<PAGE>
As filed with the Securities and Exchange Commission on February 15, 2000
Registration No. 333-77229
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
AMENDMENT NO. 5
to
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
____________
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)
_________________
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
<TABLE>
<CAPTION>
=================================================================================================================================
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 (3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 11,750,000 shares $10.00 $117,500,000 $32,665
================================================================================================================================
</TABLE>
(1) Includes 10,000,000 shares offered to the public, 700,000 shares offered
to shareholders pursuant to a dividend reinvestment program, 250,000 shares
issuable upon exercise of warrants issued to our dealer manager and 800,000
shares issuable pursuant to two stock option plans, 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.
(3) A filing fee of $30,719 was paid in connection with the Registrant's
original filing on April 28, 1999, and $1,946 was paid in connection with
the Registrant's filing on July 23, 1999.
--------------------------
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.
================================================================================
<PAGE>
Information contained in this Prospectus is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
securities and exchange Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time that the
registration statement becomes effective. This Prospectus shall not constitute
an offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any state in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such state.
Subject to Completion, Dated February ___, 2000
INITIAL PUBLIC OFFERING PROSPECTUS
T REIT, INC. [LOGO]
Common Stock
100,000 Shares
(minimum amount to break escrow)
We are offering shares of common stock for $10.00 per share. We have not
yet qualified as a REIT for federal income tax purposes but intend to do so for
our first full taxable year.
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
material risk factors relevant to an investment in our common stock, including
but not limited to the following:
. there will be no market for our common stock and you may not be able to
resell your common stock at the offering price;
. we are totally reliant on our advisor, which is an affiliate of three of
our officers and directors, to manage our business and assets;
. our officers and directors will be subject to substantial conflicts of
interest;
. we may incur substantial debt, which could hinder our ability to pay
dividends to our shareholders; and
. if we raise substantially less than the maximum offering, we will not be
able to invest in a diverse portfolio of properties and the value of
your investment will fluctuate with the performance at specific
properties.
<TABLE>
<CAPTION>
This Offering Per Share Total Minimum Total Maximum
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Public Price........................... $10.00 $1,000,000 $100,000,000
Selling Commissions......................... $ .80 $ 80,000 $ 8,000,000
Marketing and
Due Diligence Expenses........................ $ .15 $ 15,000 $ 1,500,000
------------- ------------- -------------
Proceeds to T REIT.......................... $ 9.05 $ 905,000 $ 90,500,000
</TABLE>
After payment of offering and acquisition expenses, we estimate that
approximately 87.5% of the offering proceeds will be available for investments.
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 use of forecasts in this offering is prohibited. Any representation to
the contrary and prediction, written or oral, as to the amount or certainty of
any present or future cash benefit or tax consequence which may flow from your
investment in our shares is prohibited.
The securities dealers in this offering must sell the minimum number of
securities offered, 100,000 shares, if any are sold. The securities dealers are
required only to use their best efforts to sell the maximum number of securities
offered, 10,000,000 shares. A securities dealer may not complete a sale of our
shares to you until at least five business days after the date you receive a
copy of the final prospectus. That securities dealer must also send you a
confirmation of your purchase.
. We will sell shares until earlier of ________, 2002, or the date on
which the maximum offering has been sold.
. Your investment will be placed in an interest-bearing escrow account
with Privest Bank as escrow agent, until we have received and accepted
subscriptions for at least 100,000 shares.
. If you are a resident of Pennsylvania, your investment will be placed in
a separate interest-bearing escrow account with Privest Bank or escrow
agent, until we have received and accepted subscriptions for at least
1,000,000 shares.
. If we do not sell 100,000 shares before __________, 2001, this offering
will be terminated and we will promptly refund your investment with
interest and without deducting for escrow expenses.
The Date of this Prospectus is __________, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
About Our Company.................................................... 1
About Our Business................................................... 1
Our Advisor and the Dealer Manager................................... 1
Summary Risk Factors................................................. 2
This Offering........................................................ 3
Use of Proceeds...................................................... 3
Distributions........................................................ 3
Summary Financial Information........................................ 3
Compensation to Our Advisor and the Dealer Manager................... 3
RISK FACTORS............................................................... 6
No Properties Owned; No Properties Identified For Investment......... 6
No Market for Our Common Stock....................................... 6
Total Reliance on Our Advisor........................................ 6
Conflicts of Interest................................................ 7
Lack of Investment Diversification................................... 8
Acquisition Risks.................................................... 9
Joint Venture Arrangements........................................... 9
Insufficient Reserves................................................ 10
Borrowings May Increase Our Business Risks........................... 10
Our Ability to Change Policies Without a Shareholder Vote; No
Limitation on Debt................................................. 11
Limited Experience in Managing a REIT................................ 11
Possible Adverse Consequences of Limits on Ownership
and Transfer of Our Shares......................................... 11
Potential Anti-Takeover Effects...................................... 12
Dilution............................................................. 13
Negative Characteristics of Investments in Neighborhood Retail
Centers............................................................ 13
Seller Financing by Our Company May Delay Liquidation or
Reinvestment....................................................... 14
Negative Characteristics of Real Estate Investments.................. 14
Federal Income Tax Requirements...................................... 16
Effects of ERISA Regulations......................................... 17
INVESTOR SUITABILITY STANDARDS............................................. 18
Ensuring Our Suitability Standards are Adhered To.................... 19
ESTIMATED USE OF PROCEEDS OF THIS OFFERING................................. 20
OUR COMPANY................................................................ 21
INVESTMENT OBJECTIVES AND POLICIES......................................... 21
General.............................................................. 21
Types of Investments................................................. 22
Our Acquisition Standards............................................ 22
Property Acquisition................................................. 23
Joint Ventures....................................................... 23
Description of Our Leases............................................ 24
Our Operating Partnership............................................ 24
Our Policies With Respect to Borrowing............................... 24
Sale or Disposition of Properties.................................... 25
Our Long Term Investment Objective................................... 26
Changes in Our Investment Objectives................................. 26
Investment Limitations............................................... 26
Making Loans and Investments in Mortgages............................ 27
Investment in Securities............................................. 27
Appraisals........................................................... 27
Other Policies....................................................... 28
Investing in States Without Personal Income Tax...................... 28
DISTRIBUTION POLICY........................................................ 30
MANAGEMENT OF OUR COMPANY.................................................. 31
General.............................................................. 31
The Directors and Executive Officers................................. 31
Committees of Our Board of Directors................................. 33
Officer and Director Compensation.................................... 34
OUR ADVISOR................................................................ 37
Management........................................................... 37
The Advisory Agreement............................................... 39
COMPENSATION TABLE......................................................... 41
Additional Payments for Additional Services.......................... 45
Additional Important Information on Compensation to Our Affiliates... 46
PRIOR PERFORMANCE SUMMARY.................................................. 47
Prior Programs of Our Advisor........................................ 47
CONFLICTS OF INTEREST...................................................... 50
Competition for the Time and Service of Our Advisor and Affiliates... 50
Process for Resolution of Conflicting Opportunities.................. 50
Acquisitions From Our Advisor and Its Affiliates..................... 51
We May Purchase Properties From Persons With Whom Affiliates of
Our Advisor Have Prior Business Relationships...................... 51
Our Advisor May Have Conflicting Fiduciary Obligations in the Event
Our Company Acquires Properties with Our Advisor or Affiliates..... 51
Property Management Services will be Rendered by Our Advisor......... 51
Receipt of Commissions, Fees and Other Compensation by Our Advisor... 51
Non-Arm's-Length Agreements; Conflicts; Competition.................. 52
Legal Counsel for Our Company and Our Advisor is the Same Law Firm... 52
</TABLE>
<PAGE>
TABLE OF CONTENTS (cont'd)
<TABLE>
<CAPTION>
Page
----
<S> <C>
NNN Capital Corp. is Participating as Dealer Manager in the Sale of
Our Shares......................................................... 54
SUMMARY OF DIVIDEND REINVESTMENT PROGRAM................................... 55
General.............................................................. 55
Investment of Dividends.............................................. 55
Participant Accounts, Fee, and Allocation of Shares.................. 55
Reports to Participants.............................................. 56
Election to Participate or Terminate Participation................... 56
Federal Income Tax Considerations.................................... 56
Amendments and Termination........................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................. 58
The Year 2000 Issue.................................................. 58
PRINCIPAL SHAREHOLDERS..................................................... 60
DESCRIPTION OF CAPITAL STOCK............................................... 61
General.............................................................. 61
Common Stock......................................................... 61
Shareholder Voting................................................... 61
Preferred Stock...................................................... 62
Warrants Issued to the Dealer Manager in this Offering............... 62
Issuance of Additional Securities and Debt Instruments............... 63
Restrictions on Ownership and Transfer............................... 61
IMPORTANT PROVISIONS OF VIRGINIA CORPORATE LAW AND OUR ARTICLES OF
INCORPORATION AND BYLAWS.................................................. 65
Our Articles of Incorporation and Bylaws............................. 65
Shareholders' Meetings............................................... 65
Our Board of Directors............................................... 66
Limitation of Liability and Indemnification.......................... 66
Inspection of Books and Records...................................... 68
Restrictions on Roll-Up Transactions................................. 68
Anti-takeover Provisions of the Virginia Stock Corporation Act....... 69
Dissolution or Termination of Our Company............................ 70
Transactions with Affiliates......................................... 70
SHARES AVAILABLE FOR FUTURE SALE........................................... 71
AGREEMENT OF LIMITED PARTNERSHIP........................................... 71
Management........................................................... 71
Transferability of Interests......................................... 71
Capital Contribution................................................. 71
Redemption Rights.................................................... 72
Incentive Units...................................................... 72
Operations........................................................... 73
Distributions........................................................ 74
Allocations.......................................................... 74
Term................................................................. 76
Tax Matters.......................................................... 76
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT.................... 77
Taxation of Our Company.............................................. 77
Requirements for Qualification....................................... 78
Recordkeeping Requirements........................................... 83
Failure to Qualify................................................... 83
Taxation of Taxable U.S. Shareholders................................ 84
Taxation of U.S. Shareholders on the Disposition of the Common
Stock.............................................................. 84
Capital Gains and Losses............................................. 85
Information Reporting Requirements and Backup Withholding............ 85
Taxation of Tax-Exempt Shareholders.................................. 85
Taxation of Non-U.S. Shareholders.................................... 86
Other Tax Consequences............................................... 87
ERISA CONSIDERATIONS....................................................... 88
PLAN OF DISTRIBUTION....................................................... 90
EXPERTS.................................................................... 93
REPORTS TO SHAREHOLDERS.................................................... 94
LEGAL MATTERS.............................................................. 94
LEGAL PROCEEDINGS.......................................................... 94
ADDITIONAL INFORMATION..................................................... 94
</TABLE>
EXHIBIT A Prior Performance Tables
EXHIBIT B Subscription Agreement
EXHIBIT C Dividend Reinvestment Program
<PAGE>
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. We have not yet qualified
as a REIT for federal income tax purposes, but intend to do so for our first
full taxable year.
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
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 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 advisor and will generally manage our
business and assets. The advisor is affiliated with our company in that several
of our officers and directors serve as officers and directors of the advisor and
own approximately 36% of the outstanding ownership interest in our advisor. Our
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 nine other entities that invest in
various types of real estate with respect to the acquisition, management and
disposition of their properties, which entities may compete with us for
acquisition opportunities. Our advisor's principal offices are located at 1551
N. Tustin Avenue, Suite 650, Santa Ana, California 92705.
An affiliate of our advisor, NNN 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 100% of the
outstanding capital stock of the dealer manager.
<PAGE>
Summary 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. If we
are unable to acquire suitable properties, or suffer a delay in making
any acquisitions, we will not have any cash available for distribution
to you as a shareholder.
. 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 a diverse portfolio of 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 and
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 disrupt the
operation of our properties and materially decrease our earnings.
. 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 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.
. Our board of directors' ability to issue and set the terms of up to 10
million shares of preferred stock, without your approval, may deter or
prevent a sale of our company in which you could profit.
-2-
<PAGE>
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."
This Offering
We are offering for sale to the residents of the states listed in this
prospectus a maximum of 10 million shares and a minimum of 100,000 shares of our
common stock. The minimum number of shares you may purchase is 100, except in
states which require a higher minimum purchase. 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 which warrants may be reallowed to broker-dealers
participating in this offering.
. up to 700,000 shares to shareholders who elect to participate in our
dividend reinvestment program.
. up to 800,000 shares to our officers, employees and directors under
our two stock option plans.
Use of Proceeds
We will contribute the net proceeds of the sale of any common stock 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, which are described under "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.
Distributions
As a REIT, we must distribute to our shareholders at least 95% of our
annual taxable income, decreasing to 90% beginning in 2001. 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. 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; 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.
Compensation to Our 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.
-3-
<PAGE>
In connection with the sale of our common stock in this offering, the
dealer manager will receive the following fees:
<TABLE>
<CAPTION>
Amount if Amount if
Description of Fee Calculation of Fee Minimum Sold Maximum Sold
------------------ ------------------ ------------ ------------
<S> <C> <C> <C>
. Selling Commission 8% of gross offering $80,000 $8,000,000
proceeds
. Marketing Support and Due 1.5% of gross offering $15,000 $1,500,000
Diligence Expense Reimbursement proceeds
. Warrants to purchase common one warrant for every forty warrants to warrants to
stock at a price of $12.00 per shares of stock sold by purchase 2,500 purchase
share broker-dealers in states shares 250,000 shares
that permit such
compensation
</TABLE>
In connection with the management of our business and properties, we will
pay our advisor the following fees:
<TABLE>
<CAPTION>
Amount if Amount if
Description of Fee Calculation of Fee Minimum Sold Maximum Sold
------------------ ------------------ ------------ ------------
<S> <C> <C> <C>
. Reimbursement of acquisition estimated to be 0.5% of $5,000 $500,000
expenses gross offering proceed
. Real estate commission An affiliate of our advisor will serve as our broker in property
acquisitions and may receive a real estate commission from the
seller of a property equal to up to 2% of the purchase price of the
property.
The reimbursement of acquisition expenses and real estate commissions
for one property cannot exceed 6% of the purchase price of that property.
. Asset management fee up to 1.5% of our average
invested assets
. Return on incentive units of Equal to 15% of the operating cashflow of our operating partnership
limited partnership interest in after we have received, and paid to our shareholders, the sum of:
our operating partnership . an 8% annual cumulative non-compounded return on the capital we
invested in the operating partnership; and
. any shortfall in the recovery of the capital we invested in the
operating partnership allocable to sold properties.
. Property management fee 5% of gross income generated by our properties
</TABLE>
Upon the disposition of any property, we will pay our advisor the following
fees.
-4-
<PAGE>
<TABLE>
<CAPTION>
Description of Fee Calculation of Fee
------------------ ------------------
<S> <C>
. Property disposition fee Equal to the lesser of 3% of sale price or 50% of sales
commission that would have been paid to third party sales broker
. Incentive distribution on the Equal to 15% of the net proceeds of the sale of the property
advisor's incentive limited after we have received, and paid to our shareholders, the sum of:
partnership interest . the amount of capital we invested in our operating
partnership allocable to such property;
. any shortfall in the recovery of our invested capital with
respect to prior sales of properties; and
. any shortfall in our 8% annual cumulative, non-compounded
return on the capital we invested in our operating partnership.
</TABLE>
All of this compensation is more fully described under "Compensation Table."
-5-
<PAGE>
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.
No Properties Owned; 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
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.
Our success is totally dependent on our ability to acquire properties.
Thus, 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.
See "--Acquisition Risks."
No Market for Our 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. The purchase price you pay for your shares
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 Advisor
Our inability to find management to replace our advisor or a delay in
finding such management would adversely impact our ability to operate the
properties and, ultimately, our revenue.
We will rely on our advisor to manage our business and assets. Our 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 adversely impact
the operation of our properties and, consequently, our cash flow and ability to
make distributions to our shareholders.
-6-
<PAGE>
Either we or our advisor can terminate the advisory agreement upon 60 days'
written notice to the other party, in which case no termination or other fee
will be payable to our advisor. However, if the advisory agreement is
terminated as a result of the advisor's merger into our company in connection
with the listing of our shares on a national securities market or exchange, we
will redeem the advisor's incentive units in our operating partnership for cash,
or if agreed by both parties, shares of common stock of our company. Our cost
to redeem the incentive units will be the amount that would be payable to the
advisor pursuant to the "incentive distribution" and "incentive distribution
upon dispositions" described under the heading "Compensation Table" if we
liquidated all of our assets for their fair market value.
If our advisor cannot retain the services of its current key employees, their
replacements may not manage our company as effectively as we anticipate the
current key employees will.
We depend on our advisor to retain its key officers and employees, but none
of such individuals has an employment agreement with our advisor or its
affiliates. Our advisor's key employees are Mr. Thompson, Mr. Maurer, Ms.
Voorhies, Mr. McGregor and Mr. Gee. The loss of any of these individuals and
our ability to find, or any delay in finding, replacements with equivalent skill
and experience could adversely impact our ability to acquire properties and the
operation of our properties. See "Management of Our Company," and "Our Advisor-
- -Management."
Conflicts of Interest
Throughout this section and other sections of this prospectus, references
to affiliates of a person generally mean:
. 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;
. 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;
. any person directly or indirectly controlling, controlled by or under
common control with such other person;
. any executive officer, director, trustee or general partner of such
other person; and
. any legal entity for which such person acts as an executive officer,
director, manager, trustee or general partner.
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.
Our advisor also advises Western REIT and other entities that may compete
with our company or otherwise have similar business interests. All of our
officers are also officers of our advisor and Western REIT. Our Chairman, Chief
Executive Officer and President, Mr. Thompson, also serves as an officer of our
advisor and Western REIT. In addition, several of our officers and directors
own an interest in our advisor, the dealer manager or Western REIT. Mr.
Thompson, our Chairman, CEO and President, currently owns 100% of our dealer
manager, and Mr. Thompson, Mr. McGregor and Mr. Maurer collectively own
approximately 36% of our advisor.
As officers, directors and partial owners of entities with which we do
business or with interests in competition with our own 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:
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. 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.
See "Conflicts of Interest--Competition for Time and Service of Our Advisor
and Affiliates."
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.
See "Conflicts of Interest--Non-Arms Length Agreement; Conflicts; Competition"
and "Our Advisor--The Advisor Agreement."
The business and financial due diligence investigation of our company was
conducted by an affiliate. That investigation might not have been as thorough as
an investigation conducted by an unaffiliated third party, and might not have
uncovered facts that would be important to a potential investor.
Because the dealer manager is an affiliate of our advisor and several 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. See "Conflicts of Interest--NNN Capital Corp. is Participating as
Dealer Manager in the Sale of Our Shares."
Lack of Investment Diversification
The affect of adverse conditions at specific properties will be magnified to the
extent we are able to acquire only a limited number of properties.
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 will not be able to purchase a diverse portfolio of properties. In
that event, our performance and the returns to you as a shareholder will depend
directly on the success of that limited number of properties. Adverse
conditions at that limited number of properties or in the location in which the
properties exist would have a direct negative impact on your return as a
shareholder.
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Acquisition Risks
Our inability to find funding for acquisitions could prevent us from realizing
our objectives and would adversely impact the amount of dividends we pay to our
shareholders and the value your investment in our company generally.
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, decreasing to 90%
beginning in 2001, 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 properties with special modifications could cause us
to incur substantial costs in remodeling, 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 us to sell such property at a below-market price
or spend funds that would otherwise be available for distribution to you as a
shareholder.
Competing for the acquisition of properties with others with superior financial
resources could make it more difficult for us to acquire attractive properties
and achieve our investment objectives.
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.
Joint Venture Arrangements
Any joint venture arrangements may not reflect solely our shareholders' best
interests.
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.
Investing in properties through joint ventures subjects that investment to
increased risk.
Such joint venture investments may involve risks not otherwise present,
including, for example:
. the risk that our co-venturer, co-tenant or partner in an investment
might become bankrupt;
. the risk 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
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. the risk 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 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. See "Conflicts
of Interest--Our Advisor May Have Conflicting Fiduciary Obligations in the Event
Our Company Acquires Properties with Our Advisors or Affiliates," and
"Investment Objectives and Policies--Joint Ventures."
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, decreasing to 90% beginning in 2001. However, depending on
the size of our operations, we will require a minimum 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 Business Risks
As we incur indebtedness, the risk associated with your investment in our
company will increase.
The risk associated with your investment in our company depends on, among
other factors, the amount of debt we incur. We intend to incur indebtedness in
connection with our acquisition of properties. 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, decreasing to 90% beginning in
2001. 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. In the event the fair market value of our
properties were to increase, we could incur more debt without a commensurate
increase in cash flow to service the debt. In addition, our directors can
change our debt policy at any time without shareholder approval. See
"Investment Objectives and Policies--Our Policies With Respect to Borrowing,"
and "Distribution Policy."
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 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.
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Increases in interest rates could increase the amount of our debt payments and
adversely affect our ability to make cash distributions to our shareholders.
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 attempt 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 risks, including the
risk that losses on a hedge position will reduce our cash available for
distribution to you as a shareholder and 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 the
instruments we intend to use as hedges for our assets and liabilities, we will
be exposed to the risk that the counterparties to the hedge investments may
cease making markets and quoting prices in such hedge instruments, which may
render us unable to enter into an offsetting transaction with respect to an open
position.
Our Ability to Change Policies Without a Shareholder Vote; No Limitation on Debt
Most of our policies described in this prospectus, including the limits on debt,
may be changed or removed by our board of directors at any time without a vote
of the shareholders.
Most of our major policies, including policies intended to protect you as a
shareholder and the policies described in this prospectus with respect to
acquisitions, financing, limitations on debt and investment limitations, have
been determined by our board of directors and can be changed at any time without
a vote of our shareholders or notice to you as a shareholder. Therefore, these
policies and limitations may not be meaningful to protect your interests as a
shareholder. See "Investment Objectives and Policies--Description of Our
Leases," "--Our Policies With Respect to Borrowing," "--Changes in Our
Investment Objectives," and "--Investment Limitations."
Limited Experience in Managing a REIT
Your investment in our company may not perform as well as an investment in a
company with a management team that has more experience in managing a REIT.
Our officers and directors, and the officers and directors of our advisor,
have limited or no experience in managing the affairs of a REIT, which include
complicated operations and tax issues. Your investment in our company may not
perform as well as an investment in similar companies with management teams that
have experience in operating REITs. See "Management of Our Company," and "Our
Advisor."
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
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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, specified employee benefit plans
and trusts, and charitable trusts, owning more than 50% of our capital stock,
applying broad attribution rules imposed by 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. 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. Unless our
shares are then traded on a national securities exchange or trading system, the
market price of such shares will be a price determined by our board of directors
in good faith. If our shares are traded on a national securities exchange or
trading system, the market price will be the average of the last sales prices or
the average of the last bid and ask prices for the five trading days immediately
preceding the date of determination.
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.
See "Description of Capital Stock--Restrictions on Ownership and Transfer."
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. The ownership limit and restrictions on
transferability 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. See "Description of Capital Stock--Restrictions on
Ownership and Transfer."
Our ability to issue preferred stock may also deter or prevent a sale of our
company in which you could profit.
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 million
shares of preferred stock. Our board of directors may establish the preferences
and rights of any issued preferred shares designed to prevent, or
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with the effect of preventing, someone from acquiring control of our company.
See "Description of Capital Stock--Issuance of Additional Securities and Debt
Instruments."
Virginia anti-takeover statutes may deter others from seeking to acquire our
company and prevent you from making a profit in such transaction.
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 "Important Provisions of Virginia
Corporate Law and Our Articles of Incorporation and Bylaws."
Dilution
Your investment in our company will be diluted immediately by $0.95 per share.
The offering price is $10.00 per share. After the payment of selling
commission and marketing and due diligence expenses, we will receive $9.05 per
share. As a result of these expenses, you will experience immediate dilution of
$0.95 in book value per share or 9.5% of the offering price. To the extent that
you do not participate in any future issuance of our securities, you will also
experience dilution of your ownership percentage in our company.
Several potential events could cause the fair market and book value of your
investment in our company to decline.
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 and up to 10 million shares of any
preferred stock that our board may authorize;
. private issuances of our securities to other investors, including
institutional investors;
. issuances of our securities upon the exercise of warrants, including
the warrants issued to our dealer manager in this offering, and
options, including the officer, employee and director stock options;
or
. redemptions of units of limited partnership interest in our operating
partnership in exchange for shares of common stock.
Negative Characteristics of Investments in Neighborhood Retail Centers
Generally
If we acquire neighborhood retail centers, the following events could
adversely affect our revenues and ability to make distributions to our
shareholders:
. the bankruptcy or insolvency, or a downturn in the business, of any
anchor tenant, meaning any tenant occupying approximately 30% or more
of the gross leasable area of a neighborhood retail center;
. 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
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. failure to lease space to 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.
Restrictions on re-leasing space will make it difficult for us to find tenants
for vacant space in neighborhood retail centers and may prevent us from meeting
our revenue objectives with respect to 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 a specific type of
merchandise or provide a specific type 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
and prevent us from meeting our revenue objectives with respect to our
properties.
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
You may not receive any profits resulting from the sale of one of our
properties, or receive such profits in a timely manner, because we may provide
financing for the purchaser of such property.
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. 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."
Negative Characteristics of Real Estate Investments
We depend on our tenants to pay rent, and their inability to pay rent may
substantially reduce our revenues and cash available for distribution to our
shareholders.
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
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adversely affect our tenants' ability to make lease payments and consequently
would substantially reduce 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;
and
. changes in federal, state or local regulations and controls affecting
rents, prices of goods, interest rates, fuel and energy consumption.
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 our revenues and the value of our common stock or our cash available
for distribution to our shareholders.
If we are unable to find tenants for our properties, or find replacement tenants
when leases expire and are not renewed by the tenants, our revenues and cash
available for distribution to our shareholders will be substantially reduced.
Increased construction of similar properties that compete with our properties in
any particular location could adversely affect the operating results of our
properties and our cash available for distribution to our shareholders.
We may acquire properties in locations which experience increases in
construction of properties that compete with our properties. This increased
competition and construction could:
. make it more difficult for us to find tenants to lease our space;
. force us to lower our rental prices in order to lease space; and
. substantially reduce our revenues and cash available for distribution
to our shareholders.
Lack of diversification and liquidity of real estate will make it difficult for
us to sell underperforming properties or recover our investment in one or more
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. Often, 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.
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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 ADA, all public
accommodations must meet 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. We could be liable for violations of
such laws and regulations by us or our tenants. 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 or are underinsured. There are 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. We may acquire
properties that are 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 recharacterization of any sale and leaseback transactions 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 up to 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.
Federal Income Tax Requirements
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 Status as a REIT,"
you are strongly
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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 several 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, which would increase the risk associated with your
investment in our company.
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. The distribution requirement will decrease to 90% of taxable income
beginning in 2001. To the extent that we distribute at least the required
amount, 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. We intend to distribute all of our
taxable income to our shareholders each year so that we will satisfy the
distribution requirement 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 distribution requirement and avoid corporate income
tax and the 4% excise tax in a particular year. See "Federal Income Tax
Consequences of Our Status as a REIT--Requirements for Qualification--
Distribution Requirements."
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 relief
provisions of the 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 Status as a REIT--Failure to
Qualify."
Effects of ERISA Regulations
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
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from us. See "Federal Income Tax Consequences of Our 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 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." However, we cannot
assure you that those provisions in our articles will be effective. See "ERISA
Considerations."
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 Arizona,
California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana,
Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri,
Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oregon,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia,
Washington, West Virginia 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 our 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, home furnishings and automobiles.
Several states have established suitability standards different from those
we have established. In these states, shares will be sold only to investors who
meet the special suitability standards set forth below:
California: Investors must have either (1) a minimum net worth of at least
$250,000 and a gross income of at least $65,000 or (2) a minimum net worth of at
least $500,000.
Iowa, Massachusetts and North Carolina: Investors must have either (1) a
net worth of at least $225,000 or (2) gross annual income of $60,000 and a net
worth of at least $60,000.
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Ohio and Pennsylvania: An investor's investment in our common stock cannot
exceed 10% of that investor's net worth.
Because the minimum offering of shares of our common stock is less than $10
million, Pennsylvania investors are cautioned to evaluate carefully our ability
to fully accomplish our stated objectives and to inquire as to the current
dollar volume of our subscription proceeds.
Tennessee: Investors must have (1) a minimum net worth of at least
$250,000 and to have had during the last tax year and be expected to have during
the current tax year a gross income of at least $65,000 or (2) a minimum net
worth of at least $500,000.
The minimum purchase is 100 shares of our common stock, or $1,000, except
in Minnesota, which requires a minimum investment of 250 shares, or $2,500, and
North Carolina, which requires a minimum investment of 500 shares, or $5,000.
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 $100, except for purchases of shares under the dividend reinvestment
program, which may be in lesser amounts.
Ensuring Our Suitability Standards are Adhered To
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 investment
in our company is suitable for the investor and (2) transmit promptly to us all
fully completed and duly executed Subscription Agreements.
In addition, by signing the Subscription Agreement Signature Page attached
to this prospectus as Exhibit B, you are representing and warranting to us that
you have received a copy of this prospectus, that you agree to be bound by our
amended and restated articles of incorporation, that you meet the net worth and
annual gross income requirements described above and that you will comply with
requirements of California law summarized in that Exhibit with respect to resale
of shares of common stock. These representations and warranties help us to
ensure that you are fully informed about an investment in our company and that
we adhere to our suitability standards. In the event you or another shareholder
or a regulatory authority attempted to hold our company liable because
shareholders did not receive copies of this prospectus, were not adequately
informed of the requirements of our articles of incorporation or because we
failed to adhere to each state's investor suitability requirements, we will
assert these representations and warranties made by you in any proceeding in
which such potential liability is disputed in an attempt to avoid any such
liability.
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ESTIMATED USE OF PROCEEDS OF THIS OFFERING
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.
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. Please note that in this table, the Maximum Offering column does not
include 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 warrants
issued to our dealer manager in this offering, and up to 800,000 shares that may
be issued under two stock option plans. The amounts shown for Gross Offering
Proceeds do not reflect the possible discounts in commissions and other fees in
connection with volume purchases.
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
--------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $1,000,000 100% $100,000,000 100%
Less Public Offering Expenses:
Selling Commissions 80,000 8% 8,000,000 8%
Marketing Support and Due Diligence
Reimbursement Fee 15,000 1.5% 1,500,000 1.5%
Other Organizational and Offering Expenses 25,000 2.5% 2,500,000 2.5%
Total Organizational and Offering Expenses 120,000 12% 12,000,000 12%
---------- ---- ------------ ----
Net Proceeds to Company $ 880,000 88% $ 88,000,000 88%
---------- ---- ------------ ----
Miscellaneous Acquisition Expenses 5,000 0.5% 500,000 0.5%
---------- ---- ------------ ----
Amount Available for Investment in Properties $ 875,000 87.5% $ 87,500,000 87.5%
========== ==== ============ ====
</TABLE>
The dealer manager may seek the assistance of other broker-dealers in
selling our common stock and may reallow the selling commissions it receives to
such broker-dealers.
The total organizational and offering expenses that we will pay in
connection with our company's formation and the offering and sale of shares of
our common stock will be reasonable and will not exceed an amount equal to 15%
of the proceeds raised in this offering.
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OUR COMPANY
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.
T REIT, Inc. was formed as a Virginia corporation in December of 1998 and
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., which was formed as a Virginia
limited partnership in May of 1999. 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. 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.
Our day to day operations will be managed by our advisor, Triple Net
Properties, LLC, under an advisory agreement. Our 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.
INVESTMENT OBJECTIVES AND POLICIES
General
Our board of directors has established written policies on investment
objectives and borrowing. While it is our board's responsibility to monitor the
administrative procedures, investment operations and performance of our company
and our advisor to assure such policies are carried out, generally our board may
change our policies or investment objectives at any time without a vote of our
shareholders. The independent directors will review our investment policies at
least annually to determine that our policies are in the best interests of our
shareholders and will set forth their determinations in the minutes of the board
meetings.
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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.
"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 for terms of 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 corporate debt rating by Moody's or Standard & Poors of B or better;
. a minimum tangible net worth equal to ten times one year's rental
payments required under the terms of the lease; or
. a guaranty for its payments under the lease by a guarantor with a
minimum tangible net worth of $10 million.
A majority of properties acquired will be at least 75% leased on the
acquisition date. We may acquire 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. Fair market value will be determined
each year by an internal or independent certified appraiser and in a similar
manner as the fair market determination at the time of purchase.
Our 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. We may also acquire
properties from entities advised by our advisor. Such acquisitions must be
approved by a majority of our directors, including a majority of our independent
directors. We currently do not have any plans to acquire a property or
properties from our advisor, its affiliates or entities advised by our advisor.
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, the primary factor
we will consider is the property's current and projected cash flow. We will
also consider a number of other factors, including a property's:
. geographic location and type;
. construction quality and condition;
. 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;
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. 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.
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 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.
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.
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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.
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 and, for neighborhood retail centers and similar properties,
percentage rent if sales exceed predetermined levels. Some of our leases also
will contain provisions that increase the amount of base rent payable at 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 our income and net
worth tests.
Our board of directors controls our policies with respect to the terms of
leases into which we may enter and may change those policies at any time without
shareholder approval.
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. 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. 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.
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
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anticipate that no property will be encumbered by secured indebtedness or
financed by unsecured indebtedness in excess of 80% of its fair market value.
Our board of directors will review our aggregate borrowings at least quarterly
to ensure that such borrowings are reasonable in relation to our net assets. The
maximum amount of such borrowings in relation to our net assets will not exceed
300%. 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.
We do not intend to secure financing with cross-default or cross-
collateralization provisions.
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 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. When appropriate to minimize our tax liabilities, we may structure
the sale of a property as a "like-kind exchange" under the federal income tax
laws so that we may acquire qualifying like-kind replacement property 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.
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 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.
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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.
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.
As used above, "unimproved real property" means any investment with the
following characteristics:
. an equity interest in real property which was not acquired for the
purpose of producing rental or other operating income;
. has no development or construction in process on such land; and
. no development or construction on such land is planned in good faith to
commence on real land within one year.
In addition, we have adopted the following investment policies:
We will not issue redeemable equity securities.
We will not issue our shares on a deferred payment basis or other similar
arrangement.
We will not issue debt securities unless the historical debt service
coverage in the most recently completed fiscal year as adjusted for known
charges is sufficient to properly service that higher level of debt.
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.
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<PAGE>
Making Loans and Investments in Mortgages
We will not make loans to other entities or persons unless secured by
mortgages. We will not make or invest in mortgage loans unless we obtain an
appraisal concerning the underlying property from a certified independent
appraiser. We will maintain their appraisal in our records for at least five
years, and will make it available during normal business hours for inspection
and duplication by any shareholder at such shareholder's expense. 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 make or invest in mortgage loans on any one property if the
aggregate amount of all mortgage loans outstanding on the property, including
the loans of our company, would exceed an amount equal to 85% of the appraised
value of the property as determined by an appraisal from a certified independent
appraiser, 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.
All of our mortgage loans must provide for at least one of the following:
. except for differences attributable to adjustable rate loans, equal
periodic payments on a schedule that would be sufficient to fully
amortize the loan over a 20 to 40 year period;
. payments of interest only for a period of not greater than ten years
with the remaining balance payable in equal periodic payments on a
schedule that would fully amortize the loan over a 20 to 30 year period;
or
. payment of a portion of stated interest currently and deferral of the
remaining interest for a period not greater than five years, with the
remaining principal and interest payable in equal periodic payments on a
schedule that would fully amortize the loan over a 20 to 35 year period.
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, officer 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 85% 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, including a majority of the independent directors, not otherwise
interested in such 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.
Appraisals
The purchase price for each property that we acquire must be approved by a
majority of our independent directors and be based on the fair market value of
the property. We will support the determination of the purchase price with an
appraisal from an appraiser who is a member-in-good-standing of the American
Institute of Real Estate Appraisers or similar national or regional
organization. In cases in which a majority of the independent directors require,
and in all cases in which we acquire property from our officers, directors,
advisor or any affiliate
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<PAGE>
of our officers, director or advisor, we will obtain an appraisal from an
independent appraiser who is a member-in-good-standing of the American Institute
of Real Estate Appraisers or similar national or regional organization and who
will be selected by the independent directors.
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.
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 States Without Personal Income Tax
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 personal income
taxes. These states include Florida, Nevada, South Dakota, Tennessee, Texas,
Washington, and Wyoming. We believe that we can profit by investing in these
"income 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
the listed 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 personal income taxes, has experienced a 4.7% annual increase in
employment, while Arizona, a state with a personal 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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Although we believe that the absence of state income tax in these states is
a partial cause of the economic growth in these states, there is limited or no
evidence to suggest that the absence of state income tax favorably affects the
markets for office, industrial, retail or service real estate. Other factors,
such as the rate of development of these type properties, employment
characteristics and other demographics, in these states would also affect these
real estate markets.
Analysis of Long-Term Employment 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).
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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 applicable to REITs under the
federal income tax laws; 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, which requirement will decrease to 90% of taxable income beginning in
2001.
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
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.
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<PAGE>
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. At our board's
first meeting, our articles of incorporation were reviewed and adopted by a
majority of our board of directors, including a majority of the independent
directors. As of the commencement of this offering, our board of directors will
be comprised of five individuals, three of whom will be independent directors.
We consider a director to be independent if he or she is not, and has not been
in the last two years, associated, directly or indirectly, with our company or
our advisor.
The independent directors will determine, from time to time but at least
annually, that the total fees and expenses of our company are reasonable in
light of our investment performance, our net assets, our net income and the fees
and expenses of other comparable unaffiliated REITs. This determination will be
reflected in the minutes of the meetings of our board of directors. For
purposes of this determination, net assets are our company's total assets, other
than intangibles, calculated at cost before depreciation or other non-cash
reserves, less total liabilities and computed at least quarterly on a
constantly-applied basis. In addition, the independent directors will 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 will
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 will base each 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;
. 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.
Each determination will be reflected in the minutes of the meetings of our
board of directors.
Anthony W. Thompson, Jack R. Maurer and Talle Voorhies have worked to found
and organize our company. Mr. Thompson will serve as the Chairman of the Board
of Directors, Chief Executive Officer and President of our company. Mr. Maurer
will serve as the Secretary and Treasurer of our company. Ms. Voorhies serves
as the Executive Vice President and Director of our advisor.
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 one-year terms or
until the next annual meeting of the shareholders, whichever occurs first. The
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<PAGE>
following table and biographical descriptions set forth 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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Anthony W. Thompson 52 Chairman of the Board of Directors,
Chief Executive Officer, President and Director
Debra Meyer Kirby 44 Independent Director
Warren H. James 58 Independent Director
James R. Nance 71 Independent Director
Sterling McGregor 42 Vice President and Director
Jack R. Maurer 56 Secretary and Treasurer
</TABLE>
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 of
1998. Before 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, NNN Capital Corp., formerly Cunningham Capital Corp. and 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, a southern
California real estate developer and construction management company, 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, a developer of commercial and residential projects in Orange County,
California, where he oversaw the development of a single family home project in
Corona Del Mar, California, Vice President of Bear Brand Ranch Company, a
developer of master planned communities, and Vice President of Operations at
Foxx Development Corp., a developer and builder of residential communities. Mr.
James also worked for approximately eight years with the Irvine Company, the
largest owner of real estate in Orange County, including three years as Vice
President of its home building division.
James R. ("Jim") Nance retired as Senior Vice President-Agency of
Jefferson-Pilot Financial, a life insurance company, in Greensboro, North
Carolina, in 1992, after 41 years experience in the life insurance business. He
served as an agent, Agency Manager and Agency Vice President before his
appointment as Senior Vice President-Agency. As Senior Vice President, Mr.
Nance was responsible for the 80 Agency Offices, 125 Sales Offices, and all
sales and administrative personnel. His responsibilities included production,
expenses, planning and budgeting for the 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.
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<PAGE>
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 17 years of experience in transactional real estate
and 12 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., one of the
nation's largest retailers of brand name consumer electronics, computers,
appliances and music software, 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, both large commercial and mortgage banking operations, from December
1996 to July 1998 and Wells Fargo Bank, a diversified financial services
company, from 1992 to September 1998. Prior experience includes mortgage
banking for Metmor Financial, a subsidiary of MetLife, and acquisitions and due
diligence for Arthur Andersen & Co., as well as Cal Fed Syndications, a publicly
traded NYSE real estate investment trust. Mr. 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. Maurer's previous experience also includes experience with the national
accounting firm of Kenneth Leventhal & Company, a leading provider of
professional services to owners, developers, builders, operators and financiers
of real estate.
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 three members of our board of directors. A majority of
the members of the acquisition committee will be independent directors. Our
board of directors may establish additional acquisition committees from time to
time based on property type or other relevant factors. Our 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
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<PAGE>
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, 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 has established 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. Initially, the members of our compensation committee will
be Mr. Thompson, Ms. Kirby and Mr. James. 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 we
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. Our independent
directors will qualify for the independent 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 over the five years following the
commencement of this offering. In addition, officers or employees of our
company will qualify for the employee stock option plan under which our board of
directors has authorized the issuance of up to 700,000 shares over the five
years following the commencement of this offering. Initially, we do not intend
to pay cash compensation to any employees or officers.
Independent Director Stock Option Plan
We will adopt the independent director stock option plan concurrently with
the commencement of this offering. Only independent directors are eligible to
participate in the independent director stock option plan.
We have authorized and reserved a total of 100,000 shares of common stock
for issuance under the independent director stock option plan.
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<PAGE>
The independent 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 independent director as of the date such
individual becomes an independent 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
independent director so long as the individual is still in office. As of the
date of this prospectus, we have granted options to purchase 15,000 shares to
the independent directors at price per share in this offering less the dealer
manager's selling commission and marketing support and due diligence
reimbursement fee.
Officer and Employee Stock Option Plan
We will adopt the officer and employee stock option plan concurrently with
the commencement of this offering. All of our officers and employees are
eligible to participate in the officer and employee stock option plan.
We have authorized and reserved a total of 700,000 shares of common stock
for issuance under the officer and employee stock option plan. Our board of
directors, acting on the recommendation of the compensation committee, will have
discretion to grant options to officers and employees effective as of each
annual meeting of our shareholders. As of the date of this prospectus, we have
granted our Chief Executive Officer and President, Mr. Thompson, options to
purchase 45,000 shares at price per share in this offering less the dealer
manager's selling commission and marketing support and due diligence
reimbursement fee. We have also granted our Vice President, Mr. McGregor,
options to purchase 45,000 shares at price per share in this offering less the
dealer manager's selling commission and marketing support and due diligence
reimbursement fee. We anticipate issuing the same number of options to each of
these individuals, in addition to options that may be granted to other officers
and employees, simultaneously with each annual shareholders' meeting.
Characteristics of Both Stock Option Plans
Exercise Price: We will determine the option price, meaning the purchase
price of our common stock under the options, as follows:
. The option price under each option granted on or before the
commencement of this offering is the price per share in this offering
less the dealer manager's selling commission and marketing support and
due diligence reimbursement fee.
. The option price under each option granted during this offering will
be the greater of the price per share in this offering less the dealer
manager's selling commission and marketing support and due diligence
reimbursement fee and the fair market value of our common stock as of
the date of grant.
. The option price under each option granted after the completion of
this offering will be the fair market value of our common stock as of
the date of grant.
We will not grant options under either plan with exercise prices less than
the fair market value for such options as of the date of the grant or in
consideration for services rendered to our company that in the judgment of the
independent directors has a fair market value less than the value of such option
as of the date of the grant.
Unless our shares are then traded on a national securities exchange or
trading system, the fair market value of shares of our common stock will be a
price determined by our board of directors in good faith. In determining the
fair market value of our stock, the directors will consider several factors,
including the price per share at which our shares are then being sold to the
public, the price per share of common stock of comparable companies, our
company's earnings and the value of our assets. If our common stock is traded
on a national securities exchange or quotation system, the fair market value
will be the average of the last sales price or the average of the last bid and
ask prices for the five trading days immediately preceding the date of
determination.
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<PAGE>
Vesting: Both of our stock option plans provide that persons holding
options can exercise them as follows:
. Options granted on or before the commencement of this offering 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.
. Options granted after the commencement of this offering will become
exercisable in whole or in part on the second anniversary of the date
of grant.
. If an option holder dies or becomes disabled while an officer,
director or member of the board, his options will be exercisable for
one year after death or the disabling event.
. Both of our stock option plans provide that if the vesting of any
stock option would cause the aggregate of all vested stock options and
warrants owned by our advisor, our dealer manager, their affiliates
and our officers and directors to exceed ten percent of the total
outstanding shares of our common stock, then such vesting will be
delayed until the first date on which the vesting will not cause us to
exceed this ten percent limit.
. If options under more than one grant will vest on the same day, and
the vesting of all of such options would cause us to exceed our ten
percent limit, then such options will vest pro rata according to the
total number of options scheduled to vest.
. If an option holder ceases to serve the company in his or her capacity
for any reason except death or disability, his or her options will be
exercisable only for three months after the last date of service to
our company.
. No option granted under either 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 either stock option plan to the
contrary, we will not permit an option holder to exercise any option or options
if the exercise thereof would jeopardize our status as a REIT under the federal
income tax laws.
Transferability: An option holder may not sell, pledge, assign or transfer
any option in any manner otherwise than by will or the laws of descent or
distribution.
Change of Control or Dissolution: 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 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.
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, both stock option plans 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 parent
or subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and option prices;
. the continuation of either stock option plan by such successor
corporation in which event such 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.
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<PAGE>
Taxation: All options granted under both stock option plans 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, an option recipient 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 an option holder 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 an option holder.
OUR ADVISOR
Our 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 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, Colorado, South Dakota, Nevada and Kansas. The advisor is
affiliated with our company in that several of our officers and directors also
serve as officers and directors of the advisor and own approximately 36% of the
ownership interests in the advisor.
Before the commencement of this offering, our advisor purchased 22,100
shares of our common stock at a price of $9.05 per share, which equals a total
of $200,005. The advisor purchased those shares for cash and intends to hold
such shares for as long as it serves as the advisor to our company.
Management
The following table sets forth information with respect to our advisor's
executive officers and board of managers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Anthony W. Thompson 53 President, Chief Executive Officer and Director
Jack R. Maurer 56 Chief Financial Officer and Director
Talle Voorhies 52 Executive Vice President and Director
Richard D. Gee 59 Managing Director
Don Ferrari 62 Senior Marketing Director
Damian Gallagher 38 Senior Vice President of Capital Markets
Mary J. Holcomb 50 Vice President of Real Estate Services
Sterling McGregor 42 Vice President of Financial Management
</TABLE>
Anthony W. ("Tony") Thompson. Mr. Thompson's background is described under
"Management of Our Company--The Directors and Executive Officers."
-37-
<PAGE>
Jack R. Maurer. Mr. Maurer's background is described under "Management of
Our Company--The 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 privately owned company engaged in
developing and acquiring multi-family and retail real estate projects 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 $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.
Don Ferrari has been Regional Marketing Director for our advisor since
September of 1998. Prior to joining our advisor, he served as National
Marketing Director of Ridgewood Power for seven years. He also served as
President of Amador Financial, a real estate syndication company specializing in
apartment buildings and retail strip malls. Mr. Ferrari has over 37 years
experience in the securities industry where he specialized in mutual fund
marketing and related financial planning products and services. Mr. Ferrari is
recognized as a financial services public speaker by a number of groups
including the International Association of Financial Planners and Investment
Dealers Digest. He is a licensed real estate broker in California and a
registered securities principal with the National Association of Securities
Dealers. He holds a degree in organic chemistry from UC Berkeley.
Damian Gallagher has been Senior Vice President of Capital Markets for our
advisor and for the dealer manager 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.
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 Chief Executive Officer 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--The Directors and Executive Officers."
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<PAGE>
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;
. manages or causes to be managed our properties and other assets; and
. renders other services as our board of directors deems appropriate.
Our 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. In addition, our advisor will have a
fiduciary duty to our Company's shareholders. 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 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 some expenses it incurs, including expenses
related to proposed acquisitions and travel expenses. We will not reimburse our
advisor at the end of any fiscal quarter for operating expenses that, in the
four consecutive fiscal quarters then ended exceed the greater of 2% of Average
Invested Assets or 25% of net income for such year. If our advisor receives an
incentive distribution, net income, for purposes of calculating operating
expenses, will exclude any gain from the sale of our assets. Any amount
exceeding the greater of 2% of Average Invested Assets or 25% of net income paid
to our advisor during a fiscal quarter will be repaid to us within 60 days after
the end of the fiscal year. 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.
Term. The advisory agreement, which was entered into by our company after
our board of directors reviewed and evaluated the performance of our advisor and
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.
In determining whether to renew the advisory agreement, our board of directors
will re-evaluate the performance of our advisor. The criteria used in such
evaluation will be reflected in the minutes of our board of director's meetings.
The advisory agreement may be terminated by our advisor or a majority of
the independent directors upon 60 days' prior written notice without cause or
penalty, in which case we will not be required to pay any termination fee. 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. If the
advisory agreement is terminated, our board of directors will determine that any
successor advisor possess sufficient qualifications to:
. perform the advisory function for our company; and
. justify the compensation provided for in the contract with our
company.
If the advisory agreement is terminated as a result of the merger of our
advisor into our company in connection with the listing of our shares on a
national exchange or market, our advisor's incentive limited partnership
interest will be redeemed for cash, or if agreed by both parties, shares of
common stock of our company. Our cost to redeem the incentive units will be the
amount that would be payable to the advisor pursuant to the "incentive
distribution" and "incentive distribution upon dispositions" described under the
heading "Compensation Table" if we liquidated all of our assets for their fair
market value.
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<PAGE>
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.
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, many 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, 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:
. 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 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 broker-dealers participating in this
offering during the stages in the life of our company and other payments that
are subordinated to achieving the returns listed in the table. For ease of
presentation and understanding, we have used defined terms in the table. Those
terms have the following meanings:
Average Invested Assets means, for any period, the average of 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 sum of (A) the total number
of outstanding shares of our common stock and (B) the number of partnership
units issued by our operating partnership to limited partners, other than our
advisor, and (2) a dollar amount that initially will be $10.00 and that will be
adjusted appropriately to reflect stock dividends, stock splits, or other
changes in the capital structure of our company or our operating partnership,
and, at our discretion, changes in the average price per share paid for our
common stock and partnership units in our operating partnership after this
offering. 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.
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.
Our advisor and its affiliates will not be compensated for any services
other than those which have been fully disclosed in this Compensation Table. 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.
Except as expressly provided in the table, 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.
<TABLE>
<CAPTION>
OFFERING STAGE
- ------------------------------------------------------------------------------------------------------------------------
Type of Method of Estimated
Compensation Compensation Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Selling The dealer manager will receive 8% of the gross proceeds of this Actual amount depends upon
Commissions offering, or $0.80 for each share sold, and one warrant for every the number of shares sold.
40 shares of common stock sold in this offering in states other The dealer manager will
than Arizona, Missouri, Ohio or Tennessee. Each of these receive a total of $80,000 if
warrants permits the holder to purchase one share of our common the minimum offering is sold
stock at a purchase price of $12.00 per share, or 120% of the and $8,000,000 if the maximum
offering price, prior to ____________, 2005. The dealer manager offering is sold.
may reallow a portion of the Selling Commissions and the warrants
to broker-dealers for each share they sell. Shares purchased
under the dividend reinvestment program will be purchased without
Selling Commissions.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
OFFERING STAGE
- ------------------------------------------------------------------------------------------------------------------------
Type of Method of Estimated
Compensation Compensation Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marketing We will pay the dealer manager an amount up to 1.5% of the gross Actual amount depends upon
Support and proceeds of this offering to pay expenses associated with the number of shares sold. A
Due Diligence marketing fees, wholesaling fees, expense reimbursements, bonuses total of $15,000 will be paid
Reimbursement and incentive compensation and volume discounts and to generally if the minimum offering is
Fee reimburse the dealer manager for due diligence expenses. We will sold and $1,500,000 will be
not require the dealer manager to account for spending of amounts paid if the maximum offering
comprising this fee. The dealer manager may reallow a portion of is sold.
this fee to broker-dealers participating in this offering. We
will not pay this fee with respect to shares purchased under the
dividend reinvestment program.
- ------------------------------------------------------------------------------------------------------------------------
Other Our advisor may advance, and we will reimburse it for, Actual amounts will be based
Organizational organization and offering expenses incurred on our behalf in on actual funds advanced. We
and Offering connection with this offering, including legal and accounting estimate that a total of
Expenses fees, filing fees, printing costs and selling expenses. We $25,000 will be reimbursed if
estimate such expenses will be approximately 2.5% of the net the minimum offering is sold
proceeds of this offering. and $2,500,000 will be
reimbursed if the maximum
offering is sold.
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ACQUISITION STAGE
- ------------------------------------------------------------------------------------------------------------------------
Type of Method of Estimated
Compensation Compensation Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate In property acquisitions in which an affiliate of our advisor Actual amounts depend on the
Commission serves as our real estate broker, such affiliate may receive from purchase price of properties
the seller in such acquisitions a real estate commission of up to acquired.
2% of the purchase price of the property. Since any seller will
attempt to set the selling price at an amount to cover the cost
of real estate commissions, we, as purchaser, may be deemed to be
indirectly paying such cost in the form of a higher price.
- ------------------------------------------------------------------------------------------------------------------------
Acquisition We will reimburse our advisor for costs and expenses of Actual amounts to be reimbursed
Expenses selecting, evaluating and acquiring properties, whether or not could be up to 0.5% of gross
actually acquired, including surveys, appraisals, title insurance offering proceeds; however, the
and escrow fees, legal and accounting fees and expenses, amount that we reimburse our
architectural and engineering reports, environmental and asbestos advisor for Acquisition Expenses
audits, travel and communication expenses, non-refundable option on the acquisition of a specific
payments on properties not acquired and other related expenses property, when added to Real Estate
payable to our advisor and its affiliates. Interest shall be Commissions could be up to 6% of
paid on funds advanced at our advisor's actual cost of funds or the contract price of the
as otherwise established by our board of directors. property. If the minimum offering
is sold, acquisition expenses are
estimated to be $5,000. If the
maximum offering is sold,
acquisition expenses are
estimated to be $500,000.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OPERATIONAL STAGE
- --------------------------------------------------------------------------------------------------------------------
Type of Method of Estimated
Compensation Compensation Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property We will pay our advisor a Property Management Fee equal to 5% of Actual amounts to be paid
Management Fee the gross income from the properties. This fee will be paid depend upon the gross income
monthly. of the properties and,
therefore, cannot be
determined at the present
time.
- --------------------------------------------------------------------------------------------------------------------
Compensation We will pay our advisor for other property-level services Actual amounts to be received
for Services including leasing fees, construction management fees, loan depend upon the services
origination and servicing fees, property tax reduction fees and provided and, therefore,
risk management fees. Such compensation will not exceed the cannot be determined at the
amount which would be paid to unaffiliated third parties present time.
providing such services. All such compensation must be approved
by a majority of our independent directors.
- --------------------------------------------------------------------------------------------------------------------
Reimbursable We will reimburse our advisor for: Actual amounts are dependent
Expenses . the cost to our advisor or its affiliates of goods and upon results of operations.
services used for and by us and obtained from unaffiliated
parties and
. administrative services related to such goods and services
limited to 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.
- --------------------------------------------------------------------------------------------------------------------
LIQUIDATION STAGE
- --------------------------------------------------------------------------------------------------------------------
Type of Method of Estimated
Compensation Compensation Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property We will pay our advisor, or one of its affiliates, Actual amounts to be received
Disposition Fee a Property Disposition Fee out of net profits upon depend upon the sale price of
the sale of each of the properties, in an amount equal properties and, therefore,
to the lesser of 3% of the property's contract sales price cannot be determined at the
or 50% of a customary Competitive Real Estate Commission given present time.
the 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. We will pay the Property Disposition Fee on all
dispositions of properties, whether made in the ordinary course
of business, upon liquidation or otherwise.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SUBORDINATED PAYMENTS
- --------------------------------------------------------------------------------------------------------------------
Type of Method of Estimated
Compensation Compensation Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Asset We will pay our advisor an Asset Management Fee of up to 1.5% of the Actual amounts are
Management Fee Average Invested Assets. The Asset Management Fee will be paid or dependent upon the actual
accrue quarterly, but will not be paid until our shareholders have amounts that we invest in
received distributions equal to a cumulative, noncompounded rate of assets and, therefore,
8% per annum on their investment in our company. If the fee is not cannot be determined at
paid in any quarter, it will accrue and be paid once the shareholders this time.
have received a cumulative 8% return.
- --------------------------------------------------------------------------------------------------------------------
Incentive Our operating partnership will pay an incentive distribution to our Actual amounts to be
Distribution advisor equal to 15% of our operating partnership's operating cash received depend upon
flow after our company has received, and paid to our shareholders, results of operations and
the sum of: the actual amounts that
we invest in properties
. an 8% cumulative, non-compounded return on our Invested Capital, and, therefore, cannot be
and determined at the present
. any remaining shortfall in the recovery of our Invested Capital time.
with respect to prior sales of properties.
If there is a shortfall in that 8% return 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 Our operating partnership will pay an incentive distribution upon the Actual amounts to be
Distribution sale of a property equal to 15% of the net proceeds from the sale received depend upon the
Upon after our company has received, and paid to our shareholders, the sum sale price of properties
Dispositions of and, therefore, cannot be
. our Invested Capital that initially was allocated to that property, determined at the present
. any remaining shortfall in the recovery of our Invested Capital time.
with respect to prior sales of properties, and
. any remaining shortfall in the 8% return on Invested Capital.
If we and, in turn, our shareholders have not received a return of
our Invested Capital or if there is a shortfall in the 8% return
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 and, in turn, our shareholders to receive a full return of
the our Invested Capital and a full distribution of the 8% return.
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>
Additional Payments for Additional Services
In 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.
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.
Limitations on Reimbursements
No reimbursement to our advisor or its affiliates is permitted for items
such as rent, depreciation, utilities, capital equipment, salaries, fringe
benefits and other administrative items of any controlling persons of our
advisor, its affiliates or any other supervisory personnel except 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, including a majority of
the independent 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 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.
Limitation on Acquisition-Related Compensation
The total of all real estate commissions and acquisition fees and 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.
Limitation on Operating Expenses
In the absence of a satisfactory showing to the contrary, our total
operating expenses will be deemed to be excessive if, in any fiscal year, they
exceed the greater of:
. 2% of our Average Invested Assets or
-45-
<PAGE>
. 25% of our net income for such year.
The independent directors have a fiduciary responsibility to limit such expenses
to amounts that do not exceed these limitations.
Within 60 days after the end of any fiscal quarter for which our total
operating expenses for the 12 months then ended exceeded the greater of 2% of
our Average Invested Assets or 25% of net income, we will send to our
shareholders a written disclosure of such fact.
Our advisor will reimburse our company at the end of the 12 month period
the amount by which the aggregate annual expenses paid or incurred by our
company exceed the limitations provided above.
Total operating expenses include aggregate expenses of every character paid
or incurred by us as determined under generally accepted accounting principles,
including the fees we pay to our advisor, such as the Incentive Distribution
referred to in the Compensation Table. However, total operating expenses do
not include:
. the expenses we incur in raising capital such as organizational and
offering expenses, legal, audit, accounting, registration and other
fees, printing and other expenses, and tax incurring in connection
with the issuance, distribution, transfer and registration of our
shares;
. interest payment;
. taxes;
. non-cash expenditures such as depreciation, amortization and bad debt
reserves; and
. acquisition and disposition fees, acquisition expenses, real estate
commissions on resale of properties and other expenses connected with
the acquisition, disposition and ownership of real estate interests,
mortgage loans or other property, including the Incentive Distribution
Upon Disposition referred to in the Compensation Table.
Additional Important Information on Compensation to Our Affiliates
Our advisor and its affiliates will be involved in determining the types
and structure of the transactions in which we participate. Our advisor may
benefit from our acquiring properties, retaining ownership of our properties or
leveraging our properties, while it may be in your best interest as a
shareholder for us to buy, sell or hold such property on an unleveraged basis.
Furthermore, our advisor's receipt and retention of many of the fees it receives
and reimbursements depends 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.
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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 advisor has served as manager or sponsor of a total of nine real estate
investment entities. These real estate investment entities and the year in
which their offerings were commenced and/or completed are as follows:
1. Telluride Barstow, LLC (commenced and completed in 1998)
2. Truckee River Office Tower, LLC (commenced in 1998 and completed in
1999)
3. Western Real Estate Investment Trust (commenced in 1998, not
completed)
4. Yerington Shopping Center, LLC (commenced in 1998 and completed in
1999)
5. NNN Fund VIII, LLC (commenced in 1999, not completed)
6. NNN Town & Country, LLC (commenced in 1999, not completed)
7. NNN "A" Credit TIC, LLC (commenced in 1999, not completed)
8. NNN Exchange Fund, LLC (commenced in 1999, not completed)
9. NNN Redevelopment Fund, LLC (commenced in 1999, not completed)
These nine programs constitute the "prior advisor programs." The prior
performance tables included in Exhibit A attached hereto set forth information
regarding these prior advisor programs as of the dates indicated with respect
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 Advisor
Our 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, 1999, was approximately $42,364,873, and the total number of
investors in all such entities was approximately 587.
The prior advisor programs have acquired a total of fifteen properties in
California, Colorado, South Dakota, Nevada, Kansas and Hawaii.
The aggregate dollar amount of the acquisition and development costs of the
properties purchased by the prior advisor programs, as of December 31, 1999, was
approximately $130,158,201. Of the aggregate amount, approximately 21% was
spent on acquiring office buildings, and approximately 79% 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, 1999:
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<TABLE>
<CAPTION>
Type of Property Existing
---------------- --------
<S> <C>
Office $ 26,836,396
Retail 103,321,805
------------
Total $130,158,201
============
</TABLE>
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 1998 to acquire Barstow Road Shopping Center, a community
shopping center in Barstow, California. Our advisor is the managing member of
Telluride Barstow, LLC, which acquired this shopping center in May of 1998. The
center includes approximately 77,950 square feet of leasable space and, as of
December 31, 1999, was approximately 100% 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
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 December
31, 1999, was approximately 72% occupied. The building was developed in 1981 by
casino operator, Harrah's, which currently leases over 40% of the space.
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 December 31, 1999, was approximately 94% occupied.
Our 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.
NNN Fund VIII, LLC, a Virginia limited liability company, was formed by our
advisor and has acquired three properties. The Belmont Shopping Center, Pueblo,
Colorado was acquired on June 11, 1999; the Village Fashion Center in Wichita,
Kansas was acquired on June 18, 1999; and the Palm Court Shopping Center was
acquired on August 3, 1999. The Belmont Shopping Center is a retail shopping
center containing approximately 81,289 square feet of leasable space. As of
December 31, 1999, the Belmont Shopping Center was approximately 99% occupied.
The Village Fashion Center is a retail shopping center containing approximately
129,973 square feet of leasable space. As of December 31, 1999, the Village
Fashion Center was approximately 79% occupied. The Palm Court Shopping Center
is a retail shopping center containing approximately 266,641 square feet of
leasable space. As of December 31, 1999, the Palm Court Shopping Center was
approximately 83% occupied.
NNN Town & Country, LLC, a Virginia limited liability company, was formed
by our advisor in May of 1999, to acquire the Town & Country Shopping Center, a
retail shopping center in Sacramento, California, which it acquired on July 1,
1999. The Town & Country shopping center includes approximately 239,645 square
feet of leasable space, and as of December 31, 1999, was approximately 89%
occupied. Our advisor is the managing member of NNN Town & Country, LLC.
NNN `A" Credit TIC, LLC, a Virginia limited liability company, was formed
by our advisory in July 1999 to acquire the Pueblo Shopping Center in Pueblo,
Colorado. Our advisory is the managing member of NNN `A' Credit TIC, LLC, which
closed on the acquisition of the Pueblo Shopping Center on November 3, 1999. The
retail shopping center contains approximately 106,264 square feet of retail
space and was approximately 96% occupied as of December 31, 1999.
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NNN Redevelopment Fund, LLC, a Virginia limited liability company, was
formed by our advisory in August 1999 to acquire the Bank One Building in
Colorado Springs, Colorado. Our advisory is the managing member of NNN
Redevelopment Fund, LLC, which closed on the acquisition of the Bank One
Building on November 22, 1999. The building contains approximately 129,427
square feet of office space and was approximately 64% occupied as of December
31, 1999.
NNN Exchange Fund III, LLC, a Virginia limited liability company, was
formed by our advisory in September of 1999 to acquire the County Fair retail
center in Woodland, California. Our advisory is the managing member of NNN
Exchange Fund III, LLC, which closed on the acquisition of the County Fair on
December 15, 1999. The retail shopping center contains approximately 403,063
square feet of retail space and was approximately 88% occupied as of December
31, 1999.
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 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 December 31, 1999, the building was
approximately 88% occupied.
The Phelan Village Shopping Center is an approximately 58,619 square foot
shopping center in Phelan, California built in 1989. Western REIT acquired this
property on October 16, 1998. As of December 31, 1999, Phelan Village was
approximately 97% occupied.
The Century Plaza East Shopping Center is a retail shopping center located
in East Lancaster, California, which is near Palmdale, California. The center
includes approximately 121,192 square feet and, as of December 31, 1999, was
approximately 89% occupied.
The Bryant Ranch Shopping Center is an approximately 93,892 square foot
neighborhood shopping center located in Yorba Linda, California, which is in
Orange County. Western REIT acquired this property on December 1, 1998 and, as
of December 31, 1999, the center was approximately 91% leased.
The Huron Mall Shopping Center is approximately 208,650 square foot
neighborhood shopping center in Huron, South Dakota. Western REIT acquired this
property on December 31, 1999 and, as of that date, the property was
approximately 74% leased.
The Crossroads Shopping Center is a retail shopping center in Kona, Hawaii,
built in 1996. Western REIT acquired a leasehold interest in this property on
July 31, 1999. The center includes approximately 74,973 square feet of space
and is anchored by a Safeway grocery store. As of December 31, 1999, the center
was approximately 100% leased.
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.
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.
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Additionally, Table VI contained in Part II of the registration statement of
which this prospectus is a part gives additional information relating to
properties acquired by the prior advisor programs. We will furnish, without
charge, copies of such table upon request.
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.
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 areas.
Competition for the Time and Service of Our 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 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 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.
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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.
Acquisitions From Our 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 will not acquire a property from our
advisor or any affiliate, including our officers and directors, unless a
competent independent appraiser confirms that our purchase price is equal to or
less than the property's fair market value and a majority of our board of
directors not otherwise interested in the transaction, including a majority of
our independent directors, determines that the transaction and the purchase
price are fair, reasonable and in our best interests. 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. In no event, however,
will the cost of a property to our company exceed such property's current
appraised value.
We May Purchase Properties From Persons With Whom Affiliates of Our Advisor Have
Prior Business Relationships
We may purchase properties from 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 Advisor May Have Conflicting Fiduciary Obligations in the Event Our Company
Acquires Properties with Our Advisor or Affiliates
Our 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 our company, our
shareholders 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.
Property Management Services will be Rendered by Our Advisor
Our advisor will provide property and asset management services to our
company and other entities, some of whom may be in competition with our company.
Our advisor will render these services to our company for the price and on the
terms we would expect from an unaffiliated third party and in a manner
consistent with customary business practices. Our 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 Advisor
Our advisor and its affiliates have received and will continue to receive
the compensation as described in "Compensation Table." Many of the fees
described under "Compensation Table" are based on acquisitions or asset value
and are 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.
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Furthermore, our advisor's receipt and retention of many of the fees and
reimbursements it receives from us are 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.
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 if a majority of our
board of directors, including a majority of the independent directors, approve
the transaction as being fair, competitive, commercially reasonable and no less
favorable to our company than loans between unaffiliated parties under the same
circumstances. Our 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 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 matters of real estate law. 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 parties which could
affect us and, therefore, our shareholders' ability to meet our investment
objectives.
NNN Capital Corp. is Participating as Dealer Manager in the Sale of Our Shares
NNN 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
warrants based on the number of shares sold in many states, which may be
retained or reallowed to broker-dealers participating in this offering. 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. 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.
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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 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.
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 an employee benefit plan or other entity
subject to ERISA from participating in the dividend reinvestment program.
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 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
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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 of that amendment. 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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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. 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.
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.
The Year 2000 Issue
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. We recognize the need to ensure that our operations will not be adversely
impacted by year 2000 related failures. The systems on which we will rely are
owned and maintained by our advisor and, to a more limited extent, our dealer
manger. Over the past 18 months, our advisor and our dealer manager have jointly
engaged in an analysis and remediation of their year 2000 exposure. Although
neither the advisor nor the dealer manager was adversely affected by the change
to the year 2000, there can be no assurance that year 2000 problems will not
occur in the future.
The advisor and the dealer manager have determined that all of their
systems are year 2000 compliant. The advisor and dealer manager reached this
conclusion as a result of a three-phase year 2000 plan, which they conducted
jointly. The first phase was the identification of information technology and
other systems that could be affected by the change to the year 2000, the second
phase was evaluating and modifying those systems to ensure they are year 2000
compliant, and the third phase is testing the modified systems and contingency
planning for worst case scenarios.
Identification of Systems: In the first phase of the year 2000 plan, the
advisor and the dealer manager identified critical and non-critical systems that
could be affected by the change to the year 2000. Among the critical systems
were the computer-based investor reporting and accounting and property
management software. The identification of systems was completed by June 30,
1998.
Evaluation and Implementation: In the second phase, the advisor and dealer
manager evaluated the systems identified in the first phase and crafted
modifications or other remedies that would prevent the systems from being
adversely affected by the change to the year 2000. Next, the advisor and dealer
manager implemented those modifications. Key steps in phase two included:
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. the purchase and installation in June of 1998 of new hardware or
software for the accounting, property management, word processing, e-
mail and internet access systems from reputable vendors, many of whom
certified the product's year 2000 compliance;
. the purchase and installation of new telephone systems; and
. the completion of the dealer manager's year 2000 review required by
the NASD;
In addition, in connection with the financial audit for each fiscal year
performed by the advisor's independent certified public accountants, the advisor
is reviewed for year 2000 compliance. The second phase was completed by February
28, 1999.
Testing and Contingency Planning: The testing of critical and non-critical
systems at the advisor and dealer manager began in January of 1999 and was
concluded prior to the end of 1999. In this phase, the advisor, in connection
with external consultants and internal information systems personnel, performed
various functions, including:
. the engagement of three external consulting firms to thoroughly review
and test the investor reporting systems and the new accounting and
property management system;
. the regular updating and testing for compliance all computer hardware
and software with a focus on critical testing of their investor
database and accounting systems; and
. overseeing the certification from the landlord of the office space
that the computer systems used in the office building are year 2000
compliant.
If any of the advisor's or dealer manager's systems were affected by the
change to the year 2000, the reasonable worst case scenario would be a complete
failure of the system hardware for their critical systems. However, throughout
the contingency planning phases, the advisor and dealer manager have discovered
that even complete system failure could remedied or replaced promptly. The
advisor and dealer manager routinely "back up" and save in hard copy important
databases and system applications.
Throughout the course of the three phases of the advisor's and dealer
manager's year 2000 plan, they have collectively spent approximately $65,000 in
connection with year 2000 compliance. Approximately $55,000 of these total costs
were incurred in the ordinary course of business for system upgrades and other
modifications made for primary reasons other than year 2000 risk.
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PRINCIPAL SHAREHOLDERS
Before the commencement of this offering, our advisor purchased 22,100
shares of our common stock for approximately $200,005, which is equivalent to
$9.05 per share and is net of selling commissions and marketing allowance and
due diligence reimbursement fees.
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. None of the
purchases by the officers and directors of our company and our advisor will
count toward the minimum offering needed to break escrow. The following table
sets forth the expected ownership of our shares of common stock by owners we
expect to hold more than 5% of our shares and their percentage ownership of our
company assuming the minimum and maximum number of shares are sold.
<TABLE>
<CAPTION>
Number of Shares Beneficially Percent Percent
Owned as of Commencement of this if Minimum if Maximum
Name Offering is Sold is Sold
---- -------- ------- -------
<S> <C> <C> <C>
Triple Net Properties LLC 22,100 22.1% 2.21%
</TABLE>
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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;
. 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.
Shareholder Voting
Except as otherwise provided, all shares of common stock shall have equal
voting rights. Shareholders do not have cumulative voting rights. The voting
rights per share of our 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, without the need for
concurrence by our board of directors, by the affirmative vote of a majority of
votes cast at 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 and without the necessity for
concurrence by our board of directors, 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 called for the purpose of removing directors. All other
questions shall be decided by a majority of the votes cast at a meeting.
Our articles of incorporation provide that all of the matters listed below
require the affirmative vote of a majority of our shareholders:
. 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;
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. cause a merger or reorganization of our company;
. dissolve or liquidate our company; or
. take any action to disqualify our company as a REIT or otherwise
revoke our election to be taxed as a REIT.
Our articles of incorporation further provide that, without the necessity
for concurrence by our board of directors our shareholders may:
. amend our articles of incorporation;
. remove any or all of our directors; or
. dissolve or liquidate our company.
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 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 be cast. Any such signed writing or written consent must be
received by the board of directors prior to the date on which the vote is taken.
Pursuant to Virginia law, if no meeting is held, 100% of the shareholders
must consent in writing.
Preferred Stock
Our articles of incorporation authorize our board of directors without
further shareholder action to provide for the issuance of up to 10 million
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.
Warrants Issued to the Dealer Manager in this Offering
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 in any state other than Arizona, Missouri, Ohio or
Tennessee, up to a maximum of 250,000 warrants to purchase an equivalent number
of shares. The dealer manager has agreed to pay our company $0.0008 for each
warrant. The 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 warrants to the broker-dealers
participating in this offering, unless prohibited by either federal or state
securities laws.
The holder of a warrant will be entitled to purchase one share from our
company at a price of $12.00, or 120% of the public offering price per share,
during the time period beginning on the first anniversary of the effective date
of this offering and ending on the fifth anniversary of the effective date of
this offering. A warrant may not be exercised unless the shares to be issued
upon the exercise of the warrant have been registered or are exempt from
registration in the state of residence of the holder of the 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 warrants will be
exercisable until one year from the date of issuance. In addition, holders of
warrants may not exercise the warrants to the extent such exercise would
jeopardize our status as a REIT under the federal tax laws.
The terms of the warrants, including the exercise price and the number and
type of securities issuable upon exercise of a warrant and the number of such
warrants, may be adjusted pro rata in the event of stock dividends,
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 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. Warrants are not transferable or
assignable except by the dealer manager, the broker-dealers participating in
this
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offering, 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 a participating broker-dealer. Exercise of these warrants
will be under the terms and conditions detailed in this prospectus, in the
dealer manager agreement and in the warrant.
Holders of 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. 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
several 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 specified private foundations, employee
benefit plans and trusts, and 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. The requirements
concerning the ownership of our outstanding capital stock are more fully
described under the heading "Federal Income Tax Consequences of Our 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 the 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 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.
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;
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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 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" refers
to the last quoted price as reported by the primary securities exchange or
market on which our stock is then listed or quoted for trading. If our stock is
not so listed or quoted at the time of determination of the market price, our
board of directors will determine the market price in good faith.
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
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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. 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 a majority 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.
IMPORTANT PROVISIONS OF VIRGINIA CORPORATE LAW
AND OUR ARTICLES OF INCORPORATION AND BYLAWS
The following is a summary of some important 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.
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. 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.
Shareholders' Meetings
An annual meeting of our shareholders will be held upon reasonable notice
and within a reasonable period, not less than 30 days, following delivery of the
annual report, 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 this 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 15
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.
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Our Board of Directors
Our articles of incorporation provide that the number of directors of our
company may not be fewer than three and that a majority of the directors shall
be independent directors. This provision may only be amended by a vote of a
majority of our shareholders. Our bylaws provide that the initial number of
directors shall be five. 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 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.
Each director will serve a term beginning on the date of his or her
election and ending on the next annual meeting of the shareholders. 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 directors.
Limitation of Liability and Indemnification
Subject to the conditions set forth below, our articles of incorporation
provide that we will indemnify and hold harmless our directors, officers,
advisors or their affiliates against any and all losses or liabilities
reasonably incurred by our directors, officers, advisors or any of their
affiliates in connection with or by reason of any act or omission performed or
omitted to be performed on our behalf.
Under articles of incorporation, our company shall indemnify any of our
directors, officers or advisors or any of their affiliates for any liability or
loss suffered by such party seeking indemnification nor shall we hold harmless
any of our directors, officers or advisors or any of their affiliates loss or
liability suffered by our company, provided, that:
. the party seeking indemnification was acting on behalf of or
performing services on the part of our company;
. our directors, officers, or our advisor or their affiliates have
determined, in good faith, that the course of conduct which caused the
loss or liability was in the best interest of our company;
. such indemnification or agreement to be held harmless is recoverable
only out of our net assets and not from our shareholders; and
. such liability or loss was not the result of:
. negligence or misconduct by our officers or directors, excluding
the independent directors or our advisor or their affiliates; or
. gross negligence or willful misconduct by the independent
directors.
Our articles of incorporation further provide that our company shall
indemnify and hold harmless any of our directors, officers, our advisor or any
of their affiliates 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 to the same extent and subject to the
same conditions as set forth above.
Our company shall not indemnify any of our directors, officers, or our
advisor or any of their affiliates for losses, liabilities or expenses arising
from or out of an alleged violation of federal or state securities laws by such
party unless one or more of the following conditions are met:
. there has been a successful determination on the merits of each count
involving alleged securities law violations as to the party seeking
indemnification;
. such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the party seeking
indemnification; or
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. a court of competent jurisdiction approves a settlement of the claims
against the party seeking indemnification and finds that
indemnification of the settlement and related costs should be made and
the court considering the request has been advised of the position of
the Securities and Exchange Commission and the published opinions of
any state securities regulatory authority in which shares of our stock
were offered and sold as to indemnification for securities law
violations.
We may advance amounts to persons entitled to indemnification for
reasonable expenses and costs incurred as a result of any proceeding for which
indemnification is being sought in advance of a final disposition of the
proceeding only if all of the following conditions are satisfied:
. the legal action relates to acts or omissions with respect to the
performance of duties or services by the indemnified party for or on
behalf of our company;
. the legal action is initiated by a third party who is not a
shareholder of our company or the legal action is initiated by a
shareholder of our company acting in his or her capacity as such and a
court of competent jurisdiction specifically approves such
advancement;
. the party receiving such advances furnishes our company with a written
statement of his or her good faith belief that he or she has met the
standard of conduct described above; and
. the indemnified party receiving such advances furnishes to our company
a written undertaking, personally executed on his or her behalf, to
repay the advanced funds to our company, together with the applicable
legal rate of interest thereon, if it is ultimately determined that he
or she did not meet the standard of conduct described above.
Authorizations of payments shall be made by a majority vote of a quorum of
disinterested directors.
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 and Exchange
Commission, such indemnification is contrary to public policy and, therefore,
unenforceable.
Defenses Available
There are 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.
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Inspection of Books and Records
Our advisor will keep, or cause to be kept, on our behalf, full and true
books of account on an accrual basis of accounting, in accordance with generally
accepted accounting principles. We will maintain at all times at our principal
office all of our books of account, together with all of our other records,
including a copy of our articles of incorporation and any amendments to our
articles of incorporation.
Any shareholder or his or her agent will be permitted access to all of our
records at all reasonable times, and may inspect and copy any of them. We will
permit the official or agency administering the securities laws of a
jurisdiction to inspect our books and records upon reasonable notice and during
normal business hours. As part of our books and records, we will maintain an
alphabetical list of the names, addresses and telephone numbers of our
shareholders along with the number of shares held by each of them. We will make
the shareholder list available for inspection by any shareholder or his or her
agent at our principal office upon the request of the shareholder.
We will update, or cause to be updated, the shareholder list at least
quarterly to reflect changes in the information contained therein.
We will mail a copy of the shareholder list to any shareholder requesting
the shareholder list within ten days of the request. The copy of the
shareholder list will be printed in alphabetical order, on white paper, and in a
readily readable type size. We may impose a reasonable charge for copy work
incurred in reproducing the shareholder list.
The purposes for which a shareholder may request a copy of the shareholder
list include, without limitation, matters relating to shareholders' voting
rights and the exercise of shareholders' rights under federal proxy laws.
If our advisor or our board of directors neglects or refuses to exhibit,
produce or mail a copy of the shareholder list as requested, our advisor and our
board of directors will be liable to any shareholder requesting the list for the
costs, including attorneys' fees, incurred by that shareholder for compelling
the production of the shareholder list, and for actual damages suffered by any
shareholder by reason of such refusal or neglect. It will be a defense that the
actual purpose and reason for the requests for inspection or for a copy of the
shareholder list is to secure such list of shareholders or other information for
the purpose of selling such list or copies thereof, or of using the same for a
commercial purpose other than in the interest of the applicant as a shareholder
relative to the affairs of our company. We may require that the shareholder
requesting the shareholder list represent that he or she is not requesting the
list for a commercial purpose unrelated to the shareholder's interests in our
company and that he or she will not make any commercial distribution of such
list or the information disclosed through such inspection. These remedies are
in addition to, and shall not in any way limit, other remedies available to
shareholders under federal law, or the laws of any state.
The list may not be sold for commercial purposes.
Restrictions on Roll-Up Transactions
In connection with a proposed "roll-up transaction," which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of our company and the issuance of
securities of an entity that would be created or would survive after the
successful completion of the roll-up transaction, we will obtain an appraisal of
all of our properties from an independent appraiser. In order to qualify as an
independent appraiser for this purpose, the person or entity must have no
material current or prior business or personal relationship with our advisor or
directors and must be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by our
company. Our properties will be appraised on a consistent basis, and the
appraisal will be based on the evaluation of all relevant information and will
indicate the value of our properties as of a date immediately prior to the
announcement of the proposed roll-up transaction. The appraisal will assume an
orderly liquidation of properties over a 12-month period. The terms of the
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engagement of such independent appraiser will clearly state that the engagement
is for the benefit of our company and our shareholders. We will include a
summary of the independent appraisal, indicating all material assumptions
underlying the appraisal, will be included in a report to the shareholders in
connection with a proposed roll-up transaction.
In connection with a proposed roll-up transaction, the person sponsoring
the roll-up transaction must offer to shareholders who vote against the proposal
a choice of:
. accepting the securities of the entity that would be created or would
survive after the successful completion of the roll-up transaction
offered in the proposed roll-up transaction; or
. one of the following:
. remaining shareholders of our company and preserving their
interests in our company on the same terms and conditions as
existed previously; or
. receiving cash in an amount equal to the shareholder's pro rata
share of the appraised value of our net assets.
Our company is prohibited from participating in any proposed roll-up
transaction:
. which would result in the shareholders having voting rights in the
entity that would be created or would survive after the successful
completion of the roll-up transaction that are less than those
provided in our articles of incorporation, including rights with
respect to the election and removal of directors, annual reports,
annual and special meetings, amendment of the articles of
incorporation, and dissolution of our company;
. which includes provisions that would operate as a material impediment
to, or frustration of, the accumulation of shares by any purchaser of
the securities of the entity that would be created or would survive
after the successful completion of the roll-up transaction, except to
the minimum extent necessary to preserve the tax status of such
entity, or which would limit the ability of an investor to exercise
the voting rights of its securities of the entity that would be
created or would survive after the successful completion of the roll-
up transaction on the basis of the number of shares held by that
investor;
. in which our shareholder's rights to access of records of the entity
that would be created or would survive after the successful completion
of the roll-up transaction will be less than those provided in our
articles of incorporation and described in "Inspection of Books and
Records," above; or
. in which our company would bear any of the costs of the roll-up
transaction if our shareholders do not approve the roll-up
transaction.
Anti-takeover Provisions of the Virginia Stock Corporation Act
The Virginia Stock Corporation Act contains 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
holders of 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 statutory 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
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authorized by its 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 and without the necessity of
the concurrence of our board of directors. 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. 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 restrictions upon dealings between our company, our
advisor and any of their officers, directors or affiliates in our articles of
incorporation and elsewhere. The Virginia Stock Corporation Act also governs
such transactions. In particular, unless a majority of the directors, including
a majority of the independent 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 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.
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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 warrants issued to our
dealer manager in this offering. In addition, we may issue up to 800,000 shares
upon exercise of the options granted under two stock option plans.
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. Except in the limited
situations described in the Agreement of Limited Partnership, 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 percentage interest in our operating partnership will be increased on a
proportionate basis based upon the amount of such additional capital
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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.
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 our company has received, and paid to
our shareholders, 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 sum of (1) 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 warrants issued to the
dealer manager in this offering and (2) the number of partnership
units issued by our operating partnership to limited partners other
than our advisor; and
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. a dollar amount that initially will be $10.00 and that will be
adjusted appropriately to reflect stock dividends, stock splits, or
other changes in the capital structure of our company or our operating
partnership, and, at our discretion, changes in the average price per
share paid for our common stock and partnership units in our operating
partnership after this offering.
When a property is sold, Invested Capital will be reduced by the lesser of: the
net sale proceeds available for distributions; or the sum of (1) the portion of
Invested Capital that initially was allocated to that property and (2) any
remaining shortfall in the recovery of our Invested Capital with respect to
prior sales of properties.
If there is a shortfall in the 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.
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
our company has received, and paid to the shareholders, 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 the 8% return.
If we and, in turn, our shareholders have not received a return of our
Invested Capital or if there is a shortfall in the 8% return after the sale of
the operating partnership's 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 and, in turn, our
shareholders to receive a full return of our Invested Capital and a full
distribution of the 8% return. 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.
If the advisory agreement is terminated as a result of the merger of our
advisor into our company in connection with the listing of our shares on a
national exchange or market, our advisor's incentive limited partnership
interest will be redeemed for cash, or if agreed by both parties, shares of
common stock of our company. Our cost to redeem the incentive units will be the
amount that would be payable to the advisor pursuant to the "incentive
distribution" and "incentive distribution upon dispositions" described under the
heading "Compensation Table" if we liquidated all of our assets for their fair
market value. The advisory agreement may be terminated by our advisor or a
majority of the independent directors upon 60 days' prior written notice without
cause or penalty, in which case we will not be required to pay any termination
fee.
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 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:
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. 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. Distributions of cash from operations will be made first to our
company until we have received an 8% cumulative, non-compounded return on our
Invested Capital plus 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 distributed 85% to us and 15% to our
advisor. The net sale proceeds from the sale of one of our operating
partnership's properties 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.
Notwithstanding the foregoing, if there is a shortfall in the distribution
of the 8% return to us at the end of any calendar year and the advisor
previously has received incentive distributions, other than distributions that
have previously been repaid, the advisor will be required to repay to the
operating partnership whatever portion of those prior distributions is necessary
to cause our 8% return to be met.
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. Notwithstanding the
foregoing, if we have not received a full return of our Invested Capital or
there is a shortfall in our 8% return when the operating partnership's last
property has been sold and the advisor previously has received distributions,
other than distributions that have previously been repaid, the advisor will be
required to repay to the operating partnership whatever portion of those prior
distributions is necessary to cause a full return of our Invested Capital and a
full distribution of our 8% return.
Allocations
Operating Income. Operating income of our operating partnership will be
allocated as follows:
(1) First, 100% to our company to the extent operating losses previously
allocated 100% to us pursuant to clause (3) under Operating Losses
below and losses from property sales previously allocated 100% to us
pursuant to clause (2) under Losses from Capital Transactions below;
(2) Second, 85% to our company and 15% to our advisor to the extent of
operating losses and losses from property sales previously allocated
to us and the advisor in that same proportion pursuant to clause (2)
under Operating Losses below and clause (1) under Losses from Capital
Transactions below;
(3) Third, 100% to our company until we have been allocated operating
income and gain from property sales in an amount equal to the
distributions to us of our 8% return on Invested Capital;
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(4) Fourth, 85% to our company and 15% to our advisor until the advisor
has been allocated operating income and gain from property sales in an
amount equal to the cash from operations and net sale proceeds
distributed to the advisor; and
(5) Thereafter, any remaining operating income will be allocated 100% to
our company.
Operating Losses. Operating losses of our operating partnership will be
allocated as follows:
(1) First, 100% to our company to the extent of operating income
previously allocated 100% to us pursuant to clause (5) under Operating
Income above;
(2) Second, 85% to our company and 15% to our advisor to the extent of
operating income and gain from property sales previously allocated to
us and the advisor in that same proportion pursuant to clause (4)
under Operating Income above and clause (4) under Gains from Capital
Transactions below; and
(3) Thereafter, any remaining operating losses will be allocated 100% to
our company.
All depreciation and amortization deductions of our operating partnership
will be allocated 100% to our company.
Gains from Capital Transactions. Gains from the sale of property other
than the disposition of all or substantially all of the assets of the operating
partnership will be allocated as follows:
(1) First, 100% to our company to the extent of operating losses and
losses from property sales previously allocated 100% to us pursuant to
clause (3) under Operating Losses above and clause (2) under Losses
from Capital Transactions below;
(2) Second, 85% to our company and 15% to our advisor to the extent of
operating losses and losses from property sales previously allocated
to us and the advisor in that same proportion pursuant to clause (2)
under Operating Losses above and clause (1) under Losses from Capital
Transactions below;
(3) Third, 100% to our company until we have been allocated an aggregate
amount equal to the sum of (A) any depreciation or amortization
recapture associated with the operating partnership's investment in
the property, (B) the amount by which our Invested Capital allocable
to the property sold exceeds the operating partnership's investment in
the property, (C) 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 (D)
any remaining shortfall in our 8% return that is distributed to us in
connection with the sale of the property; and
(4) Thereafter, any remaining gain will be allocated 85% to our company
and 15% to our advisor.
Losses from Capital Transactions. Losses from the sale of property other
than the disposition of all or substantially all of the assets of the operating
partnership will be allocated as follows:
(1) First, 85% to our company and 15% to our advisor to the extent of
operating income and gain from property sales previously allocated to
us and the advisor in that same proportion pursuant to clause (4)
under Operating Income above and clause (4) under Gains from Capital
Transactions above; and
(2) Thereafter, any remaining loss will be allocated 100% to our company.
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Gains from Terminating Capital Transactions. Gains from the sale of all or
substantially all of the assets of the operating partnership will be allocated
as follows:
(1) First, to our company until our aggregate capital account balance
equals the sum of (A) the Invested Capital and (B) the cumulative 8%
return that has not previously been distributed; and
(2) Thereafter, any remaining gain will be allocated 85% to our company
and 15% to our advisor.
Losses from Terminating Capital Transactions. Losses from the sale of all
or substantially all of the assets of the operating partnership will be
allocated as follows:
(1) First, 85% to our company and 15% to our advisor to the extent of
operating income and gain from property sales previously allocated to
us and the advisor in that same proportion pursuant to clauses (2) and
(4) under "Operating Income" above and clause (4) under "Gains from
Capital Transactions" above; and
(2) Thereafter, any remaining loss will be allocated 100% to our company.
Notwithstanding the foregoing, to the extent that our advisor is required
to repay distributions to the operating partnership, the allocations will be
adjusted to reflect such repayment.
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 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 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, among others.
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, 2000. 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, 2000, 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 specified assumptions
and on the factual representations we have made, all of which are described in
Hunton & Williams' opinion.
Our REIT qualification depends on our ability to meet on a continuing basis
several 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 specified categories, the
diversity of our share ownership, and the percentage of our earnings that we
distribute. We describe the REIT qualification tests, and the consequences of
our failure to meet those 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.
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:
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. 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;
. 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 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 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 specified 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 other qualification tests, described below, regarding the
nature of its income and assets.
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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, 2001.
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.
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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.
. 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
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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.
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
specific 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 the relief 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
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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:
. cash or cash items, including receivables specified in the federal tax
laws;
. 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
offerings or offerings of debt with a term of at least five years; 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 stock in other REITs or any qualified REIT subsidiary or our
interest in any partnership, including our operating partnership.
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.
Recently enacted legislation (the "Tax Bill") allows us to own up to 100%
of the stock of taxable REIT subsidiaries ("TRSs"), which can perform activities
unrelated to our tenants, such as third-party management, development, and other
independent business activities, as well as provide services to our tenants. We
and our subsidiary must elect for the subsidiary to be treated as a TRS. In
addition, the Tax Bill prevents us from owning more than 10% of the voting power
or value of the stock of a taxable subsidiary that is not treated as a TRS.
Prior to the effective date of the Tax Bill, we only are prohibited from owning
more than 10% of the voting stock of a taxable subsidiary. Overall, no more than
20% of our assets can consist of securities of TRSs under the Tax Bill. The TRS
provisions of the Tax Bill apply for taxable years beginning after
December 31, 2000.
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:
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. 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 specified 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. Under the
Tax Bill, the 95% distribution requirement discussed above was reduced to 90%
for taxable years beginning after December 31, 2000.
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:
. 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 applicable
distribution requirement or to avoid corporate income tax or the excise tax
imposed on undistributed income. In such a situation, we might be required to
borrow money or raise funds by issuing additional stock.
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 specified records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, we must request on an annual basis
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
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ordinary income. Subject to limitations in 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;
. 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. We generally 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
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.
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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
depreciable real property is 25% to the extent that such gain would have been
treated as ordinary income if the property were a type of depreciable property
other than real 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 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 another exempt category 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, 2000.
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
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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 some
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%;
. 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, 2000.
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.
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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
interests in U.S. real property and stock in corporations at least 50% of whose
assets consists of interests in U.S. 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 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.
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<PAGE>
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;
. will provide sufficient liquidity; and
. is prudent under the general ERISA standards.
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, who are
"parties in interest" within the meaning of ERISA and, "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 an exception from the plan asset regulations
applies.
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
-86-
<PAGE>
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.
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. We refer to this as 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 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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<PAGE>
PLAN OF DISTRIBUTION
The total of 11,050,000 shares registered in this offering includes:
. a maximum of 10 million 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 warrants issued to
our dealer manager in this offering; and
. up to 800,000 shares issuable under two stock option plans.
The 10 million shares offered to residents of our sales states are being
offered through NNN Capital Corp., our dealer manager, a registered broker-
dealer affiliated with our advisor, and unaffiliated broker-dealers. NNN Capital
Corp. recently changed its name from Cunningham Capital Corp. and has also
operated under the name TMP Capital Corp. 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 advisor purchased 22,100 shares of our common stock prior to the
commencement of this offering to the public, at a price of $9.05 per share,
which equals a total of $200,005. Our advisor purchased such shares for cash and
intends to hold such shares for as long as it serves as the advisor to our
company. Any shares sold to the advisor will not count toward the minimum amount
of shares required to break escrow, except with respect to the separate escrow
account for subscriptions from residents of Pennsylvania described in this
prospectus. In addition, neither the dealer manager or any other broker dealer
will receive any compensation with respect to shares sold to our advisor.
Our board of directors and the dealer manager have determined the offering
price of the shares. When determining the offering price, our board considered
primarily the per share offering prices in similar offerings conducted by
companies formed for the purpose of acquiring properties similar to the
properties we seek to acquire. Because we do not own any assets as of the
commencement of this offering and have no historical earnings, the offering
price is not related to the company's historical book value or earnings.
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 warrant for each 40 shares sold during
this offering in states other than Arizona, Missouri, Ohio and Tennessee. The
dealer manager may reallow these warrants to broker-dealers participating in
this offering, subject to federal and state securities laws. Each 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 warrants are being registered as part
of this offering. For the life of these 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 these 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 warrants.
-88-
<PAGE>
The dealer manager may authorize 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 warrants to such
participating broker-dealers.
We have agreed to indemnify the participating broker-dealers, including the
dealer manager, against liabilities arising under the Securities Act unless such
liability arises from information in this prospectus relating to the dealer
manager and supplied by the dealer manager. 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 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.
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, or $1,000, except in Minnesota,
which requires a minimum investment of 250 shares, or $2,500.
Except as noted below, subscription proceeds will be placed in interest-
bearing accounts with the escrow agent until subscriptions for at least the
minimum offering of 100,000 shares aggregating at least $1,000,000 have been
received and accepted by us. Neither the shares purchased by our officers,
employees or directors under the option plans nor the shares purchased by our
advisor or its affiliates will 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.
Subscription proceeds received from residents of Pennsylvania will be
placed in a separate interest bearing escrow account with the escrow agent until
subscriptions for at least 1,000,000 shares from all sources, including the
shares purchased by our officers, employees, directors pursuant to options or
otherwise and shares purchased by our advisor and its affiliates, aggregating at
least $10 million have been received and accepted by us. If we have not received
and accepted subscriptions for 1,000,000 shares by the end of the 120-day escrow
periods (with the initial 120-day escrow period commencing upon the
effectiveness of this offering), we will notify Pennsylvania investors in
writing by certified mail within 10 calendar days after the end of each 120-day
escrow period that they have a right to have their investment returned to them.
If a Pennsylvania investor requests the return of his or her subscription funds
within 10 calendar days after receipt of the notification, we must return those
funds, together with any interest earned on the funds for the time those funds
remain in escrow subsequent to the initial 120-day escrow period, to the
investor within 15 calendar days after receipt of the investor's request.
If subscriptions for at least 100,000 shares have not been received and
accepted by ___________, 2001, 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
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<PAGE>
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.
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.
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 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 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:
<TABLE>
<CAPTION>
Purchase Selling Marketing and Net Proceeds
Dollar Volume Price Commissions Due Diligence to Company
of Shares Purchased Per Share Per Share Fee Per Share Per Share
-------------------- --------- --------- -------------- ---------
<S> <C> <C> <C> <C>
$250,000-$499,999 $9.75 $0.55 $0.15 $9.05
$500,000-$999,999 $9.60 $0.40 $0.15 $9.05
$1,000,000-$1,999,999 $9.45 $0.25 $0.15 $9.05
$2,000,000-$5,000,000 $9.30 $0.10 $0.15 $9.05
Over $5,000,000 $9.25 $0.05 $0.15 $9.05
</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, or $0.25 per share, and
we would receive net proceeds of $905,000, or $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."
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<PAGE>
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:
. 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.
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<PAGE>
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 December 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 by this prospectus 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.
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,
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.
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<PAGE>
T REIT, INC
(A Development Stage Enterprose
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Financial Statements
Balance Sheet as of December 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 December 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 December 31,
1999, in conformity with generally accepted accounting principles.
/s/ HASKELL & WHITE LLP
Irvine, California
February 14, 2000
F-2
<PAGE>
T REIT, INC
(A Development Stage Enterprise)
Balance Sheet
As of December 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 December 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 Commonwealth 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 December 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 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 December 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 million 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 105,000 options to purchase its common stock to
directors at $9.05 per share.
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 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)
December 31, 1999
<TABLE>
<CAPTION>
Yerington
Telluride Truckee Shopping NNN
Barstow, WREIT, River Office Center, Fund VIII,
LLC INC. Tower, LLC LLC LLC
----------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Dollar Amount Offered $1,620,000 $50,000,000 $5,550,000 $1,625,000 $8,000,000
=========== =========== ============ ========== ===========
Dollar Amount Raised 1,620,000 8,220,815 5,550,000 1,599,063 7,904,800
=========== =========== ============ ========== ===========
Percentage Amount Raised 100.0% 16.4% 100.0% 98.4% 98.8%
=========== =========== ============ ========== ===========
Less Offering Expenses:
Selling Commissions & Discounts to Affiliates 10.0% 8.0% 10.0% 10.0% 10.0%
Organization & Offering Expenses (1) 2.5% 4.5% 3.0% 4.9% 3.0%
Due Diligence Allowance (2) 1.5% 0.5% 0.5% 0.5% 0.5%
Reserves 3.6% 1.5% 3.7% 7.8% 8.9%
----------- ----------- ------------ ---------- -----------
Percent Available for Investment 82.4% 85.5% 82.8% 76.8% 77.6%
Acquisition Cost:
Cash Down Payment 75.6% 83.0% 73.7% 70.1% 70.7%
Loan Fees 5.3% 2.5% 5.1% 2.0% 2.4%
Acquisition Fees Paid to Affiliates 1.5% 0.0% 4.0% 4.5% 4.5%
----------- ----------- ------------ ---------- -----------
Total Acquisition Cost 82.4% 85.5% 82.8% 76.8% 76.6%
=========== =========== ============ ========== ===========
Percent Leveraged 71% 75% 75% 75% 75%
Date Offering Began 1-Jun-98 1-Jul-98 21-Aug-98 15-Dec-98 22-Feb-99
Date Offering Ended 16-Dec-98 Open 15-Jul-99 31-Aug-99 Open
Length of Offering (days) 198 Open 328 260 Open
Days to Invest 90% of Amount Available for
Investment (Measured from Beginning of Offering) 46 N/A 102 83 180
Number of Investors 14 215 67 11 114
<CAPTION>
NNN NNN NNN
Town & NNN Exchange Redevelpop-
Country, `A' Credit Fund III, ment Fund
LLC TIC, LLC LLC LLc
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dollar Amount Offered $7,200,000 $4,500,000 $10,000,000 $8,000,000
=========== ========== =========== ===========
Dollar Amount Raised 7,073,000 1,708,750 4,165,695 3,522,750
=========== ========== =========== ===========
Percentage Amount Raised 98.2% 38.0% 41.7% 44.0%
=========== ========== =========== ===========
Less Offering Expenses:
Selling Commissions & Discounts to Affiliates 10.0% 10.0% 10.0% 10.0%
Organization & Offering Expenses (1) 3.0% 3.5% 3.5% 3.5%
Due Diligence Allowance (2) 0.5% 0.5% 0.5% 0.5%
Reserves 2.0% 6.1% 10.5% 9.5%
----------- ----------- ----------- -----------
Percent Available for Investment 84.5% 79.9% 75.5% 76.5%
Acquisition Cost:
Cash Down Payment 74.3% 73.8% 69.0% 69.5%
Loan Fees 5.7% 2.1% 2.0% 2.5%
Acquisition Fees Paid to Affiliates 4.5% 4.0% 4.5% 4.5%
----------- ----------- ----------- -----------
Total Acquisition Cost 84.5% 79.9% 75.5% 76.5%
=========== ========== =========== ===========
Percent Leveraged 75% 75% 77% 69%
Date Offering Began 10-May-99 10-Aug-99 15-Sep-99 27-Aug-99
Date Offering Ended Open Open Open Open
Length of Offering (days) Open Open Open Open
Days to Invest 90% of Amount Available for
Investment (Measured from Beginning of Offering) 43 N/A N/A N/A
Number of Investors 61 13 16 56
</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 and other members of
the Selling Group.
A-2
<PAGE>
TABLE II
COMPENSATION TO SPONSOR (UNAUDITED)
December 31, 1999
<TABLE>
<CAPTION>
Truckee
Telluride River Office Yerington NNN
Barstow, WREIT, Tower, Shopping Fund VIII,
LLC INC. LLC Center, LLC LLC
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Date Offering Commenced 1-Jun-98 1-Jul-98 21-Aug-98 15-Dec-98 22-Feb-99
Dollar Amount Raised
to Sponsor from Proceeds of Offering $1,620,000 $8,220,815 $5,550,000 $1,599,063 $7,904,800
============ =========== ============ ========== ============
Amounts Paid to Sponsor from Proceeds of
Offering:
Selling Commissions to Selling Group Members $ 162,000 $ 657,665 $ 529,948 $ 159,906 $ 790,480
Organization & Marketing Expenses 64,000 369,937 166,500 78,354 237,144
Due Diligence Allowance -- 123,312 30,000 7,995 39,524
Acquisition Fees 25,000 -- 220,000 75,000 355,716
------------ ----------- ------------ ----------- ------------
Totals $ 251,000 $1,150,914 $ 946,448 $ 321,256 $1,422,864
============ =========== ============ ========== ============
Dollar Amount of Cash Generated from
Operations Before Deducting Payments
to Sponsor $ 343,842 $1,079,057 $1,010,455 $ 138,330 $ 650,348
============ =========== ============ ========== ============
Amounts Paid to Sponsor from Operations - Year
1998
Property Management Fees $ 27,506 $ 26,103 $ 9,390
Asset Management Fees 14,550 26,932 6,781
Leasing Commissions -- -- --
------------ ----------- ------------ ----------- ------------
Totals $ 42,056 $ 53,035 $ 16,171 N/A N/A
============ =========== ============ ========== ============
Amounts Paid to Sponsor from Operations -
Year Ending December 31, 1999
Property Management Fees $ 39,936 $ 193,174 $ 129,204 $ 17,599 $ 74,766
Asset Management Fees 41,741 119,017 80,500 6,264 155,585
Leasing Commissions -- 70,481 45,922 --
------------ ----------- ------------ ----------- ------------
Totals $ 81,677 $ 382,672 $ 255,626 $ 23,863 $ 230,351
============ =========== ============ ========== ============
<CAPTION>
NNN
NNN NNN Redevelop-
Town & NNN Exchange ment Total
Country, `A' Credit Fund III, Fund, All
LLC TIC, LLC LLC LLC Prograns
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Date Offering Commenced 10-May-99 10-Aug-99 15-Sep-99 27-Aug-99
Dollar Amount Raised
to Sponsor from Proceeds of Offering $7,073,000 $1,708,750 $4,165,695 $3,522,750 $42,364,873
============ =========== ============ =========== =============
Amounts Paid to Sponsor from Proceeds of
Offering:
Selling Commissions to Selling Group Members $ 707,300 $ 170,875 $ 416,570 $ 352,275 $ 4,047,019
Organization & Marketing Expenses 212,190 59,806 145,799 123,296 1,506,027
Due Diligence Allowance 35,365 8,544 20,828 17,614 288,183
Acquisition Fees 318,285 68,350 187,456 158,524 1,408,331
------------ ----------- ------------ ----------- -------------
Totals $1,273,140 307,575 770,654 651,709 7,249,559
============ =========== ============ =========== =============
Dollar Amount of Cash Generated from
Operations Before Deducting Payments
to Sponsor 583,310 91,723 75,658 103,693 4,083,011
============ =========== ============ =========== =============
Amounts Paid to Sponsor from Operations - Year
1998
Property Management Fees $ --
Asset Management Fees --
Leasing Commissions --
------------ ----------- ------------ ----------- -------------
Totals N/A N/A N/A N/A $ --
============ =========== ============ =========== =============
Amounts Paid to Sponsor from Operations -
Year Ending December 31, 1999
Property Management Fees $ 86,309 7,885 8,701 7,164 571,333
Asset Management Fees 80,000 11,343 10,983 14,234 519,667
Leasing Commissions 18,538 134,941
------------ ----------- ------------ ----------- -------------
Totals $ 184,847 $ 19,228 $ 19,684 $ 21,398 $1,225,941
============ =========== ============ =========== =============
</TABLE>
A-3
<PAGE>
TABLE III
1998 OPERATING RESULTS OF PRIOR PROGRAMS (UNAUDITED)
<TABLE>
<CAPTION>
Truckee
River
Telluride Office Total
Barstow, WREIT, Tower, All
LLC INC. 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 209,494 258,680 42,840 511,014
Interest Expense 177,908 208,078 88,346 474,332
Depreciation 47,183 77,537 15,417 140,137
----------------- ----------------- --------------- ---------------
Net Income - GAAP Basis $ 62,655 $ 49,863 $ 49,089 $ 161,607
================= ================= =============== ===============
Taxable Income From:
Operations 62,655 49,863 49,089 161,607
Gain on Sale -- -- -- --
Cash Generated From:
Operations 109,838 127,400 64,506 301,744
Sales -- -- -- --
Refinancing -- -- -- --
----------------- ----------------- --------------- ---------------
Cash Generated From Operations, Sales &
Refinancing $109,838 $127,400 $ 64,506 $ 301,744
================= ================= =============== ===============
Less Cash Distributions to Investors From:
Operating Cash Flow 77,052 89,971 -- 167,023
Sales & Refinancing -- -- -- --
Other -- -- -- --
----------------- ----------------- --------------- ---------------
Cash Generated (Deficiency) after Cash
Distributions 32,786 37,429 64,506 134,721
Less Special Items (not including Sales &
Refinancing) -- -- -- --
----------------- ----------------- --------------- ---------------
Cash Generated (Deficiency) after Cash
Distributions and Special Items $ 32,786 37,429 $ 64,506 $ 134,721
================= ================= =============== ===============
Tax and Distribution Data Per $1,000
Invested
Federal Income Tax Results:
Ordinary Income (Loss)
-- from operations $ 38.68 $ 14.73 $8.84 $ 62.25
-- from recapture -- -- -- --
Capital Gain (Loss) -- -- -- --
Cash Distributions to Investors
Sources (on GAAP basis)
-- Investment Income $ 47.56 $ 26.57 $ -- $ 74.14
-- Return of Capital -- -- -- --
Sources (on Cash basis)
-- Sales -- -- -- --
-- Refinancing -- -- -- --
-- Operations $ 47.56 $ 14.18 $ -- $ 61.75
-- 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>
TABLE III - Continued
1999 OPERATING RESULTS OF PRIOR PROGRAMS (UNAUDITED)
<TABLE>
<CAPTION>
Yerington NNN NNN
Telluride Truckee Shopping Fund Town &
Barstow, WREIT, River Office Center, VIII, Country,
LLC INC. Tower, LLC LLC LLC LLC
----------- ------------ -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues $721,168 $4,726,712 $2,598,280 $393,367 $1,821,793 $1,727,435
Profit on Sale of Properties --
Less: Operating Expenses 366,116 1,904,986 999,301 90,371 896,924 404,167
Interest Expense 244,781 2,305,776 924,827 188,529 504,872 924,805
Depreciation 97,330 707,842 366,688 67,598 227,102 284,211
----------- ------------ -------------- ------------ ----------- ------------
Net Income - GAAP Basis $ 12,941 $ (191,892) $ 307,464 $ 46,869 $ 192,895 $ 114,252
=========== ============ ============== ============ =========== ============
Taxable Income From:
Operations 12,941 (191,892) 307,464 46,869 192,895 114,252
Gain on Sale -- -- --
Cash Generated From:
Operations 110,271 515,950 674,152 114,467 419,997 398,463
Sales -- -- --
Refinancing -- 526,326 --
----------- ------------ -------------- ------------ ----------- ------------
Cash Generated From Operations, Sales &
Refinancing $110,271 $1,042,276 $ 674,152 $114,467 $ 419,997 $ 398,463
=========== ============ ============== ============ =========== ============
Less: Cash Distributions to Investors From:
Operating Cash Flow $172,748 $ 543,543 $ 420,271 $106,326 $ 210,592 $ 173,253
Sales & Refinancing --
Other --
----------- ------------ -------------- ------------ ----------- ------------
Cash Generated (Deficiency) after Cash
Distributions (62,477) 498,733 253,881 8,141 209,406 225,210
Less: Special Items (not including Sales &
Refinancing) --
----------- ------------ -------------- ------------ ----------- ------------
Cash Generated (Deficiency) after Cash
Distributions and Special Items $(62,477) $ 498,733 $ 253,881 $ 8,141 $ 209,406 $ 225,210
=========== ============ ============== ============ =========== ============
Tax and Distribution Data Per $1,000
Invested
Federal Income Tax Results:
Ordinary Income (Loss)
-- from operations $ 7.99 $ (23.34) $ 55.40 $ 29.31 $ 24.40 $ 16.15
-- from recapture
Capital Gain (Loss)
Cash Distributions to Investors
Sources (on GAAP basis)
-- Investment Income
-- Return of Capital
Sources (on Cash basis)
-- Sales
-- Refinancing
-- Operations $ 106.63 $ 66.12 $ 75.72 $ 66.49 $ 26.64 $ 24.49
<CAPTION>
NNN
NNN `A' Exchange NNN Total
Credit TIC, Fund III, Redevelopment All
LLC LLC Fund, LLC Programs
------------- --------- ------------- -----------
<S> <C> <C> <C>
Gross Revenues 157,783 119,731 143,284 $12,409,553
Profit on Sale of Properties --
Less: Operating Expenses 51,239 14,938 46,345 4,774,387
Interest Expense 34,049 48,819 14,644 5,191,101
Depreciation 17,127 21,056 1,788,954
------------- --------- ------------- -------------
Net Income - GAAP Basis $ 55,368 $ 55,974 $ 61,239 $ 655,110
============= ========= ============= =============
Taxable Income From:
Operations 55,368 55,974 61,239 655,110
Gain on Sale --
Cash Generated From: --
Operations 72,495 55,974 82,295 2,444,064
Sales --
Refinancing 526,326
------------- --------- ------------- -------------
Cash Generated From Operations, Sales &
Refinancing $ 72,495 $55,974 82,295 $ 2,970,390
============= ========= ============= =============
Less: Cash Distributions to Investors From:
Operating Cash Flow 8,927 -- 286 $ 1,635,946
Sales & Refinancing --
Other --
------------- --------- ------------- -------------
Cash Generated (Deficiency) after Cash
Distributions 63,568 55,974 $ 82,009 $ 1,334,445
Less: Special Items (not including Sales &
Refinancing) --
------------- --------- ------------- -------------
Cash Generated (Deficiency) after Cash
Distributions and Special Items $ 63,568 $55,974 $ 82,009 $ 1,334,445
============= ========= ============= =============
Tax and Distribution Data Per $1,000 --
Invested
Federal Income Tax Results: --
Ordinary Income (Loss)
-- from operations $ 32.40 $ 13.44 $ 17.38 $ 173.13
-- from recapture --
Capital Gain (Loss) --
Cash Distributions to Investors --
Sources (on GAAP basis) --
-- Investment Income --
-- Return of Capital --
Sources (on Cash basis) --
-- Sales --
-- Refinancing --
-- Operations $ 5.22 $ -- $ 0.08 $ 371.41
</TABLE>
A-5
<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."
Except as specifically provided in "Special Notice of Pennsylvania
Residents Only," 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 _______________, 2001, the 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 offering of the
Shares dated ______________, 2000 (the "Prospectus").
Any person selling Shares on behalf of the Company may not complete a sale
of Shares to me until at least five business days after I receive a copy of the
final prospectus. Morever, any person selling shares on behalf of the Company
must send me a confirmation of my purchase.
Prospective investors are hereby advised of the following:
(a) The assignability and transferability of the Shares is restricted and
will be governed by the 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 their 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
_________________.
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
In connection with secondary trading of the Shares, the Commissioner of the
State of California Department of Corporations will withhold the Section
25104(h) exemption which permits secondary trading of the Shares for 18 months
from the date of qualification of the Shares.
SPECIAL NOTICE FOR PENNSYLVANIA RESIDENTS ONLY
The Company will not admit Pennsylvania investors as shareholders until it
has received and accepted subscriptions for 1,000,000 shares ($10 million) of
common stock from all sources. The Company will place the funds representing
subscriptions for shares from Pennsylvania investors in an interest-bearing
escrow account with Privest Bank as escrow agent, until it has received and
accepted subscriptions for shares for gross offering proceeds of at least $10
million. If the Company has not received and accepted subscriptions for
1,000,000 shares by the end of a 120-day escrow periods (with the initial 120-
day escrow period commencing upon the effectiveness of the offering), the
Company will notify Pennsylvania investors in writing by certified mail within
10 calendar days after the end of each 120-day escrow period that they have a
right to have their investment returned to them. If a Pennsylvania investor
requests the return of his or her subscription funds within 10 calendar days
after receipt of the notification, the Company must return those funds, together
with any interest earned on the funds for the time those funds remain in escrow
subsequent to the initial 120-day escrow period, to the investor within 15
calendar days after receipt of the investor's request.
The escrow agent will release the funds received from Pennsylvania
investors to the Company from the escrow account immediately after subscriptions
for at least $10 million have been received from all sources. The Company will
include subscriptions from Pennsylvania investors in determining whether
subscriptions for 1,000,000 shares have been obtained.
Because the minimum offering of shares is less than $10 million,
Pennsylvania investors are cautioned to evaluate carefully the Company's ability
to fully accomplish its stated objectives and to inquire as to the current
dollar volume of subscription proceeds.
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. Failure to
INSTRUCTIONS 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 Minnesota which requires a $2,500 (250 Shares)
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 the type of
OWNERSHIP entity or type of individuals subscribing.
- --------------------------------------------------------------------------------
3. REGISTRATION Please enter the exact name in which the Shares are to be
NAME AND held. For joint tenants with right of survivorship or
ADDRESS 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 name and
AND ADDRESS 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 representation made by the
SIGNATURE 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 additional
INVESTMENTS 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
B-4
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
<TABLE>
<S> <C>
1. ========= INVESTMENT ====================================================================================
--------------------------------------------
Make Investment Check Payable to:
________________ __________________ Privest Bank as Escrow Agent for T REIT, Inc.
# of Shares Total $ Invested ---------------------------------------------------------
[_] Initial Investment (Minimum $1,000) (except in
(#Shares x $10.00 = $ Invested) Minnesota, which requires a minimum
Minimum purchase 100 Shares or $1,000 investment of $2,500)
(250 Shares or $2,500 in Minnesota) [_] Additional Investment (Minimum $100.00)
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 =============================================================================
[_] 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_____________________________________________
4. ========= REGISTRATION NAME AND ADDRESS =================================================================
Please print name(s) in which Shares are to be registered. Include trust name, if applicable.
Mr. Mrs. Ms. MD 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 ___________________________________________
________________________ ___________________________________________
Email Address __________________________________________
__________________________________________
</TABLE>
B-6
<PAGE>
<TABLE>
<S> <C>
5. ========= INVESTOR NAME AND ADDRESS =====================================================================
(Complete only if different from registration name and address).
Mr. Mrs. Ms. MD 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 residence as set forth in the Prospectus under
"INVESTOR SUITABILITY STANDARDS". ________ ________
Initials Initials
(d) I am purchasing the Shares for my own account. ________ ________
Initials Initials
(e) I acknowledge that the Shares are not liquid. ________ ________
Initials Initials
(f) 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
</TABLE>
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.
B-7
<PAGE>
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
UNDER FEDERAL OR STATE SECURITIES LAWS.
<TABLE>
<S> <C>
_________________________________________ _________________________________________ __________________
_________________________________________ _________________________________________ __________________
Signature of Investor or Trustee Signature of Joint Owner, if applicable Date
(MUST BE SIGNED BY TRUSTEE(S) IF IRA, KEOGH OR QUALIFIED PLAN).
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 Dealer Manager Agreement and/or the Participating
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, if applicable Registered Representative Signature
</TABLE>
B-8
<PAGE>
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-9
<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 the Company's 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 registered initial
public offering of 11,050,000 shares of the Company's 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 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.
C-1
<PAGE>
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.
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
You must own shares of Common Stock in order to participate in the DRIP.
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.
C-2
<PAGE>
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 books.
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 DRIP Price. 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 DRIP 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 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.
C-3
<PAGE>
Certificates for Shares
Within 90 days after the end of the 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 and arranging for the sale yourself, 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
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 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.
C-4
<PAGE>
Amendment and Termination of the DRIP
The 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.
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
C-5
<PAGE>
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-6
<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.
Please indicate your participation below. Return this card only if you wish
to participate in the DRIP.
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 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.
_____________ 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 a 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-7
<PAGE>
[outside back cover]
TREIT, INC.
[LOGO]
1-877-85T-REIT
(1-877-858-7348)
Dealer Prospectus Delivery Requirements
All dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
Advised by Triple Net Properties, LLC
1551 N. Tustin Ave, Suite 650, Santa Ana, CA 92705
714-667-8252 Fax: 714-667-6843
www.1031NNN.com*
*Our web site is not part of this prospectus.
<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.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee............... $ 32,566
Printing and mailing............................................... 100,000
Accountant's fees and expenses..................................... 3,000
Blue Sky fees and expenses......................................... 200,000
Counsel fees and expenses.......................................... 175,000
Miscellaneous...................................................... 4,335
--------
Total........................................................... $515,000
</TABLE>
* 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 proceeding brought by or in the right of the Company or brought by
or on behalf of the shareholders, the Company shall indemnify any of the
Directors and Officers for any liability or loss suffered by such party seeking
indemnification and shall hold harmless any of the Directors and Officers loss
or liability suffered by the Company, provided, that:
II-1
<PAGE>
. the party seeking indemnification has determined, in good faith, that
the course of conduct which caused the loss or liability was in the best
interest of the Company;
. the party seeking indemnification was acting on behalf of or performing
services on the part of the Company;
. such indemnification or agreement to be held harmless is recoverable
only out of the Company's net assets and not from the shareholders; and
. such liability or loss was not the result of:
. negligence or misconduct by the Officers or Directors, excluding
the Independent Directors; or
. gross negligence or willful misconduct by the Independent
Directors.
The Company shall not indemnify any of the Directors or Officers for
losses, liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws by such party unless one or more of the
following conditions are met:
. there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the party seeking
indemnification;
. such claims have been dismissed with prejudice on the merits by a court
of competent jurisdiction as to the party seeking indemnification; or
. a court of competent jurisdiction approves a settlement of the claims
and finds that indemnification of the settlement and related costs
should be made and the court considering the request has been advised of
the position of the Securities and Exchange Commission and the published
opinions of any state securities regulatory authority in which shares of
our stock were offered and sold as to indemnification for securities law
violations.
The Company may pay for or reimburse amounts to persons entitled to
indemnification for reasonable expenses and costs incurred as a result of any
proceeding for which indemnification is being sought in advance of a final
disposition of the proceeding only if all of the following conditions are
satisfied:
. the legal proceeding relates to acts or omissions with respect to the
performance of duties or services by the indemnified party for or on
behalf of the Company;
. the legal proceeding is initiated by a third party and a court of
competent jurisdiction specifically approves such advancement;
. the party receiving such advances furnishes our company with a written
statement of his or her good faith belief that he or she has met the
standard of conduct described above; and
. the indemnified party receiving such advances furnishes to the Company a
written undertaking, personally executed on his or her behalf, to repay
the advanced funds to the Company, together with the applicable legal
rate of interest thereon, if it is ultimately determined that he or she
did not meet the standard of conduct described above.
Authorizations of payments shall be made by a majority vote of a quorum 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.
II-2
<PAGE>
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:
<TABLE>
<CAPTION>
Exhibit
- -------
Number Exhibit
- ------ -------
<S> <C>
1.1** Dealer Manager Agreement between T REIT, Inc. and NNN Capital Corp.
1.2** Form of Participating Broker-Dealer Agreement
3.1** Articles of Incorporation of the Registrant
3.2** Amended and Restated Articles of Incorporation of the Registrant
3.3** Form of By-Laws of the Registrant
4.1** 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** Independent Director Stock Option Plan
10.4** Employee and Officer Stock Option Plan
10.5** 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)
99.1** Consent of Debra Meyer Kirby to be named as a director
99.2** Consent of Warren H. James to be named as a director
99.3** Consent of James R. Nance to be named as a director
99.4** Consent of Sterling McGregor to be named as a director
</TABLE>
** Filed previously.
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 34 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,
II-3
<PAGE>
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 dealer
manager at the closing specified in the Dealer Manager 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.
The Registrant undertakes: (a) to file any prospectuses required by
Section 10(a)(3) as post-effective amendments to the registration statement, (b)
that for the purpose of determining any liability under the Securities Act each
such post-effective amendment may be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time may be deemed to be the initial bona fide offering thereof, (c)
that all post-effective amendments will comply with the applicable forms, rules
and regulations of the Commission in effect at the time such post-effective
amendments are filed, and (d) to remove from registration by means of a post-
effective amendment any of the securities being registered which remain at the
termination of the offering.
The Registrant undertakes to send to each shareholder at least on an annual
basis a detailed statement of any transactions with the advisor or its
affiliates, and of fees, commissions, compensation and other benefits paid, or
accrued to the advisor or its affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the shareholders the financial
statements required by Form 10-K for the first full year of operations of the
company.
The Registrant undertakes to file a sticker supplement pursuant to Rule
424(c) under the Act during the distribution period describing each property not
identified in the prospectus at such time as there arises a reasonable
probability that such property will be acquired and to consolidate all such
stickers into a post-effective amendment filed at least once every three months,
with the information contained in such amendment provided simultaneously to the
existing shareholders. Each sticker supplement should disclose all compensation
and fees received by the advisor and its affiliates in connection with any such
acquisition. The post-effective amendment shall include audited financial
statements meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period.
The Registrant also undertakes to file, after the end of the distribution
period, a current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment (i.e., the signing of a binding purchase agreement) made after the
end of the distribution period involving the use of 10 percent or more (on a
cumulative basis) of the net proceeds of the offering and to
II-4
<PAGE>
provide the information contained in such report to the shareholders at least
once each quarter after the distribution period of the offering has ended.
II-5
<PAGE>
Table VI. Acquisitions of Properties by Programs
December 31, 1999
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 $3,300,000
Cash down payment $1,325,000
Contract purchase price plus acquisition fee $4,625,000
Other cash expenditures expensed $ 9,722
Other cash expenditures capitalized $ 107,485
Total acquisition cost $4,742,207
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 $ 9,715
Other cash expenditures capitalized $ 320,904
Total acquisition cost $16,360,619
Program: Yerington Shopping Center, LLC.
Name, location, type of property: Yerington Shopping Center
Yerington, Nevada
Retail Shopping Center
Gross leasable square footage 55,531
Date of purchase: March 8, 1999
Mortgage financing at date of purchase $3,316,297
Cash down payment $1,105,433
Contract purchase price plus acquisition fee $4,421,730
Other cash expenditures expensed $ 1,542
Other cash expenditures capitalized $ 66,404
Total acquisition cost $4,489,676
II-6
<PAGE>
Table VI. Acquisitions of Properties by Programs - continued
December 31, 1999
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 $ 7,439
Other cash expenditures capitalized $ 24,284
Total acquisition cost $1,881,723
Program: Western Real Estate Investment Trust, Inc.
Name, location, type of property: Huron Mall Shopping Center
Huron South Dakota
Retail Shopping Center
Gross leasable square footage 208,650
Date of purchase: March 31, 1999
Mortgage financing at date of purchase $ 1,440,000
Cash down payment $ 360,000
Contract purchase price plus acquisition fee $ 1,800,000
Other cash expenditures expensed $(24,278.00)
Other cash expenditures capitalized $ 30,958.78
Total acquisition cost $ 1,806,681
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 93,851
Date of purchase: October 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 $ 14,273
Other cash expenditures capitalized $ 111,032
Total acquisition cost $5,070,905
II-7
<PAGE>
Table VI. Acquisitions of Properties by Programs - continued
December 31, 1999
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 $ 18,746
Other cash expenditures capitalized $ 131,793
Total acquisition cost $9,250,539
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 $ 642
Other cash expenditures capitalized $ 127,031
Total acquisition cost $9,667,673
Program: NNN Fund VIII, LLC
Name, location, type of property: Belmont Shopping Center
Pueblo, Colorado
Retail Shopping Center
Gross leasable square footage 81,289
Date of purchase: June 11, 1999
Mortgage financing at date of purchase $2,840,000
Cash down payment $ 664,879
Contract purchase price plus acquisition fee $3,504,879
Other cash expenditures expensed --
Other cash expenditures capitalized $ 159,399
Total acquisition cost $3,664,278
II-8
<PAGE>
Table VI. Acquisitions of Properties by Programs - continued
December 31, 1999
Program: NNN Fund VIII, LLC
Name, location, type of property: Village Fashion Centre
Wichita, Kansas
Retail Shopping Center
Gross leasable square footage 129,973
Date of purchase: June 18, 1999
Mortgage financing at date of purchase $7,200,000
Cash down payment $1,600,000
Contract purchase price plus acquisition fee $8,800,000
Other cash expenditures expensed --
Other cash expenditures capitalized $ 283,555
Total acquisition cost $9,083,555
Program: NNN Fund VIII, LLC
Name, location, type of property: Palm Court
Fontana, California
Retail Shopping Center
Gross leasable square footage 266,641
Date of purchase: August 3, 1999
Mortgage financing at date of purchase $7,116,000
Cash down payment $1,872,000
Contract purchase price plus acquisition fee $8,988,000
Other cash expenditures expensed $ 32,960
Other cash expenditures capitalized $ 213,303
Total acquisition cost $9,234,263
Program: Town & Country, LLC
Name, location, type of property: Town & Country Shopping Center
Sacramento, California
Retail Shopping Center
Gross leasable square footage 239,645
Date of purchase: June 30, 1999
Mortgage financing at date of purchase $25,775,000
Cash down payment $ 6,225,000
Contract purchase price plus acquisition fee $32,000,000
Other cash expenditures expensed --
Other cash expenditures capitalized $ 397,639
Total acquisition cost $32,397,639
II-9
<PAGE>
Program: NNN `A' Credit TIC, LLC
Name, location, type of property: Pueblo Shopping Center
Pueblo, Colorado
Retail Shopping Center
Gross leasable square footage 106,264
Date of purchase: November 3, 1999
Mortgage financing at date of purchase $5,306,300
Cash down payment $1,784,843
Contract purchase price plus acquisition fee $7,091,143
Other cash expenditures expensed (credited) $ -
Other cash expenditures capitalized $ -
Total acquisition cost $7,091,143
Program: NNN Redevelopment Fund, LLC
Name, location, type of property: Bank One Building
Colorado Springs, Colorado
Office Building
Gross leasable square footage 129,427
Date of purchase: November 22, 1999
Mortgage financing at date of purchase $6,000,000
Cash down payment $2,730,000
Contract purchase price plus acquisition fee $8,730,000
Other cash expenditures expensed/(credited) (251,013)
Other cash expenditures capitalized $ 115,067
Total acquisition cost $8,594,054
Program: NNN Exchange Fund III, LLC
Name, location, type of property: County Fair
Woodland, California
Retail
Gross leasable square footage 403,063
Date of purchase: December 15, 1999
Mortgage financing at date of purchase $11,835,000
Cash down payment $ 4,015,000
Contract purchase price plus acquisition fee $15,850,000
Other cash expenditures expensed $ (65,974)
Other cash expenditures capitalized $ 273,483
Total acquisition cost $16,057,509
II-10
<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 February 15,
2000.
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
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Anthony W. Thompson Chairman of the Board of Directors, February 15, 2000
- -----------------------
Anthony W. Thompson President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jack R. Maurer Secretary and Treasurer February 15, 2000
- -----------------------
Jack R. Maurer (Principal Financial Officer and
Principal Accounting Officer).
</TABLE>
<PAGE>
Exhibit List
------------
<TABLE>
<CAPTION>
Exhibit
- -------
Number Exhibit
- ------ -------
<S> <C>
1.1** **Dealer Manager Agreement between T REIT, Inc. and NNN Capital Corp.
1.2** **Form of Participating Broker-Dealer Agreement
3.1** Articles of Incorporation of the Registrant
3.2** Amended and Restated Articles of Incorporation of the Registrant
3.3** Form of By-Laws of the Registrant
4.1** 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** Independent Director Stock Option Plan
10.4** Employee and Officer Stock Option Plan
10.5** 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)
99.1** Consent of Debra Meyer Kirby to be named as a director
99.2** Consent of Warren H. James to be named as a director
99.3** Consent of James R. Nance to be named as a director
99.4** Consent of Sterling McGregor to be named as a director
</TABLE>
** Filed previously.
<PAGE>
EXHIBIT 23.2
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 5 to the Registration Statement of T
REIT, Inc. on Form S-11 of our report dated February 14, 2000, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ HASKELL & WHITE LLP
Irvine, California
February 14, 2000
