<PAGE>
INITIAL PUBLIC OFFERING PROSPECTUS
Filed pursuant to Rule 424 (b) (3)
Registration NO. 333-77229
[LOGO]
T REIT, INC.
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 February 22, 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 February 22, 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 February 22, 2000
<PAGE>
TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................ 1
About Our Company....................................................... 1
About Our Business...................................................... 1
Our Advisor and the Dealer Manager...................................... 1
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...................... 4
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....................................................... 8
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................................................................ 12
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........................................ 22
General................................................................. 22
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Types of Investments..................................................... 22
Our Acquisition Standards................................................ 23
Property Acquisition..................................................... 23
Joint Ventures........................................................... 23
Description of Our Leases................................................ 24
Our Operating Partnership................................................ 24
Our Policies With Respect to Borrowing................................... 25
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................................................. 28
Appraisals............................................................... 28
Other Policies........................................................... 28
Investing in States Without Personal Income Tax.......................... 29
DISTRIBUTION POLICY........................................................ 30
MANAGEMENT OF OUR COMPANY.................................................. 31
General.................................................................. 31
The Directors and Executive Officers..................................... 32
Committees of Our Board of Directors..................................... 33
Officer and Director Compensation........................................ 34
Independent Director Stock Option Plan................................... 34
Officer and Employer Stock Option Plan................................... 35
Characteristics of Both Stock Option Plans............................... 35
OUR ADVISOR................................................................ 38
Management............................................................... 38
The Advisory Agreement................................................... 39
COMPENSATION TABLE......................................................... 42
Additional Payments for Additional Services.............................. 47
Limitation on Reimbursements............................................. 47
Limitation on Acquisition-Related Compensation........................... 47
Limitation on Operating Expenses......................................... 47
Additional Important Information on Compensation to Our Affiliates....... 48
PRIOR PERFORMANCE SUMMARY.................................................. 49
Prior Programs of Our Advisor............................................ 49
CONFLICTS OF INTEREST...................................................... 52
Competition for the Time and Service of Our Advisor and Its Affiliates... 52
Process for Resolution of Conflicting Opportunities...................... 52
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Acquisitions From Our Advisor and Its Affiliates........................ 53
We May Purchase Properties From Persons With Whom Affiliates of Our
Advisor Have Prior Business Relationships.............................. 53
Our Advisor May Have Conflicting Fiduciary Obligations in the Event Our
Company Acquires Properties with Our Advisor or Its Affiliates......... 53
Property Management Services will be Rendered by Our Advisor............ 53
Receipt of Commissions, Fees and Other Compensation by Our Advisor...... 53
Non-Arm's-Length Agreements; Conflicts; Competition..................... 54
Legal Counsel for Our Company and Our Advisor is the Same Law Firm...... 54
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.................................. 63
IMPORTANT PROVISIONS OF VIRGINIA CORPORATE LAW AND OUR ARTICLES OF
INCORPORATION AND BYLAWS................................................. 66
Our Articles of Incorporation and Bylaws................................ 66
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Shareholders' Meetings................................................... 66
Our Board of Directors................................................... 66
Limitation of Liability and Indemnification.............................. 66
Defenses Available....................................................... 68
Inspection of Books and Records.......................................... 68
Restrictions on Roll-Up Transactions..................................... 69
Anti-takeover Provisions of the Virginia Stock Corporation Act........... 70
Dissolution or Termination of Our Company................................ 70
Transactions with Affiliates............................................. 71
SHARES AVAILABLE FOR FUTURE SALE........................................... 71
AGREEMENT OF LIMITED PARTNERSHIP........................................... 72
Management............................................................... 72
Transferability of Interests............................................. 72
Capital Contribution..................................................... 72
Redemption Rights........................................................ 73
Incentive Units.......................................................... 73
Operations............................................................... 74
Distributions............................................................ 75
Allocations.............................................................. 75
Term..................................................................... 77
Tax Matters.............................................................. 77
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT.................... 78
Taxation of Our Company.................................................. 78
Requirements for Qualification........................................... 79
Income Tests............................................................. 80
Asset Tests.............................................................. 83
Distribution Requirements................................................ 83
Recordkeeping Requirements............................................... 84
Failure to Qualify....................................................... 84
Taxation of Taxable U.S. Shareholders.................................... 85
Taxation of U.S. Shareholders on the Disposition of the Common Stock..... 85
Capital Gains and Losses................................................. 86
Information Reporting Requirements and Backup Withholding................ 86
Taxation of Tax-Exempt Shareholders...................................... 86
Taxation of Non-U.S. Shareholders........................................ 87
Other Tax Consequences................................................... 88
ERISA CONSIDERATIONS....................................................... 89
PLAN OF DISTRIBUTION....................................................... 91
EXPERTS.................................................................... 95
REPORTS TO SHAREHOLDERS.................................................... 95
LEGAL MATTERS.............................................................. 95
LEGAL PROCEEDINGS.......................................................... 95
ADDITIONAL INFORMATION..................................................... 95
EXHIBIT A--Prior Performance Tables
EXHIBIT B--Subscription Agreement
EXHIBIT C--Dividend Reinvestment Program
</TABLE>
<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.
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."
2
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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.
3
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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.
In connection with the sale of our common stock in this offering, the dealer
manager will receive the following fees:
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Amount if Amount if
Description of Fee Calculation of Fee Minimum Sold Maximum Sold
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. Selling Commission 8% of gross offering $80,000 $8,000,000
proceeds
. Marketing Support and 1.5% of gross offering $15,000 $1,500,000
Due Diligence Expense proceeds
Reimbursement
. Warrants to purchase one warrant for every warrants to purchase warrants to purchase
common stock at a forty shares of stock 2,500 shares 250,000 shares
price of $12.00 per sold by broker-dealers
share in states that permit
such compensation
</TABLE>
In connection with the management of our business and properties, we will
pay our advisor the following fees:
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<CAPTION>
Amount if Amount if
Description of Fee Calculation of Fee Minimum Sold Maximum Sold
------------------ ------------------ ------------ ------------
<S> <C> <C> <C>
. Reimbursement of estimated to be 0.5% of $5,000 $500,000
acquisition expenses gross offering proceeds
. 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 for that
property.
. Asset management fee up to 1.5% of our average invested assets
. Return on incentive
units of limited Equal to 15% of the operating cashflow of our operating partnership
partnership after we have received, and paid to our shareholders, the sum of:
interest in our .an 8% annual cumulative non-compounded return on the capital we
operating partnership 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
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4
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Upon the disposition of any property, we will pay our advisor the following
fees.
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Description of Fee Calculation of Fee
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. Property disposition Equal to the lesser of 3% of sale price or 50% of
fee sales commission that would have been paid to third
party sales broker
. Incentive distribution Equal to 15% of the net proceeds of the sale of the
on the advisor's property after we have received, and paid to our
incentive limited shareholders, the sum of:
partnership interest
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. 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.
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All of this compensation is more fully described under "Compensation Table."
5
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RISK FACTORS
Before you invest in our common stock, you should be aware that your
investment is subject to various risks, including those described below. You
should carefully consider these risks together with all of the other
information included in this prospectus before you decide to purchase any of
our common stock.
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.
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
6
<PAGE>
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:
. 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
7
<PAGE>
. 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 the 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-Arm's Length Agreements;
Conflicts; Competition" and "Our Advisor--The Advisory 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.
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 of 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
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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
. 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."
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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.
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.
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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 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.
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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
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
commissions and marketing and due diligence expenses, we will receive $9.05
per share. As a result of these expenses, you will experience
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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
. failure to lease space to tenants on terms which are attractive to our
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.
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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 to 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 Investment
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 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 our tenants, our revenues
and cash available for distribution to our shareholders will be substantially
reduced.
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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.
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
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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 and 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 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
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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 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 income 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 our 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."
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INVESTOR SUITABILITY STANDARDS
An investment in our company involves significant risk. An investment in our
common stock is suitable only for persons who have adequate financial means and
desire a relatively long-term investment with respect to which they do not
anticipate any need for immediate liquidity.
We intend to offer our shares for sale to the residents of Arizona,
California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana,
Iowa, Kansas, 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, Wisconsin and Wyoming. We refer to these states as the sales
states.
Some of our sales states may have established suitability standards that are
less rigorous than those described in this prospectus. We reserve the right to
sell to investors in those states that meet such state's suitability standards
but may not necessarily meet our suitability standards described in this
prospectus. On the other hand, some of our sales states have established
suitability standards for individual investors and subsequent transferees that
are more rigorous than those set by our company. We must adhere to those state
standards when selling to investors in such states.
If you are an individual, including an individual beneficiary of a
purchasing Individual Retirement Account, or if you are a fiduciary, such as a
trustee of a trust or corporate pension or profit sharing plan, or other tax-
exempt organization, or a custodian under a Uniform Gifts to Minors Act, you
must represent that you meet 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.
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.
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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 our 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 the 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.
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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.
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 ten to fifteen years, but generally not less than five
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.
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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;
. 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
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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 partnership, 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 partnership or joint venture arrangements with our
advisor and its affiliates as co-owners of a property to allow us to increase
our equity participation in such venture as additional proceeds of this
offering are received, with the result that we will end up owning a larger
equity percentage of the property. In addition, we will have the right to enter
into co-ownership and joint venture arrangements with entities unaffiliated
with our advisor and its affiliates.
You should note that there is a potential risk that our company and the co-
owner or its joint venture partner will be unable to agree on a matter material
to the joint venture on joint venture decisions and we may not control the
decision. Furthermore, we cannot assure you that we will have sufficient
financial resources to exercise any right of first refusal.
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 terms 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
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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 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.
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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.
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;
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. 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.
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.
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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 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.
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<PAGE>
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.
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 Employment (000's) Annual Change
& Local ---------------------- ---------------
State Taxes as a 1978-
Income % of 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).
29
<PAGE>
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.
30
<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.
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<PAGE>
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
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
---- --- --------
<C> <C> <S>
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.
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.
32
<PAGE>
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.
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
33
<PAGE>
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 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 our 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 our board of directors. 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.
34
<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.
35
<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 our board of directors, 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, the 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 our 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;
36
<PAGE>
. 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.
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.
37
<PAGE>
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
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and
Anthony W. Thompson......... 53 Director
Jack R. Maurer.............. 56 Chief Financial Officer and Director
Talle Voorhies.............. 52 Executive Vice President and Director
Richard D. Gee.............. 59 Executive Vice President and Director
Don Ferrari................. 62 Senior Marketing Director
Damian Gallagher............ 38 Senior Vice President of Capital Markets
Richard T. Hutton, Jr. ..... 48 Vice President of Property Management
Rick Burnett................ 47 Vice President of Asset Management
Glenn Agnew................. 55 Senior Vice President for Midwest Markets
Greg Hill................... 47 Senior Vice President for Eastern 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."
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
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<PAGE>
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.
Richard T. Hutton, Jr. has served as our advisor's Vice President of
Property Management since April of 1999. In that position, Mr. Hutton oversees
the management of our advisor's and its affiliates' real estate portfolios and
property management staff. Mr. Hutton has over 15 years experience in real
estate accounting, finance and property operations including construction,
development, acquisitions, dispositions, and management of shopping centers,
industrial parks, office buildings, and apartment complexes. Mr. Hutton's
previous experience includes serving as Controller for the TMP Group, a
predecessor to our advisor, from November of 1997 to April of 1999, and as
Controller for Summit Commercial, a Highridge Company that owns and acquires
retail real estate, from May of 1996 to November of 1997. Mr. Hutton also
worked as Controller for Brooks Resources Corporation, a resort developer and
operator in Bend, Oregon, from September of 1992 to November of 1993. A
graduate of Claremont McKenna College, Mr. Hutton's background also includes
public accounting and licensure as a California Certified Public Accountant.
Richard G. Burnett, who has served as our advisor's Vice President of Asset
Management since December of 1999, has 22 years of real estate experience. Mr.
Burnett's prior positions include Manager at PM Real Estate Group from December
1998 to December 1999; Western Region Executive Director at USAA Realty Company
from 1996 to 1998, where he was responsible for operations and leasing for that
company's commercial real estate assets; Vice President, Corporate Properties
Division, at Great Western Bank, where he was in charge of acquiring branch
bank sites, from 1992 to 1996; Regional Manager for August Financial from 1986
to 1988, where he oversaw a large portfolio of office, industrial and retail
properties in Southern California; and Vice President--Real Estate Asset
Manager at Heron Financial, a real estate company, from 1988 to 1991. Mr.
Burnett holds a BSBA from the University of Phoenix, possesses both a
California and an Arizona real estate broker's license, holds real estate
professional designations, and served as the 1998 President of the Institute of
Real Estate Management's (IREM) Greater Los Angeles Chapter. Mr. Burnett has
also authored several articles for trade publications, including the Journal of
Property Management, and serves on IREM's National Education Policy Committee
and Asset Management Committee.
Glenn Agnew has served as our advisor's Senior Vice President for Midwestern
Markets since January 2000 and is responsible for raising capital from the
Midwestern United States. Mr. Agnew has been in the securities wholesale
marketing industry since 1982, working the areas of both oil and gas and real
estate syndication. Prior to joining our advisor, Mr. Agnew was a wholesaler
for Inland Securities Corporation for 12 years where he raised approximately
$350 million to fund real estate acquisitions and operations. Mr. Agnew has
Series 22, 63, 65 and 7 licenses through the NASD and received his bachelor's
degree from East Central University in Ada, Oklahoma.
Gregory R. Hill has been our advisor's Senior Vice President for Eastern
Markets since January 2000 and is responsible for raising capital from the
Eastern United States. Mr. Hill has been actively involved in the securities
business since 1978, specializing in real estate exclusively since 1981. Prior
to joining our advisor, Mr. Hill was a wholesaler for Inland Securities
Corporation for 14 years where he raised approximately
39
<PAGE>
$150 million to fund real estate acquisitions and operations. Mr. Hill received
his bachelor's degree from Brown University and holds General Securities and
Registered Investment Advisor licenses with the NASD.
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."
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 directors'
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
our board of directors in making an orderly
40
<PAGE>
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.
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.
41
<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.
OFFERING STAGE
<TABLE>
<C> <C> <S>
Type of
Compensation Method of Compensation Estimated Amount
</TABLE>
<TABLE>
<S> <C> <C>
Selling The dealer manager will receive 8% of the gross Actual amount depends
Commissions proceeds of this offering, or $0.80 for each share upon the number of
sold, and one warrant for every 40 shares of shares sold. The
common stock sold in this offering in states other dealer manager will
than Arizona, Missouri, Ohio or Tennessee. Each of receive a total of
these warrants permits the holder to purchase one $80,000 if the
share of our common stock at a purchase price of minimum offering is
$12.00 per share, or 120% of the offering price, sold and $8,000,000
prior to February 22, 2005. The dealer manager may if the maximum
reallow a portion of the Selling Commissions and offering is sold.
the warrants to broker-dealers for each share they
sell. Shares purchased under the dividend
reinvestment program will be purchased without
Selling Commissions.
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
OFFERING STAGE
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
</TABLE>
<TABLE>
<S> <C> <C>
Marketing We will pay the dealer manager an amount up to 1.5% Actual amount depends
Support and of the gross proceeds of this offering to pay upon the number of
Due Diligence expenses associated with marketing fees, shares sold. A total
Reimbursement wholesaling fees, expense reimbursements, bonuses of $15,000 will be
Fee and incentive compensation and volume discounts paid if the minimum
and to generally reimburse the dealer manager for offering is sold and
due diligence expenses. We will not require the $1,500,000 will be
dealer manager to account for spending of amounts paid if the maximum
comprising this fee. The dealer manager may offering is sold.
reallow a portion of 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 Actual amounts will
Organizational for, organization and offering expenses incurred be based on actual
and Offering on our behalf in connection with this offering, funds advanced. We
Expenses including legal and accounting fees, filing fees, estimate that a total
printing costs and selling expenses. We estimate of $25,000 will be
such expenses will be approximately 2.5% reimbursed if the
of the net proceeds of this offering. minimum offering is
sold and $2,500,000
will be reimbursed if
the maximum offering
is sold.
</TABLE>
- --------------------------------------------------------------------------------
ACQUISITION STAGE
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
</TABLE>
<TABLE>
<S> <C> <C>
Real In property acquisitions in which an affiliate of Actual amounts depend
Estate our advisor serves as our real estate broker, such on the purchase price
Commission affiliate may receive from the seller in such of properties
acquisitions a real estate commission of up to 2% acquired.
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 Actual amounts to be
Expenses expenses of selecting, evaluating and acquiring reimbursed could be
properties, whether or not actually acquired, up to 0.5% of gross
including surveys, appraisals, title insurance and offering proceeds;
escrow fees, legal and accounting fees and however, the amount
expenses, architectural and engineering reports, that we will
environmental and asbestos audits, travel and reimburse our advisor
communication expenses, non-refundable option for Acquisition
payments on properties not acquired and other Expenses when added
related expenses payable to our advisor and its to Real Estate
affiliates. Interest shall be paid on funds Commissions could be
advanced at our advisor's actual cost of funds or up to 6% of the
as otherwise established by our board of contract price of the
directors.
</TABLE>
43
<PAGE>
ACQUISITION STAGE
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
Acquisition property. If the
Expenses minimum offering is
(continued) sold, acquisition
expenses are
estimated to be
$5,000. If the
maximum offering is
sold, acquisition
expenses are
estimated to be
$500,000.
</TABLE>
- --------------------------------------------------------------------------------
OPERATIONAL STAGE
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
Property We will pay our advisor a Property Management Fee Actual amounts to be
Management equal to 5% of the gross income from the paid depend upon the
Fee properties. This fee will be paid monthly. gross income of the
properties and,
therefore, cannot be
determined at the
present time.
- ---------------------------------------------------------------------------------------
Compensation We will pay our advisor for other property-level Actual amounts to be
for services including leasing fees, construction received depend upon
Services management fees, loan origination and servicing the services provided
fees, property tax reduction fees and risk and, therefore,
management fees. Such compensation will not exceed cannot be determined
the amount which would be paid to unaffiliated at the present time.
third parties 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
Expenses dependent upon
results of
. the cost to our advisor or its affiliates of operations.
goods and 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.
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
LIQUIDATION STAGE
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
- --------------------------------------------------------------------------------------
Property We will pay our advisor, or one of its affiliates, Actual amounts to be
Disposition a Property Disposition Fee out of net profits upon received depend upon
Fee the sale of each of the properties, in an amount the sale price of
equal to the lesser of 3% properties and,
of the property's contract sales price or 50% of a therefore, cannot be
customary Competitive Real Estate Commission given determined at the
the circumstances surrounding the sale. The amount present time.
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>
- --------------------------------------------------------------------------------
SUBORDINATED PAYMENTS
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
Asset We will pay our advisor an Asset Management Fee of Actual amounts are
Management up to 1.5% of the Average Invested Assets. The dependent upon the
Fee Asset Management Fee will be paid or accrue actual amounts that
quarterly, but will not be paid until our we invest in assets
shareholders have received distributions equal to and, therefore,
a cumulative, noncompounded rate of 8% per annum cannot be determined
on their investment in our company. If the fee is at this time.
not paid in any quarter, it will accrue and be
paid once the shareholders have received a
cumulative 8% return.
- ---------------------------------------------------------------------------------------
Incentive Our operating partnership will pay an incentive Actual amounts to be
Distribution distribution to our advisor equal to 15% of our received depend on
operation partnership's operating cash flow results of operations
after our company has received, and paid and the actual amounts
to our shareholders, the sum of: that we invest in
properties and,
. an 8% cumulative, non-compouned return on our therefore, cannot
Invested Capital, and be determined
at the present
. any remaining shortfall in the recovery of our time.
Invested Capital with respect to prior sales of
properties.
</TABLE>
45
<PAGE>
SUBORDINATED PAYMENTS
<TABLE>
<S> <C> <C>
Type of
Compensation Method of Compensation Estimated Amount
</TABLE>
<TABLE>
<S> <C> <C>
Incentive If there is a shortfall in that 8% return at the
Distribution end of any calendar year and our advisor
(continued) 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 Actual amounts to be
Distribution distribution upon the sale of a property equal to received depend upon
Upon 15% of the net proceeds from the sale after our the sale price of
Dispositions company has received, and paid to our properties and,
shareholders, the sum of therefore, cannot be
determined at the
present
. our Invested Capital that initially was time.
allocated to that property,
. 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 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>
- --------------------------------------------------------------------------------
46
<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.
Limitation 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, 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
. 25% of our net income for such year.
47
<PAGE>
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:
<TABLE>
<CAPTION>
Type of Property Existing
---------------- --------
<S> <C>
Office...................................................... $ 26,836,396
Retail...................................................... 103,321,805
------------
Total....................................................... $130,158,201
============
</TABLE>
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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 advisor in July of 1999 to acquire the Pueblo Shopping Center in Pueblo,
Colorado. Our advisor 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.
NNN Redevelopment Fund, LLC, a Virginia limited liability company, was
formed by our advisor in August of 1999 to acquire the Bank One Building in
Colorado Springs, Colorado. Our advisor 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.
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NNN Exchange Fund III, LLC, a Virginia limited liability company, was formed
by our advisor in September of 1999 to acquire the County Fair retail center in
Woodland, California. Our advisor 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.
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.
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CONFLICTS OF INTEREST
Our management will be subject to various conflicts of interest arising out
of our relationship with our advisor, the dealer manager and their affiliates.
All agreements and arrangements, including those relating to compensation,
between us and our advisor, the dealer manager and their affiliates are not the
result of arm's-length negotiations. The limitations on our advisor described
below have been adopted to control when we enter into transactions with our
advisor, the dealer manager and their affiliates. With respect to the conflicts
of interest described herein, our advisor, the dealer manager and their
affiliates have informed us that they will endeavor to balance their interests
with our interests.
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 Its 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.
We believe that the three factors, including the obligations of our advisor
and its affiliates to present to us any income-producing investment
opportunities that could be suitable for our company, will help to lessen the
competition or conflicts with respect to the acquisition of properties.
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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 Its 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. 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.
53
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Non-Arm's-Length Agreements; Conflicts; Competition
The agreements and arrangements, including those relating to compensation,
between our company, our advisor and its affiliates are not the result of
arm's-length negotiations, but are expected to approximate the terms of arm's-
length transactions. While we will not make loans to our advisor or its
affiliates, we may borrow money from our advisor or its affiliates for various
business purposes, including working capital requirements, but only 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
56
<PAGE>
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 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, the
dealer manager. Over the past 18 months, our advisor and the dealer manager
have jointly engaged in an analysis and remediation of their year 2000
exposure. Although neither our 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.
Our advisor and the dealer manager have determined that all of their systems
are year 2000 compliant. Our advisor and the 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, our
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, our advisor and the
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:
. 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;
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. 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 our advisor's independent certified public accountants, our
advisor was 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 our advisor and the dealer manager began in January of 1999 and was
concluded prior to the end of 1999. In this phase, our 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 our advisor's or the 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, our advisor and the dealer manager have
discovered that even complete system failure could be remedied or replaced
promptly. Our advisor and the dealer manager routinely "back up" and save in
hard copy important databases and system applications.
Throughout the course of the three phases of our advisor's and the 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 Percent Percent
Beneficially Owned as if if
of Commencement of Minimum Maximum
Name this 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;
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. sell all or substantially all of our assets other than in the ordinary
course of our business;
. cause a merger or reorganization of our company;
. 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.
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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 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 Instrumentss
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;
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. 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;
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.
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If you acquire or attempt to acquire shares of our common or preferred stock
in violation of the foregoing restrictions, or if you owned shares of common or
preferred stock that were transferred to a trust, then we will require you
immediately to give us written notice of such event and to provide us with such
other information as we may request in order to determine the effect, if any,
of such transfer on our status as a REIT.
If you own, directly or indirectly, more than 5%, or such lower percentages
as required under the federal income tax laws, of our outstanding shares of
stock, then you must, within 30 days after January 1 of each year, provide to
us a written statement or affidavit stating your name and address, the number
of shares of common and preferred stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
shareholder shall provide to us such additional information as we may request
in order to determine the effect, if any, of such ownership on our status as a
REIT and to ensure compliance with the ownership limit.
The ownership limit generally will not apply to the acquisition of shares of
common or preferred stock by an underwriter that participates in a public
offering of such shares. In addition, our board of directors, upon receipt of a
ruling from the Internal Revenue Service or an opinion of counsel and upon such
other conditions as our board of directors may direct, may exempt a person from
the ownership limit. 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.
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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.
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.
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Under our 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
. 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.
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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.
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.
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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
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;
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. 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
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
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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;
. the material facts of the transaction and interest are disclosed to or
known by our shareholders and the transaction is authorized approved or
ratified by the disinterested shareholders; or
. the transaction is established to be fair to our company.
SHARES AVAILABLE FOR FUTURE SALE
All of the shares of common stock offered and sold by this prospectus will
be freely tradable under the federal securities laws, except shares held by
affiliates of our company, such as officers and directors. We may issue up to
700,000 shares in connection with our dividend reinvestment program and up to
250,000 shares in connection with the exercise of the warrants issued to the
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.
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AGREEMENT OF LIMITED PARTNERSHIP
The following description of the Agreement of Limited Partnership is a
summary of the provisions that may be included in the Agreement of Limited
Partnership when a party other than our company and our advisor is admitted as
a partner of our operating partnership. Our operating partnership may issue
units of limited partnership interest in exchange for interests in properties,
thus creating additional limited partners in our operating partnership.
Management
Our operating partnership has been organized as a Virginia limited
partnership under the terms of the Agreement of Limited Partnership. As the
sole general partner of our operating partnership, we will have full, exclusive
and complete responsibility and discretion in the management and control of it.
When and if additional limited partners are admitted, they will have no
authority in their capacity as limited partners to transact business for, or
participate in the management activities or decisions of, our operating
partnership. However, any amendment to the Agreement of Limited Partnership
that would affect the limited partners' redemption rights described below would
require the consent of limited partners holding more than 50% of the units of
limited partnership interest held by such partners.
Transferability of Interests
It is anticipated that our company may not voluntarily withdraw from our
operating partnership or transfer or assign our interest in our operating
partnership unless the transaction in which such withdrawal or transfer occurs
results in the limited partners receiving property in an amount equal to the
amount they would have received had they exercised their redemption rights
immediately prior to such transaction, or unless the successor to our company
contributes substantially all of its assets to our operating partnership in
return for an interest in our operating partnership. 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 this
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 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
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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
. 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.
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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 our 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:
. 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.
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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 our operating partnership's last
property has been sold and our advisor previously has received distributions,
other than distributions that have previously been repaid, our advisor will be
required to repay to our 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;
(4)Fourth, 85% to our company and 15% to our advisor until our 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 our advisor; and
(5)Thereafter, any remaining operating income will be allocated 100% to
our company.
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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 our 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 our 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.
Gains from Terminating Capital Transactions. Gains from the sale of all or
substantially all of the assets of our 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 our 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.
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Notwithstanding the foregoing, to the extent that our advisor is required to
repay distributions to our 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 this
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 this 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 income 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
income tax in the following circumstances:
. we will pay federal income tax on taxable income, including net capital
gain, that we do not distribute to our shareholders during, or within a
specified time period after, the calendar year in which the income is
earned;
. 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;
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. 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 income for purposes of the 95% gross income test,
exceeds 5% of our gross income during the year, we would lose our REIT status.
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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
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
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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:
. 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
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. 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 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
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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 in come 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
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for six months or less as a long-term capital loss to the extent of capital
gain dividends and other distributions from us that such U.S. shareholder
treats as long-term capital gain. All or a portion of any loss a U.S.
shareholder realizes upon a taxable disposition of the common stock may be
disallowed if the U.S. shareholder purchases other shares of common stock
within 30 days before or after the disposition.
Capital Gains and Losses
A taxpayer generally must hold a capital asset for more than one year for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gain applicable to non-corporate
taxpayers is 20% for sales and exchanges of assets held for more than one year.
The maximum tax rate on long-term capital gain from the sale or exchange of
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 of the common stock
with debt, a portion of the income that they
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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
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exceeds both our current and accumulated earnings and profits and the adjusted
basis of its common stock, if the non-U.S. shareholder otherwise would be
subject to tax on gain from the sale or disposition of its common stock, as
described below. Because we generally cannot determine at the time we make a
distribution whether or not the distribution will exceed our current and
accumulated earnings and profits, we normally will withhold tax on the entire
amount of any distribution at the same rate as we would withhold on a dividend.
However, a non-U.S. shareholder may obtain a refund of amounts that we withhold
if it later determines that a distribution in fact exceeded our current and
accumulated earnings and profits.
We must withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. Consequently, although we intend to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that
we do not do so, we will withhold at a rate of 10% on any portion of a
distribution not subject to withholding at a rate of 30%.
For any year in which we qualify as a REIT, a non-U.S. shareholder will
incur tax on distributions that are attributable to gain from our sale or
exchange of "U.S. real property interests" under special provisions of the
federal income tax laws. The term "U.S. real property interests" includes
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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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
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widely held because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. Although we anticipate that upon completion of the sale of
the maximum offering, our common stock will be "widely held," our common stock
will not be widely held until we sell shares to 100 or more independent
investors.
The regulations list restrictions on transfer that ordinarily will not
prevent securities from being freely transferable. Such restrictions on
transfer include:
. any restriction on or prohibition against any transfer or assignment that
would result in the termination or reclassification of an entity for
federal or state tax purposes, or that otherwise would violate any
federal or state law or court order;
. any requirement that advance notice of a transfer or assignment be given
to the issuer;
. any administrative procedure that establishes an effective date, or an
event, such as completion of an offering, prior to which a transfer or
assignment will not be effective; and
. any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer.
We believe that the restrictions imposed under our articles of incorporation
on the ownership and transfer of our common stock will not result in the
failure of our common stock to be "freely transferable." We also are not aware
of any other facts or circumstances limiting the transferability of our common
stock that are not enumerated in the regulations as those not affecting free
transferability. However, no assurance can be given that the Department of
Labor or the Treasury Department will not reach a contrary conclusion.
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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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., the 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 our 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 our 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 our
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.
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.
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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 ten 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 ten 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 February 22, 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 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
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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 ten 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>
Selling Marketing and Net Proceeds
Dollar Volume Purchase 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."
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;
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. 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.
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.
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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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T REIT, INC.
(A Development Stage Enterprise)
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-2
Financial Statements
Balance Sheet as of 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>
<S> <C>
ASSETS
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>
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>
NNN
Telluride Truckee Yerington NNN NNN Town & NNN, Exchange
Barstow, River Office Shopping Fund VIII, Country, "A' Credit Fund III,
LLC WREIT, INC. Tower, LLC Center, LLC LLC LLC TIC, LLC LLC
---------- ----------- ------------ ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollar Amount
Offered.......... $1,620,000 $50,000,000 $5,550,000 $1,625,000 $8,000,000 $7,200,000 $4,500,000 $10,000,000
========== =========== ========== ========== ========== ========== ========== ===========
Dollar Amount
Raised........... 1,620,000 8,220,815 5,550,000 1,599,063 7,904,800 7,073,000 1,708,750 4,165,695
========== =========== ========== ========== ========== ========== ========== ===========
Percentage Amount
Raised........... 100.0% 16.4% 100.0% 98.4% 98.8% 98.2% 38.0% 41.7%
========== =========== ========== ========== ========== ========== ========== ===========
Less Offering
Expenses:
Selling
Commissions &
Discounts to
Affiliates...... 10.0% 8.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Organization &
Offering
Expenses(1)..... 2.5% 4.5% 3.0% 4.9% 3.0% 3.0% 3.5% 3.5%
Due Diligence
Allowance(2).... 1.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Reserves......... 3.6% 1.5% 3.7% 7.8% 8.9% 2.0% 6.1% 10.5%
---------- ----------- ---------- ---------- ---------- ---------- ---------- -----------
Percent
Available for
Investment...... 82.4% 85.5% 82.8% 76.8% 77.6% 84.5% 79.9% 75.5%
Acquisition Cost:
Cash Down
Payment......... 75.6% 83.0% 73.7% 70.1% 70.7% 74.3% 73.8% 69.0%
Loan Fees....... 5.3% 2.5% 5.1% 2.0% 2.4% 5.7% 2.1% 2.0%
Acquisition Fees
Paid to
Affiliates...... 1.5% 0.0% 4.0% 4.5% 4.5% 4.5% 4.0% 4.5%
---------- ----------- ---------- ---------- ---------- ---------- ---------- -----------
Total Acquisition
Cost............. 82.4% 85.5% 82.8% 76.8% 76.6% 84.5% 79.9% 75.5%
========== =========== ========== ========== ========== ========== ========== ===========
Percent
Leveraged........ 71% 75% 75% 75% 75% 75% 75% 77%
Date Offering
Began............ 1-Jun-98 1-Jul-98 21-Aug-98 15-Dec-98 22-Feb-99 10-May-99 10-Aug-99 15-Sep-99
Date Offering
Ended............ 16-Dec-98 Open 15-Jul-99 31-Aug-99 Open Open Open Open
Length of
Offering (days).. 198 Open 328 260 Open Open Open Open
Days to Invest
90% of Amount
Available for
Investment
(Measured from
Beginning
of Offering)..... 46 N/A 102 83 180 43 N/A N/A
Number of
Investors........ 14 215 67 11 114 61 13 16
<CAPTION>
NNN
Redevelopment
Fund, LLC
-------------
<S> <C>
Dollar Amount
Offered.......... $8,000,000
=============
Dollar Amount
Raised........... 3,522,750
=============
Percentage Amount
Raised........... 44.0%
=============
Less Offering
Expenses:
Selling
Commissions &
Discounts to
Affiliates...... 10.0%
Organization &
Offering
Expenses(1)..... 3.5%
Due Diligence
Allowance(2).... 0.5%
Reserves......... 9.5%
-------------
Percent
Available for
Investment...... 76.5%
Acquisition Cost:
Cash Down
Payment......... 69.5%
Loan Fees....... 2.5%
Acquisition Fees
Paid to
Affiliates...... 4.5%
-------------
Total Acquisition
Cost............. 76.5%
=============
Percent
Leveraged........ 69%
Date Offering
Began............ 27-Aug-99
Date Offering
Ended............ Open
Length of
Offering (days).. Open
Days to Invest
90% of Amount
Available for
Investment
(Measured from
Beginning
of Offering)..... N/A
Number of
Investors........ 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>
NNN NNN
Telluride Truckee Yerington NNN Town & NNN, Exchange NNN
Barstow, WREIT, River Office Shopping Fund VIII, Country, "A' Credit Fund III, Redevelopment
LLC INC. Tower, LLC Center, LLC LLC LLC TIC, LLC LLC Fund, LLC
---------- ---------- ------------ ----------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Date Offering
Commenced......... 1-Jun-98 1-Jul-98 21-Aug-98 15-Dec-98 22-Feb-99 10-May-99 10-Aug-99 15-Sep-99 27-Aug-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 $7,073,000 $1,708,750 $4,165,695 $3,522,750
========== ========== ========== ========== ========== ========== ========== ========== ==========
Amounts Paid to
Sponsor from
Proceeds of
Offering:
Selling
Commissions to
Selling Group
Members $ 162,000 $ 657,665 $ 529,948 $ 159,906 $ 790,480 $ 707,300 $ 170,875 $ 416,570 $ 352,275
Organization &
Marketing
Expenses........ 64,000 369,937 166,500 78,354 237,144 212,190 59,806 145,799 123,296
Due Diligence
Allowance....... -- 123,312 30,000 7,995 39,524 35,365 8,544 20,828 17,614
Acquisition
Fees............ 25,000 -- 220,000 75,000 355,716 318,285 68,350 187,456 158,524
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals.......... $ 251,000 $1,150,914 $ 946,448 $ 321,256 $1,422,864 $1,273,140 307,575 770,654 651,709
========== ========== ========== ========== ========== ========== ========== ========== ==========
Dollar Amount of
Cash Generated
from Operations
Before Deducting
Payments to
Sponsor........... $ 343,842 $1,079,057 $1,010,455 $ 138,330 $ 650,348 583,310 91,723 75,658 103,693
========== ========== ========== ========== ========== ========== ========== ========== ==========
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 N/A N/A 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 $ 86,309 7,885 8,701 7,164
Asset Management
Fees............ 41,741 119,017 80,500 6,264 155,585 80,000 11,343 10,983 14,234
Leasing
Commissions..... -- 70,481 45,922 -- 18,538
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals.......... $ 81,677 $ 382,672 $ 255,626 $ 23,863 $ 230,351 $ 184,847 $ 19,228 $ 19,684 $ 21,398
========== ========== ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
Total All
Programs
-----------
<S> <C>
Date Offering
Commenced.........
Dollar Amount
Raised to Sponsor
from Proceeds of
Offering.......... $42,364,873
===========
Amounts Paid to
Sponsor from
Proceeds of
Offering:
Selling
Commissions to
Selling Group
Members $ 4,047,019
Organization &
Marketing
Expenses........ 1,506,027
Due Diligence
Allowance....... 288,183
Acquisition
Fees............ 1,408,331
-----------
Totals.......... 7,249,559
===========
Dollar Amount of
Cash Generated
from Operations
Before Deducting
Payments to
Sponsor........... 4,083,011
===========
Amounts Paid to
Sponsor from
Operations--Year
1998
Property
Management
Fees............ $ --
Asset Management
Fees............ --
Leasing
Commissions..... --
-----------
Totals.......... $ --
===========
Amounts Paid to
Sponsor from
Operations--Year
Ending December
31, 1999
Property
Management
Fees............ 571,333
Asset Management
Fees............ 519,667
Leasing
Commissions..... 134,941
-----------
Totals.......... $ 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
Telluride Truckee Shopping NNN Fund NNN Town & NNN "A' Exchange NNN
Barstow, WREIT, River Office Center, VIII, Country, Credit TIC, Fund Redevelopment
LLC INC. Tower, LLC LLC LLC LLC LLC III, LLC Fund, LLC
--------- ---------- ------------ --------- ---------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenues... $721,168 $4,726,712 $2,598,280 $393,367 $1,821,793 $1,727,435 157,783 119,731 143,284
Profit on Sale of
Properties....... --
Less: Operating
Expenses......... 366,116 1,904,986 999,301 90,371 896,924 404,167 51,239 14,938 46,345
Interest
Expense......... 244,781 2,305,776 924,827 188,529 504,872 924,805 34,049 48,819 14,644
Depreciation.... 97,330 707,842 366,688 67,598 227,102 284,211 17,127 21,056
-------- ---------- ---------- -------- ---------- ---------- -------- -------- --------
Net Income--GAAP
Basis............ $ 12,941 $ (191,892) $ 307,464 $ 46,869 $ 192,895 $ 114,252 $ 55,368 $ 55,974 $ 61,239
======== ========== ========== ======== ========== ========== ======== ======== ========
Taxable Income
From:
Operations...... 12,941 (191,892) 307,464 46,869 192,895 114,252 55,368 55,974 61,239
Gain on Sale.... -- -- --
Cash Generated
From:............
Operations...... 110,271 515,950 674,152 114,467 419,997 398,463 72,495 55,974 82,295
Sales........... -- -- --
Refinancing..... -- 526,326 --
-------- ---------- ---------- -------- ---------- ---------- -------- -------- --------
Cash Generated
From Operations,
Sales &
Refinancing...... $110,271 $1,042,276 $ 674,152 $114,467 $ 419,997 $ 398,463 $ 72,495 $ 55,974 $ 82,295
======== ========== ========== ======== ========== ========== ======== ======== ========
Less: Cash
Distributions to
Investors From:
Operating Cash
Flow............ $172,748 $ 543,543 $ 420,271 $106,326 $ 210,592 $ 173,253 8,927 -- 286
Sales &
Refinancing..... --
Other........... --
-------- ---------- ---------- -------- ---------- ---------- -------- -------- --------
Cash Generated
(Deficiency)
after Cash
Distributions.... (62,477) 498,733 253,881 8,141 209,406 225,210 63,568 55,974 82,009
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 $ 63,568 $ 55,974 $ 82,009
======== ========== ========== ======== ========== ========== ======== ======== ========
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 $ 32.40 $ 13.44 $ 17.38
-- 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 $ 5.22 $ -- $ 0.08
<CAPTION>
Total
All
Programs
-----------
<S> <C>
Gross Revenues... $12,409,553
Profit on Sale of
Properties....... --
Less: Operating
Expenses......... 4,774,387
Interest
Expense......... 5,191,101
Depreciation.... 1,788,954
-----------
Net Income--GAAP
Basis............ $ 655,110
===========
Taxable Income
From:
Operations...... 655,110
Gain on Sale.... --
Cash Generated
From:............ --
Operations...... 2,444,064
Sales........... --
Refinancing..... 526,326
-----------
Cash Generated
From Operations,
Sales &
Refinancing...... $ 2,970,390
===========
Less: Cash
Distributions to
Investors From:
Operating Cash
Flow............ $ 1,635,946
Sales &
Refinancing..... --
Other........... --
-----------
Cash Generated
(Deficiency)
after Cash
Distributions.... 1,334,445
Less: Special
Items (not
including Sales &
Refinancing)..... --
-----------
Cash Generated
(Deficiency)
after Cash
Distributions and
Special Items.... $ 1,334,445
===========
Tax and
Distribution Data
Per $1,000
Invested......... --
Federal Income
Tax Results:..... --
Ordinary Income
(Loss)
-- from
operations...... $ 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... $ 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
February 22, 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 February 22, 2000 (the "Prospectus").
I agree that if this subscription is accepted, it will be held, together
with the accompanying payment, and disbursed on the terms described in the
Prospectus. I agree that subscriptions may be rejected in whole or in part by
the Company in its sole and absolute discretion. In addition, I understand and
agree that subscriptions are irrevocable, and I will not have the right to
cancel or rescind my subscription, except as required under applicable law.
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 the date that I receive
a copy of the final prospectus. Moreover, 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
February 22, 2000.
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
<TABLE>
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<C> <S>
Investment Please follow these instructions carefully. Failure to do so
Instructions 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, and North Carolina, which requires a
$5,000 (500 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 tenants
Address 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 address
and Address is different from the registration name and address provided
in Section 4. If the Shares are registered in the name of a
trust, enter the name, address, telephone number, social
security number, birth date and occupation of the beneficial
owner of the trust.
- -------------------------------------------------------------------------------
5. Subscriber Please separately initial each 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 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.
</TABLE>
B-4
<PAGE>
<TABLE>
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<C> <S>
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.
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</TABLE>
The Subscription Agreement Signature Page, which has been delivered with
this Prospectus, together with a check for the full purchase price, should be
delivered or mailed to your Broker-Dealer. Only original, completed copies of
Subscription Agreements can be accepted. Photocopied or otherwise duplicated
Subscription Agreements cannot be accepted by the Company.
IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THIS
SUBSCRIPTION AGREEMENT SIGNATURE PAGE,
PLEASE CALL 1-877-888-7348
B-5
<PAGE>
T REIT, INC.
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
1. INVESTMENT ______________________________________________________________
Make Investment Check Payable to:
PriVest Bank as Escrow Agent for T
_____________ _____________ REIT, Inc.
# of Shares Total $ Invested
(#Shares x $10.00 = $ Invested)
Minimum purchase 100 Shares or [_]Initial Investment (Minimum
$1,000 $1,000) (except in Minnesota,
(250 Shares or $2,500 in which requires a minimum
Minnesota) investment of $2,500, and North
Carolina, which requires a
minimum investment of $5,000)
[_]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 [_]Keogh(10)
Survivorship (02) [_]Qualified Pension Plan(11)
[_]Community Property (03) [_]Qualified Profit Sharing
[_]Tenants in Common (04) Plan(12)
[_]Custodian: A Custodian for [_]Other Trust _______ For the
under the Uniform Gift Benefit of ________________
to Minors Act or the Uniform [_]Partnership(15)
Transfers to Minors Act of the State
of ______________________________(08)
[_]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 Telephone No. ( ) __________ Business Telephone No. ( ) __________
Birth Date Occupation _____________________________________________________
Email Address
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
UNDER FEDERAL OR STATE SECURITIES LAWS.
<TABLE>
<S> <C> <C>
_________________________________ _________________________________ ___________________
Signature of Joint Owner, if
Signature of Investor or Trustee applicable Date
</TABLE>
(MUST BE SIGNED BY TRUSTEE(S) IF IRA, KEOGH OR QUALIFIED PLAN).
B-6
<PAGE>
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 Telephone No. ( ) _________ Business 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:
<TABLE>
<C> <S> <C> <C>
(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.
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
UNDER FEDERAL OR STATE SECURITIES LAWS.
<TABLE>
<S> <C> <C>
_________________________________ _________________________________ ___________________
Signature of Joint Owner, if
Signature of Investor applicable Date
</TABLE>
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<PAGE>
7. DISTRIBUTIONS __________________________________________________________
7(a). Check the following box to participate in the Dividend Reinvestment
Program. [_]
7(b). Complete following section only to direct distributions to a party
other than registered owner:
Name _______________________________________________________________________
Account Number _____________________________________________________________
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
Representative Name ____________________ Telephone No. _____________________
Fax No. __________________________ Email Address ___________________________
Reg. Rep. Street
Address or P.O. Box ________________________________________________________
City _________________ State _________________ Zip Code _________________
<TABLE>
<S> <C>
________________________________________ ________________________________________
Broker-Dealer Signature, if applicable Registered Representative Signature
</TABLE>
Please mail completed Subscription Agreement (with all signatures) and
check(s) made payable to
Privest Bank, as Escrow Agent for:
T REIT, Inc.
1-877-888-7348
1551 N. Tustin Avenue, Suite 650
Santa Ana, California 92705
B-8
<PAGE>
EXHIBIT C
T REIT, INC.
DIVIDEND REINVESTMENT PROGRAM
The Dividend Reinvestment Program (the "DRIP") for T REIT, Inc., a Virginia
corporation (the "Company"), offers to holders of 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.
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.
C-1
<PAGE>
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.
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.
C-2
<PAGE>
You may elect dividend reinvestment with respect to any whole number of
shares registered in your name on the records of the Company. Specify on the
enrollment form the number of shares for which you want dividends reinvested.
Dividends on all shares purchased pursuant to the DRIP will be automatically
reinvested. The number of shares purchased for you as a participant in the DRIP
will depend on the amount of your dividends on these shares (less any required
withholding tax) and the 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.
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
C-3
<PAGE>
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.
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.
C-4
<PAGE>
Interpretation and Regulation of the DRIP
The Company reserves the right, without notice to participants, to interpret
and regulate the DRIP as it deems necessary or desirable in connection with its
operation. Any such interpretation and regulation shall be conclusive.
Federal Income Tax Consequences of Participation in the DRIP
The following discussion summarizes the principal federal income tax
consequences, under current law, of participation in the DRIP. It does not
address all potentially relevant federal income tax matters, including
consequences peculiar to persons subject to special provisions of federal
income tax law (such as tax-exempt organizations, insurance companies,
financial institutions, broker-dealers and foreign persons). The discussion is
based on various rulings of the Internal Revenue Service regarding several
types of dividend reinvestment programs. No ruling, however, has been issued or
requested regarding the DRIP. The following discussion is for your general
information only, and you must consult your own tax advisor to determine the
particular tax consequences (including the effects of any changes in law) that
may result from your participation in the DRIP and the disposition of any
shares purchased pursuant to the DRIP.
Reinvested Dividends. Shareholders subject to federal income taxation who
elect to participate in the DRIP will incur a tax liability for distributions
allocated to them even though they have elected not to receive their dividends
in cash but rather to have their dividends reinvested pursuant to the DRIP.
Specifically, participants will be treated as if they received the distribution
from the Company and then applied such distribution to purchase the shares in
the DRIP. To the extent that a shareholder purchases shares through the DRIP at
a discount to fair market value, the shareholders will be treated for tax
purposes as receiving an additional distribution equal to the amount of such
discount. A shareholder designating a distribution for reinvestment will be
taxed on the amount of such distribution as ordinary income to the extent such
distribution is from current or accumulated earnings and profits, unless the
Company has designated all or a portion of the distribution as capital gain
dividend. In such case, such designated portion of the distribution will be
taxed as a capital gain. The amount treated as a distribution to you will
constitute a dividend for federal income tax purposes to the same extent as a
cash distribution.
Receipt of Share Certificates and Cash. You will not realize any income if
you receive certificates for whole shares credited to your account under the
DRIP. Any cash received for a fractional share held in your account will be
treated as an amount realized on the sale of the fractional share. You
therefore will recognize gain or loss equal to any difference between the
amount of cash received for a fractional share and your tax basis in the
fractional share.
C-5
<PAGE>
ENROLLMENT FORM
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-6
<PAGE>
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
February 22, 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 February 22, 2000 (the "Prospectus").
I agree that if this subscription is accepted, it will be held, together with
the accompanying payment, and disbursed on the terms described in the
Prospectus. I agree that subscriptions may be rejected in whole or in part by
the Company in its sole and absolute discretion. In addition, I understand and
agree that subscriptions are irrevocable, and I will not have the right to
cancel or rescind my subscription, except as required under applicable law.
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 the date that I receive a
copy of the final prospectus. Moreover, 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.
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
February 22, 2000.
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.
1
<PAGE>
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.
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.
2
<PAGE>
INSTRUCTIONS TO SUBSCRIPTION AGREEMENT SIGNATURE PAGE
TO T REIT, INC. SUBSCRIPTION AGREEMENT
<TABLE>
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<C> <S>
Investment Please follow these instructions carefully. Failure to do so
Instructions 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, and North Carolina, which requires a
$5,000 (500 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 tenants
Address 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 address
and Address is different from the registration name and address provided
in Section 4. If the Shares are registered in the name of a
trust, enter the name, address, telephone number, social
security number, birth date and occupation of the beneficial
owner of the trust.
- -------------------------------------------------------------------------------
5. Subscriber Please separately initial each 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 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.
</TABLE>
3
<PAGE>
<TABLE>
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<C> <S>
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.
- -------------------------------------------------------------------------------
</TABLE>
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
4
<PAGE>
T REIT, INC.
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
1. INVESTMENT ______________________________________________________________
Make Investment Check
Payable to:
_________ _________ PriVest Bank as Escrow
# of Shares Agent for T REIT, Inc.
Total $ Invested
(#Shares x $10.00 = $
Invested) [_Initial]Investment
Minimum purchase 100 (Minimum $1,000)
Shares or $1,000 (except in Minnesota,
(250 Shares or $2,500 which requires a
in Minnesota) minimum investment
of $2,500, and North
Carolina, which
requires a minimum
investment of $5,000)
[_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 [_Keogh(10)]
of Survivorship (02) [_Qualified]Pension
[_Community]Property (03) Plan(11)
[_Tenants]in Common (04) [_Qualified]Profit
Sharing Plan(12)
[_Custodian:]A Custodian for [_Other]Trust ____ For
under the the Benefit of _____
Uniform Gift to Minors Act [_Partnership(15)]
or the Uniform Transfers
to Minors Act of the State
of ____________________(08)
[_]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 Telephone No. ( ) __________ Business Telephone No. ( ) ___________
Birth Date Occupation ______________________________________________________
Email Address
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
UNDER FEDERAL OR STATE SECURITIES LAWS.
<TABLE>
<S> <C> <C>
_________________________________ _________________________________ ___________________
Signature of Joint Owner, if
Signature of Investor or Trustee applicable Date
</TABLE>
(MUST BE SIGNED BY TRUSTEE(S) IF IRA, KEOGH OR QUALIFIED PLAN).
5
<PAGE>
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 Telephone No. ( ) _________ Business 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:
<TABLE>
<C> <S> <C> <C>
(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.
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
UNDER FEDERAL OR STATE SECURITIES LAWS.
<TABLE>
<S> <C> <C>
_________________________________ _________________________________ ___________________
Signature of Joint Owner, if
Signature of Investor applicable Date
</TABLE>
6
<PAGE>
7. DISTRIBUTIONS ___________________________________________________________
7(a). Check the following box to participate in the Dividend Reinvestment
Program. [_]
7(b). Complete following section only to direct distributions to a party
other than registered owner:
Name _________________________________________________________________________
Account Number _______________________________________________________________
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
Representative Name _____________________ Telephone No. ______________________
Fax No. ___________________________ Email Address: ___________________________
Reg. Rep. Street
Address or P.O. Box __________________________________________________________
City ___________ State ___________ Zip Code ___________
<TABLE>
<S> <C>
________________________________________ ________________________________________
Broker-Dealer Signature, if applicable Registered Representative Signature
</TABLE>
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
7
<PAGE>
ENROLLMENT FORM
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.
<PAGE>
[LOGO]
1-877-88T-REIT
(1-877-888-7348)
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.
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.
