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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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T REIT, INC.
(Exact name of registrant as specified in governing instruments)
1551 N. TUSTIN AVENUE
SUITE 650
SANTA ANA, CALIFORNIA 92705
(Address of principal executive offices)
ANTHONY W. THOMPSON
1551 N. TUSTIN AVENUE
SUITE 650
SANTA ANA, CALIFORNIA 92705
(877) 888-7348
(Name and address of agent for service)
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Copies to:
GEORGE C. HOWELL, III, ESQUIRE
HUNTON & WILLIAMS
RIVERFRONT PLAZA, EAST TOWER
951 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(804) 788-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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 number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
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Common Stock, par value $.01 per share 11,050,000 shares $10.00 $110,500,000 $30,719
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(1) Includes 10,000,000 shares offered to the public, 700,000 shares
offered to shareholders pursuant to a dividend reinvestment program and
250,000 shares issuable upon exercise of warrants issued to certain
broker-dealers and 100,000 shares issuable pursuant to our director
stock option plan, all of which are being offered pursuant to the
prospectus contained in this registration statement.
(2) Estimated solely for the purpose of determining the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED APRIL 28, 1999
INITIAL PUBLIC OFFERING PROSPECTUS
11,050,000 SHARES
T REIT, INC.
COMMON STOCK
T REIT, Inc. was incorporated to acquire ownership interests in office,
industrial, retail and service properties, including single user retail and
office properties rented to tenants under net leases. We intend to qualify as a
real estate investment trust for federal income tax purposes. As of the date of
this prospectus, we do not own any properties.
This is our initial public offering. This offering of our common stock
includes a maximum of 10,000,000 shares and a minimum of 100,000 shares for sale
to the residents of certain states identified in this prospectus. In addition,
we may issue up to 700,000 shares under our dividend reinvestment program; up to
250,000 shares upon exercise of warrants issued to broker-dealers in connection
with this offering; and up to 100,000 shares under our director stock option
plan. The minimum purchase in this offering is 100 shares ($1,000), except in
certain states described in this prospectus. No person may own more than 9.9% of
our outstanding common stock, unless our board of directors waives this
restriction.
This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss. You should consider carefully the
information set forth in "RISK FACTORS" BEGINNING ON PAGE 6 for a discussion of
certain factors relevant to an investment in our common stock, including but not
limited to the following:
. we do not own any properties;
. there will be no market for our common stock and the offering
price may not reflect the fair market value of our common stock
after the completion of this offering;
. we are totally reliant on a third-party advisor to manage our business
and assets;
. our officers and directors will be subject to substantial conflicts of
interest; and
. initially, we will not be able to invest in several or diverse
properties and our overall performance will fluctuate with the
performance at specific properties.
This Offering/(1)/ Per Share Total Minimum Total Maximum/(1)/
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Public Price $10.00 $1,000,000 $100,000,000
Selling Commissions $ .80 $ 80,000 $ 8,000,000
Proceeds to T REIT $ 9.20 $ 920,000 $ 92,000,000
/(1)/Excludes shares issuable under our dividend reinvestment program, upon
exercise of warrants issued to broker-dealers in connection with this offering
or issuable under our director stock option plan.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The securities dealers participating in this offering must sell the minimum
number of securities offered (100,000 shares) if any are sold. The participating
securities dealers are required only to use their best efforts to sell the
maximum number of securities offered (10,000,000 shares).
This offering will commence upon the date of this prospectus and will
continue until and terminate upon the earlier of ________, 2001, or the date on
which an aggregate of 10,000,000 shares, excluding any shares sold under the
dividend reinvestment program or issued under our director stock option plan or
upon exercise of warrants, have been sold. Subscription proceeds will be placed
in an interest-bearing escrow account with PriVest Bank as escrow agent, until
subscriptions for at least 100,000 shares have been received and accepted by us,
at which time the escrow agent will release the proceeds to us. If we do not
sell 100,000 shares before __________, 2000, this offering will be terminated
and we will refund your investment to you promptly thereafter plus interest and
without deducting for escrow expenses.
_____________________
CUNNINGHAM CAPITAL CORP.
THE DATE OF THIS PROSPECTUS IS ________, 1999
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY..................................................... 1
About Our Company................................................ 1
About Our Business............................................... 1
Our Advisor and the Dealer Manager............................... 1
Risk Factors..................................................... 2
Business Objectives.............................................. 3
This Offering.................................................... 3
Use of Proceeds.................................................. 4
Distributions.................................................... 4
Summary Financial Information.................................... 4
Compensation to Our Affiliated Advisor and
the Dealer Manager............................................ 5
RISK FACTORS........................................................... 6
No Properties; No Properties Identified For Investment........... 6
No Market for Common Stock....................................... 6
Total Reliance on Our Affiliated Advisor......................... 6
Conflicts of Interest............................................ 7
Lack of Investment Diversification............................... 8
Acquisition Risks................................................ 8
Joint Venture Arrangements....................................... 9
Insufficient Reserves............................................ 9
Borrowings May Increase Our Company's Business Risks............. 9
Possible Adverse Consequences of Limits on Ownership and
Transfer of Our Shares........................................ 10
Potential Anti-Takeover Effects.................................. 11
Dilution......................................................... 11
Risks Associated with Neighborhood Retail Centers................ 11
Seller Financing by Our Company May Delay Liquidation or
Reinvestment.................................................. 12
Risks of Real Estate Investments................................. 13
Tax Risks........................................................ 14
ERISA Risks...................................................... 15
INVESTOR SUITABILITY STANDARDS......................................... 17
ESTIMATED USE OF PROCEEDS OF THIS OFFERING............................. 19
OUR COMPANY............................................................ 21
INVESTMENT OBJECTIVES AND POLICIES..................................... 21
Types of Investments............................................. 21
Our Acquisition Standards........................................ 22
Property Acquisition............................................. 22
Description of Our Leases........................................ 23
Our Operating Partnership........................................ 23
Our Policies With Respect to Borrowing........................... 24
Sale or Disposition of Properties................................ 24
Our Long Term Investment Objective............................... 25
Changes in Our Investment Objectives............................. 25
Investment Limitations........................................... 25
Appraisals....................................................... 26
Joint Ventures................................................... 26
Other Policies................................................... 27
Investing in Tax-Free States..................................... 27
DISTRIBUTION POLICY.................................................... 28
MANAGEMENT OF OUR COMPANY.............................................. 29
General.......................................................... 29
The Directors and Executive Officers............................. 30
Committees of Our Board of Directors............................. 31
Officer and Director Compensation................................ 32
Director Stock Option Plan....................................... 32
Indemnification.................................................. 34
OUR AFFILIATED ADVISOR................................................. 34
Management....................................................... 34
The Advisory Agreement........................................... 35
COMPENSATION TABLE..................................................... 38
PRIOR PERFORMANCE SUMMARY.............................................. 44
Prior Programs of Our Affiliated Advisor......................... 44
CONFLICTS OF INTEREST.................................................. 47
Competition for the Time and Service of Our Affiliated Advisor
and Affiliates................................................ 47
Process for Resolution of Conflicting Opportunities.............. 47
Acquisition From Our Affiliated Advisor and Its Affiliates....... 48
We May Purchase Properties From Persons With Whom Affiliates of
Our Affiliated Advisor Have Prior Business Relationships...... 48
Our Affiliated Advisor May Have Conflicting Fiduciary Obligations
in the Event Our Company Acquires Properties with Our
Affiliated Advisor or Affiliates.............................. 48
Property Management Services will be Rendered by Our Affiliated
Advisor....................................................... 48
Receipt of Commissions, Fees and Other Compensation by Our
Affiliated Advisor............................................ 48
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TABLE OF CONTENTS (CONT'D)
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Non-Arm's-Length Agreements; Conflicts;
Competition.................................................. 49
Legal Counsel for Our Company and Our Affiliated Advisor is the
Same Law Firm................................................ 49
Cunningham Capital Corp. is Participating as Dealer Manager in
the Sale of Our Shares....................................... 49
Potential Conflict of Interest Resulting From Unofficial
Advisory Committee........................................... 49
SUMMARY OF DIVIDEND REINVESTMENT PROGRAM.............................. 51
General......................................................... 51
Investment of Dividends......................................... 51
Participant Accounts, Fee, and Allocation of Shares............. 51
Reports to Participants......................................... 52
Election to Participate or Terminate Participation.............. 52
Federal Income Tax Considerations............................... 52
Amendments and Termination...................................... 53
FORMATION TRANSACTIONS................................................ 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 55
PRINCIPAL SHAREHOLDERS................................................ 56
DESCRIPTION OF CAPITAL STOCK.......................................... 57
General......................................................... 57
Common Stock.................................................... 57
Preferred Stock................................................. 57
Soliciting Dealer Warrants...................................... 57
Issuance of Additional Securities and Debt Instruments.......... 58
Restrictions on Ownership and Transfer.......................... 58
CERTAIN PROVISIONS OF VIRGINIA CORPORATE LAW AND OUR COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS.................................. 60
Certain Provisions of Our Articles of Incorporation and Bylaws.. 60
Shareholders' Meetings.......................................... 61
Our Board of Directors.......................................... 61
Staggered Terms for Directors................................... 61
Limitation of Liability and Indemnification..................... 61
Shareholder Voting Rights....................................... 62
Anti-takeover Provisions of the Virginia Stock Corporation Act.. 63
Dissolution or Termination of Our Company....................... 64
Transactions with Affiliates.................................... 64
SHARES AVAILABLE FOR FUTURE SALE...................................... 64
AGREEMENT OF LIMITED PARTNERSHIP...................................... 65
Management...................................................... 65
Transferability of Interests.................................... 65
Capital Contribution............................................ 65
Redemption Rights............................................... 66
Incentive Units................................................. 66
Operations...................................................... 67
Distributions................................................... 67
Allocations..................................................... 68
Term............................................................ 68
Tax Matters..................................................... 68
FEDERAL INCOME TAX CONSEQUENCES OF OUR COMPANY'S STATUS AS A REIT..... 69
Taxation of Our Company......................................... 69
Requirements for Qualification.................................. 70
Rents and Interest.............................................. 71
Hedging Transactions............................................ 73
Failure to Satisfy Income Tests................................. 73
Prohibited Transaction Rules.................................... 73
Recordkeeping Requirements...................................... 75
Failure to Qualify.............................................. 75
Taxation of Taxable U.S. Shareholders........................... 75
Taxation of U.S. Shareholders on the Disposition of the Common
Stock........................................................ 76
Capital Gains and Losses........................................ 76
Information Reporting Requirements and Backup Withholding....... 77
Taxation of Tax-Exempt Shareholders............................. 77
Taxation of Non-U.S. Shareholders............................... 78
Other Tax Consequences.......................................... 79
ERISA CONSIDERATIONS.................................................. 79
PLAN OF DISTRIBUTION.................................................. 82
EXPERTS............................................................... 85
REPORTS TO SHAREHOLDERS............................................... 85
LEGAL MATTERS......................................................... 85
LEGAL PROCEEDINGS..................................................... 85
ADDITIONAL INFORMATION................................................ 86
GLOSSARY.............................................................. 87
Exhibit A Prior Performance Tables
Exhibit B Subscription Agreement
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TABLE OF CONTENTS (CONT'D)
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Exhibit C Dividend Reinvestment Program
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does
not contain all the information that is important to you. You should carefully
read this entire prospectus, including the "Risk Factors" section beginning on
page 6.
ABOUT OUR COMPANY
We are a recently formed Virginia corporation that intends to elect to be
treated as a real estate investment trust for federal income tax purposes.
We will operate in an umbrella partnership REIT structure, in which our
subsidiary operating partnership will own substantially all of the properties
that we acquire. Our operating partnership will be T REIT L.P., a recently
formed Virginia limited partnership, and we will be its sole general partner.
Initially, we will own 100% of the ownership interests in our operating
partnership, other than the incentive limited partnership interest owned by our
affiliated advisor, Triple Net Properties, LLC. References in this prospectus to
"us," "we" or "our company" mean T REIT, Inc. and our operating partnership
combined, unless the context otherwise requires.
Our principal executive offices are located at 1551 N. Tustin Avenue, Suite
650, Santa Ana, California 92705.
ABOUT OUR BUSINESS
As of the date of this prospectus, we do not own any properties. We intend
to acquire properties with the net proceeds of this offering. We generally
intend to acquire existing office, industrial, retail and service properties,
including neighborhood retail centers and properties leased to one or more
tenants under net leases. Neighborhood retail centers are properties leased to
one or more retail tenants that focus primarily on the sale of consumer goods
and personal services for the daily living needs of the immediate neighborhood.
Under net leases, our tenants generally will be responsible for paying operating
expenses, real estate taxes, special assessments, sales and use taxes,
utilities, insurance and repairs and maintenance related to the properties. We
may acquire certain single-user retail and office properties in sale and
leaseback transactions in which we enter into net leases with creditworthy
tenants.
We generally intend to acquire properties in secondary and tertiary
markets, in which:
. quality properties are plentiful,
. good values still exist (generally well below replacement cost), and
. there is reduced competition from other REITs and investment entities.
We initially intend to acquire properties primarily in Alaska, Florida,
Iowa, Michigan, Minnesota, Nevada, North Carolina, South Carolina, South Dakota,
Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming, which we refer to
as the focus states. We intend that a majority of the properties will be at
least 75% leased on the acquisition date.
OUR ADVISOR AND THE DEALER MANAGER
Triple Net Properties, LLC is our affiliated advisor and will generally
manage our business and assets. Our affiliated advisor was formed in April of
1998 to serve as an asset and property manager for real estate investment
trusts, syndicated real estate limited partnerships, limited liability companies
and similar real estate entities. In addition to our company, our advisor
currently advises four other entities that invest in various types of real
estate with respect to the acquisition, management and disposition of their
properties, including Western Real Estate Investment Trust, Inc. Western REIT
was formed in April of 1998 to own, acquire and develop properties substantially
similar to the properties we intend to own, acquire and develop. However,
Western REIT does not
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currently own and is not currently developing properties in our focus states. We
do not intend to own, acquire or develop properties in states in which Western
REIT currently owns or is developing properties. See "Prior Performance
Summary."
An affiliate of our advisor, Cunningham Capital Corp., will assist us in
selling our common stock under this prospectus by serving as the dealer manager
of this offering. Since August of 1986, the dealer manager has helped various
syndicated limited partnerships, limited liability companies and other real
estate entities raise money to invest in real estate. The President of our
company and our advisor, Anthony Thompson, currently owns 50% of the outstanding
capital stock of the dealer manager.
We will pay our advisor, the dealer manager and their affiliates
substantial amounts in connection with this offering and the ongoing management
of our business and assets. See "Compensation Table."
RISK FACTORS
An investment in our common stock involves a number of risks. We urge you
to carefully consider the matters discussed under "Risk Factors" beginning on
page 6 before investing in our company. Such risks include, among several
others, those described below. However, not all important risks are listed in
this Summary, and you should consider carefully all of the other information
included in this prospectus before you decide to purchase any shares of our
common stock.
. There is no public market for our common stock and it will not be
listed on a national exchange or market system. It is not likely that
there will be an active trading market for our common stock. You may
not be able to easily resell your shares or to resell your shares at a
price that is equal to or greater than the price you paid for them.
. As of the date of this prospectus, we do not own any properties and
our advisor has not identified any properties for us to acquire. We
intend to use the net proceeds of this offering to acquire properties
through our operating partnership. If we are unable to acquire
suitable properties, or suffer a delay in making any acquisitions, our
cash available for distribution to you as a shareholder may be
reduced.
. To the extent we sell substantially less than the maximum number of
shares, we will not have sufficient funds after payment of offering
and related expenses to acquire more than a few properties. The
resulting lack of property and geographic diversification would
materially increase the risk involved in purchasing our common stock.
. We will rely on our advisor to manage our business and properties. Our
affiliated advisor will make all decisions with respect to the
management of our company. Thus, the success of our business will
depend on the ability of our advisor to manage our day-to-day
operations. Any adversity experienced by our advisor or in our
relationship with our advisor could have a materially adverse impact
on our company. In many circumstances, we must pay our advisor a fee
in order to terminate the advisory agreement.
. Our officers and directors will experience conflicts between the
interests of our company and the interests of our advisor, the dealer
manager and their affiliates. Many of the same persons who will serve
as our officers, directors and employees are also officers, directors,
employees or owners of our advisor, the dealer manager and their
affiliates. Any existing or future agreements between us and our
advisor, the dealer manager and their affiliates, including agreements
relating to their compensation, were not and will not be reached
through arm's-length negotiations. Such agreements may not solely
reflect your interests as a shareholder of our company.
. Our affiliated advisor also serves as an advisor to Western REIT,
which is engaged in a business substantially similar to ours. Our
affiliated advisor does and will serve in similar capacities for a
number of entities and properties. These relationships will result in
further conflicts of interest
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between our company and our officers and directors who work for our
advisor. These and other conflicts may result in such officers and
directors taking actions and making decisions that do not solely
reflect your interests as a shareholder of our company.
. Because the dealer manager is an affiliate of our company and our
advisor, you cannot consider the dealer manager's due diligence
investigation of our company to be an independent review of our
company. That due diligence review may not be as meaningful as a
review conducted by an unaffiliated broker-dealer.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE THE IMPACT OF THESE AND OTHER RISKS,
OUR ABILITY TO MEET OUR INVESTMENT OBJECTIVES WILL BE SUBSTANTIALLY IMPAIRED. IN
TURN, THE VALUE OF YOUR COMMON STOCK AND OUR DISTRIBUTIONS TO YOU WILL BE
MATERIALLY REDUCED. SEE "RISK FACTORS."
BUSINESS OBJECTIVES
Our primary business objectives are to acquire suitable properties and to
enhance the performance and value of those properties through management
strategies designed to address the needs of the modern real estate marketplace.
Key elements of our strategy to achieve those objectives include:
Acquiring Properties:
. We will selectively acquire well-located office, industrial, retail
and service properties located primarily in our focus states,
including neighborhood retail centers and properties net leased by one
or more creditworthy tenants.
. We may acquire certain properties by issuing units of limited
partnership interest in our operating partnership to the sellers,
which may allow such sellers to defer taxation on any gain from their
disposition of that property.
. We may acquire certain properties on an all-cash basis, which may
provide a competitive advantage over other potential purchasers who
must secure financing. We will also acquire certain properties with
the proceeds of debt financing or subject to existing indebtedness.
Enhancing Property Values:
. We will actively manage costs and seek to minimize operating expenses
by centralizing management, leasing, marketing, financing, accounting,
renovation and data processing activities.
. We will seek to improve rental income and cash flow by aggressively
marketing rentable space and raising rents when feasible.
. We will emphasize regular maintenance and periodic renovation to meet
the needs of tenants and to maximize long-term returns.
. In our neighborhood retail centers, we will seek to maintain a
diversified tenant base, consisting primarily of retail tenants
providing consumer goods and services.
. We will seek to finance acquisitions and refinance certain properties
when favorable financing terms are available to increase our cash
flow.
We may incur indebtedness to fund the acquisition or operation of our
properties. We intend to limit our aggregate indebtedness, both secured and
unsecured, to no more than 60% of the aggregate of all of our properties' fair
market values, as determined at the end of each calendar year, beginning with
the first full year of operations. In addition, we do not intend to incur
secured indebtedness on a specific property in excess of 80% of such property's
fair market value.
THIS OFFERING
We are offering for sale to the residents of certain states listed below a
maximum of 10,000,000 shares and a minimum of 100,000 shares of our common
stock. The minimum number of shares you may purchase is 100
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($1,000), except in certain states described in "Investor Suitability
Standards." This offering is being conducted on a "best efforts" basis, which
means that the securities dealers participating in this offering are under no
obligation to purchase any of the shares and, therefore, no specified dollar
amount is guaranteed to be raised. If we do not sell 100,000 shares, we will
return your investment to you plus interest and without deducting for escrow
expenses.
In addition, we expect to issue:
. up to 250,000 shares upon the exercise of warrants granted to the
dealer manager and certain soliciting dealers.
. up to 700,000 shares to shareholders who elect to participate in our
dividend reinvestment program.
. up to 100,000 shares to our directors under our director stock option
plan.
We intend to offer our shares for sale to the residents of Alabama,
Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New
Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania,
Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia,
Washington, West Virginia, Wisconsin and Wyoming, which we refer to as our sales
states.
USE OF PROCEEDS
We will contribute the net proceeds of the sale of any common stock we
offer under this prospectus to our operating partnership in return for 100% of
the initial interests in our operating partnership, other than the incentive
limited partnership interest owned by our advisor. See "Agreement of Limited
Partnership--Incentive Units." Our operating partnership will use the net
proceeds to purchase suitable properties, to repay debt that we may assume when
acquiring properties in exchange for units of limited partnership interest in
our operating partnership and to pay the amounts due to our advisor and the
dealer manager. See "Estimated Use of Proceeds of This Offering" and
"Compensation Table."
DISTRIBUTIONS
As a REIT, we must distribute to our shareholders at least 95% of our
annual taxable income. Because we have not identified any properties to acquire,
we cannot give any assurances as to when or if we will make distributions.
However, when we have acquired sufficient properties and such properties are
generating sufficient cash flow, we intend to pay regular monthly distributions
to our shareholders out of our cash available for distribution, in an amount
determined by our board of directors. However, we reserve the right, at any
time, instead to pay distributions on a quarterly basis. The continuation of
distributions and the amount of the distributions depend upon a variety of
factors, including:
. our cash available for distribution;
. our overall financial condition;
. our capital requirements;
. the annual distribution requirements applicable to REITs under the
federal income tax laws (see "Federal Income Tax Consequences of Our
Company's Status as a REIT--Requirements for Qualification"); and
. such other considerations as our board of directors may deem
relevant.
SUMMARY FINANCIAL INFORMATION
We are newly formed and do not have a history of operations.
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COMPENSATION TO OUR AFFILIATED ADVISOR AND THE DEALER MANAGER
We will pay our advisor, the dealer manager and their affiliates
substantial amounts for assisting us in this offering and sale of our common
stock and for managing our business and assets.
In connection with the sale of our common stock in this offering, the
dealer manager will receive:
. 8% of the gross proceeds of this offering, which may be retained or
reallowed to other broker-dealers participating in this offering;
. a nonaccountable marketing support and due diligence reimbursement of
up to 1.5% of the gross proceeds of this offering; and
. in certain cases, one warrant to purchase one share of common stock
for every forty shares of common stock sold by any broker-dealer in
this offering.
In connection with the management of our business and properties, we will
pay our advisor:
. an acquisition fee equal to 4% of the gross proceeds of this offering;
. reimbursement for out of pocket expenses incurred in connection with
our acquisitions of properties, estimated to be approximately 0.5% of
the gross proceeds of this offering;
. after receipt by the shareholders of an annual return equal to 8% of
the initial offering price of $10.00 per share, an annual asset
management fee of 1.5% of the Average Invested Assets, payable
quarterly (Average Invested Assets is computed, for any period, as the
average of the aggregate book value of our assets of our company
invested, directly or indirectly, in equity interests and in loans
secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, at the end of each month during
such period);
. an incentive distribution with respect to our advisor's incentive
limited partnership interest in our operating partnership equal to 15%
of the operating cash flow of our operating partnership after we have
received the sum of (1) an 8% cumulative, non-compounded return on our
capital invested in our operating partnership and (2) any remaining
shortfall in the recovery of our invested capital with respect to
prior sales of properties; and
. a property management fee equal to 5% of the gross income generated by
each of our properties, to be paid monthly.
In connection with any disposition of our properties, we will pay our
advisor:
. a property disposition fee equal to the lesser of 3% of the sale price
for any property or 50% of the commission customarily paid to a third-
party broker; and
. an incentive distribution with respect to our advisor's incentive
limited partnership interest in our operating partnership equal to 15%
of the net proceeds from the sale of a property after we have received
the sum of (1) the amount of our capital invested in our operating
partnership that is allocable to that property, (2) any remaining
shortfall in the recovery of our invested capital with respect to
prior sales of properties, and (3) any remaining shortfall in our 8%
cumulative, non-compounded return on our capital invested in our
operating partnership.
In the event our shares of common stock are listed on a national stock
exchange or included for quotation on a national market system and our advisor
is merged into our company, our advisor will receive shares of our common stock
and our company will no longer be obligated to pay fees to our advisor. See
"Compensation Table."
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RISK FACTORS
Before you invest in our common stock, you should be aware that your
investment is subject to various risks, including those described below. You
should carefully consider these risks together with all of the other information
included in this prospectus before you decide to purchase any of our common
stock.
Some of the information you will find in this prospectus may contain
"forward-looking" statements. You can identify such statements by the use of
forward-looking words such as "may," "will," "anticipate," "expect," "estimate,"
"continue" or other similar words. These types of statements discuss future
expectations or contain projections or estimates. When considering such forward-
looking statements, you should keep in mind the following risk factors. These
risk factors could cause our actual results to differ materially from those
contained in any forward-looking statement.
NO PROPERTIES; NO PROPERTIES IDENTIFIED FOR INVESTMENT
We currently own no properties and must acquire properties before we can
generate income or pay distributions to you as a shareholder.
As of the date of this prospectus, we do not own any properties. Our
affiliated advisor has neither identified nor placed under contract any
properties for us to acquire. We cannot give you any information as to the
identification, location, operating histories, lease terms or other relevant
economic and financial data regarding the properties that we will purchase with
the net proceeds of this offering. We may experience a delay between your
purchase of our shares and our purchase of properties. Such a delay will result
in a delay in the benefits to you, if any, of an investment in our company,
including the delay in the payment of any distributions to you as a shareholder.
NO MARKET FOR COMMON STOCK
The absence of a market for our common stock will make it difficult for you
to sell your shares.
There is no public market for our common stock and we have no plans to list
our common stock on a stock exchange or market. You may not be able to resell
your shares promptly or at a price that is at or above the price at which you
purchased them. It is likely that there will not be an active trading market for
our common stock. It may be difficult for you to find a buyer for your shares if
you decide to sell them. Our board of directors determined the offering price of
our common stock in the exercise of its business judgment. This price may not be
indicative of either the price at which the shares may trade if they were
publicly traded on an exchange or the proceeds that you would receive if our
company were liquidated or dissolved.
TOTAL RELIANCE ON OUR AFFILIATED ADVISOR
We are reliant on our advisor to run our company and that advisor also has
competing obligations to other companies.
We will rely on our advisor to manage our business and assets. Our
affiliated advisor will make all decisions with respect to the management of our
company. Thus, the success of our business will depend in large part on the
ability of our advisor to manage our day-to-day operations. Any adversity
experienced by our advisor or problems in our relationship with our advisor
could have a materially adverse impact on our company. We may not remove our
advisor except under limited circumstances, which circumstances could require us
to pay substantial sums to our advisor. See "Our Affiliated Advisor--The
Advisory Agreement."
Many of the same persons will serve as directors, officers and employees of
our company and of our advisor. We will depend on our advisor to retain the
services of its officers and key employees, but none of such individuals has an
employment agreement with our advisor or its affiliates. The loss of any of
these individuals
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could have a materially adverse effect on our company. Our affiliated advisor
has obtained key man insurance on the life of Anthony W. Thompson, the President
of our company and our advisor. Our affiliated advisor has informed us that it
would seek to use the proceeds of such insurance upon the death of Mr. Thompson
to hire a qualified replacement to serve as President of our company and our
advisor. Except for Mr. Thompson, our advisor does not anticipate obtaining key
man life insurance policies on any of the individuals employed by our advisor or
its affiliates. See "Management of Our Company."
CONFLICTS OF INTEREST
The conflicts of interests described below may mean our company will not be
managed solely in your best interests as a shareholder.
Many of our officers and directors and our advisor's officers will have
conflicts of interest in managing our business and properties. Thus, they may
make decisions or take actions that do not solely reflect your interests as a
shareholder.
All of our officers are officers of our advisor and Western REIT. Two of
our directors also serve as officers of our advisor and Western REIT. Our
affiliated advisor also advises Western REIT and other entities that may compete
with our company or otherwise have similar business interests. The dealer
manager is affiliated with our advisor. In addition, several of our officers and
directors own an interest in our advisor, the dealer manager or Western REIT.
Mr. Thompson currently owns 50% of the outstanding capital stock of the dealer
manager.
As officers, directors and partial owners of entities with interests in
competition with our interests, our officers and directors will experience
conflicts between their fiduciary obligations to our company and their fiduciary
obligations to, and pecuniary interests in, our advisor, the dealer manager and
their affiliated entities. This conflict of interest could:
. limit the time and services that our officers and our advisor devote
to our company, because they will be providing similar services to
Western REIT and other real estate entities, and
. impair our ability to compete for acquisition of properties with other
real estate entities that are also advised by our advisor and its
affiliates, including Western REIT.
If our advisor or its affiliates breach their fiduciary obligations to our
company, or do not resolve conflicts of interest in the manner described in the
section of this prospectus entitled "Conflicts of Interest--Process for
Resolution of Conflicting Opportunities," we may not meet our investment
objectives, which could reduce our expected cash available for distribution to
our shareholders.
The absence of arm's-length bargaining may mean that our agreements are not
as favorable to you as a shareholder as they otherwise would have been.
Any existing or future agreements between us and our advisor, the dealer
manager or their affiliates were not and will not be reached through arm's-
length negotiations. Thus, such agreements may not solely reflect your interests
as a shareholder. For example, the advisory agreement, our agreement with the
dealer manager and the terms of the compensation to our advisor and the dealer
manager were not arrived at through arm's-length negotiations. The terms of such
agreements and compensation may not solely reflect your interests as a
shareholder and may be overly favorable to the other party to such agreements.
The dealer manager may not have conducted its due diligence investigation
of our company as thoroughly as an independent dealer manager or underwriter
would.
Because the dealer manager is an affiliate of our advisor and certain of
our officers and directors are officers, directors or owners of the dealer
manager, you cannot consider the dealer manager's due diligence investigation of
our company to be an independent review. The dealer manager's due diligence
review may not be as meaningful as a review conducted by an unaffiliated broker-
dealer.
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LACK OF INVESTMENT DIVERSIFICATION
A lack of diversity in the properties in which we invest could increase
your risk in investing in our company. To the extent that less than the maximum
amount of this offering is sold, and until the maximum amount of this offering
is sold, we may only be able to purchase one property or a limited number of
properties. In that event, our performance and the return to you as a
shareholder will depend directly on the success of that property or properties.
Adverse conditions at that property or properties or in the location in which
the properties exist would have a direct negative impact on your return as a
shareholder.
ACQUISITION RISKS
Generally
Your investment is subject to the risks attendant to real estate
acquisitions, such as:
. the risk that properties may not perform in accordance with
expectations, including projected occupancy and rental rates;
. the risk that we may have overpaid for properties; and
. the risk that we may have underestimated the cost of improvements
required to bring an acquired property up to standards established for
its intended use or its intended market position.
Our inability to find funding for acquisitions could prevent us from
realizing our objectives and would adversely affect your investment in our
company.
We may not be able to obtain financing to acquire properties, which would
limit the number of properties we could acquire and subject your investment to
further risk. As a REIT, we are required to distribute at least 95% of our
taxable income to our shareholders in each taxable year and thus our ability to
retain internally generated cash is limited. Accordingly, our ability to acquire
properties or to make capital improvements to or remodel properties will depend
on our ability to obtain debt or equity financing from third parties or the
sellers of properties. Other than the net proceeds of this offering, we have not
identified sources of funding for future acquisitions. We cannot assure you that
we will receive any proceeds from our dividend reinvestment program or, if we
do, that such proceeds will be available to acquire properties.
Our potential ownership of single-user retail properties with special
modifications could cause us to incur substantial costs in remarketing and re-
leasing such properties.
We may acquire properties that are designed or built primarily for a
particular tenant or a specific type of use. If we are holding such a property
on the termination of the lease and the tenant fails to renew or if the tenant
defaults on its lease obligations, the property may not be readily marketable to
a new tenant at all or without substantial capital improvements or remodeling.
Such improvements may require the sale of such property at a below-market price
or require expenditure of funds that would otherwise be available for
distribution to you as a shareholder.
Competing for the acquisition of properties with other with superior
financial resources could make it difficult for us to acquire attractive
properties.
We compete for investment opportunities with entities with substantially
greater financial resources. These entities may be able to accept more risk than
we can manage wisely. This competition may limit the number of suitable
investment opportunities offered to us. This competition may also increase the
bargaining power of property owners seeking to sell to us, making it more
difficult for us to acquire properties. In addition, we believe that competition
from entities organized for purposes substantially similar to ours has increased
and may increase in the future.
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JOINT VENTURE ARRANGEMENTS
The joint venture arrangements which we may enter into may not reflect
solely your best interests as a shareholder.
The terms of any joint venture arrangements in which we acquire or hold
properties or other investments may not solely reflect your interests as a
shareholder. We may acquire an interest in a property through a joint venture or
co-ownership arrangement with our advisor, one or more of our advisor's
affiliates or unaffiliated third parties. In joint venture arrangements with our
advisor or its affiliates, our advisor will have fiduciary duties to both our
company and its affiliate participating in the joint venture. The terms of such
joint venture or co-ownership arrangement may be more favorable to the co-owner
than to you as a shareholder of our company.
Such joint venture investments may, under certain circumstances, involve
risks not otherwise present, including, for example, the possibility that our
co-venturer, co-tenant or partner in an investment might become bankrupt, that
such co-venturer, co-tenant or partner may at any time have economic or business
interests or goals which are inconsistent with our business interests or goals,
or that such co-venturer, co-tenant or partner may be in a position to take
action contrary to our instructions or requests or contrary to our company's
policies or objectives. Actions by such a co-venturer, co-tenant or partner
might have the result of subjecting the applicable property to liabilities in
excess of those otherwise contemplated and may have the effect of reducing our
cash available for distribution. It may also be difficult for us to sell our
interest in any such joint venture or partnership or as a co-tenant in such
property.
INSUFFICIENT RESERVES
Insufficient reserves may adversely impact our ability to fund our working
capital needs.
We may not be able to fund our working capital needs. As a REIT, we are
required to distribute at least 95% of our taxable income to our shareholders in
each taxable year. However, we will require a certain amount of capital to fund
our daily operations. Initially, we will not establish any reserves to fund our
working capital needs. We may have to obtain financing from either affiliated or
unaffiliated sources to meet such cash needs. There is no assurance that this
financing will be available or, if available, that the terms will be acceptable
to us.
BORROWINGS MAY INCREASE OUR COMPANY'S BUSINESS RISKS
We will incur indebtedness and the more indebtedness we incur, the more
risky your investment in our company will become.
The riskiness of your investment in our company depends on the amount of
debt we incur. We intend to incur indebtedness in connection with our
acquisition of properties. Under certain circumstances, we may also borrow for
the purpose of maintaining our operations or funding our working capital needs.
Lenders may require restrictions on future borrowings, distributions and
operating policies. We also may incur indebtedness if necessary to satisfy the
federal income tax requirement that we distribute at least 95% of our taxable
income to our shareholders in each taxable year. Borrowing increases our
business risks. Debt service increases the expense of operations since we will
be responsible for retiring the debt and paying the attendant interest, which
may result in decreased cash available for distribution to you as a shareholder.
We anticipate that aggregate borrowings, both secured and unsecured, will not
exceed 60% of the combined fair market values of all of our properties, as
determined at the end of each calendar year beginning in the first full year of
operations, which is expected to be 2000. Many REITs have established a lower
maximum amount of borrowings.
We may incur indebtedness secured by our properties, which may subject our
properties to foreclosure.
Incurring mortgage indebtedness increases the risk of possible loss. Most
of our borrowings to acquire properties will be secured by mortgages on our
properties. If we default on our secured indebtedness, the lender may foreclose
and we could lose our entire investment in the properties securing such loan.
For federal tax purposes, any
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such foreclosure would be treated as a sale of the property for a purchase price
equal to the outstanding balance of the debt secured by the mortgage and, if the
outstanding balance of the debt secured by the mortgage exceeds the basis of the
property to our company, there could be taxable income upon a foreclosure. To
the extent lenders require our company to cross-collateralize its properties, or
its loan agreements contain cross-default provisions, a default under a single
loan agreement could subject multiple properties to foreclosures.
We may incur debt that accrues interest at variable interest rates, which
would increase the amount of our debt payments and adversely affect your
investment in our company.
Adverse economic conditions could result in higher interest rates which
could increase debt service requirements on variable rate debt and could reduce
the amounts available for distribution to you as a shareholder. Adverse economic
conditions could cause the terms on which borrowings become available to be
unfavorable. In such circumstances, if we are in need of capital to repay
indebtedness in accordance with its terms or otherwise, we could be required to
liquidate one or more of our investments in properties at times which may not
permit realization of the maximum return on such investments.
Our use of hedging instruments to reduce the risks of increasing interest
rates may cause us to incur costs if such hedges do not function as intended.
We may employ a hedging strategy to limit the effects of changes in
interest rates on our operations, including engaging in interest rate swaps,
caps, floors and other interest rate exchange contracts. The use of these types
of derivatives to hedge our assets and liabilities carries certain risks,
including the risk that losses on a hedge position will reduce our cash
available for distribution to you as a shareholder and, indeed, that such losses
may exceed the amount invested in such instruments. There is no perfect hedge
and a hedge may not perform its intended use of offsetting losses. Moreover,
with respect to certain of the instruments used as hedges for our assets and
liabilities, we are exposed to the risk that the counterparties to such
investments may cease making markets and quoting prices in such instruments,
which may render us unable to enter into an offsetting transaction with respect
to an open position.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP AND TRANSFER OF OUR
SHARES
The limitation on ownership of our common stock will prevent you from
acquiring more than 9.9% of our stock and may force you to sell stock back to
us.
Our articles of incorporation limit direct and indirect ownership of our
capital stock by any single shareholder to 9.9% of the number of outstanding
shares of our common stock and 9.9% of the number of outstanding shares of our
preferred stock of any class or series. We refer to this limitation as the
ownership limit. Our articles of incorporation also prohibit transfers of our
stock that would result in (1) our capital stock being beneficially owned by
fewer than 100 persons, (2) five or fewer individuals, including natural
persons, private foundations, some employee benefit plans and trusts, and some
charitable trusts, owning more than 50% of our capital stock, applying certain
broad attribution rules under the federal income tax laws, (3) our company
owning 10% or more of one of our tenants, or (4) before our common stock
qualifies as a class of "publicly-offered securities," 25% or more of the common
stock being owned by ERISA investors (see "ERISA Considerations"). If you
acquire shares in excess of the ownership limit or the restrictions on transfer,
we:
. will consider the transfer to be null and void;
. will not reflect the transaction on our books;
. may institute legal action to enjoin the transaction;
. will not pay dividends or other distributions to you with respect to
those excess shares;
. will not recognize your voting rights for those excess shares; and
. will consider the excess shares held in trust for the benefit of a
charitable beneficiary.
You will be paid for such excess shares a price per share equal to the
lesser of the price you paid or the "market price" of our stock.
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If you acquire our stock in violation of the ownership limit or the
restrictions on transfer described above:
. you may lose your power to dispose of the stock;
. you may not recognize profit from the sale of such stock if the
"market price" of the stock increases;
and
. you may incur a loss from the sale of such stock
if the "market price" decreases.
POTENTIAL ANTI-TAKEOVER EFFECTS
Limitations on share ownership and transfer may deter a sale of our
company in which you could profit.
The limits on ownership and transfer of our equity securities in our
articles of incorporation may have the effect of delaying, deferring or
preventing a transaction or a change in control of our company that might
involve a premium price for your common stock or otherwise be in your best
interest as a shareholder. See "Description of Capital Stock--Restrictions on
Ownership and Transfer." The restrictions on transferability and ownership will
continue to apply until our board of directors determines that it is no longer
in our best interest to continue to qualify as a REIT and there is an
affirmative vote of a majority of the votes entitled to be cast on such matter
at a regular or special meeting of our shareholders to terminate our
qualification as a REIT.
Our ability to issue preferred stock may also deter or prevent a sale
of our company.
Our ability to issue preferred stock and other securities without your
approval could also deter or prevent someone from acquiring our company, even if
a change in control were in your best interests as a shareholder. Our articles
of incorporation authorize our board of directors to issue up to 10,000,000
shares of preferred stock. Our board of directors may establish the preferences
and rights of any issued preferred shares designed to prevent, or with the
effect of preventing, someone from acquiring control of our company.
Virginia anti-takeover statutes may deter others from seeking to
acquire our company.
Virginia law contains many provisions that are designed to prevent, or
with the effect of preventing, someone from acquiring control of our company.
These laws may delay or prevent offers to acquire our company and increase the
difficulty of consummating any such offers, even if such a transaction would be
in our shareholders' best interests. See "Certain Provisions of Virginia Law and
Our Company's Articles of Incorporation and Bylaws."
DILUTION
Your investment in our company could be diluted by a number of factors,
including:
. future offerings of our securities, including issuances under our
dividend reinvestment program;
. private issuances of our securities to other investors, including
institutional investors;
. issuances of our securities upon the exercise of warrants,
including the soliciting dealer warrants, and options, including
the director stock options; or
. redemptions of units of limited partnership interest in our
operating partnership in exchange for shares of common stock.
To the extent that you do not participate in any future issuance of our
securities, you will experience dilution of your equity investment in our
company.
RISKS ASSOCIATED WITH NEIGHBORHOOD RETAIL CENTERS
Generally
If we acquire neighborhood retail centers, the following events could
adversely affect our business:
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. the bankruptcy or insolvency, or a downturn in the business, of any
anchor tenant, meaning any tenant generally occupying approximately
30% or more of the gross leasable area of a neighborhood retail
center;
. the bankruptcy or insolvency, or a downturn in the business, of an
anchor tenant at any property;
. the failure of any anchor tenant to renew its lease when it
expires;
. the lease termination by an anchor tenant resulting in lease
terminations or reductions in rent by other tenants whose leases
permit cancellation or rent reduction in the event an anchor
tenant's lease is terminated;
. the transfer by an anchor tenant of its lease to a new anchor
tenant resulting in the decrease of customer traffic in the
neighborhood retail center, the reduction in income generated by
that center and the possibility that other tenants would be
permitted to make reduced rental payments or to terminate their
leases at the center; and
. failure to lease space to tenants other than anchor tenants on
terms which are attractive to the company.
If any of these events were to occur, we could experience substantial
difficulty in re-leasing any vacated space. Moreover, each of these developments
could adversely affect our revenues and our ability to make expected
distributions to you.
Neighborhood retail center leases contain restrictions on re-leasing
space that will make it difficult for us to find tenants for vacant space in
those properties.
We may have difficulty in re-leasing space in neighborhood retail
centers because of the limited number of tenants that would find such lease
attractive. Many, if not all, of our neighborhood retail center leases will
contain provisions giving the tenant the exclusive right to sell certain types
of merchandise or provide certain types of services within that neighborhood
retail center or limiting the ability of other tenants to sell such merchandise
or provide such services. When re-leasing space in a neighborhood retail center
after a vacancy occurs, these "exclusives" will limit the number and types of
prospective tenants for the vacant space.
Competition for tenants and customers may limit the amount of rent we
can charge.
The construction of retail centers in locations competitive with our
neighborhood retail centers could adversely affect our business by causing
increased competition for customer traffic and tenants. This could result in
decreased cash flow for tenants. This may also require us to make capital
improvements to our properties to compete with other retail centers. This
competition could limit the amounts of cash available for distributions to you.
SELLER FINANCING BY OUR COMPANY MAY DELAY LIQUIDATION OR REINVESTMENT
If we liquidate our company, you may experience a delay before
receiving your share of the proceeds of such liquidation. In a forced or
voluntary liquidation, we may sell our properties either subject to or upon the
assumption of any then outstanding mortgage debt or, alternatively, may provide
financing to purchasers upon terms advantageous to us. We may take a purchase
money obligation secured by a mortgage as part payment. We do not have any
limitations or restrictions on our taking such purchase money obligations. To
the extent we receive promissory notes or other property in lieu of cash from
sales, such proceeds, other than any interest payable on those proceeds, will
not be included in net sale proceeds until and to the extent the promissory
notes or other property are actually paid, sold, refinanced or otherwise
disposed of. In many cases, we will receive initial down payments in the year of
sale in an amount less than the selling price and subsequent payments will be
spread over a number of years. Therefore, you may experience a delay in the
distribution of the proceeds of a sale until such time. See "Investment
Objectives and Policies--Sale or Disposition of Properties."
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RISKS OF REAL ESTATE INVESTMENTS
Generally
Our investments in office, industrial, retail and service properties
will be subject to varying degrees of risk that generally arise from the
ownership of real estate. The underlying value of our properties and the income
and ability to make distributions to you depend on the ability of the tenants of
our properties to generate enough income in excess of their operating expenses
to make their lease payments to us. Changes beyond our control may adversely
affect both our income from operations and our ability to make distributions to
you. These changes include, among others, the following:
. changes in national, regional or local economic conditions;
. changes in local market conditions or neighborhood characteristics;
. changes in interest rates and in the availability, costs and terms
of borrowings, including increased new construction of commercial
space of a type which competes with our properties;
. changes in federal, state or local regulations and controls
affecting rents, prices of goods, fuel and energy consumption,
environmental restrictions and other factors affecting real
property; and
. the ongoing need for capital improvements, particularly in older
structures.
Due to these changes or others, tenants and lease guarantors, if any,
may be unable to make their lease payments. A default by a tenant, the failure
of a tenant's guarantor to fulfill its obligations or other premature
termination of a lease could, depending on the size of the leased premises and
our advisor's ability to successfully find a substitute tenant, have a
materially adverse effect on the value of our common stock or our cash available
for distribution to you as a shareholder.
Lack of diversification and liquidity of real estate will make it
difficult for us to sell underperforming properties.
Our business will be subject to risks associated with investment solely
in real estate. Real estate investments are relatively illiquid. Our ability to
vary our portfolio in response to changes in economic and other conditions will
be limited. We cannot assure you that we will be able to dispose of a property
when we want or need to. Consequently, the sale price for any property may not
recoup or exceed the amount of our investment.
Environmental laws governing properties we acquire may cause us to
incur additional costs to comply with such laws.
We may acquire properties that have unknown environmental problems or
develop environmental problems after acquisition that could require substantial
expenditures to remedy. We intend to perform Phase I environmental site
assessments on the properties that we acquire. It is possible that the
assessment on a property may not reveal all of the environmental conditions,
liabilities, or compliance concerns at that property. It is also possible that
material environmental conditions, liabilities or compliance concerns will arise
at a property after we purchase it. In certain circumstances, federal and state
laws impose liability on property owners or operators for the clean-up or
removal of hazardous substances on their properties even if the present owner
did not know of, or was not responsible for, the contamination caused by the
substances. In addition to the costs of clean-up, contamination can affect the
value of a property, our ability to lease and sell the property, and our ability
to borrow funds using the property as collateral. Environmental laws typically
allow the government to place liens for such liabilities against affected
properties, which liens would be senior in priority to other liens. Costs that
we incur to remedy environmental problems would reduce our cash available for
distribution to you as a shareholder.
Compliance with the Americans with Disabilities Act at our properties
may cause us to incur additional costs.
We may acquire properties that are not in compliance with the Americans
with Disabilities Act of 1990. We would be required to pay for improvement to
the properties to effect compliance with the ADA. Under the
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ADA, all public accommodations must meet certain federal requirements related to
access and use by disabled persons. The ADA requirements could require removal
of access barriers and could result in the imposition of fines by the federal
government or an award of damages to private litigants.
Under our net leases, the tenant generally may be responsible for
compliance with the ADA and other laws and regulations and may be required to
indemnify us, as lessor, when the law or regulation places the cost or burden on
the landlord. However, we could be liable for violations of such laws and
regulations to the extent the tenant does not satisfy such indemnification
obligation. State and federal laws in this area are constantly evolving, and
could evolve to place a greater cost or burden on us as landlord of the
properties we acquire.
Losses for which we either could not or did not obtain insurance will
adversely affect our earnings.
We could suffer a loss due to the cost to repair any damage to
properties that are not insured. We generally intend to obtain casualty,
liability, fire and extended insurance coverage that is customary for similar
properties and in amounts that our advisor determines are sufficient to cover
reasonably foreseeable losses. Tenants of our single-user, net leased properties
will provide such insurance for those properties. There are certain types of
losses, generally of a catastrophic nature, such as losses due to wars,
earthquakes or acts of God, that are either uninsurable or not economically
insurable. Some of the properties will be located in areas where there exists a
risk of earthquakes, floods or other acts of God. Generally, we will not obtain
insurance for earthquakes, floods or other acts of God unless required by a
lender or our advisor determines that such insurance is necessary and may be
obtained on a cost-effective basis. If such a catastrophic event were to occur,
or cause 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 Our Leases."
The potential risk of recharacterization of sale and leaseback
transactions, which we may enter into, could cause us to lose properties without
full compensation.
If a seller/lessee in a sale and leaseback transaction in which we are
the buyer/lessor declares bankruptcy, we could suffer a material loss due to
recharacterization of our ownership of that property as financing. We intend to
enter into sale and leaseback transactions, in which we will purchase a property
from an entity and lease such property back to that same entity. In the event of
the bankruptcy of a lessee in a sale leaseback transaction, the trustee in
bankruptcy may seek to recharacterize the transaction as either a financing or
as a joint venture. To the extent the sale and leaseback is treated as a
financing, the lessee may be deemed the owner of the property and we would have
the status of a creditor with respect to the property. We may not be able to
reacquire the property and may not be adequately compensated for our loss of the
property. Sale and leaseback transactions also may be recharacterized as
financings for tax purposes, in which case we would not be allowed depreciation
and other deductions with respect to the property.
Our investments in unimproved real property will take longer to produce
returns and will be riskier than investments in developed property.
Our board of directors has the discretion to invest not more than 10%
of our total assets in other types of property, including land, apartments or
other residential property. In addition to the risks of real estate investments
in general, an investment in unimproved real property is subject to additional
risks, including the expense and delay which may be associated with rezoning the
land for a higher use and the development and environmental concerns of
governmental entities and/or community groups.
TAX RISKS
Generally
There are various federal income tax risks associated with an
investment in our company. Although the provisions of the federal income tax
laws relevant to an investment in our company are described generally in the
section of this prospectus entitled "Federal Income Tax Consequences of Our
Company's Status as a REIT," you are
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strongly urged to consult your tax advisor concerning the effects of the federal
income tax laws on an investment in our company and on your individual tax
situation.
We intend to operate in a manner so as to qualify as a REIT for federal
income tax purposes. Qualifying as a REIT will require us to meet certain tests
regarding the nature of our assets and income on an ongoing basis.
The REIT minimum distribution requirements may require us to borrow to make
required distributions.
In order to qualify as a REIT, we must distribute each calendar year to
our shareholders at least 95% of our taxable income, other than any net capital
gain. To the extent that we distribute at least 95%, but less than 100%, of our
taxable income in a calendar year, we will incur federal corporate income tax on
our undistributed taxable income. In addition, we will incur a 4% nondeductible
excise tax if the actual amount we distribute to our shareholders in a calendar
year is less than a minimum amount specified under federal income tax law. See
"Federal Income Tax Consequences of Our Company's Status as a REIT--Requirements
for Qualification--Distribution Requirements." We intend to distribute all of
our taxable income to our shareholders each year so that we will satisfy the 95%
test and avoid corporate income tax and the 4% excise tax. However, we could be
required to include earnings in our taxable income before we actually receive
the related cash. That timing difference could require us to borrow funds to
meet the 95% test and avoid corporate income tax and the 4% excise tax in a
particular year.
Our failure to qualify as a REIT would subject us to corporate income
tax and would materially impact our earnings.
If we fail to qualify as a REIT in any year, we would pay federal
income tax on our taxable income. We might need to borrow money or sell assets
to pay that tax. Our payment of income tax would decrease the amount of our
income available to be distributed to our shareholders. In addition, we no
longer would be required to distribute substantially all of our taxable income
to our shareholders. Unless our failure to qualify as a REIT is excused under
federal income tax laws, we could not re-elect REIT status until the fifth
calendar year following the year in which we fail to qualify. See "Federal
Income Tax Consequences of Our Company's Status as a REIT--Failure to Qualify."
ERISA RISKS
Our common stock may not be a suitable investment for qualified pension
and profit-sharing trusts.
When considering an investment in our company with a portion of the
assets of a qualified pension or profit-sharing trust, you should consider:
. whether the investment satisfies the diversification requirements
of the Employee Retirement Income Security Act of 1974 ("ERISA"),
or other applicable restrictions imposed by ERISA; and
. whether the investment is prudent and suitable, since we anticipate
that initially there will be no market in which you can sell or
otherwise dispose of our shares.
We have not evaluated, and will not evaluate, whether an investment in
our company is suitable for any particular employee benefit plan, but, subject
to restrictions described in "ERISA Considerations," we will accept such
entities as shareholders if an entity otherwise meets the suitability standards.
If we are considered a "pension-held REIT," an investment in our
company may produce unrelated business taxable income for a qualified pension or
profit sharing trust, which may cause a qualified pension or profit sharing
trust holding 10% or more of our stock to pay federal income tax on a portion of
the distributions it receives from us. See "Federal Income Tax Consequences of
Our Company's Status as a REIT--Taxation of Tax-Exempt Shareholders."
In addition to considering their fiduciary responsibilities under ERISA
and the prohibited transaction rules of ERISA and the federal tax laws, advisors
to employee benefit plans should also consider the effect of the "plan asset"
regulations issued by the Department of Labor. To avoid being subject to those
regulations, our articles of
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incorporation prohibit ERISA investors from owning 25% or more of our common
stock prior to the time that the common stock qualifies as a class of "publicly-
offered securities." See "ERISA Considerations."
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INVESTOR SUITABILITY STANDARDS
An investment in our company involves significant risk. An investment
in our common stock is suitable only for persons who have adequate financial
means and desire a relatively long-term investment with respect to which they do
not anticipate any need for immediate liquidity.
We intend to offer our shares for sale to the residents of Alabama,
Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New
Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania,
Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia,
Washington, West Virginia, Wisconsin and Wyoming. We refer to these states as
the sales states.
Some of our sales states may have established suitability standards
that are less rigorous than those described in this prospectus. We reserve the
right to sell to investors in those states that meet such state's suitability
standards but may not necessarily meet our suitability standards described in
this prospectus. On the other hand, some of our sales states have established
suitability standards for individual investors and subsequent transferees that
are more rigorous than those set by our company. We must adhere to those state
standards when selling to investors in such states.
If you are an individual, including an individual beneficiary of a
purchasing Individual Retirement Account, or if you are a fiduciary, such as a
trustee of a trust or corporate pension or profit sharing plan, or other tax-
exempt organization, or a custodian under a Uniform Gifts to Minors Act, you
must represent that you meet certain investor suitability standards, as set
forth in the Subscription Agreement attached as Exhibit B to this prospectus,
including the following:
(1) that you or, in the case of a fiduciary, that the fiduciary account
or the donor who directly or indirectly supplies the funds to
purchase our common stock have a minimum annual gross income of
$45,000 and a net worth of not less than $45,000; or
(2) that you or, in the case of a fiduciary, that the fiduciary account
or the donor who directly or indirectly supplies the funds to
purchase our common stock have a net worth of not less than
$150,000.
Net worth in all cases excludes home, furnishings and automobiles.
The minimum purchase is 100 shares of our common stock ($1,000). We
will not permit transfers of less than the minimum required purchase. Only in
very limited circumstances may you transfer, fractionalize or subdivide such
shares so as to retain less than the minimum number of our shares. For purposes
of satisfying the minimum investment requirement for our retirement plans,
unless otherwise prohibited by state law, a husband and wife may jointly
contribute funds from their separate IRAs provided that each such contribution
is made in increments of at least $100. However, please note that your
investment in our company will not, in itself, create a retirement plan for you
and that, in order to create a retirement plan, you must comply with all
applicable provisions of the federal income tax laws. After you have purchased
the minimum investment, any additional investments must be made in increments of
at least 10 shares of our common stock ($100), except for purchases of shares
under the dividend reinvestment program, which may be in lesser amounts.
In order to assure adherence to the suitability standards described
above, requisite suitability standards must be met as set forth in the
Subscription Agreement, including the Subscription Agreement Signature Page,
which is attached as Exhibit B to this prospectus. We and each person selling
common stock on our behalf are required to (1) make reasonable efforts to assure
that each person purchasing our common stock is suitable in light of such
person's age, educational level, knowledge of investments, financial means and
other pertinent factors and (2) maintain records for at least six years of the
information used to determine that an investment in our common stock is suitable
and appropriate for each investor. Our agreements with the selling broker-
dealers require such broker-dealers to (1) make inquiries diligently as required
by law of all prospective investors in order to ascertain whether an
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investment in our company is suitable for the investor and (2) transmit promptly
to us all fully completed and duly executed Subscription Agreements.
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ESTIMATED USE OF PROCEEDS OF THIS OFFERING
This prospectus relates to the offering of a minimum of 100,000 shares
and a maximum of 10,000,000 shares of our common stock on a best efforts basis.
In addition, we may issue up to 700,000 shares to our shareholders under our
dividend reinvestment program, up to 250,000 shares upon exercise of warrants
issued to broker-dealers in connection with this offering, and up to 100,000
shares under our director stock option plan. The dealer manager, Cunningham
Capital Corp., will assist us in selling our common stock. We will contribute
the net proceeds of the sale of any common stock we offer under this prospectus
to our operating partnership in return for 100% of the initial interests in our
operating partnership, other than our advisor's incentive limited partnership
interest. Our operating partnership will use the net proceeds to purchase
suitable properties and to repay debt that we may assume when acquiring
properties in exchange for units of limited partnership interest in our
operating partnership and to pay the amounts due to our advisor and the dealer
manager.
We will compensate the dealer manager for its services in the manner
described in "Compensation Table." The dealer manager will seek the assistance
of other broker-dealers in selling our common stock and may reallow some of the
consideration it receives to such broker-dealers.
The following table sets forth information concerning the estimated use
of the gross proceeds of this offering. Many of the figures set forth below
represent our best estimate since they cannot be precisely calculated at this
time.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING(1)
---------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Gross Offering Proceeds (2) $ 1,000,000 100% $ 100,000,000 100%
Less Public Offering Expenses:
Selling Commissions (3) 80,000 8% 8,000,000 8%
Marketing Support and Due Diligence
Reimbursement Fee (3) 15,000 1.5% 1,500,000 1.5%
Other Organizational and Offering Expenses(4) 25,000 2.5% 2,500,000 2.5%
Total Offering Expenses 120,000 12% 12,000,000 12%
-------------- --------- --------------- ---------
Net Proceeds to Company $ 880,000 88% $ 88,000,000 88%
-------------- --------- --------------- ---------
Acquisition Fee (4) 40,000 4% 4,000,000 4%
-------------- --------- --------------- ---------
Amount Available for Investment in Properties (5) $ 840,000 84% $ 84,000,000 84%
============== ========= =============== =========
</TABLE>
- -------------------------
(1) Excludes up to 700,000 shares that may be issued under our dividend
reinvestment program, up to 250,000 shares that may be issued under the
exercise of Soliciting Dealer Warrants, and up to 100,000 shares that
may be issued under our director stock option plan.
(2) The amounts shown for Gross Offering Proceeds do not reflect the
possible discounts in commissions and other fees as described in "Plan
of Distribution."
(3) Our company will pay the dealer manager Selling Commissions equal to 8%
of the Gross Offering Proceeds and one Soliciting Dealer Warrant for
every 40 shares sold, all or part of which compensation may be retained
or reallowed to soliciting dealers. The dealer manager will also
receive the Marketing Support and Due Diligence Reimbursement Fee of up
to 1.5% of the Gross Offering Proceeds, some portion of which may be
reallowed to soliciting dealers. This category of expense is intended
to pay or reimburse, on a nonaccountable basis, amounts attributable to
marketing and due diligence expenses. Certain volume discounts may be
given on orders of 25,000 shares or more and soliciting dealers may, in
their discretion, request that we pay them less than the maximum
permitted compensation for the sale of shares; however, such discounts
will not affect the amount of proceeds to our company. See "Plan of
Distribution." No Selling Commissions or the Marketing Support and Due
Diligence Reimbursement Fee will be paid on any shares purchased by our
advisor, the dealer manager, soliciting dealers or their affiliates and
certain other persons. Any shares purchased by our advisor or its
affiliates will be for investment purposes only and not with a view
toward resale. Shares purchased or issued under the dividend
reinvestment program or director
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stock plan or issued upon exercise of Soliciting Dealer Warrants will
not be subject to Selling Commissions or the Marketing Support and Due
Diligence Reimbursement Fee. See "Dividend Reinvestment Program."
(4) These amounts are our advisor's best estimates of the legal,
accounting, printing and other offering expenses, including amounts for
the reimbursement of our advisor for marketing, salaries and direct
expenses of its employees while directly engaged in marketing the
shares and other marketing and organization expenses. Our company will
pay an Acquisition Fee to our advisor in connection with the
acquisition of properties equal to 4% of the gross proceeds of this
offering.
(5) We estimate that approximately 84.00% of the gross proceeds of this
offering will be invested in properties. However, from this amount we
will pay legal fees and expenses, travel and communication expenses,
costs of appraisals, nonrefundable option payments accounting fees and
expenses, title insurance premiums and other closing costs and
miscellaneous expenses relating to the selection and acquisition of
properties which we estimate will be approximately 0.5% of the gross
offering proceeds. For a complete description of fees paid to our
advisor and its affiliates, see "Compensation Table."
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OUR COMPANY
T REIT, Inc. is a recently formed Virginia corporation that intends to
qualify as a real estate investment trust for federal income tax purposes. As of
the date of this prospectus, we do not own any properties but anticipate
acquiring properties with the net proceeds of this offering. We intend to invest
in office, industrial, retail and service properties primarily in designated
states throughout the United States. We may acquire neighborhood retail centers,
which are properties designed for lease to one or more retail tenants that focus
primarily on the sale of consumer goods and services to the immediate
neighborhood. We may lease our properties to tenants under net leases. We may
acquire retail and office properties in sale and leaseback transactions in which
creditworthy tenants enter into net leases with our company.
We plan to acquire properties primarily in the fifteen focus states,
which are Alaska, Florida, Iowa, Michigan, Minnesota, Nevada, North Carolina,
South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin
and Wyoming. However, we may decide to acquire properties in other states.
We will conduct business and own properties through our operating
partnership, T REIT Operating Partnership, L.P. We will be the sole general
partner of our operating partnership and will have control over the affairs of
our operating partnership. We will contribute the net proceeds of this offering
to our operating partnership in exchange for 100% of the initial capital and
profits interests in our operating partnership, other than the incentive limited
partnership interest owned by our advisor. That incentive limited partnership
interest will generally entitle our advisor to 15% of the operating cash flow of
our operating partnership after we receive (1) an 8% return on our capital
invested in our operating partnership, and (2) any shortfall in the recovery of
our invested capital with respect to prior sales of properties. In addition, the
incentive limited partnership interest will entitle our advisor to receive 15%
of the net proceeds from a sale of a property in excess of (1) the amount of our
capital invested in our operating partnership that is allocable to that
property, plus any shortfall in the recovery of our invested capital with
respect to prior sales of properties, and (2) any remaining shortfall in our 8%
return. See "Agreement of Limited Partnership--Incentive Units." In the future,
our operating partnership may issue units of limited partnership interest in
exchange for suitable properties. Our operating partnership will use the net
proceeds of this offering to purchase suitable properties and to repay debt
secured by properties contributed to it in exchange for units of limited
partnership interest. See "Investment Objectives and Policies."
Our day to day operations will be managed by our affiliated advisor,
Triple Net Properties, LLC, under an advisory agreement. Our affiliated advisor
was formed in April of 1998 to serve as an asset and property manager for real
estate investment trusts, syndicated real estate limited partnerships and
limited liability companies and similar real estate entities. See "Our
Affiliated Advisor."
In addition to our company, our advisor currently also serves as an
advisor to four entities that invest in various types of real estate with
respect to the acquisition, management and disposition of their properties,
including Western REIT. Western REIT owns, acquires and develops properties
substantially similar to the properties that our company intends to own, acquire
and develop. However, Western REIT does not currently own and is not currently
developing properties in our focus states. We do not intend to own, acquire or
develop properties in states in which Western REIT currently owns or is
developing properties.
INVESTMENT OBJECTIVES AND POLICIES
TYPES OF INVESTMENTS
We intend to acquire office, industrial, retail and service properties,
including neighborhood retail centers and single-user properties leased by
generally creditworthy tenants under net leases. We may enter into sale and
leaseback transactions, under which we will purchase a property from an entity
and lease the property back to such entity under a net lease.
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"Net" leases typically require that tenants pay all or a majority of
the operating expenses, including real estate taxes, special assessments and
sales and use taxes, utilities, insurance and building repairs related to the
property, in addition to the lease payments. We expect that most of our leases
will be long-term (typically 10 to 15 years, but generally not less than 5
years) and may provide for a base minimum annual rent with periodic increases.
We consider a tenant to be creditworthy when it has a minimum net worth equal to
ten times one year's rental payments required under the terms of the lease or,
alternatively, a guarantor for its payments under the lease with a minimum net
worth of $10 million.
A majority of properties acquired will be at least 75% leased on the
acquisition date. We may acquire certain properties free and clear of permanent
mortgage indebtedness by paying the entire purchase price for such property in
cash or in units of limited partnership interest in our operating partnership.
However, when we think it is prudent, we will incur indebtedness to acquire
properties. On properties purchased on an all-cash basis, we may later incur
mortgage indebtedness by obtaining loans secured by selected properties, if
favorable financing terms are available. The proceeds from such loans would be
used to acquire additional properties and increase our cash flow. We do not
intend to incur indebtedness in excess of 60% of the aggregate fair market value
of all our properties, as determined at the end of each calendar year beginning
with our first full year of operations.
Our affiliated advisor and its affiliates may purchase properties in
their own name, assume loans in connection with the purchase of properties and
temporarily hold title to such properties for the purpose of facilitating the
acquisition of such property, borrowing money or obtaining financing, completing
construction of the property or for any other purpose related to our business.
OUR ACQUISITION STANDARDS
We believe, based on our advisor's prior real estate experience, that
we have the ability to identify quality properties capable of meeting our
investment objectives. In evaluating potential acquisitions, we will consider a
number of factors, including a property's:
. geographic location and type;
. construction quality and condition;
. current and projected cash flow;
. potential for capital appreciation;
. lease terms and 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;
. 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.
PROPERTY ACQUISITION
We anticipate acquiring fee simple and tenancy-in-common interests in
real property and real property subject to long-term ground leases, although
other methods of acquiring a property may be used when we consider 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 wholly owned subsidiaries of our
operating partnership to acquire properties. Such wholly owned subsidiaries will
be formed solely for the purpose of acquiring and/or financing a property or
properties. See "--Joint Ventures."
In some cases, we may commit to purchase properties subject to
completion of construction in accordance with terms and conditions specified by
our advisor. In such cases, we will be obligated to purchase the property at the
completion of construction, provided that (1) the construction conforms to
definitive plans, specifications and
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costs approved by us in advance and embodied in the construction contract and
(2) 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 currently do not
intend to construct or develop properties, or render any services in connection
with such development or construction.
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. Such amount will be based on the estimated cost
of such remodeling. In such instances, we will also have the right to review the
lessee's books during and following completion of the remodeling to verify
actual costs. In the event of substantial disparity between estimated and actual
costs, an adjustment in purchase price may be negotiated. If remodeling is
required after the purchase of a property, our advisor or an affiliate may serve
as construction manager for a fee no greater than the fee a third party would
charge for such services.
DESCRIPTION OF OUR LEASES
We anticipate that many of our leases will be net leases with terms
generally not less than five years, but typically ten to fifteen years. The
leases with anchor tenants or tenants in single tenant properties or tenants
occupying the largest percentage and more than 30% of the rentable space in any
property will generally have initial term of five to fifteen years, with one or
more options to renew available to the lessee upon expiration of the initial
term. By contrast, our smaller tenant leases will typically be for three to five
year terms. Under our net leases, the tenant will pay us a predetermined minimum
annual rent with, in some cases, particularly neighborhood retail centers,
percentage rent if sales exceed certain predetermined levels. Some of our leases
also will contain provisions that increase the amount of base rent payable at
certain points during the lease term and/or provide for the payment of
additional rent calculated as a percentage of a tenant's gross sales above
predetermined thresholds.
We anticipate that our tenants generally will be required to pay a
share, either pro rata or fixed, of the real estate taxes, insurance, utilities
and common area maintenance charges associated with the properties. We will
require that each net lease tenant pay its share of the cost of the liability
insurance covering the properties owned by our operating partnership or provide
such coverage. The third party liability coverage will insure, among others, our
operating partnership and our advisor. We will also require that each tenant
obtain, at its own expense, property insurance naming our operating partnership
as the insured party for fire and other casualty losses in an amount equal to
the full value of such property. All such insurance must be approved by our
advisor. In general, the net lease may be assigned or subleased with our
operating partnership's prior written consent, but the original tenant will
remain fully liable under the lease unless the assignee meets certain income and
net worth tests.
OUR OPERATING PARTNERSHIP
We will conduct our business and own properties through our operating
partnership. Our operating partnership will be governed by its Agreement of
Limited Partnership, a copy of which may be obtained from us. As the sole
general partner of our operating partnership, we will have control over the
affairs of our operating partnership. We will delegate to our advisor the
management of the day-to-day affairs of our operating partnership. We will
contribute the net proceeds of this offering to our operating partnership in
return for 100% of the initial capital and profits interest in our operating
partnership, other than our advisor's incentive limited partnership interest
that entitles it to share in operating cash flow and property sale proceeds
above a threshold return to the company. See "Agreement of Limited Partnership--
Incentive Units." Our operating partnership may issue additional units of
limited partnership interest in the future in exchange for properties. The
holders of these units will have the right to redeem their units for cash or
shares of common stock on terms set forth in the Agreement of Limited
Partnership. See "Agreement of Limited Partnership." Our operating partnership
will use the net proceeds to purchase suitable properties and may use a portion
of the net proceeds to repay debt secured by properties contributed to our
operating partnership in exchange for units of limited partnership interest.
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OUR POLICIES WITH RESPECT TO BORROWING
When we think it is appropriate, we will borrow funds to acquire or
finance properties. We may later refinance or increase mortgage indebtedness by
obtaining additional loans secured by selected properties, if favorable
financing terms are available. We will use the proceeds from such loans to
acquire additional properties for the purpose of increasing our cash flow and
providing further diversification. We anticipate that aggregate borrowings, both
secured and unsecured, will not exceed 60% of all of our properties' combined
fair market values, as determined at the end of each calendar year beginning
with the first full year of operation. In addition, we anticipate that no
property will be encumbered by secured indebtedness or financed by unsecured
indebtedness in excess of 80% of its fair market value. We may also incur
indebtedness to finance improvements to properties and, if necessary, for
working capital needs or to meet the distribution requirements applicable to
REITs under the federal income tax laws.
When incurring secured debt, we generally intend to incur only
nonrecourse indebtedness, which means that the lenders' rights on our default
generally will be limited to foreclosure on the property that secured the
obligation. If we incur mortgage indebtedness, we will endeavor to obtain level
payment financing, meaning that the amount of debt service payable would be
substantially the same each year, although some mortgages are likely to provide
for one large payment.
Our board of directors controls our policies with respect to borrowing
and may change such policies at any time without a vote of the shareholders.
SALE OR DISPOSITION OF PROPERTIES
Our affiliated advisor and our board of directors will determine
whether a particular property should be sold or otherwise disposed of after
consideration of relevant factors, including performance or projected
performance of the property and market conditions, with a view toward achieving
our principal investment objectives.
In general, we intend to hold properties, prior to sale, for a minimum
of four years. See "Federal Income Tax Consequences of Our Company's Status as a
REIT--Requirements for Qualification--Income Tests." We intend to structure the
sale of certain properties as "like-kind exchanges" under the federal income tax
laws so that we may acquire qualifying like-kind replacement properties meeting
our investment objectives without recognizing taxable gain on the sale.
Furthermore, our general policy will be to reinvest into additional properties
proceeds from the sale, financing, refinancing or other disposition of our
properties that represent our initial investment in such property or,
secondarily, to use such proceeds for the maintenance or repair of existing
properties or to increase our reserves for such purposes. The objective of
reinvesting such portion of the sale, financing and refinancing proceeds is to
increase the total value of real estate assets that we own, and the cash flow
derived from such assets.
Despite this policy, our board of directors, in its discretion, may
distribute to our shareholders all or a portion of the proceeds from the sale,
financing, refinancing or other disposition of properties. In determining
whether any of such proceeds should be distributed to our shareholders, our
board of directors will consider, among other factors, the desirability of
properties available for purchase, real estate market conditions and compliance
with the REIT distribution requirements. Because we may reinvest such portion of
the proceeds from the sale, financing or refinancing of our properties, we could
hold our shareholders' capital indefinitely. However, the affirmative vote of
shareholders controlling a majority of our outstanding shares of common stock
may force us to liquidate our assets and dissolve. See "Certain Provisions of
Virginia Law and Our Company's Articles of Incorporation and Bylaws."
In connection with a sale of a property, our general preference will be
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. There are
no limitations or restrictions on our taking such purchase money obligations.
The terms of payment upon sale will be affected by custom in the area in which
the property being sold is located and the then prevailing economic conditions.
To the extent we receive notes, securities or other property instead of cash
from sales, such proceeds, other than any interest payable on such proceeds,
will not be included in net sale proceeds until and to the extent the notes or
other property are actually paid, sold, refinanced or otherwise disposed of.
Thus, the distribution
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of the proceeds of a sale to you as a shareholder, to the extent contemplated by
our board of directors, may be delayed until such time. In such cases, we will
receive payments in the year of sale in an amount less than the selling price
and subsequent payments will be spread over a number of years.
OUR LONG TERM INVESTMENT OBJECTIVE
Our long term investment objective is to provide you, the shareholder,
with liquidity with respect to your investment by either having our common stock
listed on a national stock exchange or quoted on a quotation system of a
national securities association or merging with an entity whose shares are so
listed or quoted. If we have not accomplished one of these objectives on or
before the tenth anniversary of the date of this prospectus, we intend to submit
for a vote of the shareholders at the next annual meeting a proposal to
liquidate all of our properties in an orderly fashion and distribute the
proceeds to our shareholders. We shall at that time submit to a vote of our
shareholders a proposal to liquidate the company by selling the properties in an
orderly fashion or continue operations.
CHANGES IN OUR INVESTMENT OBJECTIVES
Our principal investment objectives are generally to invest, through
our operating partnership, in office, industrial, retail and service properties
(and certain other kinds of properties described in "Certain Investment
Limitations" below). Our shareholders have no voting rights with respect to
implementing our investment objectives and policies, all of which are the
responsibility of our board of directors and may be changed at any time.
INVESTMENT LIMITATIONS
We do not intend to:
. invest more than 10% of our total assets in unimproved real
property, apartments, other residential property and real estate
investments not contemplated herein;
. invest in commodities or commodity future contracts, except for
interest rate futures contracts used solely for purposes of hedging
against changes in interest rates; or
. operate in such a manner as to be classified as an "investment
company" for purposes of the Investment Company Act of 1940.
In addition, we have adopted the following investment policies:
Investments in Mortgages. We will not make or invest in mortgage loans
unless we obtain an appraisal from an independent certified appraiser concerning
the underlying property. The aggregate amount of mortgage indebtedness on any
such property shall not exceed an amount equal to 90% of the property's
appraised value unless we find substantial justification due to the presence of
other underwriting criteria. In no event will we invest in mortgage loans that
exceed the appraised value of the property as of the date of the loans. In
addition to the appraisal, we will obtain 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.
We will not make or invest in any mortgage loans that are subordinate
to any mortgage or equity interest of our advisor, any director or any of their
affiliates.
We will not invest in subordinated secured indebtedness except where
the amount of total indebtedness secured by that property does not exceed 90% of
the appraised value of such property. In addition, the value of all such
investments, as shown on their books in accordance with generally accepted
accounting principles, after all reasonable reserves but before provision for
depreciation, will not exceed 5% of our total assets.
Investment in Securities. We will not invest in equity securities of
another entity, other than our operating partnership or a wholly owned
subsidiary, unless a majority of the directors not otherwise interested in such
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transaction approves the investment as being fair, competitive and commercially
reasonable. Investments in entities affiliated with our advisor, any officer,
director or affiliates must be approved by a majority of independent directors.
We may purchase our own securities, when traded on a secondary market or on a
national securities exchange or market, if a majority of the directors determine
such purchase to be in our best interests. We will not invest in the securities
of other entities for the purpose of exercising control over that entity.
To the extent we invest in real property acquired from an affiliate, a
majority of our directors, including a majority of the independent directors,
must determine the consideration paid for such real property. Such consideration
shall not exceed the fair market value of the property, as evidenced by an
appraisal by a qualified independent real estate appraiser selected by the
independent directors.
We will not engage in trading, as opposed to investment, activities.
We will not engage in underwriting or the agency distribution of
securities issued by others.
Our shareholders have no voting rights with respect to our investment
limitations, all of which are the responsibility of our board of directors and
may be changed at any time.
APPRAISALS
At least 75% of the real estate properties that we will acquire will be
appraised by a competent, independent appraiser who is a member-in-good-standing
of the American Institute of Real Estate Appraisers or similar national or
regional organization. The purchase price of each property generally will not
exceed its appraised value. It should be noted, however, that appraisals are
estimates of value and should not be relied on as measures of true worth or
realizable value.
JOINT VENTURES
We may invest in general partnership, co-ownership and joint venture
arrangements with other real estate programs formed by, sponsored by or
affiliated with our advisor or an affiliate of our advisor if a majority of our
independent directors who are not otherwise interested in the transaction
approve the transaction as being fair and reasonable to our company and our
shareholders. We may so invest with nonaffiliated third parties by following the
general procedures to obtain approval of an acquisition.
We will invest in general partnerships, co-ownership or joint venture
arrangements with our advisor and its affiliates only when:
. there are no duplicate property management or other fees;
. the investment of each entity is on substantially the same terms and
conditions; and
. we have a right of first refusal if our advisor or its affiliates
wish to sell its interest in the property held in such arrangement.
We may invest in general partnerships or joint venture arrangements
with our advisor and its affiliates as co-owners of a property to allow us to
increase our equity participation in such venture as additional proceeds of this
offering are received, with the result that we will end up owning a larger
equity percentage of the property. In addition, we will have the right to enter
into co-ownership and joint venture arrangements with entities unaffiliated with
our advisor and its affiliates.
You should note that there is a potential risk that our company and the
co-owner or its joint venture partner will be unable to agree on a matter
material to the joint venture on joint venture decisions and we may not control
the decision. Furthermore, we cannot assure you that we will have sufficient
financial resources to exercise any right of first refusal. See "Risk Factors--
Joint Venture Arrangements."
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OTHER POLICIES
In determining whether to purchase a particular property, we may first
obtain an option to purchase such property. We may forfeit the amount paid for
the option, if any, if the property is not purchased.
Assuming the maximum offering is sold, we generally do not intend to
invest more than 20% of the gross proceeds of this offering in any one property,
although we may do so with the approval of a majority of our board of directors.
We will hold all funds, pending investment in properties, in readily
marketable, interest-bearing securities which will allow us to continue to
qualify as a REIT. Such investments will be highly liquid and provide for
appropriate safety of principal and may include, but will not be limited to,
investments such as Government National Mortgage Association certificates, U.S.
government bonds, CDs, time deposits and other government securities. See
"Federal Income Tax Consequences of Our Company's Status as a REIT--Requirements
for Qualification."
We do not intend to make distributions-in-kind, except for:
. distributions of beneficial interest in a liquidating trust
established for the dissolution of our company and the liquidation
of our assets in accordance with the terms of the Virginia Stock
Corporation Act; or
. distributions of property which meet all of the following
conditions:
. our board of directors advises each shareholder of the risks
associated with direct ownership of the property;
. our board of directors offers each shareholder the election of
receiving in-kind property distributions; and
. our board of directors distributes in-kind property only to those
shareholders who accept the directors' offer.
INVESTING IN TAX-FREE STATES
We initially intend to invest in properties located in our focus states
listed elsewhere in this prospectus. We will invest a portion of the net
proceeds of this offering in states that have eliminated state income taxes.
These states include Florida, Nevada, South Dakota, Tennessee, Texas,
Washington, and Wyoming. We believe that we can profit by investing in these
"tax-free" states because of the general high rate of job and economic growth in
these states. In addition, we believe that the economies of these states are
benefited by the influx of retiring baby boomers who are looking for a tax
friendly state in which to retire, where their pensions and investments will not
be subjected to state income tax.
Below is an analysis we have prepared showing long-term economic growth
of certain states with and without state income taxes. As summarized in the
analysis, states without an income tax generally have experienced greater
employment growth than states with income taxes. For example, Nevada, a state
without income taxes, has experienced a 4.7% annual increase in employment,
while Arizona, a state with an income tax, experienced only a 3.8% annual job
growth, even though both states are located in the same general region. We
believe that we will have a competitive advantage by investing a portion of the
net proceeds of this offering in the tax-free states, which are experiencing
employment gains in excess of the national average. Also, we believe that these
states will experience greater than average economic growth, with the resulting
need for office, industrial, retail and service properties.
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ANALYSIS OF LONG-TERM ECONOMIC GROWTH OF STATES WITHOUT STATE INCOME TAXES
(INCLUDING COMPARISON WITH SELECTED STATES WITH STATE INCOME TAXES)
<TABLE>
<CAPTION>
1998 Per
Capita State
& Local
---------------------------------- ----------------------
State Taxes as a Employment (000's) Annual Change
---------------------------------- ----------------------
Income % of 1978-97 Change Percent
Tax(1) Income(2) 1978(3) 1997(3) Change (000's) Change
- ---------------------------------- ---------- -------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES 11.4% 96,089 129,518 33,429 1,759 1.6%
LARGE SUNBELT STATES:
Florida No 10.6% 3,684 6,768 3,084 162 3.3%
Texas No 10.5% 5,920 9,350 3,430 181 2.4%
California Yes 12.0% 10,137 14,965 4,828 254 2.1%
SMALL SOUTHWESTERN STATES:
Nevada No 11.3% 357 847 490 26 4.7%
Arizona Yes 11.0% 1,010 2,065 1,055 56 3.8%
NORTHWESTERN STATES:
Washington No 11.8% 1,684 2,846 1,162 61 2.8%
Oregon Yes 11.2% 1,149 1,631 482 25 1.9%
SMALL MIDWESTERN STATES:
South Dakota No 10.6% 318 381 63 3 1.0%
Nebraska Yes 11.5% 742 883 141 7 0.9%
OTHER STATES:
Alaska No 6.1% 162 291 129 7 3.1%
Wyoming No 7.9% 203 238 35 2 8.0%
- -------------------------
</TABLE>
(1) Source: 1997 State Tax Handbook (All States) (Research Institute of
America).
(2) Source: The Tax Foundation, Washington, D.C.
(http://www.taxfoundation.org).
(3) Source: U.S. Bureau of Labor Statistics (see
http://recenter.tamm.edu).
DISTRIBUTION POLICY
We intend to pay regular monthly distributions to our shareholders out
of our cash available for distribution, in an amount determined by our board of
directors. However, we reserve the right, at any time, instead to pay
distributions on a quarterly basis. The commencement and continuation of
distributions and the size of the distributions will depend upon a variety of
factors, including:
. our cash available for distribution;
. our overall financial condition;
. our capital requirements;
. the annual distribution requirements application to REITs under the
federal income tax laws (see "Federal Income Tax Consequences of Our
Company's Status as a REIT--Requirements for Qualification--
Distribution Requirements"); and
. such other considerations as our board of directors deems relevant.
We cannot assure you that we will make distributions.
In order to qualify as a REIT for federal income tax purposes, among
other things, we must distribute each taxable year at least 95% of our taxable
income, other than net capital gain. See "Federal Income Tax Consequences of Our
Company's Status as a REIT--Requirements for Qualification--Distribution
Requirements."
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We will have a policy of avoiding, to the extent possible, the fluctuations
in distributions that might result if distributions were based on actual cash
received during the distribution period. To implement this policy, we may use
cash received during prior periods or cash received subsequent to the
distribution period and prior to the payment date for such distribution, to pay
annualized distributions consistent with the distribution level established from
time to time by our board of directors. Our ability to maintain this policy will
depend upon the availability of cash flow and applicable requirements for
qualification as a REIT under the federal income tax laws. Therefore, we cannot
assure you that there will be cash flow available to pay distributions or that
distributions will not fluctuate. If cash available for distribution is
insufficient to pay such distributions to you as a shareholder, we may obtain
the necessary funds by borrowing, issuing new securities or selling assets.
These methods of obtaining funds could affect future distributions by increasing
operating costs.
To the extent that distributions to our shareholders are made out of our
current or accumulated earnings and profits, such distributions will be taxable
as ordinary dividend income. To the extent that our distributions exceed our
current and accumulated earnings and profits, such amounts will constitute a
return of capital to our shareholders for federal income tax purposes, to the
extent of their basis in their stock, and thereafter will constitute capital
gain.
Monthly distributions will be calculated with daily record and distribution
declaration dates. However, our board of directors could, at any time, elect to
pay distributions quarterly to reduce administrative costs. It will be our
company's general policy, subject to applicable REIT rules, to reinvest proceeds
from the sale, financing, refinancing or other disposition of our properties
through the purchase of additional properties, although we cannot assure you
that we will be able to do so. See "Investment Objectives and Policies--Sale or
Disposition of Properties."
MANAGEMENT OF OUR COMPANY
GENERAL
We operate under the direction of our board of directors, which is
responsible for the overall management and control of our affairs. However, our
board of directors has retained our advisor to manage our day-to-day affairs,
subject to our board of directors' supervision. Under the Virginia Stock
Corporation Act, each director is required to discharge his duties in accordance
with his good faith business judgment of our best interest. Our board of
directors is currently comprised of five individuals, three of whom are
independent directors. See "Certain Provisions of Virginia Law and Our Company's
Articles of Incorporation and Bylaws." We consider a director to be independent
if he or she is not, and has not been in the last two years, (1) an officer or
employee of our company, our advisor, the dealer manager or any affiliate of
those entities or (2) an owner of greater than 10% of the outstanding equity
interests in our company, our advisor, the dealer manager or any affiliates of
those entities.
The independent directors shall determine from time to time, but at least
annually, that the compensation that we contract to pay to our advisor is
reasonable in relation to the nature and quality of the services performed and
that such compensation is within the limits prescribed by any applicable state
regulatory authorities. The independent directors shall also supervise the
performance of our advisor and the compensation paid to it to determine that the
provisions of the advisory agreement are being carried out. The independent
directors shall base each such determination on the factors set forth below and
other factors that they deem relevant. Such factors include:
. the size of the advisory fee in relation to the size, composition and
profitability of our portfolio of properties;
. the success of our advisor in generating opportunities that meet our
investment objectives;
. the rates charged to similar REITs and to investors other than REITs
by advisors performing similar services;
. additional revenues realized by our advisor and any affiliate through
their relationship with us, including real estate commissions,
servicing, and other fees, whether paid by us or by others with whom
we do business;
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. the quality and extent of service and advice furnished by our
advisor;
. the performance of our portfolio of properties, including income,
conservation or appreciation of capital, frequency of problem
investments and competence in dealing with distress situations; and
. the quality of our portfolio of properties in relationship to the
investments generated by our advisor for its own account or for the
account of other entities it advises.
THE DIRECTORS AND EXECUTIVE OFFICERS
Initially, our board of directors will consist of five members, three of
whom will be independent. All of the directors will serve staggered three-year
terms and the board will be divided into three classes. Class I directors'
initial terms will expire in 2003, Class II directors' initial terms will expire
in 2002 and Class III directors' initial terms will expire in 2001. The
following table sets forth certain information with respect to our officers and
directors. Each of the officers and directors other than Mr. Thompson and Mr.
Maurer will assume the positions indicated as of the effective date of the
registration statement of which this prospectus is a part.
Name Age Position
- ---- --- --------
Anthony W. Thompson (Class I) 52 Chairman of the Board of Directors,
Chief Executive Officer,
President and Director
Debra Meyer Kirby (Class III) 44 Independent Director
Warren H. James 58 Independent Director
James R. Nance 71 Independent Director
Sterling McGregor (Class I) 42 Director
Jack R. Maurer 55 Secretary and Treasurer
Certain information regarding our directors and executive officers is
set forth below.
ANTHONY W. ("TONY") THOMPSON is a co-founder of our advisor, Triple Net
Properties, LLC and has been its President since its inception in April 1998.
Prior to that time he was co-founder, co-owner, director and officer of a number
of real estate investment entities trading under the name The TMP Companies
including the TMP Group, Inc., a full-service real estate investment group
founded in 1978. Mr. Thompson has been the President and co-owner of the dealer
manager, Cunningham Capital Corp. (formerly TMP Capital Corp.), since 1986 and
is a registered securities principal with the NASD. He is a 1969 graduate of
Sterling College with a Bachelor of Science degree in Economics. Mr. Thompson
holds the professional designation of Chartered Life Underwriter and Chartered
Financial Consultant from the American College. He is a member of the Sterling
College Board of Trustees and UCLA's Athletic Fund Major Gifts Committee.
WARREN H. JAMES has been a general partner of Wescon Properties since 1986.
At Wescon, Mr. James has overseen the acquisition, management and construction
of apartment communities, commercial office buildings and shopping centers in
Los Angeles, Orange and Riverside Counties in Southern California. Prior to
1986, Mr. James served as Vice President of Gfeller Development Company (where
he oversaw the development of a single family home project in Corona Del Mar,
California), Vice President of Bear Brand Ranch Company and Vice President of
Operations at Foxx Development Corp. Mr. James also worked for approximately 8
years with the Irvine Company, including three years as Vice President of that
company's home building division.
JAMES R. ("JIM") NANCE retired as Senior Vice President-Agency of
Jefferson-Pilot Financial, Greensboro, North Carolina, in1992, after forty-one
years experience in the life insurance business. He served as an agent, Agency
Manager and Agency Vice President prior to his appointment as Senior Vice
President-Agency. As Senior Vice President, Mr. Nance was responsible for the
company's eighty Agency Offices, one hundred twenty-
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five Sales Offices, and all sales and administrative personnel. His
responsibilities included production, expenses, planning and budgeting for the
company's Agency Department. Mr. Nance was a registered securities principal
with the NASD from 1978 until 1992. Upon retiring, Mr. Nance returned to
Amarillo, Texas, and assumed the position of Financial Manager of the Mary E.
Harris Ranch, Inc., a 31,000 acre family ranch located near Clayton, New Mexico.
After honorable discharge from the U.S. Navy in 1946, he attended the University
of North Texas from 1948 until 1950. He graduated from Southern Methodist
University's School of Insurance Marketing in 1953, the University of North
Carolina's Executive Program in 1981, and holds the designation of Chartered
Life Underwriter from the American College. During his career, Mr. Nance was
active in community, civic, and church activities.
DEBRA MEYER KIRBY is President of & Kirby, Inc., a specialty firm focusing
on tax deferred exchanges and real estate acquisitions which she founded in
1996. She is also Chief Executive Officer of the Kirby Group, which includes a
sister corporation, Kirby Corporation of Virginia, Inc., founded in 1988 as a
medical consulting firm. In this role she coordinates its strategic planning
function and development of new services and programs. Ms. Kirby is also
Executive Vice President of National Exchange Group, Inc., a qualified exchange
intermediary. Ms. Kirby has seventeen years of experience in transactional real
estate and twelve years of experience in negotiating and managing multi-state
real estate transactions within the corporate real estate development arena.
From 1994 to 1996, she was a co-founder, principal and Executive Vice President
of a qualified exchange intermediary, Capital Exchange Company, Inc., performing
strategic planning services and intermediary escrow services, identifying
replacement properties. Prior to co-founding Capital Exchange Company, Inc., she
served as Director of Real Estate for Circuit City Stores, Inc. for
approximately six years. During her six years as Director, she served in
positions ranging from oversight of all site acquisitions and business and legal
negotiations for the development of Circuit City store locations east of the
Mississippi River to Director of Real Estate Development forming Circuit City's
self-development program through which she developed a number of power retail
centers anchored by Circuit City Superstores. Ms. Kirby received a B.A. from
Hamilton College and its coordinate Kirkland College, in Clinton, New York in
1977 and her J.D. from Wake Forest University in Winston-Salem, North Carolina
in 1980. She was an associate in the commercial real estate litigation
department of the Richmond law firm, Hirschler, Fleischer, Weinberg, Cox & Allen
from 1980-1984.
STERLING MCGREGOR has been Vice President of Financial and Asset Management
for our advisor, Triple Net properties, LLC, since July 1998. Mr. McGregor has
over 15 years of commercial real estate experience in debt and equity financing,
asset management, due diligence, underwriting, acquisitions and restructuring
loan portfolios. He recently managed several institutional quality portfolios
for CB/Richard Ellis, L.J. Melody & Company (a CB Commercial Real Estate
Company) from December 1996 to July 1998 and Wells Fargo Bank from 1992 to
September 1998. Prior experience includes mortgage banking for Metmor Financial,
a subsidiary of Metropolitan Life and acquisitions and due diligence for Arthur
Andersen & Co., as well as Cal Fed Syndications, a publicly traded NYSE real
estate investment trust. McGregor is a licensed California Real Estate Broker
and a California Certified General Appraiser with a Bachelor of Business
Management and Finance from Brigham Young University.
JACK R. MAURER has served as Chief Financial Officer of our advisor, Triple
Net properties, LLC, since April 1998. Mr. Maurer has over 24 years of real
estate financial management experience, including Chief Financial Officer and
Controller positions in residential and commercial development and the banking
industry. From 1986 to April 1998, he was a General Partner and Chief Financial
Officer of Wescon Properties, where he was involved in finance, accounting and
forecasting. He also participated in the development and construction management
process, including due diligence, design development, municipal processing,
construction, marketing, property management and investor services. Mr. Mauer's
previous experience also includes experience with the national accounting firm
of Kenneth Leventhal & Company.
COMMITTEES OF OUR BOARD OF DIRECTORS
Acquisition Committee.
Each of our acquisitions must be approved by the acquisition committee or a
majority of our board of directors, including a majority of the independent
directors, as being fair and reasonable to our company and consistent with our
investment objectives. Initially we will have an acquisition committee comprised
of at least two
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members of our board of directors, including one independent director. Our board
of directors may establish additional acquisition committees from time to time
based on property type or other relevant factors. Our affiliated advisor will
recommend suitable properties for consideration by the appropriate acquisition
committee or our board of directors from time to time. If the members of the
acquisition committee unanimously approve a given acquisition, then our advisor
will be directed to acquire the property on our behalf, if such acquisition can
be completed on terms approved by the committee. If the acquisition committee
does not approve a proposed acquisition, then the property may be presented to
our full board of directors for consideration, who, by majority vote, may elect
to acquire or reject the property. Properties may be acquired from our advisor
or its affiliates or our officers and directors, provided that any interested or
affiliated directors shall not vote on such an acquisition.
Audit Committee.
We will have an audit committee comprised of three directors and including
at least two independent directors. The audit committee will:
. make recommendations to our board of directors concerning the
engagement of independent public accountants;
. review the plans and results of the audit engagement with the
independent public accountants;
. approve professional services provided by, and the independence of,
the independent public accountants;
. consider the range of audit and non-audit fees; and
. consult with the independent public accountants regarding the adequacy
of our internal accounting controls.
Executive Compensation Committee.
Our board of directors may establish an executive compensation committee
consisting of up to three directors, including at least two independent
directors, to establish compensation policies and programs for our directors and
executive officers. The executive compensation committee will exercise all
powers of our board of directors in connection with establishing and
implementing compensation matters, including incentive compensation and benefit
plans, except for those which require actions by all of the directors under our
articles of incorporation, bylaws or applicable law. Stock-based compensation
plans will be administered by the board of directors if the members of the
executive compensation committee do not qualify as "non-employee directors"
within the meaning of the Exchange Act.
OFFICER AND DIRECTOR COMPENSATION
Our board of directors will determine the amount of compensation that our
company will pay to each director serving on our board of directors. Initially,
all directors will receive a fee of $1,000 for attendance in person or by
telephone at each quarterly meeting of the board. Initially such compensation,
including fees for attending meetings, will not exceed $7,500 annually. In
addition, the directors will qualify for the director stock option plan under
which our board of directors has authorized the issuance of options to acquire
up to 100,000 shares of common stock to the directors.
DIRECTOR STOCK OPTION PLAN
We will adopt the director stock option plan concurrently with the
commencement of this offering. Only directors are eligible to participate in the
director stock option plan.
We have authorized and reserved a total of 100,000 shares of common stock
for issuance under the director stock option plan. If a transaction, such as a
reorganization or merger in which our company is the surviving entity, or a
combination, recapitalization, reclassification, stock split, stock dividend or
stock consolidation, occurs causing the outstanding shares of our common stock
to be increased, decreased or changed into, or exchanged for, a different number
or kind of our shares or securities, then we will make an appropriate adjustment
in the number and kind of
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shares that may be issued in connection with options. We will also make a
corresponding adjustment to the option exercise price with respect to options
granted prior to any such change.
The director stock option plan provides for the grant of initial and
subsequent options. Initial options are non-qualified stock options to purchase
5,000 shares of common stock at the applicable option exercise price described
below granted to each director as of the date such individual becomes a
director. Subsequent options are options to purchase 5,000 shares of common
stock at the applicable option exercise price described below on the date of
each annual shareholders' meeting to each director so long as the individual is
still in office granted to each director. As of the date of this prospectus, we
have granted options to purchase 25,000 shares at $9.05 per share.
We will determine the option price, meaning the purchase price of our
common stock under the options, as follows:
. The option price under each initial option granted to directors who
became directors on or before the date of this offering is the fair
market value of our common stock at the date of the commencement of
this offering ($9.05).
. The option price under each option (whether initial or subsequent)
granted to directors during this offering will be the greater of $9.05
and the fair market value of our common stock as of the date of grant.
. The option price under each option (whether initial or subsequent)
granted to directors after the completion of this offering will be the
fair market value of our common stock as of the date of grant.
The director stock option plan provides that directors holding options can
exercise them as follows:
. Initial options are exercisable for one-third of the shares subject to
the option on the date of grant, and will become exercisable for an
additional one-third of such shares on each of the first and second
anniversaries of the date of grant.
. Subsequent options will become exercisable in whole or in part on the
second anniversary of the date of grant .
. If a director dies or becomes disabled while a member of the board,
his options will be exercisable for one year after death or the
disabling event.
. If the director ceases to serve on the board for any reason except
death or disability, his options will be exercisable for three months
after the last date of service on the board.
. No option granted under the director stock option plan may be
exercised after the tenth anniversary of the date of grant.
. The option price for the options can be paid in cash or the surrender
of common stock.
Notwithstanding any other provisions of the director stock option plan to the
contrary, we will not permit a director to exercise any option or options if the
exercise thereof would jeopardize our status as a REIT under the federal income
tax laws.
A director may not sell, pledge, assign or transfer any option in any
manner otherwise than by will or the laws of descent or distribution.
Upon the dissolution or liquidation of our company, or upon a
reorganization, merger or consolidation of our company with one or more
corporations as a result of which we are not the surviving corporation or upon
sale of all or substantially all of our property, the director stock option plan
will terminate and any outstanding options will terminate and be forfeited.
Notwithstanding the foregoing, our board of directors may provide in writing in
connection with, or in contemplation of, any such transaction for any or all of
the following alternatives, separately or in combinations:
. the assumption by the successor corporation of the options already
granted or the substitution by such corporation for such options of
options covering the stock of the successor corporation, or a
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parent or subsidiary thereof, with appropriate adjustments as to the
number and kind of shares and option prices;
. the continuation of the director stock option plan by such successor
corporation in which event the director stock option plan and the
options will continue in the manner and under the terms so provided;
or
. the payment in cash or shares in lieu of and in complete satisfaction
of such options.
All options granted under the director stock option plan are intended to be
"non-qualified options," meaning that they are options not intended to qualify
as incentive stock options under the federal income tax laws. For federal income
tax purposes, a director will not recognize ordinary income at the time an
initial option or subsequent option is granted. The exercise of an option is a
taxable event that will require a director to recognize, as ordinary income, the
difference between the common stock's fair market value and the option price. We
will be entitled to a federal income tax deduction on account of the exercise of
an option equal to the ordinary income recognized by a director.
INDEMNIFICATION
Our articles of incorporation contain a provision that is intended to limit
liability for monetary damages and indemnify our directors and officers from
certain liabilities. For a description of the limitation of liability and
indemnification rights of our directors and officers, see "Certain Provisions of
Virginia Law and of Our Company's Articles of Incorporation and Bylaws--
Limitation of Liability and Indemnification."
OUR AFFILIATED ADVISOR
Our affiliated advisor, Triple Net properties, LLC, is primarily
responsible for managing our day-to-day business affairs and assets and carrying
out our board of directors' directives. Our affiliated advisor is a Virginia
limited liability company that was formed in April of 1998 to advise syndicated
limited partnerships, limited liability companies and other entities with
respect to the acquisition, management and disposition of real estate assets.
Currently, our advisor advises four entities that invest or have invested in
properties located in California, Nevada and Kansas.
MANAGEMENT
The following table sets forth information with respect to our advisor's
executive officers and board of managers:
Name Age Position
- ---- --- --------
Anthony W. Thompson 52 President, Chief Executive Officer and Director
Jack R. Maurer 55 Chief Financial Officer and Director
Talle Voorhies 51 Executive Vice President and Director
Richard D. Gee 57 Managing Director
Damian Gallagher 37 Senior Vice President of Capital Markets
Edgar W. Woodland 63 Senior Vice President of Leasing
Mary J. Holcomb 49 Vice President of Real Estate Services
Sterling McGregor 42 Vice President of Financial Management
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ANTHONY W. ("TONY") THOMPSON. Mr. Thompson's background is described under
"Management of Our Company--Directors and Executive Officers."
JACK R. MAURER. Mr. Maurer's background is described under "Management of
Our Company--Directors and Executive Officers."
TALLE VOORHIES has been Executive Vice President of Triple Net Properties,
LLC since April of 1998 and is President and Financial Principal of the dealer
manager. From December 1987 to January 1999, Ms. Voorhies worked with The TMP
Group, Inc., where she served as Chief Administrative Officer and Vice President
of Broker/Dealer Relations. She is responsible for communications with the
broker/dealer network; due diligence activities, marketing and compliance; and
Investor Services. Ms. Voorhies is a Registered Representative with the National
Association of Securities Dealers.
RICHARD D. GEE, has been Executive Vice President - Acquisitions for Triple
Net Properties, LLC since June 1998. Mr. Gee has 25 years of real estate
experience. From 1990 to May 1998, Mr. Gee acted as Managing Director and
Partner for InterCapital Partners, a company engaged in developing and acquiring
multi-family and retail "power" centers in California, Illinois and Texas. In
this position he raised over $60 million of equity capital used to acquire
and/or develop approximately 600,000 square feet of retail centers and 9,000
apartment units. He then sold the company's $230 million portfolio to two
institutional buyers. Mr. Gee also has experience developing a publicly traded,
master-limited partnership and a tax-exempt participating-bond fund with
Shearson Lehman Brothers. Mr. Gee holds a degree in electrical engineering from
the University of Miami.
DAMIAN GALLAGHER has been Senior Vice President of Capital Markets for
Thompson Capital since 1993. Since 1984, Mr. Gallagher has been involved in the
investment/syndication industry. He is a Registered Representative with the
National Association of Securities Dealers. Mr. Gallagher received a degree in
Economics from UCLA in 1983.
EDGAR W. "ED" WOODLAND has been Senior Vice President of Leasing for Triple
Net Properties, LLC since June 1998. Mr. Woodland has 25 years experience in
commercial and retail real estate. Mr. Woodland served as the Director of
Leasing for the TMP Realty, Koll Partnerships and Bonutto-Hofer Investments for
ten years. He was President of Merchants National Management, Inc., the leasing
and management company for W.R. Grace Development Corporation, merchant builders
of approximately 40 shopping centers in the western REIT United States. Mr.
Woodland is a member of the International Council of Shopping Centers and has a
real estate broker's license in California and Nevada. Prior to entering the
real estate profession, Woodland was Director of Golf at the Apple Valley
Country Club in Apple Valley, California and a Teaching Professional at the
Desert Inn Hotel and Country Club in Las Vegas. He attended the University of
Montana and the University of Hawaii.
MARY J. HOLCOMB, Vice President of Real Estate Marketing and Finance, has
been involved in all aspects of real estate and the financial industry for over
28 years. She spent 14 years with Home Federal Savings and Loan and managed four
branch escrow offices, and 14 years as CEO and Manager of three independent
escrow companies. Ms. Holcomb is responsible for acquisition and tenant-in-
common escrows and exchanges, as well as interfacing with broker/dealers and
investors. She has a real estate license and is a Senior Certified Escrow
Officer.
STERLING MCGREGOR. Mr. McGregor's background is described under "Management
of Our Company -- Directors and Executive Officers."
THE ADVISORY AGREEMENT
Under the terms of the advisory agreement, our advisor generally
. has responsibility for day-to-day operations of our company;
. administers our bookkeeping and accounting functions;
. serves as our consultant in connection with policy decisions to be
made by our board of directors;
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<PAGE>
. manages or causes to be managed our properties and other
assets; and
. renders other services as our board of directors deems appropriate.
Our affiliated advisor is subject to the supervision of our board of directors
and, except as expressly provided in the advisory agreement, has only such
additional functions as are delegated to it. A copy of the advisory agreement
has been filed as an exhibit to the registration statement of which this
prospectus is a part and you may obtain a copy from us.
Expenses. Our affiliated advisor bears the expenses incurred by it in
connection with performance of its duties under the advisory agreement,
including employment expenses of its personnel, rent, telephone and equipment
expenses and miscellaneous administrative expenses incurred in supervising,
monitoring and inspecting real property or other assets owned by us, excluding
proposed acquisitions, or relating to its performance under the advisory
agreement. We will reimburse our advisor for certain expenses it incurs,
including expenses related to proposed acquisitions and travel expenses. We bear
our own expenses for functions not required to be performed by our advisor under
the advisory agreement, which generally include capital raising and financing
activities, corporate governance matters and other activities not directly
related to our properties and assets. See "Compensation Table."
Term. The advisory agreement, which was entered into by our company with
the approval of a majority of independent directors, is for a one-year term
subject to successive one-year renewals 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 of our company or our advisor, as the case
may be, upon 60 days prior written notice without cause. If the advisory
agreement is terminated due to the listing of our shares on a national exchange
or market, our advisor's incentive limited partnership interest will be redeemed
for the amount our advisor would have received if our operating partnership
immediately sold all of its assets at fair market value. See "Agreement of
Limited Partnership--Incentive Units." If the advisory agreement is terminated,
the advisory agreement requires our advisor to cooperate with us and take all
reasonable steps requested to assist the directors in making an orderly
transition of all advisory functions.
Our Right of First Opportunity. The advisory agreement gives us the first
opportunity to purchase any income-producing properties located in our focus
states placed under contract by our advisor, provided that:
. we have funds available to make the purchase;
. our acquisition committee or board of directors votes to make the
purchase within fourteen days of being offered such property by our
advisor; and
. the property meets our acquisition criteria (see "Investment
Objectives and Policies").
Possible Merger. Many REITs that are listed on a national stock exchange or
included for quotation on a national market system are considered "self-
administered," because the employees of the REIT perform all significant
management functions. In contrast, REITs that are not self-administered, like
our company, typically engage a third-party to perform management functions on
its behalf. Accordingly, if we apply to have our shares listed for trading on a
national stock exchange or included for quotation on a national market system,
it may be in our best interest to become self-administered. If the independent
directors determine that we should become self-administered, the advisory
agreement contemplates the merger of our advisor and our company and the
termination of the advisory agreement, with the consideration in such merger and
for such termination to be determined by our company and our advisor. In the
event our advisor is merged into our company, certain of our advisor's key
employees will become employees of our company. While we would then be relieved
of paying fees to our advisor under the advisory agreement (see "Compensation
Table"), we would be required to pay the salaries of our advisor's employees,
the rent and "overhead" associated with our advisor's office and related costs
and expenses formerly absorbed by our advisor under the advisory agreement.
Indemnification. We have agreed to indemnify our advisor, its managers,
members and employees and pay or reimburse reasonable expenses in advance of
final disposition of a proceeding with respect to acts or omissions of our
advisor, provided that:
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. the indemnified person determined, in good faith, that the course of
conduct which caused a loss or liability was in our best interest;
. the indemnified person was acting on behalf of, or performing services
for, our company;
. such liability or loss was not the result of misconduct, negligence or
a knowing violation of the criminal law or any federal or state
securities laws; and
. such indemnification or agreement to hold harmless is recoverable only
out of our company's net assets and not from our shareholders.
Other Services. In addition to the services described above to be provided
by our advisor and its affiliates, affiliates of our advisor may provide other
property-level services to our company and may receive compensation for such
services, including leasing, development, construction management, loan
origination and servicing, property tax reduction and risk managing fees.
However, under no circumstances will such compensation exceed an amount that
would be paid to non-affiliated third parties for similar services. A majority
of the independent directors must approve all compensation for such other
services paid to our advisor or any of its affiliates.
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<PAGE>
COMPENSATION TABLE
The Compensation Table below outlines all the compensation that we will pay
to our advisor, the dealer manager and the soliciting dealers during certain
stages in the life of our company and other payments that are subordinated to
achieving certain returns. For ease of presentation and understanding, we have
used certain defined terms in the table. Those terms have the following
meanings:
Average Invested Assets means, for any period, the aggregate book value of
our assets that are invested, directly or indirectly, in equity interests and in
loans secured by real estate, before reserves for depreciation or bad debts or
other similar non-cash reserves, computed by taking the average of the values at
the end of each month during such period.
Invested Capital means the product of (1) the total number of outstanding
shares of our common stock and (2) a dollar amount that initially will be $10.00
and that will be adjusted appropriately to reflect changes in the average price
per share paid for our common stock. When a property is sold, Invested Capital
will be reduced by the lesser of (1) the net sale proceeds available for
distribution from such sale or (2) the sum of (A) the portion of Invested
Capital that initially was allocated to that property and (B) any remaining
shortfall in the recovery of our Invested Capital with respect to prior sales of
properties (see Incentive Distribution Upon Dispositions, below).
Competitive Real Estate Commission means the real estate or brokerage
commission paid for the purchase or sale of a property which is reasonable,
customary and competitive in light of the size, type and location of such
property.
The arrangements by which we pay our advisor and the dealer manager are
arrangements by and among affiliated entities. Consequently, such arrangements
were not determined by arm's-length negotiations. See "Conflicts of Interest."
In those instances in which there are maximum amounts or ceilings on the
compensation which may be received by our advisor or the dealer manager for
services rendered, our advisor and the dealer manager may not recover any
amounts in excess of such ceilings or maximum amounts for those services by
reclassifying such services under a different compensation or fee category. See
"Conflicts of Interest--Receipt of Commissions, Fees and Other Compensation by
Our Affiliated Advisor."
OFFERING STAGE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION(4) METHOD OF ESTIMATED
COMPENSATION AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Selling Commissions (payable We will pay the dealer manager $0.80 for each share Actual amount depends upon the
to the dealer manager) sold (8%) and one Soliciting Dealer Warrant for every number of shares sold. A total of
40 shares of common stock sold. Each Soliciting $80,000 will be paid if the
Dealer Warrant permits the holder to purchase one share minimum offering is sold and
of our common stock at a purchase price of $12.00 per $8,000,000 will be paid if the
share (120% of the offering price) prior to maximum offering is sold.
____________, 2004. The dealer manager may reallow a
portion of the Selling Commissions and Soliciting
Dealer Warrants to soliciting dealers for each share they
sell. Shares purchased under the dividend reinvestment
program will be purchased without Selling Commissions.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
OFFERING STAGE (CONT'D.)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION(4) METHOD OF ESTIMATED
COMPENSATION AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marketing Support and Due We will pay the dealer manager an amount Actual amount depends upon
Diligence Reimbursement Fee (nonaccountable) up to 1.5% of the gross proceeds the number of shares sold. A
(payable to the dealer manager) this offering to pay expenses associated with total of $15,000 will be
nonaccountable marketing fees, wholesaling fees, paid if the minimum offering
expense reimbursements, bonuses and incentive is sold and $1,500,000 will
compensation and volume discounts and to generally be paid if the maximum
reimburse the dealer manager for nonaccountable due offering is sold.
diligence expenses. The dealer manager may
reallow a portion of this fee to Soliciting
Dealers. Shares purchased under the dividend
reinvestment program will be purchased without
the Marketing Support and Due Diligence
Reimbursement Fee.
- ------------------------------------------------------------------------------------------------------------------------------------
Other Organizational and Our affiliated advisor may advance, and we will Actual amounts to be
Offering Expenses (payable reimburse it for, organization and offering expenses reimbursed are based on
to our advisor) incurred on our behalf in connection with this actual funds advanced. We
offering, including legal and accounting fees, filing estimate that a total of
fees, printing costs and selling expenses. We $25,000 will be reimbursed
estimate such expenses will be approximately 2.5% of if the minimum offering is
the net proceeds of this offering. sold and $2,500,000 will be
reimbursed if the maximum
offering is sold.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ACQUISITION STAGE(1) (5)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION(4) METHOD OF ESTIMATED
COMPENSATION AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Acquisition Fee (payable to We will pay our advisor an Acquisition Fee equal to 4% Actual amounts depend on the
our advisor) of the gross proceeds of this offering. number of shares sold. A
total of $40,000 will be paid if the
minimum offering is sold and
$4,000,000 will be paid if the
maximum offering is sold.
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition Expenses We will reimburse our advisor for costs and expenses Actual amounts to be
(payable to our advisor)(2) of selecting, evaluating and acquiring properties, reimbursed depend upon the
whether or not actually acquired, including surveys, purchase price of properties
appraisals, title insurance and escrow fees, legal and and actual cost of goods or
accounting fees and expenses, architectural and services. If the minimum
engineering reports, environmental and asbestos offering is sold,
audits, travel and communication expenses, acquisition expenses are
non-refundable option payments on properties not estimated to be $5,000. If
acquired and other related expenses payable to our the maximum offering is
advisor and its affiliates. Interest shall be paid on sold, acquisition expenses
funds advanced at our advisor's actual cost of funds are estimated to be $500,000.
or as otherwise established by our board of directors.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
OPERATIONAL STAGE(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION(4) METHOD OF ESTIMATED
COMPENSATION AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property Management Fee We will pay our advisor a Property Management Fee equal Actual amounts to be paid
(payable to our advisor) to 5% of the gross income from the properties. depend upon the gross income
This fee will be paid monthly. of the properties and,
therefore, cannot be determined
at the present time.
- -------------------------------------------------------------------------------------------------------------------------------
Compensation for Services We will pay our advisor for other property-level Actual amounts to be
services including leasing fees, construction received depend upon the
management fees, loan origination and servicing fees, services provided and,
property tax reduction fees and risk management fees. therefore, cannot be
Such compensation will not exceed the amount which determined at the present
would be paid to unaffiliated third parties providing time.
such services. All such compensation must be approved
by a majority of our independent directors. See "Our
Affiliated Advisor."
- -------------------------------------------------------------------------------------------------------------------------------
Reimbursable Expenses We will pay our advisor certain miscellaneous expenses. Actual amounts are dependent
(payable to our upon results of operations.
advisor)(3)(4)(5)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDATION STAGE(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION(4) METHOD OF ESTIMATED
COMPENSATION AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property Disposition Fee We will pay our advisor a Property Disposition Fee out Actual amounts to be
(payable to our advisor and of net profits upon the sale of received depend upon the
its affiliates) each of the properties, in an amount sale price of properties
equal to the lesser of 3% of the and, therefore, cannot be
property's contract sales price or 50% of a customary determined at the present
Competitive Real Estate Commission given the time.
circumstances surrounding the sale. The amount paid,
when added to the sums paid to unaffiliated parties,
shall not exceed the lesser of the customary
Competitive Real Estate Commission or an amount equal
to 6% of the contracted for sales price. Payment of
such fees shall be made only if our advisor provides a
substantial amount of services in connection with the
sale of the property.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SUBORDINATED PAYMENTS
- -------------------------------------------------------------------------------------------------------------------------------
TYPE OF COMPENSATION(4) METHOD OF ESTIMATED
COMPENSATION AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Asset Management Fee We will pay our advisor an Asset Management Fee of up Actual amounts are dependent
(payable to our advisor) to 1.5% of the Average Invested Assets. The Asset upon the actual amounts that
Management Fee will be paid or accrue quarterly, but we invest in assets and,
will not be paid until our shareholders have received therefore, cannot be
distributions equal to a cumulative, noncompounded rate determined at this time.
of 8% per annum on their investment in our company. If
the fee is not paid in any quarter, it will accrue and
be paid once the shareholders have received a
cumulative 8% return.
- -------------------------------------------------------------------------------------------------------------------------------
Incentive Distribution Our operating partnership will pay an incentive Actual amounts to be
(payable to our advisor distribution to our advisor equal to 15% of our received depend upon results
with respect to its operating partnership's operating cash flow after we of operations and the actual
incentive limited have received the sum of (1) an 8% cumulative, non- amounts that we invest in
partnership interest)(6) compounded return on our Invested Capital and (2) any properties and, therefore,
remaining shortfall in the recovery of our Invested cannot be determined at the
Capital with respect to prior sales of properties (see present time.
Incentive Distribution Upon Dispositions, below). If
there is a shortfall in our 8% return on Invested Capital
at the end of any calendar year and our advisor
previously has received incentive distributions, other
than those that have previously been repaid, our advisor
will be required to repay to our operating partnership an
amount of those distributions sufficient to cause the
cumulative 8% return threshold to be met. In no event
will the cumulative amount repaid by our advisor to our
operating partnership exceed the cumulative amount of
incentive distributions that our advisor previously has
received.
- -------------------------------------------------------------------------------------------------------------------------------
Incentive Distribution Our operating partnership will pay an incentive distribution Actual amounts to be
Upon Dispositions upon the sale of a property equal to 15% of the net proceeds received depend upon
(payable to our advisor from the sale after we have received the sum of (1) our the sale price of
with respect to its Invested Capital that initially was allocated to that property, properties and,
incentive limited (2) any remaining shortfall in the recovery of our Invested therefore, cannot be
partnership interest)(6) Capital with respect to prior sales of properties, and (3) any determined at the
remaining shortfall in our 8% return on Invested Capital (see present time.
Incentive Distribution, above). If we have not received a
return of our Invested Capital after the sale of the last
property and our advisor previously has received incentive
distributions, other than those that have previously been
repaid, our advisor will be required to repay to our operating
partnership an amount of those distributions sufficient to
cause us to receive a full return of our Invested Capital. In
no event will the cumulative amount repaid by our advisor to
our operating partnership exceed the cumulative amount of
incentive distributions that our advisor previously has
received.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
(1) Our affiliated advisor and its affiliates will be involved in
determining the types and structure of the transactions in which we participate.
Our affiliated advisor may benefit from our retaining ownership of our
properties and leveraging our properties, while it may be in your best interest
as a shareholder for us to sell or hold such property on an unleveraged basis.
Furthermore, our advisor's receipt and retention of certain fees and
reimbursements is dependent upon our company making investments in properties.
Therefore, the interest of our advisor in receiving such fees may conflict with
the interest of our shareholders to earn income on their investment in shares
and may result in our entering into transactions that do not solely reflect your
interest as a shareholder. The independent directors must approve all
transactions between us and our advisor or its affiliates. See "Certain
Provisions of Virginia Law and Our Company's Articles of Incorporation and
Bylaws--Transactions with Affiliates."
(2) The total of all Acquisition Expenses paid in connection with our
purchase of a property may not exceed an amount equal to 6% of the contract
purchase price for the property unless a majority of our board of directors,
including a majority of the independent directors, not otherwise interested in
the transaction approve the transaction as being commercially competitive, fair
and reasonable to our company. Notwithstanding the foregoing, the total of all
Acquisition Expenses paid in connection with our purchase of a property from an
affiliate may not exceed 6% of the contract purchase price for the property.
(3) (a) affiliated advisor and its affiliates are reimbursed for:
. the cost to our advisor or its affiliates of goods and services
used for and by us and obtained from unaffiliated parties and
. administrative services related to such goods and services.
"Administrative services" include only ministerial services such as
typing, record keeping, preparing and disseminating company reports, preparing
and maintaining records regarding shareholders, record keeping and
administration of our dividend reinvestment program, preparing and disseminating
responses to shareholder inquiries and other communications with shareholders
and any other record keeping required.
(b) extraordinary circumstances fully justified to the official or
agency administering the state securities laws, our advisor and its affiliates
may provide other goods and services to our company if all of the following
criteria are met:
. the goods or services must be necessary to our prudent
operation; and
. the compensation, price or fee must be equal to the lesser of
90% of the compensation, price or fee we would be required to
pay to independent parties rendering comparable services or
selling or leasing comparable goods on competitive terms in
the same geographic location, or 90% of the compensation,
price or fee charged by our advisor or its affiliates for
rendering comparable services or selling or leasing comparable
goods on competitive terms.
In addition, any such payment will be subject to the further limitation
described in paragraph (c) below. Extraordinary circumstances shall be presumed
only when there is an emergency situation requiring immediate action by our
advisor or its affiliates and the goods or services are not immediately
available from unaffiliated parties. Services which may be performed in such
extraordinary circumstances include emergency maintenance of our properties,
janitorial and other related services due to strikes or lock-outs, emergency
tenant evictions and repair services which require immediate action, as well as
operating and re-leasing properties with respect to which the leases are in
default or have been terminated.
(c) reimbursement to our advisor or its affiliates is permitted
under clause (a) above for items such as rent, depreciation, utilities, capital
equipment, salaries, fringe benefits, travel expenses and other administrative
items of any controlling persons of our advisor, its affiliates or any other
supervisory personnel except
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<PAGE>
in those instances in which our board of directors believes it to be in our best
interest that our advisor or its affiliates operate or otherwise deal with, for
an interim period, a property with respect to which the lease is in default.
Permitted reimbursements, except as set forth above, include salaries and
related salary expenses for non-supervisory services which could be performed
directly for our company by independent parties such as legal, accounting,
transfer agent, data processing and duplication. Controlling persons include,
but are not limited to, any person, irrespective of his or her title, who
performs functions for our advisor similar to those of chairman or member of the
board of directors, president or executive vice president, or those entities or
individuals holding 5% or more of the stock of our advisor or a person having
the power to direct or cause the direction of our advisor, whether through
ownership of voting securities, by contract or otherwise. Despite the foregoing,
and subject to the approval of our board of directors, we may reimburse our
advisor for expenses related to the activities of controlling persons undertaken
in capacities other than those which cause them to be controlling persons. Our
affiliated advisor has informed us that it believes that its employees and the
employees of its affiliates and controlling persons who perform services for
which reimbursement is allowed under clause (b) above, have the experience and
educational background, in their respective fields of expertise, appropriate for
the performance of such services.
(4) Our affiliated advisor and its affiliates will not be compensated
for any services other than those which have been fully disclosed in this
Compensation Table.
(5) Except as expressly provided above, we shall not pay, directly or
indirectly, a commission or fee to our advisor or its affiliates in connection
with the reinvestment of the proceeds of any resale, exchange, financing or
refinancing of a Company property.
(6) If the advisory agreement is terminated by us due to the listing of
our common stock on a national exchange or market, our advisor's incentive
limited partnership interest, which entitles it to the Incentive Distribution
and the Incentive Distribution Upon Dispositions, shall be redeemed for the
amount that our advisor would receive if our operating partnership immediately
sold all of its assets for their fair market value. Such amount will be paid in
either shares in our company or units of limited partnership interest of our
operating partnership, at the election of our advisor, subject to the ownership
limit. See "Description of Capital Stock--Restrictions on Ownership and
Transfer."
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PRIOR PERFORMANCE SUMMARY
The information presented in this section represents the historical
experience of real estate programs managed by our advisor. Investors in our
company should not assume that they will experience returns, if any, comparable
to those experienced by investors in such prior real estate programs.
Our affiliated advisor has served as manager or sponsor of a total of
four real estate investment entities: two of which have completed offerings; one
of which has commenced but not completed an offering; and one of which, Western
REIT, recently commenced an offering but has not yet received any proceeds of
that offering. These real estate investment entities and the year in which their
offerings were commenced and/or completed are as follows:
1. Tulluride Barstow, LLC (1998)
2. Truckee River Office Tower, LLC (1998)
3. Western Real Estate Investment Trust (1998) (not completed)
4. Yerington Shopping Center, LLC (offering commenced on December 15,
1998, but has not yet broken escrow)
These first three programs constitute the "prior advisor programs." The
prior performance tables included in Exhibit A attached hereto set forth
information as of the dates indicated regarding certain of these prior advisor
programs as to:
. experience in raising and investing funds (Table I);
. compensation to the sponsor (Table II); and
. annual operating results of the prior advisor programs (Table III).
No information is given as to results of completed programs or sales or
dispositions of property because, to date, none of the prior programs have sold
any of their properties.
PRIOR PROGRAMS OF OUR AFFILIATED ADVISOR
Our affiliated advisor sponsored the prior advisor programs. The total
amount of funds raised from all investors in the offerings of the prior advisor
programs, as of December 31, 1998, was approximately $10,089,000, and the total
number of investors in all such entities was approximately 161.
The prior advisor programs have acquired a total of six properties in
California, Nevada and Kansas.
The aggregate dollar amount of the acquisition and development costs of
the properties purchased by the prior advisor programs, as of December 31, 1998,
was approximately $46,066,000. Of the aggregate amount, approximately 39% was
spent on acquiring office buildings, and approximately 61% was spent on retail
properties.
All of these funds were spent on existing or used properties. The
following table shows a breakdown of the aggregate amount of the acquisition and
development costs of the properties purchased by the prior advisor programs as
of December 31, 1998:
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<PAGE>
Type of Property Existing
---------------- --------
Office $17,880,000
Retail 28,186,000
----------
Total $46,066,000
===========
Each of the prior advisor programs and the properties that they have
acquired are described below.
Telluride Barstow, LLC, a Virginia limited liability company, was
formed by our advisor in June of 1998 to acquire Barstow Road Shopping Center, a
community shopping center in Barstow, California. Our affiliated advisor is the
managing member of Telluride Barstow, LLC. The center includes approximately
77,950 square feet of leasable space and, as of February 1, 1999, was
approximately 98% occupied.
Truckee River Office Tower, LLC, a Virginia limited liability company,
was formed by our advisor in August of 1998 to acquire Truckee River Office
Tower, a 15-story office and parking facility located in downtown Reno, Nevada.
Our affiliated advisor is the managing member of Truckee River Office Tower,
LLC, which closed on the purchase of the office tower on December 1, 1998. The
property contains approximately 137,572 square feet of Class-B office space and,
as of February 1, 1999, was approximately 58% occupied. The building was
developed in 1981 by casino operator, Harrah's, which currently leases over 40%
of the space.
Western Real Estate Investment Trust, a Virginia corporation, was
formed by our advisor in July of 1998 and intends to qualify as a REIT for
federal income tax purposes. Western REIT is currently engaged in an ongoing
best efforts private placement of $50,000,000 of its common stock. Western REIT
was formed to acquire office and industrial properties and retail shopping
centers with the proceeds of its private placement. Our affiliated advisor
manages the properties owned by Western REIT and serves as the general partner
of Western REIT's operating partnership subsidiary. Western REIT's ongoing best
efforts private placement is being conducted by the dealer manager.
Western REIT currently owns the following properties:
The Kress Energy Center is an office building located in the downtown
central business district of Wichita, Kansas. This six-story, historically
registered building with approximately 57,693 leasable square feet was
originally constructed in 1930. As of February 1, 1999, the building was
approximately 89% occupied.
The Phelan Village Shopping Center is a 58,619 square foot shopping
center in Phelan, California built in 1989. Western REIT acquired this property
on October 16, 1998. As of February 1, 1999, Phelan Village was approximately
93% occupied.
The Century Plaza East Shopping Center is a retail shopping center
located in East Lancaster, California (near Palmdale, California). The center
includes approximately 121,192 square feet and, as of February 1, 1999, was
approximately 90% occupied.
The Bryant Ranch Shopping Center is a 93,892 square foot neighborhood
shopping center located in Yorba Linda (Orange County), California. Western REIT
acquired this property on December 1, 1998 and, as of February 1, 1999, the
center was approximately 91% leased.
The Huron Mall Shopping Center is a 208,650 square foot neighborhood
shopping center in Huron, South Dakota. Western REIT acquired this property on
March 31, 1999 and, as of that date, the property was approximately 72% leased.
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<PAGE>
None of these prior programs has liquidated or sold any of its real
properties to date and, accordingly, no assurance can be made that prior
programs will ultimately be successful in meeting their investment objectives.
See "Risk Factors."
In addition, Yerington Shopping Center, LLC, a Virginia limited
liability company, was formed by our advisor in December of 1998 to acquire
Yerington Plaza Shopping Center, a neighborhood shopping center in Yerington,
Nevada, about 80 miles southeast of Reno, Nevada. The Plaza includes
approximately 55,531 square feet of leasable space and, as of February 1, 1999,
was approximately 94% occupied. Our affiliated advisor is the managing member of
Yerington Shopping Center, LLC, which closed the private placement of its equity
interests and acquired the shopping center on March 8, 1999.
The information set forth above should not be considered indicative of
results to be expected from our company.
Potential investors are encouraged to examine the prior performance
tables attached as Exhibit A to this prospectus for more detailed information
regarding the prior experience of our advisor. In addition, upon request,
prospective investors may obtain from our advisor without charge copies of
offering materials and any reports prepared in connection with any of the prior
advisor programs. Any such request should be directed to our advisor.
Additionally, Table VI contained in Part II of the registration statement of
which this prospectus is a part (which is not part of this prospectus) gives
certain additional information relating to properties acquired by the prior
advisor programs. We will furnish, without charge, copies of such table upon
request.
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CONFLICTS OF INTEREST
Our management will be subject to various conflicts of interest arising out
of our relationship with our advisor, the dealer manager and their affiliates.
All agreements and arrangements, including those relating to compensation,
between us and our advisor, the dealer manager and their affiliates are not the
result of arm's-length negotiations. The limitations on our advisor described
below have been adopted to control when we enter into transactions with our
advisor, the dealer manager and their affiliates. With respect to the conflicts
of interest described herein, our advisor, the dealer manager and their
affiliates have informed us that they will endeavor to balance their interests
with our interests. See "Risk Factors--Conflicts of Interest."
We believe that the compensation paid to our advisor or its affiliates
under the advisory agreement is on terms no less favorable to our company than
those customary for similar services performed by independent firms in the
relevant geographic area. See "Compensation Table." The advisory agreement
provides that it may be terminated by a majority vote of our independent
directors or our shareholders upon 60 days prior written notice and payment of a
cancellation fee. See "Our Affiliated Advisor--The Advisory Agreement."
COMPETITION FOR THE TIME AND SERVICE OF OUR AFFILIATED ADVISOR AND AFFILIATES
Our company relies on our advisor and its affiliates to manage our assets
and daily operations. Many of the same persons serve as directors, officers and
employees of our company and our advisor. Affiliates of our advisor have
conflicts of interest in allocating management time, services and functions
among various existing real estate programs, including the prior advisor
programs, and any future real estate programs or business ventures that they may
organize or serve. Our affiliated advisor and its affiliates have informed us
that they believe they have sufficient staff to be fully capable of discharging
their responsibilities in connection with various real estate programs and other
business ventures.
PROCESS FOR RESOLUTION OF CONFLICTING OPPORTUNITIES
Our affiliated advisor has sponsored privately offered real estate programs
and may in the future sponsor privately and publicly offered real estate
programs that may have investment objectives similar to ours. Therefore, our
advisor and its affiliates could be subject to conflicts of interest between our
company and other real estate programs. The advisory agreement gives us the
first opportunity to buy income-producing properties located in our focus states
placed under contract by our advisor or its affiliates, provided that:
. we have funds available to make the purchase;
. our board of directors or appropriate acquisition committee votes to
make the purchase within fourteen days of being offered such
property by our advisor; and
. the property meets our acquisition criteria.
Other factors that may be considered in connection with the decisions as to the
suitability of the property for investment include:
. the effect of the acquisition on the diversification of our portfolio;
. the amount of funds we have available for investment;
. cash flow; and
. the estimated income tax effects of the purchase and subsequent
disposition.
The independent directors must, by majority vote, approve all actions by our
advisor or its affiliates that present potential conflicts with our company. See
"Our Affiliated Advisor--The Advisory Agreement."
We believe that the three factors, including the obligations of our advisor
and its affiliates to present to us any income-producing investment
opportunities that could be suitable for our company, will help to lessen the
competition or conflicts with respect to the acquisition of properties.
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ACQUISITION FROM OUR AFFILIATED ADVISOR AND ITS AFFILIATES
We may acquire properties from our advisor, our directors or officers or
their affiliates. The prices we pay for such properties will not be the subject
of arm's-length negotiations. However, we do not intend to acquire a property
from our advisor or an affiliate unless either a competent independent appraiser
confirms that our purchase price is equal to or less than the property's fair
market value or a majority of our board of directors, including a majority of
our independent directors that are not interested in the transaction, determines
that the purchase price is fair, reasonable and in our best interests. However,
there can be no absolute assurance that the price we pay for any such property
will not, in fact, exceed that which would be paid by an unaffiliated purchaser.
WE MAY PURCHASE PROPERTIES FROM PERSONS WITH WHOM AFFILIATES OF OUR AFFILIATED
ADVISOR HAVE PRIOR BUSINESS RELATIONSHIPS
We may purchase properties from certain sellers with whom our advisor or
its affiliates have purchased properties in the past and may purchase properties
in the future. If we purchase properties from such sellers, our advisor will
experience a conflict between the current interests of our company and its
interests in preserving any ongoing business relationship with such seller. Our
board of directors will not, and our advisor has informed us that it will not,
consummate such purchases in a manner that would effect a breach of any
fiduciary obligations to our company.
OUR AFFILIATED ADVISOR MAY HAVE CONFLICTING FIDUCIARY OBLIGATIONS IN THE EVENT
OUR COMPANY ACQUIRES PROPERTIES WITH OUR AFFILIATED ADVISOR OR AFFILIATES
Our affiliated advisor may advise us to acquire an interest in a property
through a joint venture or co-ownership arrangement with our advisor or its
affiliates. In such instance, our advisor will have a fiduciary duty to both our
company and the affiliate participating in the joint venture or co-ownership
arrangement. In order to minimize the likelihood of a conflict between these
fiduciary duties, the advisory agreement provides guidelines for investments in
such co-ownership or joint venture arrangements in various respects. In
addition, the advisory agreement provides that a majority of the independent
directors not otherwise interested in the transaction must determine that the
transaction is on terms and conditions no less favorable than from unaffiliated
third parties and is fair and reasonable to our company. See "Investment
Objectives and Policies--Joint Ventures."
PROPERTY MANAGEMENT SERVICES WILL BE RENDERED BY OUR AFFILIATED ADVISOR
Our affiliated advisor will provide property and asset management services
to our company and other entities, some of whom may be in competition with the
company. Our affiliated advisor will render these services to our company on a
competitive basis in a manner consistent with customary business practices. Our
affiliated advisor has informed us that it believes that it has sufficient
personnel and other required resources to discharge all responsibilities to the
various properties that it manages and will manage in the future.
RECEIPT OF COMMISSIONS, FEES AND OTHER COMPENSATION BY OUR AFFILIATED ADVISOR
Our affiliated advisor and its affiliates have received and will continue
to receive the compensation as described in "Compensation Table." Certain
compensation is payable to our advisor despite the lack of cash available to
make distributions to our shareholders. To that extent, our advisor benefits
from our retaining ownership of properties and leveraging our properties, while
our shareholders may be better served by our disposing of a property or holding
a property on an unleveraged basis. Furthermore, our advisor's receipt and
retention of certain fees and reimbursements is dependent upon our making
investments in properties. Therefore, the interest of our advisor in receiving
such fees may conflict with your interest in earning income on your investment
in the shares. Our affiliated advisor and its affiliates have a fiduciary duty
to our company and our shareholders and have represented to us that their
actions and decisions will be made in compliance with their fiduciary duty. See
also "Risk Factors--Dilution" regarding issuance of Soliciting Dealer Warrants
to the dealer manager.
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NON-ARM'S-LENGTH AGREEMENTS; CONFLICTS; COMPETITION
The agreements and arrangements, including those relating to compensation,
between our company, our advisor and its affiliates are not the result of arm's-
length negotiations, but are expected to approximate the terms of arm's-length
transactions. While we will not make loans to our advisor or its affiliates, we
may borrow money from our advisor or its affiliates for various business
purposes, including working capital requirements, but only on terms as to
interest rate, security, fees and other charges at least as favorable to our
company, as determined by a majority of the independent directors, as those
charged by unaffiliated lending institutions in the same locality on comparable
loans for the same purpose or our advisor's actual cost of funds. Our affiliated
advisor and its affiliates are not prohibited from providing services to, and
otherwise dealing or doing business with, persons who deal with us, although
there are no present arrangements with respect to any such services. However, no
rebates or "give-ups" may be received by our advisor or its affiliates, nor may
our advisor or any such affiliates participate in any reciprocal business
arrangements which would have the effect of circumventing any of the provisions
of the advisory agreement.
LEGAL COUNSEL FOR OUR COMPANY AND OUR AFFILIATED ADVISOR IS THE SAME LAW FIRM
Hirschler, Fleischer, Weinberg, Cox & Allen, a Professional Corporation
acts as legal counsel to our advisor and some of its affiliates and also is
expected to represent us with respect to certain legal matters including real
estate matters. Hirschler is not acting as counsel for the shareholders or any
potential investor. There is a possibility in the future that the interests of
the various parties may become adverse and, under the Code of Professional
Responsibility of the legal profession, Hirschler may be precluded from
representing any one or all of such parties. 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 by one or more of the parties to
assure that their interests are adequately protected. Moreover, should such a
conflict not be readily apparent, Hirschler may inadvertently act in derogation
of the interest of certain parties which could affect us and, therefore, our
shareholders' ability to meet our investment objectives.
CUNNINGHAM CAPITAL CORP. IS PARTICIPATING AS DEALER MANAGER IN THE SALE OF OUR
SHARES
Cunningham Capital Corp., a securities dealer affiliated with Anthony W.
Thompson, the Chairman of the Board, President and Chief Executive Officer of
our company and the President and Chief Executive Officer of our advisor, is
participating as the dealer manager in this offering. The dealer manager is
entitled to the Selling Commissions, Marketing Support and Due Diligence
Reimbursement Fee and Soliciting Dealer Warrants, which may be retained or
reallowed to soliciting dealers. The dealer manager may be subject to a conflict
of interest, which may arise out of its participation in this offering and its
affiliation with Mr. Thompson, in performing independent "due diligence" with
respect to our company. See "Risk Factors--Dilution" and "Description of Capital
Stock--Soliciting Dealer Warrants." Any review of our structure, formation or
operation performed by the dealer manager will be conducted as if it was an
independent review; however, because the dealer manager is our affiliate, such
review cannot be considered to represent an independent review, and such review
may not be as meaningful as a review conducted by an unaffiliated broker-dealer.
Therefore, this offering will not necessarily have the independent review
typically conducted by an underwriter or managing broker-dealer.
POTENTIAL CONFLICT OF INTEREST RESULTING FROM UNOFFICIAL ADVISORY COMMITTEE
Our affiliated advisor has an unofficial advisory committee comprised of
persons licensed to sell securities through one of the soliciting dealers. The
advisory committee members have been chosen because of their experience and
standing in the investment community. Meetings of the advisory committee may be
convened from time to time to make unofficial recommendations to our company and
our advisor. While the advisory committee has no power or authority, interaction
with the members of the advisory committee is intended to provide our advisor
and our management with a sounding board for new acquisitions and investment
ideas. The advisory committee members will be reimbursed travel and meal costs
for out-of-town meetings; we will not pay them any other compensation or
reimbursement. Serving on the advisory committee may create a conflict of
interest for its members in that such persons may be asked to recommend purchase
of the shares, as opposed to other securities. Because of this conflict of
interest, investors who purchase shares through the advisory committee members
should not assume
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that they will be receiving independent investment advice in connection with the
shares and may wish to seek the advice of an independent soliciting dealer.
Names of the advisory committee members may be obtained from us upon request.
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SUMMARY OF DIVIDEND REINVESTMENT PROGRAM
We have adopted a dividend reinvestment program under which our
shareholders may elect to have their cash dividends reinvested in additional
shares of our common stock. The following discussion summarizes the principal
terms of the dividend reinvestment program, which is attached to this prospectus
as Exhibit C.
GENERAL
Shareholders who have received a copy of this prospectus and participate in
this offering can elect to participate in and purchase shares through the
dividend reinvestment program at any time and will not need to receive a
separate prospectus relating solely to the dividend reinvestment program. A
person who becomes a shareholder otherwise than by participating in this
offering may purchase shares through the dividend reinvestment program only
after receipt of a separate prospectus relating solely to the dividend
reinvestment program.
Until the earlier to occur of the termination of this offering and the sale
of all the shares reserved for issuance under the dividend reinvestment program,
the purchase price for shares purchased under the dividend reinvestment program
will be the greater of $9.05 and the fair market value of a share of our common
stock as of the date of reinvestment.
INVESTMENT OF DIVIDENDS
Dividends will be used to purchase shares on behalf of the participants
from our company. All such dividends shall be invested in shares within 30 days
after such payment date. Any dividends not so invested will be returned to the
participants in the dividend reinvestment program.
As of the date of this prospectus, participants will not have the option to
make voluntary contributions to the dividend reinvestment program to purchase
shares in excess of the amount of shares that can be purchased with their
dividends. The board of directors reserves the right, however, to amend the
dividend reinvestment program in the future to permit voluntary contributions to
the dividend reinvestment program by participants, to the extent consistent with
our objective of qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEE, AND ALLOCATION OF SHARES
For each participant in the dividend reinvestment program, we will maintain
a record which shall reflect for each dividend period the dividends received by
us on behalf of such participant. Any interest earned on such dividends will be
retained by us to defray certain costs relating to the dividend reinvestment
program.
We will use the aggregate amount of dividends to all participants for
each dividend period to purchase shares for the participants. If the aggregate
amount of dividends to participants exceeds the amount required to purchase all
shares then available for purchase, our company will purchase all available
shares and will return all remaining dividends to the participants within 30
days after the date such dividends are made. We will allocate the purchased
shares among the participants based on the portion of the aggregate dividends
received on behalf of each participant, as reflected in our records. The
ownership of the shares purchased under the dividend reinvestment program shall
be reflected on our books.
Shares acquired under the dividend reinvestment program will entitle
the participant to the same rights and to be treated in the same manner as those
purchased by the participants in this offering.
The allocation of shares among participants may result in the ownership
of fractional shares, computed to four decimal places.
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REPORTS TO PARTICIPANTS
Within 90 days after the end of each fiscal year, we will mail to each
participant a statement of account describing, as to such participant:
. the dividends reinvested during the year;
. the number of shares purchased during the year;
. the per share purchase price for such shares;
. the total administrative charge retained by us on behalf of each
participant; and
. the total number of shares purchased on behalf of the participant under
the dividend reinvestment program.
See "--General" above.
Tax information with respect to income earned on shares under the dividend
reinvestment program for the calendar year will be sent to each participant.
ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Shareholders who purchase shares in this offering may become
participants in the dividend reinvestment program by making a written election
to participate on their Subscription Agreements at the time they subscribe for
shares. Any other shareholder who receives a copy of this prospectus or a
separate prospectus relating solely to the dividend reinvestment program and who
has not previously elected to participate in the dividend reinvestment program
may so elect at any time by completing the enrollment form attached to such
prospectus or by other appropriate written notice to us of such shareholder's
desire to participate in the dividend reinvestment program. Participation in the
dividend reinvestment program will commence with the next dividend made after
receipt of the participant's notice, provided it is received at least ten days
prior to the record date for such dividend. Subject to the preceding sentence,
the election to participate in the dividend reinvestment program will apply to
all dividends attributable to the dividend period in which the shareholder made
such written election to participate in the dividend reinvestment program and to
all dividends. Participants will be able to terminate their participation in the
dividend reinvestment program at any time without penalty by delivering written
notice to us no less than ten days prior to the next record date. We may also
terminate the dividend reinvestment program for any reason at any time, upon ten
days' prior written notice to all participants.
A participant who chooses to terminate participation in the dividend
reinvestment program must terminate his or her entire participation in the
dividend reinvestment program and will not be allowed to terminate in part. If
the dividend reinvestment program is terminated, we will update our stock
records to account for all whole shares purchased by the participant(s) in the
dividend reinvestment program, and if any fractional shares exist, we may either
(a) send you a check in payment for any fractional shares in your account based
on the then-current market price for the shares, or (b) credit your stock
ownership account with any such fractional shares. There are no fees associated
with a participant's terminating his interest in the dividend reinvestment
program or our termination of the dividend reinvestment program. A participant
in the dividend reinvestment program who terminates his interest in the dividend
reinvestment program will be allowed to participate in the dividend reinvestment
program again by notifying us and completing any required forms.
We reserve the right to prohibit certain employee benefit plans from
participating in the dividend reinvestment program if such participation would
cause the underlying assets of the company to constitute "plan assets" of such
plans. See "ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Shareholders subject to federal income taxation who elect to participate in
the dividend reinvestment program will incur tax liability for dividends
reinvested under the dividend reinvestment program even though they will receive
no related cash. Specifically, shareholders will be treated as if they have
received the dividend from our
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company and then applied such dividend to purchase shares in the dividend
reinvestment program. A shareholder who reinvests dividends will be taxed on
distributions from our company as ordinary income to the extent such
distributions are made out of our current or accumulated earnings and profits,
unless we have designated all or a portion of the distribution as a capital gain
dividend. In such case, such designated portion of the distribution will be
taxed as long-term capital gain.
AMENDMENTS AND TERMINATION
We reserve the right to amend any aspect of the dividend reinvestment
program without the consent of shareholders, provided that notice of any
material amendment is sent to participants at least 30 days prior to the
effective date thereof. We also reserve the right to terminate the dividend
reinvestment program for any reason at any time by ten days' prior written
notice of termination to all participants. We may terminate a participant's
participation in the dividend reinvestment program immediately if in our
judgment such participant's participation jeopardizes in any way our status as a
REIT.
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FORMATION TRANSACTIONS
The principal transactions in connection with the formation of our
company are as follows:
. In December of 1998, our company was formed as a Virginia
corporation and, in January of 1999, our operating partnership was
formed as a Virginia limited partnership.
. We will sell a minimum of 100,000 and a maximum of 10,000,000 shares
of our common stock in this offering and will contribute the net
proceeds therefrom to our operating partnership in exchange for 100%
of the initial interests in our operating partnership, other than
our advisor's incentive limited partnership interest. We will be the
sole general partner of our operating partnership.
. We will sell up to 700,000 shares to shareholders under our dividend
reinvestment program and up to 250,000 shares upon the exercise of
warrants issued to broker-dealers in connection with this offering.
. We will issue up to 100,000 shares to our directors under our
director stock option plan.
. Our operating partnership will use the net proceeds of this offering
to acquire suitable properties and to repay debt secured by
properties contributed to our operating partnership in return for
units of limited partnership interest.
. Our affiliated advisor will manage our day-to-day operations under
the advisory agreement.
. Our operating partnership may issue units of limited partnership
interest in the future in exchange for properties.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of the date of this prospectus, we had not yet commenced active
operations. Subscription proceeds may be released to us after the minimum
offering is achieved and will be applied to investment in properties and the
payment or reimbursement of Selling Commissions and other fees and expenses. See
"Estimated Use of Proceeds of This Offering" and "Compensation Table." We will
experience a relative increase in liquidity as we receive additional
subscriptions for shares and a relative decrease in liquidity as we spend net
offering proceeds in connection with the acquisition, development and operation
of properties.
As of the date of this prospectus, we have not entered into any
arrangements creating a reasonable probability that we will acquire a specific
property. The number of properties that we will acquire will depend upon the
number of shares sold and the resulting amount of the net proceeds available for
investment in properties. See "Risk Factors--Lack of Investment
Diversification."
We are not aware of any material trends or uncertainties, favorable or
unfavorable, other than national economic conditions affecting real estate
generally, which may be reasonably anticipated to have a material impact on
either capital resources or the revenues or income to be derived from the
operation of our properties.
Until required for the acquisition, development or operation of
properties, we will keep the net proceeds of this offering in short-term, liquid
investments. We expect the majority of leases for the properties that we will
acquire will be net leases that require the tenant to pay operating expenses.
Thus, we do not anticipate establishing a permanent reserve for maintenance and
repairs of our properties.
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PRINCIPAL SHAREHOLDERS
As of the date of this prospectus, none of the officers and directors
of our company or our advisor have committed to purchasing shares in this
offering. However, such individuals are not precluded from purchasing shares in
this offering, and may do so at the offering price of $10.00 net of the Selling
Commissions and the Marketing Allowance and Due Diligence Reimbursement Fee. We
do not contemplate that any such person will own beneficially in excess of 5% of
our shares.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following statements with respect to our capital stock are subject
to the provisions of our articles of incorporation and bylaws as in effect as of
the date of this prospectus. You should be aware that, while accurate, these
statements do not purport to be complete, or to give full effect to the terms of
the provisions of statutory or common law, and are subject to, and are qualified
in their entirety by reference to, the terms of our articles of incorporation
and bylaws, which are filed as exhibits to the registration statement of which
this prospectus is a part.
COMMON STOCK
Under our articles of incorporation, we have 50,000,000 authorized
shares of common stock, $.01 par value per share, available. We have authorized
the issuance of 11,050,000 shares of common stock in connection with this
offering. The common stock offered by this prospectus will be duly authorized,
fully paid and nonassessable. The common stock is not convertible or subject to
redemption.
Holders of our common stock:
. are entitled to receive dividends when and as declared by our board
of directors after payment of, or provision for, full cumulative
dividends on and any required redemptions of shares of preferred
stock then outstanding;
. have one vote per share and non-cumulative voting rights, which
means that holders of more than 50% of the shares voting can elect
all of the directors if they choose to do so, and, in such event,
the holders of the remaining shares will not be able to elect any
directors;
. are entitled to share ratably in the distributable assets of our
company remaining after satisfaction of the prior preferential
rights of the preferred stock and the satisfaction of all of our
debts and liabilities in the event of any voluntary or involuntary
liquidation or dissolution of our company; and
. do not have preemptive rights.
Initially, we will serve as our own transfer agent for the common
stock.
PREFERRED STOCK
Our articles of incorporation authorize our board of directors without
further shareholder action to provide for the issuance of up to 10,000,000
shares of preferred stock, in one or more series, with such voting powers and
with such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions, as our
board of directors shall approve. As of the date of this prospectus, there are
no preferred shares outstanding and we have no present plans to issue any
preferred shares.
SOLICITING DEALER WARRANTS
We have agreed to issue and sell to the dealer manager one warrant to
purchase one share of common stock for every 40 shares sold by the dealer
manager in this offering (the "Soliciting Dealer Warrants") up to a maximum of
250,000 Soliciting Dealer Warrants to purchase an equivalent number of shares.
The dealer manager has agreed to pay our company $0.0008 for each Soliciting
Dealer Warrant. The Soliciting Dealer Warrants will be issued on a quarterly
basis commencing 60 days after the date on which the shares are first sold under
this offering. The dealer manager may retain or reallow Soliciting Dealer
Warrants to the soliciting dealers, unless prohibited by either federal or state
securities laws.
The holder of a Soliciting Dealer Warrant will be entitled to purchase
one share from our company at a price of $12.00 (120% of the public offering
price per share) during the time period beginning on the first anniversary of
the effective date of this
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offering and ending on the fifth anniversary of the effective date of this
offering. A Soliciting Dealer Warrant may not be exercised unless the shares to
be issued upon the exercise of the Soliciting Dealer Warrant have been
registered or are exempt from registration in the state of residence of the
holder of the Soliciting Dealer Warrant or if a prospectus required under the
laws of such state cannot be delivered to the buyer on our behalf.
Notwithstanding the foregoing, no Soliciting Dealer Warrants will be exercisable
until one year from the date of issuance. In addition, holders of Soliciting
Dealer Warrants may not exercise the Soliciting Dealer Warrants to the extent
such exercise would jeopardize our status as a REIT under the federal tax laws.
The terms of the Soliciting Dealer Warrants, including the exercise
price and the number and type of securities issuable upon exercise of a
Soliciting Dealer Warrant and the number of such warrants, may be adjusted pro
rata in the event of stock dividends, certain subdivisions, combinations and
reclassification of shares or the issuance to shareholder of rights, options or
warrants entitling them to purchase shares or securities convertible into
shares. The terms of the Soliciting Dealer Warrants also may be adjusted if we
engage in a merger or consolidation transactions or if all or substantially all
of our assets are sold. Soliciting Dealer Warrants are not transferable or
assignable for one year and thereafter may be assigned or transferred in
compliance with federal and state securities laws, except by the dealer manager,
the soliciting dealers, their successors in interest, or to individuals who are
both officers and directors of such a person or licensed representatives of the
dealer manager or the soliciting dealer. Exercise of these Soliciting Dealer
Warrants will be under the terms and conditions detailed in this prospectus, in
the Warrant Purchase Agreement and in the Soliciting Dealer Warrant.
Holders of Soliciting Dealer Warrants do not have the rights of
shareholders and may not vote on company matters and are not entitled to receive
distributions.
ISSUANCE OF ADDITIONAL SECURITIES AND DEBT INSTRUMENTS
Our board of directors is authorized to issue additional securities,
including common stock, preferred stock, convertible preferred stock and
convertible debt, for cash, property or other consideration on such terms as
they may deem advisable and to classify or reclassify any unissued shares of
capital stock of our company without approval of the holders of the outstanding
securities. We may issue debt obligations with conversion privileges on such
terms and conditions as the directors may determine, whereby the holders of such
debt obligations may acquire our common stock or preferred stock. Subject to
certain restrictions, we may also issue warrants, options and rights to buy
shares on such terms as the directors deem advisable, despite the possible
dilution in the value of the outstanding shares which may result from the
exercise of such warrants, options or rights to buy shares, as part of a ratable
issue to shareholders, as part of a private or public offering or as part of
other financial arrangements.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order to qualify as a REIT under the federal tax laws, we must meet
certain requirements concerning the ownership of our outstanding capital stock.
Specifically, no more than 50% in value of our outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals, as defined in the
federal income tax laws to include private foundations, some employee benefit
plans and trusts, and some charitable trusts, during the last half of a taxable
year, other than our first REIT taxable year. Moreover, 100 or more persons must
own our outstanding shares of capital stock during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year, other than our first REIT taxable year. See "Federal Income Tax
Consequences of Our Company's Status as a REIT--Requirements for Qualification."
Because our board of directors believes it is essential for our company
to qualify and continue to qualify as a REIT and for other corporate purposes,
our articles of incorporation, subject to certain exceptions described below,
provide that no person may own, or be deemed to own by virtue of the attribution
provisions of the federal income tax laws, more than the ownership limit, which
is 9.9% of:
. the number of outstanding shares of our common stock; or
. the number of outstanding shares of our preferred stock of any class
or series of preferred stock
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Our articles of incorporation provide that, subject to the exceptions
described below, any transfer of common or preferred stock that would:
. result in any person owning, directly or indirectly, shares of our
common or preferred stock in excess of 9.9% of the outstanding
shares of common stock or any class or series of preferred stock;
. result in our common and preferred stock being owned by fewer than
100 persons, determined without reference to any rules of
attribution;
. result in our company being "closely held" under the federal income
tax laws;
. cause our company to own, actually or constructively, 10% or more of
the ownership interests in a tenant of our real property, under the
federal income tax laws; or
. before our common stock qualifies as a class of "publicly-offered
securities," result in 25% or more of our common stock being owned
by ERISA investors (see "ERISA Considerations");
will be null and void, and the intended transferee will acquire no rights in
such shares of stock. In addition, such shares will be designated as shares-in-
trust and transferred automatically to a trust effective on the day before the
purported transfer of such shares. The record holder of the shares that are
designated as shares-in-trust, or the prohibited owner, will be required to
submit such number of shares of common stock or preferred stock to our company
for registration in the name of the trust. We will designate the trustee, but he
will not be affiliated with our company. The beneficiary of a trust will be one
or more charitable organizations that are named by our company.
Shares-in-trust will remain shares of issued and outstanding common
stock or preferred stock and will be entitled to the same rights and privileges
as all other stock of the same class or series. The trust will receive all
dividends and distributions on the shares-in-trust and will hold such dividends
or distributions in trust for the benefit of the beneficiary. The trust will
vote all shares-in-trust. The trust will designate a permitted transferee of the
shares-in-trust, provided that the permitted transferee purchases such
shares-in-trust for valuable consideration and acquires such shares-in-trust
without such acquisition resulting in a transfer to another trust.
Our articles of incorporation require that the prohibited owner of the
shares-in-trust pay to the trust the amount of any dividends or distributions
received by the prohibited owner that are attributable to any shares-in-trust
and the record date of which was on or after the date that such shares of stock
became shares-in-trust. The prohibited owner generally will receive from the
trust the lesser of:
. the price per share such prohibited owner paid for the shares of
common stock or preferred stock that were designated as shares-in-
trust or, in the case of a gift or devise, the market price (as
defined below) per share on the date of such transfer; or
. the price per share received by the trust from the sale of such
shares-in-trust.
The trust will distribute any amounts received by the trust in excess of the
amounts to be paid to the prohibited owner to the beneficiary.
The shares-in-trust will be deemed to have been offered for sale to our
company, or our designee, at a price per share equal to the lesser of:
. the price per share in the transaction that created such shares-in-
trust or, in the case of a gift or devise, the market price per
share on the date of such transfer; or
. the market price per share on the date that our company, or our
designee, accepts such offer.
We will have the right to accept such offer for a period of 90 days
after the later of the date of the purported transfer which resulted in such
shares-in-trust or the date we determine in good faith that a transfer resulting
in such shares-in-trust occurred.
"Market price" on any date means the average of the closing prices for
the five consecutive trading days ending on such date. The "closing price" on
any date generally shall mean the last quoted price as reported by the primary
securities exchange or market on which our stock is then listed or quoted for
trading or if our stock is not so
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listed or quoted, a price determined by our board of directors in good faith.
"Trading day" shall mean a day on which the principal national securities
exchange on which shares of our common or preferred stock are listed or admitted
to trading is open for the transaction of business or, if our common or
preferred stock is not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
If you acquire or attempt to acquire shares of our common or preferred
stock in violation of the foregoing restrictions, or if you owned shares of
common or preferred stock that were transferred to a trust, then we will require
you immediately to give us written notice of such event and to provide us with
such other information as we may request in order to determine the effect, if
any, of such transfer on our status as a REIT.
If you own, directly or indirectly, more than 5%, or such lower
percentages as required under the federal income tax laws, of our outstanding
shares of stock, then you must, within 30 days after January 1 of each year,
provide to us a written statement or affidavit stating your name and address,
the number of shares of common and preferred stock owned directly or indirectly,
and a description of how such shares are held. In addition, each direct or
indirect shareholder shall provide to us such additional information as we may
request in order to determine the effect, if any, of such ownership on our
status as a REIT and to ensure compliance with the ownership limit.
The ownership limit generally will not apply to the acquisition of
shares of common or preferred stock by an underwriter that participates in a
public offering of such shares. In addition, our board of directors, upon
receipt of a ruling from the Internal Revenue Service or an opinion of counsel
and upon such other conditions as our board of directors may direct, may exempt
a person from the ownership limit under certain circumstances. However, the
ownership limit will continue to apply until:
. our board of directors determines that it is no longer in the best
interests of our company to attempt to qualify, or to continue to
qualify, as a REIT; and
. there is an affirmative vote of two-thirds of the number of shares
of outstanding common and preferred stock entitled to vote on such
matter at a regular or special meeting of our shareholders.
All certificates representing shares of common or preferred stock will
bear a legend referring to the restrictions described above.
The ownership limit in our articles of incorporation may have the
effect of delaying, deferring or preventing a takeover or other transaction or
change in control of our company that might involve a premium price for your
shares of common stock or otherwise be in your interest as a shareholder. See
"Risk Factors -- Potential Adverse Consequences of Limits on Ownership and
Transfer. "
CERTAIN PROVISIONS OF VIRGINIA CORPORATE LAW
AND OUR COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following is a summary of certain provisions of Virginia corporate
law, our articles of incorporation and our bylaws in effect as of the date of
this prospectus, and is qualified in its entirety by reference to Virginia law
and to such documents, copies of which may be obtained from our company.
CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
Shareholder rights and related matters are governed by the Virginia
Stock Corporation Act, our articles of incorporation and bylaws. Certain
provisions of our articles of incorporation and bylaws, which are summarized
below, may make it more difficult to change the composition of our board of
directors and may discourage or make more difficult any attempt by a person or
group to obtain control of our company.
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SHAREHOLDERS' MEETINGS
An annual meeting of our shareholders will be held within six months
after the end of each fiscal year, for the purpose of electing directors and for
the transaction of such other business as may come before the meeting. A special
meeting of our shareholders may be called by the President or a majority of our
board of directors, and shall be called by the President upon written request of
shareholders holding in the aggregate at least 10% of the outstanding shares.
Upon receipt of a written request, either in person or by mail, stating the
purpose(s) of the meeting, we shall provide all shareholders, within ten days
after receipt of said request, written notice, either in person or by mail, of a
meeting and the purpose of such meeting to be held on a date not less than 10
nor more than 60 days after the distribution of such notice, at a time and place
specified in the request, or if none is specified, at a time and place
convenient to our shareholders. At any meeting of the shareholders, each
shareholder is entitled to one vote for each share owned of record on the
applicable record date. In general, the presence in person or by proxy of a
majority of the outstanding shares shall constitute a quorum, and the majority
vote of our shareholders will be binding on all of our shareholders.
OUR BOARD OF DIRECTORS
Our articles of incorporation and bylaws provide that the number of
directors of our company may not be fewer than five nor more than nine, a
majority of which shall be independent directors. This provision may only be
amended by a vote of a majority of our shareholders. A vacancy in our board of
directors caused by the death, resignation or incapacity of a director or by an
increase in the number of directors (within the limits described above) may be
filled by the vote of a majority of the remaining directors. With respect to a
vacancy created by the death, resignation or incapacity of an independent
director, the remaining independent directors shall nominate a replacement.
Vacancies occurring as a result of the removal of a director by our shareholders
shall be filled by a majority vote of our shareholders. Any director may resign
at any time and may be removed with or without cause by our shareholders owning
at least a majority of the outstanding shares.
STAGGERED TERMS FOR DIRECTORS
Our articles of incorporation require that our board of directors be
divided into three classes of directors. At each annual meeting of shareholders,
the class of directors to be elected at such meeting will be elected for a
three-year term, and the directors in the other two classes will continue in
office. Because holders of common stock have no right to cumulative voting for
the election of directors, at each annual meeting of shareholders, the holders
of the shares of common stock with a majority of the voting power of the common
stock will be able to elect all of the successors of the class of directors
whose term expires at the meeting. In effect, the classified board of directors
may make more difficult or delay a change in control of our company or the
removal of incumbent management. See "Management of Our Company--The Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our articles of incorporation provide that in any preceding brought by
or in the right of our company or brought by or on behalf of our shareholders,
no director or officer of our company shall be liable to our company or our
shareholders for any monetary damages with respect to any transaction,
occurrence or course of conduct, except for liability resulting from such
person's having engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
Our articles of incorporation further provide that the company shall
indemnify:
. any person who was or is a party to any proceeding, including a
proceeding brought by a shareholder in the right of our company
or brought by or on behalf of our shareholders, by reason of the
fact that he is or was a director or officer of our company; and
. any director or officer who is or was serving at our request as a
director, trustee, partner or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise,
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against any liability incurred by him in connection with such
proceeding, unless he engaged in willful misconduct or a knowing
violation of the criminal law or of the federal or state
securities law.
Our board of directors is further empowered by a majority vote of a
quorum of disinterested directors, to contract to indemnify any director or
officer in respect of any such proceeding arising out of any act or omission,
whether occurring before or after the execution of such contract.
We shall pay for or reimburse the reasonable expenses incurred by any
applicant that is a party to a proceeding in advance of final disposition of the
proceeding or the making of a new determination for indemnification described in
the preceding paragraph if the applicant furnished our company:
. a written statement of his or her good faith belief that he or
she has met the standard of conduct described above; and
. a written undertaking, executed personally on his or her behalf,
to repay the advance if it is ultimately determined that he or
she did not meet such standard of conduct, which undertaking
shall be an unlimited general obligation of the applicant but
need not be secured and may be accepted without reference to
financial ability to make repayment.
Authorizations of payment shall be made by the persons described in the
preceding paragraph.
Also, our board of directors may cause our company to indemnify or
contract to indemnify any person not specified above who was, is, or may become
a party to any proceeding, by reason of the fact that he or she is or was an
employee or agent of our company, or is or was serving at the request of our
company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, to
the same extent as if such person were specified as one whom indemnification is
granted as described above. Any determination to indemnify or contract to
indemnify under our articles of incorporation shall be made by a majority vote
of a quorum consisting of disinterested directors.
We may purchase and maintain insurance to indemnify it against the
liability assumed by it in accordance with our articles of incorporation.
The indemnification provided in our articles of incorporation is not
exclusive to any other right to which any person may be entitled, including any
right under policies of insurance that may be purchased and maintained by our
company or others, with respect to claims, issues, or matters in relation to
which our company would not have obligation or right to indemnify such person
under the provisions of our articles of incorporation.
To the extent that the indemnification may apply to liabilities arising
under the Securities Act, in the opinion of the Securities Exchange Commission,
such indemnification is contrary to public policy and, therefore, unenforceable.
Defenses Available
There are certain defenses available to our directors and officers and
our advisor under Virginia corporate law in the event of a shareholder action
against them. One such defense is the "business judgment rule." Under the
business judgment rule, a director or officer may contend that he or she
performed the action giving rise to the shareholder's action in good faith and
in a manner he or she reasonably believed to be in the best interests of our
company. The directors and officers also are entitled to rely on information,
opinions, reports or records prepared by experts, including accountants,
consultants and counsel, who were selected with reasonable care.
SHAREHOLDER VOTING RIGHTS
Except as otherwise provided, all shares of common stock shall have
equal voting rights. Shareholders are entitled to vote by written consent and do
not have cumulative voting rights. The voting rights per share of our
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equity securities issued in the future shall be established by our board of
directors. The shareholders purchasing shares in this offering will not have
preemptive rights to purchase any securities issued by us in the future.
All elections for directors shall be decided by the affirmative vote of
a majority of votes cast at a meeting or without a meeting, provided that a
quorum, defined as a majority of the aggregate number of votes entitled to be
cast thereon, is present. Any or all directors may be removed, with or without
cause, by the affirmative vote of the holders of at least a majority of the
outstanding shares entitled to vote at an annual or special meeting. All other
questions shall be decided by a majority of the votes cast at a meeting. If no
meeting is held, 100% of the shareholders must consent in writing.
Without concurrence of a majority of the outstanding shares, our
directors may not:
. amend our articles of incorporation, including, by way of
illustration, amendments to provisions relating to director
qualifications, fiduciary duty, liability and indemnification,
conflicts of interest, investment policies or investment
restrictions, except for amendments with respect to
authorizations of series of preferred stock and amendments which
do not adversely affect the rights, preferences and privileges of
our shareholders;
. sell all or substantially all of our assets other than in the
ordinary course of our business;
. cause a merger or reorganization of our company; or
. dissolve or liquidate our company.
Matters submitted to the shareholders regarding the removal of our
advisor or directors or any transaction between our company and any of them will
require the approval of a majority of the outstanding shares other than the
shares held by our advisor or such officers or directors, as the case may be.
If, before the tenth anniversary of the date of this prospectus, our
common stock is not listed on a national stock exchange or quoted on a quotation
system of a national securities association or we have not merged with an entity
whose shares are so listed or quoted, we intend to submit for a vote of the
shareholders at the next annual meeting a proposal to liquidate all of our
properties in an orderly fashion and distribute the proceeds to our
shareholders.
Each shareholder entitled to vote on a matter may do so at a meeting in
person, by written proxy or by a signed writing or consent directing the manner
in which he or she desires that his or her vote, which must be received by the
director before such meeting, be cast or without a meeting by a signed writing
or consent directing the manner in which he or she desires that his or her vote,
which must be received by the director before the date the votes of our
shareholders are to be counted, be cast.
ANTI-TAKEOVER PROVISIONS OF THE VIRGINIA STOCK CORPORATION ACT
The Virginia Stock Corporation Act contains certain anti-takeover
provisions regarding affiliated transactions, control share acquisitions and the
adoption of shareholder rights plans. In general, the Virginia Stock Corporation
Act's affiliated transactions provisions prevent a Virginia corporation from
engaging in an affiliated transaction with an interested shareholder, unless
approved by a majority of the disinterested directors and the holders of at
least two-thirds of the outstanding voting stock not owned by the interested
shareholder. Generally, this provision would prevent us from engaging in a
transaction with any person owning more than 10% of any class of voting
securities of our company unless a majority of the disinterested directors on
our board of directors and at least two-thirds of the outstanding voting stock
not owned by the interested shareholder approved the transaction.
Under the control share acquisitions provisions of the Virginia Stock
Corporation Act, shares acquired in a control share acquisition, which means a
transaction that increases the voting strength of the person acquiring such
shares above certain thresholds in director elections, generally have no voting
rights unless granted by a majority of the outstanding voting stock not owned by
such acquiring person. If such voting rights are granted and the acquiring
person controls 50% or more of the voting power, all shareholders, other than
the acquiring person, are entitled to receive fair value for their shares. If
such voting rights are not granted, the corporation may, if authorized by its
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articles of incorporation or bylaws, purchase the acquiring person's shares at
their cost to the acquiring person. As permitted by the Virginia Stock
Corporation Act, we have included a provision in our bylaws that opts our
company out of the control share acquisition statute. Our bylaws, however, may
be amended by our board of directors without shareholder approval.
Finally, the shareholder rights plan provisions of the Virginia Stock
Corporation Act permit our board of directors to adopt a shareholder rights plan
that could render a hostile takeover prohibitively expensive if our board of
directors determines that such a takeover is not in our best interests. The
existence of the shareholder rights plan provisions of the Virginia Stock
Corporation Act, as well as the affiliated transactions and control share
acquisition provisions, could delay or prevent a change in control of our
company, impede a merger, consolidation or other business combination involving
our company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
DISSOLUTION OR TERMINATION OF OUR COMPANY
We are an infinite-life corporation which may be dissolved under the
procedures explained in the Virginia Stock Corporation Act at any time by the
affirmative vote of a majority of our shareholders. Our operating partnership
will terminate on December 31, 2050, unless its term is extended in accordance
with the Virginia Revised Uniform Limited Partnership Act.
TRANSACTIONS WITH AFFILIATES
We have established certain restrictions upon dealings between our
company, our advisor and any of their officers, directors or affiliates. The
Virginia Stock Corporation Act also governs such transactions. In particular,
unless a majority of the directors not otherwise interested in such transaction
determines that the transaction is fair and reasonable to our company and is on
terms and conditions no less favorable than from unaffiliated third parties, our
company may not:
. borrow money from, loan money to, or sell property to our
advisor, any officer, director or affiliates of our advisor or
our company; and
. enter into any other transaction with our advisor, any officer,
director or affiliates of our advisor or our company.
Under the Virginia Stock Corporation Act, each director is required to
discharge his duties in accordance with his good faith business judgment of the
best interest of our company. In addition, Virginia law provides that a
transaction with our company in which a director or officer of our company has a
direct or indirect interest is not voidable by us solely because of the
directors' or officers' interest in the transaction if:
. the material facts of the transaction and interest are disclosed
to or known by the directors and the transaction is authorized,
approved or ratified by the disinterested directors; or
. the material facts of the transaction and interest are disclosed
to or known by our shareholders and the transaction is authorized
approved or ratified by the disinterested shareholders; or
. the transaction is established to be fair to our company.
SHARES AVAILABLE FOR FUTURE SALE
All of the shares of common stock offered and sold by this prospectus
will be freely tradable under the federal securities laws, except shares held by
affiliates of our company, such as officers and directors. We may issue up to
700,000 shares in connection with our dividend reinvestment program and up to
250,000 shares in connection with the exercise of the Soliciting Dealer
Warrants. In addition, we may issue up to 100,000 shares upon exercise of the
options granted under our director stock option plan.
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AGREEMENT OF LIMITED PARTNERSHIP
The following description of the Agreement of Limited Partnership is a
summary of the provisions that may be included in the Agreement of Limited
Partnership when a party other than our company and our advisor is admitted as a
partner of our operating partnership. Our operating partnership may issue units
of limited partnership interest in exchange for interests in properties, thus
creating additional limited partners in our operating partnership.
MANAGEMENT
Our operating partnership has been organized as a Virginia limited
partnership under the terms of the Agreement of Limited Partnership. As the sole
general partner of our operating partnership, we will have full, exclusive and
complete responsibility and discretion in the management and control of it. When
and if additional limited partners are admitted, they will have no authority in
their capacity as limited partners to transact business for, or participate in
the management activities or decisions of, our operating partnership. However,
any amendment to the Agreement of Limited Partnership that would affect the
limited partners' redemption rights described below would require the consent of
limited partners holding more than 50% of the units of limited partnership
interest held by such partners.
TRANSFERABILITY OF INTERESTS
It is anticipated that our company may not voluntarily withdraw from
our operating partnership or transfer or assign our interest in our operating
partnership unless the transaction in which such withdrawal or transfer occurs
results in the limited partners receiving property in an amount equal to the
amount they would have received had they exercised their redemption rights
immediately prior to such transaction, or unless the successor to our company
contributes substantially all of its assets to our operating partnership in
return for an interest in our operating partnership. With certain limited
exceptions, it is anticipated that the limited partners may not transfer their
interests in our operating partnership, in whole or in part, without our written
consent, which consent we may withhold in our sole discretion.
CAPITAL CONTRIBUTION
We will contribute to our operating partnership all the net proceeds of
the offering as an initial capital contribution in exchange for 100% of the
initial interests in our operating partnership, other than our advisor's
incentive limited partnership interest. The Agreement of Limited Partnership
provides that if our operating partnership requires additional funds at any time
or from time to time in excess of funds available to our operating partnership
from borrowing or capital contributions, we may borrow such funds from a
financial institution or other lender and lend such funds to our operating
partnership on the same terms and conditions as are applicable to our borrowing
of such funds. Under the Agreement of Limited Partnership, it is anticipated
that we generally will be obligated to contribute the proceeds of a securities
offering as additional capital to our operating partnership. Moreover, we will
be authorized to cause our operating partnership to issue partnership interests
for less than fair market value if our company has concluded in good faith that
such issuance is in the best interests of our company and our operating
partnership. If we so contribute additional capital to our operating
partnership, we will receive additional units of limited partnership interest of
our operating partnership and our company's percentage interest in our operating
partnership will be increased on a proportionate basis based upon the amount of
such additional capital contributions and the value of our operating partnership
at the time of such contributions. Conversely, the percentage interests of any
limited partners will be decreased on a proportionate basis in the event of
additional capital contributions by our company. In addition, if we contribute
additional capital to our operating partnership, we will revalue the property of
our operating partnership to its fair market value, as determined by us, and the
capital accounts of the partners will be adjusted to reflect the manner in which
the unrealized gain or loss inherent in such property that has not been
reflected in the capital accounts previously would be allocated among the
partners under the terms of the Agreement of Limited Partnership if there were a
taxable disposition of such property for such fair market value on the date of
the revaluation.
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REDEMPTION RIGHTS
Under the Agreement of Limited Partnership, it is anticipated that any
limited partners, other than our advisor, will receive redemption rights, which
will enable them to cause our operating partnership to redeem their units of
limited partnership interests in our operating partnership in exchange for cash
or, at our option, common stock on a one-for-one basis. The redemption price
will be paid in cash at our discretion or if the issuance of common stock to the
redeeming limited partner would:
. result in any person owning, directly or indirectly, stock in
excess of the ownership limit;
. result in our shares of capital stock being owned by fewer than
100 persons, determined without reference to any rules of
attribution;
. result in our company being "closely held" under the federal
income tax laws;
. cause us to own, actually or constructively, 10% or more of the
ownership interests in a tenant of our real property; or
. cause the acquisition of common stock by such redeeming limited
partner to be "integrated" with any other distribution of common
stock for purposes of complying with the Securities Act.
A limited partner may exercise the redemption rights at any time after
one year following the date on which he received such units of limited
partnership interest in our operating partnership, provided that a limited
partner may not exercise the redemption right for fewer than 1,000 units or, if
such limited partner holds fewer than 1,000 units, all of the units held by such
limited partner. In addition, a limited partner may not exercise the redemption
right more than two times annually.
The number of shares of common stock issuable upon exercise of the
redemption rights will be adjusted upon the occurrence of share splits, mergers,
consolidations or similar pro rata share transactions, which otherwise would
have the effect of diluting or increasing the ownership interests of the limited
partners or our shareholders.
INCENTIVE UNITS
Our operating partnership will issue 100 units of incentive limited
partnership interest to our advisor. The incentive units will entitle our
advisor to receive an incentive distribution equal to 15% of our operating
partnership's operating cash flow after we have received the sum of:
. an 8% cumulative, non-compounded return on our Invested Capital;
and
. any remaining shortfall in the recovery of our Invested Capital
with respect to prior sales of our operating partnership's
properties.
Invested Capital will equal the product of:
. the number of shares of common stock that we issue, including any
shares actually issued through the dividend reinvestment program,
the director stock options, or the broker-dealer warrants; and
. a dollar amount that initially will be $10.00 and that will be
adjusted appropriately to reflect changes in the average price
per share paid for our company's common stock.
When a property is sold, Invested Capital will be reduced by the lesser
of:
. the net sale proceeds available for distribution; or
. (A) the portion of Invested Capital that initially was allocated
to that property and (B) any remaining shortfall in the recovery
of our Invested Capital with respect to prior sales of
properties.
If there is a shortfall in our 8% return on Invested Capital at the end
of any calendar year and our advisor previously has received incentive
distributions, other than those that have previously been repaid, our advisor
will be required to repay to our operating partnership an amount of those
distributions sufficient to cause the cumulative 8%
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return threshold to be met. In no event will the cumulative amount repaid by our
advisor to our operating partnership exceed the cumulative amount of incentive
distributions that our advisor previously has received.
The incentive units also will entitle our advisor to receive an
incentive distribution equal to 15% of the net proceeds of the sale of a
property after we have received the sum of:
. our Invested Capital that initially was allocated to the property
sold;
. any remaining shortfall in the recovery of our Invested Capital
with respect to prior sales of properties; and
. any remaining shortfall in our 8% return.
If we have not received a return of our Invested Capital after the sale
of the last property and our advisor previously has received incentive
distributions, other than those that have previously been repaid, our advisor
will be required to repay to our operating partnership an amount of those
distributions sufficient to cause us to receive a full return of our Invested
Capital. In no event will the cumulative amount repaid by our advisor to our
operating partnership exceed the cumulative amount of incentive distributions
that our advisor previously has received.
We will have the option to acquire our advisor's incentive units if our
common stock is listed on a stock exchange. The purchase price will be payable
in common stock or limited partnership interests in our operating partnership,
at the election of our advisor, except that our advisor will not be allowed to
elect to receive common stock to the extent that doing so would cause us to fail
to qualify as a REIT. See "Description of Capital Stock--Restrictions on
Ownership and Transfer." The purchase price for the incentive units will equal
the amount of the incentive distribution that our advisor would receive if our
operating partnership sold all of its properties for their fair market value.
OPERATIONS
The Agreement of Limited Partnership requires that our operating
partnership be operated in a manner that will enable our company to satisfy the
requirements for being classified as a REIT, to avoid any federal income or
excise tax liability imposed by the federal income tax laws, other than any
federal income tax liability associated with our company's retained capital
gains, and to ensure that our operating partnership will not be classified as a
"publicly traded partnership" for purposes of the federal income tax laws.
In addition to the administrative and operating costs and expenses
incurred by our operating partnership, our operating partnership will pay all
administrative costs and expenses of our company, including:
. all expenses relating to our formation and continuity of
existence;
. all expenses relating to our public offering;
. all expenses associated with the preparation and filing of any
periodic reports under federal, state or local laws or
regulations;
. all expenses associated with compliance with laws, rules and
regulations promulgated by any regulatory body; and
. all other operating or administrative costs incurred by our
company in the ordinary course of business on behalf of our
operating partnership.
DISTRIBUTIONS
The Agreement of Limited Partnership provides that our operating
partnership will distribute to the partners cash from operations, including net
sale or refinancing proceeds, but excluding net proceeds from the sale of our
operating partnership's property in connection with the liquidation of our
operating partnership, on a quarterly or, at the election of our company, more
frequent basis. In our sole discretion, we will determine the amounts of such
distributions. Such distributions will be made first to our company until we
have received an 8% cumulative, non-compounded return on our Invested Capital
and any remaining shortfall in the recovery of our Invested Capital with respect
to prior sales of our operating partnership's properties. Any remaining cash
from operations will be
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distributed 85% to us and 15% to our advisor. The net sale proceeds from the
sale of a property will be distributed 100% to us until we have received an
amount equal to the sum of (1) our Invested Capital that initially was allocated
to that property, (2) any remaining shortfall in the recovery of our Invested
Capital with respect to prior sales of properties, and (3) any remaining
shortfall in our 8% return. Any remaining net sale proceeds will be distributed
85% to us and 15% to our advisor.
Upon liquidation of our operating partnership, after payment of, or
adequate provision for, debts and obligations of our operating partnership,
including any partner loans, any remaining assets of our operating partnership
will be distributed to all partners with positive capital accounts in accordance
with their respective positive capital account balances. If we have a negative
balance in our capital account following a liquidation of our operating
partnership, we will be obligated to contribute cash to our operating
partnership equal to the negative balance in our capital account.
ALLOCATIONS
Operating income of our operating partnership will be allocated first
to our company in an aggregate amount equal to the sum of (1) any operating
losses previously allocated to us and (2) the aggregate distributions to us of
(A) the 8% cumulative, non-compounded return on our Invested Capital and (B) any
remaining shortfall in the recovery of our Invested Capital with respect to
prior sales of our operating partnership's properties. Thereafter, operating
income will be allocated 85% to us and 15% to our advisor until our advisor has
been allocated an aggregate amount of income equal to the aggregate amount of
the incentive distributions that it has received from our operating
partnership's operating cash flow. Any remaining operating income, any operating
losses, and all depreciation, amortization, and other non-cash charges will be
allocated 100% to us.
Taxable gain from the sale of a property will be allocated 100% to our
company until we have been allocated an amount equal to the sum of:
. any depreciation recapture with respect to the property;
. the amount by which our Invested Capital allocable to the
property sold exceeds our operating partnership's original
investment in the property;
. any remaining shortfall in the recovery of our Invested Capital
with respect to prior sales of properties that is distributed to
us in connection with the sale of the property; and
. any remaining shortfall in our 8% return that is distributed to
us in connection with the sale of the property.
Any remaining taxable gain will be allocated 85% to us and 15% to our
advisor. Any tax losses from property sales generally will be allocated 100% to
us. All allocations are subject to compliance with the provisions of the federal
income tax laws.
TERM
Our operating partnership will continue until December 31, 2050, or
until sooner dissolved upon the bankruptcy, dissolution or withdrawal of our
company, unless the limited partners elect to continue our operating
partnership; the sale or other disposition of all or substantially all the
assets of our operating partnership; or the election by the general partner.
TAX MATTERS
Under the Agreement of Limited Partnership, we will be the tax matters
partner of our operating partnership and, as such, will have authority to handle
tax audits and to make tax elections under the federal income tax laws on behalf
of our operating partnership.
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FEDERAL INCOME TAX CONSEQUENCES OF OUR COMPANY'S STATUS AS A REIT
This section summarizes the federal income tax issues that you, as a
prospective shareholder, may consider relevant. Because this section is a
summary, it does not address all of the tax issues that may be important to you.
In addition, this section does not address the tax issues that may be important
to certain types of shareholders that are subject to special treatment under the
federal income tax laws, such as insurance companies, tax-exempt organizations
(except to the extent discussed in "--Taxation of Tax-Exempt Shareholders"
below), financial institutions or broker-dealers, and non-U.S. individuals and
foreign corporations (except to the extent discussed in "--Taxation of Non-U.S.
Shareholders" below).
The statements in this section are based on the current federal income
tax laws governing qualification as a REIT. We cannot assure you that new laws,
interpretations thereof, or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF INVESTING IN OUR COMMON STOCK AND OF OUR ELECTION TO BE
TAXED AS A REIT. SPECIFICALLY, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
INVESTMENT AND ELECTION, AND REGARDING POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF OUR COMPANY
We currently have in effect an election to be taxed as an S corporation
for federal income tax purposes. Effective on the day prior to the closing of
the offering, we plan to revoke our election to be taxed as an S corporation. We
plan to elect to be taxed as a REIT under the federal income tax laws commencing
with our short taxable year beginning on the day before the closing of the
offering and ending on December 31, 1999. We believe that, commencing with such
short taxable year, we will be organized and will operate in a manner so as to
qualify as a REIT under the federal income tax laws. We cannot assure you,
however, that we will qualify or remain qualified as a REIT. This section
discusses the laws governing the federal income tax treatment of a REIT and its
shareholders, which laws are highly technical and complex.
Hunton & Williams, our counsel, has given us an opinion that we will
qualify as a REIT under the federal income tax laws beginning with our short
taxable year beginning on the day before the closing of this offering and ending
on December 31, 1999, and that our organization and proposed method of operation
will enable us to continue to qualify as a REIT. You should be aware that Hunton
& Williams' opinion is not binding upon the Internal Revenue Service or any
court. In addition, Hunton & Williams' opinion is based on certain assumptions
and on our factual representations, all of which are described in Hunton &
Williams' opinion.
Our REIT qualification depends on our ability to meet on a continuing
basis certain qualification tests set forth in the federal tax laws. Those
qualification tests involve the percentage of income that we earn from specified
sources, the percentage of our assets that fall within certain categories, the
diversity of our share ownership, and the percentage of our earnings that we
distribute. We describe the REIT qualification tests in more detail below.
Hunton & Williams will not review our compliance with those tests on a
continuing basis. Accordingly, neither we nor Hunton & Williams can assure you
that we will satisfy those tests. For a discussion of the tax treatment of our
company and our shareholders if we fail to qualify as a REIT, see "--Failure to
Qualify."
If we qualify as a REIT, we generally will not be subject to federal
income tax on the taxable income that we distribute to our shareholders. The
benefit of that tax treatment is that it avoids the "double taxation," which
means taxation at both the corporate and shareholder levels, that generally
results from owning stock in a corporation. However, we will be subject to
federal tax in the following circumstances:
. we will pay federal income tax on taxable income, including net
capital gain, that we do not distribute to our shareholders
during, or within a specified time period after, the calendar
year in which the income is earned;
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. we may be subject to the "alternative minimum tax" on any items
of tax preference that we do not distribute or allocate to our
shareholders;
. we will pay income tax at the highest corporate rate on (1) net
income from the sale or other disposition of property acquired
through foreclosure that we hold primarily for sale to customers
in the ordinary course of business and (2) other non-qualifying
income from foreclosure property;
. we will pay a 100% tax on our net income from certain sales or
other dispositions of property, other than foreclosure property,
that we hold primarily for sale to customers in the ordinary
course of business;
. if we fail to satisfy the 75% gross income test or the 95% gross
income test, as described below under "--Requirements for
Qualification--Income Tests", and nonetheless continue to qualify
as a REIT because we meet certain other requirements, we will pay
a 100% tax on (1) the gross income attributable to the greater of
the amounts by which we fail the 75% and 95% gross income tests,
multiplied by (2) a fraction intended to reflect our
profitability;
. if we fail to distribute during a calendar year at least the sum
of (1) 85% of our REIT ordinary income for such year, (2) 95% of
our REIT capital gain net income for such year, and (3) any
undistributed taxable income from prior periods, we will pay a 4%
excise tax on the excess of such required distribution over the
amount we actually distributed;
. we may elect to retain and pay income tax on our net long-term
capital gain; and
. if we acquire any asset from a C corporation, or a corporation
generally subject to full corporate-level tax, in a merger or
other transaction in which we acquire a basis determined by
reference to the C corporation's basis in the asset, we will pay
tax at the highest regular corporate rate if we recognize gain on
the sale or disposition of such asset during the 10-year period
after we acquire such asset. The amount of gain on which we will
pay tax is the lesser of (1) the amount of gain that we recognize
at the time of the sale or disposition and (2) the amount of gain
that we would have recognized if we had sold the asset at the
time we acquired the asset. The rule described in this paragraph
will apply assuming that we make an election under IRS Notice 88-
19 upon our acquisition of an asset from a C corporation.
REQUIREMENTS FOR QUALIFICATION
A REIT is a corporation, trust, or association that meets the following
requirements:
(1) it is managed by one or more trustees or directors;
(2) its beneficial ownership is evidenced by transferable shares, or
by transferable certificates of beneficial interest;
(3) it would be taxable as a domestic corporation, but for the REIT
provisions of the federal income tax laws;
(4) it is neither a financial institution nor an insurance company
subject to certain provisions of the federal income tax laws;
(5) at least 100 persons are beneficial owners of its shares or
ownership certificates;
(6) not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals, including specified entities, during the last half
of any taxable year;
(7) it elects to be a REIT, or has made such election for a previous
taxable year, and satisfies all relevant filing and other
administrative requirements established by the Internal Revenue
Service that must be met to elect and maintain REIT status;
(8) it uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the federal
income tax laws; and
(9) it meets certain other qualification tests, described below,
regarding the nature of its income and assets.
We must meet requirements 1 through 4 during our entire taxable year and must
meet requirement 5 during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months.
Requirements 5 and 6 will not apply to us until our taxable year ending December
31, 2000.
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If we comply with all the requirements for ascertaining the ownership
of our outstanding shares in a taxable year and have no reason to know that we
violated requirement 6 above, we will be deemed to have satisfied that
requirement for such taxable year. For purposes of determining share ownership
under requirement 6, an "individual" generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the federal income tax laws, and
beneficiaries of such a trust will be treated as holding our shares in
proportion to their actuarial interests in the trust for purposes of requirement
6.
We plan to issue sufficient common stock with sufficient diversity of
ownership to satisfy requirements 5 and 6 set forth above. In addition, our
articles of incorporation restrict the ownership and transfer of our stock so
that we should continue to satisfy requirements 5 and 6. The provisions of our
articles of incorporation restricting the ownership and transfer of our stock
are described in "Description of Capital Stock--Restrictions on Ownership and
Transfer."
A corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a "qualified REIT subsidiary" are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
is owned by the REIT. Thus, in applying the requirements described herein, any
of our "qualified REIT subsidiaries" will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiaries
will be treated as assets, liabilities, and items of income, deduction, and
credit of our company. We currently do not have any corporate subsidiaries, but
we may have corporate subsidiaries in the future.
In the case of a REIT that is a partner in a partnership, the REIT is
treated as owning its proportionate share of the assets of the partnership and
as earning its allocable share of the gross income of the partnership for
purposes of the applicable REIT qualification tests. Thus, our proportionate
share of the assets, liabilities, and items of income of our operating
partnership will be treated as assets and gross income of our company for
purposes of applying the requirements described in this prospectus.
Income Tests
We must satisfy two gross income tests annually to qualify and maintain
our qualification as a REIT. First, at least 75% of our gross income, excluding
gross income from prohibited transactions, for each taxable year must consist of
defined types of income that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or temporary investment
income. Qualifying income for purposes of the 75% gross income test includes:
. "rents from real property;"
. interest on debt secured by mortgages on real property or on
interests in real property; and
. dividends or other distributions on and gain from the sale of
shares in other REITs.
Second, at least 95% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must consist of income that is
qualifying income for purposes of the 75% gross income test described above,
dividends, other types of interest, gain from the sale or disposition of stock
or securities, or any combination of the foregoing. The following paragraphs
discuss the specific application of those tests to our company.
RENTS AND INTEREST
Rent that we receive from our tenants will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if the following conditions are met:
. The amount of rent must not be based, in whole or in part, on the
income or profits of any person, but may be based on a fixed
percentage or percentages of receipts or sales.
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. Neither we nor a direct or indirect owner of 10% or more of our
stock may own, actually or constructively, 10% or more of a
tenant from whom we receive rent, known as a related party
tenant.
. If the rent attributable to the personal property leased in
connection with a lease of our real property exceeds 15% of the
total rent received under the lease, the rent that is
attributable to personal property will not qualify as "rents from
real property."
. We generally must not operate or manage our real property or
furnish or render services to our tenants, other than through an
"independent contractor" who is adequately compensated and from
whom we do not derive revenue. However, we need not provide
services through an independent contractor, but instead may
provide services directly, if the services are "usually or
customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the
occupant." In addition, we may render a de minimis amount of
"non-customary" services to the tenants of a property, other than
through an independent contractor, as long as our income from the
services does not exceed 1% of our income from the related
property.
We do not expect to charge rent for any of our properties that is
based, in whole or in part, on the income or profits of any person, except by
reason of being based on a fixed percentage of gross revenues, as described
above. Furthermore, we have represented that, to the extent that the receipt of
such rent would jeopardize our REIT status, we will not charge rent for any of
our properties that is based, in whole or in part, on the income or profits of
any person. In addition, we do not anticipate receiving rent from a related
party tenant, and we have represented that, to the extent that the receipt of
such rent would jeopardize our REIT status, we will not lease any of our
properties to a related party tenant. We also do not anticipate that we will
receive rent attributable to the personal property leased in connection with a
lease of our real property that exceeds 15% of the total rent received under the
lease. Furthermore, we have represented that, to the extent that the receipt of
such rent would jeopardize our REIT status, we will not allow the rent
attributable to personal property leased in connection with a lease of our real
property to exceed 15% of the total rent received under the lease. Finally, we
do not expect to furnish or render, other than under the 1% de minimis rule
described above, "non-customary" services to our tenants other than through an
independent contractor, and we have represented that, to the extent that the
provision of such services would jeopardize our REIT status, we will not provide
such services to our tenants other than through an independent contractor.
If our rent attributable to the personal property leased in connection
with a lease of our real property exceeds 15% of the total rent we receive under
the lease for a taxable year, the portion of the rent that is attributable to
personal property will not be qualifying income for purposes of either the 75%
or 95% gross income test. Thus, if such rent attributable to personal property,
plus any other income that we receive during the taxable year that is not
qualifying income for purposes of the 95% gross income test, exceeds 5% of our
gross income during the year, we would lose our REIT status. Furthermore, if
either (1) the rent we receive under a lease of our property is considered
based, in whole or in part, on the income or profits of any person or (2) the
tenant under such lease is a related party tenant, none of the rent we receive
under such lease would qualify as "rents from real property." In that case, if
the rent we receive under such lease, plus any other income that we receive
during the taxable year that is not qualifying income for purposes of the 95%
gross income test, exceeds 5% of our gross income during the year, we would lose
our REIT status. Finally, if the rent we receive under a lease of our property
does not qualify as "rents from real property" because we furnish non-customary
services to the tenant under such lease, other than through a qualifying
independent contractor or under the 1% de minimis exception described above,
none of the rent we receive from the related property would qualify as "rents
from real property." In that case, if the rent we receive from such property,
plus any other income that we receive during the taxable year that is not
qualifying income for purposes of the 95% gross income test, exceeds 5% of our
gross income during the year, we would lose our REIT status.
To the extent that we receive from our tenants reimbursements of
amounts that the tenants are obligated to pay to third parties or penalties for
the nonpayment or late payment of such amounts, those amounts should qualify as
"rents from real property." However, to the extent that we receive interest
accrued on the late payment of the rent or other charges, that interest will not
qualify as "rents from real property," but instead will be qualifying income for
purposes of the 95% gross income test. We may receive income not described above
that is not qualifying income for purposes of the gross income tests. We will
monitor the amount of non-qualifying income that our assets produce and we will
manage our portfolio to comply at all times with the gross income tests.
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For purposes of the 75% and 95% gross income tests, the term "interest"
generally excludes any amount that is based in whole or in part on the income or
profits of any person. However, the term "interest" generally does not exclude
an amount solely because it is based on a fixed percentage or percentages of
receipts or sales. Furthermore, if a loan contains a provision that entitles a
REIT to a percentage of the borrower's gain upon the sale of the secured
property or a percentage of the appreciation in the property's value as of a
certain date, income attributable to such provision will be treated as gain from
the sale of the secured property, which generally is qualifying income for
purposes of the 75% and 95% gross income tests.
HEDGING TRANSACTIONS
From time to time, we may enter into hedging transactions with respect
to one or more of our assets or liabilities. Our hedging activities may include
entering into interest rate swaps, caps, and floors, or options to purchase such
items, futures and forward contracts, and options. To the extent that we enter
into an interest rate swap or cap contract, option, futures contract, forward
rate agreement, or any similar financial instrument to hedge our indebtedness
incurred to acquire or carry assets that are qualifying real estate-related
assets under the federal income tax laws, any periodic income or gain from the
disposition of such contract should be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. To the extent that we
hedge with other types of financial instruments, or in other situations, it is
not entirely clear how the income from those transactions will be treated for
purposes of the gross income tests. We intend to structure any hedging
transactions in a manner that does not jeopardize our status as a REIT.
FAILURE TO SATISFY INCOME TESTS
If we fail to satisfy one or both of the 75% and 95% gross income tests
for any taxable year, we nevertheless may qualify as a REIT for such year if we
qualify for relief under certain provisions of the federal income tax laws.
Those relief provisions generally will be available if:
. our failure to meet such tests is due to reasonable cause and not
due to willful neglect;
. we attach a schedule of the sources of our income to our tax
return; and
. any incorrect information on the schedule was not due to fraud
with intent to evade tax.
We cannot predict, however, whether in all circumstances we would
qualify for the relief provisions. In addition, as discussed above in "--
Taxation of Our Company," even if the relief provisions apply, we would incur a
100% tax on the gross income attributable to the greater of the amounts by which
we fail the 75% and 95% gross income tests, multiplied by a fraction intended to
reflect our profitability.
PROHIBITED TRANSACTION RULES
A REIT will incur a 100% tax on the net income derived from any sale or
other disposition of property, other than foreclosure property, that the REIT
holds primarily for sale to customers in the ordinary course of a trade or
business. We anticipate that none of our assets will be held for sale to
customers and that a sale of any such asset would not be in the ordinary course
of our business. Whether a REIT holds an asset "primarily for sale to customers
in the ordinary course of a trade or business" depends, however, on the facts
and circumstances in effect from time to time, including those related to a
particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. We cannot provide
assurance, however, that we can comply with such safe-harbor provisions or that
we will avoid owning property that may be characterized as property that we hold
"primarily for sale to customers in the ordinary course of a trade or business."
Asset Tests
To qualify as a REIT, we also must satisfy two asset tests at the close
of each quarter of each taxable year. First, at least 75% of the value of our
total assets must consist of:
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. cash or cash items, including certain receivables;
. government securities;
. interests in mortgages on real property;
. stock of other REITs;
. investments in stock or debt instruments during the one-year
period following our receipt of new capital that we raise through
equity or long-term (at least five-year) debt offerings; or
. interest in real property, including leaseholds and options to
acquire real property and leaseholds.
The second asset test has two components. First, of our investments
not included in the 75% asset class, the value of our interest in any one
issuer's securities may not exceed 5% of the value of our total assets. Second,
we may not own more than 10% of any one issuer's outstanding voting securities.
For purposes of both components of the second asset test, "securities"
does not include our company's stock in other REITs or any qualified REIT
subsidiary or our interest in any partnership, including our operating
partnership.
The Clinton Administration's budget proposal for fiscal 2000 would
allow us to own up to 100% of the stock in two types of taxable REIT
subsidiaries: (1) qualified business subsidiaries, which could perform
activities unrelated to our company's tenants, such as third-party management,
development, and other independent business activities, as well as provide
"customary" services to our company's tenants; and (2) qualified independent
contractor subsidiaries, which could perform activities that a qualified
business subsidiary could perform and provide "non-customary" services to our
company's tenants. We would be subject to restrictions on our stock ownership of
these subsidiaries. The taxable REIT subsidiary provision would be effective
after the date of enactment.
We anticipate that, at all relevant times, (1) at least 75% of the
value of our total assets will be represented by real estate assets, cash and
cash items, including receivables, and government securities and (2) we will not
own any securities in violation of the 5% or 10% asset tests. In addition, we
will monitor the status of our assets for purposes of the various asset tests
and we will manage our portfolio to comply at all times with such tests.
If we should fail to satisfy the asset tests at the end of a calendar
quarter, we would not lose our REIT status if (1) we satisfied the asset tests
at the close of the preceding calendar quarter and (2) the discrepancy between
the value of our assets and the asset test requirements arose from changes in
the market values of our assets and was not wholly or partly caused by an
acquisition of one or more non-qualifying assets. If we did not satisfy the
condition described in clause (2) of the preceding sentence, we still could
avoid disqualification as a REIT by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which the discrepancy arose.
Distribution Requirements
To qualify as a REIT, each taxable year, we must make distributions,
other than capital gain dividends and deemed distributions of retained capital
gain, to our shareholders in an aggregate amount at least equal to:
. the sum of (1) 95% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain
or loss) and (2) 95% of our after-tax net income, if any, from
foreclosure property; minus
. the sum of certain items of non-cash income.
We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if we declare the distribution before
we timely file our federal income tax return for such year and pay the
distribution on or before the first regular dividend payment date after such
declaration.
We will pay federal income tax on any taxable income, including net
capital gain, that we do not distribute to our shareholders. Furthermore, if we
fail to distribute during a calendar year or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January following such calendar year, at least the sum of:
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. 85% of our REIT ordinary income for such year;
. 95% of our REIT capital gain income for such year; and
. any undistributed taxable income from prior periods;
we will incur a 4% nondeductible excise tax on the excess of such required
distribution over the amounts we actually distributed. We may elect to retain
and pay income tax on the net long-term capital gain we receive in a taxable
year. If we so elect, we will be treated as having distributed any such retained
amount for purposes of the 4% excise tax described above. We intend to make
timely distributions sufficient to satisfy the annual distribution requirements.
From time to time, we may experience timing differences between (1)
our actual receipt of income and actual payment of deductible expenses and (2)
the inclusion of that income and deduction of such expenses in arriving at our
REIT taxable income. In that case, we still would be required to recognize such
excess as income in the calendar quarter in which it was due. Further, it is
possible that, from time to time, we may be allocated a share of net capital
gain attributable to the sale of depreciated property which exceeds our
allocable share of cash attributable to that sale. Therefore, we may have less
cash available for distribution than is necessary to meet the 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, we might be required to
borrow money or raise funds by issuing additional stock.
Under certain circumstances, we may be able to correct a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to our shareholders in a later year. We may include such deficiency dividends in
our deduction for dividends paid for the earlier year. Although we may be able
to avoid income tax on amounts we distribute as deficiency dividends, we will be
required to pay interest to the Internal Revenue Service based on the amount of
any deduction we take for deficiency dividends.
RECORDKEEPING REQUIREMENTS
We must maintain certain records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, we must request on an annual basis
certain information from our shareholders designed to disclose the actual
ownership of our outstanding stock. We intend to comply with such requirements.
FAILURE TO QUALIFY
If we fail to qualify as a REIT in any taxable year, and no relief
provision applies, we will be subject to federal income tax and any applicable
alternative minimum tax on our taxable income at regular corporate rates. In
such a year, we would not be able to deduct amounts paid out to shareholders in
calculating our taxable income. In fact, we would not be required to distribute
any amounts to our shareholders in such year. In such event, to the extent of
our current and accumulated earnings and profits, all distributions to our
shareholders would be taxable as ordinary income. Subject to certain limitations
of the federal income tax laws, corporate shareholders might be eligible for the
dividends received deduction. Unless we qualified for relief under specific
statutory provisions, we also would be disqualified from taxation as a REIT for
the four taxable years following the year during which we ceased to qualify as a
REIT. We cannot predict whether in all circumstances we would qualify for such
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as we qualify as a REIT, a taxable "U.S. shareholder" must
take into account distributions out of our current or accumulated earnings and
profits and that we do not designate as capital gain dividends or retained long-
term capital gain as ordinary income. A U.S. shareholder will not qualify for
the dividends received deduction generally available to corporations. As used
herein, the term "U.S. shareholder" means a holder of our common stock that for
U.S. federal income tax purposes is:
. a citizen or resident of the United States;
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. a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of an political
subdivision thereof;
. an estate whose income from sources without the United States is
includable in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or
business within the United States; or
. any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons have the authority to
control all substantial decisions of the trust.
A U.S. shareholder generally will recognize distributions that we
designate as capital gain dividends as long-term capital gain without regard to
the period for which the U.S. shareholder has held its common stock. Subject to
certain limitations, we will designate our capital gain dividends as either 20%
or 25% rate distributions. A corporate U.S. shareholder, however, may be
required to treat up to 20% of certain capital gain dividends as ordinary
income.
We may elect to retain and pay income tax on the net long-term capital
gain that it receives in a taxable year. In that case, a U.S. shareholder would
be taxed on its proportionate share of our undistributed long-term capital gain.
The U.S. shareholder would receive a credit or refund for its proportionate
share of the tax we paid. The U.S. shareholder would increase the basis in its
stock by the amount of its proportionate share of our undistributed long-term
capital gain, minus its share of the tax we paid.
If a distribution exceeds our current and accumulated earnings and
profits but does not exceed the adjusted basis of the a U.S. shareholder's
common stock, the U.S. shareholder will not incur tax on the distribution.
Instead, such distribution will reduce the adjusted basis of the common stock. A
U.S. shareholder will recognize a distribution that exceeds both our current and
accumulated earnings and profits and the U.S. shareholder's adjusted basis in
its common stock as long-term capital gain, or short-term capital gain if the
common stock has been held for one year or less, assuming the common stock is a
capital asset in the hands of the U.S. shareholder. In addition, if we declare a
distribution in October, November, or December of any year that is payable to a
U.S. shareholder of record on a specified date in any such month, such
distribution shall be treated as both paid by us and received by the U.S.
shareholder on December 31 of such year, provided that we actually pay the
distribution during January of the following calendar year. We will notify U.S.
shareholders after the close of our taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income or
capital gain dividends.
TAXATION OF U.S. SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, a U.S. shareholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the common stock
as long-term capital gain or loss if the U.S. shareholder has held the common
stock for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder generally must treat any loss upon a sale or
exchange of common stock held by such shareholder for six months or less as a
long-term capital loss to the extent of capital gain dividends and other
distributions from us that such U.S. shareholder treats as long-term capital
gain. All or a portion of any loss a U.S. shareholder realizes upon a taxable
disposition of the common stock may be disallowed if the U.S. shareholder
purchases other shares of common stock within 30 days before or after the
disposition.
CAPITAL GAINS AND LOSSES
A taxpayer generally must hold a capital asset for more than one year
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gain applicable to non-corporate
taxpayers is 20% for sales and exchanges of assets held for more than one year.
The maximum tax rate on long-term capital gain from the sale or exchange of
"section 1250 property" is 25% to the extent that such gain would have been
treated as ordinary income if the property were "section 1245 property." With
respect to distributions that we designate as capital gain dividends and any
retained capital gain that we are deemed to distribute, we generally may
designate whether such a distribution is taxable to our non-corporate
shareholders at a 20% or 25% rate. Thus, the tax rate differential
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between capital gain and ordinary income for non-corporate taxpayers may be
significant. In addition, the characterization of income as capital gain or
ordinary income may affect the deductibility of capital losses. A non-corporate
taxpayer may deduct capital losses not offset by capital gains against its
ordinary income only up to a maximum annual amount of $3,000. A non-corporate
taxpayer may carry forward unused capital losses indefinitely. A corporate
taxpayer must pay tax on its net capital gain at ordinary corporate rates. A
corporate taxpayer can deduct capital losses only to the extent of capital
gains, with unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
We will report to our shareholders and to the Internal Revenue Service
the amount of distributions we pay during each calendar year, and the amount of
tax we withhold, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to
distributions unless such holder either:
. is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact; or
. provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies
with the applicable requirements of the backup withholding rules.
A shareholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed by the Internal
Revenue Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, we may be required
to withhold a portion of capital gain distributions to any shareholders who fail
to certify their non-foreign status to us. The Treasury Department has issued
final regulations regarding the backup withholding rules as applied to non-U.S.
shareholders. Those regulations alter the current system of backup withholding
compliance and are effective for distributions made after December 31, 1999. See
"--Taxation of Non-U.S. shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities, generally are
exempt from federal income taxation. However, they are subject to taxation on
their unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income,
provided that the exempt employee pension trust does not otherwise use the
shares of the REIT in an unrelated trade or business of the pension trust. Based
on that ruling, amounts that we distribute to tax-exempt shareholders generally
should not constitute unrelated business taxable income. However, if a tax-
exempt shareholder were to finance its acquisition of the common stock with
debt, a portion of the income that they receive from us would constitute
unrelated business taxable income under the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under special provisions of the federal income tax laws are
subject to different unrelated business taxable income rules, which generally
will require them to characterize distributions that they receive from us as
unrelated business taxable income. Finally, in certain circumstances, a
qualified employee pension or profit sharing trust that owns more than 10% of
our stock is required to treat a percentage of the dividends that it receives
from us as unrelated business taxable income. The percentage of the dividends
that the tax-exempt trust must treat as unrelated business taxable income is
equal to the gross income we derive from an unrelated trade or business,
determined as if our company were a pension trust, divided by our total gross
income for the year in which we pay the dividends. The unrelated business
taxable income rule applies to a pension trust holding more than 10% of our
stock only if:
. the percentage of the dividends that the tax-exempt trust must
otherwise treat as unrelated business taxable income is at least
5%;
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. we qualify as a REIT by reason of the modification of the rule
requiring that no more than 50% of our shares be owned by five or
fewer individuals that allows the beneficiaries of the pension
trust to be treated as holding our stock in proportion to their
actuarial interests in the pension trust; and
. either (A) one pension trust owns more than 25% of the value of
our stock or (B) a group of pension trusts individually holding
more than 10% of the value of our stock collectively owns more
than 50% of the value of our stock.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders are complex. This section is only a summary of such rules. WE URGE
THOSE NON-U.S. SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS ON OWNERSHIP OF THE COMMON
STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
A non-U.S. shareholder that receives a distribution that is not
attributable to gain from our sale or exchange of U.S. real property interests
(as defined below) and that we do not designate as a capital gain dividend or
retained capital gain will recognize ordinary income to the extent that we pay
such distribution out of our current or accumulated earnings and profits. A
withholding tax equal to 30% of the gross amount of the distribution ordinarily
will apply to such distribution unless an applicable tax treaty reduces or
eliminates the tax. However, if a distribution is treated as effectively
connected with the non-U.S. shareholder's conduct of a U.S. trade or business,
the non-U.S. shareholder generally will be subject to federal income tax on the
distribution at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to such distributions. A non-U.S. shareholder may also be
subject to the 30% branch profits tax We plan to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distribution paid to a non-U.S.
shareholder unless either:
. a lower treaty rate applies and the non-U.S. shareholder files
the required form evidencing eligibility for that reduced rate
with us; or
. the non-U.S. shareholder files an IRS Form 4224 with us claiming
that the distribution is effectively connected income.
The U.S. Treasury Department has issued final regulations that modify
the manner in which we will comply with the withholding requirements. Those
regulations are effective for distributions made after December 31, 1999.
A non-U.S. shareholder will not incur tax on a distribution that
exceeds our current and accumulated earnings and profits but does not exceed the
adjusted basis of its common stock. Instead, such a distribution will reduce the
adjusted basis of such stock. A non-U.S. shareholder will be subject to tax on a
distribution that exceeds both our current and accumulated earnings and profits
and the adjusted basis of its common stock, if the non-U.S. shareholder
otherwise would be subject to tax on gain from the sale or disposition of its
common stock, as described below. Because we generally cannot determine at the
time we make a distribution whether or not the distribution will exceed our
current and accumulated earnings and profits, we normally will withhold tax on
the entire amount of any distribution at the same rate as we would withhold on a
dividend. However, a non-U.S. shareholder may obtain a refund of amounts that we
withhold if it later determines that a distribution in fact exceeded our current
and accumulated earnings and profits.
We must withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. Consequently, although we intend to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that we
do not do so, we will withhold at a rate of 10% on any portion of a distribution
not subject to withholding at a rate of 30%.
For any year in which we qualify as a REIT, a non-U.S. shareholder
will incur tax on distributions that are attributable to gain from our sale or
exchange of "U.S. real property interests" under special provisions of the
federal income tax laws. The term "U.S. real property interests" includes
certain interests in real property and stock in corporations at least 50% of
whose assets consists of interests in real property. Under those rules, a non-
U.S. shareholder is taxed on distributions attributable to gain from sales of
U.S. real property interests as if such gain were
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effectively connected with a U.S. business of the non-U.S. shareholder. A non-
U.S. shareholder thus would be taxed on such a distribution at the normal
capital gain rates applicable to U.S. shareholders and might also be subject to
the alternative minimum tax. A nonresident alien individual also might be
subject to a special alternative minimum tax. A non-U.S. corporate shareholder
not entitled to treaty relief or exemption also may be subject to the 30% branch
profits tax on such distributions. We must withhold 35% of any distribution that
we could designate as a capital gain dividend. A non-U.S. shareholder will
receive a credit against its tax liability for the amount we withhold.
A non-U.S. shareholder generally will not incur tax under the
provisions applicable to distributions that are attributable to gain from the
sale of U.S. real property interests on gain from the sale of its common stock
as long as at all times non-U.S. persons hold, directly or indirectly, less than
50% in value of our stock. We cannot assure you that this test will be met. If
the gain on the sale of the common stock were taxed under those provisions, a
non-U.S. shareholder would be taxed in the same manner as U.S. shareholders with
respect to such gain, subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations. Furthermore, a non-U.S. shareholder will incur tax on gain not
subject to the provisions applicable to distributions that are attributable to
gain from the rule of U.S. real property interests if either:
. the gain is effectively connected with the non-U.S. shareholder's
U.S. trade or business, in which case the non-U.S. shareholder
will be subject to the same treatment as U.S. shareholders with
respect to such gain; or
. the non-U.S. shareholder is a nonresident alien individual who
was present in the U.S. for 183 days or more during the taxable
year, in which case the non-U.S. shareholder will incur a 30% tax
on his capital gains.
OTHER TAX CONSEQUENCES
We and/or you may be subject to state and local tax in various states
and localities, including those states and localities in which we or you
transact business, own property, or reside. The state and local tax treatment in
such jurisdictions may differ from the federal income tax treatment described
above. Consequently, you should consult your own tax advisor regarding the
effect of state and local tax laws upon an investment in our common stock.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under
ERISA and the prohibited transaction provisions of the federal income tax laws
that may be relevant to a prospective purchaser. This discussion does not deal
with all aspects of either ERISA or the prohibited transaction provisions of the
federal income tax laws or, to the extent not preempted, state law that may be
relevant to particular employee benefit plan shareholders, including plans
subject to Title I of ERISA, other employee benefit plans and IRAs subject to
the prohibited transaction provisions of the federal income tax laws, and
governmental plans and church plans that are exempt from ERISA and the
prohibited transaction provisions of the federal income tax laws but that may be
subject to state law requirements, in light of their particular circumstances.
In considering whether to invest a portion of the assets of a pension,
profit-sharing, retirement or other employee benefit plan, fiduciaries should
consider, among other things, whether the investment:
. will be in accordance with the documents and instruments covering
the investments by such plan;
. will allow the plan to satisfy the diversification requirements
of ERISA, if applicable;
. will result in unrelated business taxable income to the plan (see
"Federal Income Tax Consequences of Our Company's Status as a
REIT--Taxation of Tax-Exempt Shareholders");
. will provide sufficient liquidity; and
. is prudent under the general ERISA standards.
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In addition to imposing general fiduciary standards of investment
prudence and diversification, ERISA and the corresponding provisions of the
federal income tax laws prohibit a wide range of transactions involving the
assets of the plan and persons who have specified relationships to the plan
("parties in interest" within the meaning of ERISA, "disqualified persons"
within the meaning of the federal income tax laws). Thus, a designated plan
fiduciary considering an investment in our shares should also consider whether
the acquisition or the continued holding of our shares might constitute or give
rise to a direct or indirect prohibited transaction. The fiduciary of an IRA or
of an employee benefit plan not subject to Title I of ERISA because it is a
governmental or church plan or because it does not cover common law employees
should consider that such an IRA or plan not subject to Title I of ERISA may
only make investments that are authorized by the appropriate governing
documents, not prohibited under the prohibited transaction provisions of the
federal income tax laws and permitted under applicable state law.
The Department of Labor has issued final regulations that provide
guidance on the definition of plan assets under ERISA. Under the regulations, if
a plan acquires an equity interest in an entity which is neither a "publicly-
offered security" nor a security issued by an investment company registered
under the Investment Company Act of 1940, the plan's assets would include, for
ERISA purposes, both the equity interest and an undivided interest in each of
the entity's underlying assets unless certain exceptions described below apply.
The regulations define a publicly-offered security as a security that
is:
. "widely-held;"
. "freely-transferable;" and
. either part of a class of securities registered under Section
12(b) or 12(g) of the Securities Exchange Act of 1934, or sold in
connection with an effective registration statement under the
Securities Act, provided the securities are registered under the
Exchange Act within 190 days after the end of the fiscal year of
the issuer during which the offering occurred.
Our shares of common stock are being sold in connection with an effective
registration statement under the Securities Act.
The regulations provide 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 public offering as a result of events beyond the issuer's control.
Although we anticipate that upon completion of the sale of the maximum offering,
our common stock will be "widely held," our common stock will not be widely held
until we sell shares to 100 or more independent investors.
The regulations list restrictions on transfer that ordinarily will not
prevent securities from being freely transferable. Such restrictions on transfer
include:
. any restriction on or prohibition against any transfer or
assignment that would result in the termination or
reclassification of an entity for federal or state tax purposes,
or that otherwise would violate any federal or state law or court
order;
. any requirement that advance notice of a transfer or assignment
be given to the issuer;
. any administrative procedure that establishes an effective date,
or an event, such as completion of an offering, prior to which a
transfer or assignment will not be effective; and
. any limitation or restriction on transfer or assignment that is
not imposed by the issuer or a person acting on behalf of the
issuer.
We believe that the restrictions imposed under our articles of
incorporation on the ownership and transfer of our common stock will not result
in the failure of our common stock to be "freely transferable." We also are not
aware of any other facts or circumstances limiting the transferability of our
common stock that are not enumerated in the regulations as those not affecting
free transferability. However, no assurance can be given that the Department of
Labor or the Treasury Department will not reach a contrary conclusion.
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One exception to the regulations provides that the assets of a plan or
ERISA investor, which is a person acting on behalf of or using the assets of a
plan, will not include any of the underlying assets of an entity in which it
invests if at all times less than 25% of the value of each class of equity
interests in the entity is held by ERISA investors (the "insignificant
participation exception"). Because our common stock will not be "widely held"
until we sell shares to 100 or more independent investors, prior to the date
that either our common stock qualifies as a class of "publicly-offered
securities" or we qualify for another exception to the regulations, other than
the insignificant participation exception, our articles of incorporation will
prohibit ERISA investors from owning, directly or indirectly, in the aggregate,
25% or more of our common stock. Accordingly, our company's assets should not be
deemed to be "plan assets" of any plan, IRA, or plan not subject to Title I of
ERISA that invests in our common stock.
If the underlying assets of our company were treated by the Department
of Labor as "plan assets," the management of our company would be treated as
fiduciaries with respect to plan shareholders and the prohibited transaction
restrictions of ERISA and the federal income tax laws would apply unless an
exception under ERISA were to apply. If the underlying assets of our company
were treated as "plan assets," an investment in our company also might
constitute an improper delegation of fiduciary responsibility to our company and
expose the fiduciary of the plan to co-fiduciary liability under ERISA and might
result in an impermissible commingling of plan assets with other property.
If a prohibited transaction were to occur, the federal income tax laws
and ERISA would impose an excise tax equal to 15% of the amount involved and
authorize the Internal Revenue Service to impose an additional 100% excise tax
if the prohibited transaction is not "corrected." Such taxes will be imposed on
any disqualified person who participates in the prohibited transaction. In
addition, our advisor and possibly other fiduciaries of plan shareholders
subject to ERISA who permitted such prohibited transaction to occur or who
otherwise breached their fiduciary responsibilities would be required to restore
to the plan any profits realized by these fiduciaries as a result of the
transaction or beach. With respect to an IRA that invests in our company, the
occurrence of a prohibited transaction involving the individual who established
the IRA, or his or her beneficiary, would cause the IRA to lose its tax-exempt
status under the federal income tax laws. In that event, the IRA owner generally
would be taxed on the fair market value of all the assets in the IRA as of the
first day of the owner's taxable year in which the prohibited transaction
occurred.
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PLAN OF DISTRIBUTION
The total of 11,050,000 shares registered in this offering includes:
. a maximum of 10,000,000 shares offered to residents of our sales
states;
. up to 700,000 shares offered to our shareholders under our
dividend reinvestment program;
. up to 250,000 shares issuable upon exercise of the Soliciting
Dealer Warrants; and
. up to 100,000 shares issuable under our director stock option
plan.
The 10,000,000 shares offered to residents of our sales states are
being offered through the dealer manager, a registered broker-dealer affiliated
with our advisor, and certain unaffiliated broker-dealers. See "Conflicts of
Interest" and "Compensation Table." The shares are being offered at a price of
$10.00 per share on a "best efforts" basis, which means generally that the
dealer manager will be required to use only its best efforts to sell the shares
and has no firm commitment or obligation to purchase any of the shares. Our
board of directors and the dealer manager have determined the offering price of
the shares based on their analysis of other similar offerings and what they
believe the investing market is willing to pay for the shares.
Except as provided below, the dealer manager will receive commissions
of 8% of the gross offering proceeds. In addition, we may reimburse the expenses
incurred by the dealer manager and nonaffiliated dealers for actual marketing
support and due diligence purposes in the maximum amount of 1.5% of the gross
offering proceeds. We will not pay referral or similar fees to any accountants,
attorneys or other persons in connection with the distribution of the shares.
The dealer manager will also receive one Soliciting Dealer Warrant for each 40
shares sold during this offering, and may reallow Soliciting Dealer Warrants to
soliciting dealers participating in this offering, subject to federal and state
securities laws. Each Soliciting Dealer Warrant will entitle the holder to
purchase one share from our company at a price of $12.00 during the period
commencing on the first anniversary of the effective date of this offering and
ending five years after the effective date of this offering. The shares issuable
upon exercise of the Soliciting Dealer Warrants are being registered as part of
this offering. For the life of the Soliciting Dealer Warrants, the holders are
given, at nominal cost, the opportunity to profit from a rise in the market
price for the common stock without assuming the risk of ownership, with a
resulting dilution in your interest and the interests of other shareholders.
Moreover, the holders of the Soliciting Dealer Warrants might be expected to
exercise them at a time when we would, in all likelihood, be able to obtain
needed capital by a new offering of its securities on terms more favorable than
those provided by the Soliciting Dealer Warrants. See "Description of Capital
Stock--Soliciting Dealer Warrants."
The dealer manager may authorize certain other broker-dealers who are
members of the NASD to sell shares. In the event of the sale of shares by such
other broker-dealers, the dealer manager may reallow its commissions in the
amount of up to 8% of the gross offering proceeds and part or all of its
Soliciting Dealer Warrants to such participating broker-dealers.
We have agreed to indemnify the participating broker-dealers, including
the dealer manager, against certain liabilities arising under the Securities
Act. Causes of action resulting from violations of federal or state securities
laws shall be governed by such law.
The broker-dealers are not obligated to obtain any subscriptions, and
there is no assurance that any shares will be sold.
Our affiliated advisor and its affiliates may at their option purchase
shares offered hereby at the public offering price, net of the Selling
Commission and Marketing Support and Due Diligence Reimbursement Fee in which
case they have advised us that they would expect to hold such shares as
shareholders for investment and not for distribution. We will not pay any
Selling Commissions in connection with any shares purchased by our advisor.
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Payment for shares should be made by check payable to "PriVest Bank,
as Escrow Agent for T REIT, Inc." Subscriptions will be effective only upon
acceptance by us, and we reserve the right to reject any subscription in whole
or in part. In no event may a subscription for shares be accepted until at least
five business days after the date the subscriber receives this prospectus. Each
subscriber will receive a confirmation of his purchase. Except for purchase
under the dividend reinvestment program, all accepted subscriptions will be for
whole shares and for not less than 100 shares ($1,000). See "Investor
Suitability Standards."
Subscription proceeds will be placed in interest-bearing accounts with
the escrow agent by noon of the business day after the proceeds are received by
us until subscriptions for at least the minimum offering of 100,000 shares
aggregating at least $1,000,000, exclusive of any subscriptions for shares by
our advisor or its affiliates, have been received and accepted by us. Any shares
purchased by our advisor or its affiliates will not be counted in calculating
the minimum offering. Subscription proceeds held in the escrow accounts will be
invested in obligations of, or obligations guaranteed by, the United States
government or bank money-market accounts or certificates of deposit of national
or state banks that have deposits insured by the Federal Deposit Insurance
Corporation, including certificates of deposit of any bank acting as depository
or custodian for any such funds, as directed by our advisor. Subscribers may not
withdraw funds from the escrow account.
If subscriptions for at least 100,000 shares have not been received
and accepted by ___________, 2000, the escrow agent will promptly so notify us
and this offering will be terminated. In such event, the escrow agent is
obligated to use its best efforts to obtain an executed IRS Form W-9 from each
subscriber whose subscription is rejected. No later than ten business days after
rejection of a subscription, the escrow agent will refund and return all monies
to rejected subscribers and any interest earned thereon without deducting escrow
expenses. In the event that a subscriber fails to remit an executed IRS Form W-9
to the escrow agent prior to the date the escrow agent returns the subscriber's
funds, the escrow agent will be required to withhold from such funds 31% of the
earnings attributable to such subscriber in accordance with Internal Revenue
Service regulations. During any period in which subscription proceeds are held
in escrow, interest earned thereon will be allocated among subscribers on the
basis of the respective amounts of their subscriptions and the number of days
that such amounts were on deposit. Such interest net of escrow expenses will be
paid to subscribers upon the termination of the escrow period.
Initial subscribers may be admitted as shareholders of our company and
the payments transferred from escrow to us at any time after we have received
and accepted the minimum offering. Certain states may impose different
requirements than those set forth herein. Any such additional requirements will
be set forth in a supplement to this prospectus.
After the close of the minimum offering, subscriptions will be
accepted or rejected within 30 days of receipt by us, and if rejected, all funds
shall be returned to subscribers within 10 business days. Investors whose
subscriptions are accepted will be admitted as shareholders of our company
periodically, but not less often than quarterly. Escrowed proceeds will be
released to us on the date that the applicable shareholder is admitted to our
company.
The dealer manager may sell shares to our advisor, its officers,
directors and affiliates, to retirement plans of broker-dealers participating in
this offering, to broker-dealers in their individual capacities, to IRAs and
qualified plans of their registered representatives or to any one of their
registered representatives in their individual capacities for $9.05 (i.e., net
of the Selling Commission and Marketing Support and Due Diligence Reimbursement
Fees) in consideration of the services rendered by such broker-dealers and
registered representatives in the distribution. The net proceeds to our company
from such sales will be identical to our net proceeds from other sales of
shares.
In connection with sales of 25,000 or more shares ($250,000) to a
"purchaser" (as defined below), investors may agree with their registered
representatives to reduce the amount of selling commissions payable to
participating broker-dealers. Such reduction will be credited to the purchaser
by reducing the total purchase price payable by such purchaser. The following
table illustrates the various discount levels:
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<TABLE>
<CAPTION>
SELLING COMMISSIONS NET PROCEEDS
DOLLAR VOLUME PURCHASE PRICE TO COMPANY
OF SHARES PURCHASED PERCENT PER SHARE PER SHARE PER SHARE
------------------- ------- --------- --------- ---------
<S> <C> <C> <C> <C>
$250,000-$499,999 5.5% $0.55 $9.75 $9.05
$500,000-$999,999 4.0% $0.40 $9.60 $9.05
$1,000,000-$1,999,999 2.5% $0.25 $9.45 $9.05
$2,000,000-$5,000,000 1.0% $0.10 $9.15 $9.05
Over $5,000,000 0.5% $0.05 $9.10 $9.10
</TABLE>
For example, if an investor purchases 100,000 shares in our company,
he would pay $945,000 rather than $1,000,000 for the shares, in which event the
commission on the sale of such shares would be $25,000 ($0.25 per share), and we
would receive net proceeds of $905,000 ($9.05 per Share). Our net proceeds will
not be affected by volume discounts.
Because all investors will be deemed to have contributed the same
amount per share to our company for purposes of distributions of cash available
for distribution, an investor qualifying for a volume discount will receive a
higher return on his investment in our company than investors who do not qualify
for such discount.
Subscriptions may be combined for the purpose of determining the
volume discounts in the case of subscriptions made by any "purchaser," as that
term is defined below, provided all such shares are purchased through the same
broker-dealer. The volume discount shall be prorated among the separate
subscribers considered to be a single "purchaser." Any request to combine more
than one subscription must be made in writing, and must set forth the basis for
such request. Any such request will be subject to verification by our advisor
that all of such subscriptions were made by a single "purchaser."
For the purposes of such volume discounts, the term "purchaser"
includes:
. an individual, his or her spouse and their children under the age
of 21 who purchase the shares for his, her or their own accounts;
. a corporation, partnership, association, joint-stock company,
trust fund or any organized group of persons, whether
incorporated or not;
. an employees' trust, pension, profit sharing or other employee
benefit plan qualified under the federal income tax laws; and
. all commingled trust funds maintained by a given bank.
Notwithstanding the above, in connection with volume sales made to
investors in our company, the dealer manager may, in its sole discretion, waive
the "purchaser" requirements and aggregate subscriptions as part of a combined
order for purposes of determining the number of shares purchased, provided that
any aggregate group of subscriptions must be received from the same broker-
dealer, including the dealer manager. Any such reduction in selling commission
will be prorated among the separate subscribers except that, in the case of
purchases through the dealer manager, the dealer manager may allocate such
reduction among separate subscribers considered to be a single "purchaser" as it
deems appropriate. An investor may reduce the amount of his purchase price to
the net amount shown in the foregoing table, if applicable. If such investor
does not reduce the purchase price, the excess amount submitted over the
discounted purchase price shall be returned to the actual separate subscribers
for shares. Except as provided in this paragraph, separate subscriptions will
not be cumulated, combined or aggregated.
California residents should be aware that volume discounts will not be
available in connection with the sale of shares made to California residents to
the extent such discounts do not comply with the provisions of the California
corporate securities laws. Under these laws, volume discounts can be made
available to California residents only in accordance with the following
conditions:
-84-
<PAGE>
. there can be no variance in the net proceeds to our company from
the sale of the shares to different purchasers of the same
offering;
. all purchasers of the shares must be informed of the availability
of quantity discounts;
. the same volume discounts must be allowed to all purchasers of
shares which are part of the offering;
. the minimum amount of shares as to which volume discounts are
allowed cannot be less than $10,000;
. the variance in the price of the shares must result solely from a
different range of commissions, and all discounts allowed must be
based on a uniform scale of commissions; and
. no discounts are allowed to any group of purchasers.
Accordingly, volume discounts for California residents will be available in
accordance with the foregoing table of uniform discount levels based on dollar
volume of shares purchased, but no discounts are allowed to any group of
purchasers, and no subscriptions may be aggregated as part of a combined order
for purposes of determining the number of shares purchased.
Investors who, in connection with their purchase of shares, have
engaged the services of a registered investment advisor with whom the investor
has agreed to pay a fee for investment advisory services in lieu of normal
commissions based on the volume of securities sold may agree with the
participating broker-dealer selling such shares and the dealer manager to reduce
the amount of selling commissions payable with respect to such sale to zero. The
net proceeds to our company will not be affected by eliminating the commissions
payable in connection with sales to investors purchasing through such investment
advisors. All such sales must be made through registered broker-dealers.
Neither the dealer manager nor its affiliates will directly or
indirectly compensate any person engaged as an investment advisor by a potential
investor as an inducement for such investment advisor to advise favorably for
investment in our company.
EXPERTS
The balance sheet of T REIT, Inc. as of January 31, 1999 included in
this prospectus and elsewhere in this registration statement, has been audited
by Haskell & White LLP, independent auditors, as stated in their report
appearing in this prospectus and elsewhere in this registration statement, and
is included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
REPORTS TO SHAREHOLDERS
We intend to furnish our shareholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon by
Hunton & Williams, Richmond, Virginia. Hirschler, Fleischer, Weinberg, Cox &
Allen will advise us with respect to real estate law and other matters.
LEGAL PROCEEDINGS
None of our company, our operating partnership or our advisor is
currently involved in any material litigation nor, to their knowledge, is any
material litigation threatened against any of them.
-85-
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-11 of which this prospectus is a part under the
Securities Act with respect to the shares offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Securities and Exchange Commission. Statements contained
in this prospectus as to the content of any contract or other document filed as
an exhibit to the registration statement, each such statement being qualified in
all respects by such reference and the schedules and exhibits to this
prospectus. For further information regarding our company and the shares offered
by this prospectus, reference is made by this prospectus to the registration
statement and such schedules and exhibits.
The registration statement and the schedules and exhibits forming a
part of the registration statement filed by us with the Securities and Exchange
Commission can be inspected and copies obtained from the Securities and Exchange
Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Securities and Exchange
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Securities
and Exchange Commission maintains a Web site that contains reports, proxies and
information statements and other information regarding our company and other
registrants that have been filed electronically with the Securities and Exchange
Commission. The address of such site is http://www.sec.gov.
-86-
<PAGE>
GLOSSARY
The definitions used in the prospectus are set forth below:
"ADA" means the Americans with Disabilities Act of 1990.
"ACQUISITION FEE" means the fee payable to our advisor equal to 4% of
the gross proceeds of this offering.
"ADMINISTRATIVE SERVICES" means only ministerial services such as
typing, record keeping, preparing and disseminating Company reports, preparing
and maintaining records regarding shareholders, record keeping and
administration of the dividend reinvestment program, preparing and disseminating
responses to shareholder inquiries and other communications with shareholders
and any other record keeping required for our company.
"ADVISOR" means the person(s) or entity responsible for directing or
performing the day-to-day business affairs of our company, including a person or
entity to which an Advisor subcontracts substantially all such functions. Our
initial advisor shall be Triple Net Properties, LLC, a Virginia limited
liability company.
"AFFILIATE" means: (1) 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; (2) 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; (3) any person directly or
indirectly controlling, controlled by or under common control with such other
person; (4) any executive officer, director, trustee or general partner of such
other person; and (5) any legal entity for which such person acts as an
executive officer, director, manager, trustee or general partner.
"ANCHOR TENANT" means tenants generally occupying approximately 30% or
more of the gross leasable area of a neighborhood retail center, or the tenant
of any single-user property.
"ASSET MANAGEMENT FEE" means an amount equal to 1.5% of the Average
Invested Assets payable by the company to our advisor out of net profits.
"AVERAGE INVESTED ASSETS" means for any period, the aggregate book
value of the assets of our company invested, directly or indirectly, in equity
interests and in loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period.
"CLOSING PRICE" means the last quoted price as reported by the primary
securities exchange or market on which our stock is then listed or quoted for
trading, or if our stock is not so listed or quoted, a price determined by our
board of directors in good faith.
"COMPANY" means T REIT, Inc., a Virginia corporation, and unless the
context requires otherwise, our operating partnership.
"COMPETITIVE REAL ESTATE COMMISSION" means the real estate or
brokerage commission paid for the purchase or sale of a property which is
reasonable, customary and competitive in light of the size, type and location of
such property.
"DEALER MANAGER" means Cunningham Capital Corp.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ESCROW AGENT" means PriVest Bank.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
-87-
<PAGE>
"FOCUS STATES" means the states of Alaska, Florida, Iowa, Michigan,
Minnesota, Nevada, North Carolina, South Carolina, South Dakota, Tennessee,
Texas, Virginia, Washington, Wisconsin, and Wyoming.
"GROSS OFFERING PROCEEDS" means proceeds of this offering before
deducting Selling Commissions, offering expenses or fees.
"HIRSCHLER" means Hirschler, Fleischer, Weinberg, Cox & Allen, a
Professional Corporation.
"INCENTIVE DISTRIBUTION" means our operating partnership distribution
to which our advisor is entitled in connection with its incentive units equal to
15% of the profits upon a sale of a property in excess of an 8% return to our
operating partnership on its investment in such property.
"INCENTIVE UNITS" means the 100 units of incentive limited partnership
interest in our operating partnership to be issued to our advisor.
"INITIAL OPTIONS" means non-qualified stock options to purchase 5,000
shares of common stock at the applicable option exercise price granted under the
director stock option plan to each director as of the date such individual
becomes a director.
"INVESTED CAPITAL" means the original issue price of the shares
offered by this prospectus reduced by prior distributions from the sale or
financing of company real estate.
"IRA" means an individual retirement account established under the
federal income tax laws.
"MARKET PRICE" means the average of the closing prices for the five
consecutive days ending on the date of determination.
"MARKETING SUPPORT AND DUE DILIGENCE REIMBURSEMENT FEE" means an
amount equal to 1.5% of the Gross Offering Proceeds paid to the dealer manager,
a portion of which may be reallowed to soliciting dealers, to pay expenses
associated with nonaccountable marketing fees, wholesaling fees, expense
reimbursements, bonuses and incentive compensation and volume discounts and to
reimburse the dealer manager or soliciting dealers for nonaccountable due
diligence expenses.
"MINIMUM OFFERING" means 100,000 shares ($1,000,000).
"MAXIMUM OFFERING" means 10,000,000 shares ($100,000,000).
"NASD" means the National Association of Securities Dealers, Inc.
"NEIGHBORHOOD RETAIL CENTER" means any property leased primarily to
one or more retail tenants providing for the sale of household goods (food,
drugs, apparel, etc.) and personal services (laundry, dry cleaning, etc.) for
the day-to-day living needs of the immediate neighborhood, typically with gross
leasable area ranging from approximately 5,000 to 150,000 square feet.
"NON-U.S. SHAREHOLDER" means non-resident alien individuals, foreign
corporations, foreign partnerships, and other foreign shareholders for U.S.
federal income tax purposes.
"OPERATING PARTNERSHIP" means T REIT L.P., a Virginia limited
partnership, for which our company serves as sole general partner and which will
acquire and own properties.
"OPTIONS" means initial options and subsequent options, collectively.
"OTHER ORGANIZATION AND OFFERING EXPENSES" means those expenses
incurred by and to be paid from the assets of our company in connection with the
organization of our company and our operating partnership, and
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<PAGE>
subsequently offering and distributing shares in this offering, including, but
not limited to, expenses for printing, engraving, mailing, depositories,
experts, expenses of qualifying for exemptions from registration of the shares
under federal and state laws, including fees, and accountants' and attorneys'
fees, which we estimate to be approximately 2.5% of the gross proceeds of this
offering.
"OWNERSHIP LIMIT" means 9.9% of the number of outstanding shares of
our common stock and 9.9% of the number of outstanding shares of our preferred
stock of any class or series.
"PARTICIPANT" means any shareholder who elects to automatically
reinvest distributions in our company by permitting the purchase of additional
shares under our dividend reinvestment program.
"PROPERTY DISPOSITION FEE" means a real estate disposition fee,
payable under certain conditions by our company to our advisor out of net
profits upon the sale of our company's property in an amount equal to the lesser
of 3% of the contracted for sales price of the property or 50% of the commission
paid to third parties which is reasonable, customary and competitive in light of
the size, type and location of such property.
"PROPERTY MANAGEMENT FEE" means any fee paid by our company to an
affiliate or third party as compensation for management of our company's
properties. The Property Management Fee shall be equal to 5.0% of the aggregate
gross revenues from the properties.
"QUALIFIED PLAN" means any qualified pension, profit-sharing or other
retirement plan (including a Keogh plan) and any trust or bank commingled trust
fund for such a plan.
"REIMBURSABLE EXPENSES" means those certain expenses of our advisor
and its affiliates which will be reimbursed by our company.
"RELATED PARTY TENANT" means a tenant from whom our company receives
rent whose outstanding ownership interests are 10% or more owned by our company
or a direct or indirect owner of 10% or more of our company's outstanding
capital stock.
"REIT" means a real estate investment trust as defined under the
federal income tax laws.
"SALES STATES" means Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North
Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia,
Wisconsin and Wyoming.
"SECURITIES ACT" means the Securities Act of 1933.
"SELLING COMMISSIONS" means an amount equal to 8% of the Gross
Offering Proceeds payable to the dealer manager, which may be retained, or
reallowed to soliciting dealers, for each share sold.
"SOLICITING DEALERS" means the dealer members of the National
Association of Securities Dealers, Inc. designated by the dealer manager.
"SOLICITING DEALER WARRANTS" means the warrants to purchase one share
of common stock at a price of $12.00 per share for every 40 shares sold by the
dealer manager.
"SUBSCRIPTION AGREEMENT" means the Subscription Agreement and
Subscription Agreement Signature Page which are attached as Exhibit B to this
prospectus.
"SUBSEQUENT OPTIONS" means grants of options to purchase 5,000 shares
of common stock on the date of each annual shareholders' meeting to each
director so long as the individual is still in office.
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<PAGE>
"TRADING DAY" means a day on which the principal national securities
exchange on which shares of our common stock or preferred stock are listed or
admitted to trading is open for the transaction of business or, if our common or
preferred stock is not listed or admitted to trading on any national securities
exchange, any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"U.S. SHAREHOLDER" means a holder of our common stock that for U.S.
federal income tax purposes is:
. a citizen or resident of the United States;
. a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of an
political subdivision thereof;
. an estate whose income from sources without the United States
is includable in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a
trade or business within the United States; or
. any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the
administration of such trust and (B) one or more U.S. persons
have the authority to control all substantial decisions of
the trust.
"UNITS" means units of limited partnership interest in our operating
partnership.
"VIRGINIA STOCK CORPORATION ACT" means the Virginia Stock Corporation
Act, Sections 13.1-601 to - 781 of the Code of Virginia (1950), as amended.
"WARRANTS" means the warrants issued to the dealer manager and
soliciting dealers to purchase one share of common stock for each 40 shares sold
in this offering and which are exercisable during the exercise period to
purchase shares of common stock at $12.00 per share.
"WESTERN REIT" means Western Real Estate Investment Trust, Inc.
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<PAGE>
T REIT, INC.
(A Development Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS F-2
FINANCIAL STATEMENTS
Balance Sheet as of January 31, 1999 F-3
Notes to Balance Sheet F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholder
T REIT, Inc.
(A Development Stage Enterprise)
We have audited the accompanying balance sheet of T REIT, Inc. (A Development
Stage Enterprise) (the "Company") as of January 31, 1999. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Company as of January 31,
1999, in conformity with generally accepted accounting principles.
HASKELL & WHITE LLP
February 4, 1999
F-2
<PAGE>
T REIT, INC.
(A Development Stage Enterprise)
BALANCE SHEET
AS OF JANUARY 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 100
--------
Total assets $ 100
========
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 authorized,
10 shares issued and outstanding (Note 2) $ 100
--------
Total stockholder's equity $ 100
========
</TABLE>
See Accompanying Notes to Balance Sheet
F-3
<PAGE>
T REIT, INC.
(A Development Stage Enterprise)
NOTES TO BALANCE SHEET
AS OF JANUARY 31, 1999
1. BUSINESS AND ORGANIZATIONAL STRUCTURE
T REIT, Inc. (a Development Stage Enterprise) (the "Company") was
incorporated in December 1998 under the laws of the State of Virginia. When
the Company has met the qualification requirements, it intends to elect to
be treated as a real estate investment trust for federal income tax
purposes. The Company was incorporated to raise capital and acquire
ownership interests in office, industrial, retail and service properties,
including single user retail and office properties rented to tenants under
net leases. As of January 31, 1999, the Company does not own any
properties.
The Company intends to operate in an umbrella partnership REIT structure,
in which its subsidiary operating partnership will own substantially all of
the properties that the Company acquires. The Company will be the sole
general partner of our operating partnership, T REIT L.P., a Virginia
limited partnership.
The Company's activities to date have focused primarily on raising capital
and establishing a corporate infrastructure to support planned operations.
Accordingly, the Company is considered to be a development stage enterprise
as of January 31, 1999.
2. SUBSEQUENT EVENTS
The Company is planning to commence an initial public offering in which it
intends to sell a minimum of 100,000 shares of its common stock and a
maximum of 10,000,000 shares of its common stock for $10 per share. The
Company also intends to amend its articles of incorporation to increase the
number of authorized shares of common stock from 1,000 to 50,000,000.
Concurrent with the commencement of the initial public offering, the
Company intends to grant 25,000 options to purchase its common stock to
directors at $9.05 per share.
See Accompanying Notes to Balance Sheet
F-4
<PAGE>
EXHIBIT A
PRIOR PERFORMANCE TABLES
The following Prior Performance Tables (the "Tables") provide
information relating to all prior real estate investment programs sponsored by
our advisor ("Prior Programs").
As a prospective investor, you should read these Tables carefully
together with the summary information concerning the Prior Programs as set forth
in "PRIOR PERFORMANCE SUMMARY" elsewhere in this prospectus.
AS AN INVESTOR IN OUR COMPANY, YOU WILL NOT OWN ANY INTEREST IN THE
PRIOR PROGRAMS AND SHOULD NOT ASSUME THAT YOU WILL EXPERIENCE RETURNS, IF ANY,
COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE PRIOR PROGRAMS.
Our affiliated advisor is responsible for managing our day-to-day
business affairs and assets, administering our bookkeeping and accounting
functions, serving as our consultant in connection with policy decisions to be
made by our board of directors, managing or causing to be managed our
properties, and rendering other services as our board of directors deems
necessary. The financial results of the Prior Programs thus provide an
indication of our advisor's performance of its obligations during the periods
covered. However, general economic conditions affecting the real estate industry
and other factors contribute significantly to financial results.
The following tables are included herein:
TABLE I - Experience in Raising and Investing Funds (As a Percentage of
Investment)
TABLE II - Compensation to Sponsor (in Dollars)
TABLE III - Annual Operating Results of Prior Programs
TABLE IV (Results of completed programs) and TABLE V (sales or
disposals of property) have been omitted since none of the Prior Programs have
sold any of their properties to date.
Additional information relating to the acquisition of properties by the
Prior Programs is contained in TABLE VI, which is included in the registration
statement which our Company has filed with the Securities and Exchange
Commission. As described above, no Prior Program has sold or disposed of any
property held by it. We will provide to you copies of any or all information
concerning the Prior Programs at no charge upon request.
A-1
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS (UNAUDITED)(1)
<TABLE>
<CAPTION>
TRUCKEE
TELLURIDE RIVER OFFICE
BARSTOW, LLC WREIT, INC. TOWER, LLC
------------------ ------------------ -------------------
<S> <C> <C> <C>
Dollar Amount Offered $1,620,000 $50,000,000 $5,550,000
================== ================== ===================
Dollar Amount Raised 1,620,000 3,385,875 5,525,000
================== ================== ===================
Percentage Amount Raised 100.0% 6.8% 99.5%
================== ================== ===================
Less Offering Expenses:
Selling Commissions & Discounts to Affiliates 10.0% 8.0% 10.0%
Organization & Offering Expenses (1) 2.5% 4.5% 3.0%
Due Diligence Allowance (2) 1.5% 1.5% 0.5%
Reserves 3.6% 1.5% 3.7%
------------------ ------------------ -------------------
Percent Available for Investment 82.5% 84.5% 82.4%
Acquisition Cost:
Cash Down Payment 67.6% 67.6% 74.1%
Loan Fees 13.4% 13.4% 5.1%
Acquisition Fees Paid to Affiliates 1.5% 0.7% 4.0%
------------------ ------------------ -------------------
Total Acquisition Cost 82.5% 81.6% 83.2%
================== ================== ===================
Percent Leveraged 71% 75% 75%
Date Offering Began 1-Jun-98 1-Jul-98 21-Aug-98
Date Offering Ended 16-Dec-98 183 (Open) 183 (Open)
Length of Offering (days) 198 Open Open
Days to Invest 90% of Amount Available for Investment
(Measured from Beginning of Offering) 46 N/A 102
Number of Investors 14 88 67
</TABLE>
NOTES:
_____
(1) Includes legal, accounting, printing and other offering expenses, including
amounts for the reimbursement for marketing, salaries and direct expenses
of employees engaged in marketing and other organization expenses.
(2) Nonaccountable due diligence reimbursement to Sponsor.
A-2
<PAGE>
TABLE II
COMPENSATION TO SPONSOR (UNAUDITED)
<TABLE>
<CAPTION>
TRUCKEE
TELLURIDE RIVER OFFICE
BARSTOW, LLC WREIT, INC. TOWER, LLC
------------------ ------------------ -------------------
<S> <C> <C> <C>
Date Offering Commenced 1-Jun-98 1-Jul-98 21-Aug-98
Dollar Amount Raised $1,620,000 $3,385,875 $5,525,000
================== ================== ===================
Amounts Paid to Sponsor from Proceeds of Offering:
Selling Commissions to Selling Group Members $162,000 $270,870 $529,948
Organization & Marketing Expenses 64,000 152,364 166,500
Due Diligence Allowance -- 50,788 30,000
Acquisition Fees 25,000 -- 220,000
------------------ ------------------ -------------------
Totals $251,000 $474,023 $946,448
================== ================== ===================
Dollar Amount of Cash Generated from Operations
Before Deducting Payments to Sponsor $202,119 -- --
Amounts Paid to Sponsor from Operations:
Property Management Fees $33,384 $5,942 $9,390
Asset Management Fees 8,672 6,674 6,781
Leasing Commissions -- -- --
Other -- -- --
------------------ ------------------ -------------------
Totals $160,063 $12,615 $16,172
================== ================== ===================
Dollar Amount of Property Sales & Refinancing
Payments to Sponsor
Cash -- -- --
Notes -- -- --
Amount Paid to Sponsor from:
Property Sales and Refinancing -- -- --
Real Estate Commissions -- -- --
Incentive Fees -- -- --
Other -- -- --
</TABLE>
A-3
<PAGE>
TABLE III
1998 OPERATING RESULTS OF PRIOR PROGRAMS (UNAUDITED)
<TABLE>
<CAPTION>
TELLURIDE TRUCKEE TOTAL
BARSTOW, WREIT, RIVER OFFICE ALL
LLC INC. TOWER, LLC PROGRAMS
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Gross Revenues $497,240 $594,158 $195,692 $1,287,090
Profit on Sale of Properties -- -- -- --
Less: Operating Expenses 209,494 241,680 42,840 494,014
Interest Expense 177,908 165,808 88,346 432,062
Depreciation 47,183 64,435 15,417 127,035
-------------- -------------- ---------------- ----------------
Net Income - GAAP Basis $62,655 $122,235 $49,089 $233,979
============== ============== ================ ================
Taxable Income From:
Operations 160,063 122,235 49,089 331,387
Gain on Sale -- -- -- --
Cash Generated From:
Operations 160,063 186,670 64,506 411,239
Sales -- -- -- --
Refinancing -- -- -- --
-------------- -------------- ---------------- ----------------
Cash Generated From Operations, Sales &
Refinancing $160,063 $186,670 $64,506 $411,239
============== ============== ================ ================
Less Cash Distributions to Investors From:
Operating Cash Flow 77,052 -- -- 77,052
Sales & Refinancing -- -- -- --
Other -- -- -- --
-------------- -------------- ---------------- ----------------
Cash Generated (Deficiency) after Cash
Distributions 83,011 186,670 64,506 334,187
Less Special Items (not including Sales &
Refinancing) -- -- -- --
-------------- -------------- ---------------- ----------------
Cash Generated (Deficiency) after Cash
Distributions and Special Items $83,011 $186,670 $64,506 $334,187
============== ============== ================ ================
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
-- from operations $98.80 $20.91 $7.02 $126.74
-- from recapture -- -- -- --
Capital Gain (Loss) -- -- -- --
Cash Distributions to Investors
Sources (on GAAP basis)
-- Investment Income $38.68 $20.91 $7.02 $66.61
-- Return of Capital -- -- -- --
Sources (on Cash basis)
-- Sales -- -- -- --
-- Refinancing -- -- -- --
-- Operations $38.68 $20.91 $7.02 $66.61
-- Other -- -- -- --
Amount remaining invested in program
properties as of 12-31-98 100% 100% 100% 100%
</TABLE>
NOTES:
_____
(1) Operating results are shown for 1998 only because all programs started in
1998.
A-4
<PAGE>
EXHIBIT B
SUBSCRIPTION AGREEMENT
To: T REIT, Inc.
1551 N. Tustin Avenue, Suite 650
Santa Ana, California 92705
Ladies and Gentlemen:
The undersigned, by signing and delivering a copy of the attached
Subscription Agreement Signature Page, hereby tenders this subscription and
applies for the purchase of the number of shares of common stock ("Shares") in T
REIT, Inc., a Virginia corporation (the "Company"), set forth on such
Subscription Agreement Signature Page. Payment for the Shares is hereby made by
check payable to "PriVest Bank, as Escrow Agent for T REIT, Inc."
Payments for Shares will be held in an interest-bearing escrow account
until the Company has received and accepted subscriptions for an aggregate of
100,000 Shares ($1,000,000), at which time PriVest Bank will release the
proceeds to the Company. If the Company does not sell 100,000 Shares before
_______________, 2000, the Company's offering will be terminated and the Company
will refund all the monies in escrow (plus interest and without deducting for
escrow expenses) proportionately to investors.
I hereby acknowledge receipt of the Prospectus for the Company's offering
of the Shares dated ______________, 1999 (the "Prospectus").
I agree that if this subscription is accepted, it will be held, together
with the accompanying payment, and disbursed on the terms described in the
Prospectus. Subscriptions may be rejected in whole or in part by the Company in
its sole and absolute discretion. In addition, subscriptions are irrevocable,
and no investor will have the right to cancel or rescind his subscription,
except as required under the law of any jurisdiction in which Shares are sold.
Prospective investors are hereby advised of the following:
(a) The assignability and transferability of the Shares is restricted and
will be governed by the Company's Amended and Restated Articles of Incorporation
and Bylaws and all applicable laws as described in the Prospectus.
(b) Prospective investors should not invest in Shares unless they have an
adequate means of providing for their current needs and personal contingencies
and have no need for liquidity in this investment.
(c) There will be no public market for the Shares, and accordingly, it
may not be possible to readily liquidate an investment in the Shares.
B-1
<PAGE>
SPECIAL NOTICE FOR SOUTH DAKOTA RESIDENTS ONLY
This subscription is made pursuant to, and is subject to, the terms and
conditions of the registration approved by the director of the Division of
Securities of the State of South Dakota for T REIT, Inc. under the date of
_________________.
B-2
<PAGE>
STANDARD REGISTRATION REQUIREMENTS
The following requirements have been established for the various forms of
registration. Accordingly, complete Subscription Agreements and such supporting
material as may be necessary must be provided.
TYPE OF OWNERSHIP AND SIGNATURE(S) REQUIRED
(1) INDIVIDUAL: One signature required.
(2) JOINT TENANTS WITH RIGHT OF SURVIVORSHIP: All parties must sign.
(3) TENANTS IN COMMON: All parties must sign.
(4) COMMUNITY PROPERTY: Only one investor signature required.
(5) PENSION OR PROFIT SHARING PLANS: The trustee signs the Signature Page.
(6) TRUST: The trustee signs the Signature Page. Provide the name of the
trust, the name of the trustee and the name of the beneficiary.
(7) COMPANY: Identify whether the entity is a general or limited
partnership. The general partners must be identified and their signatures
obtained on the Signature Page. In the case of an investment by a general
partnership, all partners must sign (unless a "managing partner") has
been designated for the partnership, in which case he may sign on behalf
of the partnership if a certified copy of the document granting him
authority to invest on behalf of the partnership is submitted).
(8) CORPORATION: The Subscription Agreement must be accompanied by (1) a
certified copy of the resolution of the Board of Directors designation of
the officer(s) of the corporation authorized to sign on behalf of the
corporation and (2) a certified copy of the Board's resolution
authorizing the investment.
(9) IRA AND IRA ROLLOVERS: Requires signature of authorized signer (e.g., an
officer) of the bank, trust company, or other fiduciary. The address of
the trustee must be provided in order for the trustee to receive checks
and other pertinent information regarding the investment.
(10) KEOGH (HR 10): Same rules as those applicable to IRAs.
(11) UNIFORM GIFT TO MINORS ACT (UGMA) or UNIFORM TRANSFERS TO MINORS ACT
(UTMA): The required signature is that of the custodian, not of the
parent (unless the parent has been designated as the custodian). Only one
child is permitted in each investment under UGMA or UTMA. In addition,
designate the state under which the gift is being made.
B-3
<PAGE>
INSTRUCTIONS TO SUBSCRIPTION AGREEMENT SIGNATURE PAGE
TO T REIT, INC. SUBSCRIPTION AGREEMENT
- -------------------------------------------------------------------------------
INVESTMENT Please follow these instructions carefully.
INSTRUCTIONS Failure to do so may result in the rejection
of your subscription. All information on the
Subscription Agreement Signature Page should
be completed as follows:
- --------------------------------------------------------------------------------
1. INVESTMENT A minimum investment of $1,000 (100 Shares)
is required, except for certain states which
require a higher minimum investment. A CHECK
FOR THE FULL PURCHASE PRICE OF THE SHARES
SUBSCRIBED FOR SHOULD BE MADE PAYABLE TO THE
ORDER OF "PRIVEST BANK, AS ESCROW AGENT FOR
T REIT, INC." Shares may be purchased only
by persons meeting the standards set forth
under the Section of the Prospectus entitled
"INVESTOR SUITABILITY STANDARDS." Please
indicate the state in which the sale was
made.
- --------------------------------------------------------------------------------
2. TYPE OF Please check the appropriate box to indicate
OWNERSHIP the type of entity or type of individuals
subscribing.
- --------------------------------------------------------------------------------
3. REGISTRATION Please enter the exact name in which the
NAME AND ADDRESS Shares are to be held. For joint tenants
with right of survivorship or tenants in
common, include the names of both investors.
In the case of partnerships or corporations,
include the name of an individual to whom
correspondence will be addressed. Trusts
should include the name of the trustee. All
investors must complete the space provided
for taxpayer identification number or social
security number. By signing in Section 6,
the investor is certifying that this number
is correct. Enter the mailing address and
telephone numbers of the registered owner of
this investment. In the case of a Qualified
Plan or trust, this will be the address of
the trustee. Indicate the birthday and
occupation of the registered owner unless
the registered owner is a partnership,
corporation or trust.
- --------------------------------------------------------------------------------
4. INVESTOR NAME Complete this Section only if the investor's
AND ADDRESS name and address is different from the
registration name and address provided in
Section 4. If the Shares are registered in
the name of a trust, enter the name,
address, telephone number, social security
number, birth date and occupation of the
beneficial owner of the trust.
- --------------------------------------------------------------------------------
5. SUBSCRIBER Please separately initial each
SIGNATURE representation made by the investor where
indicated. Except in the case of fiduciary
accounts, the investor may not grant any
person a power of attorney to make such
representations on his or her behalf. Each
investor must sign and date this Section. If
title is to be held jointly, all parties
must sign. If the registered owner is a
partnership, corporation or trust, a general
partner, officer or trustee of the entity
must sign. PLEASE NOTE THAT THESE SIGNATURES
DO NOT HAVE TO BE NOTARIZED.
- --------------------------------------------------------------------------------
6. ADDITIONAL Please check if you plan to make one or more
INVESTMENTS additional investments in the Company. All
additional investments must be increments of
at least $100 (10 Shares). If additional
investments in the Company are made, the
investor agrees to notify the Company and
the Broker-Dealer named on the Subscription
Agreement Signature Page in writing if at
any time he fails to meet the applicable
suitability standards or he is unable to
make any other representations or warranties
set forth in the Prospectus or the
Subscription Agreement. The investor
acknowledges that the Broker-Dealer named in
the Subscription Agreement Signature Page
may receive a commission not to exceed 8% of
any such additional investments in the
Company.
B-4
<PAGE>
- -------------------------------------------------------------------------------
7. DISTRIBUTIONS a. DIVIDEND REINVESTMENT PLAN: By electing
the Dividend Reinvestment Program, the
investor elects to reinvest dividends in
the Company. The investor agrees to
notify the Company and the Broker-Dealer
named on the Subscription Agreement
Signature Page in writing if at any time
he fails to meet the applicable
suitability standards or he is unable to
make any other representations and
warranties as set forth in the
Prospectus or Subscription Agreement.
b. DIVIDEND ADDRESS: If cash dividends are
to be sent to an address other than that
provided in Section 5 (i.e., a bank,
brokerage firm or savings and loan,
etc.), please provide the name, account
number and address.
- --------------------------------------------------------------------------------
8. BROKER-DEALER This Section is to be completed by the
Registered Representative. Please complete
all BROKER-DEALER information contained in
Section 8 including suitability
certification. SIGNATURE PAGE MUST BE SIGNED
BY AN AUTHORIZED REPRESENTATIVE.
- --------------------------------------------------------------------------------
The Subscription Agreement Signature Page, which has been delivered with
this Prospectus, together with a check for the full purchase price, should be
delivered or mailed to your Broker-Dealer. Only original, completed copies of
Subscription Agreements can be accepted. Photocopied or otherwise duplicated
Subscription Agreements cannot be accepted by the Company.
IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THIS
SUBSCRIPTION AGREEMENT SIGNATURE PAGE,
PLEASE CALL 1-877-888-7348
B-5
<PAGE>
T REIT, INC.
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
1. ______ INVESTMENT____________________________________________________________
______________________________
Make Investment Check Payable to:
___________ _________________ PriVest Bank as Escrow Agent for T REIT, Inc.
# of Shares Total $ Invested
---------------------------------------------
(#Shares x $10.00=$ Invested) [_] Initial Investment (Minimum $1,000)
Minimum purchase 100 Shares or [_] Additional Investment (Minimum $100.00
$1,000 State in which sale was made _________
------------------------------ ---------------------------------------------
2._____ ADDITIONAL INVESTMENTS__________________________________________________
Please check if you plan to make additional investments in the Corporation (If
additional investments are made, please include social security number or other
taxpayer identification number on your check.) (All additional investments must
be made in increments of at least $100.00 except purchases pursuant to the
Dividend Reinvestment Program, which may be made in lesser amounts.)
3.______TYPE OF OWNERSHIP_______________________________________________________
<TABLE>
<S> <C>
[_] Individual (01) [_] IRA (06)
[_] Joint Tenants With Right of Survivorship (02) [_] Keogh (10)
[_] Community Property (03) [_] Qualified Pension Plan (11)
[_] Tenants in Common (04) [_] Qualified Profit Sharing Plan (12)
[_] Custodian: A Custodian for____________ under the Uniform [_] Other Trust____________________
Gift to Minors Act or the Uniform Transfers to Minors Act of For the Benefit of ________________
the State of _____________________________________(08) [_] Partnership (15)
[_] Other_____________________________________________
</TABLE>
4.______REGISTRATION NAME AND ADDRESS___________________________________________
Please print name(s) in which Shares are to be registered. Include trust
name, if applicable.
[_] Mr. [_] Mrs. [_] Ms. [_] [_]Ph.D. [_][DDS [_] Other_________________
Taxpayer Identification Number
________________________________________ [_][_] - [_][_][_][_][_][_][_]
________________________________________
________________________________________ Social Security Number
[_][_][_]-[_][_]-[_][_][_][_]
Street Address ________________________________________________________________
or P.O. Box ________________________________________________________________
________________ _______________ ________
City ________________ State _______________ Zip Code ________
________________ _______________________________
Home ( ) Business ( )
Telephone No. ________________ Telephone No._______________________________
__________________ _______________________________
Birth Date __________________ Occupation _______________________________
B-6
<PAGE>
5.________INVESTOR NAME AND ADDRESS_____________________________________________
(Complete only if different from registration name and address).
[_] Mr. [_] Mrs. [_] Ms. [_] [_]Ph.D. [_][DDS [_] Other_________________
Name Social Security Number
_____________________________________________ [_][_][_]-[_][_]-[_][_][_][_]
_____________________________________________
Street Address________________________________________________________________
or P.O. Box ________________________________________________________________
__________________ _______________ ________
City __________________ State _______________ Zip Code________
__________________ ____________________________
Home ( ) Business ( )
Telephone No.__________________ Telephone No.____________________________
__________________ ____________________________
Birth Date __________________ Occupation ____________________________
6.______INVESTOR SIGNATURE______________________________________________________
Please separately initial each of the representations below. Except in the
case of fiduciary accounts, you may not grant any person a power of attorney to
make such representations on your behalf. In order to induce the Company to
accept this subscription, I hereby represent and warrant to you as follows:
(a) I have received the Prospectus ________ ________
Initials Initials
(b) I accept and agree to be bound by the
terms and conditions of the Amended and
Restated Articles of Incorporation. ________ ________
Initials Initials
(c) I have (i) a net worth (exclusive of home,
home furnishings and automobiles) of $150,000
or more, or (ii) a net worth (as described
above) of at least $45,000 and had during the
last tax year or estimate that I will have
during the current tax year a minimum of
$45,000 annual gross income, or that I meet
the higher suitability requirements imposed
by my state of primary resident as set
forth in the Prospectus under "INVESTOR
SUITABILITY STANDARDS". ________ ________
Initials Initials
(d) If I am a California resident or if the
Person to whom I subsequently propose to
assign or transfer any Shares is a
California resident, I may not consummate
a sale or transfer of my Shares, or any
interest therein, or receive any
consideration therefor, without the prior
written consent of the Commissioner of the
Department of Corporations of the State of
California, except as permitted in the
Commissioner's Rules, and I understand that
my Shares, or any document evidencing my
Shares, will bear a legend reflecting the
substance of the foregoing understanding. ________ ________
Initials Initials
I declare that the information supplied above is true and correct and may be
relied upon the Company in connection with my investment in the Company. Under
penalties of perjury, by signing this Signature Page, I hereby certify that (a)
I have provided herein my correct Taxpayer Identification Number, and (b) I am
not subject to back-up withholding as a result of a failure to report all
interest or dividends, or the Internal Revenue Service has notified me that I am
no longer subject to back-up withholding.
________________________________ ________________________________ __________
________________________________ ________________________________ __________
Signature of Investor Signature of Joint Owner, Date
or Trustee if applicable
(MUST BE SIGNED BY TRUSTEE(S) IF IRA, KEOGH OR QUALIFIED PLAN).
B-7
<PAGE>
7.______DISTRIBUTIONS___________________________________________________________
7(a). Check the following box to participate in the Dividend Reinvestment
Program.
[_]
7(b). Complete following section only to direct distributions to a party
other than registered owner:
_____________________________________________________________
Name _____________________________________________________________
_____________________________________________________________
Account Number _____________________________________________________________
Street Address _____________________________________________________________
or P.O. Box _____________________________________________________________
______________ _____________ __________
City ______________ State _____________ Zip Code __________
8.______BROKER-DEALER___________________________________________________________
(TO BE COMPLETED BY REGISTERED REPRESENTATIVE)
The Broker-Dealer or authorized representative must sign below to complete
the subscription. The Broker-Dealer warrants that it is a duly licensed
Broker-Dealer and may lawfully offer Shares in the state designated as the
investor's address or the state in which the sale was made, if different. The
Broker-Dealer or authorized representative warrants that he has reasonable
grounds to believe this investment is suitable for the subscriber as set
forth in the Section of the Prospectus entitled "INVESTOR SUITABILITY
STANDARDS" and that he has informed the subscriber of all aspects of
liquidity and marketability of this investment as required by the Management
Broker-Dealer Agreement.
_________________________ ______________
Broker-Dealer Name _________________________ Telephone No.______________
Broker-Dealer Street ________________________________________________________
Address or P.O. Box _______________________________________________________
_______________ ______________ ______
City _______________ State ______________ Zip Code ______
Registered _______________________ Telephone No._______________
Representative Name _______________________ _______________
Reg. Rep. Street ________________________________________________________
Address or P.O. Box ________________________________________________________
_______________ ______________ ______
City _______________ State ______________ Zip Code ______
________________________________________ __________________________________
________________________________________ __________________________________
Broker-Dealer Signature, Registered Representative
if applicable Signature
Please mail completed Subscription Agreement (with all signatures)
and check(s) made payable to
PriVest Bank, as Escrow Agent for:
T REIT, INC.
1-877-888-7348
1551 N. Tustin Avenue, Suite 650
Santa Ana, California 92705
B-8
<PAGE>
EXHIBIT C
T REIT, INC.
DIVIDEND REINVESTMENT PROGRAM
The Dividend Reinvestment Program (the "DRIP") for T REIT, Inc., a
Virginia corporation (the "Company"), offers to holders of its common stock,
$.01 par value per share (the "Common Stock") the opportunity to purchase,
through reinvestment of dividends, additional shares of Common Stock, on the
terms, subject to the conditions and at the prices herein stated.
The DRIP will be implemented in connection with the Company's
registered initial public offering of 11,050,000 shares of its Common Stock (the
"Initial Offering"), of which amount 700,000 shares will be registered and
reserved for distribution pursuant to the DRIP.
Dividends reinvested pursuant to the DRIP will be applied to the
purchase of shares of Common Stock at a price per share (the "DRIP Price") equal
to the greater of (i) $9.05 or (ii) 95% of the "Market Price" (as defined below)
of the stock until all 700,000 shares reserved initially for the DRIP (the
"Initial DRIP Shares") have been purchased or until the termination of the
Company's initial public offering, whichever occurs first. Thereafter, the
Company may in its sole discretion effect additional registrations of common
stock for use in the DRIP. In any case, the per share purchase price under the
DRIP for such additionally acquired shares will equal the DRIP Price. For
purposes of the DRIP, "Market Price" means:
. the average sale price for our stock on the applicable
distribution date, as reported on the New York Stock Exchange or
another principal national securities exchange on which our stock
is listed; or
. if our stock is not listed on such an exchange, the average
quoted price for our stock on the applicable distribution date,
as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System ("Nasdaq") or another principal
automated quotations system on which our stock is quoted; or
. if our stock is not listed or quoted on any such exchange or
system, the average of the closing bid and asked prices for our
stock on the applicable distribution date, as furnished by a
professional market maker making a market in our stock selected
by our board of directors; or
. if no professional market maker makes a market in our stock, a
price determined by our board of directors in good faith.
THE DRIP
The DRIP provides you with a simple and convenient way to invest your
cash dividends in additional shares of Common Stock. As a participant in the
DRIP, you may purchase shares at the DRIP Price until all 700,000 Initial DRIP
Shares have been purchased or until the Company elects to terminate the DRIP.
The Company may, in its sole discretion, effect registration of additional
shares of Common Stock for issuance under the DRIP.
You receive free custodial service for the shares you hold through the
DRIP.
Shares for the DRIP will be purchased directly from the Company. Such
shares will be authorized and may be either previously issued or unissued
shares. Proceeds from the sale of the DRIP Shares provide the Company with funds
for general corporate purposes.
C-1
<PAGE>
ELIGIBILITY
Holders of record of Common Stock are eligible to participate in the
DRIP with respect to any whole number of their shares. If your shares are held
of record by a broker or nominee and you want to participate in the DRIP, you
must make appropriate arrangements with your broker or nominee.
The Company may refuse participation in the DRIP to shareholders
residing in states where shares offered pursuant to the DRIP are neither
registered under applicable securities laws nor exempt from registration.
ADMINISTRATION
As of the date of this Prospectus, the DRIP will be administered by the
Company or an affiliate of the Company (the "DRIP Administrator"), but a
different entity may act as DRIP Administrator in the future. The DRIP
Administrator will keep all records of your DRIP account and sends statements of
your account to you. Shares of Common Stock purchased under the DRIP will be
registered in the name of each participating shareholder.
ENROLLMENT
If you purchase shares in this offering, then you may become a
participant in the DRIP by completing and signing the enrollment form enclosed
with this Prospectus and returning it to us at the time you subscribe for
shares. If you receive a copy of this Prospectus or a separate prospectus
relating solely to the DRIP and have not previously elected to participate in
the DRIP, then you may so elect at any time by completing the enrollment form
attached to such prospectus or by other appropriate written notice to the
Company of your desire to participate in the DRIP.
Your participation in the DRIP will begin with the first dividend
payment after your signed enrollment form is received, provided such form is
received on or before ten days prior to the record date established for that
dividend. If your enrollment form is received after the record date for any
dividend and before payment of that dividend, that dividend will be paid to you
in cash and reinvestment of your dividends will not begin until the next
dividend payment date.
COSTS
Purchases under the DRIP will not be subject to Selling Commissions or
the Marketing and Due Diligence Reimbursement Fee. All costs of administration
of the DRIP will be paid by the Company. However, any interest earned on
dividends on shares within the DRIP will be paid to the Company to defray
certain costs relating to the DRIP. If you ask that your dividend reinvestment
program shares be sold, you will pay certain charges as explained in
"Certificates for Shares" below.
PURCHASES AND PRICE OF SHARES
Common Stock dividends will be invested within 30 days after the date
on which Common Stock dividends are paid each quarter (the "Investment Date").
Payment dates for Common Stock dividends will be ordinarily on or about the last
calendar day of March, June, September and December, but may be changed from
time to time in the sole discretion of the Company. Any dividends not so
invested will be returned to participants in the DRIP.
You become an owner of shares purchased under the DRIP as of the
Investment Date. Dividends paid on shares held in the DRIP (less any required
withholding tax) will be credited to your DRIP account. Dividends will be paid
on both full and fractional shares held in your account and are automatically
reinvested.
Reinvested Distributions. The Company will use the aggregate amount of
dividends to all participants for each dividend period to purchase shares for
the participants. If the aggregate amount of dividends to participants exceeds
the amount required to purchase all shares then available for purchase, the
Company will purchase all available shares and will return all remaining
dividends to the participants within 30 days after the date such dividends are
made. The Company will allocate the purchased shares among the participants
based on the portion of the aggregate dividends received on behalf of each
participant, as reflected in the Company's books.
C-2
<PAGE>
You may elect dividend reinvestment with respect to any whole number of
shares registered in your name on the records of the Company. Specify on the
enrollment form the number of shares for which you want dividends reinvested.
Dividends on all shares purchased pursuant to the DRIP will be automatically
reinvested. The number of shares purchased for you as a participant in the DRIP
will depend on the amount of your dividends on these shares (less any required
withholding tax) and the purchase price of the Common Stock. Your account will
be credited with the number of shares, including fractions computed to four
decimal places, equal to the total amount invested divided by the purchase price
per share.
Shares of Common Stock for participants will be purchased from the
Company at the dividend reinvestment program Price.
Optional Cash Purchases. Until determined otherwise by the Company,
DRIP participants may not make additional cash payments for the purchase of
Common Stock under the DRIP.
DIVIDENDS ON SHARES HELD IN THE DRIP
Dividends paid on shares held in the DRIP (less any required
withholding tax) will be credited to your DRIP account. Dividends will be paid
on both full and fractional shares held in your account and will be
automatically reinvested.
ACCOUNT STATEMENTS
You will receive a statement of your account within 90 days after the
end of the Company's fiscal year. The statements will contain a report of all
transactions with respect to your account since the last statement, including
information with respect to the dividends reinvested during the year, the number
of shares purchased during the year, the per share purchase price for such
shares, the total administrative charge retained by the Company or Plan
Administrator on your behalf and the total number of shares purchased on your
behalf pursuant to the DRIP. In addition, tax information with respect to income
earned on shares under the DRIP for the year will be included in the account
statements. These statements are your continuing record of the cost of your
purchase and should be retained for income tax purposes.
CERTIFICATES FOR SHARES
Within 90 days after the end of the Company's fiscal year, the Company
will issue certificates evidencing ownership of shares purchased under the DRIP
during the prior fiscal year. The ownership of shares purchased under the DRIP
will be in book-entry form prior to the issuance of certificates. The number of
shares purchased will be shown on your statement of account. This feature
permits ownership of fractional shares, protects against loss, theft or
destruction of stock certificates and reduces the costs of the DRIP. The Company
reserves the right to delay the production and/or dissemination of actual
certificates in any given year, in which case it will continue to evidence
ownership of shares purchased in the DRIP in book entry form.
Certificates for any number of whole shares credited to your account
will be issued in your name. Certificates for fractional shares will not be
issued. Should you want your certificates issued in a different name, you must
notify the DRIP Administrator in writing and comply with applicable transfer
requirements. If you wish to sell any whole shares credited to your account
under the DRIP, you will have the option of either (i) receiving a certificate
for such whole number of shares, or (ii) requesting that such shares held in
your account be sold, in which case the shares will be sold on the open market
as soon as practicable. Brokerage commissions on such sales will not be paid by
the Company and will be deducted from the sales proceeds. If you wish to pledge
shares credited to your account, you must first have the certificate for those
shares issued in your name.
TERMINATION OF PARTICIPATION
You may discontinue reinvestment of dividends under the DRIP with
respect to all, but not less than all, of your shares (including shares held for
your account in the DRIP) at any time without penalty by notifying the DRIP
C-3
<PAGE>
Administrator in writing no less than ten days prior to the next record date. A
notice of termination received by the DRIP Administrator after such cutoff date
will not be effective until the next following Investment Date. Participants who
terminate their participation in the DRIP may thereafter rejoin the DRIP by
notifying the Company and completing all necessary forms and otherwise as
required by the Company.
If you notify the DRIP Administrator of your termination of
participation in the DRIP or if your participation in the DRIP is terminated by
the Company, the Company's stock ownership records will be updated to include
the number of whole shares in your DRIP account. For any fractional shares of
stock in your DRIP account, the DRIP Administrator may either (i) send you a
check in payment for any fractional shares in your account, or (ii) credit your
stock ownership account with any such fractional shares.
A participant who changes his or her address must promptly notify the
DRIP Administrator. If a participant moves his or her residence to a state where
shares offered pursuant to the DRIP are neither registered nor exempt from
registration under applicable securities laws, the Company may deem the
participant to have terminated participation in the DRIP.
The Company reserves the right to prohibit certain employee benefit
plans from participating in the DRIP if such participation could cause the
underlying assets of the Company to constitute "plan assets" of such plans.
AMENDMENT AND TERMINATION OF THE DRIP
The Company's Board of Directors may, in its sole discretion, terminate
the DRIP or amend any aspect of the DRIP without the consent of participants or
other shareholders, provided that written notice of any material amendment is
sent to participants at least 10 days prior to the effective date thereof. You
will be notified if the DRIP is terminated or materially amended. The Board of
Directors may also terminate any participant's participation in the DRIP at any
time by notice to such participant if continued participation will, in the
opinion of the Board of Directors, jeopardize the status of the Company as a
REIT under the Code.
VOTING OF SHARES HELD UNDER THE DRIP
You will be able to vote all shares of Common Stock (including
fractional shares) credited to your account under the DRIP at the same time that
you vote the shares registered in your name on the records of the Company.
STOCK DIVIDENDS, STOCK SPLITS AND RIGHTS OFFERINGS
Your DRIP account will be amended to reflect the effect of any stock
dividends, splits, reverse splits or other combinations or recapitalizations by
the Company on shares held in the DRIP for you. If the Company issues to its
shareholders rights to subscribe to additional shares, such rights will be
issued to you based on your total share holdings, including shares held in your
DRIP account.
RESPONSIBILITY OF THE DRIP ADMINISTRATOR AND THE COMPANY UNDER THE DRIP
The DRIP Administrator will not be liable for any claim based on an act
done in good faith or a good faith omission to act. This includes, without
limitation, any claim of liability arising out of failure to terminate a
participant's account upon a participant's death, the prices at which shares are
purchased, the times when purchases are made, or fluctuations in the market
price of Common Stock.
All notices from the DRIP Administrator to a participant will be mailed
to the participant at his or her last address of record with the DRIP
Administrator, which will satisfy the DRIP Administrator's duty to give notice.
Participants must promptly notify the DRIP Administrator of any change in
address.
YOU SHOULD RECOGNIZE THAT NEITHER THE COMPANY NOR THE DRIP
ADMINISTRATOR CAN PROVIDE ANY ASSURANCE OF A PROFIT OR PROTECTION AGAINST LOSS
ON ANY SHARES PURCHASED UNDER THE DRIP.
C-4
<PAGE>
INTERPRETATION AND REGULATION OF THE DRIP
The Company reserves the right, without notice to participants, to
interpret and regulate the DRIP as it deems necessary or desirable in connection
with its operation. Any such interpretation and regulation shall be conclusive.
FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE DRIP
The following discussion summarizes the principal federal income tax
consequences, under current law, of participation in the DRIP. It does not
address all potentially relevant federal income tax matters, including
consequences peculiar to persons subject to special provisions of federal income
tax law (such as tax-exempt organizations, insurance companies, financial
institutions, broker-dealers and foreign persons). The discussion is based on
various rulings of the Internal Revenue Service regarding several types of
dividend reinvestment programs. No ruling, however, has been issued or requested
regarding the DRIP. THE FOLLOWING DISCUSSION IS FOR YOUR GENERAL INFORMATION
ONLY, AND YOU MUST CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES (INCLUDING THE EFFECTS OF ANY CHANGES IN LAW) THAT MAY RESULT FROM
YOUR PARTICIPATION IN THE DRIP AND THE DISPOSITION OF ANY SHARES PURCHASED
PURSUANT TO THE DRIP.
REINVESTED DIVIDENDS. Shareholders subject to federal income taxation
who elect to participate in the DRIP will incur a tax liability for
distributions allocated to them even though they have elected not to receive
their dividends in cash but rather to have their dividends reinvested pursuant
to the DRIP. Specifically, participants will be treated as if they received the
distribution from the Company and then applied such distribution to purchase the
shares in the DRIP. To the extent that a shareholder purchases shares through
the DRIP at a discount to fair market value, the shareholders will be treated
for tax purposes as receiving an additional distribution equal to the amount of
such discount. A shareholder designating a distribution for reinvestment will be
taxed on the amount of such distribution as ordinary income to the extent such
distribution is from current or accumulated earnings and profits, unless the
Company has designated all or a portion of the distribution as capital gain
dividend. In such case, such designated portion of the distribution will be
taxed as a capital gain. The amount treated as a distribution to you will
constitute a dividend for federal income tax purposes to the same extent as a
cash distribution.
RECEIPT OF SHARE CERTIFICATES AND CASH. You will not realize any income
if you receive certificates for whole shares credited to your account under the
DRIP. Any cash received for a fractional share held in your account will be
treated as an amount realized on the sale of the fractional share. You therefore
will recognize gain or loss equal to any difference between the amount of cash
received for a fractional share and your tax basis in the fractional share.
C-5
<PAGE>
E N R O L L M E N T F O R M
- - - - - - - - - - - - - -
T REIT, INC.
DIVIDEND REINVESTMENT PROGRAM
TO JOIN THE DIVIDEND REINVESTMENT PROGRAM:
(l) Complete this card. Be sure to include your social security or tax
identification number and signature.
(2) Staple or tape the card closed so that your signature is enclosed.
I hereby appoint T REIT, Inc. (the "Company") (or any successor),
acting as DRIP Administrator, as my agent to receive cash dividends that may
hereafter become payable to me on shares of Common Stock of the Company
registered in my name as set forth below, and authorize the Company to apply
such dividends to the purchase of full shares and fractional interests in shares
of the Company's Common Stock.
I understand that the purchases will be made under the terms and
conditions of the DRIP as described in the Prospectus and that I may revoke this
authorization at any time by notifying the DRIP Administrator, in writing, of my
desire to terminate my participation.
Please indicate your participation below. Return this card only if you
wish to participate in the DRIP.
_____________ Yes, I would like to participate in the Dividend Reinvestment
Program for ____ of my shares of Common Stock (you may elect
dividend reinvestment only with respect to any whole number of
shares).
_______________________________ ______________________________
Signature Date
_______________________________ ______________________________
Please Print Full Legal Name(s) Social Security or Tax
Identification Number
IF YOUR SHARES ARE HELD OF RECORD BY A BROKER OR NOMINEE, YOU MUST MAKE
APPROPRIATE ARRANGEMENTS WITH THE BROKER OR NOMINEE TO PARTICIPATE IN THE DRIP.
C-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Shares.
Securities and Exchange Commission, registration fee...... $ 30,719
Printing and mailing...................................... *
Accountant's fees and expenses............................ *
Blue Sky fees and expenses................................ 59,150
Counsel fees and expenses................................. *
Miscellaneous............................................. *
--------
Total................................................ $ *
* To be supplied by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On December 28, 1998, the Company was capitalized with the issuance to
Louis J. Rogers of 10 shares of common stock for a purchase price of $10 per
share for an aggregate purchase price of $100. The shares were purchased for
investment and for the purpose of organizing the Company. The Company issued
these Common Shares in reliance on an exemption from registration under Section
4(2) of the Securities Act. Mr. Rogers' shares of common stock will be redeemed
for $10.00 per share as soon as the minimum offering has been sold.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Virginia Stock Corporation Act permits a Virginia corporation to
include in its articles of incorporation a provision limiting the liability of
its Directors and Officers for monetary damages to the Company or the
shareholders of the Company with respect to any transaction, occurrence or
course of conduct, except for liability resulting from such person's having
engaged in willful misconduct or a knowing violation of the criminal law or any
federal or state securities law. The Amended and Restated Articles of
Incorporation of the Company contains such a provision that eliminates such
liability to the maximum extent permitted by the Virginia Stock Corporation Act.
The Amended and Restated Articles of Incorporation of the Company
provide that in any preceding brought by or in the right of the Company or
brought by or on behalf of the stockholders, no Director or Officer of the
Company shall be liable to the Company or its stockholders for any monetary
damages with respect to any transaction, occurrence or course of conduct, except
for liability resulting from such person's having engaged in willful misconduct
or a knowing violation of the criminal law or any federal or state securities
law.
The Company shall indemnify (i) any person who was or is a party to any
proceeding, including a proceeding brought by a stockholder in the right of the
Company or brought by or on behalf of stockholders of the Company, by reason of
the fact that he is or was a Director or Officer of the Company, or (ii) any
Director or Officer
II-1
<PAGE>
who is or was serving at the request of the Company as a director, trustee,
partner or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability incurred by him
in connection with such proceeding, unless he engaged in willful misconduct or a
knowing violation of the criminal law or of the federal or state securities law.
The Board of Directors is further empowered by a majority vote of a quorum of
disinterested Directors, to contract to indemnify any Director or Officer in
respect of any such proceeding arising out of any act or omission, whether
occurring before or after the execution of such contract.
The Amended and Restated Articles of Incorporation also obligate the
Company to pay for or reimburse the reasonable expenses incurred by any
applicant that is a party to a proceeding in advance of final disposition of the
proceeding or the making of a new determination for indemnification described in
the preceding paragraph if the applicant furnished the Company (i) a written
statement of his good faith belief that he has met the standard of conduct
described above, and (ii) a written undertaking, executed personally or on his
behalf, to repay the advance if it is ultimately determined that he did not meet
such standard of conduct, which undertaking shall be an unlimited general
obligation of the applicant but need not be secured and may be accepted without
reference to financial ability to make repayment.
Also, the Board may, but shall not be obligated or required to, cause
the Company to indemnify or contract to indemnify any person not specified above
who was, is, or may become a party to any proceeding, by reason of the fact that
he or she is or was an employee or agent of the Company, or is or was serving at
the request of the Company as a Director, Officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, to the same extent as if such person were specified as one whom
indemnification is granted as described above. Any determination to indemnify or
contract to indemnify under the Articles shall be made by a majority vote of a
quorum consisting of disinterested Directors.
The Company may, but shall not be required or obligated to, purchase
and maintain insurance to indemnify it against the liability assumed by it in
accordance with the Articles.
The indemnification provided in the Articles is not exclusive to any
other right to which any person may be entitled, including any right under
policies of insurance that may be purchased and maintained by the Company or
others, with respect to claims, issues, or matters in relation to which the
Company would not have obligation or right to indemnify such person under the
provisions of the Articles.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
None.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
(b) Exhibits:
EXHIBIT
- -------
NUMBER EXHIBIT
- ------ -------
1.1* Dealer Manager Agreement between T REIT, Inc. and Cunningham Capital
Corp.
1.2* Form of Soliciting Dealer Agreement
3.1 Articles of Incorporation of the Registrant
3.2* Form of Amended and Restated Articles of Incorporation of the
Registrant
3.3 Form of By-Laws of the Registrant
4.1* Form of Share Certificate
5.1* Opinion of Hunton & Williams
8.1* Opinion of Hunton & Williams as to Tax Matters
II-2
<PAGE>
10.1* Form of Agreement of Limited Partnership of T REIT, L.P.
10.2 Dividend Reinvestment Program (included as Exhibit C to the
Prospectus)
10.3* Director Stock Option Plan
10.4* Advisory Agreement between T REIT, Inc. and Triple Net Properties,
LLC
23.1* Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2 Consent of Haskell & White LLP
24.1 Powers of Attorney (Included on Signature Page)
* To be filed by amendment.
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions referred to in
Item 33 of this registration statement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 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 the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to 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.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
TABLE VI. ACQUISITIONS OF PROPERTIES BY PROGRAMS
PROGRAM: TELLURIDE BARSTOW, LLC
Name, location, type of property: Barstow Road Shopping Center
Barstow, California
Retail shopping center
Gross leasable square footage 77,950
Date of purchase: May 1, 1998
Mortgage financing at date of purchase $3,450,000
Cash down payment $1,175,000
Contract purchase price plus acquisition fee $4,625,000
Other cash expenditures expensed --
Other cash expenditures capitalized --
Total acquisition cost $4,625,000
PROGRAM: TRUCKEE RIVER OFFICE TOWER, LLC
Name, location, type of property: Truckee River Office Tower
Reno, Nevada
Office Building
Gross leasable square footage 137,572
Date of purchase: Dec. 1, 1998
Mortgage financing at date of purchase $12,000,000
Cash down payment $4,030,000
Contract purchase price plus acquisition fee $16,030,000
Other cash expenditures expensed --
Other cash expenditures capitalized --
Total acquisition cost $16,030,000
PROGRAM: WESTERN REAL ESTATE INVESTMENT TRUST, INC.
Name, location, type of property: Kress Energy Center
Wichita, Kansas
Office Building
Gross leasable square footage 57,693
Date of purchase: July 13, 1998
Mortgage financing at date of purchase $925,000
Cash down payment $925,000
Contract purchase price plus acquisition fee $1,850,000
Other cash expenditures expensed --
Other cash expenditures capitalized --
Total acquisition cost $1,850,000
II-4
<PAGE>
TABLE VI. ACQUISITION OF PROPERTIES BY PROGRAM - CONTINUED
PROGRAM: WESTERN REAL ESTATE INVESTMENT TRUST, INC.
Name, location, type of property: Phelan Village Shopping Center
Phelan, California
Retail Shopping Center
Gross leasable square footage 58,619
Date of purchase: Oct. 16, 1998
Mortgage financing at date of purchase $3,625,000
Cash down payment $1,320,600
Contract purchase price plus acquisition fee $4,945,600
Other cash expenditures expensed --
Other cash expenditures capitalized --
Total acquisition cost $4,945,600
PROGRAM: WESTERN REAL ESTATE INVESTMENT TRUST, INC.
Name, location, type of property: Century Plaza East Shopping Center
Lancaster, California
Retail Shopping Center
Gross leasable square footage 121,192
Date of purchase: Nov. 3, 1998
Mortgage financing at date of purchase $6,937,000
Cash down payment $2,163,000
Contract purchase price plus acquisition fee $9,100,000
Other cash expenditures expensed --
Other cash expenditures capitalized --
Total acquisition cost $9,100,000
PROGRAM: WESTERN REAL ESTATE INVESTMENT TRUST, INC.
Name, location, type of property: Bryant Ranch Shopping Center
Yorba Linda, California
Retail Shopping Center
Gross leasable square footage 93,892
Date of purchase: Dec. 18, 1998
Mortgage financing at date of purchase $7,950,000
Cash down payment $1,590,000
Contract purchase price plus acquisition fee $9,540,000
Other cash expenditures expensed --
Other cash expenditures capitalized --
Total acquisition cost $9,540,000
II-5
<PAGE>
EXHIBIT LIST
- ------------
NUMBER EXHIBIT
- ------ -------
1.1* Dealer Manager Agreement between T REIT, Inc. and Cunningham Capital
Corp.
1.2* Form of Soliciting Dealer Agreement
3.1 Articles of Incorporation of the Registrant
3.2* Form of Amended and Restated Articles of Incorporation of the
Registrant
3.3 Form of By-Laws of the Registrant
4.1* Form of Share Certificate
5.1* Opinion of Hunton & Williams
8.1* Opinion of Hunton & Williams as to Tax Matters
10.1* Form of Agreement of Limited Partnership of T REIT, L.P.
10.2 Dividend Reinvestment Program (included as Exhibit C to the
Prospectus)
10.3* Director Stock Option Plan
10.4* Advisory Agreement between T REIT, Inc. and Triple Net Properties,
LLC
23.1* Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2 Consent of Haskell & White LLP
24.1 Powers of Attorney (Included on Signature Page)
* To be filed by amendment.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF SANTA ANA, STATE OF CALIFORNIA ON APRIL 26, 1999.
T REIT, Inc., a Virginia corporation
(Registrant)
By /s/ ANTHONY W. THOMPSON
------------------------------------
ANTHONY W. THOMPSON
CHAIRMAN OF THE BOARD OF DIRECTORS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Anthony W. Thompson and Louis R. Rogers and each or either of them, his true and
lawful attorney-in-fact with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement, or any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
and to cause the same to be filed, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite or
desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or either
of them, or their substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Anthony W. Thompson Chairman of the Board of Directors, April 26, 1999
- -----------------------
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jack R. Maurer Secretary and Treasurer April 26, 1999
- ------------------
(Principal Financial Officer and
Principal Accounting Officer).
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
T REIT, INC.
ARTICLE I
---------
The name of the Corporation is T REIT, Inc.
ARTICLE II
----------
The purpose for which the Corporation is formed is to transact any or all
lawful business, not required to be specifically stated in these Articles, for
which corporations may be incorporated under the Virginia Stock Corporation Act
as amended from time to time.
ARTICLE III
-----------
The total number of shares which the Corporation shall have authority to issue
shall be 1,000 shares of Common Stock, $.01 par value per share.
No holder of shares of any class of the Corporation shall have any preemptive
or preferential right to purchase or subscribe to (i) any shares of any class of
the Corporation, whether now or hereafter authorized; (ii) any warrants, rights,
or options to purchase any such shares; or (iii) any securities or obligations
convertible into any such shares or into warrants, rights, or options to
purchase any such shares.
ARTICLE IV
----------
The initial registered office shall be located at 951 East Byrd Street,
Richmond, Virginia 23219-4074 in the City of Richmond, and the initial
registered agent shall be James S. Seevers, Jr., who is a resident of Virginia
and a member of the Virginia State Bar, and whose business address is the same
as the address of the initial registered office.
ARTICLE V
---------
The number of Directors constituting the Board of Directors shall be
designated in the Corporation's Bylaws.
<PAGE>
ARTICLE VI
----------
1. In this Article:
"applicant" means the person seeking indemnification pursuant to this Article.
"expenses" includes counsel fees.
"liability" means the obligation to pay a judgment, settlement, penalty, fine,
including any excise tax assessed with respect to an employee benefit plan, or
reasonable expenses incurred with respect to a proceeding.
"party" includes an individual who was, is, or is threatened to be made a
named defendant or respondent in a proceeding.
"proceeding" means any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal.
2. In any proceeding brought by or in the right of the Corporation or brought
by or on behalf of shareholders of the Corporation, no Director or officer of
the Corporation shall be liable to the Corporation or its shareholders for
monetary damages with respect to any transaction, occurrence or course of
conduct, whether prior or subsequent to the effective date of this Article,
except for liability resulting from such person's having engaged in willful
misconduct or a knowing violation of the criminal law or any federal or state
securities law.
3. The Corporation shall indemnify (i) any person who was or is a party to
any proceeding, including a proceeding brought by a shareholder in the right of
the Corporation or brought by or on behalf of shareholders of the Corporation,
by reason of the fact that he is or was a Director, officer, employee or agent
of the Corporation, or (ii) any Director or officer who is or was serving at the
request of the Corporation as a Director, trustee, partner or officer of another
corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan or other enterprise, against any liability incurred by him
in connection with such proceeding unless he engaged in willful misconduct or a
knowing violation of the criminal law. A person is considered to be serving an
employee benefit plan at the Corporation's request if his duties to the
Corporation also impose duties on, or otherwise involve services by, him to the
plan or to participants in or beneficiaries of the plan. The Board of Directors
is hereby empowered, by a majority vote of a quorum of disinterested Directors,
to enter into a contract to indemnify any Director or officer in respect of any
proceedings arising from any act or omission, whether occurring before or after
the execution of such contract.
4. The provisions of this Article shall be applicable to all proceedings
commenced after the adoption hereof by the shareholders of the Corporation,
arising from any act or omission, whether occurring before or after such
adoption. No amendment or repeal of this Article shall have any effect on the
rights provided under this Article with respect to any act or omission occurring
-2-
<PAGE>
prior to such amendment or repeal. The Corporation shall promptly take all such
actions, and make all such determinations, as shall be necessary or appropriate
to comply with its obligation to make any indemnity under this Article and shall
promptly pay or reimburse all reasonable expenses, including attorneys' fees,
incurred by any such Director, officer, employee or agent in connection with
such actions and determinations or proceedings of any kind arising therefrom.
5. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in section 2 or 3 of this Article.
6. Any indemnification under section 3 of this Article (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the applicant is proper in the
circumstances because he has met the applicable standard of conduct set forth in
section 3.
The determination shall be made:
(a) By the Board of Directors by a majority vote of a quorum consisting of
Directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under subsection (a) of this section,
by majority vote of a committee duly designated by the Board of Directors (in
which designation Directors who are parties may participate), consisting solely
of two or more Directors not at the time parties to the proceeding;
(c) By special legal counsel:
(i) Selected by the Board of Directors or its committee in the
manner prescribed in subsection (a) or (b) of this section; or
(ii) If a quorum of the Board of Directors cannot be obtained under
subsection (a) of this section and a committee cannot be designated under
subsection (b) of this section, selected by majority vote of the full Board of
Directors, in which selection Directors who are parties may participate; or
(d) By the shareholders, but shares owned by or voted under the control of
Directors who are at the time parties to the proceeding may not be voted on the
determination.
Any evaluation as to reasonableness of expenses shall be made in the same
manner as the determination that indemnification is appropriate, except that if
the determination is made by special legal counsel, such evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (c)
of this section 6 to select counsel.
-3-
<PAGE>
Notwithstanding the foregoing, in the event there has been a change in the
composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect to
any claim for indemnification made pursuant to this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the applicant.
If the Board of Directors and the applicant are unable to agree upon such
special legal counsel the Board of Directors and the applicant each shall select
a nominee, and the nominees shall select such special legal counsel.
7. (a) The Corporation may pay for or reimburse the reasonable expenses
incurred by any applicant who is a party to a proceeding in advance of final
disposition of the proceeding or the making of any determination under section 6
if the applicant furnishes the Corporation:
(i) a written statement of his good faith belief that he has met
the standard of conduct described in section 3; and
(ii) a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he did not meet such
standard of conduct.
(b) The undertaking required by paragraph (ii) of subsection (a) of this
section shall be an unlimited general obligation of the applicant but need not
be secured and may be accepted without reference to financial ability to make
repayment.
(c) Authorizations of payments under this section shall be made by the
persons specified in section 6.
8. The Board of Directors is hereby empowered, by majority vote of a quorum
consisting of disinterested Directors, to cause the Corporation to indemnify or
contract to indemnify any person not specified in section 2 or 3 of this Article
who was, is or may become a party to any proceeding, by reason of the fact that
he is or was an employee or agent of the Corporation, or is or was serving at
the request of the Corporation as Director, officer, employee or agent of
another corporation, partnership, limited liability company, joint venture,
trust, employee benefit plan or other enterprise, to the same extent as if such
person were specified as one to whom indemnification is granted in section 3.
The provisions of sections 4 through 7 of this Article shall be applicable to
any indemnification provided hereafter pursuant to this section 8.
9. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any person who is or was a Director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a Director, officer, employee or agent of another
corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan or other enterprise, against any liability asserted
against or incurred by him in any such capacity or arising from his status as
such, whether or not the Corporation would have power to indemnify him against
such liability under the provisions of this Article.
-4-
<PAGE>
10. Every reference herein to Directors, officers, employees or agents shall
include former Directors, officers, employees and agents and their respective
heirs, executors and administrators. The indemnification hereby provided and
provided hereafter pursuant to the power hereby conferred by this Article on the
Board of Directors shall not be exclusive of any other rights to which any
person may be entitled, including any right under policies of insurance that may
be purchased and maintained by the Corporation or others, with respect to
claims, issues or matters in relation to which the Corporation would not have
the power to indemnify such person under the provisions of this Article. Such
rights shall not prevent or restrict the power of the Corporation to make or
provide for any further indemnity, or provisions for determining entitlement to
indemnity, pursuant to one or more indemnification agreements, bylaws, or other
arrangements (including, without limitation, creation of trust funds or security
interests funded by letters of credit or other means) approved by the Board of
Directors (whether or not any of the Directors of the Corporation shall be a
party to or beneficiary of any such agreements, bylaws or arrangements);
provided, however, that any provision of such agreements, bylaws or other
arrangements shall not be effective if and to the extent that it is determined
to be contrary to this Article or applicable laws of the Commonwealth of
Virginia.
11. Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
Dated: December 23, 1998 /s/ James S. Seevers, Jr.
-----------------------------------
James S. Seevers, Jr.
Incorporator
-5-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
T REIT, INC.
ARTICLE I.
----------
Meetings of Shareholders.
-------------------------
1.1 Places of Meetings. All meetings of the shareholders shall be held at
such place, either within or without the Commonwealth of Virginia, as from time
to time may be fixed by the Board of Directors.
1.2 Annual Meetings. The annual meeting of the shareholders, for the
election of Directors and transaction of such other business as may come before
the meeting, shall be held in each year on the third Tuesday in March, at 10
a.m., if that day is not a legal holiday. If that day is a legal holiday, the
annual meeting shall be held on the next succeeding day not a legal holiday.
1.3 Special Meetings. A special meeting of the shareholders for any purpose
or purposes may be called at any time by the Chairman of the Board, the Vice-
Chairman of the Board or the President, by a majority of the Board of Directors,
or by shareholders together holding at least 50% of the number of shares of the
Corporation at the time outstanding and entitled to vote with respect to the
business to be transacted at such meeting. At a special meeting no business
shall be transacted and no corporate action shall be taken other than that
stated in the notice of the meeting.
1.4 Notice of Meetings. Written or printed notice stating the place, day and
hour of every meeting of the shareholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be mailed not less
than 10 nor more than 60 days before the date of the meeting to each shareholder
of record entitled to vote at such meeting, at his address which appears in the
share transfer books of the Corporation. Such further notice shall be given as
may be required by law, but meetings may be held without notice if all the
shareholders entitled to vote at the meeting are present in person or by proxy
or if notice is waived in writing by those not present, either before or after
the meeting.
1.5 Quorum. Any number of shareholders together holding at least a majority
of the outstanding shares of capital stock entitled to vote with respect to the
business to be transacted, who shall be present in person or represented by
proxy at any meeting duly called, shall constitute a quorum for the transaction
of business. If less than a quorum shall be in attendance at the time for which
a meeting shall have been called, the meeting may be adjourned from time to time
by a majority of the shareholders present or represented by proxy without notice
other than by announcement at the meeting.
<PAGE>
1.6 Voting. At any meeting of the shareholders each shareholder of a class
entitled to vote on any matter coming before the meeting shall, as to such
matter, have one vote, in person or by proxy, for each share of capital stock of
such class standing in his name on the books of the Corporation on the date, not
more than seventy days prior to such meeting, fixed by the Board of Directors as
the record date for the purpose of determining shareholders entitled to vote.
Every proxy shall be in writing, dated and signed by the shareholder entitled to
vote or his duly authorized attorney-in-fact.
1.7 Inspectors. An appropriate number of inspectors for any meeting of
shareholders may be appointed by the Chairman of such meeting. Inspectors so
appointed will open and close the polls, will receive and take charge of proxies
and ballots, and will decide all questions as to the qualifications of voters,
validity of proxies and ballots, and the number of votes properly cast.
ARTICLE II.
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Directors.
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2.1 General Powers. The property, affairs and business of the Corporation
shall be managed under the direction of the Board of Directors, and, except as
otherwise expressly provided by law, the Articles of Incorporation or these
Bylaws, all of the powers of the Corporation shall be vested in such Board.
2.2 Number of Directors. The initial number of Directors constituting the
Board of Directors shall be one.
2.3 Election and Removal of Directors; Quorum.
(a) Directors shall be elected at each annual meeting of shareholders to
succeed those Directors whose terms have expired and to fill any vacancies then
existing.
(b) Directors shall hold their offices for terms of one year and until
their successors are elected. Any Director may be removed from office at a
meeting called expressly for that purpose by the vote of shareholders holding
not less than a majority of the shares entitled to vote at an election of
Directors.
(c) Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of the majority of the remaining Directors though less than a
quorum of the Board, and the term of office of any Director so elected shall
expire at the next shareholders' meeting at which directors are elected.
(d) A majority of the number of Directors prescribed in these Bylaws
shall constitute a quorum for the transaction of business. The act of a majority
of Directors present
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at a meeting at which a quorum is present shall be the act of the Board of
Directors. Less than a quorum may adjourn any meeting.
2.4 Meetings of Directors. An annual meeting of the Board of Directors shall
be held as soon as practicable after the adjournment of the annual meeting of
shareholders at such place as the Board may designate. Other meetings of the
Board of Directors shall be held at places within or without the Commonwealth of
Virginia and at times fixed by resolution of the Board, or upon call of the
Chairman of the Board, the Vice Chairman of the Board, the President or any one
of the Directors. The Secretary or officer performing the Secretary's duties
shall give not less than 24 hours' notice by letter, telegraph or telephone (or
in person) of all meetings of the Board of Directors, provided that notice need
not be given of the annual meeting or of regular meetings held at times and
places fixed by resolution of the Board. Meetings may be held at any time
without notice if all of the Directors are present, or if those not present
waive notice in writing either before or after the meeting. The notice of
meetings of the Board need not state the purpose of the meeting.
2.5 Compensation. By resolution of the Board, Directors may be allowed a fee
and expenses for attendance at all meetings, but nothing herein shall preclude
Directors from serving the Corporation in other capacities and receiving
compensation for such other services.
ARTICLE III.
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Committees.
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3.1 Executive Committee. The Board of Directors, by resolution adopted by a
majority of the number of Directors fixed by these Bylaws, may elect an
Executive Committee which shall consist of not less than two Directors,
including the President. When the Board of Directors is not in session, the
Executive Committee shall have all power vested in the Board of Directors by
law, by the Articles of Incorporation, or by these Bylaws, provided that the
Executive Committee shall not have power to (i) approve or recommend to
shareholders action that the Virginia Stock Corporation Act (the "VSCA")
requires to be approved by shareholders; (ii) fill vacancies on the Board or on
any of its committees; (iii) amend the Articles of Incorporation pursuant to (S)
13.1-706 of the VCSA; (iv) adopt, amend, or repeal the Bylaws; (v) approve a
plan of merger not requiring shareholder approval; (vi) authorize or approve a
distribution, except according to a general formula or method prescribed by the
Board of Directors; or (vii) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, other than within
limits specifically prescribed by the Board of Directors. The Executive
Committee shall report at the next regular or special meeting of the Board of
Directors all action which the Executive Committee may have taken on behalf of
the Board since the last regular or special meeting of the Board of Directors.
3.2 Other Committees. The Board of Directors, by resolution adopted by a
majority of the number of Directors fixed by these Bylaws, may establish such
other standing or special
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committees of the Board as it may deem advisable, consisting of not less than
two Directors; and the members, terms and authority of such committees shall be
as set forth in the resolutions establishing the same.
3.3 Meetings. Regular and special meetings of any Committee established
pursuant to this Article may be called and held subject to the same requirements
with respect to time, place and notice as are specified in these Bylaws for
regular and special meetings of the Board of Directors.
3.4 Quorum and Manner of Acting. A majority of the members of any Committee
serving at the time of any meeting thereof shall constitute a quorum for the
transaction of business at such meeting. The action of a majority of those
members present at a Committee meeting at which a quorum is present shall
constitute the act of the Committee.
3.5 Term of Office. Members of any Committee shall be elected as above
provided and shall hold office until their successors are elected by the Board
of Directors or until such Committee is dissolved by the Board of Directors.
3.6 Resignation and Removal. Any member of a Committee may resign at any
time by giving written notice of his intention to do so to the President or the
Secretary of the Corporation, or may be removed, with or without cause, at any
time by such vote of the Board of Directors as would suffice for his election.
3.7 Vacancies. Any vacancy occurring in a Committee resulting from any cause
whatever may be filled by a majority of the number of Directors fixed by these
Bylaws.
ARTICLE IV.
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Officers.
---------
4.1 Election of Officers; Terms. The officers of the Corporation shall
consist of a President, a Secretary and a Treasurer. Other officers, including
a Chairman of the Board, one or more Vice Presidents (whose seniority and
titles, including Executive Vice Presidents and Senior Vice Presidents, may be
specified by the Board of Directors), and assistant and subordinate officers,
may from time to time be elected by the Board of Directors. All officers shall
hold office until the next annual meeting of the Board of Directors and until
their successors are elected. The President shall be chosen from among the
Directors. Any two officers may be combined in the same person as the Board of
Directors may determine.
4.2 Removal of Officers; Vacancies. Any officer of the Corporation may be
removed summarily with or without cause, at any time, by the Board of Directors.
Vacancies may be filled by the Board of Directors.
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4.3 Duties. The officers of the Corporation shall have such duties as
generally pertain to their offices, respectively, as well as such powers and
duties as are prescribed by law or are hereinafter provided or as from time to
time shall be conferred by the Board of Directors. The Board of Directors may
require any officer to give such bond for the faithful performance of his duties
as the Board may see fit.
4.4 Duties of the President. The President shall be the chief executive
officer of the Corporation and shall be primarily responsible for the
implementation of policies of the Board of Directors. He shall have authority
over the general management and direction of the business and operations of the
Corporation and its divisions, if any, subject only to the ultimate authority of
the Board of Directors. He shall be a Director, and, except as otherwise
provided in these Bylaws or in the resolutions establishing such committees, he
shall be ex officio a member of all Committees of the Board. In the absence of
the Chairman and the Vice Chairman of the Board, or if there are no such
officers, the President shall preside at all corporate meetings. He may sign
and execute in the name of the Corporation share certificates, deeds, mortgages,
bonds, contracts or other instruments except in cases where the signing and the
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the Corporation or shall be
required by law otherwise to be signed or executed. In addition, he shall
perform all duties incident to the office of the President and such other duties
as from time to time may be assigned to him by the Board of Directors.
4.5 Duties of the Vice Presidents. Each Vice President, if any, shall have
such powers and duties as may from time to time be assigned to him by the
President or the Board of Directors. Any Vice President may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts or other
instruments authorized by the Board of Directors, except where the signing and
execution of such documents shall be expressly delegated by the Board of
Directors or the President to some other officer or agent of the Corporation or
shall be required by law or otherwise to be signed or executed.
4.6 Duties of the Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit all monies and securities of the Corporation in
such banks and depositories as shall be designated by the Board of Directors.
He shall be responsible (i) for maintaining adequate financial accounts and
records in accordance with generally accepted accounting practices; (ii) for the
preparation of appropriate operating budgets and financial statements; (iii) for
the preparation and filing of all tax returns required by law; and (iv) for the
performance of all duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him by the Board of Directors,
the Finance Committee or the President. The Treasurer may sign and execute in
the name of the Corporation share certificates, deeds, mortgages, bonds,
contracts or other instruments, except in cases where the signing and the
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the Corporation or shall be
required by law or otherwise to be signed or executed.
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<PAGE>
4.7 Duties of the Secretary. The Secretary shall act as secretary of all
meetings of the Board of Directors and shareholders of the Corporation. When
requested, he shall also act as secretary of the meetings of the committees of
the Board. He shall keep and preserve the minutes of all such meetings in
permanent books. He shall see that all notices required to be given by the
Corporation are duly given and served; shall have custody of the seal of the
Corporation and shall affix the seal or cause it to be affixed to all share
certificates of the Corporation and to all documents the execution of which on
behalf of the Corporation under its corporate seal is duly authorized in
accordance with law or the provisions of these Bylaws; shall have custody of all
deeds, leases, contracts and other important corporate documents; shall have
charge of the books, records and papers of the Corporation relating to its
organization and management as a Corporation; shall see that all reports,
statements and other documents required by law (except tax returns) are properly
filed; and shall in general perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board of Directors or the President.
4.8 Compensation. The Board of Directors shall have authority to fix the
compensation of all officers of the Corporation.
ARTICLE V.
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Capital Stock.
--------------
5.1 Certificates. The shares of capital stock of the Corporation shall be
evidenced by certificates in forms prescribed by the Board of Directors and
executed in any manner permitted by law and stating thereon the information
required by law. Transfer agents and/or registrars for one or more classes of
shares of the Corporation may be appointed by the Board of Directors and may be
required to countersign certificates representing shares of such class or
classes. If any officer whose signature or facsimile thereof shall have been
used on a share certificate shall for any reason cease to be an officer of the
Corporation and such certificate shall not then have been delivered by the
Corporation, the Board of Directors may nevertheless adopt such certificate and
it may then be issued and delivered as though such person had not ceased to be
an officer of the Corporation.
5.2 Lost, Destroyed and Mutilated Certificates. Holders of the shares of the
Corporation shall immediately notify the Corporation of any loss, destruction or
mutilation of the certificate therefor, and the Board of Directors may in its
discretion cause one or more new certificates for the same number of shares in
the aggregate to be issued to such shareholder upon the surrender of the
mutilated certificate or upon satisfactory proof of such loss or destruction,
and the deposit of a bond in such form and amount and with such surety as the
Board of Directors may require.
5.3 Transfer of Shares. The shares of the Corporation shall be transferable
or assignable only on the books of the Corporation by the holder in person or by
attorney on surrender of the certificate for such shares duly endorsed and, if
sought to be transferred by
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<PAGE>
attorney, accompanied by a written power of attorney to have the same
transferred on the books of the Corporation. The Corporation will recognize,
however, the exclusive right of the person registered on its books as the owner
of shares to receive dividends and to vote as such owner.
5.4 Fixing Record Date. For the purpose of determining shareholders entitled
to notice of or to vote at any meeting of shareholders or any adjournment
thereof, or entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than seventy
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notices of the meeting are mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
ARTICLE VI.
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Miscellaneous Provisions.
-------------------------
6.1 Seal. The seal of the Corporation shall consist of a flat-faced circular
die, of which there may be any number of counterparts, on which there shall be
engraved the word "Seal" and the name of the Corporation.
6.2 Fiscal Year. The fiscal year of the Corporation shall end on such date
and shall consist of such accounting periods as may be fixed by the Board of
Directors.
6.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders for the
payment of money shall be signed by such persons as the Board of Directors from
time to time may authorize. When the Board of Directors so authorizes, however,
the signature of any such person may be a facsimile.
6.4 Amendment of Bylaws. Unless proscribed by the Articles of Incorporation,
these Bylaws may be amended or altered at any meeting of the Board of Directors
by affirmative vote of a majority of the number of Directors fixed by these
Bylaws. The shareholders entitled to vote in respect of the election of
Directors, however, shall have the power to rescind, amend, alter or repeal any
Bylaws and to enact Bylaws which, if expressly so provided, may not be amended,
altered or repealed by the Board of Directors.
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6.5 Voting of Shares Held. Unless otherwise provided by resolution of the
Board of Directors or of the Executive Committee, if any, the President may from
time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the vote
which the Corporation may be entitled to cast as a shareholder or otherwise in
any other corporation, partnership, limited liability company or joint venture,
any of whose securities may be held by the Corporation, at meetings of the
holders of the shares or other securities of such other corporation,
partnership, limited liability company or joint venture or to consent in writing
to any action by any such other corporation, partnership, limited liability
company or joint venture; and the President shall instruct the person or persons
so appointed as to the manner of casting such votes or giving such consent and
may execute or cause to be executed on behalf of the Corporation, and under its
corporate seal or otherwise, such written proxies, consents, waivers or other
instruments as may be necessary or proper in the premises. In lieu of such
appointment the President may himself attend any meetings of the holders of
shares or other securities of any such other corporation, partnership, limited
liability company or joint venture and there vote or exercise any or all power
of the Corporation as the holder of such shares or other securities of such
other corporation, partnership, limited liability company or joint venture.
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EXHIBIT 23.2
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INDEPENDENT AUDITORS' CONSENT
We consent to the use in this registration statement of T REIT, Inc. on Form S-
11 of our report dated February 10, 1999, appearing in the Prospectus, which is
part of this registration statement.
We also consent to the reference to use under the heading "Experts" in such
Prospectus.
HASKELL & WHITE LLP
Newport Beach, California
April 26, 1999
