including a majority of
disinterested independent directors, approves the transaction as fair,
competitive and commercially reasonable and no less favorable to us
than loans between unaffiliated parties under the same circumstances.
(4) INVESTMENTS. We will not invest in joint ventures with our
sponsor, advisor, directors or any of their affiliates, unless a
majority of disinterested directors, including a majority of
disinterested independent directors, approves the transaction as fair
and reasonable to us and on substantially the same terms and conditions
as those received by the other joint ventures. Neither can we invest in
equity securities unless a majority of disinterested directors,
including a majority of disinterested independent directors, approves
the transaction as being fair, competitive, and commercially
reasonable.
(5) OTHER TRANSACTIONS. All other transactions between us and
our sponsor, advisor, directors or any of their affiliates, require
approval by a majority of disinterested directors, including a majority
of disinterested independent directors, as being fair and reasonable
and on terms and conditions not less favorable to us than those
available from unaffiliated third parties.
RESTRICTIONS ON BORROWING
We may not incur indebtedness to enable us to make distributions except
as necessary to satisfy the requirement to distribute at least 90% of our REIT
taxable income, or otherwise as necessary or advisable to ensure that we
maintain our qualification as a REIT for federal income tax purposes. Our
aggregate borrowings, secured and unsecured, will be reasonable in relation to
our net assets and will be reviewed by our board at least quarterly. We
anticipate that, in general, aggregate borrowings secured by all our properties
will not exceed 55% of their combined fair market value. This anticipated amount
of leverage will be achieved over time. However, as of September 30, 2000, the
aggregate borrowings on our properties was 55.8%, thereby exceeding 55% of their
combined fair market value. Our charter provides that the aggregate amount of
borrowing in relation to our net assets will, 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 will be:
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- approved by a majority of our independent directors,
- disclosed to stockholders in our next quarterly report to
them, along with justification for such excess, and
- subject to approval of the stockholders.
See "Investment Objectives and Policies -- Borrowing."
RESTRICTIONS ON INVESTMENTS
The investment policies set forth in our charter have been approved by
a majority of independent directors. Our charter prohibits investments in:
(1) any foreign currency or bullion;
(2) short sales; and
(3) any security in any entity holding investments or engaging in
activities prohibited by our charter.
In addition to other investment restrictions imposed by our directors
from time to time consistent with our objective to continue to qualify as a
REIT, we will observe the following restrictions on our investments as set forth
in our charter:
(1) Not more than 10% of our 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 acquired for the
purpose of producing rental or other operating income,
properties under construction, and properties under contract
for development or in planning for development within one
year.
(2) We will not invest in commodities or commodity future
contracts. This limitation does not apply to interest rate
futures when used solely for hedging purposes.
(3) We will not invest in contracts for the sale of real estate.
(4) We will not invest in or make mortgage loans unless we
obtain an appraisal of the underlying property. Mortgage
indebtedness on any property will 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 our advisor, sponsor,
directors or their affiliates, we must obtain the appraisal
from an independent expert. We will keep the appraisal in
our records for at least five years, where it will be
available for inspection and duplication by any
stockholder. In addition to the appraisal, we will also
obtain a mortgagee's or owner's title insurance policy or
commitment as to the priority of the mortgage or condition
of the title. We will not invest in real estate contracts
of sale otherwise known as land sale contracts.
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(5) We will not make or invest in mortgage loans, including
construction loans, on any one property if the aggregate
amount of all outstanding mortgage loans outstanding on the
property, including our loans, would exceed an amount equal
to 85% of the appraised value of the property. However, if
there is substantial justification due to other
underwriting criteria and provided that loans would not
exceed the appraised value of the property at the date of
the loans, we could invest in mortgage loans that exceed
85% of the appraised value of the property.
(6) We will 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 their affiliates.
(7) We will not invest in equity securities unless a majority
of disinterested directors, including a majority of
disinterested independent directors, approves the
transaction as being fair, competitive and commercially
reasonable. Investments in entities affiliated with our
advisor, the sponsor, any director or their affiliates are
subject to the restrictions on joint venture investments.
Notwithstanding these restrictions, we may purchase our own
securities when traded on a national securities exchange or
market if a majority of our directors, including a majority
of our independent directors, determines the purchase to be
in our best interests.
(8) We will not engage in any short sale nor will we borrow on an
unsecured basis if the borrowing will result in an asset
coverage of less than 300%.
(9) To the extent we invest in properties, a majority of the
directors, including a majority of the independent
directors, will approve the consideration paid for such
properties based on the fair market value of the
properties. If a majority of independent directors so
determines, the fair market value will be determined by a
qualified independent real estate appraiser selected by the
independent directors. If any property is acquired from
our sponsor, our advisor, any director, or any of their
affiliates, the provisions on transactions with affiliates
will apply.
(10) We will not invest in debt that is secured by a mortgage on
real property that is subordinate to the lien of other debt,
except where the amount of total debt does not exceed 90% of
the appraised value of the property. The value of all of these
investments may not exceed 25% of our tangible assets. The
value of all investments in this debt that does not meet these
requirements will be limited to 10% of our tangible assets,
which would be included within the 25% limitation.
(11) We will not engage in trading, as compared with investment,
activities.
(12) We will not engage in underwriting activities, or distribute
as agent, securities issued by others.
(13) We will not acquire securities in any entity holding
investments or engaging in activities prohibited by the
restrictions on investments set forth in the foregoing clauses
(1) through (12). Temporary investments of cash may be in such
entities.
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Subject to the above restrictions and so long as we qualify as a REIT,
a majority of our directors, including a majority of our independent directors,
may alter the investment policies if they determine that a change is in our best
interests.
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OPERATING PARTNERSHIP AGREEMENT
The following is a summary of the agreement of limited partnership
of Inland Retail Real Estate Limited Partnership. This summary and the
descriptions of its provisions elsewhere in this prospectus, are qualified by
the operating partnership agreement itself, which is filed as an exhibit to
our registration statement, of which this prospectus is a part. See "Where
You Can Find Additional Information."
Conducting our operations through the operating partnership allows
the sellers of properties to contribute their property interests to the
operating partnership in exchange for limited partnership common units rather
than for cash or common stock. By this, the seller is able to defer some or
all of the potential taxable gain on the transfer. From the seller's point of
view, there are also differences between the ownership of common stock and
units. Some of the differences may be material to investors because they
impact the form of business organization, distribution rights, voting rights,
transferability of equity interests received and federal income taxation.
DESCRIPTION OF PARTNERSHIP UNITS
Partnership interests in the operating partnership are divided into
"units." Initially, the operating partnership will have two classes of units:
general partnership common units and limited partnership common units.
General partnership common units represent an interest as a general partner
in the operating partnership and we will hold them as general partner.
Limited partnership 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
general partnership common units or limited partnership common units without
the consent of the limited partners. Holders of limited partnership common
units do not have any preemptive rights with respect to the issuance of
additional units.
For each limited partnership common unit received, investors
generally will be required to contribute money or a property with a net
equity value equal to the market price of one share of common stock on the
date of contribution. The net equity value is subject to adjustment in the
event of stock splits or other changes in our capital structure. Market price
means the average of the closing price per share for the five consecutive
trading days ending on that date. Holders of limited partnership common units
will not be obligated to make additional capital contributions to the
operating partnership. Furthermore, they will not have the right to make
additional capital contributions to the operating partnership or the right to
purchase additional units without our consent as 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. We, however, as the general
partner of the operating partnership, are liable for any unpaid debts and
liabilities.
Limited partners do not have the right to participate in the
management of the operating partnership. The voting rights of the limited
partners are generally limited to approval of specific types of amendments to
the operating partnership agreement. With respect to such amendments, each
limited partnership common unit has one vote. See "-- Management of the
operating partnership" in this section for a more detailed discussion of this
subject.
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In general, each limited partnership common unit will share equally
in distributions from the operating partnership when as general partner we
may declare distributions in our sole discretion. They will also share
equally in the assets of the operating partnership legally available for
distribution upon its liquidation after payment of all liabilities and
establishment of reserves and after payment of the preferred return owed to
holders of limited partnership preferred units, if any. In addition, a
portion of the items of income, gain, loss and deduction of the operating
partnership for federal income tax purposes will be allocated to each limited
partnership common unit, regardless of whether any distributions are made by
the operating partnership. See "Federal Income Tax Considerations -- Income
Taxation of the Partnerships and Their Partners" for a description of the
manner in which income, gain, loss and deductions are allocated under the
operating partnership agreement. There can be no assurance that cash
distributions to a limited partnership common unit holder will equal the
amount of income allocated to him or her in any period. Neither can there be
assurance that such distribution, if any, will be sufficient to pay the taxes
imposed on the income allocated to the holder. As general partner, we may
amend the allocation and distribution sections of the operating partnership
agreement to reflect the issuance of additional units and classes of units
without the consent of the limited partnership 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" for a more detailed explanation of these
matters.
Holders of limited partnership common units generally may not
transfer their interests 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 a limited partnership common unit for one year,
limited partnership common unit holders generally may, subject to
restrictions, convert limited partnership common units into shares of common
stock or require the operating partnership to redeem the 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. These conversion rights are accelerated in the case of some
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 limited partnership 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. We
are the general partner of the operating partnership and we anticipate that
we will conduct substantially all of our business through it. However, some
development, leasing and property management services will be conducted
through affiliates of The Inland Group, Inc. in order to preserve our REIT
status and minimize our liabilities. Generally, pursuant to the operating
partnership agreement, we, as general partner, will have full, exclusive and
complete responsibility and discretion in the management and control of the
partnership, including the ability to enter into some major transactions,
including acquisitions, dispositions and refinancings, and to cause changes
in its line of business and distribution policies. We may, without the
consent of the limited partners:
- file a voluntary petition seeking liquidation, reorganization,
arrangement or readjustment, in any form, of the partnership's
debts under Title 11 of the United States Bankruptcy Code, or
any other federal or state insolvency law, or corresponding
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provisions of future laws, or file an answer consenting to or
acquiescing in any such petition; or
- 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.
As general partner of the operating partnership, we may amend the
operating partnership agreement without the consent of the limited partners.
However, any amendment that:
- alters or changes the distribution rights of limited
partners, subject to the exceptions discussed below under
"-- Distributions" in this section,
- alters or changes their redemption rights or conversion
rights,
- imposes on limited partners any obligation to make
additional capital contributions, or
- alters the terms of the operating partnership agreement
regarding the rights of the limited partners with respect to
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.
Nevertheless, the limited partners have no right to remove us as the general
partner.
INDEMNIFICATION
To the extent permitted by law, the operating partnership agreement
provides for our indemnification as general partner. It also provides for the
indemnification of directors, officers and other persons as we 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 our charter. See "Limitation of Liability and
Indemnification of Directors, Officers and Our Advisor."
TRANSFERABILITY OF INTERESTS
Under the operating partnership agreement, we may not withdraw from the
partnership or transfer or assign all of our general partnership interest
without the unanimous consent of the limited partners. We may, however, assign
less than all of our general partnership interest. Subject to limited
exceptions, holders of limited partnership common units may withdraw from the
partnership and may transfer or encumber all or any part of their units only
with the written consent of the general partner and upon satisfaction of the
other conditions set forth in the partnership agreement. In addition, limited
partnership common units are not registered under the federal or state
securities laws. As a result, the ability of a holder to transfer units may be
restricted under such laws.
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EXTRAORDINARY TRANSACTIONS
The operating partnership agreement generally provides that either we
or the operating partnership may engage in any authorized business combination
without the consent of the limited partners. 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. We are required to send to
each limited partnership common unit holder notice of a proposed business
combination at least 30 days prior to the record date for the stockholder vote
on the combination, if any, and at least 90 days before the effective date of
the combination itself. Generally, a limited partner may not exercise his or her
conversion rights until he or she has held the units for at least one year.
However, in the case of a proposed combination, each holder of a limited
partnership common unit in the operating partnership shall have the right to
exercise his or her conversion right prior to the stockholder vote on the
transaction, even if he or she has held the 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, we have the right to pay the limited partnership
common unit holder in cash rather than in shares only if the issuance of shares
to such holder would:
- violate the ownership limit;
- result in our being "closely held" within the meaning of
section 856(h) of the Internal Revenue Code;
- cause us to own, directly or constructively, 10% or more of
the ownership interests in a tenant of our or the operating
partnership's real property within the meaning of section
856(d)(2)(B) of the Internal Revenue Code;
- cause us to no longer qualify or create a material risk
that we may no longer qualify as a REIT in the opinion of our
counsel; or
- 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
Securities Act of 1933.
Holders of limited partnership common units who timely convert their units prior
to the record date for the stockholder vote on a business combination, if any,
shall be entitled to vote their shares in any stockholder vote on the business
combination. Holders of limited partnership common units who convert their units
after the record date may not vote their shares in any stockholder vote on the
proposed business combination. The right of the limited partnership common unit
holders to exercise their right to convert without regard to whether they have
held the units for more than a year shall terminate upon the first to occur of
the disapproval of the business combination by our board of directors, its
disapproval by the stockholders, its abandonment by any of the parties to it, or
its effective date.
ISSUANCE OF ADDITIONAL UNITS
As general partner of the operating partnership, we can, without the
consent of the limited partners, cause the operating partnership to issue
additional units representing general or limited
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partnership interests. A new issuance may include preferred units, which may
have rights which are different and/or superior to those of general
partnership common units and limited partnership 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 it from borrowings or prior capital
contributions, we as general partner have the right to raise additional funds
required by the operating partnership by causing it to borrow the necessary
funds from third parties on such terms and conditions as we deem appropriate.
As an alternative to borrowing funds required by the operating partnership,
we may contribute the amount of such required funds as an additional capital
contribution. The operating partnership agreement also provides that we 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, we will receive one general partnership 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, we shall
receive one unit with rights and preferences respecting distributions
corresponding to the rights and preferences of the equity stock. If we so
contribute additional capital to the operating partnership, our partnership
interest 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 we contribute any additional capital.
DISTRIBUTIONS
The operating partnership agreement sets forth the manner in which
distributions from the partnership will be made to unit holders. Distributions
from the partnership are made at the times and in the amounts determined by us
as the general partner. Under the operating partnership agreement, preferred
units, if any, may entitle their holders to distributions prior to the payment
of distributions for the common units. The agreement further provides that
remaining amounts available for distribution after distributions for preferred
units, if any, will be distributed at the times and in the amounts we determine
as the general partner in our sole discretion, pro rata, to the holders of the
common units. We will also distribute the remaining amounts 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 as general partner we have the right to amend the distribution
provisions of the operating partnership agreement to reflect the issuance of
additional classes of units.
OPERATIONS
The operating partnership agreement requires that the operating
partnership be operated in a manner that will:
- satisfy the requirements for classification as a REIT;
- avoid any federal income or excise tax liability, unless we
otherwise cease to qualify as a REIT; and
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- ensure that the operating partnership will not be classified
as a publicly traded partnership under the Internal Revenue
Code.
Pursuant to the operating partnership agreement, the operating partnership will
assume and pay when due or reimburse us for payment of all administrative and
operating costs and expenses incurred by the operating partnership and the
administrative costs and expenses that we incur 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 the conditions in the operating partnership agreement, each holder of
a limited partnership common unit will have the right to have all or any portion
of his or her units converted into that number of shares which has an aggregate
market price as of the date of conversion equal to the net equity value of the
property or properties as of the date of contribution of the property or
properties he or she contributed. However, at our option, we may satisfy the
conversion right by delivering cash in an amount equal to the aggregate market
price on the date of conversion. We shall make the decision to exercise our
right to deliver cash in lieu of conversion shares on a case by case basis at
our sole and absolute discretion. The limited partnership common units exchanged
for cash or common stock will augment our ownership percentage 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 limited partnership
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 limited partnership common units at any time if the limited
partner's actual or constructive ownership of our common stock would:
- violate the 9.8% ownership limit;
- result in our being "closely held" within the meaning of
Section 856(h) of the Internal Revenue Code;
- cause us to directly or constructively own 10% or more of the
ownership interests in one of our tenants or of the operating
partnership's real property, within the meaning of Section
856(d)(2)(B) of the Internal Revenue Code;
- in the opinion of our counsel, cause us to no longer
qualify, or create a material risk that we would no longer
qualify, as a REIT; or
- cause the acquisition of common stock by the limited partner
to be integrated with any other distribution of common stock
for purposes of complying with the registration provisions of
the Securities Act of 1933.
In addition, as general partner we will 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 our
counsel, we would therefore no longer qualify, or if there is a material risk
that we would no longer qualify, as a REIT. See "Description of Securities --
Restrictions on Ownership and Transfer." Any common stock issued to the
limited partners upon exchange of their respective limited partnership common
units may be sold only pursuant to an effective registration statement under
the Securities Act of 1933 or pursuant
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to an available exemption from registration. See "Shares Eligible for Future
Sale -- Conversion and Redemption Rights" and "-- Registration Rights."
As general partner, we will 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 entities
that own our properties.
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 common stock 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 the Partnerships and
their Partners" and "-- Tax Consequences of Exercise of Conversion Right."
LIMITED PARTNER REDEMPTION RIGHTS
Under the terms of the operating partnership agreement and subject
to the conditions in the operating partnership agreement, each holder of a
limited partnership common unit will have the right to have all or any
portion of his or her limited partnership common units redeemed. The cash
redemption price for each limited partnership common unit will equal the net
equity value on the date of contribution of the property or properties
contributed by the holder divided by the total number of units received by
the holder for the property or properties. However, at our option, we may
satisfy the redemption right with respect to all or any portion of the common
stock offered for redemption:
- on behalf of the operating partnership; or
- by delivering common stock having an aggregate market price as
of the date the holder exercises the 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
the common stock.
The holder may not exercise this redemption right during the first year
following the receipt of the limited partnership common units, except in
connection with a business combination, or if in the opinion of our counsel,
we would, as a result of the exercise, no longer qualify, or if in the
opinion of our counsel there is a material risk that we would no longer
qualify, as a REIT.
We may not exchange any common stock for units if the limited partner's
actual or constructive ownership of our common stock would:
- violate the 9.8% ownership limit;
- result in our being "closely held" within the meaning of
Section 856(h) of the Internal Revenue Code;
- cause us to own, directly or constructively, 10% or more of
the ownership interests in a tenant of our or of the operating
partnership's real property, within the meaning of Section
856(d)(2)(B) of the Internal Revenue Code;
- in the opinion of our counsel, cause us to no longer
qualify, or create a material risk that we would no longer
would qualify, as a REIT; or
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- cause the acquisition of common stock by the limited partner
to be integrated with any other distribution of common stock
for purposes of complying with the registration provisions of
the Securities Act of 1933.
See "Description of Securities -- Restrictions on Ownership and Transfer."
Any common stock issued to the limited partners upon redemption of
their units may be sold only pursuant to an effective registration statement
under the Securities Act of 1933 or pursuant to an available exemption from such
registration. See "Shares Eligible for Future Sale -- Conversion and Redemption
Rights" and "-- Registration Rights." The interest represented by the limited
partnership common units exchanged for cash or common stock will augment our
ownership percentage interest in the operating partnership. The cash necessary
to redeem limited partnership common units will come from any funds legally
available to us or the operating partnership. However, specific funds will not
be specially set aside for such purposes, nor will an accounting reserve be
established for it. The necessary cash to satisfy the redemption right could
come from cash flow not required to be distributed to stockholders to maintain
our REIT status, fund operations or acquire new properties, or could come from
borrowings. However, as explained above, we always have the option to satisfy
the redemption right by the issuance of common stock, and we intend to reserve
common stock for that purpose. We will make the decision to exercise our right
to satisfy the redemption right by paying to the holder the redemption price or
common stock having an aggregate market price on the date the holder exercises
the redemption right equal to the redemption price for all units being redeemed
on a case by case basis in our sole and absolute discretion.
As general partner we will 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 entities that own our
properties.
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 limited partnership common units redeemed to the extent that the amount
realized exceeds the limited partner's adjusted basis in the limited partnership
common units redeemed. See "Federal Income Tax Considerations -- Income Taxation
of Partnerships and their Partners and "-- Tax Consequences of Exercise of
Redemption Right."
TAX MATTERS
Pursuant to the operating partnership agreement, we will be the tax
matters partner of the operating partnership and, as such, will have authority
to make tax decisions under the Internal Revenue 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 our investment in the operating partnership, see "Federal Income
Tax Considerations -- Income Taxation of the 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.
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TERM
The operating partnership will continue in full force and effect
until December 31, 2040 or until sooner dissolved and terminated upon (1) our
dissolution, bankruptcy, insolvency or termination, (2) the sale or other
disposition of all or substantially all of the assets of the operating
partnership unless we, as general partner, elect to continue the business of
the operating partnership to collect the indebtedness or other consideration
to be received in exchange for the assets of the operating partnership, or
(3) by operation of law.
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FEDERAL INCOME TAX CONSIDERATIONS
Beginning with the calendar year ended December 31, 1999, we elected
to qualify as a REIT under the applicable provisions of the Internal Revenue
Code of 1986, as amended, and the regulations promulgated thereunder and
receive the beneficial federal income tax treatment described below, and we
intend to continue operating as a REIT so long as REIT status remains
advantageous. However, we cannot assure you that we will meet the applicable
requirements under federal income tax laws, which are highly technical and
complex. The following discusses the applicable requirements under federal
income tax laws to maintain REIT status, the federal income tax consequences
to maintaining REIT status and all material federal income tax consequences
to you. Katten Muchin Zavis has acted and will act as our tax counsel in
connection with our election to be taxed as a REIT, and has rendered the
opinion set forth below. Some of the federal income tax implications of your
investment are set forth in the "-- Taxation of Stockholders" section below.
We, however, urge you to consult your tax advisor with respect to the
federal, state, local, foreign and other tax consequences of the purchase,
ownership and disposition of common shares which may be particular to your
tax situation.
In brief, a corporation that invests primarily in real estate can,
if it complies with the provisions in Sections 856-860 of the Internal
Revenue Code, qualify as a REIT and claim federal income tax deductions for
the dividends it pays to its stockholders. Such a corporation generally is
not taxed on its REIT taxable income to the extent such income is currently
distributed to stockholders, thereby completely or substantially eliminating
the "double taxation" that a corporation and its stockholders generally bear
together. However, as discussed in greater detail below, a corporation could
be subject to federal income tax in some circumstances even if it qualifies
as a REIT and would likely suffer adverse consequences, including reduced
cash available for distribution to its stockholders, if it failed to qualify
as a REIT.
Katten Muchin Zavis is of the opinion, assuming that the actions
described in this section are completed on a timely basis and we timely filed
the requisite elections, that we have been organized in conformity with the
requirements for qualification as a REIT beginning with our taxable year
ending December 31, 1999, and our current and proposed method of operation
(as described in this prospectus) will enable us to continue to satisfy the
applicable requirements under federal income tax laws. This opinion has been
filed as an exhibit to the registration statement of which this prospectus is
a part, and is based and conditioned, in part, on various assumptions and
representations made to Katten Muchin Zavis by us and the advisor as to
factual matters. Our qualification and federal income tax treatment as a REIT
depends upon our ability to meet, through operation of the properties we
acquire and our investment in other assets, the applicable requirements under
federal income tax laws. Katten Muchin Zavis has not reviewed these operating
results for compliance with the applicable requirements under federal income
tax laws. Therefore, we cannot assure you that our actual operating results
allow us to satisfy the applicable requirements under federal income tax laws
in any taxable year. In addition, this opinion represents Katten Muchin
Zavis' legal judgment and is not binding on the Internal Revenue Service or
the courts.
TAXATION
GENERAL. We use the term REIT Taxable Income which means the
taxable income as computed for a corporation which is not a REIT:
- without the deductions allowed by Internal Revenue Code
Sections 241 and 247, and 249 and 250 (relating generally to
the deduction for dividends received);
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- excluding amounts equal to:
- the net income from foreclosure property; and
- the net income derived from prohibited transactions;
- deducting amounts equal to:
- any net loss derived from prohibited transactions;
and
- the tax imposed by Internal Revenue Code Section
857(b)(5) upon a failure to meet the 95% and/or the
75% gross income tests;
- disregarding the deduction for dividends paid, computed
without regard to the amount of the net income from
foreclosure property which is excluded from REIT Taxable
Income; and
- without regard to any change of annual accounting period
pursuant to Internal Revenue Code Section 443(b).
In any year in which we qualify as a REIT and have a valid election
in place, we will claim deductions for the dividends we pay to the
stockholders, and therefore will not be subject to federal income tax on that
portion of our REIT Taxable Income or capital gain which is distributed to
our stockholders. We will, however, be subject to federal income tax at
normal corporate rates on any REIT Taxable Income or capital gain not
distributed.
Although we can eliminate or substantially reduce our federal income
tax liability by maintaining our REIT status and paying sufficient dividends,
we could be subject to federal income tax on some items of income. If we fail
to satisfy either the 95% Gross Income Test or the 75% Gross Income Test
(each of which is described below), yet maintain our REIT status by meeting
other requirements, we will be subject to a 100% federal income tax based on
the amount of income which caused us to fail these tests, as described below.
We will also be subject to a 100% federal income tax on the net income from
any "prohibited transaction," as described below. In addition, if we fail to
distribute annually at least the sum of: (1) 85% of our REIT Taxable Income
for such year; (2) 95% of our REIT capital gain net income for such year; and
(3) any undistributed taxable income from prior years, we 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. We may
also be subject to the corporate alternative minimum tax. Additionally, we
will be subject to federal income tax at the highest corporate rate on any
nonqualifying income from foreclosure property, although we will not own any
foreclosure property unless we make loans or accept purchase money notes
secured by interests in real property and foreclose on the property following
a default on the loan.
If we acquire any asset from a corporation that is subject to full
corporate-level federal income tax in a transaction in which our basis in the
asset is determined by reference to the selling corporation's basis in the
asset, and we recognize gain on the disposition of such an asset during the
10-year period beginning on the date we acquired such asset, then the excess
of the fair market value as of the beginning of the applicable recognition
period over our adjusted basis in such asset at the beginning of such
recognition period will be subject to federal income tax at the highest
regular corporate federal income tax rate.
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REIT QUALIFICATION TESTS. The Internal Revenue Code defines a REIT
as a corporation, trust or association:
- that is managed by one or more trustees or directors;
- the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of
beneficial interest;
- that would be taxable as a domestic corporation but for its
status as a REIT;
- that is neither a financial institution nor an insurance
company;
- 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;
- generally in which, at any time during the last half of each
taxable year, no more than 50% in value of the outstanding
stock is owned, directly, or indirectly, by five or fewer
individuals or some entities; and
- that meets the gross income, asset and annual distribution
requirements, described in greater detail below.
The first four and last conditions must be met during each taxable
year for which REIT status is sought, while the other two conditions do not
have to be met until after the first taxable year for which a REIT election
is made.
Although the 25% Asset Test (as defined below) generally prevents a
REIT from owning more than 10% of the stock, by vote or value, of an entity
other than another REIT, the Internal Revenue Code provides an exception for
ownership of voting stock in a qualified REIT subsidiary and in a taxable
REIT subsidiary. The qualified REIT subsidiary is a corporation that is
wholly owned by a REIT, and that it is not a taxable REIT subsidiary. For
purposes of the asset and Gross Income Tests described below, all assets,
liabilities and tax attributes of a qualified REIT subsidiary are treated as
belonging to the REIT. A qualified REIT subsidiary is not subject to federal
income tax, but may be subject to state or local tax. Although we expect to
hold all of our investments through the operating partnership, we may hold
investments through qualified REIT subsidiaries. A taxable REIT subsidiary is
described under "Asset Tests - 25% Asset Test" below. With respect to the
operating partnership, a partnership is not subject to federal income tax,
and instead allocates its tax attributes to its partners. The partners are
subject to federal income tax on their allocable share of the income and
gain, without regard to whether they receive distributions from the
partnership. Each partner's share of a partnership's tax attributes is
determined in accordance with the partnership agreement. In addition, for
purposes of the asset and income tests, we will be deemed to own and earn
(based on our capital interest) an undivided interest in each asset and a
share of each item of gross income, of the operating partnership.
We, in satisfying the general tests described above, must meet,
among others, the following requirements:
- SHARE OWNERSHIP TESTS. The common stock and any other
stock we issue must be held by a minimum of 100 persons (determined without
attribution to the owners of any entity owning our stock) for at least 335
days in each full taxable year, proportionately adjusted for partial taxable
years.
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In addition, at all times during the second half of each taxable year, no
more than 50% in value of our stock may be owned, directly or indirectly, by
five or fewer individuals (determined with attribution to the owners of any
entity owning our stock). However, these two requirements do not apply until
after the first taxable year an entity elects REIT status. In addition, our
charter contains provisions restricting the transfer of our stock, which
provisions are intended to assist us in satisfying both requirements.
Furthermore, the distribution reinvestment program contains provisions that
prevent it from causing a violation of these tests as do the terms of the
options granted to the independent directors and the warrants issuable to the
dealer manager and soliciting dealers. Pursuant to the applicable
requirements under federal income tax laws, we will maintain records which
disclose the actual ownership of the outstanding stock, and demand written
statements each year from the record holders of specified percentages of the
stock disclosing the beneficial owners. Those stockholders failing or
refusing to comply with our written demand are required by the Internal
Revenue Code and our charter to submit, with their tax returns, a similar
statement disclosing the actual ownership of stock and other information. See
"Description of Securities -- Restrictions on ownership and transfer."
- ASSET TESTS. We must satisfy, at the close of each calendar
quarter of the taxable year, two tests based on the composition of our
assets. After initially meeting the Asset Tests at the close of any quarter,
we will not lose our status as a REIT for failure to satisfy the Asset Tests
at the end of a later quarter solely due to changes in value of our 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
nonqualifying assets within 30 days after the close of that quarter. We
intend to maintain adequate records of the value of our assets to insure
compliance with these tests and will act within 30 days after the close of
any quarter as may be required to cure any noncompliance.
- 75% ASSET TEST. At least 75% of the value of our
assets must be represented by "real estate assets," cash, cash items
(including receivables) and government securities. Real estate assets
include (i) real property (including interests in real property and
interests in mortgages on real property) (ii) shares in other
qualifying REITs and (iii) any property (not otherwise a real estate
asset) attributable to the temporary investment of "new capital" in
stock or a debt instrument, but only for the one-year period beginning
on the date we received the new capital. Property will qualify as being
attributable to the temporary investment of new capital if the money
used to purchase the stock or debt instrument is received by us in
exchange for our stock (other than amounts received pursuant to our
distribution reinvestment program) or in a public offering of debt
obligations that have a maturity of at least five years. Additionally,
regular and residual interests in a real estate mortgage investment
conduit, known as a REMIC, and regular interests in a financial asset
securitization trust, known as a FASIT, are considered real estate
assets. However, if less than 95% of the assets of a REMIC or FASIT are
real estate assets, we will be treated as holding and earning a
proportionate share of the assets and income of the REMIC or FASIT
directly.
We currently own and intend to continue to own interests in
real properties, and our purchase contracts apportion no more than 5%
of the purchase price of any property to property other than "real
property," as defined in the Internal Revenue Code. In addition, we
intend to invest funds not used to acquire properties in cash sources,
"new capital" investments or other liquid investments which allow us to
continue to qualify under the 75% Asset Test. Therefore, our investment
in the real properties will constitute "real estate assets" and should
allow us to meet the 75% Asset Test.
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- 25% ASSET TEST. The remaining 25% of our assets may
generally be invested without restriction. However, if we invest in any
securities that do not qualify under the 75% Asset Test, such
securities may not exceed either: (i) 5% of the value of our assets as
to any one issuer; or (ii) 10% of the outstanding securities by vote or
value of any one issuer. A partnership interest held by a REIT is not
considered a "security" for purposes of these tests; instead, the REIT
is treated as owning directly its proportionate share of the
partnership's assets.
Two modifications apply to the 25% Asset Test for "qualified
REIT subsidiaries" or "taxable REIT subsidiaries." As discussed above,
the stock of a "qualified REIT subsidiary" is not counted for purposes
of the 25% Asset Test. A qualified REIT subsidiary is a corporation
that is wholly owned by a REIT throughout the subsidiary's existence.
All assets, liabilities and tax attributes of a qualified REIT
subsidiary are treated as belonging to the REIT. A qualified REIT
subsidiary is not subject to federal income tax, but may be subject to
state or local tax. Although we expect to hold all of our investments
through the operating partnership, we may hold investments through
qualified REIT subsidiaries.
Additionally, a REIT may own the stock of a "taxable REIT
subsidiary." A taxable REIT subsidiary is a corporation (other than
another REIT) that is owned in whole or in part by a REIT, and joins in
an election with the REIT to be classified as such. Corporations that
directly or indirectly operate or manage lodging or health care
facilities cannot be taxable REIT subsidiaries. A corporation that is
35% owned by a taxable REIT subsidiary will also be treated as a
taxable REIT subsidiary. A taxable REIT subsidiary may not be a
qualified REIT subsidiary, and vice versa. As described below regarding
the 75% Gross Income Test, a taxable REIT subsidiary is utilized in
much the same way an independent contractor is used to provide types of
services without causing the REIT to receive or accrue some types of
non-qualifying income. For purposes of the 25% Asset Test, securities
of a taxable REIT subsidiary are excepted from the 10% vote and value
limitations on a REIT's ownership of securities of a single issuer.
However, no more than 20% of the value of a REIT may be represented by
securities of one or more taxable REIT subsidiaries. In addition to
using independent contractors to provide services in connection with
the operation of our properties, we may also use taxable REIT
subsidiaries to carry out these functions.
- GROSS INCOME TESTS. We must satisfy for each calendar year
two separate tests based on the composition of our gross income, as defined
under our method of accounting.
- THE 75% GROSS INCOME TEST. At least 75% of our gross
income for the taxable year (excluding gross income from prohibited
transactions) must result from (i) rents from real property, (ii)
interest on obligations secured by mortgages on real property or on
interests in real property, (iii) gains from the sale or other
disposition of real property (including interests in real property and
interests in mortgages on real property) other than property held
primarily for sale to customers in the ordinary course of our trade or
business, (iv) dividends from other qualifying REITs and gain (other
than gain from prohibited transactions) from the sale of shares of
other qualifying REITs, (v) other specified investments relating to
real property or mortgages thereon, and (vi) for a limited time
qualified temporary investment income, as defined under the 75% Asset
Test. We intend to invest funds not otherwise invested in real
properties in cash sources or other liquid investments which will allow
us to qualify under the 75% Gross Income Test.
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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 rules discussed
below:
- Rent from a particular tenant will not
qualify if we, or an owner of 10% or more of our stock,
directly or indirectly, owns 10% or more of the voting stock
or the total number of shares of all classes of stock in, or
10% or more assets or net profits of, the tenant (unless the
tenant is a taxable REIT subsidiary leasing a property at
least 90% leased to tenants other than taxable REIT
subsidiaries).
- The portion of rent attributable to personal
property rented in connection with real property will not
qualify, unless the portion attributable to personal property
is 15% or less of the total rent received under, or in
connection with, the lease.
- Generally rent will not qualify if it is
based in whole, or in part, on the income or profits of any
person from the underlying property. 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.
- Rental income will not qualify if we furnish
or render services to tenants or manage or operate the
underlying property, other than through a permissible
"independent contractor" from whom we derive no revenue, or
through a taxable REIT subsidiary. This requirement, however,
does not apply to the extent that the services, management or
operations we provide are "usually or customarily rendered" in
connection with the rental of space, and are not otherwise
considered "rendered to the occupant."
With respect to the last rule, tenants will receive some
services in connection with their leases of the real properties. We
believe that the services to be provided are usually or customarily
rendered in connection with the rental of space, and, therefore,
providing 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
described below). The board of directors intends to hire qualifying
independent contractors or to utilize taxable REIT subsidiaries to
render services which it believes, after consultation with Katten
Muchin Zavis, are not usually or customarily rendered in connection
with the rental of space.
- THE 95% GROSS INCOME TEST. In addition to deriving
75% of our gross income from the sources listed above, at least 95% of
our gross income (excluding gross income from prohibited transactions)
for the taxable year must be derived from (i) sources which satisfy the
75% Gross Income Test, (ii) dividends, (iii) interest, or (iv) gain
from the sale or disposition of stock or other securities that are not
assets held primarily for sale to customers in the ordinary course of
our trade or business. It is important to note that 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. We intend to invest funds not otherwise invested in
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properties in cash sources or other liquid investments which will allow
us to qualify under the 95% Gross Income Test.
Our share of income from the properties will primarily give
rise to rental income and gains on sales of the properties,
substantially all of which will generally qualify under the 75% Gross
Income and 95% Gross Income Tests. Our anticipated operations indicate
that it is likely that we will have little or no nonqualifying income
to cause adverse federal income tax consequences.
If we fail to satisfy either the 75% Gross Income or 95% Gross
Income Tests for any taxable year, we may retain our status as a REIT
for such year if we satisfy the Internal Revenue Service that: (i) the
failure was due to reasonable cause and not due to willful neglect,
(ii) we attach to our return a schedule describing the nature and
amount of each item of our gross income, and (iii) any incorrect
information on such schedule was not due to fraud with intent to evade
federal income tax. If this relief provision is available, we would
remain subject to a 100% tax on the greater of the amount by which we
failed the 75% Gross Income Test or the 95% Gross Income Test
multiplied by a fraction meant to reflect our profitability.
- ANNUAL DISTRIBUTION REQUIREMENTS. In addition to the other
tests described above, we are required to distribute dividends (other than
capital gain dividends) to the stockholders each year in an amount at least
equal to the excess of: (1) the sum of: (a) 90% of our REIT Taxable Income
(determined without regard to the deduction for dividends paid and by
excluding any net capital gain); and (b) 90% of the net income (after tax)
from foreclosure property; less (2) the sum of some types of items of
non-cash income. Whether sufficient amounts have been distributed is based on
amounts paid in the taxable year to which they relate, or in the following
taxable year if we: (1) declared a dividend before the due date of our tax
return (including extensions), (2) distribute the dividend within the
12-month period following the close of the taxable year (and not later than
the date of the first regular dividend payment made after such declaration),
and (3) file an election with our tax return. Additionally, dividends that we
declare in October, November or December in a given year payable to
stockholders of record in any such month will be treated as having been paid
on December 31 of that year so long as the dividends are actually paid during
January of the following year. If we fail to meet the annual distribution
requirements as a result of an adjustment to our federal income tax return by
the Internal Revenue Service, we may cure the failure by paying a "deficiency
dividend" (plus penalties and interest to the Internal Revenue Service)
within a specified period.
If we do not distribute all of our net capital gain or distribute at
least 90%, but less than 100%, of our REIT Taxable Income, we will be subject
to federal income tax on the undistributed portion. Furthermore, to the
extent that we fail to distribute annually at least the sum of: (1) 85% of
our REIT Taxable Income for such year; (2) 95% of our REIT capital gain net
income for such year; and (3) any undistributed taxable income from prior
years, we would be subject to an excise tax equal to 4% of the difference
between the amount required to be distributed under this formula and the
amount actually distributed.
We intend to pay sufficient dividends each year to satisfy the
annual distribution requirements and avoid federal income tax on net capital
gains. It is possible that we may not have sufficient cash or other liquid
assets to meet the annual distribution requirements due to tax accounting
rules and other timing differences. We will closely monitor the relationship
between our REIT Taxable Income and cash flow and, if necessary to comply
with the annual distribution requirements, will borrow funds to fully provide
the necessary cash flow.
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FAILURE TO QUALIFY. If we fail to qualify for federal income tax
purposes as a REIT in any taxable year and the relief provisions are not
available or cannot be met, we will not be able to deduct our dividends and
will be subject to federal income tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate rates, thereby
reducing cash available for distributions. In such event, all distributions
to stockholders (to the extent of our current and accumulated earnings and
profits), will be taxable as ordinary income. This "double taxation" results
from our failure to qualify as a REIT. Unless entitled to relief under
specific statutory provisions, we will not be eligible to elect REIT status
for the four taxable years following the year during which qualification was
lost.
PROHIBITED TRANSACTIONS. As discussed above, we will be subject to a
100% federal income tax on any net income derived from "prohibited
transactions." Net income derived from prohibited transactions arises from
the sale or exchange of property held for sale to customers in the ordinary
course of our business which is not foreclosure property. There is an
exception to this rule for sales of property that:
- is a real estate asset under the 75% Asset Test;
- has been held for at least four years;
- has aggregate expenditures which are includable in the basis
of the property not in excess of 30% of the net selling
price;
- in some cases, was held for production of rental income for
at least four years;
- when combined with other sales in the year, either does not
cause the REIT to have made more than seven sales of property
during the taxable year, or occurs in a year when the REIT
disposes of less than 10% of its assets (measured by federal
income tax basis and ignoring involuntary dispositions and
sales of foreclosure property); and
- in some cases, substantially all of the marketing and
development expenditures were made through an independent
contractor.
Although we will eventually sell each of the properties, our primary
intention in acquiring and operating the properties is the production of
rental income and we do not expect to hold any property for sale to customers
in the ordinary course of our business. As a general matter, any condominium
conversions we might have must satisfy these restrictions to avoid being
"prohibited transactions," which will limit the annual number of transactions.
TAX ASPECTS OF INVESTMENTS IN PARTNERSHIPS
GENERAL. We anticipate holding direct or indirect interests in one
or more partnerships, including the operating partnership. We intend to
operate as an Umbrella Partnership REIT, or UPREIT, which is a structure
whereby we would own a direct interest in the operating partnership, and the
operating partnership would, in turn, own the properties and may possibly own
interests in other non-corporate entities that own properties. Such
non-corporate entities would generally be organized as limited liability
companies, partnerships or trusts and would either be disregarded for federal
income tax purposes (if the operating partnership was the sole owner) or
treated as partnerships for federal income tax purposes. The following is a
summary of the federal income tax consequences of our
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investment in the operating partnership. This discussion should also
generally apply to any investment by us in a property partnership or other
non-corporate entity.
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. We will be required to take into account our allocable
share of the foregoing items for purposes of the various REIT gross income
and asset tests, and in the computation of our REIT Taxable Income and
federal income tax liability. Further, there can be no assurance that
distributions from the operating partnership will be sufficient to pay the
tax liabilities resulting from an investment in the operating partnership.
Generally, for entities formed after January 1, 1997, an entity with
two or more members formed as a partnership or limited liability company
under state law will be taxed as a partnership for federal income tax
purposes unless it specifically elects otherwise. Because the operating
partnership was formed as a partnership under state law after January 1, 1997
and will have two or more partners, we believe that the operating partnership
will be treated as a partnership for federal income tax purposes.
Additionally, we believe that the operating partnership (and any partnership
invested in by the operating partnership) will not be treated as a publicly
traded partnership within the meaning of Section 7704 of the Internal Revenue
Code, which is taxed as a corporation for federal income tax purposes. We
believe that the interests in the operating partnership (and any partnership
invested in by the operating partnership) will fall within one of the "safe
harbors" for the partnership to avoid being classified as a publicly traded
partnership. However, our ability to satisfy the requirements of some of
these safe harbors depends on the results of our actual operations.
If for any reason the operating partnership (or any partnership
invested in by the operating partnership) is taxable as a corporation for
federal income tax purposes, the character of our assets and items of gross
income would change, and, as a result, we would most likely be unable to
satisfy the applicable requirements under federal income tax laws discussed
above. In addition, any change in the status of any partnership may be
treated as a taxable event, in which case we could incur a tax liability
without a related cash distribution. Further, if any partnership was treated
as a corporation, items of income, gain, loss, deduction and credit of such
partnership would be subject to corporate income tax. The partners of any
such partnership would be treated as stockholders, with distributions to such
partners being treated as dividends.
Final anti-abuse Treasury regulations have been issued under the
partnership provisions of the Internal Revenue Code that authorize the
Internal Revenue Service, in some abusive transactions involving
partnerships, to disregard the form of a transaction and recast it as it
deems appropriate. The anti-abuse regulations apply where a partnership is
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 contain an
example in which a REIT contributes the proceeds of a public offering to a
partnership in exchange for a general partnership interest. The limited
partners contribute real property assets to the partnership, subject to
liabilities that exceed their respective aggregate bases in such property.
Some 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. 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 Internal Revenue Service.
However, the
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redemption rights associated with the limited partnership common units of the
operating partnership will not conform in all respects with the redemption
rights in the foregoing example. Moreover, the anti-abuse regulations are
extraordinarily broad in scope and are applied based on an analysis of all
the facts and circumstances. As a result, there can be no assurance that the
Internal Revenue Service will not attempt to apply the anti-abuse regulations
to us. Any such action could potentially jeopardize our status as a REIT and
materially affect the tax consequences and economic return resulting from an
investment in us.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS. In general,
no gain or loss will be recognized by either the operating partnership or by
the contributing partner on the transfer of a property in exchange for units
in the partnership. Gain (but not loss) may be recognized by the transferring
partner if the partner receives consideration other than units, if
liabilities of the partner are assumed in connection with the transfer of the
property, if the transfer is treated as a disguised sale, and in other
circumstances.
A partner's adjusted basis in operating partnership units (the
calculation of which is discussed below) is important for a number of
reasons. The amount of losses and deductions allocated to a partner cannot
exceed the partner's adjusted basis. Any excess loss 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 partner's adjusted
basis in the units.
The initial basis of units in the operating partnership is equal to:
(1) the sum of the adjusted basis of any property contributed to the
partnership and the amount of any money contributed (or deemed contributed);
(2) less the amount of money distributed (or deemed distributed) to the
partner by the operating partnership in connection with the contribution. For
purposes of these rules, the assumption of a partnership liability by a
partner is treated as a deemed cash contribution by the partner; the
assumption of a partner's liability by the partnership is treated as a deemed
cash distribution to the partner. Basis in units acquired through other means
is calculated under other rules. In addition, other rules such as the
disguised sale rules, may affect the basis of the partner's units.
A partner's initial basis in partnership units will be adjusted as
follows. Basis is increased to reflect: (1) the partner's distributive share
of the taxable income of the operating partnership, and (2) the amount of any
additional capital contributions made by the partner. Basis is reduced to
reflect: (1) the amount of cash distributed (or deemed distributed) to the
partner, (2) the adjusted basis of any partnership property distributed to
the partner, and (3) the partner's distributive share of the losses,
deductions and nondeductible expenditures of the partnership that are not
properly chargeable to a capital account. Finally, the basis of a unit is
adjusted to reflect the partner's share of the partnership's liabilities.
This allocation is made solely for tax purposes under federal income tax
regulations. Allocations of partnership liabilities for basis purposes do not
affect the limited liability of limited partners in the operating partnership.
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 federal income tax purposes under Section
704(b) of the Internal Revenue Code and the Treasury regulations. If any
allocation is not recognized for tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners' economic
interests in the partnership. We believe that the allocations of
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taxable income and loss in the operating partnership agreement comply with
the requirements of Section 704(b) of the Internal Revenue Code and the
Treasury regulations.
The net profits of the operating partnership will be allocated among
the partners in the following order and priority. First, net profits are
allocated to the holders of limited partnership preferred units, if any,
until the amount of net profits allocated to each holder for the current and
all prior taxable years equals the preferred return distributed to the holder
for the current and all prior taxable years. Second, net profits are
allocated to the holders of general partnership common units and limited
partnership common units (and to holders of limited partnership preferred
units, if any, that are entitled to share in the profits of the operating
partnership beyond, or in lieu of, the receipt of any preferred return) until
the amount of net profits allocated to each holder for the current and all
prior taxable years equals the cumulative amount distributed to the holder
for the current and all prior taxable years (other than distributions
attributable to a preferred return). Third, net profits are allocated to the
holders of the limited partnership preferred units, if any, until the amount
of net profits equals the amount of any accrued but unpaid preferred return
for the current and all prior taxable years for which net profits have not
been previously allocated. Fourth, any remaining amounts of net profits are
allocated to the holders of general partnership common units and limited
partnership common units (and to holders of limited partnership preferred
units, if any, that 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 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 us as the general partner.
In some cases special allocations of net profits or net losses will
be required to comply with the federal income tax principles governing
partnership tax allocations.
Additionally, pursuant to Section 704(c) of the Internal Revenue
Code, income, gain, loss and deduction attributable to property contributed
to the operating partnership in exchange for units must be allocated in a
manner so that the contributing partner is charged with, or benefits from,
the unrealized gain or loss attributable to the property at the time of
contribution. The amount of such unrealized gain or loss is generally equal
to the difference between the fair market value and the adjusted basis of the
property at the time of contribution. These allocations are designed to
eliminate book-tax differences by allocating to contributing partners lower
amounts of depreciation deductions and increased taxable income and gain
attributable to the contributed property than would ordinarily be the case
for economic or book purposes. With respect to any property purchased by the
operating partnership subsequent to our formation, such property will
generally have an initial tax basis equal to its fair market value and,
accordingly, Section 704(c) will not apply. The application of the principles
of Section 704(c) in tiered partnership arrangements is not entirely clear.
Accordingly, the Internal Revenue Service may assert a different allocation
method than the one selected by the operating partnership to cure any
book-tax differences.
For federal income tax purposes, depreciation deductions will be
computed using the straight-line method. Commercial buildings, structural
components and improvements are generally depreciated over 40 years. Some
improvements to land are depreciated over 15 years. With respect to such
improvements, however, taxpayers may elect to depreciate these improvements
over 20 years using the straight-line method. For properties transferred to
the operating partnership, depreciation deductions are calculated based on
the transferor's basis and depreciation method. For property
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acquired by a transferor prior to May 13, 1993, different depreciation
methods may apply. Because depreciation deductions are based on the
transferor's basis in the contributed property, the operating partnership
generally would be entitled to less depreciation than if the properties were
purchased in a taxable transaction. The burden of lower depreciation will
generally fall first on the contributing partner, but may also reduce the
depreciation allocated to other partners.
Gain on the sale or other disposition of depreciable property is
characterized as ordinary income (rather than capital gain) to the extent of
any depreciation recapture. Buildings and improvements depreciated under the
straight-line method of depreciation are generally not subject to
depreciation recapture unless the property was held for less than one year.
However, individuals, trusts and estates who hold shares either directly or
through a pass-through entity may be subject to tax on the disposition on
such assets at a rate of 25% rather than at the normal 20% capital gains
rate, to the extent that such assets have been depreciated.
Some expenses incurred in the conduct of the operating partnership's
activities may not be deducted in the year they were paid. To the extent 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. Prepaid interest and loan
fees, and prepaid management fees are other examples of expenses that may not
be deducted in the year they were paid.
TAX CONSEQUENCES OF DISPOSITION OF UNITS. If a unit in the operating
partnership is sold or disposed of in a transaction treated as a sale for
federal income tax purposes, the unit holder will generally recognize gain or
loss based on the difference between the amount realized for tax purposes and
the holder's adjusted basis in the unit. 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 allocated to the
unit holder. 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. In general, gain recognized on the sale of a unit will
be treated as capital gain. To the extent that the unit holder's amount
realized on the transaction 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.
TAX CONSEQUENCES OF EXERCISE OF CONVERSION RIGHTS. Subject to some
restrictions, the operating partnership agreement gives holders of limited
partnership common units the right to convert their units into shares of
common stock, subject to our right to acquire the units for cash rather than
for shares. The conversion of units into shares is treated as a taxable sale
of the units to us on which the unit owners will generally recognize capital
gain or loss. To the extent that the unit holder's amount realized on the
transaction 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. No gain or loss will
be recognized by us. Our basis in the 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 us as a result of acquiring the units.
TAX CONSEQUENCES OF EXERCISE OF REDEMPTION RIGHTS. Subject to some
restrictions, the operating partnership agreement gives holders of limited
partnership common units the right to demand that their units be redeemed by
the operating partnership. Upon exercise of this right, we will have the
option of acquiring the units either for shares or for cash in lieu of having
the operating partnership redeem the
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units. Exercise of the redemption right is a taxable transaction in which the
unit owners will generally recognize capital gain or loss. To the extent that
the unit holder's amount realized on the transaction 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. No gain or loss will be recognized by the operating
partnership (or by us if we exercise our right to acquire the units for cash
or shares). If we acquire the units for cash or shares, our adjusted basis in
the 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 us as a result of
acquiring additional units.
A redemption of units by the operating partnership using funds
contributed by us may be recharacterized by the Internal Revenue Service as a
sale of such units to us with the tax consequences to us. Further, under some
circumstances, if the operating partnership redeems the units for cash, the
original transfer of a property to the operating partnership may be
recharacterized as a disguised sale of the property by the unit holders that
were its original owners. The 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 other than cash,
unrealized receivables or inventory. Recharacterization as a disguised sale
could have a number of additional tax consequences. First, items of income,
gain, loss and deduction might have to be reallocated among the partners,
including us. Second, the operating partnership's adjusted basis in the
properties would have to be recalculated, which could have the effect of
increasing or decreasing the operating partnership's depreciation deductions.
Third, the transaction could be subject to the installment sale and original
issue discount rules which could affect the amount and timing of our
deductions. Termination of the operating partnership generally would also
cause a deemed termination of every non-corporate entity in which the
operating partnership had a majority interest, with similar consequences.
TERMINATION OF THE OPERATING PARTNERSHIP. The operating partnership
will be considered as having terminated for federal income tax purposes if
either: (1) no part of any business of the partnership continues to be
carried on, or (2) within a 12-month period there is a sale or exchange of
units representing 50% or more of the total ownership in the operating
partnership. The operating partnership would be considered as having
terminated solely for tax purposes and the termination would not result in an
actual liquidation or dissolution of the operating partnership for state law
purposes. It is unlikely that the operating partnership would terminate as a
result of a sale of 50% or more of the operating partnership's total
ownership. Provisions in the operating partnership agreement specifically
prohibit transfers of units (and any exercise of redemption or conversion
rights) that would cause such a termination.
The termination of the operating partnership for federal income tax
purposes would cause its taxable year to close. This may cause a "bunching"
of income if the operating partnership's taxable year is different from that
of its partners; however, both we and the operating partnership intend to use
the calendar taxable year. Additional tax consequences may result from a
deemed termination. A deemed termination may also cause the operating
partnership to reset its periods for depreciation and amortization, and to
remake other tax elections, all of which could result in further tax
consequences. Termination of the operating partnership generally would also
cause a deemed termination of every non-corporate entity in which the
operating partnership had a majority interest, with similar consequences.
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FEDERAL INCOME TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as we qualify as
a REIT, distributions paid to our domestic stockholders out of current or
accumulated earnings and profits (and not designated as capital gain
dividends) will be ordinary dividend income. 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 his or her common stock by the amount of such distribution, and
then as capital gain. Because our earnings and profits are reduced for
depreciation and other noncash items, it is possible that a portion of each
distribution will constitute a tax-deferred return of capital. Additionally,
because distributions in excess of earnings and profits reduce the
stockholder's basis in our stock, this will increase the stockholder's gain
on any subsequent sale of the stock.
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 unless we lose our REIT status.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains to the extent they do not exceed our actual net
capital gain for the taxable year. However, corporate stockholders may be
required to treat up to 20% of some types of capital gain dividends as
ordinary income. Although stockholders generally recognize taxable income in
the year that a distribution is received, any distribution we declare in
October, November or December of any year and is payable to a stockholder of
record on a specific date in any such month will be treated as both paid by
us and received by the stockholder on December 31 of the year it was declared
even if paid by us during January of the following calendar year. Because we
are not a pass-through entity for federal income tax purposes, stockholders
may not use any of our operating or capital losses to reduce their tax
liabilities. We may also decide to retain, rather than distribute, our net
long-term capital gains and pay any tax thereon. In this case, stockholders
would include their proportionate shares of such gains in income, receive a
credit on their returns for their proportionate share of our tax payments,
and increase the tax bases of their shares of stock by the after-tax amount
of such gain.
In general, the sale of common stock held for more than 12 months
will produce long-term capital gain or loss. All other sales will produce
short-term gain or loss. In each case, the gain or loss is equal to the
difference between the amount of cash and fair market value of any property
received from the sale and the stockholder's basis in the common stock sold.
However, any loss from a sale or exchange of common stock by a stockholder
who has held such stock for six months or less will be treated as a long-term
capital loss, to the extent of our distributions that the stockholder treated
as long-term capital gains.
We will report to our domestic stockholders and to the Internal
Revenue Service the amount of dividends paid during each calendar year, and
the amount (if any) of federal income tax we withhold. 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 us with a taxpayer identification number,
certifies as to no loss of exemption, and otherwise complies with applicable
requirements. A stockholder that does not provide us with its correct
taxpayer identification number may also be subject to penalties imposed by
the Internal Revenue Service. Any amount paid as backup withholding can be
credited against the stockholder's federal income tax liability. In addition,
we may be required to withhold a portion of distributions made to any
stockholders who fail to certify their nonforeign status to us. See "--
Taxation of Foreign Stockholders" in this section.
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TAXATION OF TAX-EXEMPT STOCKHOLDERS. Our distributions to a
stockholder that is a tax-exempt entity should not constitute unrelated
business taxable income, or UBTI, unless the stockholder borrows funds (or
otherwise incurs acquisition indebtedness within the meaning of the Internal
Revenue Code) to acquire its common shares, or the common shares are
otherwise used in an unrelated trade or business of the tax-exempt entity.
Special rules apply to the ownership of REIT shares by some
tax-exempt pension trusts. If we would fail to satisfy the "five or fewer"
share ownership test (discussed above with respect to the Share Ownership
tests) because the stock held by tax-exempt pension trusts was viewed as
being held by the trusts rather than by their respective beneficiaries,
tax-exempt pension trusts owning more than 10% by value of our stock may be
required to treat a percentage of our dividends as UBTI. This rule applies
if: (1) at least one tax-exempt pension trust owns more than 25% by value of
our shares, or (2) one or more tax-exempt pension trusts (each owning more
than 10% by value of our shares) hold in the aggregate more than 50% by value
of our shares. The percentage treated as UBTI is our gross income (less
direct expenses) derived from an unrelated trade or business (determined as
if we were a tax-exempt pension trust) divided by our gross income from all
sources (less direct expenses). If this percentage is less than 5%, however,
none of the dividends will be treated as UBTI. Because of the restrictions in
our charter regarding the ownership concentration of our common stock, we
believe that a tax-exempt pension trust should not become subject to these
rules. However, because our common shares may be publicly traded, we can give
no assurance of this.
Prospective tax-exempt purchasers should consult their own tax
advisors as to the applicability of these rules and consequences to their
particular circumstances.
TAXATION OF FOREIGN STOCKHOLDERS. The following discussion is
intended only as a summary of the rules governing federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships,
and foreign trusts and estates. These rules are quite complex and prospective
foreign stockholders should consult with their own tax advisors to determine
the impact of federal, state, and local income tax laws including any
reporting requirements with respect to their investment in our REIT.
In general, foreign stockholders will be subject to regular U.S.
income tax with respect to their investment if such investment is
"effectively connected" with the conduct of a trade or business in the U.S. A
corporate foreign stockholder that receives (or is deemed to have received)
income that is effectively connected with a U.S. trade or business may also
be subject to the 30% "branch profits tax" under Code Section 884, which is
payable in addition to regular federal corporate income tax. The following
discussion applies to foreign stockholders whose investment is not considered
"effectively connected."
Generally, any dividend that constitutes ordinary income for federal
income tax purposes will be subject to a U.S. tax at a 30% rate or such
lesser rate as may be provided for in an applicable tax treaty. We would
collect the tax by withholding from the foreign stockholder's distributions.
Generally, a distribution that does not exceed our earnings and profits will
be treated as a dividend taxable as ordinary income. A distribution in excess
of our earnings and profits is treated first as a nontaxable return of
capital that will reduce a foreign stockholder's basis in its common stock
(but not below zero) and then as gain from the disposition of such common
stock, subject to the rules discussed below for dispositions.
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Our distributions that are attributable to gain from the sale or
exchange of a "U.S. real property interest" are taxed to a foreign
stockholder as if the distributions were gains "effectively connected" with a
United States trade or business conducted by such foreign stockholder. As a
result, a foreign stockholder will be taxed on these amounts 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
nonresident alien individuals). We would collect the tax by withholding from
the foreign stockholder's distributions, generally at a 35% rate. In
addition, such dividends may also be subject to a 30% branch profits tax when
made to a corporate foreign stockholder that is not entitled to treaty
exemptions.
We will report to our foreign stockholders and the Internal Revenue
Service the amount of dividends paid during each calendar year, and the
amount (if any) of federal income tax we withhold. These information
reporting requirements apply regardless of whether withholding was reduced or
eliminated in any applicable tax treaty. Copies of these information returns
may also be made available under the provisions of a specific treaty or
agreement with the tax authorities in the country in which the foreign
stockholder resides. As discussed below, withholding tax rates of 30% and 35%
may apply to distributions on common stock to foreign stockholders.
Although tax treaties may reduce our withholding obligations, we
will generally be required to withhold from dividends to foreign
stockholders, and remit to the Internal Revenue Service, 35% of any
distribution that could be designated as a capital gain dividend (regardless
of the amount actually designated as a capital gain dividend) and 30% of
ordinary dividends paid out of earnings and profits. In addition, if we
designate prior dividends as capital gain dividends, subsequent dividends, up
to the amount of such prior dividends, will be treated as capital gain
dividends for withholding purposes. The amount of federal income tax withheld
is creditable against the foreign stockholder's federal income tax liability,
and if the amount of tax we withhold exceeds the U.S. tax liability, the
foreign stockholder may file for a refund of such excess from the Internal
Revenue Service. Note that 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 20% maximum rate on long-term capital
gains of individuals.
In October 1997, Treasury regulations were issued that alter the
information reporting and withholding rules applicable to distributions paid
to a foreign stockholder. These Treasury regulations generally apply to
distributions paid after December 31, 1999. Among other things, the 1997
Treasury regulations provide presumptions under which a foreign stockholder
would be subject to backup withholding and information reporting until we
receive certification from these stockholders of their foreign status. The
1997 Treasury regulations generally require a foreign stockholder to provide
us with federal Form W-8 referred to as a Certificate of Foreign Status, Form
W-8BEN referred to as a Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding, W-8ECI referred to as a Certificate of Foreign
Person's Claim for Exemption From Withholding on Income Effectively Connected
With the Conduct of a Trade or Business in the United States, or Form W-8EXP
referred to as a Certificate of Foreign Government or Other Foreign
Organization for United States Tax Withholding certifying the foreign
stockholder's entitlement to the benefits of any treaty.
Unless the common shares constitute a "U.S. real property interest"
under Section 897 of the Internal Revenue Code, gain on a sale of common
stock by a foreign stockholder generally will not be subject to U.S. income
taxation unless (i) investment in the common stock is effectively connected
with the foreign stockholder's U.S. trade or business, in which case, as
discussed above, the foreign stockholder would be subject to the federal
income tax, or (ii) the foreign stockholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year, in which case the nonresident alien individual will be subject to a 30%
tax on such gain.
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The common shares will not constitute a "U.S. real property
interest" if we are a "domestically controlled REIT." A domestically
controlled REIT is a REIT, which at all times during the preceding five-year
period, had less than 50% in value of its common stock held directly or
indirectly by foreign stockholders. We expect to be a domestically controlled
REIT, and, therefore, the sale of common stock should not be subject to such
taxation for foreign stockholders, except as discussed above. However,
because the common shares may be (but are not guaranteed to be) publicly
traded, we can not assure you that we will continue to be a domestically
controlled REIT. If we do not constitute a domestically controlled REIT,
whether a foreign stockholder's gain on the sale of stock is subject to
federal income tax as a sale of a U.S. real property interest depends
primarily on whether the common shares are "regularly traded" on an
established securities market and on the size of the selling stockholder's
interest. If the gain on the sale of common shares is subject to federal
income tax 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 nonresident alien individuals). In any event, a purchaser of
common stock from a foreign stockholder will not be required to withhold on
the purchase price if the purchased shares are "regularly traded" on an
established securities market or if we are a domestically controlled REIT.
Otherwise, the purchaser of stock may be required to withhold 10% of the
purchase price and remit this amount to the Internal Revenue Service.
If the proceeds of a disposition of common stock are paid by or
through a U.S. office of a broker-dealer, the payment is generally subject to
information reporting and to backup withholding at a rate of 31% 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 foreign office of
a foreign broker-dealer. Under the 1997 Treasury regulations, if the proceeds
from a disposition of common stock paid to or through a foreign office of a
U.S. broker-dealer or a non-U.S. office of a foreign broker-dealer that is
(i) a "controlled foreign corporation" for federal income tax purposes, (ii)
a person 50% or more of whose gross income from all sources for a three-year
period was effectively connected with a U.S. trade or business, (iii) a
foreign partnership with one or more partners who are U.S. persons and who in
the aggregate hold more than 50% of the income or capital interest in the
partnership, or (iv) a foreign partnership engaged in the conduct of a trade
or business in the United States, then (i) backup withholding will not apply
unless the broker-dealer has actual knowledge that the owner is not a foreign
stockholder, and (ii) information reporting will not apply if the foreign
stockholder certifies its status as a foreign stockholder and further
certifies that it has not been, and at the time the certificate is furnished
reasonably expects to be, present in the United States for a period
aggregating 183 days or more during each calendar year to which the
certification pertains. Prospective foreign purchasers should consult their
tax advisers concerning these rules.
OTHER TAX CONSIDERATIONS
DISTRIBUTION REINVESTMENT PROGRAM. Stockholders who participate in
the distribution reinvestment program will recognize taxable dividend income
in the amount they would have received had they elected not to participate,
even though they receive no cash. These deemed dividends will be treated as
actual dividends from us to the participating stockholders and will retain
the character and federal income tax effects applicable to all dividends. See
"-- Taxation of Stockholders" in this section. Stock received under the
program will have a holding period beginning with the day after purchase, and
a federal income tax basis equal to its cost, which is the gross amount of
the deemed distribution.
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STATE AND LOCAL TAXES. We and you may be subject to state or local
taxation in various jurisdictions, including those in which we transact
business or reside. Our and your state and local tax treatment may not
conform to the federal income tax consequences discussed above. Consequently,
you should consult your own tax advisors regarding the effect of state and
local tax laws on an investment in the common shares.
LEGISLATIVE PROPOSALS. You should recognize that our and your
present federal income tax treatment may be modified by legislative, judicial
or administrative actions at any time, which may be retroactive in effect.
The rules dealing with federal income taxation are constantly under review by
Congress, the Internal Revenue Service and the Treasury Department, and
statutory changes as well as promulgation of new regulations, revisions to
existing statutes, and revised interpretations of established concepts occur
frequently. We are not currently aware of any pending legislation that would
materially affect our or your taxation as described in this prospectus. You
should, however, consult your advisors concerning the status of legislative
proposals that may pertain to a purchase of common shares.
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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 Internal Revenue 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 Internal Revenue 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 Internal Revenue Code, and governmental plans and church
plans that are exempt from ERISA and Section 4975 of the Internal Revenue
Code but that may be subject to state law and other Internal Revenue Code
requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES ON BEHALF OF A
PROSPECTIVE INVESTOR WHICH IS A PENSION, PROFIT-SHARING, RETIREMENT, 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 INTERNAL REVENUE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH
RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF SHARES BY SUCH BENEFIT PLAN.
BENEFIT 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 BENEFIT PLAN TO PURCHASE THE SHARES.
In considering whether to invest a portion of the assets of a
benefit plan in shares, fiduciaries of the benefit plan should consider,
among other things, whether the investment:
- will be in accordance with the governing documents of the benefit
plan and is authorized and consistent with their fiduciary
responsibilities under ERISA;
- will allow the benefit plan to satisfy the diversification
requirements of ERISA, if applicable;
- will result in UBTI to the benefit plan (see "Federal Income
Tax Considerations -- Taxation of Stockholders -- Taxation of
Tax-Exempt Stockholders");
- will be sufficiently liquid; and
- is prudent and in the best interests of the benefit plan, its
participants and beneficiaries under ERISA standards.
The fiduciary of an IRA or a 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 should consider that such an IRA or non-ERISA plan
may be subject to prohibitions against some related-party transactions under
Section 503 of the Internal Revenue Code, which operate similar to the
prohibited transaction rules of ERISA and the Internal Revenue Code. In
addition, the fiduciary of any governmental or church plan must consider
applicable state or local laws, if any, and the restrictions and duties of
common law, if any, imposed upon such plan. We express no opinion on whether
an investment in shares is appropriate or permissible for any governmental or
church plan under SECTION 503 of the Internal Revenue Code, or under any
state, county, local, or other law respecting such plan.
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In addition to imposing general fiduciary standards of investment
prudence and diversification, ERISA and the corresponding provisions of the
Internal Revenue Code prohibit a wide range of transactions involving the
assets of the benefit plan and persons who have specified relationships to
the benefit plan ("parties in interest" within the meaning of ERISA and
"disqualified persons" within the meaning of the Internal Revenue Code).
Benefit plan fiduciaries may not enter into a prohibited transaction
involving "plan assets" and a "party in interest" (or related party) with
respect to a plan investor, unless an exemption applies. A prohibited
transaction may occur if our assets are deemed to be assets of a benefit 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 Internal Revenue Code. Under such
circumstances, any person that exercises authority or control with respect to
the management or disposition of benefit plan assets is a benefit plan
fiduciary and, therefore, is a "party in interest" and a "disqualified
person" capable of participating in a prohibited transaction with the benefit
plan. Thus, the action of an employee of ours in dealing with our assets
could cause a benefit plan which invests in the shares to be a participant in
a prohibited transaction. While "plan assets" are not defined in ERISA or the
Internal Revenue Code, the United States Department of Labor, or the DOL, has
issued regulations that provide guidance on the circumstances under which a
benefit plan's investment in shares will be subject to the "look-through
rule" and thus turn our assets into benefit plan assets. The DOL regulations
provide an exception to the "look-through rule" for a benefit 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, or sold to the benefit plan pursuant to
an effective registration statement under the Securities Act of 1933,
provided the class of securities of which the security is a part are
registered under the Securities Exchange Act of 1934 within 120 days or such
longer period as is allowed by the Securities and Exchange Commission after
the end of the fiscal year of the issuer during which the offering occurred.
The shares are being sold in an offering registered under the Securities Act
of 1933 and we represent that the class of securities of which the shares are
a part have been registered under the Securities Exchange Act within the
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. We represent that the shares are held by over 100 independent
investors 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, some
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."
We believe that the ownership limits imposed under our charter on the
transfer of the shares are designed to prevent violations of the five or
fewer requirement of federal income tax laws (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."
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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, we believe that the shares are "publicly offered
securities" for purposes of the DOL regulations and that:
- our assets will not be deemed to be "plan assets" of any benefit
plan that invests in the shares; and
- any person who exercises authority or control with respect to
our assets should not be treated as a benefit plan fiduciary
of any benefit plan that invests in the shares, for purposes
of the prohibited transaction rules of ERISA and Section 4975
of the Internal Revenue Code.
In addition, a prohibited transaction may also occur under ERISA or
the Internal Revenue Code where there are circumstances indicating that:
- investment in the shares is made or retained for the purposes of
avoiding application of the fiduciary standard of ERISA;
- the investment in the REIT constitutes an arrangement under
which it is expected that the REIT will engage in transactions
which would otherwise be prohibited if entered into directly
by the benefit plan purchasing the shares;
- the investing benefit plan, by itself, has the authority or
influence to cause the REIT to engage in such transactions; or
- the person who is prohibited from transacting with the
investing benefit plan may, but only with the aid of its
affiliates and the investing benefit plan, cause the REIT to
engage in such transactions with such person.
In any event, a fiduciary or other person investing "plan assets" of
any benefit plan should not purchase shares if we or any of our affiliates
either:
- have investment discretion with respect to the investment of
such assets;
- have authority or responsibility to give or regularly gives
investment advice with respect to such assets, for a fee,
pursuant to an agreement or understanding that such advice
will serve as a primary basis for investment decisions with
respect to such assets and that such advice will be based on
the particular investment needs of such benefit plan; or
- unless an exemption is available, or an employer maintaining
or contributing to such benefit plan. Any such purchase might
result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Internal Revenue Code.
See "Risk Factors -- Employee Benefit Plan Risks -- Annual Statement
of Value is an Estimate" for an explanation of the annual statement of value
we will provide stockholders subject to ERISA.
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PLAN OF DISTRIBUTION
GENERAL
Of the up to 56,000,000 shares of our common stock offered by this
prospectus, we are offering:
- up to 50,000,000 shares at a purchase price of $10.00 per
share through Inland Securities Corporation, the managing
dealer, to the public on a best-efforts basis. Our managing
dealer is one of our affiliates. A "best-efforts" basis means
that neither the managing dealer nor the soliciting dealers
are under any obligation to purchase any of the shares being
offered. Therefore, no specified number of shares are
guaranteed to be sold and no specified amount of money is
guaranteed to be raised from this offering.
- up to 4,000,000 shares at a purchase price of $9.50 per share
for issuance through our distribution reinvestment program
which will provide you with an opportunity to purchase
additional shares of our common stock at a reduced rate by
reinvesting your distributions.
- up to 2,000,000 shares issuable upon the exercise of an equal
number of warrants. The warrants may be issued to soliciting
dealers as a part of their compensation for selling our common
stock to the public.
This offering will commence as of the date of this prospectus. If
the minimum offering of 200,000 shares is not sold by , 2001, we will
cancel this offering and your investment will be returned to you. If the
minimum offering of 200,000 shares of common stock is sold and if this
offering continues thereafter, the offering will terminate on or before
, 2002, unless we elect to extend it to a date no later than
, 2003, in states that permit an extension. We reserve the right to
terminate this offering at any time.
ESCROW CONDITIONS
If you are qualified to participate in this offering, the proceeds
from your subscription will be deposited in a segregated escrow account with
the escrow agent, LaSalle Bank National Association, 120 South LaSalle
Street, Chicago, Illinois, and will be held in trust for your benefit,
pending release to us. Your investment will not be commingled with any other
funds. None of the common stock offered by this prospectus will be sold, no
commissions or fees will be paid, and your initial admission as a stockholder
will not take place unless the escrow agent has received and accepted paid
subscriptions for at least 200,000 shares of common stock for $2,000,000
within six months from the date of this prospectus. Until the minimum
offering is sold, our sponsor will advance expenses and commissions to the
managing dealer who may reallow them to the soliciting dealers. If
subscriptions for at least the minimum offering have not been received,
accepted, and paid for within six months from the date of this prospectus,
the escrow agent will promptly refund your investment, together with your pro
rata share of any interest earned. If a refund is made, our sponsor will pay
any escrow fees.
The escrow agreement between us, the managing dealer 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
securities issued or guaranteed by the U.S. Government which can be readily
sold, or other investments permitted under the Securities Exchange Act of
1934. Additionally, as soon
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as we have received subscription proceeds for at least 200,000 shares of our
common stock, we may invest the proceeds in other short-term investments
which can be readily sold, with appropriate safety of principal. After the
minimum offering amount is sold, subscription proceeds are expected to be
released to us as subscriptions are accepted. We will accept or reject
subscriptions within 10 days after we receive them.
The interest, if any, earned on subscription proceeds relating to
the minimum offering prior to their release to us from escrow will be
distributed to you on a pro rata basis within 30 days after the end of the
quarter during which you were admitted as a stockholder. Our sponsor will
also advance distributions during this escrow period. After your initial
admission as a stockholder in connection with the sale of at least 200,000
shares, you will not be entitled to interest earned on our funds or to
receive interest on your investment.
The escrow agreement provides that the escrow agent will be
appointed as an investment manager by a named fiduciary of any ERISA plan
that is providing money to the escrow. The escrow agreement among us, the
managing dealer and the escrow agent also provides (1) that until all the
conditions precedent for transferring the monies held in escrow are met, the
escrow property may be considered plan assets under ERISA and the escrow
holder shall act as a fiduciary to any benefit plan with respect to those
assets, and (2) that the property will be returned to the benefit plan if the
conditions precedent are not met in a reasonable period of time.
SUBSCRIPTION PROCESS
We are offering up to 50,000,000 shares of our common stock to the
public through the managing dealer and the soliciting dealers. The agreement
between our managing dealer and the soliciting dealers requires the
soliciting dealers to make diligent inquiries of you in order to find out
whether a purchase of our common stock is suitable for you, and to transmit
promptly to us the completed subscription documentation and any supporting
documentation we may reasonably require.
The managing dealer or a soliciting dealer is also required to
deliver to you a copy of this prospectus and its appendices. We plan to make
this prospectus and the appendices available electronically to the managing
dealer and the soliciting dealers, as well as to provide them paper copies.
As a result, if the managing dealer or a soliciting dealer chooses to, with
your prior consent, it may provide you with the option of receiving this
prospectus and the appendices electronically. In any case, however, you may
always receive a paper copy upon request.
Our common stock is being sold as subscriptions for the common stock
are received and accepted by us, subject to the satisfaction by us of the
escrow conditions described in the section immediately above. We have the
unconditional right to accept or reject your subscription. Your subscription
will be accepted or rejected within 10 days after our receipt of a fully
completed copy of the subscription agreement and payment for the number of
shares of common stock subscribed for. If we accept your subscription, a
confirmation will be mailed to you not more than three business days after
our acceptance. No sale of our common stock may be completed until at least
five business days after the date you receive this prospectus and, if
required by state regulatory authorities, a copy of our organizational
documents. If for any reason your subscription is rejected, your funds and
your subscription agreement will be returned to you, without interest or
deduction, within 10 days after receipt.
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REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT
The subscription agreement requires you to make the following
factual representations:
- Your tax identification number set forth in the subscription
agreement is accurate and you are not subject to backup
withholding;
- You received a copy of this prospectus not less than five
business days prior to signing the subscription agreement;
- You meet the minimum income, net worth and any other applicable
suitability standards established for you;
- You are purchasing our common stock for your own account; and
- You acknowledge that our common stock cannot be readily sold.
Each of the above representations is included in the subscription
agreement in order to help satisfy our responsibility to make every
reasonable effort to determine that the purchase of our common stock is a
suitable and appropriate investment for you and that appropriate income tax
reporting information is obtained. We will not sell any common stock to you
unless you are able to make the above factual representations by executing
the subscription agreement.
By executing the subscription agreement, you will not be waiving any
rights under the federal securities laws.
DETERMINATION OF YOUR SUITABILITY AS AN INVESTOR
The managing dealer, each soliciting dealer and we will make
reasonable efforts to determine that you satisfy the suitability standards
set forth herein and that an investment in our common stock is an appropriate
investment for you. The soliciting dealers must determine whether you can
reasonably benefit from this investment. In making this determination, the
soliciting dealers will consider whether:
- you have the capability of understanding fundamental aspects
of our business based on your 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;
- you have an apparent understanding of:
- the fundamental risks and possible financial hazards of
this type of investment;
- the fact that the shares cannot be readily sold;
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- the role of our advisor in directing or managing your
investment in our company; and
- the tax consequences of your investment; and
- you have the financial capability to invest in our common stock.
By executing the subscription agreement, each soliciting dealer
acknowledges its determination that our common stock is a suitable investment
for you. Each soliciting dealer is required to represent and warrant that it
has complied with all applicable laws in determining the suitability of our
common stock as an investment for you. We and our affiliates will coordinate
the processes and procedures used by the managing dealer and the soliciting
dealers and, where necessary, implement additional reviews and procedures to
determine that you meet the suitability standards set forth in this
prospectus.
COMPENSATION WE WILL PAY FOR THE SALE OF OUR SHARES
Except for the special sales described later in this section, we
will pay the managing dealer cash selling commissions of 7% on all of the up
to 50,000,000 shares of common stock sold on a best-efforts basis. A portion
of these selling commissions may, at the discretion of the managing dealer,
be retained or given to soliciting dealers as compensation for their services
in soliciting and obtaining subscriptions from you and other investors.
Except for the special sales described later in this section, we will pay an
additional 2% of the gross proceeds from this offering to the managing dealer
as a marketing contribution in lieu of reimbursement of expenses associated
with marketing, and we may reimburse the managing dealer for its BONA FIDE
due diligence expenses and for those of the soliciting dealers. The maximum
reimbursement, however, will not exceed 0.5% of the gross proceeds from the
up to 50,000,000 shares sold. The managing dealer may, at its discretion,
retain or give all or any portion of the marketing contribution and due
diligence expense allowance to soliciting dealers. Generally, the managing
dealer will not give any portion of the marketing contribution to soliciting
dealers unless they have a prescribed minimum annual sales volume of our
common stock. Marketing and due diligence costs paid by the managing dealer
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.
We will offer to sell to the managing dealer one warrant, at a price
of $.0008 per warrant for each 25 shares of common stock sold during this
offering, subject to federal and state securities laws and up to a maximum of
2,000,000 warrants. The managing dealer may retain the warrants or give them
to the soliciting dealer who sold the common stock. The holder of a warrant
will be entitled to purchase one share of our common stock at a price of
$12.00 per share during the period beginning one year from the date upon
which the warrant is issued and ending five years after the date of this
prospectus. The value attributable to the warrants is approximately $0.90 per
warrant or an aggregate of approximately $1,800,000 for all the warrants,
assuming the best efforts offering of 50,000,000 common shares is fully
subscribed and the maximum of 2,000,000 warrants are issued.
We will not pay selling commissions, marketing contributions or due
diligence expense allowances in connection with the following special sales:
- the sale of common stock in connection with the performance of
services to our employees, directors and associates and our
affiliates, our advisor, affiliates of our
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advisor, the managing dealer or their respective officers and
employees and some of their affiliates;
- the purchase of common stock under the distribution reinvestment
program; and
- the issuance of the warrants to the managing dealer and
soliciting dealers or the common stock issuable upon exercise
of the warrants.
No selling commissions will be paid in connection with the following
special sales:
- the sale of our common stock to one or more soliciting dealers
and to their respective officers and employees and some of
their respective affiliates who request and are entitled to
purchase common stock net of selling commissions;
- the sale of common stock to investors whose contracts for
investment advisory and related brokerage services include a
fixed or "wrap" fee feature; and
- the common stock credited to an investor as a result of a volume
discount.
It is illegal for us to pay or award any commissions or other
compensation to any person engaged by you for investment advice as an
inducement to such advisor to advise you to purchase our common stock;
however, nothing herein will prohibit a registered broker-dealer or other
properly licensed person from earning a sales commission in connection with a
sale of the common stock.
VOLUME DISCOUNTS
Subject to conditions and exceptions explained below, investors
making an initial purchase of at least $1,000,000 worth of common stock
(100,000 shares) through the same soliciting dealer may receive, in the form
of a volume discount, a reduction of the customary 7% selling commission
payable in connection with the purchase of those shares.
The volume discount will be in such amount as may be agreed upon
between the subscriber and the participating soliciting dealer, subject to
the approval of the managing dealer, but may not exceed 6%. The amount of the
selling commissions per share will be reduced by the same proportionate
amount as the volume discount may be increased, so that the sum of the
selling commissions per share and the volume discount will always equal 7%.
For example, if a volume discount of 2% or 3% is agreed upon, then the amount
of selling commissions per share would be reduced to 5% or 4%, respectively.
Any reduction in the amount of the selling commissions in respect of
volume discounts received may be credited to the investor in the following
three ways: (1) as an actual reduction in the amount of selling commissions,
(2) in the form of additional whole shares or fractional shares, or (3) any
combination of (1) and (2), as may be agreed upon between the subscriber and
the participating soliciting dealer, subject to the approval of the managing
dealer.
For example, if you make a $2 million payment at the time of the
initial investment, you would be issued a total of 200,000 shares for the
initial $2 million cash investment ($2,000,000 divided by $10 per share). If
agreed upon by the investor and the participating soliciting dealer (and
approved by the dealer manager), you may receive all or a portion of the
volume discounts credited to you in the
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form of additional whole shares or fractional shares. If, in the above
example, a 2% volume discount is agreed upon, an additional 4,000 shares
would be issued for the volume discount ($2,000,000 times the 2% volume
discount or $40,000, divided by $10 per share). In all, you would receive a
total of 204,000 shares. As to sales of shares which receive a volume
discount, we will pay the agreed upon selling commissions per share. If, as
in the above example, a 2% volume discount (and, thus, a 5% selling
commission per share) is agreed upon by the parties, the total selling
commissions payable in connection with a $2 million initial investment would
be $100,000 ($2,000,000 times the 5% selling commission) or $0.50 per share.
Selling commissions are not paid on the shares issued for the volume discount
(4,000 shares in the above example). Alternatively, if in the above example,
you and the participating soliciting dealer agree (subject to the approval of
the managing dealer) that the 2% volume discount will be taken solely in the
form of an actual reduction in the amount of selling commissions (rather than
in the form of additional shares), the customary selling commissions payable
in connection with what would otherwise be a $2 million initial investment,
or $140,000 ($2,000,000 times the 7% selling commission), would be reduced by
$40,000 ($2,000,000 times the 2% volume discount), resulting in total selling
commissions of $100,000. After taking into account the $40,000 reduction in
the amount of selling commissions, you would be required to make an actual
initial cash investment of only $1,960,000 and would receive 200,000 shares.
The agreement between the subscriber and the soliciting dealer as to
the method of effecting the volume discount and the amount of the volume
discount must be set forth in writing in an instrument satisfactory in form
and substance to us and to the managing dealer.
Some purchases may be combined for the purpose of qualifying for a
volume discount, and for determining commissions payable to the managing
dealer or the soliciting dealers, so long as all the combined purchases are
made through the same soliciting dealer. Purchases by spouses may be combined
and purchases by you may be combined with other purchases of common stock to
be held as a joint tenant or as tenant-in-common by you with others for
purposes of computing amounts invested. Purchases by entities not required to
pay federal income tax may only be combined with purchases by other entities
not required to pay federal income tax for purposes of computing amounts
invested if investment decisions are made by the same person. 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 entities not required to pay federal income tax whose purchases
are sought to be combined. You must mark the "Additional Investment" space on
the subscription agreement signature page in order for purchases to be
combined. We are not responsible for failing to combine purchases if you fail
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 common stock to be credited
to you 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 common stock to be
credited as a result of the combined purchases will be credited to the last
component purchase, unless we are otherwise directed in writing at the time
of the submission. However, the additional common stock to be credited to any
entities not required to pay federal income tax 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 entity not required to pay
federal income tax and their combined purchases.
In the event the dollar amount of commissions paid for combined
purchases exceeds the maximum commissions for combined purchases, taking the
volume discount into effect, the managing dealer will be obligated to return
to us, and soliciting dealers will be obligated to return to the
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managing dealer, any excess commissions received. The managing dealer and we
may adjust any future commissions due for any such excess commissions that are
not returned.
DEFERRED COMMISSION OPTION
DETERMINATION OF THE NUMBER OF SHARES TO BE ISSUED AND THE AMOUNT OF
THE DEFERRED SELLING COMMISSIONS. You may agree with the participating
soliciting dealer and the managing dealer to have selling commissions due
with respect to the purchase of your shares paid over a period of up to six
years pursuant to a deferred commission option arrangement. Our net proceeds
from this offering will not be affected by the election of the deferred
commission option. Under this arrangement, and based on a $10 per share
deemed value for each share issued, if you elect the deferred commission
option, you will pay a 1% selling commission upon subscription, rather than a
7% selling commission, and we will deduct an amount equal to up to a 1%
selling commission per year thereafter for up to the next six years from cash
distributions otherwise payable to you. For example, if you elect the
deferred commission option, you will be required to pay a total of $9.40 per
share purchased upon subscription, rather than $10 per share, with respect to
which $0.10 per share will be payable as selling commissions due upon
subscription (based on the number of shares that would have been issued if
the deferred commission option had not been elected). For example, for a
$100,000 initial investment, we will issue 10,638.298 shares ($100,000
divided by $9.40), and you would pay maximum selling commissions of $1,000
upon subscription ($0.10 times the 10,000 shares which would have been issued
for $100,000 if the deferred commission option had not been elected). For
each of the up to six years following the subscription, on a date or dates to
be determined from time to time by the managing dealer (initially
contemplated to be monthly as of when distributions are paid), we will deduct
$0.10 per share (based on the number of shares that would have been issued if
the deferred commission option had not been elected) on an annual basis from
cash distributions otherwise payable to you. This amount will be used to pay
deferred commission obligations. In the example of an initial cash investment
of $100,000, $1,000 would be deducted on an annual basis and used in the
above described manner for each of the six years following the subscription.
The managing dealer will pay the selling commissions paid upon subscription
and in each of the following up to six years, which selling commissions may
be reallowed to the soliciting dealer by the managing dealer, and the
deferred commission obligations would be satisfied.
As in any volume discount situation, selling commissions are not
paid on any shares issued for a volume discount. Therefore, when the deferred
commission option is used, we will not make deductions for deferred
commission obligations from cash distributions payable on the shares issued
for a volume discount, because there will not be any deferred commission
obligation as to those particular shares. The number of shares issued, if
any, for a volume discount, will be determined as provided above under "Plan
of Distribution --Volume Discounts."
TAXES. If you elect the deferred commission option and you are
subject to federal income taxation, you will incur tax liability for cash
distributions payable to you with respect to your shares even though we will
withhold such cash distributions and will instead pay third parties to
satisfy deferred commission obligations.
SUBSCRIPTION AGREEMENT. If you wish to elect the deferred commission
option, you must make the election by checking the appropriate box on the
subscription agreement/signature page. In addition, the broker-dealer must
also complete and sign the subscription agreement/signature page to
acknowledge its agreement to the deferred commission option.
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AUTHORIZATION TO WITHHOLD CASH DISTRIBUTIONS. If you elect the
deferred commission option you will be authorizing us to withhold cash
distributions otherwise payable to you for the purpose of paying selling
commissions due under the deferred commission option; provided, however, that
in no event may we withhold in excess of $0.60 per share in the aggregate
(lower when the volume discount provisions are also applicable and less than
6% of the selling commissions are deferred) under the deferred commission
option.
ACCELERATION OF DEFERRED COMMISSION OBLIGATION. If our shares become
listed for trading on a national securities exchange or included for
quotation on a national market system, or such listing or inclusion is
reasonably anticipated to occur at any time prior to the satisfaction of the
remaining deferred commission obligations, we will accelerate the remaining
selling commissions due under the deferred commission option. In such event,
we will provide notice of such acceleration to stockholders who have elected
the deferred commission option. The amount of the remaining selling
commissions due will be deducted and paid by us out of cash distributions
otherwise payable to such stockholders during the time period prior to any
such listing of the shares for trading on a national securities exchange or
inclusion for quotation on a national market system. However, in no event may
we withhold in excess of $0.60 per share in the aggregate during the six-year
period following the subscription. The maximum amount that we may withhold
and the maximum number of years for which we may offer selling commissions
will be lower when the volume discount provisions are also applicable and
less than 6% of the selling commissions are deferred. To the extent that the
cash distributions during such time period are insufficient to satisfy the
remaining deferred selling commissions due, the obligation of us and our
stockholders to make any further payments of deferred selling commissions
under the deferred commission option shall terminate and the managing dealer
(and participating soliciting dealers if the deferred selling commissions are
reallowed to them by the managing dealer) will not be entitled to receive any
further portion of the unpaid deferred selling commissions following any such
listing for trading or inclusion for quotation of our shares.
In addition, if you elect the deferred commission option and
subsequently elect to participate in our share repurchase program or request
that we transfer your shares for any other reason prior to the time that the
remaining deferred selling commissions have been deducted from cash
distributions otherwise payable to you during the mentioned period of up to
six years, then we will accelerate the remaining selling commissions due
under the deferred commission option. In such event, we shall provide notice
of such acceleration to you, and:
- in the case of an election to sell the shares under our share
repurchase program, you will be required to pay to us the
unpaid portion of the remaining deferred commission obligation
prior to or concurrently with our purchase of your shares
pursuant to our share repurchase program or we may deduct such
unpaid portion of the remaining deferred commission obligation
from the amount otherwise due to you for our purchase of your
shares under our share repurchase program; or
- if you request that we transfer the shares for any other
reason, you will not be entitled to effect any such transfer
until you first either:
- pay to us the unpaid portion of the remaining deferred commission
obligation or
- provide a written instrument in form and substance satisfactory
to us, and appropriately signed by the transferee, to the effect
that the proposed transferee agrees to have the unpaid portion of
the remaining deferred commission obligation deducted from cash
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distributions otherwise payable to the transferee during the
remaining portion of the specified period, which may be up to six
years.
LEGEND. All certificates representing any shares that elect the
deferred commission option (including any shares issued for the volume
discount in connection with the election of the deferred commission option)
will bear a legend referring to the fact that such shares are subject to the
terms of the deferred commission option including the withholding of cash
distributions otherwise payable to the stockholders for the purpose of paying
the deferred selling commission obligation.
MARKETING CONTRIBUTION AND DUE DILIGENCE EXPENSE ALLOWANCE. The
marketing contribution of 2% and the due diligence expense allowance of 0.5%
will be payable by us on the gross offering proceeds for all of the shares
issued based on an assumed price of $10 per share. We will pay those amounts
due from the proceeds we receive at the time of the initial investment.
INDEMNIFICATION
We will indemnify the managing dealer and the soliciting dealers
against liabilities, including liabilities under the Securities Act of 1933,
if one or more of the following conditions are met:
- 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
- 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
- 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 Securities and Exchange
Commission and the published opinions of any state securities
regulatory authority in which our common stock was offered and
sold respecting the availability and/or propriety of
indemnification for securities law violations. The soliciting
dealer will be required to indemnify us and our advisor
against such liabilities.
In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Exchange Act of
1934 is against public policy and, therefore, unenforceable. The managing
dealer and each of the soliciting dealers may be deemed to be an
"underwriter" as that term is defined in the Securities Exchange Act of 1934.
WHO MAY INVEST
In order to purchase shares, you must:
- Meet the financial suitability standards, and
- Purchase at least the minimum number of shares.
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SUITABILITY STANDARDS
Because an investment in our common stock is risky and is a
long-term investment, it is suitable for you only if you have adequate
financial means to make this investment, you have no immediate need for
liquidity in your investment and you can bear the loss of your investment.
We have established financial suitability standards for investors
who purchase shares of our common stock. In addition, residents of some
states must meet higher suitability standards under state law. These
standards require you to meet the applicable criteria below. In determining
your net worth, do not include your home, home furnishings or your
automobile. INVESTORS WITH INVESTMENT DISCRETION OVER ASSETS OF AN EMPLOYEE
BENEFIT PLAN COVERED BY ERISA SHOULD CAREFULLY REVIEW THE INFORMATION IN THE
SECTION ENTITLED "ERISA CONSIDERATIONS."
GENERAL STANDARDS FOR ALL INVESTORS
- Minimum net worth of at least $150,000, OR
- Minimum annual gross income of $45,000 and a minimum net worth
of $45,000.
STANDARDS FOR MAINE RESIDENTS
- Minimum net worth of $200,000, OR
- Minimum annual gross income of $50,000 and a minimum net worth
of $50,000.
STANDARDS FOR MASSACHUSETTS, MISSOURI OR TENNESSEE RESIDENTS
- Minimum net worth of $225,000, OR
- Minimum annual gross income of $60,000 and a minimum net worth
of $60,000.
STANDARDS FOR OHIO AND PENNSYLVANIA RESIDENTS
- In addition to meeting the general standards for all
investors, your investment may not exceed 10% of your 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 common
stock if the donor or the grantor is the fiduciary. INVESTORS WITH INVESTMENT
DISCRETION OVER ASSETS OF AN EMPLOYEE BENEFIT PLAN COVERED BY ERISA SHOULD
CAREFULLY REVIEW THE INFORMATION IN THE SECTION ENTITLED "ERISA
CONSIDERATIONS."
In the case of gifts to minors, the suitability standards must be
met by the custodian of the account or by the donor.
MINIMUM PURCHASE
Subject to the restrictions imposed by state law, we will sell shares
of our common stock only to investors who initially purchase a minimum of 300
shares of common stock for a total purchase price
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of $3,000, or tax-exempt entities which purchase a minimum of 100 shares of
common stock for a total purchase price of $1,000. For investors living in
Iowa, the minimum investment for IRAs will be 300 shares of common stock for
a total purchase price of $3,000, and for investors living in Minnesota, the
minimum investment for IRAs and qualified plan accounts will be 200 shares of
common stock for a total purchase price of $2,000. Tax-exempt entities are
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(a), 414(d) or 414(e) of the
Internal Revenue Code;
- a pension, profit-sharing, retirement, IRA or other employee
benefit plan which meets the requirements of Section 457 of
the Internal Revenue Code;
- trusts that are otherwise exempt under Section 501(a) of the
Internal Revenue Code;
- a voluntary employees' beneficiary association under
Section 501(c)(9) of the Internal Revenue Code; or
- an IRA which meets the requirements of Section 408 of the
Internal Revenue Code.
The term "plan" includes plans subject to Title I of ERISA, other
employee benefit plans and IRAs subject to the prohibited transaction
provisions of Section 4975 of the Internal Revenue Code, governmental or
church plans that are exempt from ERISA and Section 4975 of the Internal
Revenue Code, but that may be subject to state law requirements, or other
employee benefit plans.
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HOW TO SUBSCRIBE
Investors who meet the suitability standards described above may
purchase shares of common stock. See "Who May Invest" and "Plan of
Distribution -- Determination of Investor Suitability," above, for the
suitability standards. Investors who want to purchase shares must proceed as
follows:
- Read the entire prospectus and the current supplement(s), if
any, accompanying the prospectus.
- Complete the execution copy of the subscription agreement. A
specimen copy of the subscription agreement, including
instructions for completing it, is included in the prospectus
as Appendix C.
- 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. The name of the soliciting dealer appears
on the subscription agreement.
- By executing the subscription agreement and 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 its terms.
In addition, if a subscriber elects the deferred commission option,
he or she must do so by completing and signing the subscription
agreement/signature page of the form of subscription agreement. The
soliciting dealer must also complete and sign the subscription
agreement/signature page to acknowledge its agreement to the deferred
commission option. This is more fully explained under "Plan of Distribution
-- Deferred Commission Option."
A sale of the shares may not be completed until at least five
business days after the subscriber receives the prospectus. Within 10 days,
and generally within 24 hours, of our receipt of each completed subscription
agreement, we will accept or reject the subscription. If we accept the
subscription, we will mail a confirmation within three days. If for any
reason we reject the subscription, we will promptly return the check and the
subscription agreement, without interest or deduction, within 10 days after
we received it.
An approved trustee must process through us and forward to us
subscriptions made through individual retirement accounts, Keogh plans and
401(k) plans. In the case of individual retirement accounts, Keogh plans and
401(k) plan stockholders, we will send the confirmation to the trustee.
You have the option of placing a transfer on death, or TOD,
designation on your shares purchased in this offering. A TOD designation
transfers ownership of the shares to your designated beneficiary upon your
death. This designation may only be made by an individual, not an entity, who
is the sole owner of the shares. This option, however, is not available to
residents of the States of Louisiana, New York, North Carolina and Texas. If
you would like to place a transfer on death designation on your shares, you
must check the TOD box on the subscription agreement and you must complete
and return the transfer on death form included as Appendix D to this
prospectus in order to effect the designation.
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SALES LITERATURE
In addition to and apart from this prospectus, we may use
supplemental sales material in connection with the offering. This material,
prepared by our advisor, may consist of a brochure describing the advisor and
its affiliates and our objectives. The material may also contain pictures and
summary descriptions of properties similar to those we intend to acquire that
our affiliates 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 the dealer members of the National
Association of Securities Dealers designated by Inland Securities Corporation
and prospective investors. No person has been authorized to prepare for, or
furnish to, a prospective investor any sales literature other than that
described herein and "tombstone" newspaper advertisements or solicitations of
interest that are 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, we have 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
Our distribution reinvestment program provides our stockholders with
an opportunity to purchase additional shares of voting common stock by
reinvesting distributions. Stockholders who elect to participate in the
distribution reinvestment program will authorize us to use distributions
payable to them to purchase additional shares of common stock. A participant
will not be able to acquire common stock under the program if the purchase
would cause it to exceed the 9.8% ownership limit or would violate any of the
other share ownership restrictions imposed by our charter.
As further explained below, purchases under the distribution
reinvestment program are made at a price, $9.50 per share at first, equal to
95% of the market price of a share of common stock on the date of purchase
until such time as our 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 distribution reinvestment program may also purchase fractional shares of
common stock, so that 100% of distributions will be used to acquire common
stock. Common stock will be purchased under the distribution reinvestment
program on the record date for the distribution used to purchase the common
stock. Distributions on common stock acquired under the distribution
reinvestment program will be paid at the same time as distributions are paid
on common stock purchased outside the program and are calculated with a daily
record and distribution declaration date. Each participant agrees that if, at
any time prior to listing the common stock on a national stock exchange or
inclusion of them for quotation on a national market system, he or she fails
to meet the suitability requirements for making an investment in us or cannot
make the other representations or warranties set forth in the subscription
agreement, he or she will promptly notify us in writing.
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Beginning with the first distribution paid after the effective date
of the offering, participants will acquire our shares at a fixed price of
$9.50 per share. This will continue until the earlier of (1) the increase of
the public offering price per share of common stock in the offering from $10
per share, if there is an increase, and (2) the termination of the offering.
Thereafter, participants may acquire our shares at a price equal to 95% of
the market price of a share on the date of purchase until our shares are
listed on a national stock exchange or included for quotation on a national
market system. In the event of listing or inclusion, we will purchase shares
for the distribution reinvestment program on the exchange or market at the
prevailing market price. We will then sell the shares to stockholders at that
price. The discount from the public offering price per share will not 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 the prices on
the secondary market will be lower or higher than the price of shares
purchased through the distribution reinvestment program. Neither we nor our
affiliates will receive a fee for selling shares through the distribution
reinvestment program. We do not warrant or guarantee that participants will
acquire shares at the lowest possible price through the program.
A participant may stop participating in the distribution
reinvestment program at any time without penalty, by delivering written
notice to us. Prior to listing the shares on a national securities exchange
or including them for quotation on a national market system, any transfer of
shares by a participant to a non- participant will terminate participation in
the distribution reinvestment program with respect to the transferred shares.
Within 90 days after the end of our fiscal year, we will:
- issue certificates showing ownership of shares purchased
through the distribution reinvestment program during the prior
fiscal year, ownership of these shares will be in book-entry
form prior to the issuance of certificates; and
- 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 distribution
reinvestment program including the tax consequences relative thereto. The
directors, including a majority of independent directors, by majority vote
may amend or terminate the distribution reinvestment program upon 30 days
notice to participants.
Stockholders who participate in the distribution reinvestment
program will recognize dividend income, taxable to the extent of our current
or accumulated earnings and profits, in the amount and as though they had
received the cash rather than purchased shares through the distribution
reinvestment program. These deemed dividends will be treated as actual
dividends and will retain the character and tax effects applicable to all
dividends. In addition, the 5% discount applicable to shares purchased under
the dividend reinvestment program will itself be treated as a deemed
distribution to the purchaser. Shares received under the distribution
reinvestment program 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.
184
<PAGE>
As explained under "Description of Securities -- Restrictions on
Ownership and Transfer," the certificates representing shares purchased
through the distribution reinvestment program will bear a legend referring to
the restrictions on their ownership and transfer.
SHARE REPURCHASE PROGRAM
The share repurchase program may, subject to restrictions, provide
eligible stockholders with limited, interim liquidity by enabling them to
sell shares back to us. The prices at which shares may be sold back to us are
as follows:
- During the offering period at $9.05 per share. This is a
reduction of $0.95 from the $10 offering price per share,
reflecting the elimination of selling commissions and the
marketing contribution and due diligence expense allowance;
- During the 12 months following the end of the offering period at
$9.25 per share;
- During the next 12 months at $9.50 per share;
- During the next 12 months at $9.75 per share; and
- Thereafter, at the greater of: (i) $10 per share; or (ii) a
price equal to 10 times our "funds available for distribution"
per weighted average share outstanding for the prior calendar
year.
A stockholder must have beneficially held the shares for at least
one year prior to offering them for sale to us through the share repurchase
program.
We will make repurchases under the share repurchase program, if
requested, at least once quarterly on a first-come, first-served basis.
Subject to funds being available, we will limit the number of shares
repurchased during any calendar year to one half of one percent, 0.5%, of the
weighted average number of shares outstanding during the prior calendar year.
Funding for the share repurchase program will come exclusively from proceeds
we receive from the sale of shares under our distribution reinvestment plan
and other operating funds, if any, as the board, at its sole discretion, may
reserve for this purpose.
The board of directors, at its sole discretion, may choose to
terminate the share repurchase program after the end of the offering period,
or reduce the number of shares purchased under the program, if it determines
that the funds allocated to the share repurchase program are needed for other
purposes, such as the acquisition, maintenance or repair of properties, or
for use in making a declared distribution. A determination by the board of
directors to eliminate or reduce the share repurchase program will require
the unanimous affirmative vote of the independent directors.
We cannot guarantee that the funds set aside for the share
repurchase program will be sufficient to accommodate all requests made each
year. If no funds are available for the program when repurchase is requested,
the stockholder may withdraw the request, or ask that we honor the request
when funds are available. Pending requests will be honored on a first-come,
first-served basis.
Stockholders are not required to sell their shares to us. The share
repurchase program is only intended to provide interim liquidity for
stockholders until a liquidity event occurs, such as the listing
185
<PAGE>
of the shares on a national securities exchange, inclusion of the shares for
quotation on a national market system, or our merger with a listed company.
We cannot guarantee that a liquidity event will occur.
Shares we purchase under the share repurchase program will be
canceled, and will have the status of authorized but unissued shares. Shares
we acquire through the share repurchase program will not be reissued unless
they are first registered with the Securities and Exchange Commission under
the Securities Act of 1933 and under appropriate state securities laws or
otherwise issued in compliance with such laws.
If we terminate, reduce or otherwise change the share repurchase
program, we will send a letter to stockholders informing them of the change,
and we will disclose the changes in quarterly reports filed with the
Securities and Exchange Commission on Form 10-Q.
See "Plan of Distribution -- Deferred Commission Option" in this
prospectus for an explanation of what will be required of the stockholder if
the stockholder has elected the deferred commission option and subsequently
elects to participate in our share repurchase program while there is an
unpaid portion of the remaining deferred commission obligation.
REPORTS TO STOCKHOLDERS
Our advisor will keep, or cause to be kept, full and true books of
account on an accrual basis of accounting, in accordance with generally
accepted accounting principles. All of these books of account, together with
a copy of our charter, will at all times be maintained at our principal
office, 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 our audited annual
reports within 120 days following the close of each fiscal year. The annual
reports will contain the following:
- audited financial statements;
- the ratio of the costs of raising capital during the period to
the capital raised;
- the aggregate amount of advisory fees and the aggregate amount
of fees paid to the advisor and any affiliate of the advisor,
including fees or charges paid to the advisor and to any
affiliate of the advisor by third parties doing business with
us;
- our total operating expenses, stated as a percentage of the
average invested assets and as a percentage of net income;
- a report from the independent directors that the policies we
follow are in the best interests of our stockholders and the
basis for such determination; and
- separately stated, full disclosure of all material terms,
factors and circumstances surrounding any and all transactions
involving us, the directors, the advisor and any of their
affiliates occurring in the year for which the annual report
is made. Independent directors are specifically charged with
the duty to examine and comment in the report on the fairness
of such transactions.
186
<PAGE>
In addition, unaudited quarterly reports containing the information
required by Form 10-Q will be submitted to each stockholder within 45 days
after the close of each quarterly fiscal period.
At the same time as any distribution, we will provide stockholders
with a statement disclosing the source of the funds distributed. If the
information is not available when the distribution is made, we will provide a
statement setting forth the reasons why the information is not available. In
no event will the information be provided to stockholders more than 60 days
after we make the distribution.
Within 60 days following the end of any calendar quarter during the
period of the offering in which we have closed an acquisition of a property,
we will submit a report to each stockholder containing:
- the location and a description of the general character of the
property acquired during the quarter;
- the present or proposed use of the property and its suitability
and adequacy for that use;
- the terms of any material leases affecting the property;
- 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
- a statement that title insurance has been or will be obtained on
the property acquired.
In addition, we will send a report to each stockholder and submit to
prospective investors when the advisor believes a property will probably be
acquired:
- on specified terms, I.E., upon completion of due diligence which
includes review of the title insurance commitment, appraisal and
environmental analysis; and
- 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 will, upon
request, send a schedule to the Commissioner of Corporations of the State of
California. The schedule, verified under the penalty of perjury, reflects:
each acquisition made; the purchase price paid; the aggregate of all
acquisition expenses paid on each transaction; and a computation showing
compliance with our charter. We will, 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 our charter or any applicable law
or regulation.
The accountants we regularly retain will prepare our federal tax
return and any applicable state income tax returns. We will submit
appropriate tax information to the stockholders within 30 days following the
end of each of our fiscal years. We will not provide a specific
reconciliation between generally accepted accounting principles and income
tax information to the stockholders. However, the reconciling information
will be available in our office for inspection and review by any interested
stockholder. Annually, at the same time as the dissemination of appropriate
tax information to
187
<PAGE>
stockholders, we will 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
distribution reinvestment program. Stockholders requiring individualized
reports on a more frequent basis may request these reports. We will make
every reasonable effort to supply more frequent reports, as requested, but we
may, at our sole discretion, require payment of an administrative charge
either directly by the stockholder, or through pre-authorized deductions from
distributions payable to the stockholder making the request.
See "Risk Factors -- Employee Benefit Plan Risks -- Annual Statement
of Value is an Estimate" for an explanation of the annual statement of value
we provide to stockholders subject to ERISA.
LITIGATION
We are not subject to any material pending legal proceedings.
RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into agreements to pay our advisor and its
affiliates fees or other compensation for providing services to us. During
the year ended December 31, 1999, we paid the fees or other compensation to
our advisor or its affiliates as more fully described in "Compensation Table."
LEGAL MATTERS
Katten Muchin Zavis, Chicago, Illinois, will pass upon the legality
of the common stock and legal matters in connection with our status as a REIT
for federal income tax purposes. Katten Muchin Zavis does not purport to
represent our stockholders or potential investors, who should consult their
own counsel. Katten Muchin Zavis also provides legal services to our advisor
and its affiliates.
Katten Muchin Zavis has reviewed the statements in the section in
the prospectus titled "Federal Income Tax Considerations" and elsewhere as
they relate to federal income tax matters and the statements in the section
in the prospectus titled "ERISA Considerations."
EXPERTS
The Consolidated Financial Statements of Inland Retail Real Estate
Trust, Inc. as of and for the year ended December 31, 1999, the Historical
Summary of Gross Income and Direct Operating Expenses of Conway Plaza for the
year ended December 31, 1999, the Historical Summary of Gross Income and
Direct Operating Expenses of Pleasant Hill Square for the year ended December
31, 1999, and the Historical Summary of Gross Income and Direct Operating
Expenses of Gateway Market Center for the year ended December 31, 1999 have
been included herein and in the Registration Statement on Form S-11 in
reliance upon the reports of KPMG LLP, independent certified public
accountants, include elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
188
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have previously filed a registration statement on Form S-11 with
the Securities and Exchange Commission in connection with our initial public
offering. In addition, we are required to file annual, quarterly and current
reports, proxy statements and other information with the Securities and
Exchange Commission.
We have also filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with this offering. This
prospectus is part of the registration statement and does not contain all of
the information included in the registration statement and all of its
exhibits, certificates and schedules. Whenever a reference is made in this
prospectus to any contract or other document of ours, the reference may not
be complete and you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or document.
You may read and copy our registration statement and all of its
exhibits and schedules which we have filed with the SEC and which may be
inspected and copied at the Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. This material, as well as copies of all other
documents filed with the SEC, may be obtained from the Public Reference
Section of the SEC, Washington D.C. 20549 upon payment of the fee prescribed
by the SEC and at the regional offices of the SEC located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a web
site (http://www.sec.gov) that contains reports, proxies and other
information regarding registrants that file electronically with the SEC.
189
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INLAND RETAIL REAL ESTATE TRUST, INC.: PAGE
<S> <C>
Consolidated Financial Statements (unaudited) at and for the nine months
ended September 30, 2000 F-1
Notes to Consolidated Financial Statements (unaudited) at September 30, 2000 F-7
Independent Auditors Report F-18
Consolidated Financial Statements at and for the year ended December 31, 1999 F-19
Notes to Consolidated Financial Statements at and for the year ended December 31, 1999 F-25
Pro Forma Consolidated Balance Sheet (unaudited) at September 30, 2000 F-37
Pro Forma Consolidated Statement of Operations (unaudited) for the nine months
ended September 30, 2000 F-39
Notes to Pro Forma Consolidated Statement of Operations (unaudited) for the nine months
ended September 30, 2000 F-40
Pro Forma Consolidated Statement of Operations (unaudited) for the year ended
December 31, 1999 F-42
Notes to Pro Forma Consolidated Statement of Operations (unaudited) for the year
ended December 31, 1999 F-44
CONWAY PLAZA:
Independent Auditors' Report F-50
Historical Summary of Gross Income and Direct Operating Expenses for the year ended
December 31, 1999 F-51
Notes to the Historical Summary of Gross Income and Direct Operating Expenses for the year
ended December 31, 1999 F-52
Historical Summary of Gross Income and Direct Operating Expenses (unaudited) for
the nine months ended September 30, 2000 F-54
Notes to the Historical Summary of Gross Income and Direct Operating Expenses
(unaudited) for the nine months ended September 30, 2000 F-55
F-i
<PAGE>
PLEASANT HILL SQUARE:
Independent Auditors' Report F-56
Historical Summary of Gross Income and Direct Operating Expenses for the year ended
December 31, 1999 F-57
Notes to the Historical Summary of Gross Income and Direct Operating Expenses for the year
ended December 31, 1999 F-58
Historical Summary of Gross Income and Direct Operating Expenses (unaudited) for
the nine months ended September 30, 2000 F-60
Notes to the Historical Summary of Gross Income and Direct Operating Expenses(unaudited)
for the nine months ended September 30, 2000 F-61
GATEWAY MARKET CENTER:
Independent Auditors' Report F-62
Historical Summary of Gross Income and Direct Operating Expenses for the year ended
December 31, 1999 F-63
Notes to the Historical Summary of Gross Income and Direct Operating Expenses for the year
ended December 31, 1999 F-64
Historical Summary of Gross Income and Direct Operating Expenses (unaudited) for
the nine months ended September 30, 2000 F-66
Notes to the Historical Summary of Gross Income and Direct Operating Expenses
(unaudited) for the nine months ended September 30, 2000 F-67
</TABLE>
F-ii
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
INVESTMENT PROPERTIES:
Land $ 46,628,263 $ 33,260,261
Building and site improvements 144,109,972 93,978,854
-------------- ------------
190,738,235 127,239,115
Less accumulated depreciation 4,549,743 1,229,323
-------------- ------------
Net investment in properties 186,188,492 126,009,792
Cash and cash equivalents 11,365,111 14,869,164
Restricted cash 905,805 1,246,889
Investment in securities (Note 1) 660,066 -
Accounts and rents receivable, (net of allowance of $112,722 and $0 as
of September 30, 2000 and December 31, 1999, respectively)(Note 6) 2,060,671 1,331,213
Real estate tax and insurance escrow deposits 451,892 227,123
Loan fees (net of accumulated amortization of
$130,122 and $20,432 as of September 30, 2000
and December 31, 1999, respectively) 552,001 164,433
Leasing fees (net of accumulated amortization of $13,357 and $3,346 as
of September 30, 2000 and December 31, 1999, respectively) 48,165 34,106
Deferred acquisition costs 302,891 91,880
Other assets 153,803 13,536
------------- ------------
Total assets $ 202,688,897 $ 143,988,136
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES:
Accounts payable $ 186,796 $ 74,094
Accrued offering costs due to Affiliates 1,712,315 1,309,642
Accrued offering costs due to non-affiliates 61,680 1,554,262
Accrued interest payable 590,568 419,003
Real estate tax payable 1,379,417 --
Distributions payable (Note 12) 626,099 331,467
Security Deposits 313,583 232,370
Mortgages payable (Note 7) 106,361,082 93,099,852
Acquisition note payable (Note 8) 2,800,000 --
Unearned income 125,478 9,585
Other liabilities 1,221,700 1,359,209
Due to Affiliates (Note 3) 1,626,076 582,787
-------------- -------------
Total liabilities 117,004,794 98,972,271
-------------- -------------
Minority interest in partnership 2,000 2,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, none outstanding -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized, 10,409,799 and 5,433,839 issued and
outstanding at September 30, 2000 and December 31,
1999, respectively 104,098 54,338
Additional paid-in capital (net of costs of
Offering of $13,762,482 and $8,057,059 at September 30, 2000 and December
31, 1999, respectively, of which $9,602,538 and $5,193,155 was paid or
accrued to Affiliates,
respectively) 89,759,026 46,188,392
Accumulated distributions in excess of
net income (4,181,233) (1,228,865)
Accumulated comprehensive income 212 -
-------------- -------------
Total stockholders' equity 85,682,103 45,013,865
-------------- -------------
Commitments and contingencies (Notes 6, 7 and 11)
Total liabilities and stockholders' equity $ 202,688,897 $ 143,988,136
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
INCOME:
Rental income $ 4,652,567 $ 1,441,695 $ 11,911,261 $ 1,821,483
Additional rental income 1,163,080 278,656 3,144,168 505,354
Interest and dividend income 210,165 63,166 557,988 98,758
Other income 180,608 100 119,701 100
----------- ---------- ----------- ----------
6,206,420 1,783,617 15,733,118 2,425,695
----------- ---------- ----------- ----------
EXPENSES:
Professional services to Affiliates - 1,913 - 12,155
Professional services to non-affiliates 16,785 19,100 149,540 48,133
General and administrative expenses
to Affiliates 74,485 12,319 183,503 52,505
General and administrative expenses
to non-affiliates 56,296 12,097 129,716 51,801
Advisor asset management fee 30,000 - 90,000 -
Property operating expenses to
Affiliates 266,314 83,464 670,916 92,822
Property operating expenses to
non-affiliates 1,177,749 361,367 3,582,982 624,859
Mortgage interest to Affiliates - 583 - 2,028
Mortgage interest to non-affiliates 2,335,420 810,089 5,991,581 965,335
Acquisition costs expense 75,441 13,838 110,033 25,281
Depreciation 1,300,453 391,364 3,320,421 479,183
Amortization 60,952 1,427 131,300 1,626
---------- ---------- ----------- ----------
5,393,895 1,707,561 14,359,992 2,355,728
---------- ---------- ----------- ----------
Net income before comprehensive
income 812,525 76,056 1,373,126 69,967
---------- ---------- ----------- ----------
Unrealized holding gain on investment
securities 212 - 212 -
---------- ---------- ----------- ----------
Comprehensive income $ 812,737 $ 76,056 $ 1,373,338 $ 69,967
========== ========== =========== ==========
Net income before comprehensive
income per common share, basic
and diluted $ .09 $ .03 $ .18 $ .05
Weighted average number of
common shares outstanding, basic
and diluted 9,168,8 2,292,809 7,595,911 1,289,409
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL PAID- DISTRIBUTIONS IN
NUMBER OF COMMON IN EXCESS OF
SHARES STOCK CAPITAL NET INCOME
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 5,433,839 $ 54,338 $ 46,188,392 $ (1,228,865)
Net income -- -- -- 1,373,126
Comprehensive income -- -- -- --
Distributions declared ($.76 per weighted
average number of common shares outstanding) -- -- -- (4,325,494)
Proceeds from offering Including DRP (net of
current period and cumulative offering costs
of $5,705,423, and $13,762,482) 5,015,483 50,155 43,927,922 --
Treasury Stock (39,523) (395) (357,288) --
-------- ---------- ----------- -----------
Balance at September 30, 2000 10,409,799 $ 104,098 $ 89,759,026 $(4,181,233)
========== ========= ============ =============
<CAPTION>
ACCUMULATED
COMPREHENSIVE
INCOME TOTAL
------------ -------
<S> <C> <C>
Balance at December 31, 1999 $ -- $ 45,013,865
Net income -- 1,373,126
Comprehensive income 212 212
Distributions declared ($.76 per weighted
average number of common shares outstanding) -- (4,325,494)
Proceeds from offering Including DRP (net of
current period and cumulative offering costs
of $5,705,423, and $13,762,482) -- 43,978,077
Treasury Stock -- (357,683)
------------- -------------
Balance at September 30, 2000 $ 212 $ 85,682,103
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,373,338 $ 69,967
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,320,421 479,183
Amortization 119,701 1,626
Interest escrow 53,085 -
Rental income under master lease agreements 340,406 -
Straight-line rental income (340,799) (35,809)
Changes in assets and liabilities:
Accounts and rents receivable (388,659) (343,013)
Other assets (140,267) (123,964)
Real estate tax and insurance escrows (224,769) (513,669)
Accrued interest payable 171,565 339,809
Deferred acquisition costs (211,011) -
Real estate tax payable 1,379,417 373,085
Accounts payable 112,702 37,177
Unearned income 115,893 152,067
Other liabilities (292,674) 113,140
Security deposits 81,213 165,150
Due to affiliates 1,043,289 542,624
----------- ----------
Net cash provided by operating activities 6,512,851 1,257,373
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash 341,084 -
Purchase of investments in securities, net
of margin account (504,901) -
Purchase of investment properties (60,989,852) (27,208,723)
Additions to investment properties (107,759) -
Condemnation proceeds 5,000 -
Leasing fees (24,070) (12,190)
------------ ------------
Net cash used in investing activities (61,280,498) (27,220,913)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from offering 49,683,499 31,941,910
Repurchase of shares (357,683) -
Payment of offering costs (6,795,332) (2,797,095)
Proceeds from debt financing 35,657,500 -
Principal payments of debt (22,396,270) (50,042)
Loan fees (497,258) (131,350)
Distributions paid (4,030,862) (367,472)
------------ ------------
Net cash provided by financing activities 51,263,594 28,595,951
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
2000 1999
---------- -------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents (3,504,053) 2,632,411
Cash and cash equivalents at January 1 14,869,164 202,000
------------- -------------
Cash and cash equivalents at September 30 $ 11,365,111 $ 2,834,411
============= =============
Supplemental schedule of noncash investing and financing activities:
Purchase of investment properties $(63,789,852) $(100,873,692)
Assumption of mortgage debt - 73,664,969
Acquisition note payable 2,800,000 -
----------- -------------
$(60,989,852) $ (27,208,723)
=========== =============
Distributions payable $ 626,099 $ 175,621
============ =============
Cash paid for interest $ 5,714,190 $ 819,383
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") FOR INTERIM
FINANCIAL INFORMATION AND WITH THE INSTRUCTIONS TO FORM 10-Q AND ARTICLE 10
OF REGULATION S-X. ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GAAP FOR COMPLETE FINANCIAL STATEMENTS. READERS OF
THIS QUARTERLY REPORT SHOULD REFER TO THE AUDITED FINANCIAL STATEMENTS OF
INLAND RETAIL REAL ESTATE TRUST, INC. (THE "COMPANY") FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999, WHICH ARE INCLUDED IN THE COMPANY'S 1999 ANNUAL
REPORT, AS CERTAIN FOOTNOTE DISCLOSURES CONTAINED IN SUCH AUDITED FINANCIAL
STATEMENTS HAVE BEEN OMITTED FROM THIS REPORT.
(1) ORGANIZATION AND BASIS OF ACCOUNTING
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. 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
may also acquire single-user retail properties in locations throughout the
United States, certain of which may be sale and leaseback transactions, net
leased to creditworthy tenants. Inland Retail Real Estate Advisory Services,
Inc. (the "Advisor"), an affiliate of the Company, is the advisor to the
Company. On February 11, 1999, the Company commenced an initial public
offering ("Offering"), on a best efforts basis of 50,000,000 shares of common
stock ("Shares") at $10 per Share and 4,000,000 Shares at $9.50 per Share
which may be distributed pursuant to the Company's Distribution Reinvestment
Program ("DRP"). As of September 30, 2000, the Company had received
subscriptions for a total of 10,265,307 Shares. In addition, the Company has
issued 184,015 Shares pursuant to the Company's DRP. As of September 30,
2000, the Company has repurchased a total of 39,523 Shares through the
Company's Share Repurchase Program.
The Company is qualified and has elected to be taxed as a real estate
investment trust ("REIT") under Section 856 through 860 of the Internal
Revenue Code of 1986. Since the Company qualifies for taxation as a REIT, the
Company generally will not be subject to federal income tax to the extent it
distributes at least 95%(90% for taxable years beginning after December 31,
2000) of 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.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present
fairly the financial position and results of operations for the period
presented herein. Results of interim periods are not necessarily indicative
of results to be expected for the year.
F-7
<PAGE>
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Statement of Financial Accounting Standards No. 121 requires the Company to
record an impairment loss on its property held for investment whenever its
carrying value cannot be fully recovered through estimated undiscounted
future cash flows from operations and sale of the property. The amount of the
impairment loss to be recognized would be the difference between the
property's carrying value and the property's estimated fair value. As of
September 30, 2000, the Company does not believe any such impairment of its
properties exists.
Depreciation expense is computed using the straight-line method. Buildings
and improvements are depreciated based upon estimated useful lives of 30
years for buildings and 15 years for the site improvements. Tenant
improvements are amortized on a straight-line basis over the life of the
related leases.
Loan fees are amortized on a straight-line basis over the life of the related
loans.
Offering costs are offset against the Stockholders' equity accounts and
consist principally of printing, selling and registration costs.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned on a straight-line basis
and the cash rent due under the provisions of the lease agreements is
recorded as deferred rent receivable.
The Company believes that the interest rates associated with the mortgages
payable approximate the market interest rates for these types of debt
instruments, and as such, the carrying amount of the mortgages payable
approximate their fair value.
The carrying amount of cash and cash equivalents, restricted cash, accounts
and rents receivable, accounts payable and other liabilities, accrued
offering costs to affiliates and non-affiliates, accrued interest payable to
non-affiliates, accrued real estate taxes, distributions payable and due to
affiliates approximate fair value because of the relatively short maturity of
these instruments.
On December 2, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB
101). The staff determined that a lessor should defer recognition of
contingent rental income such as percentage/excess rent until the specified
F-8
<PAGE>
breakpoint that triggers the contingent rental income is achieved. The
Company records percentage rental revenue in accordance with the SAB 101.
The Company classifies its investment in securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until maturity. All
securities not included in trading or held-to-maturity are classified as
available for sale. Investment in securities at September 30, 2000 consist
principally of preferred stock investments in various real estate investment
trusts and are classified as available-for-sale securities.
Available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses on available-for-sale securities are excluded from earnings
and reported as a separate component of comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis. A decline in the market value
of any available-for-sale security below cost that is deemed to be other than
temporary results in a reduction in the carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established. Dividend income is recognized when earned. No sales of
investment securities available-for-sale were made during 2000. Additionally,
The Company has purchased its securities through a margin account. As of
September 30, 2000, the Company has recorded a payable of $155,166 for
securities purchased on margin.
FASB Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for fiscal
years beginning after June 15, 2000, establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be reported in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that the changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met.
Currently, the pronouncement has no impact on the Company, as the Company has
not utilized derivative instruments or entered into any hedging activities.
(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-9
<PAGE>
(3) TRANSACTIONS WITH AFFILIATES
The Company had incurred $13,762,482 and $5,650,869 of offering costs as of
September 30, 2000 and 1999, respectively, of which $9,602,538 and $3,235,221
was paid or accrued to affiliates a majority of which was reallowed to third
party soliciting dealers. Pursuant to the terms of the Offering, the Advisor is
required to pay organizational and offering expenses (excluding sales
commissions, the marketing contribution and the due diligence expense allowance)
in excess of 5.5% of the gross proceeds of the Offering ("Gross Offering
Proceeds") or all organization and offering expenses (including selling
commissions) which together exceed 15% of Gross Offering Proceeds. As of
September 30, 2000, offering costs did not exceed the 5.5% and 15% limitations,
and the Company anticipates that these costs will not exceed these limitations
upon completion of the Offering. Any excess amounts at the completion of the
Offering will be reimbursed by the Advisor.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
Offering. In addition, an affiliate of the Advisor is entitled to receive
selling commissions, a marketing contribution and a due diligence expense
allowance from the Company in connection with the Offering. Such costs are
offset against the Stockholders' equity accounts. As of September 30, 2000 such
costs totaled $8,789,678 of which $1,712,315 was unpaid at September 30, 2000.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
administration of the Company. Such costs are included in professional services
to Affiliates and general and administrative expenses to Affiliates and
acquisition costs. The Company incurred $242,231 of these costs for the nine
months ended September 30, 2000, all of which remained unpaid.
The Advisor has contributed $200,000 to the capital of the Company for which it
received 20,000 Shares.
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to the
extent that the Advisor Asset Management Fee plus other operating expenses paid
during the previous calendar year exceed 2% of the Company's average invested
assets for the calendar year or 25% of the Company's Net Income for that
calendar year; and (ii) to the extent that stockholders have not received an
annual distribution equal to or greater than the 7% Current Return. For the nine
months ended September 30, 2000, the Company accrued $90,000 of such fees, all
of which remain unpaid. For the nine months ended September 30, 1999, no such
fees were accrued or paid.
F-10
<PAGE>
The property manager, an entity owned principally by individuals who are
affiliates of the Advisor, is entitled to receive property management fees for
management and leasing services. The Company incurred and paid property
management fees of $670,916 and $92,822 for the nine months ended September 30,
2000 and 1999, respectively.
(4) STOCK OPTION PLAN AND SOLICITING DEALER WARRANTS
The Company adopted an Independent Director Stock Option Plan which, subject to
certain conditions, provides for the grant to each Independent Director of an
option to acquire 3,000 Shares following their becoming a Director and for the
grant of additional options to acquire 500 Shares on the date of each annual
stockholders' meeting commencing with the annual meeting in 2000 if the
Independent Director is a member of the board of directors on such date. The
options granted for the initial 3,000 Shares are exercisable as follows: 1,000
Shares on the date of grant and 1,000 Shares on each of the first and second
anniversaries of the date of grant. The subsequent options will be exercisable
on the second anniversary of the date of grant. The initial options will be
exercisable at $9.05 per Share. The subsequent options will be exercisable at
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 the
termination of the Offering or February 11, 2001. As of September 30, 2000,
options to acquire 10,500 Shares had been issued.
In addition to sales commissions, the dealer manager of the Offering (an
affiliate of the Advisor) has the right to purchase one soliciting dealer
warrant for $.0008 for each 25 Shares sold by such soliciting dealer during the
Offering, subject to state and federal 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 intends to reallow such warrants
to the soliciting dealers who sold such Shares. The holder of a soliciting
dealer warrant will be entitled to purchase one Share from the Company at a
price of $12 during the period commencing one year from the date of the first
issuance of any of the soliciting dealer warrants and ending five years after
February 11, 1999. As of September 30, 2000, 409,290 soliciting dealer warrants
had been issued. These warrants had no value and none had been exercised.
F-11
<PAGE>
(5) INVESTMENT PROPERTIES:
An affiliate of the Company initially purchased seven of the investment
properties on behalf of the Company. The Company subsequently purchased each of
those properties from this affiliate at their costs upon receipt of proceeds
from the Offering.
<TABLE>
<CAPTION>
Gross amount at which Carried
Initial Costs At September 30, 2000
(A) --------------------------
------------
Buildings Adjustments
And to
Encumbrance Land Improvements Basis (B) Land
----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
MULTI-TENANT RETAIL
Lake Walden Square 9,969,700 3,006,662 11,549,586 39,621 3,006,662
Plant City, FL
Merchants Square 3,167,437 992,225 4,749,818 12,811 992,225
Zephyrhills, FL
Town Center Commons 4,750,000 3,293,792 6,350,835 22,909 3,293,792
Kennesaw, GA
Boynton Commons 15,125,000 8,698,355 21,803,370 (84,651) 8,698,355
Boynton Beach, FL
Lake Olympia Square (C) 5,805,945 2,567,471 7,306,483 (99,450) 2,562,471
Ocoee, FL
Bridgewater Marketplace 2,987,500 783,492 5,221,618 (16,085) 783,492
Orlando, FL
Bartow Marketplace 13,475,000 6,098,178 18,308,271 4,072 6,098,178
Cartersville, GA
Countryside 6,720,000 1,117,428 7,478,173 7,071 1,117,428
Naples, FL
Casselberry Commons 8,703,000 6,702,658 11,191,912 (83,040) 6,702,658
Naples, FL
Conway Plaza 5,000,000 2,215,325 6,332,434 7,857 2,215,325
Orlando, FL
Pleasant Hill 17,120,000 4,805,830 29,526,305 (113,755) 4,805,830
Duluth, GA
Gateway Marketplace 13,537,500 6,351,847 14,576,809 - 6,351,847
St. Petersburg, FL
----------- ---------- ----------- -------- ----------
Subtotals 106,361,082 46,633,263 144,395,614 (302,640) 46,628,263
Date
Buildings Con-
And Accumulated Stru- Date
Improvements Total Depreciation cted Acquired
------------ ----- ------------ ---- --------
<S> <C> <C> <C> <C> <C>
MULTI-TENANT RETAIL
Lake Walden Square 11,589,207 14,595,869 656,373 1992 05/99
Plant City, FL
Merchants Square 4,762,629 5,754,854 255,521 1993 06/99
Zephyrhills, FL
Town Center Commons 6,373,744 9,667,536 273,116 1998 07/99
Kennesaw, GA
Boynton Commons 21,718,719 30,417,074 923,295 1998 07/99
Boynton Beach, FL
Lake Olympia Square (C) 7,212,033 9,774,504 293,738 1995 09/99
Ocoee, FL
Bridgewater Marketplace 5,205,533 5,989,025 199,713 1998 09/99
Orlando, FL
Bartow Marketplace 18,312,343 24,410,521 644,187 1995 09/99
Cartersville, GA
Countryside 7,485,244 8,602,672 260,259 1997 10/99
Naples, FL
Casselberry Commons 11,108,872 17,811,530 330,230 1973/ 12/99
Naples, FL 1998
Conway Plaza 6,340,291 8,555,616 172,716 1985/ 02/00
Orlando, FL 1999
Pleasant Hill 29,412,550 34,218,380 450,025 1997/ 05/00
Duluth, GA 2000
Gateway Marketplace 14,576,809 20,928,656 86,331 1997/ 07/00
St. Petersburg, FL 2000
----------- ----------- ---------
Subtotals 144,097,974 190,726,237 4,545,504
Furniture and Equipment 11,998 4,239
----------- ---------
Total 190,738,235 4,549,743
</TABLE>
F-12
<PAGE>
(A) The initial cost to the Company represents the original purchase price of
the property from an affiliate of the Advisor, or an unaffiliated third
party, including amounts incurred subsequent to acquisition, most of which
were contemplated at the time the property was acquired.
(B) Adjustments to basis includes additions to investment properties net of
payments received under master lease agreements. (Note 6)
(C) When Lake Olympia Square was purchased by an affiliate of our Advisor,
$234,145 was escrowed at the closing. At the time of purchase by the Company,
$89,400 of these funds remained available to be used on a monthly basis to
pay the principal portion of the debt service through July 2000. Accordingly,
the net effect of this structure is that the Company had paid only the
interest portion of the debt service through July 2000. The cumulative amount
received by the Company was $89,400 as of September 30, 2000, which is
reflected as an adjustment to the basis of the property.
(6) LEASES
Master Leases
In connection with certain acquisitions, the Company receives payments under
master lease agreements on some of the space which was vacant at the time of
the purchase, for periods ranging from one to two years after the date of the
purchase or until the spaces are leased. GAAP requires that as these payments
are received, they be recorded as a reduction in the basis of the property.
The cumulative amount of such payments was $340,406 as of September 30, 2000.
Operating Leases
Certain tenant leases contain provisions providing for stepped rent increases
and rent abatements. GAAP requires the Company to record rental income for
the period of occupancy using the effective monthly rent, which is the
average monthly rent for the entire period of occupancy during the term of
the lease. The accompanying consolidated financial statements include an
increase of $340,799 for the nine months ended September 30, 2000, of rental
income for the period of occupancy for which stepped rent increases apply and
$475,916 in the related accounts and rents receivable as of September 30,
2000. The Company anticipates collecting these amounts over the terms of the
related leases as scheduled rent payments are made.
F-13
<PAGE>
(7) MORTGAGES PAYABLE
Mortgages payable consist of the following at September 30, 2000:
<TABLE>
<CAPTION>
Current Balance at
Interest Maturity Monthly September
Property as Collateral Rate Date Payments 30, 2000
---------------------- -------- --------- -------- --------
<S> <C> <C> <C> <C>
Lake Walden Square 7.63% 11/2007 $ 72,584 (a) $ 9,969,698
Merchants Square 7.25% 11/2008 (b) 3,167,437
Town Center Commons 7.00% 04/2006 (b) 4,750,000
Boynton Commons 7.21% 03/2006 (b) 15,125,000
Lake Olympia Square 8.25% 04/2007 50,978 (a) 5,805,947
Bridgewater Marketplace 8.37% 09/2006 (c) 2,987,500
Bartow Marketplace 8.12% 09/2004 (c) 13,475,000
Countryside 8.37% 03/2001 (c) 6,720,000
Casselberry Commons 7.64% 04/2006 (b) 8,703,000
Conway Plaza 8.27% 06/2005 (c) 5,000,000
Pleasant Hill Square 8.02% 06/2005 (c) 17,120,000
Gateway Marketplace 8.53% 08/2001 (c) 4,512,500
Gateway Marketplace 7.94% 06/2005 (b) 9,025,000
-------------
$106,361,082
=============
</TABLE>
(a) Payments include principal and interest at a fixed rate.
(b) Payments include interest only at a fixed rate.
(c) Payments include interest only. Payments on these mortgages adjust monthly
and are calculated based on a floating rate over LIBOR.
All of these mortgages are serviced by an affiliate of the Advisor on behalf
of the Company. The affiliate receives servicing fees at a market rate for
such services.
In certain circumstances the Company may secure recourse financing or provide
a guaranty to lenders if it believes this will result in more favorable terms
offered the Company.
F-14
<PAGE>
(8) ACQUISITION NOTE PAYABLE
When Gateway Marketplace was purchased, the Company issued a $2,800,000 note
payable to the seller to be paid off when a tenant representing 35,000 square
feet takes possession and begins regularly scheduled rents. This note was paid
off on October 26, 2000, when these events occurred.
(9) SEGMENT REPORTING
The Company owns and seeks to acquire multi-tenant shopping centers in the
southeastern states, primarily Florida, Georgia, North Carolina and South
Carolina. All of the Company's shopping centers are located within Florida and
Georgia. The Company's shopping centers are typically anchored by grocery and
drug stores complemented with additional stores providing a wide range of other
goods and services to shoppers.
The Company assesses and measures operating results on an individual property
basis for each of its properties based on net property operations. Since all of
the Company's properties exhibit highly similar economic characteristics, cater
to the day-to-day living needs of their respective surrounding communities, and
offer similar degrees of risk and opportunities for growth, the properties have
been aggregated and reported as one operating segment.
The property revenues and net property operations of the reportable segments are
summarized in the following tables as of September 30, 2000 and 1999, and for
the nine month periods then ended, along with a reconciliation to net income.
F-15
<PAGE>
Property asset information is as of September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Total property revenues $ 15,055,429 2,326,837
Total property operating
expenses 4,253,898 717,681
Mortgage interest 5,991,581 967,363
------------ ------------
Net property operations 4,809,950 641,793
------------ ------------
Interest and dividend income 557,988 98,758
Other income 119,701 100
Less non property expenses:
Professional services 149,540 60,288
General and administrative 313,219 104,306
Advisor asset management fee 90,000 --
Acquisition costs expensed 110,033 25,281
Depreciation and amortization 3,451,721 480,809
------------ ------------
Net income $1,373,126 69,967
Total Assets
Investment properties $186,188,492 126,009,792
Non-segment assets 16,500,405 17,978,344
------------ ------------
$202,688,897 143,988,136
============== =============
</TABLE>
(10) EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed by reflecting the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
As of September 30, 2000, warrants to purchase 409,290 shares of common stock at
a price of $12.00 per share were outstanding, but were not included in the
computation of diluted EPS because the exercise price of such warrants was
greater than the average market price of common shares. The weighted average
number of common shares outstanding were 7,595,911 and 1,289,409 for the nine
month period ended September 30, 2000 and 1999, respectively.
F-16
<PAGE>
(11) COMMITMENT AND CONTINGENCIES
On behalf of the Company, the advisor is currently exploring the purchase of
additional shopping centers from unaffiliated third parties.
The Company is not subject to any material pending legal proceeding.
(12) SUBSEQUENT EVENTS
The Company paid distributions of $626,099 and $707,975 to its stockholders in
October and November, 2000, respectively.
On October 26, 2000, the Company paid off the $2,800,000 acquisition note
payable issued in connection with it's acquisition of Gateway Market Place in
St. Petersburg, FL, with $2,100,000 of additional funds from the existing
mortgage payable and $700,000 of its own cash.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Inland Retail Real Estate Trust, Inc.:
We have audited the consolidated financial statements of Inland Retail Real
Estate Trust, Inc. (the Company) as listed in the accompanying index. In
connection with the audit of the consolidated financial statements, we also have
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Inland Retail Real
Estate Trust, Inc. as of December 31, 1999 and the results of their operations
and their cash flows for the year ended December 31, 1999, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
February 15, 2000, except as
to Note 10 which is as of
March 23, 2000
F-18
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Balance Sheet
December 31, 1999
ASSETS
<TABLE>
<CAPTION>
1999
----
<S> <C>
Investment Properties (Note 4):
Land $ 33,260,261
Tenant improvement 201,418
Building and site improvements 93,765,247
-------------
127,226,926
Less accumulated depreciation 1,226,910
-------------
Net investment properties 126,000,016
Cash and cash equivalents 14,869,164
Restricted cash (Note 1) 1,246,889
Accounts and rents receivable (Note 6) 1,331,213
Real estate tax and insurance escrows 227,123
Furniture and equipment (net of accumulated depreciation of $2,413) 9,776
Loan fees (net of accumulated amortization of $20,432) 164,433
Leasing fees (net of accumulated amortization of $3,346) 34,106
Other assets 105,416
-------------
Total assets $ 143,988,136
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999
----
<S> <C>
Liabilities:
Accounts payable $ 74,094
Accrued offering costs due to affiliates (Note 3) 1,309,642
Accrued offering costs due to non-affiliates (Note 3) 1,554,262
Accrued interest payable to non-affiliates 419,003
Distributions payable (Note 11) 331,467
Security Deposits 232,370
Mortgages payable (Note 7) 93,099,852
Unearned income 9,585
Other liabilities 1,359,209
Due to affiliates (Note 3) 582,787
-------------
Total liabilities 98,972,271
-------------
Minority interest in partnership 2,000
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized,
none outstanding -
Common stock, $.01 par value, 100,000,000 Shares authorized;
5,433,839 issued and outstanding at December 31, 1999 54,338
Additional paid-in capital (net of costs of offering of $8,057,059
at December 31, 1999, of which $5,193,155 was paid to affiliates) 46,188,392
Accumulated distributions in excess of net income (1,228,865)
--------------
Total stockholders' equity 45,013,865
--------------
Commitments and contingencies (Notes 5, 6 and 10)
Total liabilities and stockholders' equity $ 143,988,136
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Operations
For the year ended December 31, 1999
<TABLE>
<CAPTION>
1999
----
<S> <C>
Income:
Rental income (Notes 1 and 6) $ 4,339,614
Additional rental income 1,452,868
Interest income 237,261
Other income 350
---------------
6,030,093
---------------
Expenses:
Professional services to affiliates 22,878
Professional services to non-affiliates 53,966
General and administrative expenses to affiliates 144,638
General and administrative expenses to non-affiliates 63,987
Property operating expenses to affiliates 203,235
Property operating expenses to non-affiliates 1,668,823
Mortgage interest to non-affiliates 2,365,854
Mortgage interest to affiliates 2,028
Depreciation 1,229,323
Amortization 23,778
Acquisition cost expenses to non-affiliates 27,788
Acquisition cost expenses to affiliates 55,799
---------------
5,862,097
---------------
Net income $ 167,996
===============
Net income per common share, basic and diluted $ .07
===============
Weighted average number of common shares outstanding, basic and diluted 2,522,628
===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Stockholders' Equity
For the year ended December 31, 1999
<TABLE>
<CAPTION>
ACCUMULATED
COMMON ADDITIONAL PAID-IN DISTRIBUTIONS IN
STOCK CAPITAL EXCESS OF NET INCOME TOTAL
------- --------- -------------------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $ 200 $ 199,800 $ -- $ 200,000
Net income -- -- 167,996 167,996
Distributions declared ($.72 per weighted
average number of common shares outstanding) -- -- (1,396,861) (1,396,861)
Proceeds from offering including DRP (net of
offering costs of $8,057,059) 54,138 45,988,592 -- 46,042,730
--------- ----------- ----------- -----------
Balance at December 31, 1999 $ 54,338 $46,188,392 $(1,228,865) $45,013,865
========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Cash Flows
For the year ended December 31, 1999
<TABLE>
<CAPTION>
1999
----
<S> <C>
Cash flows from operating activities:
Net income $ 167,996
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,229,323
Amortization 23,778
Interest escrow 41,178
Rental income under master lease 172,109
Straight line rental income (135,116)
Changes in assets and liabilities:
Accounts and rents receivable (1,196,097)
Other assets (105,416)
Real estate tax and insurance escrows (227,123)
Accrued interest payable to non-affiliates 419,003
Accounts payable 74,094
Unearned income 9,585
Other liabilities 1,359,209
Security deposits 232,370
Due to affiliates 582,787
--------------
Net cash provided by operating activities 2,647,680
--------------
Cash flows from investing activities:
Restricted cash (1,246,889)
Purchase of investment properties (32,910,559)
Furniture and equipment (12,189)
Additions to investment properties (219,886)
Leasing fees (37,452)
--------------
Net cash used in investing activities (34,426,975)
--------------
Cash flows from financing activities:
Proceeds from offering 54,099,789
Payment of offering costs (5,193,155)
Principal payments of debt (1,209,916)
Loan fees (184,865)
Distributions paid (1,065,394)
--------------
Net cash provided by financing activities 46,446,459
Net increase in cash and cash equivalents 14,667,164
Cash and cash equivalents at January 1, 1999 202,000
--------------
Cash and cash equivalents at end of year $ 14,869,164
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
For the year ended December 31, 2000 and 1999
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Purchase of investment properties $ 127,220,327
Assumption of mortgage debt 94,309,768
----------------- ----------------
$ 32,910,559
================= ================
Distributions payable $ 331,467
================= ================
Cash paid for interest $ 1,948,879
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
For the year ended December 31, 1999
(1) Organization and Basis of Accounting
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. 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 may also acquire
single-user retail properties in locations throughout the United States, certain
of which may be sale and leaseback transactions, net leased to creditworthy
tenants. Inland Retail Real Estate Advisory Services, Inc. (the "Advisor"), an
affiliate of the Company, is the advisor to the Company. On February 11, 1999,
the Company commenced an initial public offering ("Offering"), on a best efforts
basis of 50,000,000 shares of common stock ("Shares") at $10 per Share and
4,000,000 Shares at $9.50 per Share which may be distributed pursuant to the
Company's Distribution Reinvestment Program ("DRP"). As of December 31, 1999,
the Company had received subscriptions for a total of 5,390,632 Shares. In
addition the Company has distributed 43,207 Shares pursuant to the Company's
DRP.
The Company is qualified and has elected to be taxed as a real estate investment
trust ("REIT") under section 856 through 860 of the Internal Revenue Code of
1986. Since the Company qualifies for taxation as a REIT, the Company generally
will not be subject to Federal income tax to the extent it distributes at least
95% of 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.
The preparation of consolidated financial statements in conformity with
Generally Accepted Accounting Principle ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Statement of Financial Accounting Standards No. 121 requires the Company to
record an impairment loss on its property to be held for investment whenever its
carrying value cannot be fully recovered through estimated undiscounted future
cash flows from operations and sale of properties. The amount of the impairment
loss to be recognized would be the difference between the property's carrying
value and the properties estimated fair value. As of December 31, 1999, the
Company does not believe any such impairment of its properties exists.
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents and are carried at cost, which
approximates market.
F-25
<PAGE>
Depreciation expense is computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 30 years and
15 years for the site improvements. Furniture and equipment is depreciated over
five years. Tenant improvements are amortized on a straight-line basis Over the
life of the related leases.
Leasing fees are amortized on a straight-line basis over the life of the related
lease.
Loan fees are amortized on a straight-line basis over the life of the related
loans.
Offering costs are offset against the stockholders' equity accounts and consist
principally of printing, selling and registration costs.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned on a straight-line basis and
the cash rent due under the provisions of the lease agreements is recorded as
deferred rent receivable and is included as a component of accounts and rents
receivable in the accompanying consolidated balance sheet.
The Company believes that the interest rates associated with the mortgages
payable approximate the market interest rates for these types of debt
instruments, and as such, the carrying amount of the mortgages payable
approximate their fair value.
The carrying amount of cash and cash equivalents, restricted cash, accounts and
rents receivable, accounts payable and other liabilities, accrued offering costs
to affiliates and non-affiliates, accrued interest payable to non-affiliates,
accrued real estate taxes, distributions payable and due to affiliates
approximate fair value because of the relatively short maturity of these
instruments.
On December 2, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements." The staff
determined that a lessor should defer recognition of contingent rental income
(i.e., percentage/excess rent) until the specified target (i.e., breakpoint)
that triggers the contingent rental income is achieved. The Company records
percentage rental revenue in accordance with the SAB.
F-26
<PAGE>
(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 and all
wholly owned subsidiaries. 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.
(3) Transactions with Affiliates
As of December 31, 1999, the Company had incurred $8,057,059 of offering costs,
of which $5,193,155 was paid to affiliates. Pursuant to the terms of the
Offering, the Advisor is required to pay organizational and offering expenses
(excluding sales commissions, the marketing contribution and the due diligence
expense allowance) in excess of 5.5% of the gross proceeds of the Offering
("Gross Offering Proceeds") or all organization and offering expenses (including
selling commissions) which together exceed 15% of Gross Offering Proceeds. As of
December 31, 1999, offering costs did not exceed the 5.5% and 15% limitations
and the Company anticipates that these costs will not exceed these limitations
upon completion of the Offering. Any excess amounts at the completion of the
Offering will be reimbursed by the Advisor.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
Offering. In addition, an affiliate of the Advisor is entitled to receive
selling commissions, a marketing contribution and a due diligence expense
allowance from the Company in connection with the Offering. Such costs are
offset against the Stockholders' equity accounts. During the year, such costs
totaled $4,786,547, of which $896,544 was unpaid at December 31, 1999.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
administration of the Company. Such costs are included in professional services
to affiliates and general and administrative expenses to affiliates. The Company
incurred $683,055 of these costs, of which $549,089 remained unpaid.
The Advisor has contributed $200,000 to the capital of the Company for which it
received 20,000 Shares.
F-27
<PAGE>
The Advisor may receive an annual advisor asset management fee of not more than
1% of the Company's average invested assets, paid quarterly. For any year in
which the Company qualifies as a REIT, the Advisor must reimburse the Company
(i) to the extent that the advisor asset management fee plus other operating
expenses paid during the previous calendar year exceed 2% of the Company's
average invested assets for the calendar year or 25% of the Company's net income
for that calendar year; and (ii) to the extent that stockholders have not
received an annual distribution equal to or greater than the 7% current return.
For the year ended December 31, 1999, the Company has neither paid nor accrued
such fees because the Advisor indicated that it would forego such fees.
The property manager, an entity owned principally by individuals who are
affiliates of the Advisor, is entitled to receive property management fees for
management and leasing services. The Company incurred and paid property
management fees of $225,665 for the year ended December 31, 1999, of which
$203,235 were retained by that property manager. The balance was paid to an
unaffiliated property manager.
(4) Stock Option Plan and Soliciting Dealer Warrants
The Company adopted an Independent Director Stock Option Plan which, subject to
certain conditions, provides for the grant to each Independent Director of an
option to acquire 3,000 Shares following their becoming a Director and for the
grant of additional options to acquire 500 Shares on the date of each annual
stockholders' meeting commencing with the annual meeting in 2000 if the
Independent Director is a member of the board of directors on such date. The
options for the initial 3,000 Shares to be granted shall be exercisable as
follows: 1,000 Shares on the date of grant and 1,000 Shares on each of the first
and second anniversaries of the date of grant. The subsequent options will be
exercisable on the second anniversary of the date of grant. The initial options
will be exercisable at $9.05 per Share. The subsequent options will be
exercisable at 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 the termination of the Offering or February 11, 2001. As of
December 31, 1999, no options had been issued.
In addition to sales commissions, the dealer manager of the Offering ("an
affiliate of the Advisor") has the right to purchase one soliciting dealer
warrant for $.0008 for each 25 Shares sold by such soliciting dealer during the
Offering, subject to state and federal securities laws and subject to the
issuance of a maximum of 2,000,000 soliciting dealers warrants to purchase an
equivalent number of Shares. The dealer manager intends to reallow such warrants
to the soliciting dealers who sold such shares. The holder of a soliciting
dealer warrant will be entitled to purchase one Share from the Company at a
price of $12 during the period commencing one year from the date of the first
issuance of any of the soliciting dealer warrants and ending five years after
February 11, 1999. As of December 31, 1999, these warrants had no value and none
had been exercised.
(5) Investment Properties
An affiliate of the Company initially purchased seven of the investment
properties on behalf of the Company. The Company subsequently purchased each
property from this affiliate at their cost upon receipt of proceeds from the
offering.
F-28
<PAGE>
Pro Forma Information (unaudited)
The Company acquired its investment properties at various times. The following
table sets forth certain summary unaudited pro forma operating data as if the
acquisitions had been consummated as of the beginning of the previous respective
period.
<TABLE>
<CAPTION>
For the year
ended
December 31, 1999
-----------------
<S> <C>
Rental income $ 11,802,456
Additional rental income 3,396,268
Total revenues 15,198,724
Property operating expenses 4,399,898
Total depreciation 3,472,981
Total expenses 16,013,522
Net loss 814,798
</TABLE>
The unaudited pro forma operating data are presented for comparative purposes
only and are not necessarily indicative of what the actual results of operations
would have been for each of the periods presented, nor does such data purport to
represent the results to be achieved in future periods.
F-29
<PAGE>
(6) Leases
Master Lease Agreements
In conjunction with certain acquisitions, the Company receives payments under
master lease agreements on some of the space which was vacant at the time of the
purchase, for periods ranging from one to two years after the date of the
purchase or until the spaces are leased. GAAP requires that as these payments
are received, they be recorded as a reduction in the purchase price of the
properties rather than as rental income. The cumulative amount of such payments
was $172,109 as of December 31, 1999.
Operating Leases
Minimum lease payments to be received in the future under operating leases,
excluding rental income under master lease agreements and assuming no expiring
leases are renewed, are as follows:
<TABLE>
<CAPTION>
Minimum Lease
Payments
-------------
<S> <C>
2000 $ 12,333,117
2001 11,594,784
2002 11,077,930
2003 10,380,568
2004 9,162,195
Thereafter 86,706,242
--------------
Total $ 141,254,836
==============
</TABLE>
Remaining lease terms range from one year to fifty-five years. Pursuant to the
lease agreements, tenants of the property are required to reimburse the Company
for some or all of their pro rata share of the real estate taxes, operating
expenses and management fees of the property. Such amounts are included in
additional rental income.
Certain tenant leases contain provisions providing for stepped rent increases.
GAAP requires the Company to record rental income for the period of occupancy
using the effective monthly rent, which is the average monthly rent for the
entire period of occupancy during the term of the lease. The accompanying
consolidated financial statements include $135,116 for the period ended December
31, 1999, of rental income for the period of occupancy for which stepped rent
increases apply and $135,116 in the related accounts and rents receivable as of
December 31, 1999. The Company anticipates collecting these amounts over the
terms of the related leases as scheduled rent payments are made.
F-30
<PAGE>
(7) Mortgages Payable
Mortgages payable consist of the following at December 31, 1999:
<TABLE>
<CAPTION>
Balance at
Property as Interest Maturity Monthly December 31,
Collateral Rate Date Payment 1999
---------- ---- ---- ------- ----
<S> <C> <C> <C> <C>
Mortgages payable to non-affiliates:
Lake Walden Square 7.63% 11/2007 $72,584 (a) $ 10,049,869
Merchants Square 7.25% 11/2008 (b) 3,167,437
Town Center Commons 7.15% 04/2000 (c) 2,508,000
7.00% 04/2006 (b) 4,750,000
Boynton Commons* 8.23% 03/2000 (c) 7,797,580
7.21% 03/2006 (b) 15,125,000
Lake Olympia Square 8.25% 04/2007 50,978 (a) 5,902,166
Bridgewater Marketplace 7.15% 09/2000 (c) 1,792,500
7.15% 09/2006 (c) 2,987,500
Bartow Marketplace 6.90% 09/2000 (c) 4,900,000
6.90% 09/2004 (c) 13,475,000
Countryside Shopping Center 7.15% 03/2001 (c) 6,720,000
Casselberry Commons* 8.30% 04/2000 (c) 5,221,800
7.64% 04/2006 (b) 8,703,000
$ 93,099,852
============
</TABLE>
(a) Payments include principal and interest.
(b) Payments include interest only at a fixed rate.
(c) Payments include interest only. Payments on these mortgages adjust monthly
and are calculated based on a floating rate over LIBOR.
* Certain of the mortgage payables are subject to guarantees, in which
an Affiliate of the Advisor has guaranteed payment on these notes to
the lender.
These mortgages are serviced by an Affiliate of the Advisor on behalf
of the Company. The Affiliate receives servicing fees at a market rate
for such services.
F-31
<PAGE>
As of December 31, 1999, the required future principal payments on the Company's
mortgages payable over the next five years are as follows:
<TABLE>
<CAPTION>
<C> <C>
2000 $ 22,457,441
2001 . 6,977,199
2002 . 278,462
2003 . 303,957
2004 . 13,828,316
</TABLE>
The Company intends to retire its debt as it becomes due, however, in certain
individual cases some debt obligations may be restructured or partially retired.
These restructured or partial paydowns may occur if the Company's lenders
provide favorable terms.
(8) Segment Reporting
The Company owns and seeks to acquire multi-tenant shopping centers in the
southeastern states, primarily Florida, Georgia, North Carolina, and South
Carolina. All of the Company's shopping centers are currently located within
Florida and Georgia. The Company's shopping centers are typically anchored by
grocery and drugstores complemented with additional stores providing a wide
range of other goods and services to shoppers.
The Company assesses and measures operating results on an individual property
basis for each of its properties based on net property operations. Since all of
the Company's properties exhibit highly similar economic characteristics, cater
to the day-to-day living needs of their respective surrounding communities, and
offer similar degrees of risk and opportunities for growth, the properties have
been aggregated and reported as one operating segment.
F-32
<PAGE>
The property revenues and net property operations are summarized in the
following tables as of and for the year ended December 31, 1999, along with
reconciliation to net income.
<TABLE>
<CAPTION>
1999
<S> <C>
Total property revenues $ 5,792,482
Total property operating expenses 1,872,058
Mortgage interest 2,367,882
----------------
Net property operations 1,552,542
----------------
Interest income 237,261
Other income 350
Less non property expenses:
Professional services 76,844
General and administrative 292,212
Depreciation and amortization 1,253,101
----------------
Net income $ 167,996
================
Total Assets:
Shopping Centers $ 129,618,034
Non-segment assets 14,370,102
----------------
$ 143,988,136
================
</TABLE>
F-33
<PAGE>
(9) Earnings per Share
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed by reflecting the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
As of December 31, 1999, warrants to purchase 214,223 shares of common stock at
a price of $12.00 per share were outstanding, but were not included in the
computation of diluted EPS because the warrants exercise price was greater than
the average market prices of common shares.
The weighted average number of common shares outstanding were 2,522,628 for the
year ended December 31, 1999.
(10) Commitments & Contingencies
The Company is not subject to any material pending legal proceedings.
(11) Subsequent Events
As of March 23, 2000, subscriptions for a total of 6,558,294 Shares were
received for total gross Offering proceeds of $65,570,938 and additional 79,684
Shares were issued pursuant to the DRP for $756,998 of additional gross
proceeds. Such 6,637,978 Shares and $66,327,936 of gross Offering proceeds do
not include 20,000 shares purchased by the Advisor for $200,000.
In January 2000, the Company paid a distribution of $331,467 to its
Stockholders. The Company paid a distribution of $361,625 and $370,972 to its
Stockholders in February and March 2000, respectively.
On February 9, 2000, the Company purchased a shopping center known as Conway
Plaza from an unaffiliated third party for $8,540,363, by paying the entire
purchase price in cash. The property is expected to be financed in the future.
The Company's wholly owned Florida limited liability company, Inland Southeast
Conway, L.L.C., owns the entire fee simple interest in Conway Plaza. The
property is located in Orlando, Florida. Two tenants, Publix (a supermarket)
and Beall's Outlet store (a discount department clothing store), each lease
more than 10% of the total gross leasable area of the property.
On February 29, 2000, the Company decided to increase monthly distributions
from a rate of $.75 per share per annum to a rate of $.76 per share per annum.
The increase becomes effective April 1, 2000, and will be paid beginning May 7,
2000.
F-34
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1999
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED
(A) AT END OF PERIOD (B)
--- --------------------
ADJUSTMENTS
BUILDINGS AND TO BUILDINGS AND TOTAL
MULTI-TENANT RETAIL ENCUMBRANCE LAND IMPROVEMENTS BASIS (C) LAND IMPROVEMENTS (D)
------------------- ----------- ---- ------------ --------- ---- ------------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
Lake Walden Square
Plant City, FL 10,049,869 3,006,662 11,549,586 26,378 3,006,662 11,575,964 14,582,626
Merchants Square
Zephyrhills, FL 3,167,437 992,225 4,749,818 12,619 992,225 4,762,437 5,754,662
Town Center Commons
Kennesaw, GA 7,258,000 3,293,792 6,350,835 24,718 3,293,792 6,375,553 9,669,345
Boynton Commons
Boynton Beach, FL 22,922,580 8,698,355 21,803,370 (44,855) 8,698,355 21,758,515 30,456,870
Lake Olympia Square (C)
Ocoee, FL 5,902,166 2,567,471 7,306,483 (35,992) 2,567,471 7,270,491 9,837,962
Bridgewater Marketplace
Orlando, FL 4,780,000 783,492 5,221,618 (566) 783,492 5,221,052 6,004,544
Bartow Marketplace
Cartersville, GA 18,375,000 6,098,178 18,308,271 236 6,098,178 18,308,507 24,406,685
Countryside
Naples, FL 6,720,000 1,117,428 7,478,173 6,893 1,117,428 7,485,066 8,602,494
Casselberry Commons
Casselberry, FL 13,924,800 6,702,658 11,191,912 17,168 6,702,658 11,209,080 17,911,738
---------- --------- ---------- ------ --------- ---------- ----------
Totals 93,099,852 33,260,261 93,960,066 6,599 33,260,261 93,966,665 127,226,926
========== ========== ========== ========= ========== =========== ===========
<CAPTION>
DATE
ACCUMULATED CON-
DEPRECIATION STRU DATE
MULTI-TENANT RETAIL (E) CTED ACQ
------------------- --- ---- ---
<S> <C> <C> <C>
Lake Walden Square
Plant City, FL 303,471 1992 05/99
Merchants Square
Zephyrhills, FL 110,827 1993 06/99
Town Center Commons
Kennesaw, GA 122,074 1998 07/99
Boynton Commons
Boynton Beach, FL 328,364 1998 07/99
Lake Olympia Square (C)
Ocoee, FL 90,823 1995 09/99
Bridgewater Marketplace
Orlando, FL 61,300 1998 09/99
Bartow Marketplace
Cartersville, GA 162,734 1995 09/99
Countryside
Naples, FL 47,317 1997 10/99
Casselberry Commons
Casselberry, FL - 1973/1998 12/99
---------
Totals 1,226,910
=========
</TABLE>
F-35
<PAGE>
Notes:
(A) The initial cost to the Company represents the original purchase price
of the property, including amounts incurred subsequent to acquisition
which were contemplated at the time the property was acquired.
(B) The aggregate cost of real estate owned at December 31, 1999 for
federal income tax purposes was approximately $127,253,000
(unaudited).
(C) Adjustments to basis include additions to investment properties net of
payments received under master lease agreements. As part of several
purchases, the Company will receive rent under master lease agreements
on the spaces currently vacant for periods ranging from one to two
years or until the spaces are leased. GAAP requires that as these
payments are received, they be recorded as a reduction in the purchase
price of the properties rather than as rental income.
(D) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Balance at beginning of year $ -
Purchases of property 127,220,327
Additions 219,886
Payments received under master leases
and other obligations (213,287)
---------
Balance at end of year $ 127,226,926
=============
</TABLE>
(E) Reconciliation of accumulated depreciation:
<TABLE>
<S> <C>
Balance at beginning of year $ -
Depreciation expense 1,226,910
---------
Balance at end of year $ 1,226,910
=========
</TABLE>
F-36
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Balance Sheet
September 30, 2000
(unaudited)
The unaudited Pro Forma Consolidated Balance Sheet has not been presented since
all actual property acquisitions have been reflected in the unaudited
consolidated balance sheet as of September 30, 2000 included on Form 10-Q.
In addition, no pro forma adjustments were made for Columbia Promenade as the
property's construction was not completed until October 2000. No pro forma
adjustments were made for Universal Plaza as construction had not begun as of
September 30, 2000.
F-37
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Statement of Operations
For the nine months ended September 30, 2000
(unaudited)
The following unaudited Pro Forma Consolidated Statement of Operations is
presented to effect the acquisition of the properties indicated in Note B of the
Notes to the Pro Forma Consolidated Statement of Operations as though they
occurred on January 1, 1999.
This unaudited Pro Forma Consolidated Statement of Operations is not necessarily
indicative of what the actual results of operations would have been for the nine
months ended September 30, 2000, nor does it purport to represent our future
financial position. No pro forma adjustments were made for Columbia Promenade as
the property's construction was not completed until October 2000. No pro forma
adjustments were made for Universal Plaza as construction had not begun as of
September 30, 2000. Unless otherwise defined, capitalized terms used herein
shall have the same meaning as in the Prospectus.
F-38
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Statement of Operations
For the nine months ended September 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments
(A) (B) Pro Forma
----------------- ---------------- -----------------
<S> <C> <C> <C>
Rental income $ 11,911,261 2,019,500 13,930,761
Percentage rental income - - -
Additional rental income 3,144,168 360,784 3,504,952
Interest income 557,988 - 557,988
Other income 119,701 - 119,701
----------------- ---------------- -----------------
Total income 15,733,118 2,380,284 18,113,402
================= ================ =================
Professional services 149,540 - 149,540
General and administrative expenses 313,219 - 313,219
Advisor asset management fee (C) 90,000 149,014 239,014
Property operating expenses 3,582,982 420,844 4,003,826
Management fee (G) 670,916 108,109 779,025
Interest expense (H) 5,991,581 1,055,208 7,046,789
Acquisition costs expensed 110,033 - 110,033
Depreciation (D) 3,320,421 652,420 3,972,841
Amortization 131,300 64,506 195,806
----------------- ---------------- -----------------
Total expenses 14,359,992 2,450,101 16,810,093
----------------- ---------------- -----------------
Net income (loss) applicable to common shareholders (F) 1,373,126 (69,817) 1,303,309
================= ================ =================
Weighted average number of shares of common stock
outstanding (E) 7,595,911 7,595,911
================= =================
Basic and diluted net income (loss) per weighted average
shares of common stock outstanding (E) .18 .17
================= =================
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-39
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the nine months ended September 30, 2000
(unaudited)
(A) Historical information represents the historical statement of operations of
the Company for the nine months ended September 30, 2000 as filed with the
SEC on Form 10-Q.
(B) Total pro forma adjustments for acquisitions are as though they were
acquired January 1, 1999.
<TABLE>
<CAPTION>
Pleasant Gateway
Conway Hill Market Total
Plaza Square Center Pro Forma
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Rental income 51,435 1,011,548 956,517 2,019,500
Additional rental income 6,690 174,251 179,843 360,784
----------------- ---------------- ----------------- ----------------
Total income 58,125 1,185,799 1,136,360 2,380,284
----------------- ---------------- ----------------- ----------------
Advisor asset management fee 10,600 85,854 52,560 149,014
Property operating expenses 19,674 200,289 200,881 420,844
Management fee 3,615 53,360 51,134 108,109
Interest expense - 500,098 555,110 1,055,208
Depreciation 21,500 360,120 270,800 652,420
Amortization - 11,502 53,004 64,506
----------------- ---------------- ----------------- ----------------
Total expenses 55,389 1,211,223 1,183,489 2,450,101
----------------- ---------------- ----------------- ----------------
Net income (loss) 2,736 (25,424) (47,129) (69,817)
================= ================ ================= ================
</TABLE>
(C) The advisor asset management fee will be subordinated to the shareholders'
receipt of a stated return. The advisor asset management fee has been
calculated as .5% of the cost of acquisition of the properties, based on
the Company's projection of the amount to be subordinated.
(D) Depreciation expense is computed using the straight-line method, based upon
an estimated useful life of thirty years for buildings and fifteen years
for improvements. The allocation of land, buildings and improvements was
based upon values stated in the related appraisal.
(E) The pro forma weighted average shares of common stock outstanding for the
period ended September 30, 2000 was calculated using the additional shares
sold to purchase each of the properties on a weighted average basis plus
the 20,000 shares purchased by the Advisor in connection with our
organization.
(F) The net income (loss) allocable to the minority interest is immaterial, and
therefore, has been excluded.
(G) Management fees are calculated as 4.5% of gross revenues.
F-40
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the nine months ended September 30, 2000
(unaudited)
(H) As part of the acquisition of certain of these properties, the Company
originated debt. The pro forma adjustments relating to interest expense
were based on the following terms:
Pleasant Hill Square
The Company purchased this property with the proceeds of a new first
mortgage in the amount of approximately $17,120,000. The note bears an
annual interest rate of 140 basis points over LIBOR (which equates to a
current interest rate of 8.02%).
Gateway Market Center
The Company purchased this property with the proceeds of a new mortgage,
which secures two promissory notes in the aggregate principal amount of
$15,637,000. One promissory note is in the principal amount of $10,425,000,
requires monthly payments of interest only at a fixed rate of 7.94% and is
due August 2005. The other note is in the principal amount of $5,212,000,
requires monthly payments of interest only at a floating rate per annum of
190 basis points over a 30-day LIBOR rate (which equates to a current
interest rate of 8.53%), and is due August 2001. At the time of the
purchase, the lender funded $9,025,000 and $4,512,000 respectively of these
two notes. The balances of $1,400,000 and $700,000, respectively, will be
funded at the time of the purchase of the Home Place of America building.
F-41
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
The following unaudited Pro Forma Consolidated Statement of Operations is
presented to effect the acquisition of the properties indicated in Note B of the
Notes to the Pro Forma Consolidated Statement of Operations as though they
occurred on January 1, 1999.
This unaudited Pro Forma Consolidated Statement of Operations is not necessarily
indicative of what the actual results of operations would have been for the year
ended December 31, 1999, nor does it purport to represent our future financial
position. No pro forma adjustments were made for Columbia Promenade as the
property's construction was not completed until October 2000. No pro forma
adjustments were made for Universal Plaza as construction had not begun as of
September 30, 2000. Unless otherwise defined, capitalized terms used herein
shall have the same meaning as in the Prospectus.
F-42
<PAGE>
Inland Retail Real Estate Trust, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments
(A) (B) Pro Forma
----------------- ----------------- ----------------
<S> <C> <C> <C>
Rental income $ 4,339,614 11,202,362 15,541,976
Percentage rental income - 85,529 85,529
Additional rental income 1,452,868 2,538,385 3,991,253
Interest income 237,261 - 237,261
Other income 350 - 350
----------------- ----------------- ----------------
Total income 6,030,093 13,826,276 19,856,369
================= ================= ================
Professional services 76,844 - 76,844
General and administrative expenses 208,625 - 208,625
Advisor asset management fee (C) - 953,400 953,400
Property operating expenses 1,646,393 2,992,344 4,638,737
Management fee (G) 225,665 625,612 851,277
Interest expense (H) 2,367,882 6,993,092 9,360,974
Acquisition costs expensed 83,587 - 83,587
Depreciation (D) 1,229,323 4,068,699 5,298,022
Amortization 23,778 - 23,778
----------------- ----------------- ----------------
Total expenses 5,862,097 15,633,147 21,495,244
================= ================= ================
Net income (loss) applicable to common shareholders (F) 167,996 (1,806,871) (1,638,875)
================= ================= ================
Weighted average number of shares of common stock outstanding (E) 2,522,628 7,421,300
================= ================
Basic and diluted net income (loss) per weighted average shares of
common stock outstanding (E) .07 (.22)
================= ================
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-43
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
(A) Historical information represents the historical statement of operations of
the Company for the year ended December 31, 1999 as filed with the SEC on
Form 10-K.
(B) Total pro forma adjustments for acquisitions are as though they were
acquired January 1, 1999.
<TABLE>
<CAPTION>
Lake Merchants Town Lake Boynton
Walden Square Center Olympia Commons
--------------- ----------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income $571,000 245,000 359,529 567,413 1,387,674
Percentage rental income - - - - -
Additional rental income 183,000 122,555 91,961 149,668 364,195
--------------- ----------------- ----------------- --------------- --------------
Total income 754,000 367,555 451,490 717,081 1,751,869
=============== ================= ================= =============== ==============
Advisor asset management fee 72,900 28,700 48,300 49,100 152,200
Property operating expenses 186,165 90,189 84,921 161,885 517,421
Management fee 33,930 16,540 20,317 32,269 82,266
Interest expense 286,988 133,720 266,000 326,312 922,360
Depreciation 149,186 80,173 121,687 182,114 459,802
--------------- ----------------- ----------------- --------------- --------------
Total expenses 729,169 349,322 541,225 751,680 2,134,049
--------------- ----------------- ----------------- --------------- --------------
Net income (loss) 24,831 18,233 (89,735) (34,599) (382,180)
=============== ================= ================= =============== ==============
</TABLE>
<TABLE>
<CAPTION>
Countryside
Bridgewater Bartow Shopping Casselberry Conway
Marketplace Marketplace Center Commons Plaza
--------------- ----------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income 279,320 1,747,468 648,397 1,790,825 483,054
Percentage rental income - 63,717 - - -
Additional rental income 74,564 82,535 127,579 571,837 98,614
--------------- ----------------- ----------------- --------------- --------------
Total income 353,884 1,893,720 775,976 2,362,662 581,668
Advisor asset management fee 30,000 122,000 43,000 89,500 42,500
Property operating expenses 86,821 41,168 198,943 650,051 172,708
Management fee 15,925 85,217 34,919 106,319 26,175
Interest expense 222,748 946,772 399,280 1,098,318 -
Depreciation 122,089 488,010 227,448 405,687 258,083
--------------- ----------------- ----------------- --------------- --------------
Total expenses 477,583 1,683,167 903,590 2,349,875 499,466
--------------- ----------------- ----------------- --------------- --------------
Net income (loss) (123,699) 210,553 (127,614) 12,787 82,202
=============== ================= ================= =============== ==============
</TABLE>
F-44
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Pleasant Gateway
Hill Market Total
Square Center Pro Forma
---------------- -------------------- --------------------
<S> <C> <C> <C>
Rental income 2,345,409 777,273 11,202,362
Percentage rental income - 21,812 85,529
Additional rental income 430,874 241,003 2,538,385
---------------- -------------------- --------------------
Total income 2,776,283 1,040,088 13,826,276
================ ==================== ====================
Advisor asset management fee 171,200 104,000 953,400
Property operating expenses 495,461 306,611 2,992,344
Management fee 124,932 46,803 625,612
Interest expense 1,289,136 1,101,458 6,993,092
Depreciation 1,074,420 500,000 4,068,699
---------------- -------------------- --------------------
Total expenses 3,155,149 2,058,872 15,633,147
---------------- -------------------- --------------------
Net income (loss) (378,866) (1,018,784) (1,806,871)
================ ==================== ====================
</TABLE>
F-45
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
Acquisition of Conway Plaza, Orlando, Florida
Reconciliation of Gross Income and Direct Operating Expenses for the year ended
December 31, 1999 prepared in accordance with Rule 3.14 of Regulation S-X (*)
to the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Conway Plaza
------------------------------------------------------------------------------------------------
*As Pro Forma
Reported Adjustments Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 483,054 - 483,054
Additional rental income 98,614 - 98,614
------------------------------------------------------------------------------------------------
Total income 581,668 - 581,668
------------------------------------------------------------------------------------------------
Advisor asset management fee - 42,500 42,500
Property operating expenses 172,708 - 172,708
Management fees 25,929 246 26,175
Depreciation - 258,083 258,083
------------------------------------------------------------------------------------------------
Total expenses 198,637 300,829 499,466
------------------------------------------------------------------------------------------------
Net income (loss) $ 383,031 (300,829) 82,202
================================================================================================
</TABLE>
Acquisition of Pleasant Hill Square, Duluth, Georgia
Reconciliation of Gross Income and Direct Operating Expenses for the year ended
December 31, 1999 prepared in accordance with Rule 3.14 of Regulation S-X (*) to
the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Pleasant Hill Square
-----------------------------------------------------------------------------------------------
*As Pro Forma
Reported Adjustments Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 2,345,409 - 2,345,409
Additional rental income 430,874 - 430,874
-----------------------------------------------------------------------------------------------
Total income 2,776,283 - 2,776,283
-----------------------------------------------------------------------------------------------
Advisor asset management fee - 171,200 171,200
Property operating expenses 495,461 - 495,461
Management fees 72,079 52,853 124,932
Interest expense - 1,289,136 1,289,136
Depreciation - 1,074,420 1,074,420
-----------------------------------------------------------------------------------------------
Total expenses 567,540 2,587,609 3,155,149
-----------------------------------------------------------------------------------------------
Net income (loss) $ 2,208,743 (2,587,609) (378,866)
===============================================================================================
</TABLE>
F-46
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
Acquisition of Gateway Market Center, St. Petersburg, Florida
Reconciliation of Gross Income and Direct Operating Expenses for the year ended
December 31, 1999 prepared in accordance with Rule 3.14 of Regulation S-X (*) to
the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Gateway Market Center
-----------------------------------------------------------------------------------------------
*As Pro Forma
Reported Adjustments Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 777,273 - 777,273
Percentage rental income 21,812 - 21,812
Additional rental income 241,003 - 241,003
-----------------------------------------------------------------------------------------------
Total income 1,040,088 - 1,040,088
-----------------------------------------------------------------------------------------------
Advisor asset management fee - 104,000 104,000
Property operating expenses 306,611 - 306,611
Management fees 51,157 (4,354) 46,803
Interest expense - 1,101,458 1,101,458
Depreciation - 500,000 500,000
-----------------------------------------------------------------------------------------------
Total expenses 357,768 1,701,104 2,058,872
-----------------------------------------------------------------------------------------------
Net income (loss) $ 682,320 (1,701,104) (1,018,784)
===============================================================================================
</TABLE>
Several tenants, including two anchor tenants, executed leases during 1999
for new or additional space. In addition, one additional anchor tenant
executed a new lease with anticipated occupancy to occur in 2000. As a
result, subsequent years base rent and recovery income may differ from the
amounts reflected above.
F-47
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
(C) The advisor asset management fee will be subordinated to the
shareholders' receipt of a stated return. The advisor asset management
fee has been calculated as .5% of the cost of acquisition of the
properties, based on the Company's projection of the amount to be
subordinated.
(D) Depreciation expense is computed using the straight-line method, based
upon an estimated useful life of thirty years for buildings and
fifteen years for improvements. The allocation of land, buildings and
improvements was based upon values stated in the related appraisal.
(E) The pro forma weighted average shares of common stock outstanding for
the year ended December 31, 1999 was calculated using the additional
shares sold to purchase each of the properties on a weighted average
basis plus the 20,000 shares purchased by the Advisor in connection
with our organization.
(F) The net income (loss) allocable to the minority interest is
immaterial, and therefore, has been excluded.
(G) Management fees are calculated as 4.5% of gross revenues.
(H) As part of the acquisition of certain of these properties, the Company
originated new debt or assumed existing debt. The pro forma
adjustments relating to interest expense were based on the following
terms:
Lake Walden
Inland Retail Real Estate Trust, Inc. assumed the outstanding mortgage debt
related to Lake Walden Square of approximately $10,100,000 in connection
with the acquisition. The assumed debt, which originated October 30, 1997,
has an annual interest rate of 7.63% and requires monthly principal and
interest payments.
In addition, as part of the acquisition, the Company assumed a second
mortgage debt of approximately $800,000 due to affiliate with an interest
rate of 10.9%.
Merchants Square
Inland Retail Real Estate Trust, Inc. assumed 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
9, 1998, has an annual interest rate of 7.25% and requires monthly
principal and interest payments.
Town Center
Inland Retail Real Estate Trust, Inc. assumed the outstanding mortgage
debts related to Town Center totaling approximately $7,600,000 in
connection with the acquisition. The assumed debts, which originated April
13, 1999, have annual interest rates ranging from 7% to 175 basis points
over LIBOR (currently 7.0%).
Boynton Commons
As part of the acquisition, the Company assumed the outstanding mortgage
debts related to Boynton Commons Shopping Center of approximately
$22,900,000. The assumed debts, which were modified March 19, 1999, have
annual interest rates of 175 basis points over LIBOR (currently 8.37%) and
7.21%, respectively.
F-48
<PAGE>
Inland Retail Real Estate Trust, Inc.
Notes to Pro Forma Consolidated Statement of Operations
For the year ended December 31, 1999
(unaudited)
Lake Olympia
Inland Retail Real Estate Trust, Inc. assumed the outstanding mortgage
debt related to Lake Olympia totaling approximately $5,933,000 in
connection with the acquisition. The assumed debt, which originated June
24, 1998, has an annual interest rate of 8.25% and requires monthly
principal and interest payments.
Bridgewater Marketplace
As part of the acquisition, the Company assumed an outstanding mortgage
debt of approximately $4,450,000. The debt was modified on September 7,
1999, no prepayment penalties were incurred. The principal balance was
increased to approximately $4,780,000 and has an annual interest rate of
175 basis points over LIBOR (currently 8.37%).
Bartow Marketplace
The Company purchased this property with the proceeds of a new first
mortgage loan in the amount of $18,375,000. The loan is evidenced by two
promissory notes. The notes bear an annual interest rate of 150 basis
points over LIBOR (currently 8.12%).
Countryside Shopping Center
Inland Retail Real Estate Trust, Inc. assumed the outstanding mortgage
debt related to Countryside Shopping Center of approximately $6,720,000
in connection with the acquisition. The assumed debt, which originated
March 31, 1998, has an annual interest rate of 175 basis points over
LIBOR (currently 8.37%).
Casselberry Commons
As part of the acquisition, the Company assumed two outstanding debts
secured by one mortgage related to Casselberry Commons of approximately
$13,924,000 from an affiliate of our Advisor. The assumed debts, which
originated April 29, 1999, have annual interest rates of 7.64% and 250
basis points over LIBOR (currently 9.12%), respectively.
Pleasant Hill Square
The Company purchased this property with the proceeds of a new first
mortgage in the amount of approximately $17,120,000. The note bears an
annual interest rate of 140 basis points over LIBOR (currently 8.02%).
Gateway Market Center
The Company purchased this property with the proceeds of a new mortgage,
which secures two promissory notes in the aggregate principal amount of
$15,637,000. One promissory note is in the principal amount of
$10,425,000, requires monthly payments of interest only at a fixed rate
of 7.94% and is due August 2005. The other note is in the principal
amount of $5,212,000, requires monthly payments of interest only at a
floating rate per annum of 190 basis points over a 30-day LIBOR rate
(which equates to a current interest rate of 8.53%), and is due August
2001. At the time of the purchase, the lender funded $9,025,000 and
$4,512,000 respectively of these two notes. The balances of $1,400,000
and $700,000, respectively, will be funded at the time of the purchase
of the Home Place of America building.
F-49
<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 Conway Plaza for the year
ended December 31, 1999. 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 Current Report on Form 8-K/A of Inland Retail Real
Estate Trust, Inc., as described in note 2. The presentation is not intended
to be a complete presentation of Conway Plaza'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 Conway Plaza for the year ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
February 1, 2000
F-50
<PAGE>
Conway Plaza
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1999
<TABLE>
<S> <C>
Gross income:
Base and percentage rental income $483,054
Operating expense and real estate tax recoveries 96,237
Other Income 2,377
---------------
Total Gross Income 581,668
---------------
Direct operating expenses:
Operating expenses 67,609
Real estate taxes 77,772
Management fees 25,929
Insurance 23,006
Utilities 4,321
---------------
Total direct operating expenses 198,637
---------------
Excess of gross income over direct operating expenses $383,031
===============
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-51
<PAGE>
Conway Plaza
Notes to Historical Summary of Gross Income and Direct Operating Expenses
For the Year ended December 31, 1999
1. Business
Conway Plaza (Conway) is located in Orlando, Florida. It consists of
approximately 119,000 square feet of gross leasable area and was 90%
occupied at December 31, 1999. Inland Retail Real Estate Trust, Inc. has
signed a sale and purchase agreement for the purchase of Conway from an
unaffiliated third party with an anticipated closing date of February
2000.
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 Current Report on Form 8-K/A of Inland Retail Real Estate
Trust, Inc. and is not intended to be a complete presentation of Conway's
revenues and expenses. The Historical Summary has been prepared on the
accrual basis of accounting and requires management of Conway 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
Conway leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. Certain of the
leases include provisions under which Conway is reimbursed for common area
costs, real estate taxes, and insurance costs. Certain of the leases
contain renewal options for various periods at various rental rates.
Certain of the leases contain additional rental income based on a stated
percentage of gross sales over the tenant's annual break point. Percentage
rental income of $17,626 is included in Base and Percentage Rental Income.
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 $17,337 for the
year ended December 31, 1999.
Beginning January 1, 1999, Conway's anchor tenant, occupying approximately
32% of the gross leasable area, underwent significant renovations. During
the construction, the tenant ceased operations and payment of base rent
and recoveries. As a result of the construction, another significant
tenant, occupying approximately 10% of the gross leasable area, ceased
base rent payments, as stipulated in their lease. Construction concluded
during November 1999. As a result, future base rent and recovery income
may differ from the amounts reflected in the Historical Summary.
F-52
<PAGE>
Conway Plaza
Notes to Historical Summary of Gross Income and Direct Operating Expenses
For the Year ended December 31, 1999
Minimum rents to be received from tenants under operating leases in effect or
executed at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year Amount
--------------------- -----------------
<S> <C>
2000 $ 810,059
2001 670,901
2002 557,366
2003 531,109
2004 515,924
Thereafter 4,695,117
-----------------
$ 7,780,476
=================
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Conway. Costs such as
mortgage interest, depreciation, amortization and professional fees are
excluded from the Historical Summary.
Conway is managed pursuant to the terms of a management agreement for an
annual fee of 4% of base rent collection (as defined). Subsequent to the
sale of Conway (note 1), Inland Retail Real Estate Trust, Inc. will
execute a management agreement with an affiliate in which an annual
management fee would be charged. A new management agreement may cause
future operating expenses to differ from the amounts reflected in the
Historical Summary.
F-53
<PAGE>
Conway Plaza
Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 2000
(unaudited)
<TABLE>
<S> <C>
Gross income:
Base and percentage rental income $ 629,224
Operating expense and real estate tax recoveries 128,361
Other income 21,328
----------------
Total Gross Income 778,903
----------------
Direct operating expenses:
Operating expenses 107,747
Real estate taxes 55,445
Management fees 31,924
Insurance 15,750
Utilities 8,243
----------------
Total direct operating expenses 219,109
----------------
Excess of gross income over direct operating expenses $ 559,804
================
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-54
<PAGE>
Conway Plaza
Notes to Historical Summary of Gross Income and Direct Operating expenses
Nine months ended September 30, 2000
(unaudited)
1. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses for
the period ended September 30, 2000 has been prepared from operating
statements provided by the owners of the property during that period and
requires management of Conway Plaza 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-55
<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 Pleasant Hill Shopping
Center for the year ended December 31, 1999. 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 Post Effective Amendment No. 4 to 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 Pleasant Hill'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 Pleasant Hill Shopping Center for the year ended
December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
April 15, 2000
F-56
<PAGE>
Pleasant Hill Shopping Center
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1999
<TABLE>
<S> <C>
Gross income:
Base rental income $2,345,409
Operating expense and real estate tax recoveries 430,874
---------------------
Total Gross Income 2,776,283
---------------------
Direct operating expenses:
Operating expenses 217,693
Management fees 72,079
Real estate taxes 266,331
Insurance 11,437
---------------------
Total direct operating expenses 567,540
---------------------
Excess of gross income over direct operating expenses $2,208,743
=====================
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-57
<PAGE>
Pleasant Hill Shopping Center
Notes to Historical Summary of Gross Income and
Direct Operating Expenses
For the Year ended December 31, 1999
1. Business
Pleasant Hill Shopping Center (Pleasant Hill) is located in Duluth,
Georgia. It consists of approximately 221,400 square feet of gross leasable
area and was 97% leased and occupied at December 31, 1999. Pleasant Hill
has 20 tenant spaces and seven anchor tenants occupying 80% of the total
leasable area. Inland Retail Real Estate Trust, Inc. has signed a sale and
purchase agreement for the purchase of Pleasant Hill from an unaffiliated
third party with an anticipated closing date of May 2000.
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 Post Effective Amendment No. 4 to Form S-11 of Inland
Retail Real Estate Trust, Inc. and is not intended to be a complete
presentation of Pleasant Hill's revenues and expenses. The Historical
Summary has been prepared on the accrual basis of accounting and requires
management of Pleasant Hill 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
Pleasant Hill leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. Certain of the
leases include provisions under which Pleasant Hill is reimbursed for
common area costs, real estate taxes, trash removal, water & sewer 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 $65,758 for the
year ended December 31, 1999.
F-58
<PAGE>
Pleasant Hill Shopping Center
Notes to Historical Summary of Gross Income and
Direct Operating Expenses
For the Year ended December 31, 1999
Minimum rents to be received from tenants under operating leases in effect or
executed at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------
<S> <C>
2000 $ 2,566,188
2001 2,529,609
2002 2,484,992
2003 2,373,780
2004 2,384,905
Thereafter 10,748,781
-----------------
$23,088,255
=================
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Pleasant Hill. Costs such
as mortgage interest, depreciation, amortization and professional fees are
excluded from the Historical Summary.
Pleasant Hill is managed pursuant to the terms of a management agreement
for an annual fee of 4% to 6% of gross revenues (as defined). Subsequent to
the sale of Pleasant Hill (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-59
<PAGE>
Pleasant Hill Shopping Center
Historical Summary of Gross Income and
Direct Operating Expenses
Nine months ended September 30, 2000
(unaudited)
<TABLE>
<S> <C>
Gross income:
Base and percentage rental income $ 2,227,529
Operating expense and real estate tax recoveries 366,172
----------------
Total Gross Income 2,593,701
----------------
Direct operating expenses:
Operating expenses 106,425
Management fees 109,996
Real estate taxes 282,785
Insurance 21,540
----------------
Total direct operating expenses 520,746
----------------
Excess of gross income over direct operating expenses $ 2,072,955
================
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-60
<PAGE>
Pleasant Hill Shopping Center
Notes to Historical Summary of Gross Income and
Direct Operating Expenses
Nine months ended September 30, 2000
(unaudited)
1. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses for
the period ended September 30, 2000 has been prepared from operating
statements provided by the owners of the property during that period and
requires management of Pleasant Hill Shopping Center 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-61
<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 Gateway Market Center for
the year ended December 31, 1999. 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 Current Report on Form 8-K of Inland Retail Real Estate
Trust, Inc., as described in note 2. The presentation is not intended to be a
complete presentation of Gateway Market 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 Gateway Market Center for the year ended December 31,
1999, in conformity with generally accepted accounting principles.
Chicago, Illinois
June 26, 2000
F-62
<PAGE>
Gateway Market Center
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1999
<TABLE>
<S> <C>
Gross income:
Base rental income $ 777,273
Operating expense and real estate tax recoveries 241,003
Other income 21,812
-------------------
Total gross income 1,040,088
-------------------
Direct operating expenses:
Operating expenses 138,495
Management fees 51,157
Real estate taxes 168,116
-------------------
Total direct operating expenses 357,768
-------------------
Excess of gross income over direct operating expenses $ 682,320
===================
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expense.
F-63
<PAGE>
Gateway Market Center
Historical Summary of Gross Income and
Direct Operating Expenses
Year ended December 31, 1999
1. Business
Gateway Market Center (Gateway) is located in St. Petersburg, Florida.
It consists of approximately 231,500 square feet of gross leasable area
and was 99% leased and 82% leased and occupied at December 31, 1999.
Gateway has four anchor tenants, which occupy 68% of the gross leasable
area. Inland Retail Real Estate Trust, Inc. has signed a sale and
purchase agreement for the purchase of Gateway from an unaffiliated
third party with an anticipated closing in July 2000.
2. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expense
(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 Current Report on Form 8-K of Inland Retail Real Estate
Trust, Inc. and is not intended to be complete presentation of Gateway's
revenues and expenses. The Historical Summary has been prepared on the
accrual basis of accounting and requires management of Gateway 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
Gateway leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. Certain of the
leases include provisions under which Gateway is reimbursed for common area
costs, real estate taxes, trash removal, water & sewer and insurance costs.
Certain of the leases contain renewal options for various periods at
various rental rates. Certain of the leases contain additional rental
income based on a stated percentage of gross sales over the tenant's break
point. Such amounts totaled approximately $22,000 for the year ended
December 31, 1999.
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
$14,300 for the year ended December 31, 1999.
Several tenants, including two anchor tenants, executed leases during 1999
for new or additional space. In addition, one additional anchor tenant
executed a new lease with anticipated occupancy to occur in 2000. As a
result, subsequent years base rent and recovery income may differ from the
amounts reflected in the Historical Summary.
F-64
<PAGE>
Gateway Market Center
Historical Summary of Gross Income and
Direct Operating Expenses
Year ended December 31, 1999
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Amount
----------------------------------------------------
<S> <C>
2000 $ 1,824,667
2001 1,998,020
2002 1,958,682
2003 1,962,449
2004 1,933,352
Thereafter 18,014,650
------------------
$27,691,820
==================
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Gateway. Costs such as
mortgage interest, depreciation, amortization, and professional fees are
excluded from the Historical Summary.
Gateway was management pursuant to the terms of a management agreement for
an annual fee of 5% of gross revenues (as defined). Subsequent to the sale
of Gateway (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-65
<PAGE>
Gateway Market Center
Historical Summary of Gross Income and Direct Operating Expenses
Nine months ended September 30, 2000
(unaudited)
<TABLE>
<S> <C>
Gross income:
Base and percentage rental income $ 1,370,463
Operating expense and real estate tax recoveries 259,886
-----------------
Total Gross Income 1,630,349
-----------------
Direct operating expenses:
Operating expenses 135,694
Management fees 72,217
Real estate taxes 142,937
-----------------
Total direct operating expenses 273,098
-----------------
Excess of gross income over direct operating expenses $ 1,357,251
=================
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-66
<PAGE>
Gateway Market Center
Notes to Historical Summary of Gross Income and
Direct Operating Expenses
Nine months ended September 30, 2000
(unaudited)
1. Basis of Presentation
The Historical Summary of Gross Income and Direct Operating Expenses for
the period ended September 30, 2000 has been prepared from operating
statements provided by the owners of the property during that period and
requires management of Gateway Market Center 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-67
<PAGE>
APPENDIX A
PRIOR PERFORMANCE TABLES
The following prior performance tables contain information
concerning public real estate programs sponsored by affiliates of our
advisor. This information has been summarized in narrative form under "Prior
Performance of Our Affiliates" in the prospectus. The tables provide
information on the performance of a number of partnerships. You can use the
information to evaluate the experience of our advisor's affiliates as
sponsors of the partnerships. The inclusion of these tables does not imply
that we will make investments comparable to those reflected in the tables or
that investors in our shares will experience returns comparable to those
experienced in the programs referred to in these tables. If you purchase our
shares, you will not 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 Inland Real Estate Investment
Corporation 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>
* Our prospective investors may obtain copies of Table VI by contacting
Inland Retail Real Estate Advisory Services, Inc., our advisor.
Table VI is included in Post Effective Amendment No. 7 to Form S-11
Registration Statement under the Securities Act of 1933 filed by us November
2, 2000 with the Securities and Exchange Commission. Upon written request to
us or our advisor, any prospective investor may obtain, without charge, a
copy of Table VI. See also "Where You Can Find More Information" for
information on examining at, or obtaining copies from, offices of the
Securities and Exchange Commission.
Upon written request, any potential investor may obtain, without
charge, the most recent annual report on Form 10-K filed with the SEC by any
public program sponsored by any of Inland's affiliated companies which has
reported to the SEC within the last 24 months. For a reasonable fee, the
affiliated companies will provide copies of any exhibits to such annual
reports upon request.
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
A-1
<PAGE>
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.
Our investment objectives are to:
- provide regular distributions to stockholders in amounts which
may exceed our 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 90%
of our taxable income, pursuant to the REIT requirements;
- 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 us to
increase distributions and provide capital appreciation; and
- preserve stockholders' capital.
A-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents information on a dollar and percentage basis
showing the experience of Inland Real Estate Investment Corporation in
raising and investing funds in prior programs. The offerings presented closed
in the three years prior to December 31, 1999. The table focuses on the
dollar amount available for investment in properties expressed as a
percentage of total dollars raised.
A-3
<PAGE>
EXPERIENCE IN RAISING AND INVESTING FUNDS (A)
(000's omitted)
<TABLE>
<CAPTION>
Inland Real
Estate
Corporation
------------
1 Program
------------
<S> <C> <C>
Dollar amount offered (B) $ 647,000
Dollar amount raised 571,937 100.00%
Less offering expenses:
Syndication fees (C) 52,219 9.13
Other fees (D) 6,597 1.15
Organizational fees 37 0.00
Reserves (E) 5,719 1.00
Available for investment $ 943,478 88.71%
-------------------------
Acquisition costs:
Cash down payments (F) $ 939,751
Other cash expenditures capitalized 5,055
Total acquisition costs $ 944,806
=========
Percent leverage (G) 46.65%
Date offerings commenced (H)
Length of offering (H)
Months to invest 90% of amount available for investment, measured
from beginning of offering (H)
</TABLE>
A-4
<PAGE>
EXPERIENCE IN RAISING AND INVESTING FUNDS (A)
(000's omitted)
NOTES TO TABLE I
(A) The table reflects experience for Inland Real Estate Corporation, a
REIT which closed in 1998. The figures are cumulative and are as of
December 31, 1999. The dollar amount raised represents the cash
proceeds collected by the program. The table reflects payments made or
to be made from investor capital contributions upon receipt.
(B) The "dollar amount offered" does not reflect shares offered for
distribution to stockholders participating in Inland Real Estate
Corporation's distribution reinvestment program.
(C) Syndication fees are paid by the program to an affiliate, Inland
Securities Corporation, or unaffiliated third parties commissions for
the sale of shares. All of these syndication fees were used to pay
commissions and expenses of the offerings.
(D) Other fees are paid by the program to unaffiliated parties and consist
principally of printing, selling and registration costs.
(E) Generally, a working capital reserve is established to fund anticipated
future cash flow deficits, among other things.
(F) Cash down payments include amounts paid at closing and projected
amounts to be paid from working capital reserves at mortgage balloon
dates. Actual amounts paid at the balloon dates will depend upon the
operating results of the partnerships.
(G) Represents mortgage financing at December 31, 1999 divided by the total
acquisition costs including such mortgage financing.
(H) On October 14, 1994, the program commenced an initial public
offering, on a best effort basis, of 5,000,000 shares of common stock
at $10.00 per share. On July 24, 1996, the program commenced an
offering of an additional 10,000,000 Shares at $10.00 per share, on a
best efforts basis. On July 14, 1997, the program commenced an
offering of an additional 20,000,000 shares at $10.00 per share, on
a best efforts basis. On April 7, 1998, the program commenced an
offering of an additional 27,000,000 shares at $11.00 per share, on a
best efforts basis. In order to maximize flexibility in evaluating
strategic alternatives, the program's board of directors decided to
terminate the April 7, 1998 offering on December 31, 1998. As of
December 31, 1998, the program had received subscriptions for a total
of 16,642,397 shares in this offering. As of December 31, 1999,
substantially all proceeds available for investment from the
offerings were invested in real properties.
A-5
<PAGE>
TABLE II
COMPENSATION TO INLAND REAL ESTATE INVESTMENT CORPORATION
AND AFFILIATES (A)
Table II summarizes the amount and type of compensation paid to
Inland Real Estate Investment Corporation and its affiliates during the three
most recent years in connection with the prior partnerships and programs.
Some partnerships acquired their properties from affiliates of our
advisor that had purchased such properties from unaffiliated third parties.
A-6
<PAGE>
TABLE II
COMPENSATION TO INLAND REAL ESTATE INVESTMENT CORPORATION
AND AFFILIATES (A)
(000'S OMITTED)
<TABLE>
<CAPTION>
Inland Real
Public Estate
Programs Corporation
6 Programs 1 Program
<S> <C> <C>
Date offering commenced -- 10/14/94
Dollar amount raised $ 172,241 $ 571,937
================================
Amounts paid or payable to general partner
or affiliates from proceeds of offerings:
Selling commissions and underwriting fees $ 5,885(B) 49,869(C)
Other offering expenses (D) 2,310 2,350
Acquisition cost and expense 10,088(E) 925
================================
Dollar amount of cash available (deficiency)
from operations before deducting (adding) payments
to (from) general partner or affiliates (F) $ 118,854
===============
Amounts paid to (received from) general partner or
affiliates related to operations:
Property management fees (G) $ 732 8,769
Partnership subsidies received 0 0
Accounting services 203 210
Data processing service 155 280
Legal services 235 29
Mortgage servicing fees 0 245
Mortgage interest expense 0 196
Acquisition costs expensed 0 811
Other administrative services 703 546
Property upgrades 1,352 0
Property operating expenses 0 0
Dollar amount of property sales and refinancings
before payments to general partner and affiliates (H):
Cash $ 34,526 0
Equity in notes and undistributed sales proceeds 12,802 0
Dollar amounts paid or payable to general partner or
affiliates from sales and refinancings (I):
Sales commissions $ 267 0
Mortgage brokerage fee 0 0
Participation in cash distributions 425 0
</TABLE>
A-7
<PAGE>
TABLE II
COMPENSATION TO INLAND REAL ESTATE INVESTMENT CORPORATION AND
AFFILIATES (A)
(000'S OMITTED)
NOTES TO TABLE II
(A) The figures in table II relating to proceeds of the offerings are
cumulative and as of December 31, 1999. The figures relating to cash
available from operations are for the three years ending December 31,
1999. The dollar amount raised represents the cash proceeds collected
by the partnerships or program. Amounts paid or payable to Inland Real
Estate Investment Corporation or affiliates from proceeds of the
offerings represent payments made or to be made to Inland Real Estate
Investment Corporation and affiliates from investor capital
contributions.
(B) The total amount of selling commissions paid to an affiliate includes
approximately $2,712,000, which was in turn paid to third party
soliciting dealers.
(C) The total amount of selling commissions paid to an affiliate includes
approximately $42,500,000, which was in turn paid to third party
soliciting dealers.
(D) Other offering expenses consists of legal, accounting, printing and
other offering expenses, including amounts to be paid to Inland
Securities Corporation as incentive compensation for its regional
marketing representatives. It also includes amounts for reimbursement
of the general partner for marketing, salaries and direct expenses of
its employees while directly engaged in registering and marketing the
units and other marketing and organization expenses.
(E) Represents initial cash down payments and future principal payments and
prepaid items and fees paid to Inland Real Estate Investment
Corporation 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
6 Programs
<S> <C>
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
============
(F) See Note (B) to Table III.
</TABLE>
A-8
<PAGE>
(G) An affiliate provides property management services for all properties
acquired by the partnerships or program. Management fees have not
exceeded 4.5% 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., Inland Real Estate
Investment Corporation 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.
(H) See Table V and its corresponding notes regarding sales and disposals
of properties.
(I) Real estate sales commissions and participations in cash distributions
are paid or payable to Inland Real Estate Investment Corporation 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 their original capital investment. See table V and its
corresponding notes.
A-9
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents operating results for programs, the offerings of
which closed during each of the five years ended prior to December 31, 1999.
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-10
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
<TABLE>
<CAPTION>
Inland Real Estate Corporation
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Gross revenues $ 123,788 73,302 29,422 6,328 1,180
Profit on sale of properties 0 0 0 0 0
Less:
Operating expenses 40,303 21,017 8,863 1,873 327
Interest expense 25,654 13,422 5,655 597 164
Program expenses 7,298 3,114 1,576 449 22
Depreciation & amortization 20,361 11,663 4,681 957 170
Net income (loss)-GAAP basis $ 30,172 24,086 8,647 2,452 497
===========================================
Taxable income (loss) (A):
Total from operations 0 0 0 0 0
From gain on sale 0 0 0 0 0
===========================================
Cash available (deficiency) from operations (B) 54,479 39,999 15,218 5,180 978
Cash available from sales (C) 0 0 0 0 0
Cash (deficiency) from Financings 145,814 166,352 43,926 25,670 0
Total cash available before distributions and
special items 203,293 206,351 59,144 30,850 978
</TABLE>
A-11
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
<TABLE>
<CAPTION>
Inland Real Estate Corporation
1999 1998 1997 1996 1995
----------------------------------------
<S> <C> <C> <C> <C> <C>
Less distributions to investors:
From operations 48,773 33,454 11,899 3,286 607
From sales and refinancings 0 0 0 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 154,520 172,897 47,245 27,564 371
Special items:
Advances (repayments) from (to) general partner or
affiliates 0 0 0 0 0
Repurchase of shares (D) (3,723) (1,317) (421) (30) (27)
Use of partnership reserves 0 0 0 0 0
Use of cash available for offering purposes 0 0 0 0 0
Cash available after distributions and special items $150,797 171,580 46,824 27,534 344
===========================================
Tax data per $1,000 invested (A):
Federal income tax results:
Ordinary income (loss): 0
From operations 0 0 0 0 0
From recapture 0 0 0 0 0
Capital gain 0 0 0 0 0
Distribution date per $1,000 invested:
Cash distributions to investors:
Source (on GAAP basis):
Investment income 89 88 86 82 78
Return of capital 0 0 0 0 0
Supplemental capital contributions (return on capital) 0 0 0 0 0
Source (on cash basis):
Sales 0 0 0 0 0
Refinancings 0 0 0 0 0
Operations (E) 89 88 86 82 78
Return of capital 0 0 0 0 0
Supplemental capital contributions (return on capital) 0 0 0 0 0
Percent of properties remaining unsold (F) 100.00%
======
</TABLE>
A-12
<PAGE>
(A) Inland Real Estate Corporation qualified as a REIT under the Internal
Revenue Code for federal income tax purposes commencing with the tax
year ending December 31, 1995. Since it qualified for taxation as a
REIT, it generally will not be subject to federal income tax to the
extent it distributes its REIT taxable income to its stockholders. If
Inland Real Estate Corporation fails to qualify as a REIT in any taxable
year, it will be subject to federal income tax on its taxable income at
regular corporate tax rates. However, even if it qualifies for taxation
as a REIT, it may be subject to certain state and local taxes on its
income and property and federal income and excise taxes on its
undistributed income.
(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
Inland Real Estate Investment Corporation and affiliates which are
disclosed elsewhere in the table and include principal payments on
long-term debt. For example:
<TABLE>
<CAPTION>
Inland Real Estate Corporation
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities per the $59,201 42,775 15,924 5,530 978
Form 10-K annual report or 10-Q quarterly report
Principal payments on long-term debt (88) (74) (67) - -
Payments for deferred loan fees (1,634) (2,702) (639) (350) -
$57,479 39,999 15,218 5,180 978
==========================================
</TABLE>
(C) See table V and its corresponding notes regarding sales and disposals of
properties.
(D) The program established a share repurchase program which provides
liquidity to investors. These funds were used by the program to
repurchase shares pursuant to the terms of the related prospectus.
A-13
<PAGE>
(E) Distributions by the Inland Real Estate Corporation to the extent of its
current and accumulated earnings and profits for federal income tax
purposes are taxable to stockholders as ordinary income. Distributions
in excess of these earnings and profits generally are treated as a
non-taxable reduction of the stockholder's basis in the shares to the
extent thereof, and thereafter as taxable gain (a return of capital).
These distributions in excess of earnings and profits will have the
effect of deferring taxation of the amount of the distribution until the
sale of the stockholder's shares.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
% of Distribution representing:
Ordinary income 73.67 76.22 74.19 83.50 94.24
Return of Capital 26.33 23.78 25.81 16.50 5.76
100.00 100.00 100.00 100.00 100.00
</TABLE>
(F) 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).
A-14
<PAGE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
Table IV is a summary of operating and disposition results of prior
public partnerships sponsored by affiliates of our advisor, which during the
five years ended prior to December 31, 1999 have sold their properties and
either hold notes with respect to such sales or have liquidated. One public
partnership, Inland Real Estate Growth Fund, L.P., has disposed of all its
properties during the five years ended prior to December 31, 1999.
<TABLE>
<CAPTION>
Inland Real Estate
Program Name Growth Fund, L.P.
------------------------------------------------------------------------
<S> <C>
Dollar amount raised 9,465
Number of properties purchased 2
Date of closing of offering 08/21/87
Date property sold Various
Tax and distribution data per $1,000 invested (A):
Federal income tax results:
Ordinary income (loss):
Operations (1,245)
Recapture 0
Capital Gain 1,537
Deferred Gain:
Capital 0
Ordinary 0
Cash distributions to investors (cash basis):
Sales 1,093
Operations 196
</TABLE>
(A) Data per $1,000 invested is presented as of December 31, 1999. See
table V and its corresponding notes regarding sales and disposals of
properties.
A-15
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
Table V presents information on the results of the sale or disposals of
public partnership properties during the three years ended prior to December 31,
1999. Since January 1, 1997, partnerships sponsored by affiliates of our advisor
had 37 sales transactions. The table provides information that can be used to
evaluate property performance over the holding period. The table provides
information 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-16
<PAGE>
SALES OR DISPOSALS OF PROPERTIES (A)
(000'S OMITTED)
<TABLE>
<CAPTION>
Cash Selling Secured
Received, Commissions Notes
net of paid or Received
Date Date of Closing payable to Mortgage at at Sale
Acquired Sale Costs(B) Inland Time of Sale (C)
-------- ------- --------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
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
Land I 81.216 Acres of Parcel #1 01/19/89 Var 97 31 0 (3,580)(G) 2,170(F)
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
Land I Lots of Parcel #15 01/03/90 Var 98 645 0 0 1,968
Land I Lots of Parcel #21 03/08/90 Var 98 650 0 (450) 2,449
Land I 30 Acres of Parcel #16 01/29/90 Var 98 61 0 0 1,362
Land II Parcel #15 09/04/91 Var 98 (6) 0 0 2,750
Land II Lots Parcel #23 10/30/92 Var 98 2,142 0 0 0
Land II Lots Parcel #7 04/22/91 Var 98 1,402 0 0 0
Capital Fund Easement Parcel #5 04/01/94 Var 98 63 0 0 0
Capital Fund Lots Parcel #2 11/09/93 Var 98 143 0 0 0
Capital Fund Lots Parcel #6 05/11/94 Var 98 109 0 0 1,125
Capital Fund Lots Parcel #13 10/06/94 Var 98 1,290 0 0 0
Capital Fund Lots Parcel #4 03/30/94 Var 98 681 0 0 0
Capital Fund Lots Parcel #18 11/02/95 Var 98 1,410 0 0 0
Growth Fund I - Scottsdale Sierra 12/31/85 05/06/98 7,255 0 (375) 0
Monthly Income Fund II-Eurofresh Plaza 12/31/90 11/30/99 2,540 0 0 0
Land I 10.391 Acres of Parcel #16 01/29/90 12/15/99 1,494 0 0 0
Land I 27.51 Acres of Parcel #17 01/29/90 01/29/99 484 0 0 0
Land I 96.29 Acres of Parcel #23 05/08/90 08/26/99 589 0 0 750
Land II 19.6296 Acres of Parcel #7 04/22/91 Var 99 1,866 0 0 0
Land II 20.138 Acres of Parcel #20 01/31/92 06/30/99 1,265 0 0 0
Land II 1 Acre of Parcel #21 05/26/92 03/16/99 49 0 0 0
Land II 2.4 Acres of Parcel #22 10/30/92 07/27/99 295 0 0 0
Land II 5.8752 Acres of Parcel #23 10/30/92 Var 99 1,096 0 0 0
Land II 2.108 Acres of Parcel #26 03/10/93 Var 99 629 0 0 228
Capital Fund 13.503 Acres of Parcel #2 11/09/93 Var 99 871 0 0 0
Capital Fund Parcel #3 03/04/94 2,594 0 0 0 0
Capital Fund 1.0331 Acres of Parcel #4 03/30/94 08/19/99 348 0 0 0
Capital Fund 188.9 Acres of Parcel #5 04/01/94 10/07/99 733 0 0 0
Capital Fund 2.977 Acres of Parcel #10 09/16/94 11/03/99 87 0 0 0
Capital Fund 10.643 Acres of Parcel #14 10/26/94 06/21/99 175 0 0 0
<CAPTION>
Original Partnership
Net Selling Mortgage Capital
Price Financing Invested (D) Total
----------- --------- ------------ -----
<S> <C> <C> <C> <C>
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
Land I Lots of Parcel #15 2,613 0 2,366 2,366
Land I Lots of Parcel #21 3,549 0 2,358 2,358
Land I 30 Acres of Parcel #16 1,423 0 816 816
Land II Parcel #15 2,744 0 1,043 1,043
Land II Lots Parcel #23 2,142 0 1,455 1,455
Land II Lots Parcel #7 1,402 0 997 997
Capital Fund Easement Parcel #5 63 0 7 7
Capital Fund Lots Parcel #2 143 0 58 58
Capital Fund Lots Parcel #6 1,234 0 1,215 1,215
Capital Fund Lots Parcel #13 1,290 0 1,147 1,147
Capital Fund Lots Parcel #4 681 0 121 121
Capital Fund Lots Parcel #18 1,410 0 1,062 1,062
Growth Fund I - Scottsdale Sierra 7,630 3,283 3,755 7,038
Monthly Income Fund II-Eurofresh Plaza 2,540 0 2,186 2,186
Land I 10.391 Acres of Parcel #16 1,494 0 291 291
Land I 27.51 Acres of Parcel #17 484 0 321 321
Land I 96.29 Acres of Parcel #23 1,339 0 1,309 1,309
Land II 19.6296 Acres of Parcel #7 1,866 0 1,390 1,390
Land II 20.138 Acres of Parcel #20 1,265 0 1,250 1,250
Land II 1 Acre of Parcel #21 49 0 19 19
Land II 2.4 Acres of Parcel #22 295 0 26 26
Land II 5.8752 Acres of Parcel #23 1,096 0 821 821
Land II 2.108 Acres of Parcel #26 857 0 626 626
Capital Fund 13.503 Acres of Parcel #2 871 0 433 433
Capital Fund Parcel #3 2,594 0 1,362 1,362
Capital Fund 1.0331 Acres of Parcel #4 348 0 70 70
Capital Fund 188.9 Acres of Parcel #5 773 0 613 613
Capital Fund 2.977 Acres of Parcel #10 87 0 39 39
Capital Fund 10.643 Acres of Parcel #14 175 0 8,686 8,686
</TABLE>
A-17
<PAGE>
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 Gain
expenditures (E) cash receipts from Sale
----------------------- --------------------- ------------------
<S> <C> <C> <C>
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
Land I Lots of Parcel #15 0 0 71
Land I Lots of Parcel #21 0 0 742
Land I 30 Acres of Parcel #16 0 0 1,058
Land II Parcel #15 0 0 1,701
Land II Lots Parcel #23 0 0 521
Land II Lots Parcel #7 0 0 297
Capital Fund Easement Parcel #5 0 0 57
Capital Fund Lots Parcel #2 0 0 78
Capital Fund Lots Parcel #6 0 0 11
Capital Fund Lots Parcel #13 0 0 144
Capital Fund Lots Parcel #4 0 0 561
Capital Fund Lots Parcel #18 0 0 348
Growth Fund I - Scottsdale Sierra 822 0 4,356
Monthly Income Fund II-Eurofresh Plaza 1,291 0 514
Land I 10.391 Acres of Parcel #16 0 0 1,202
Land I 27.51 Acres of Parcel #17 0 0 163
Land I 96.29 Acres of Parcel #23 0 0 (102)
Land II 19.6296 Acres of Parcel #7 0 0 352
Land II 20.138 Acres of Parcel #20 0 0 15
Land II 1 Acre of Parcel #21 0 0 31
Land II 2.4 Acres of Parcel #22 0 0 270
Land II 5.8752 Acres of Parcel #23 0 0 202
Land II 2.108 Acres of Parcel #26 0 0 174
Capital Fund 13.503 Acres of Parcel #2 0 0 420
Capital Fund Parcel #3 0 0 1,232
Capital Fund 1.0331 Acres of Parcel #4 0 0 278
Capital Fund 188.9 Acres of Parcel #5 0 0 160
Capital Fund 2.977 Acres of Parcel #10 0 0 48
Capital Fund 10.643 Acres of Parcel #14 0 0 89
<CAPTION>
Ordinary Income
from Sale Capital Gain
--------------- ------------
<S> <C> <C>
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
Land I Lots of Parcel #15 0 71
Land I Lots of Parcel #21 0 742
Land I 30 Acres of Parcel #16 0 1,058
Land II Parcel #15 0 1,701
Land II Lots Parcel #23 0 521
Land II Lots Parcel #7 0 297
Capital Fund Easement Parcel #5 0 57
Capital Fund Lots Parcel #2 0 78
Capital Fund Lots Parcel #6 0 11
Capital Fund Lots Parcel #13 0 144
Capital Fund Lots Parcel #4 0 561
Capital Fund Lots Parcel #18 0 348
Growth Fund I - Scottsdale Sierra 0 4,356
Monthly Income Fund II-Eurofresh Plaza 0 514
Land I 10.391 Acres of Parcel #16 0 1,202
Land I 27.51 Acres of Parcel #17 0 163
Land I 96.29 Acres of Parcel #23 0 (102)
Land II 19.6296 Acres of Parcel #7 0 352
Land II 20.138 Acres of Parcel #20 0 15
Land II 1 Acre of Parcel #21 0 31
Land II 2.4 Acres of Parcel #22 0 270
Land II 5.8752 Acres of Parcel #23 0 202
Land II 2.108 Acres of Parcel #26 0 174
Capital Fund 13.503 Acres of Parcel #2 0 420
Capital Fund Parcel #3 0 1,232
Capital Fund 1.0331 Acres of Parcel #4 0 278
Capital Fund 188.9 Acres of Parcel #5 0 160
Capital Fund 2.977 Acres of Parcel #10 0 48
Capital Fund 10.643 Acres of Parcel #14 0 89
</TABLE>
A-18
<PAGE>
SALES OR DISPOSALS OF PROPERTIES
(000'S OMITTED)
NOTES TO TABLE V
(A) The table includes all sales of properties by the partnerships during
the three years ended December 31, 1999. All sales have been made to
parties unaffiliated with the partnership.
(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 a result of the sale of the remaining approximately 81 acres of
Parcel 1 on December 29, 1997, the Monthly Income Fund I received
mortgage loans receivable totaling $2,170,089, of which $575,000
accrued interest at 9% per annum and had a maturity date of July 1,
1998 and was paid in full. The remaining $1,595,089 accrues interest at
9% per annum and has a maturity date of December 30, 2000.
(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 the Monthly Income Fund I which had a balance of
$3,325,515 at that time.
A-19
<PAGE>
APPENDIX B
DISTRIBUTION REINVESTMENT PLAN
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 Second Amendment and Restatement of Charter, as
amended (the "Charter"), has adopted a Distribution Reinvestment Program (the
"DRP"), the terms and conditions of which are set forth below. Capitalized
terms are defined in Section X of this appendix, unless otherwise defined
herein.
i. As agent for the Stockholders who purchase Shares from the
Company pursuant to the Company's public offering of its Shares (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.
B-1
<PAGE>
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 Charter.
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.
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.
B-2
<PAGE>
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.
x. DEFINED TERMS.
"ACT" means the Securities Act of 1933, as amended, and the Rules
and Regulations promulgated thereunder.
"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.
"DEALER MANAGER" means Inland Securities Corporation, one of the
TIGI Affiliated Companies.
"DIRECTORS" means the members of the Board of Directors of the
Company, including the Independent Directors.
"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
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; 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.
B-3
<PAGE>
"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
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.
"NASD" means the National Association of Securities Dealers, Inc.
"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.
"SHARES" means the shares of voting common stock, par value $.01
per share, of the Company, and "SHARE" means one of those Shares.
"SOLICITING DEALERS" means the dealer members of the NASD,
designated by the Dealer Manager.
"STOCKHOLDERS" means the holders of Shares.
B-4
<PAGE>
APPENDIX C
SUBSCRIPTION AGREEMENT
C-1
<PAGE>
PLEASE MAIL THE BLUE 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.
<TABLE>
<S> <C>
INLAND RETAIL REAL ESTATE TRUST, INC. - INSTRUCTIONS TO SUBSCRIBERS
INSTRUCTIONS Any person desiring to subscribe for our common shares should carefully read and review the
prospectus, as supplemented to date, 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(a)--Enter the number of shares to be purchased and the dollars and cents amount of the
A 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).
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. If this is an Additional
Investment, and if you have a copy of your prior subscription agreement and all information
therein remains accurate, you may proceed directly to Page 2 after checking the Additional
Investment box.
Item 1(b)--Deferred Commission Option: Please check the box if you have agreed with your
soliciting dealer to elect the deferred commission option, as described in the prospectus, as
supplemented to date. By electing the deferred commission option, you are required to pay only
$9.40 per share purchased upon subscription. For the next six years, following the year of
subscription, you will have a sales commission of $0.10 per share deducted from and paid out
of cash distributions otherwise distributable to you. Election of the deferred commission
option will authorize us to withhold such amounts from cash distributions otherwise payable to
you and to pay them as described in the "Plan of Distribution--Deferred Commission Option"
section of the prospectus, as supplemented to date.
--------------------------------------------------------------------------------------------------------------------------------
B Item 2--Check if you desire to participate in our distribution reinvestment program.
--------------------------------------------------------------------------------------------------------------------------------
REGISTRATION Item 3--Enter the exact name in which the shares are to be held. For co-owners enter the names
INFORMATION of all owners. For investments by qualified plans, include the exact name of the plan. For
C 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.
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Item 4--Enter mailing address, state of residence and telephone number of owner. For qualified
investments, please enter mailing address of custodian or trustee.
Item 5--Enter birth date(s) or date of incorporation.
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 us 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).
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D Item 9--Enter the residence address if different than the mailing address. For qualified
investments, please enter the residence address of the investor.
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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 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. If you
check the Individual Ownership box and you wish to designate a Transfer on Death beneficiary,
you may check the "TOD" box and you must fill out the Transfer on Death Form in order to
effect the designation.
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SIGNATURE Item 11--The Subscription Agreement/Signature Page MUST BE EXECUTED by the owner(s), and if
F applicable, the trustee or custodian.
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ALTERNATE Item 12--If owners desire direct deposit of his/her/their cash distributions to an account or
ADDRESS FOR address other than as set forth in the Subscription Agreement/Signature Page, please
DISTRIBUTION complete. PLEASE MAKE SURE ACCOUNT HAS BEEN OPENED AND ACCOUNT NUMBER IS PROVIDED, AS WELL AS
S INFORMING RECIPIENT THAT DISTRIBUTION WILL BE FORTHCOMING AND IS AN ASSET TRANSFER.
(OPTIONAL)
G
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BROKER/DEALER Item 13--Enter the name of the broker/dealer and the name of the registered representative,
REGISTERED along with the street address, city, state, zip code, telephone number, fax and e-mail of the
REPRESENTATIVE registered representative. By executing the Subscription Agreement/Signature Page, the
H registered representative 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 an investment in us 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 us 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.
Check the box to indicate whether the broker-dealer agrees to the deferred commission option
if the subscriber has elected the deferred commission option; and the broker-dealer must
sign, where provided, to acknowledge that agreement.
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SUBMISSION OF The properly completed and executed Blue and White copies of the Subscription Agreement/
SUBSCRIPTION 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.
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NOTE: If a person other than the person in whose name the shares will be held is reporting the income received from us, you
must notify us 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 OUR 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 THEREFOR,
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 us must submit such request in writing and set forth
the basis for the request. Any such request will be subject to our verification.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
INLAND RETAIL REAL ESTATE TRUST, INC.
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
PLEASE READ THIS SUBSCRIPTION AGREEMENT/SIGNATURE PAGE IN ITS ENTIRETY BEFORE SIGNING.
SUBSCRIBER MUST READ THE INSTRUCTIONS TO SUBSCRIBERS.
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(l)a INVESTMENT MAKE CHECK PAYABLE TO LNB/ESCROW AGENT FOR IRRET
This subscription is in the amount of $____________ for the purchase of ____________ common shares of Inland Retail Real
Estate Trust, Inc. (IRRET) at $10 per share. Minimum Initial Investment: 300 shares (100 shares for IRA, Keogh and
qualified plan accounts-Iowa requires 300 shares for IRA accounts; Minnesota requires 200 shares for IRA and qualified plan
accounts).
A
This is an: ___ INITIAL INVESTMENT ___ ADDITIONAL INVESTMENT * (*If the information in the prior subscription
agreement remains accurate for the Additional Investment, you may proceed directly to Page 2.)
(l)b ___ CHECK THE BOX TO ELECT THE DEFERRED COMMISSION OPTION. (This election must be agreed to by the broker/dealer listed
below)
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B (2) DISTRIBUTION REINVESTMENT PROGRAM: ___ YES Subscriber elects to participate in the distribution reinvestment
program described in the prospectus. Distributions will be made by check unless box is marked.
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C (3) REGISTERED OWNER _ _ _ - _ _ _ _ - _ _ _ _
(AREA CODE) HOME TELEPHONE
___ Mr. ____ Mrs. ____ Ms. _____________________________________________________________
CO-OWNER
___ Mr. ____ Mrs. ____ Ms. _____________________________________________________________
(4) MAILING ADDRESS _ _ _ - _ _ _ _ - _ _ _ _
_____________________________________________________________ (AREA CODE) HOME TELEPHONE
CITY, STATE & ZIP CODE
_____________________________________________________________
STATE OF RESIDENCE ______ (5) BIRTH DATE __ __ __ __ __ __ __ __ __ __ __ __ (6) PLEASE INDICATE
MONTH DAY YEAR MONTH DAY YEAR CITIZENSHIP STATUS
___ U.S. Citizen
___ Resident Aliens
(8) SOCIAL SECURITY __ __ __ __ __ __ __ __ __ __ CORPORATE OR CUSTODIAL ___ Non-Resident Alien
TAX IDENTIFICATION NUMBER
CO-OWNER SOCIAL SECURITY # __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ (7) ___ Employee or Affiliate
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(9) RESIDENCE ADDRESS IF DIFFERENT FROM ABOVE OR FOR INVESTOR OF QUALIFIED PLAN
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D
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Street City State Zip Code
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(10) CHECK ONE
A ___ Individual Ownership H ___ IRA L ___ Pension or Profit Sharing Plan
___ TOD (Fill out TOD I ___ Qualified Plan (Keogh) ___ Taxable ___ Exempt under Section 501A
E Form to effect J ___ Simplified Employee Pension/Trust M ___ Trust/Date Trust Established
designation) (S.E.P.) _____________________ Name of Trustee or other
B ___ Joint Tenants with Administrator
Right of Survivorship K ___ Uniform Gifts to Minors Act ______________________________________________
C ___ Community Property State of ___________________ a N ___ Estate
D ___ Tenants in Common Custodian for ______________________ O ___ Other (Specify) ______________________________
E ___ Tenants by the Entirety ___ Taxable ___ Non-Taxable
F ___ Corporate Ownership
G ___ Partnership Ownership
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(11) THE UNDERSIGNED CERTIFIES, under penalties of perjury (i) that the taxpayer identification number shown on the
Subscription Agreement/Signature Page is true, correct and complete, and (ii) that he is not subject to backup withholding
either because he has not been notified that he is subject to backup withholding as a result of a failure to report all
interest or distributions, or the Internal Revenue Service has notified him that he is no longer subject to backup withholding.
The undersigned further acknowledges and/or represents (or in the case of fiduciary accounts, the person authorized to sign on
such subscriber's behalf) the following: (Texas residents must separately initial each of the representations below)
(a) acknowledges receipt, not less than five (5) business days prior to the signing of this Subscription Agreement (not
required for Minnesota residents), of the PROSPECTUS OF IRRET RELATING TO THE SHARES, WHEREIN THE TERMS AND CONDITIONS OF
THE OFFERING OF THE SHARES ARE DESCRIBED, including among other things, the restrictions on ownership and transfer of
shares, which require, under certain circumstances, that a holder of shares must give written notice and provide certain
information to IRRET;
(b) represents that I (we) either: (i) have a net worth (excluding home, home furnishings and automobiles) of at least
F $45,000 and estimate that (without regard to investment in IRRET) I (we) have gross income due in the current year of at
least $45,000; or (ii) have a net worth (excluding home, home furnishings and automobiles) of at least $150,000, or such
higher suitability as may be required by certain states and set forth on the reverse side hereof; IN THE CASE OF SALES TO
FIDUCIARY ACCOUNTS, THE SUITABILITY STANDARDS MUST BE MET BY THE BENEFICIARY, THE FIDUCIARY ACCOUNT OR BY THE DONOR OR
GRANTOR WHO DIRECTLY OR INDIRECTLY SUPPLIES THE FUNDS FOR THE PURCHASE OF THE SHARES;
(c) represents that the subscribers are purchasing the shares for his or her own account and if I am (we are) purchasing
shares on behalf of a trust or other entity of which I am (we are) trustee(s) or authorized agent(s) I (we) have due
authority to execute the Subscription Agreement/Signature Page and do hereby legally bind the trust or other entity of
which I am (we are) trustee(s) or authorized agent(s);
(d) acknowledges that the shares are not liquid; (not required for Minnesota residents);
(e) if an affiliate of the Company, represents that the shares are being purchased for investment purposes only and not for
immediate resale.
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PRINT NAME OF CUSTODIAN OR TRUSTEE (IF APPLICABLE) x ____________________________________________
_____________________________________________ SIGNATURE-REGISTERED OWNER
_____________________________________________ x ____________________________________________
AUTHORIZED SIGNATURE (CUSTODIAN OR TRUSTEE) SIGNATURE-CO-OWNER
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A SALE OF THE SHARES MAY NOT BE COMPLETED BY THE SOLICITING DELAERS UNTIL AT LEAST FIVE BUSINESS DAYS AFTER RECEIPT OF THE
PROSPECTUS.
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(12) DIRECTLY DEPOSIT CASH DISTRIBUTIONS (OPTIONAL) TO: ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Account Number -
MUST BE FILLED IN
Name of Bank, _____________________________________________________________ x ________________________________________
G Brokerage Firm Signature - Registered Owner
or Individual _____________________________________________________________
Mailing Address _____________________________________________________________ x _________________________________________
City, State & Zip Code Signature - Co-Owner
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(13) BROKER/DEALER DATA - COMPLETED BY SELLING REGISTERED REPRESENTATIVE (PLEASE USE REP'S ADDRESS--NOT HOME OFFICE)
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Name of Registered
Representative __ __ __ - __ __ __ - __ __ __ __
H ___Mr. ___Mrs. ___Ms. _____________________________________ Registered representative's telephone
Mailing Address _____________________________________
Have you changed broker/dealers? ____ Yes ____ No
City, State & Zip Code _____________________________________Registered representative's e-mail:
_________________________________________________
Broker/Dealer Name _____________________________________Registered representative's fax:
_________________________________________________
Home Office Mailing
Address _____________________________________x ________________________________________________
City, State & Zip Code _____________________________________ Signature - Registered Representative
__ REGISTERED INVESTMENT ADVISOR (RIA) (check here). This investment is made through the RIA in its capacity as an RIA and not
in its capacity as a registered representative, if applicable, whose agreement with the subscriber includes a fixed or "wrap"
fee feature for advisory and related brokerage services. If an owner or principal or any member of the RIA firm is an NASD
licensed registered representative affiliated with a broker/dealer, the transaction should be conducted through that
broker/dealer, not through the RIA.
__ DEFERRED COMMISSION OPTIONS: Check the box if broker/dealer has agreed to this option. Broker/Dealer Signature ___________
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INLAND RETAIL REAL ESTATE TRUST, INC.
</TABLE>
<PAGE>
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE - REVERSE SIDE
CERTAIN STATES HAVE IMPOSED SPECIAL FINANCIAL SUITABILITY STANDARDS FOR
SUBSCRIBERS WHO PURCHASE SHARES.
IF THE SUBSCRIBER IS A RESIDENT OF MAINE, THE SUBSCRIBER 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 SUBSCRIBER IS A RESIDENT OF MASSACHUSETTS, MISSOURI OR TENNESSEE,
THE SUBSCRIBER 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 SUBSCRIBER IS A RESIDENT OF OHIO OR PENNSYLVANIA,
THE INVESTMENT MAY NOT EXCEED 10% OF THE SUBSCRIBER'S LIQUID NET WORTH.
WE INTEND TO ASSERT THE FOREGOING REPRESENTATIONS AS A DEFENSE IN ANY
SUBSEQUENT LITIGATION WHERE SUCH ASSERTION WOULD BE RELEVANT. WE 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 SUBSCRIPTION AGREEMENT, "INLAND" REFERS
TO THE INLAND GROUP, INC. AND ITS AFFILIATES. THIS SUBSCRIPTION 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 SUBSCRIBER IS NOT WAIVING
ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
<TABLE>
<CAPTION>
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<S> <C> <C>
OFFICE USE ONLY Subscriber Check Date
Subscriber Check #
Check Amount $
OWNER ACCOUNT
NUMBER ___ ___ ___ ___ ___
BROKER/DEALER CO-OWNER
NUMBER ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ACCOUNT NUMBER ___ ___ ___ ___ ___
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</TABLE>
<PAGE>
INLAND RETAIL REAL ESTATE TRUST, INC.
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE - PAGE 2
ADDITIONAL INVESTMENTS
THIS PAGE 2 IS ONLY APPLICABLE FOR A SUBSCRIBER WHO:
- previously purchased shares in this offering
- attaches a copy of his or her subscription agreement from his or
her prior investment
- can represent to us that all information in the prior
subscription agreement is true and applicable for this Additional
Investment.
The undersigned certifies, under penalties of perjury, that all information,
representations and elections contained in the attached subscription agreement
(from the undersigned's prior investment in shares) are applicable to the
current Additional Investment and are true and correct as of the date hereof as
though made and contained in a subscription agreement for the Additional
Investment executed as of the date hereof.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C>
PRINT NAME OF CUSTODIAN OR TRUSTEE (IF APPLICABLE) x _________________________
_____________________________________________ SIGNATURE-REGISTERED OWNER
_____________________________________________ x _________________________
AUTHORIZED SIGNATURE (CUSTODIAN OR TRUSTEE) SIGNATURE -CO-OWNER
--------------------------------------------------------------------------------
</TABLE>
ATTENTION BROKER/DEALERS: If a subscriber is filling out this page 2 for an
Additional Investment, you must still complete Section H.
<PAGE>
APPENDIX D
TRANSFER ON DEATH DESIGNATION
[TO BE FILED BY AMENDMENT]
D-1
<PAGE>
UP TO 56,000,000 SHARES
INLAND RETAIL REAL ESTATE TRUST, INC.
COMMON STOCK
-------------------------------
P R O S P E C T U S
-------------------------------
_______________, 2001
INLAND SECURITIES CORPORATION
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to make any representations
other than those contained in the prospectus and supplemental literature
authorized by _______ and referred to in this prospectus, and, if given or
made, such information and representations must not be relied upon. This
prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of these securities. You should not assume that the delivery of this
prospectus or that any sale made pursuant to this prospectus implies that the
information contained in this prospectus will remain fully accurate and
correct as of any time subsequent to the date of this prospectus.
UNTIL ________, 2001 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS SOLICITING DEALERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than selling
commissions) expected to be incurred by the Company while issuing and
distributing the securities registered pursuant to this Registration
Statement. All amounts other than the SEC registration fee and NASD filing
fee are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $148,368.42
NASD Filing Fee........................................................... $ 30,500.00
Printing and Mailing Expenses............................................. $150,000.00
Blue Sky Fees and Expenses................................................ $120,000.00
Legal Fees and Expenses................................................... $300,000.00
Accounting Fees and Expenses.............................................. $ 35,000.00
Advertising and Sales Literature.......................................... $100,000.00
Due Diligence............................................................. $145,000.00
Miscellaneous............................................................. $ 50,000.00
-------------
Total................................................................ $1,078,868.42
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
Due to lower administrative costs, and in connection with the
performance of services, our employees, Directors and associates, associates
of our affiliates, Inland Real Estate Advisory Services, Inc. (the
"Advisor"), affiliates of the Advisor, our affiliate Inland Securities
Corporation (the "Dealer Manager") or their respective officers and employees
and certain of their affiliates, will be permitted to purchase Shares net of
sales commissions and the Marketing Contribution and Due Diligence Expense
Allowance or for $9.05 per Share. Also, (i) Soliciting Dealers and 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) 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 net of sales commissions or for $9.30 per Share;
however, any subsequent purchases of Shares by any such persons are limited
to a maximum discount of 5%. Independent Directors initially will be granted
options to purchase Shares under the Company's Independent Director Stock
Option Plan at an exercise price of $9.05 per Share. Stockholders will be
allowed to purchase Shares pursuant to our Distribution Reinvestment Plan
(the "DRP") for 95% of the Market Price or initially for $9.50 per Share.
Subscribers to Shares which receive volume discounts will pay reduced selling
commissions. See "Compensation Table-Nonsubordinated Payments-For and in
Connection With the Offering," "Management-Independent Director Stock Option
Plan," and "Plan of Distribution-Volume Discounts" and "-Other Discounts."
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
As of September 30, 2000, the Company has sold the following securities
for the following aggregate offering prices: In September 1998, Inland Retail
Real Estate Advisory Services, Inc., the Advisor, purchased from the Company
20,000 Shares for $10 per Share, for an aggregate purchase price of $200,000
in connection with the Company's organization. The Advisor also made a
capital contribution to Inland Retail Real Estate Limited Partnership (the
"Operating Partnership") in the amount
II-1
<PAGE>
of $2,000 in exchange for 200 LP Common Units of the Operating Partnership.
The 200 LP Common Units received by the Advisor may be exchanged, at the
option of the Advisor, for 200 Shares. No sales commissions or other
consideration was paid in connection with such sales, which were consummated
without registration under the Act in reliance upon the exemption from
registration in Section 4(2) of the Securities Act as transactions not
involving any public offering.
Options to purchase an aggregate of 10,500 Shares at an exercise price
of $9.05 per Share have been granted to the Independent Directors pursuant to
the Independent Director Stock Option Plan (options to purchase 3,000 Shares
as to each of the three Independent Directors plus options for 500 Shares
each on the date of the first annual meeting). None of such options have been
exercised. Therefore, no Shares have been issued in connection with such
options.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XV of the Company's Second Articles of Amendment and Restatement
of Charter (the "Articles") provides as follows:
SECTION 3. INDEMNIFICATION
(a) Subject to paragraphs (b), (c) and (d) of this Section 3, the
Company shall, 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 Maryland
General Corporation Law, indemnify and pay, advance, or reimburse reasonable
expenses to any Director, officer, employee and agent of the Company and the
Advisor and its Affiliates (each an "Indemnified Party").
(b) As long as the Company qualifies as a REIT, it shall not indemnify
nor pay, advance or reimburse expenses to an Indemnified Party unless: (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 Net Assets of the Company
and not from the Stockholders.
(c) As long as the Company qualifies as a REIT and notwithstanding
anything to the contrary in Section 3(b) of this Article XV, the Company
shall not indemnify a Director, officer, employee or agent of the Company or
the Advisor or its Affiliates 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 Indemnified Party;
(ii) such claims have been dismissed with prejudice on the merits by a court
of competent jurisdiction as to the particular Indemnified Party; 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
Securities and Exchange Commission (the "Commission") and the published
opinions of any state securities regulatory authority in which securities of
the Company were offered or sold as to indemnification for violations of
securities laws.
II-2
<PAGE>
(d) The Company may 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 Maryland General Corporation Law, 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 such advancement; and (iii) the Indemnified Party
receiving such advances undertakes in writing to repay the advanced funds to
the Company, together with the applicable legal rate of interest thereon, in
cases in which such party is found not to be entitled to indemnification.
(e) The Company shall have the power to 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 shall 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 these
Articles. Nothing contained herein shall constitute a waiver by any
Indemnified Party of any right which he, she or it may have against any party
under federal or state securities laws. The Company shall also have power to
enter into any contract for indemnity and advancement of expenses with an
officer, employee or agent who is not a Director to such further extent
consistent with law.
The Company's 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 Indemnified Party'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 Securities Act of 1933, as amended (the "Act"), the Company has
been advised that, in the opinion of the Commission, such indemnification is
contrary to public policy and, therefore, unenforceable.
We entered into separate indemnification agreements with each of our
Directors and some of our executive officers. The indemnification agreements
require, among other things, that we indemnify the 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. We must also 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 our 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, as a
contract, it cannot be unilaterally modified by the Board of Directors or by
the stockholders to eliminate the rights it provides.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Inapplicable.
II-3
<PAGE>
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
The following financial statements are included as part of the
registration statement in the prospectus.
1. INLAND RETAIL REAL ESTATE TRUST, INC.:
a. Consolidated Financial Statements (unaudited) at and for the nine
months ended September 30, 2000
b. Notes to Consolidated Financial Statements (unaudited) at
September 30, 2000
c. Independent Auditors Report
d. Consolidated Financial Statement at and for the year ended
December 31, 1999
e. Notes to Consolidated Financial Statements at and for the year
ended December 31, 1999
f. Pro Forma Consolidated Balance Sheet (unaudited) at
September 30, 2000
g. Pro Forma Consolidated Statement of Operations (unaudited) for
the nine months ended September 30, 2000
h. Notes to Pro Forma Consolidated Statement of Operations
(unaudited) for the nine months ended September 30, 2000
i. Pro Forma Consolidated Statement of Operations (unaudited) for
the year ended December 31, 1999
j. Notes to Pro Forma Consolidated Statement of Operations
(unaudited) for the year ended December 31, 1999
2. CONWAY PLAZA:
a. Independent Auditors' Report
b. Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1999
c. Notes to the Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31, 1999
d. Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the nine months ended September 30, 2000
II-4
<PAGE>
e. Notes to the Historical Summary of Gross Income and Direct
Operating Expenses (unaudited) for the nine months ended
September 30, 2000
3. PLEASANT HILL SQUARE:
a. Independent Auditors' Report
b. Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1999
c. Notes to the Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31, 1999
d. Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the nine months ended September 30, 2000
e. Notes to the Historical Summary of Gross Income and Direct
Operating Expenses (unaudited) for the nine months ended
September 30, 2000
4. GATEWAY MARKET CENTER:
a. Independent Auditors' Report
b. Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1999
c. Notes to the Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31, 1999
d. Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the nine months ended September 30, 2000
e. Notes to the Historical Summary of Gross Income and Direct
Operating Expenses (unaudited) for the nine months ended
September 30, 2000
All schedules have been omitted as the required information is
inapplicable or is presented in the financial statements or related notes.
(b) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1.1 Form of Dealer Manager Agreement by and between Inland Retail Real Estate
Trust, Inc. and Inland Securities Corporation.
1.2 Form of Soliciting Dealers Agreement by and between Inland Securities
Corporation and the Soliciting Dealers.
II-5
<PAGE>
1.3 Form of Warrant Purchase Agreement by and between Inland Retail Real Estate
Trust, Inc. and Inland Securities Corporation.
3.1 Second Articles of Amendment and Restatement of Charter of Inland Retail Real
Estate Trust, Inc. (Included as Exhibit 3.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-11 filed on February 9, 1999 (File
No. 333-64391) and incorporated herein by reference.)
3.2 Bylaws of Inland Retail Real Estate Trust, Inc. (Included as Exhibit 3.2 to
Amendment No. 2 to the Company's Registration Statement on Form S-11 filed
January 28, 1999 (File No. 333-64391) and incorporated herein by reference.)
4.1 Agreement of Limited Partnership of Inland Retail Real Estate Limited
Partnership.
4.1(a) First Amendment to Agreement of Limited Partnership of Inland Retail Real
Estate Limited Partnership.
4.2 Specimen Certificate for the Shares. (Included as Exhibit 4.2 to
the Company's Registration Statement on Form S-11 filed
September 28, 1998 (File No. 333-64391) and incorporated herein
by reference.)
5 Form of Opinion of Katten Muchin Zavis as to the legality of the Shares being
registered.*
8 Form of Opinion of Katten Muchin Zavis as to tax matters.*
10.1 Form of Escrow Agreement by and among Inland Retail Real Estate
Trust, Inc., Inland Securities Corporation and LaSalle National
Bank, N.A.
10.2 First Amended and Restated Advisory Agreement by and between Inland Retail
Real Estate Trust, Inc. and Inland Retail Real Estate Advisory Services, Inc.
10.3 Master Management Agreement, including the form of Management Agreement
for each Property by and between Inland Retail Real Estate Trust, Inc. and
Inland Southeast Property Management Corp.
10.3(a) First Amendment to Master Management Agreement.
10.4 First Amended and Restated Property Acquisition Service Agreement by and
among Inland Retail Real Estate Trust, Inc., Inland Retail Real Estate Advisory
Services, Inc., Inland Real Estate Corporation, Inland Real Estate Advisory
Services, Inc., and Inland Real Estate Acquisitions, Inc.
10.5 Independent Director Stock Option Plan (included as Exhibit 10.5 to
Amendment No. 1 to the Company's Registration Statement on Form S-11 filed
January 7, 1999 (File No. 333-64391) and incorporated herein by reference).
II-6
<PAGE>
10.5(a) Form of Option Agreement for initial grant of options (included as an Exhibit to
Amendment No. 4 to the Company's Registration Statement filed on May 3,
2000 (File No. 333-64391) and incorporated herein by reference).
10.5(b) Form of Option Agreement for subsequent grant of options (included as Exhibit
10.5(b) to Amendment No. 6 to the Company's Registration Statement filed on
August 2, 2000 (File No. 333-64391) and incorporated herein by reference).
10.6 Form of Indemnification Agreement by and between Inland Retail Real Estate
Trust, Inc. and its Directors and executive officers (included as Exhibit 10.6 to
Amendment No. 3 to the Company's Registration Statement on Form S-11 filed
February 9, 1999 (File No. 333-64391) and incorporated herein by reference).
10.7 Agreement dated March, 1999 between Inland Retail Real Estate Trust, Inc. and
Inland Real Estate Investment Corporation relating to payment of the reasonably
estimated cost to prepare and mail a notice to stockholders of any special
meeting of stockholders requested by the stockholders.
21 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP.
23.2 Consent of Katten Muchin Zavis.*
24 Power of Attorney (included on signature page to the Registration Statement).
</TABLE>
* To be filed by Amendment.
ITEM 37. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-7
<PAGE>
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
B. The Registrant undertakes to send to each Stockholder at least
on an annual basis a detailed statement of any transactions with the Advisor
or its Affiliates, and of fees, commissions, compensation and other benefits
paid or accrued to the Advisor or its Affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the
services performed.
C. The Registrant undertakes to provide to the Stockholders the
financial statements required by Form 10-K for the first full fiscal year of
operations of the Company.
D. The Registrant hereby undertakes to send to the Stockholders,
within 60 days after the close of each quarterly fiscal period, the
information specified by Form 10-Q, if such report is required to be filed
with the Commission.
E. The Registrant undertakes to file a sticker supplement pursuant
to Rule 424(c) under the Act during the distribution period describing each
Property not identified in the Prospectus at such time as there arises a
reasonable probability that such Property will be acquired and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months, with the information contained in such amendment provided
simultaneously to the existing Stockholders. Each sticker supplement should
also disclose all compensation and fees received by the Advisor and its
Affiliates in connection with any such acquisition. The post-effective
amendment shall include audited financial statements meeting the requirements
of Rule 3-14 of Regulation S-X only for Properties acquired during the
distribution period.
The Registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and additional information required by Rule 3-14 of Regulation
S-X, to reflect each commitment (i.e., the signing of a binding purchase
agreement) made after the end of the distribution period involving the use of
10% or more (on a cumulative basis) of the net proceeds of the offering and
to provide the information contained in such report to the Stockholders at
least once each quarter after the distribution period of the offering has
ended.
F. Insofar as indemnification for liabilities arising under the
Act may be permitted to Directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Director, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
SIGNATURES
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-11 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Oak Brook, State of Illinois, on
the 28th day of November, 2000.
INLAND RETAIL REAL ESTATE TRUST, INC.
By: /s/ Robert D. Parks
---------------------------------
Robert D. Parks, Chairman, Chief
Executive Officer and Director
II-9
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Roberta S. Matlin and Scott W. Wilton
and each of them, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
pre- and post-effective amendments to this Registration Statement, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their, his or her
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Act, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---------------------------------------- --------------------------------------- ------------------
<S> <C> <C>
/s/ Robert D. Parks Chairman, Chief Executive November 28, 2000
------------------------- Officer and Director
Robert D. Parks (Principal Executive Officer)
/s/ Barry L. Lazarus President, Chief Operating November 28, 2000
------------------------- Officer, Treasurer and Chief
Barry L. Lazarus Financial Officer and Director
(Principal Accounting and
Financial Officer)
/s/ Daniel K. Deighan Director November 28, 2000
------------------------
Daniel K. Deighan
/s/ Kenneth E. Masick Director November 28, 2000
------------------------
Kenneth E. Masick
/s/ Michael S. Rosenthal Director November 28, 2000
------------------------
Michael S. Rosenthal
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1.1 Form of Dealer Manager Agreement by and between Inland Retail Real Estate
Trust, Inc. and Inland Securities Corporation.
1.2 Form of Soliciting Dealers Agreement by and between Inland Securities
Corporation and the Soliciting Dealers.
1.3 Form of Warrant Purchase Agreement by and between Inland Retail Real Estate
Trust, Inc. and Inland Securities Corporation.
3.1 Second Articles of Amendment and Restatement of Charter of Inland Retail Real
Estate Trust, Inc. (Included as Exhibit 3.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-11 filed on February 9, 1999 (File No.
333-64391) and incorporated herein by reference.)
3.2 Bylaws of Inland Retail Real Estate Trust, Inc. (Included as Exhibit 3.2 to
Amendment No. 2 to the Company's Registration Statement on Form S-11 filed
January 28, 1999 (File No. 333-64391) and incorporated herein by reference.)
4.1 Agreement of Limited Partnership of Inland Retail Real Estate Limited Partnership.
4.1(a) First Amendment to Agreement of Limited Partnership of Inland Retail Real Estate
Limited Partnership.
4.2 Specimen Certificate for the Shares. (Included as Exhibit 4.2 to the Company's
Registration Statement on Form S-11 filed September 28, 1998 (File No.
333-64391) and incorporated herein by reference.)
5 Form of Opinion of Katten Muchin Zavis as to the legality of the Shares being
registered.*
8 Form of Opinion of Katten Muchin Zavis as to tax matters.*
10.1 Form of Escrow Agreement by and among Inland Retail Real Estate Trust, Inc.,
Inland Securities Corporation and LaSalle National Bank, N.A.
10.2 First Amended and Restated Advisory Agreement by and between Inland Retail
Real Estate Trust, Inc. and Inland Retail Real Estate Advisory Services, Inc.
10.3 Master Management Agreement, including the form of Management Agreement for
each Property by and between Inland Retail Real Estate Trust, Inc. and Inland
Southeast Property Management Corp.
10.3(a) First Amendment to Master Management Agreement.
II-11
<PAGE>
10.4 First Amended and Restated Property Acquisition Service Agreement by and
among Inland Retail Real Estate Trust, Inc., Inland Retail Real Estate Advisory
Services, Inc., Inland Real Estate Corporation, Inland Real Estate Advisory
Services, Inc., and Inland Real Estate Acquisitions, Inc.
10.5 Independent Director Stock Option Plan (included as Exhibit 10.5 to Amendment
No. 1 to the Company's Registration Statement on Form S-11 filed January 7, 1999
(File No. 333-64391) and incorporated herein by reference).
10.5(a) Form of Option Agreement for initial grant of options (included as an Exhibit to
Amendment No. 4 to the Company's Registration Statement filed on May 3, 2000
(File No. 333-64391) and incorporated herein by reference).
10.5(b) Form of Option Agreement for subsequent grant of options (included as Exhibit
10.5(b) to Amendment No. 6 to the Company's Registration Statement filed on
August 2, 2000 (File No. 333-64391) and incorporated herein by reference).
10.6 Form of Indemnification Agreement by and between Inland Retail Real Estate
Trust, Inc. and its Directors and executive officers (included as Exhibit 10.6 to
Amendment No. 3 to the Company's Registration Statement on Form S-11 filed
February 9, 1999 (File No. 333-64391) and incorporated herein by reference).
10.7 Agreement dated March, 1999 between Inland Retail Real Estate Trust, Inc. and
Inland Real Estate Investment Corporation relating to payment of the reasonably
estimated cost to prepare and mail a notice to stockholders of any special meeting
of stockholders requested by the stockholders.
21 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP.
23.2 Consent of Katten Muchin Zavis.*
24 Power of Attorney (included on signature page to the Registration Statement).
</TABLE>
* To be filed by Amendment.
II-12
