<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-20991
SUBJECT TO COMPLETION, DATED FEBRUARY 24, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 14, 1997)
1,750,000 SHARES
BRANDYWINE REALTY TRUST
COMMON SHARES OF BENEFICIAL INTEREST
------------------
Brandywine Realty Trust (the "Company") is a self-administered,
self-managed and fully integrated real estate investment trust ("REIT") that
currently owns a portfolio of 42 properties (39 office buildings and three
industrial facilities) (collectively, the "Properties") that contain an
aggregate of approximately 2.3 million net rentable square feet. Substantially
all of the Properties are located in the Suburban Philadelphia Office and
Industrial Market (as defined in the accompanying Prospectus). In addition, the
Company has entered into agreements to purchase eight additional office
buildings and expects to enter into an agreement to purchase two additional
industrial facilities (the "Acquisition Properties"). The Acquisition Properties
contain an aggregate of approximately 400,000 net rentable square feet and are
located in the Suburban Philadelphia Office and Industrial Market. The Company
also owns an interest in and operates a commercial real estate management
services company that as of January 31, 1997 managed approximately 2.9 million
net rentable square feet (including 41 of the Properties).
All of the common shares of beneficial interest, par value $.01 per share,
of the Company (the "Common Shares") offered hereby (the "Offering") are being
sold by the Company. The Common Shares are traded on the American Stock Exchange
(the "AMEX") under the symbol "BDN." On February 21, 1997, the last reported
sale price for the Common Shares was $21.50. The Company pays regular quarterly
distributions on its Common Shares and currently intends to pay quarterly
distributions at the rate of $0.35 per share. See "Price Range of Common Shares
and Distribution History." The Company qualified as a REIT for federal income
tax purposes commencing with its taxable year ended December 31, 1986. To assist
the Company in complying with certain qualification requirements applicable to
REITs, the Company's Declaration of Trust provides that no shareholder or group
of affiliated shareholders may actually or constructively own more than 9.8% in
value of the outstanding Common Shares, subject to certain exceptions. See
"Description of Shares of Beneficial Interest -- Restrictions on Transfer" in
the accompanying Prospectus.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNTS AND
COMMISSIONS(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
===========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 262,500 additional Common Shares solely to cover over-allotments, if
any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
------------------
The Common Shares are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to certain conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and reject orders in whole or in part. It
is expected that certificates for the Common Shares offered hereby will be
available for delivery on or about , 1997, at the offices of Smith
Barney Inc., 333 West 34th Street, New York, NY 10001.
------------------
SMITH BARNEY INC. LEGG MASON WOOD WALKER
INCORPORATED
, 1997
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS WILL BE DELIVERED TO PURCHASERS OF THESE SECURITIES. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 2
CERTAIN MATTERS DISCUSSED UNDER THE CAPTION "THE COMPANY," AND ELSEWHERE IN
THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS, AND THE INFORMATION
INCORPORATED BY REFERENCE HEREIN, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS FOR
PURPOSES OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND AS SUCH MAY INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE> 3
The following information contained in this Prospectus Supplement is
qualified in its entirety by the more detailed information appearing elsewhere
in the accompanying Prospectus or incorporated therein by reference. Unless
otherwise indicated, the information contained in this Prospectus Supplement
assumes that the Underwriters' overallotment option is not exercised. Unless the
context otherwise requires, all references to the "Company" shall mean
Brandywine Realty Trust and its subsidiaries and affiliated entities, including
Brandywine Operating Partnership, L.P. (the "Operating Partnership").
THE COMPANY
The Company is a self-administered, self-managed and fully integrated real
estate investment trust ("REIT") engaged in the ownership, management, leasing,
acquisition and development of primarily suburban office properties. The
Company's portfolio consists of 42 Properties (39 office buildings and three
industrial facilities) that contain an aggregate of approximately 2.3 million
net rentable square feet. Substantially all of the Properties are located in the
Suburban Philadelphia Office and Industrial Market. The Company also owns an
interest in and operates a commercial real estate management services company
(the "Management Company") that as of January 31, 1997 managed approximately 2.9
million net rentable square feet (including 41 of the Properties). As of January
31, 1997, the Properties were approximately 93.6% leased to 261 tenants. Since
the Company's December 2, 1996 public offering of Common Shares (the "1996
Public Offering"), the Company has acquired five office properties containing
approximately 290,000 net rentable square feet. Assuming completion of the
purchase of the Acquisition Properties, which contain approximately 400,000 net
rentable square feet, the Company will have increased its portfolio from
approximately 2.0 million net rentable square feet at the time of the 1996
Public Offering to approximately 2.7 million net rentable square feet, an
increase of approximately 35.0%.
The Company's portfolio consists primarily of suburban office and
industrial buildings (39 of which are Class A properties). The Company considers
Class A suburban office and industrial properties to be those that have
desirable locations, are well maintained and professionally managed and have the
potential of achieving rental and occupancy rates that are typically at or above
those prevailing in their respective markets. The Company expects to focus its
office and industrial building ownership in submarkets located within the
Suburban Philadelphia Office and Industrial Market where it believes it can
accumulate a critical mass of properties in order to enhance operating
efficiencies and, in turn, cash available for distribution. The Company's
primary business objective is to realize and maximize growth in cash available
for distribution and to increase shareholder value by:
- optimizing cash flow from properties in its portfolio through continued
active property management and prudent operating strategies;
- acquiring suburban office and industrial properties and/or portfolios of
such properties at prices that are below replacement cost and at yields
that exceed the Company's cost of capital;
- redeveloping and improving acquired properties and, to a lesser extent,
developing build-to-suit properties as opportunities arise;
- generating third party fee-related revenues; and
- operating within a conservative capital structure with financing policies
that allow for continued growth.
The Company is led by an experienced management team, the senior members of
which include Anthony A. Nichols, Sr., Chairman of the Board, and Gerard H.
Sweeney, President and Chief Executive Officer. The Company's four senior
executives have an average of approximately 22 years of real estate experience.
In aggregate, the Company's management team has been responsible for the
management of approximately 7.5 million net rentable square feet and the
development of approximately 3.2 million net rentable square feet of office and
industrial properties primarily within the Suburban Philadelphia Office and
Industrial Market.
S-3
<PAGE> 4
RECENT DEVELOPMENTS
1996 OPERATING RESULTS
On February 24, 1997, the Company announced its results of operations for
the quarter and year ended December 31, 1996. The following sets forth the
announced results for the fiscal quarters and years ended December 31, 1995 and
December 31, 1996.
BRANDYWINE REALTY TRUST
RESULTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE AND PROPERTY-RELATED DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------
1995 1996 1995 1996
-------- ---------- -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Base rents........................................................... $ 909 $ 4,399 $ 3,517 $ 8,462
Tenant Reimbursements................................................ 37 905 66 1,372
Other................................................................ 29 127 83 196
---------- ---------- ---------- ----------
Total revenue...................................................... 975 5,431 3,666 10,030
---------- ---------- ---------- ----------
Expenses --
Interest............................................................. 221 1,409 793 2,751
Depreciation and amortization........................................ 318 1,663 1,402 2,836
Property expenses.................................................... 420 1,842 1,608 3,709
General and administrative........................................... 243 386 682 825
---------- ---------- ---------- ----------
Total expenses..................................................... 1,202 5,300 4,485 10,121
---------- ---------- ---------- ----------
Income (loss) before minority interest and equity in income of
management company..................................................... (227) 131 (819) (91)
Minority interest in (income) loss..................................... (5) (66) (5) (26)
Equity in income (loss) of management company.......................... -- (99) -- (45)
---------- ---------- ---------- ----------
Income (loss).......................................................... (232) (34) (824) (162)
Income allocated to Preferred Shares................................... -- 401 -- 401
---------- ---------- ---------- ----------
Income (loss) allocated to Common Shares............................... $ (232) $ (435) $ (824) $ (563)
========== ========== ========== ==========
Earnings per share:
Income (loss) allocated to Common Shares............................. $ (.37) $ (.14) $ (1.32) $ (.43)
========== ========== ========== ==========
Weighted average number of shares outstanding.......................... 624,872 3,159,386 624,791 1,302,648
========== ========== ========== ==========
OTHER DATA:
Funds from Operations(a)............................................... $ 84 $ 1,265 $ 537 $ 2,103
Weighted average shares and share equivalents outstanding(b)........... 624,872 3,979,873 624,791 1,509,456
Total cash distributions declared...................................... $ 0.15 $ 0.25 $ 1.65 $ 0.82
PROPERTY DATA:
Number of properties owned at period end............................... 4 37 4 37
Aggregate net rentable square feet owned at period end................. 255 1,994 255 1,994
</TABLE>
- ---------------
(a) Management generally considers Funds from Operations to be a useful measure
of the operating performance of an equity REIT because, together with net
income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions and other capital expenditures. Funds from
Operations does not represent net income or cash flows from operations as
defined by generally accepted accounting principles ("GAAP") and does not
necessarily indicate that cash flows will be sufficient to fund cash needs.
It should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. Funds from Operations does not measure whether cash flow is
sufficient to fund all of the Company's cash needs, including principal
amortization, capital improvements and distributions to shareholders. Funds
from Operations also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, Funds from
Operations as disclosed by other REITs may not be comparable to the
Company's calculation of Funds from Operations. The Company adopted the
NAREIT definition of Funds from Operations in 1996 and has used it for all
periods presented. Funds from Operations is calculated as net income (loss)
adjusted for depreciation expense attributable to real property,
amortization expense attributable to capitalized leasing costs, tenant
allowances and improvements, gains on sales of real estate investments and
extraordinary and nonrecurring items.
(b) Includes the weighted average effect of 1,606,060 Common Shares issuable
upon the conversion of preferred shares of beneficial interest. Excludes
399,567 Common Shares issuable upon the conversion of 399,567 units of
limited partnership in the Operating Partnership and 762,104 Common Shares
reserved for issuance upon the exercise of outstanding warrants and options.
S-4
<PAGE> 5
RECENT ACQUISITIONS
On January 24, 1997, the Company acquired a portfolio of five office
buildings located within Burlington County, New Jersey containing an aggregate
of approximately 290,000 net rentable square feet for an aggregate purchase
price of approximately $31.3 million (the "CIB Acquisition"). As of the date of
the CIB Acquisition, the occupancy rate of these Properties was approximately
96.6%. Major tenants at these Properties include Conrail, Inc. and Computer
Sciences Corporation.
PENDING ACQUISITIONS
The Company has entered into agreements to acquire eight of the Acquisition
Properties and expects to enter into a contract to acquire two additional
Acquisition Properties, which contain an aggregate of approximately 400,000 net
rentable square feet, for an aggregate purchase price of approximately $28.6
million. If the purchase of the Acquisition Properties is consummated, the
Company's portfolio will consist of 52 properties (47 of which are office
properties and five of which are industrial properties) containing an aggregate
of approximately 2.7 million net rentable square feet. Set forth below are brief
descriptions of the Acquisition Properties.
- - The Company has entered into an agreement of sale to purchase seven
office properties containing approximately 235,209 net rentable square
feet located in the Main Street development in Voorhees, New Jersey for
approximately $21.5 million. As of December 31, 1996, the occupancy rate
of these properties was approximately 96.0%. Major tenants at these
properties include Credit Lenders, AMC Theatres and Cooper Health Care
Services.
- - The Company has entered into an agreement of sale to purchase 1336
Enterprise Drive, an approximately 38,470 net rentable square foot,
three-story office building located in the Goshen Corporate Park in East
Goshen Township, Chester County, Pennsylvania for approximately $3.6
million. As of December 31, 1996, the building was 100% leased to CFM
Technologies, Inc.
- - The Company expects to enter into an agreement of sale to purchase 201
and 221 King Manor Drive, two industrial facilities containing an
aggregate of approximately 124,960 net rentable square feet located in
the King Manor Industrial Campus in King of Prussia, Montgomery County,
Pennsylvania for approximately $3.5 million. Major tenants at these
properties include Reber-Friel Company, General Insulation Company and
Central Sprinkler Corporation.
The consummation of the purchase of the Acquisition Properties is subject
to the satisfaction of a number of conditions that, unless satisfied, could
result in one or more of the Acquisition Properties not being acquired. Should a
material number of these acquisitions not occur, the Company's cash available
for distribution could be adversely affected.
OTHER POTENTIAL ACQUISITIONS
Although no definitive agreements have been entered into, the Company is in
various stages of negotiation with respect to the acquisition of numerous
interests in additional office buildings and industrial facilities. Although the
Company has entered into non-binding letters of intent with respect to certain
of these properties, no assurance can be given that the Company will be
successful in acquiring any or all of such properties.
S-5
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Shares Offered Hereby............... 1,750,000 shares
Common Shares to be Outstanding After the
Offering................................. 10,768,867 shares (1)
Use of Proceeds............................ To fund the purchase of the Acquisition
Properties and to repay borrowings under the
Company's revolving line of credit.
AMEX Symbol................................ BDN
</TABLE>
- ---------------
(1) Includes: (i) 399,567 Common Shares reserved for issuance upon the
conversion of units of limited partnership interest in the Operating
Partnership into Common Shares and (ii) 1,606,060 Common Shares reserved for
issuance upon the conversion of outstanding preferred shares of beneficial
interest into Common Shares. Excludes: (i) 582,105 Common Shares reserved
for issuance, at an exercise price of $19.50 per share, upon the exercise of
warrants; (ii) 133,333 Common Shares reserved for issuance, at an exercise
price of $25.50 per share, upon the exercise of warrants; and (iii) 46,666
Common Shares reserved for issuance, at exercise prices of $14.31 and $6.21
per share, upon the exercise of options in respect of 33,333 and 13,333
Common Shares, respectively.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after estimated
underwriting discounts and commissions and estimated expenses of the Offering,
are expected to be approximately $35.3 million (approximately $40.6 million if
the Underwriters' over-allotment option is exercised in full). The Company will
contribute all of the net proceeds to the Operating Partnership, which will use
such contribution to fund the purchase of the Acquisition Properties and to
repay approximately $7.0 million under its revolving credit facility (which
amount had been used to finance a portion of the CIB Acquisition). If the
Underwriters' over-allotment option is exercised in full, the Company expects to
use the additional net proceeds to make additional acquisitions of office or
industrial properties, to repay certain indebtedness or for working capital
purposes. Pending the application of the net proceeds from the Offering, the
Company will invest such portion of the net proceeds in interest-bearing
accounts and short-term, interest-bearing securities, which are consistent with
the Company's intention to qualify for taxation as a REIT.
Borrowings under the revolving credit facility bear interest at a variable
rate equal to LIBOR plus 175 basis points (7.13% per annum as of February 21,
1997). The revolving credit facility expires in December 1998.
Following the consummation of the Offering, and assuming the purchase of
the Acquisition Properties, the Company expects to have remaining outstanding
indebtedness of approximately $48.4 million.
S-6
<PAGE> 7
PRICE RANGE OF COMMON SHARES AND DISTRIBUTION HISTORY
The Common Shares are traded on the AMEX under the symbol "BDN." On
February 20, 1997, there were approximately 295 holders of record of the Common
Shares. On February 21, 1997, the last reported sale price of the Common Shares
on the AMEX was $21.50. The following table sets forth the quarterly high and
low closing sale price per share reported on the AMEX for the indicated periods
and the distributions paid by the Company with respect to each such period after
giving effect to the one-for-three reverse split of the Common Shares effected
on November 25, 1996.
<TABLE>
<CAPTION>
SHARE PRICE SHARE PRICE DISTRIBUTIONS
HIGH LOW DECLARED FOR QUARTER
----------- ----------- --------------------
<S> <C> <C> <C>
First Quarter 1995................................. $14 1/4 $10 1/2 $ 1.20(1)
Second Quarter 1995................................ $12 3/8 $1011/16 $ 0.15
Third Quarter 1995................................. $1113/16 $1011/16 $ 0.15
Fourth Quarter 1995................................ $11 1/4 $10 1/8 $ 0.15
--- --- -----
First Quarter 1996................................. $165/16 $10 1/2 $ 0.18(2)
Second Quarter 1996................................ $22 1/8 $1515/16 $ 0.18(3)
Third Quarter 1996................................. $18 3/8 $171/16 $ 0.21(4)
Fourth Quarter 1996................................ $19 7/8 $15 $ 0.25(5)
--- --- -----
First Quarter 1997 (through February 21, 1997)..... $22 1/8 $19 N/A
</TABLE>
- ---------------
(1) Includes a regular dividend of $0.15 plus extraordinary dividends related to
the refinancing of Properties in 1995.
(2) On May 1, 1996, the Company declared a distribution of $0.18 per share
relating to first quarter operations that was paid to shareholders of record
as of May 10, 1996.
(3) On July 11, 1996, the Company declared a distribution of $0.18 per share
relating to second quarter operations that was paid to shareholders of
record as of July 26, 1996.
(4) On November 1, 1996, the Company declared a distribution of $0.21 per share
relating to third quarter operations that was paid to shareholders of record
as of November 11, 1996.
(5) Represents a distribution at a rate per share of $0.21 for the period from
October 1, 1996 through December 1, 1996 (the day prior to the closing of
the 1996 Public Offering) and a distribution at a rate per share of $0.35
for the period from December 2, 1996 through December 31, 1996.
Future distributions by the Company will be at the discretion of the Board
of Trustees and will depend on the actual cash flow of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code of 1986, as amended, and
such other factors as the Board of Trustees deem relevant.
S-7
<PAGE> 8
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter, the
number of Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Smith Barney Inc. ........................................................
Legg Mason Wood Walker, Incorporated......................................
---------
Total........................................................... 1,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the Common
Shares offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters propose to offer part of the shares directly to the public
at the public offering price set forth on the cover page of this Prospectus and
part of the shares to certain dealers at a price which represents a concession
not in excess of $ - per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ - per share to certain other dealers. After the offering of the shares
to the public, the public offering price and such concessions may be changed by
the Underwriters. The Underwriters have advised the Company that the
Underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus Supplement, to purchase up to
262,500 additional Common Shares at the price to public set forth on the cover
page of this Prospectus Supplement minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
offered hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares listed in such
table.
In connection with the 1996 Public Offering, the Operating Partnership, the
Company, its Trustees and executive officers, and certain shareholders of the
Company designated by the Underwriters, agreed, subject to certain limited
exceptions, not to sell, offer to sell, solicit an offer to buy, contract to
sell, grant any option to purchase or otherwise transfer or dispose of any
Common Shares or any securities convertible into or exchangeable or exercisable
for Common Shares until May 24, 1997, without the prior written consent of Smith
Barney Inc., except, in the case of the Company and the Operating Partnership,
for the issuance of such securities in connection with the acquisition of any
office or industrial property; upon the redemption of any Units issued in
connection with the SSI/TNC Transaction (as defined in the accompanying
Prospectus); upon the exercise of any options or warrants of the Company; or
upon conversion of any outstanding Series A Preferred Shares (as defined in the
accompanying Prospectus).
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933.
Smith Barney Mortgage Capital Group, Inc., an affiliate of Smith Barney
Inc., is one of the lenders under the Company's revolving credit facility (the
"Credit Facility"). Smith Barney Mortgage Capital Group, Inc. is entitled to
receive a pro rata portion of the fee on the unused portion of the Credit
Facility equal to 1/8% per annum from December 2, 1996 (the date of the closing
of the Credit Facility) through March 31, 1997, and 1/4% per annum thereafter.
In addition, Smith Barney Mortgage Capital Group, Inc. will be repaid its pro
rata share of the approximately $7.0 million outstanding under the Credit
Facility from the net proceeds of the Offering.
S-8
<PAGE> 9
Walter D'Alessio, a member of the Company's Board of Trustees, is President
of Legg Mason Real Estate Services, Inc., a subsidiary of Legg Mason, Inc., the
parent of Legg Mason Wood Walker, Incorporated. In addition, the Underwriters
have engaged, and may in the future engage, in investment banking activities on
behalf of the Company.
EXPERTS
The financial statements and schedules incorporated by reference in the
accompanying Prospectus have been audited by Arthur Andersen LLP independent
public accountants, as indicated in their reports and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
LEGAL MATTERS
The validity of the Common Shares offered hereby, as well as certain legal
matters relating to the Company, will be passed upon for the Company by Pepper,
Hamilton & Scheetz LLP, Philadelphia, Pennsylvania. Certain legal matters
related to the Offering will be passed upon for the Underwriters by Battle
Fowler LLP, New York, New York. Pepper, Hamilton & Scheetz LLP and Battle Fowler
LLP will rely on Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, as to
certain matters of Maryland law.
TAX MATTERS
The statements in the accompanying Prospectus under the caption "Federal
Income Tax Considerations" and the other statements herein and therein relating
to the Company's qualification as a REIT and the taxation of the Company's
shareholders, are based upon the opinion of Arthur Andersen LLP.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and are also available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, New York, New York 10048 and at Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Such material can also
be inspected and copied at the offices of the American Stock Exchange, Inc., 86
Trinity Place, New York, New York 10006.
The Company files information electronically with the Commission, and the
Commission maintains a Web Site that contains reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission. The address of the Commission's
Web Site is (http://www.sec.gov).
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered hereby. This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information concerning the Company and the Common Shares, reference
is made to the Registration Statement and the exhibits filed therewith, which
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the locations listed
above. Any statements contained herein concerning the provisions of any document
are not necessarily complete, and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
S-9
<PAGE> 10
[This Page Intentionally Left Bank]
<PAGE> 11
PROSPECTUS
BRANDYWINE REALTY TRUST
$500,000,000
Preferred Shares, Common Shares, Depositary Shares
And Warrants
------------------------
Brandywine Realty Trust (the "Company") may from time to time offer (i) in
one or more series its preferred shares of beneficial interest, $0.01 par value
per share ("Preferred Shares"); (ii) common shares of beneficial interest, $0.01
par value per share ("Common Shares"); (iii) in one or more series its Preferred
Shares represented by depositary shares (the "Depositary Shares"); and (iv)
warrants to purchase Preferred Shares, Common Shares or Depository Shares (the
"Warrants") with an aggregate public offering price of up to $500,000,000 (or
its equivalent based on the exchange rate at the time of sale) in amounts, at
prices and on terms to be determined at the time of offering. The Preferred
Shares, Common Shares, Depositary Shares and Warrants (collectively, the
"Securities") may be offered, separately or together, in separate series (with
respect to Preferred Shares and Depositary Shares) in amounts, at prices and on
terms to be described in one or more supplements to this Prospectus (a
"Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Preferred Shares, the
specific title and stated value, any distribution, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price; (ii)
in the case of Common Shares, any initial public offering price; (iii) in the
case of Depositary Shares, the fractional Preferred Shares represented by each
Depositary Share; and (iv) in the case of Warrants, the Securities as to which
such Warrants may be exercised, the duration, offering price, exercise price and
detachability. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to assist in maintaining the status of the
Company as a real estate investment trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about the material U.S. federal income tax considerations relating
to, and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement, not contained in this Prospectus.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement with,
between or among them, will be set forth, or will be calculable from the
information set forth, in an accompanying Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of a Prospectus
Supplement describing the method and terms of the offering of such Securities.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
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The date of this Prospectus is February 14, 1997.
<PAGE> 12
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and are also available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, New York, New York 10048 and at Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Such material can also
be inspected and copied at the offices of the American Stock Exchange, Inc., 86
Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Securities offered hereby. This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information concerning the Company and the Securities, reference is
made to the Registration Statement and the exhibits filed therewith, which may
be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the locations listed
above. Any statements contained herein concerning the provisions of any document
are not necessarily complete, and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below filed by the Company with the Commission (File
No. 1-9106) are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the year ended December
31, 1995;
b. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996;
c. The Company's Current Reports on Form 8-K dated January 19, 1996,
June 21, 1996, August 1, 1996, September 6, 1996, November 27, 1996,
December 16, 1996 and February 7, 1997 and amended Current Reports on
Form 8-K/A dated February 5, 1997 and February 13, 1997;
d. The Company's Prospectus filed with the Commission pursuant to Rule
424(b) on November 27, 1996 relating to the Company's Registration
Statement on Form S-11 (Registration No. 333-13969) declared
effective on November 25, 1996; and
e. The description of the Common Shares contained in the Company's
Registration Statement on Form 8-A dated March 24, 1986, as amended
by a Form 8 dated June 4, 1986, as further amended by a Form 8 dated
July 23, 1986 and as further amended by a Form 8-A/A dated December
23, 1996 and any other reports or amendments filed for the purpose of
updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of all Securities to which this Prospectus
relates shall be deemed to be incorporated by reference in this Prospectus and
made a part hereof from the date of filing such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein, in any
applicable Prospectus Supplement or in any other document subsequently filed
with the Commission which also is or is deemed to be incorporated by reference
herein, modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or any accompanying Prospectus Supplement.
Subject to the foregoing, all information appearing in this
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Prospectus and each accompanying Prospectus Supplement is qualified in its
entirety by the information appearing in the documents incorporated by
reference.
Copies of all documents which are incorporated by reference (not including
the exhibits to such documents unless such exhibits are specifically
incorporated by reference in such document) will be provided without charge to
each person, including any shareholder, to whom this Prospectus is delivered,
upon written or oral request. Requests should be directed to Brandywine Realty
Trust, 16 Campus Boulevard, Newtown Square, Pennsylvania 19073, Attention:
Secretary (telephone number: (610) 325-5600).
THE COMPANY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements, and the notes
thereto, appearing elsewhere and incorporated by reference in this Prospectus.
As used herein, the term "Company" includes Brandywine Realty Trust and its
subsidiaries and affiliated entities, including Brandywine Operating
Partnership, L.P. (the "Operating Partnership"), unless the context indicates
otherwise.
GENERAL
The Company is a self-administered, self-managed and fully integrated real
estate investment trust ("REIT") engaged in the ownership, management, leasing,
acquisition and development of primarily suburban office properties. As of
January 1, 1997, the Company owned a portfolio of 34 office buildings and three
industrial facilities (collectively, the "Properties") that contain an aggregate
of approximately 2.0 million net rentable square feet. Thirty-four of the 37
Properties are located in the Suburban Philadelphia Office and Industrial Market
(as defined below). The Company's property portfolio increased on January 24,
1997 upon the Company's acquisition of an additional five office buildings
containing an aggregate of approximately 290,000 net rentable square feet. The
Company also owns an interest in and operates a commercial real estate
management services company (the "Management Company") that as of January 1,
1997 managed approximately 2.6 million net rentable square feet (including 36 of
the Properties). The term "Suburban Philadelphia Office and Industrial Market"
or "Market" means the areas comprised of the following counties: Bucks, Chester,
Delaware, Lehigh, Montgomery and Northampton in Pennsylvania and Burlington and
Camden in New Jersey.
The Company carries on its activities directly and through subsidiaries. As
of the date of this Prospectus, the Company holds fee title to one of the
Properties and holds interest in subsidiaries (including the Operating
Partnership) that, in turn, either own the Properties in fee or hold interests
in partnerships that own the Properties in fee. The Company is the sole general
partner of the Operating Partnership, which was formed as a vehicle to: (i)
consolidate the Company's real estate holdings; (ii) facilitate future
acquisitions; (iii) enable the Company to comply with certain requirements under
the Internal Revenue Code of 1986 (the "Code") relating to REITs; and (iv)
preserve certain tax advantages to persons contributing properties to the
Company. As the sole general partner of the Operating Partnership, the Company
generally has the exclusive power to manage and conduct the business of the
Operating Partnership. As of January 1, 1997, the Company had an approximately
95.5% interest in the Operating Partnership.
The Company conducts its real estate management services through the
Management Company. Through the Management Company, the Company also manages
properties on behalf of unaffiliated third parties. Through its ownership of
preferred stock and common stock of the Management Company, the Operating
Partnership is entitled to receive 95% of amounts paid as dividends by the
Management Company.
The Company was organized as a Maryland real estate investment trust in
1986. The Company's principal executive offices are located at 16 Campus
Boulevard, Newtown Square, Pennsylvania 19073 and its telephone number is
610-325-5600.
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<PAGE> 14
RISK FACTORS
An investment in the Securities involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in the Prospectus before making a decision
to purchase Securities offered hereby.
LIMITED GEOGRAPHIC CONCENTRATION
Thirty-four of the 37 Properties owned by the Company as of January 1, 1997
are located in the Suburban Philadelphia Office and Industrial Market. In
addition, a fundamental element of the Company's growth strategy is to acquire
additional properties in the Market. Consequently, the Company is dependent upon
the demand for office and other commercial space in the Market. The Company's
revenue and the value of the Properties may be affected by a number of factors
in the Market, including the local economic climate (which may be adversely
impacted by business layoffs or downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of, or reduced demand for, office and other competing commercial
properties). Therefore, the Company's performance and its ability to make
distributions to shareholders will likely be dependent, to a large extent, on
the economic conditions in the Market.
REDEMPTION OF PREFERRED SHARES
Prior to the occurrence of a Conversion Approval (as defined below), a
class of outstanding Preferred Shares, designated as Series A Convertible
Preferred Shares (the "Series A Preferred Shares"), are convertible into up to
181,325 Common Shares, and following the occurrence of a Conversion Approval,
the Series A Preferred Shares will be convertible into an additional 1,424,735
Common Shares. A "Conversion Approval" means approval of the unlimited
conversion of the Series A Preferred Shares into Common Shares by a majority of
the votes cast by holders of Common Shares at a meeting of shareholders in which
holders of the Series A Preferred Shares have no right to vote. In the event
that a Conversion Approval has not occurred by July 1, 1997, holders of the
Series A Preferred Shares will become entitled to receive distributions equal to
120% of the distributions payable in respect of the number of Common Shares into
which such Series A Preferred Shares are convertible (i.e., an aggregate of
1,606,060) (the "Conversion Number"). In the event that a Conversion Approval
has not occurred by July 1, 1998, holders of the Series A Preferred Shares will
have the right to require the Company to redeem their Series A Preferred Shares
at a price (the "Redemption Price") equal to the greater of: (i) the product of
(a) $16.50 plus an amount (the "Return Amount") equal to 8.0% of $16.50 per
annum from the date of issuance of the Series A Preferred Shares through the
redemption date less an amount (not to exceed the Return Amount) equal to
distributions actually received by the holder on account of such Series A
Preferred Shares and (b) the Conversion Number, and (ii) the product of the
market price of a Common Share and the Conversion Number. If the Company is
required to redeem the Series A Preferred Shares, it is expected that the
Company would be required to significantly increase the leverage on its
portfolio or sell a significant number of Properties in order to finance such
redemption, either of which events would likely materially and adversely affect
the cash available for distribution and the market price for the Common Shares.
In addition, a mandatory redemption by the Company of the Series A Preferred
Shares could require the Company, on its own behalf or through the Operating
Partnership, to borrow funds on a short-term basis to meet the distribution
requirements applicable to REITS. In such instances, the Company, in order to
avoid the adverse tax consequences associated with loss of REIT status, might
need to: (i) borrow funds even if management believed that then prevailing
market conditions generally were not favorable for such borrowings or that such
borrowings would not be advisable in the absence of such tax considerations;
and/or (ii) liquidate certain of its investments on adverse terms. See
"Description of Shares of Beneficial Interest -- Preferred Shares."
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE COMPANY'S
PROPERTIES;
LACK OF OPERATING HISTORY
Thirty-three of the 37 Properties owned by the Company as of January 1,
1997 were acquired in 1996. These recently acquired Properties may have
characteristics or deficiencies unknown to the Company
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<PAGE> 15
affecting their valuation or revenue potential, and it is also possible that the
operating performance of such Properties may decline under the Company's
management. The Company's ability to manage its growth effectively will require
it to successfully integrate its new acquisitions into its existing management
structure. As the Company acquires additional properties, the Company will be
subject to risks associated with managing new properties, including lease-up and
tenant retention. No assurances can be given that the Company will be able to
succeed with such integration or effectively manage additional properties or
that newly acquired properties will perform as expected. In addition, the
Company's ability to manage its growth effectively will depend on whether the
integration of the management team that joined the Company's existing management
structure in 1996 in connection with a transaction (the "SSI/TNC Transaction")
involving the Company's acquisition of 19 Properties will, over time, prove to
be successful. In connection with the SSI/TNC Transaction, the Company added
approximately 20 administrative, property management, leasing, marketing, and
related personnel previously employed by The Nichols Company ("TNC"). There can
be no assurance that the integration of these additional employees into the
Company's organization will be successful or that the Company will manage the
combined operations effectively.
RISKS RELATING TO DISTRIBUTIONS
The Company pays regular distributions to its shareholders. Additional
Common Shares that may in the future be issued to finance acquisitions or upon
the exercise of options or warrants or otherwise will increase required cash
available for distribution to make anticipated distributions to shareholders. In
addition, if the distribution preference payable on the Series A Preferred
Shares increases as a result of the failure of a Conversion Approval to occur by
July 1, 1997, such event will also increase required cash available for
distribution needed for the Company to maintain its proposed new distribution
rate. In addition, the Company's ability to make distributions will depend, in
large part, on the performance of its Properties and any other properties it may
acquire in the future, including occupancy levels, the Company's ability to
enter into new leases upon expiration of current leases and costs associated
with the renewal or reletting of space, expenditures with respect to existing
and newly acquired properties, the amount of the Company's debt and the interest
rates thereon, default or bankruptcy by tenants and other costs relating to the
Properties, as well as the absence of significant expenditures relating to
environmental or other regulatory matters. Most of these matters are beyond the
control of the Company and any significant difference between the Company's
expectations with respect to these matters and actual results could have a
material adverse effect on the Company and its ability to make or sustain
distributions.
REAL ESTATE INVESTMENT CONSIDERATIONS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend in large part
on the amount of income generated and expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, including debt
service, tenant improvements, leasing commissions, and other capital
expenditures, the Company may have to borrow additional amounts to cover fixed
costs and the Company's cash available for distribution and ability to make
expected distributions to its shareholders will be adversely affected.
The Company's revenue and the value of its Properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; the perceptions of
prospective tenants of the attractiveness of the property; the ability of the
Company to manage and maintain the Properties and secure adequate insurance and
increased operating costs (including real estate taxes and utilities). In
addition, real estate values and income from properties are also affected by
such factors as applicable laws, including tax laws, interest rate levels and
the availability of financing.
Significant Lease Expirations. The Company is subject to the risk that,
upon expiration, leases may not be renewed, the space may not be relet, or the
terms of renewal or reletting (including the cost of required renovations) may
be less favorable than the current lease terms. Leases accounting for
approximately 14.9% of the aggregate annualized base rents from the Properties
as of December 31, 1996 (representing approximately 13.0% of the net rentable
square feet at the Properties) expire without penalty or premium through the end
of 1997, and leases accounting for approximately 7.0% of aggregate annualized
base rent from the Properties as
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<PAGE> 16
of December 31, 1996 (representing approximately 7.5% of the net rentable square
feet at the Properties) are scheduled to expire in 1998. Other leases grant
their tenants early termination rights upon payment of a termination penalty.
The Company has estimated the expenditures for new and renewal leases for 1997
and 1998 but no assurances can be given that the Company has correctly estimated
such expenses. Lease expirations will require the Company to locate new tenants
and negotiate replacement leases with such tenants. Replacement leases typically
require the Company to incur tenant improvements, other tenant inducements and
leasing commissions, in each case, which may be higher than the costs relating
to renewal leases. If the Company is unable to promptly relet or renew leases
for all or a substantial portion of this space, if the rental rates upon such
renewal or reletting are significantly lower than expected or if the Company's
reserves for these purposes prove inadequate, the Company's cash available for
distribution and ability to make expected distributions to shareholders could be
adversely affected.
Financially Distressed Tenants. In the event of any default by a tenant,
the Company may experience delays in enforcing its rights as a landlord and may
incur substantial costs in protecting its investment. In addition, at any time a
tenant of the Properties may seek the protection of bankruptcy laws, which could
result in the rejection and termination of such tenant's lease and thereby cause
a reduction in cash available for distribution to shareholders. There can be no
assurance that these or other tenants will not reject their leases in a
bankruptcy proceeding or that the Company will not experience significant tenant
defaults in the future, each of which could have an adverse effect on the
Company's revenues and cash available for distribution to shareholders.
Competition. The Company competes with a number of real estate developers,
operators, and institutions for tenants and acquisition opportunities. Many of
these competitors have significantly greater resources than the Company. No
assurances can be given that such competition will not adversely affect the
Company's revenues and cash available for distribution to shareholders.
Illiquidity of Real Estate. Equity real estate investments are relatively
illiquid and therefore tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Code limits the Company's ability to sell properties held for
fewer than four years, which may affect the Company's ability to sell properties
without adversely affecting returns to shareholders.
Changes in Laws. Because increases in income and service taxes are
generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make expected
distributions to shareholders. The Properties are also subject to various
federal, state, and local regulatory requirements, such as requirements of the
Americans With Disabilities Act of 1990 (the "ADA") and state and local fire and
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such requirements. However, there can be no
assurance that these requirements will not change or that new requirements will
not be imposed which would require significant unanticipated expenditures by the
Company and could have an adverse effect on the Company's cash flow and ability
to make distributions.
Compliance with Americans with Disabilities Act. Under the ADA, all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers and noncompliance could result in imposition of fines
by the U.S. government or an award of damages to private litigants. Although the
Company believes that the Properties are in material compliance with these
requirements, the Company may incur additional costs to comply with the ADA.
Although the Company believes that such costs will not have a material adverse
effect on the Company, if required changes involved a greater expenditure than
the Company currently anticipates, the Company's ability to make expected
distributions could be adversely affected.
Risks Associated with Partnership and Joint Venture Property Ownership
Structures. The Company owns its interests in all but one of its Properties
through the Operating Partnership. In addition, the Company may also participate
with other entities in property ownership through joint ventures or partnerships
in the future. Partnership or joint venture investments may, under certain
circumstances, involve risks not otherwise
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<PAGE> 17
present, including the possibility that the Company's partners or co-venturers
might become bankrupt, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company and that such partners or
co-venturers may be in a position to take action contrary to the Company's
instructions or requests or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification as
a REIT. The Company will, however, seek to maintain sufficient control of such
partnerships or joint ventures to permit the Company's business objectives to be
achieved. There is no limitation under the Company's organizational documents as
to the amount of funds that may be invested in partnerships or joint ventures.
RISKS ASSOCIATED WITH INDEBTEDNESS
Debt Financing and Existing Debt Maturities. The Company will be subject
to risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest and, the risk that existing indebtedness on the Properties (which
in all cases will not have been fully amortized at maturity) will not be able to
be refinanced or that the terms of such refinancing will not be as favorable as
the terms of existing indebtedness. On December 2, 1996 the Company entered into
an $80 million revolving credit facility (the "Credit Facility") that has a term
of two years. If principal payments due at maturity cannot be refinanced,
extended, or paid with the proceeds of other capital transactions, such as new
equity capital, the Company may not be able to pay distributions at expected
levels and to repay all such maturing debt. Furthermore, if prevailing interest
rates or other factors at the time of refinancing (such as the reluctance of
lenders to make commercial real estate loans) result in higher interest rates,
the interest expense relating to such refinanced indebtedness would increase,
which could adversely affect the Company's cash flow and its ability to make
expected distributions to its shareholders. In addition, if the Company is
unable to meet its obligations under any of its mortgage financings (including
the Credit Facility), the Properties securing such indebtedness could be
foreclosed on, which would have a material adverse effect on the Company and its
ability to make distributions and, depending on the number of Properties
foreclosed on, could threaten the continued viability of the Company.
Risk of Rising Interest Rates and Variable Rate Debt. Increases in
interest rates on variable rate indebtedness would increase the Company's
interest expense, which could adversely affect the Company's cash flow and its
ability to pay distributions to shareholders. The Credit Facility bears interest
at a variable rate.
No Limitation on Debt. Although the Company has adopted a policy that
limits the debt to total market capitalization ratio of the Company to 50%, the
organizational documents of the Company do not contain any limitation on the
amount of indebtedness the Company may incur. Accordingly, the Board of Trustees
could alter or eliminate this policy. If this policy were changed, the Company
could become more highly leveraged, resulting in an increase in debt service
that could adversely affect the Company's cash flow and, consequently, Cash
Available for Distribution and could increase the risk of default on the
Company's indebtedness.
RISKS OF ACQUISITION, DEVELOPMENT AND RENOVATION ACTIVITIES
The Company intends to continue acquiring office and industrial properties.
Acquisitions of office and industrial properties entail risks that investments
will fail to perform in accordance with expectations. Estimates of renovation
costs and costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment.
The Company anticipates that future acquisitions and renovations may be
financed through a combination of advances under the Credit Facility, other
lines of credit and other forms of secured or unsecured financing. If new
developments are financed through construction loans, there is a risk that, upon
completion of construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous terms.
While the Company has generally limited its acquisition, development,
renovation, management, and leasing business primarily to the Market, it is
possible that the Company will in the future expand its business
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<PAGE> 18
to new geographic markets. The Company will not initially possess the same level
of familiarity with new markets outside of the Suburban Philadelphia Office and
Industrial Market, which could adversely affect its ability to acquire, develop,
manage, or lease properties in any new localities. Changing market conditions,
including competition from other purchasers of suburban office and industrial
properties, may diminish the Company's opportunities for attractive additional
acquisitions.
The Company also intends to review from time to time the possibility of
developing and constructing office buildings and other commercial properties.
Risks associated with the Company's development and construction activities may
include: (i) abandonment of development opportunities; (ii) construction costs
of a property exceeding original estimates, possibly making the property
uneconomical; (iii) occupancy rates and rents at a newly completed property may
not be sufficient to make the property profitable; (iv) financing may not be
available on favorable terms for development of a property; and (v) construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs. In addition, new development activities,
regardless of whether they would ultimately be successful, typically require a
substantial portion of management's time and attention. Development activities
would also be subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations.
TAX RISKS
Consequences of Failure to Qualify as a REIT. Since 1986, the Company has
operated, and continues to operate, in such a manner as to qualify as a REIT
under the Code. Although the Company believes that it is currently organized and
will continue to operate so as to qualify as a REIT, no assurance can be given
that the Company will qualify or remain qualified as a REIT in the future.
Qualification as a REIT involves the application of highly technical and complex
Code provisions, many of which have only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the Company's control may affect its ability to qualify as a
REIT. For example, in order to qualify as a REIT, at least 95% of the Company's
gross income in any year must be derived from qualifying sources and the Company
must pay distributions to its shareholders aggregating at least 95% of its REIT
taxable income (excluding net capital gains). The complexity of these provisions
and of the applicable income tax regulations that have been promulgated under
the Code is even greater in the case of a REIT that holds its assets in
partnership form. In addition, no assurance can be given that future
legislation, new regulations, administrative interpretations, or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the Federal income tax consequences of such qualification. See "Federal
Income Tax Considerations."
One of the requirements for maintaining REIT status is that a REIT not own
more than 10% of the voting stock of a corporation other than the stock of a
qualified REIT subsidiary (of which the REIT is required to own all of such
stock) and stock in another REIT. The Operating Partnership owns 5% of the
voting common stock and all of the non-voting preferred stock of the Management
Company and, therefore, the Company believes it will comply with this rule.
However, the IRS could contend that the Operating Partnership's ownership of all
of the non-voting preferred stock of the Management Company should be viewed as
voting stock because of its substantial economic position in the Management
Company. If the IRS were to be successful in such a contention, the Company's
status as a REIT would be lost and the Company would become subject to Federal
corporate income tax on its net income, which would have a material adverse
affect on the Company's cash available for distribution. See "Federal Income Tax
Considerations."
If in any taxable year the Company were to fail to qualify as a REIT, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at the
applicable corporate rate. In addition, unless it were entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. This disqualification would reduce the funds of the
Company available for investment or distribution to shareholders because of the
additional tax liability of the Company for the year or years involved. If the
Company were to fail to qualify as a REIT, it no longer would be subject to the
distribution
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<PAGE> 19
requirements of the Code. To the extent that distributions to shareholders would
have been made in anticipation of the Company's qualifying as a REIT, the
Company might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax.
Required Distributions; Potential Requirement to Borrow. To obtain the
favorable tax treatment associated with qualification as a REIT, the Company
generally will be required each year to distribute to its shareholders at least
95% of its REIT taxable income (excluding net capital gain). In addition, the
Company will be subject to tax on its undistributed net taxable income and net
capital gain, and a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income plus 95% of its capital gain net income
for the calendar year, plus certain undistributed amounts from prior years.
The Company intends to make distributions to its shareholders to comply
with the distribution provisions of the Code and to avoid income and other
taxes. The Company's income will consist primarily of the Company's share of the
income of the Operating Partnership and the Properties it owns directly, and the
Company's cash flow will consist primarily of its share of distributions from
the Operating Partnership and cash flow from the Properties it owns directly.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income (of the Company or the Operating Partnership), the
effect of required debt amortization payments and the possible redemption by the
Company of the Preferred Shares could require the Company, on its own behalf or
through the Operating Partnership, to borrow funds on a short-term basis to meet
the distribution requirements in order to remain qualified as a REIT. In such
instances, the Company, in order to avoid adverse tax consequences, might need
to: (i) borrow funds even if management believed that then prevailing market
conditions generally were not favorable for such borrowings or that such
borrowings would not be advisable in the absence of such tax considerations;
and/or (ii) liquidate investments on adverse terms.
Consequences of Failure of the Operating Partnership (or a Subsidiary
Partnership) to be Treated as a Partnership. If the IRS were to successfully
challenge the tax status of the Operating Partnership or any of its subsidiary
partnerships for federal income tax purposes, the Operating Partnership or the
affected subsidiary partnership would be taxable as a corporation. In such
event, the Company would cease to qualify as a REIT for federal income tax
purposes. The imposition of a corporate tax on the Operating Partnership or any
of the subsidiary partnerships would also reduce the amount of cash available
for distribution to the Company and its shareholders. See "Federal Income Tax
Considerations -- Income Taxation of the Operating Partnership, the Title
Holding Partnerships and Their Partners."
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property. In
addition, the Management Company generally is subject to federal and state
income tax at regular corporate rates on its net taxable income, which will
include the Management Company's management, leasing and related service
business. If the Company has net income from a prohibited transaction, such
income will be subject to a 100% tax. See "Federal Income Tax Considerations."
Real Estate Transfer Taxes. The transfers of certain Properties to the
Operating Partnership or a subsidiary partnership were structured as transfers
of 89% of the capital interests and 99% of the cash flow and profits interests
in the limited partnerships owning such Properties with the residual interests
to be acquired by the Operating Partnership not later than September 1999. This
transaction structure is intended to comply with the provisions of informal
advice from the Pennsylvania Department of Revenue to the effect that such
transfers are not subject to Pennsylvania real estate transfer taxes. However,
the Company has not obtained a formal ruling from the Pennsylvania Department of
Revenue on this issue. If the Company desired or were required, for financing
purposes or otherwise, to acquire such residual interests within such period,
the Company could be required to pay real estate transfer taxes in an amount
aggregating approximately $640,000.
POSSIBLE ENVIRONMENTAL LIABILITIES
General. Under various Federal, state and local laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or
9
<PAGE> 20
releases at such property and may be held liable to a governmental entity or to
third parties for property damage and for investigation and clean-up costs
incurred by such parties in connection with contamination. The cost of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental fines and
injuries to persons and property. All of the Properties have been subject to a
Phase I or similar environmental site assessment (which involves general
inspections without soil sampling or groundwater analysis) completed by
independent environmental consultants. Except as indicated below with respect to
the Whitelands Business Park in Exton, Pennsylvania (the "Whitelands Property"),
these environmental site assessments have not revealed any significant
environmental liability, nor is the Company aware of any environmental liability
with respect to the Properties that the Company's management believes would have
a material adverse effect on the Company. An environmental assessment has
identified environmental contamination of potential concern with respect to the
Whitelands Property. Petroleum products, solvents and heavy metals were detected
in the groundwater. These contaminants are believed to be associated with debris
deposited by third parties in a quarry formerly located on the Whitelands
Property. The Whitelands Property previously appeared on the Comprehensive
Environmental Response Compensation and Liability Information System List, a
list maintained by the United States Environmental Protection Agency (the "EPA")
of abandoned, inactive or uncontrolled hazardous waste sites which may require
cleanup. The EPA conducted a preliminary assessment of the Property in 1984, and
subsequently the Whitelands Property was removed from the list. While the
Company believes it is unlikely that it will be required to undertake remedial
action with respect to such contamination, there can be no assurance in this
regard. If the Company were required to undertake remedial action on the
Whitelands Property, it has been indemnified through August 2001 against the
cost of such remediation by Safeguard Scientifics, Inc. ("SSI") subject to a
limitation of approximately $2.0 million. In the event SSI is unable to fulfill
its obligations under its indemnity agreement or the Company is required to
undertake remedial action after the expiration of the indemnity, the costs
associated with any remediation could materially and adversely impact Cash
Available for Distribution. Because the Company does not believe that any
remediation at the Whitelands Property is probable, no amounts have been accrued
for any such potential liability.
No assurance can be given that existing environmental studies with respect
to the Properties reveal all environmental liabilities or that any prior owner
of any such property did not create any material environmental condition not
known to the Company. Moreover, no assurance can be given that: (i) future laws,
ordinances or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the Properties will not be
affected by tenants and occupants of the Properties, by the condition of
properties in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood (where
appropriate), extended coverage, and rental loss insurance for the Properties
with policy specification and insured limits which the Company believes are
adequate and appropriate under the circumstances. There are certain types of
losses (such as from nuclear accidents, wars, civil disturbances, and
environmental matters) that generally are not insured against because they are
either uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of the insured limits occur, the Company could lose both its
investment in, and anticipated future revenues and cash flow from, the affected
Property and would continue to be obligated in respect of any recourse mortgage
indebtedness or other financial obligations on such Property. Any such loss
would adversely affect the Company. Moreover, as the general partner of the
Operating Partnership, the Company will be liable for any of the Operating
Partnership's unsatisfied obligations other than the non-recourse obligations.
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<PAGE> 21
RISKS OF THIRD-PARTY MANAGEMENT, LEASING AND RELATED SERVICE BUSINESS
Possible Termination of Management Contracts. The Company intends to
selectively pursue the management of properties owned by third parties. Risks
associated with the management of properties owned by third parties include the
risk that the management contracts (which are generally cancelable upon 30 days'
notice or upon certain events, including sale of the property) will be
terminated by the property owner or will be lost in connection with a sale of
such property, that contracts may not be renewed upon expiration or may not be
renewed on terms consistent with current terms and that the rental revenues upon
which management fees are based will decline as a result of general real estate
market conditions or specific market factors affecting properties managed by the
Company, resulting in decreased management fee income.
Possible Adverse Consequences of Lack of Control Over the Business of the
Management Company. In order to satisfy certain technical requirements
applicable to REITs, certain of the executive officers, as partners of a general
partnership that holds 95% of the voting common stock of the Management Company,
and not the Company, have the ability to elect the board of directors of the
Management Company. The Company is not able to elect directors of the Management
Company and, consequently, the Company has no ability to influence the decisions
of such entity. As a result, the board of directors and management of the
Management Company may implement business policies or decisions that would not
have been implemented by persons controlled by the Company and that are adverse
to the interests of the Company or that lead to adverse financial results, which
would adversely affect the Company's ability to pay distributions to
shareholders.
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL
The investment, financing, borrowing, and distribution policies of the
Company, and its policies with respect to all other activities, including its
growth, debt, capitalization, distributions, REIT status, and operating
policies, is determined by the Board of Trustees. Although the Board of Trustees
has no present intention to amend or revise any of these policies, these
policies may be amended or revised from time to time at the discretion of the
Board of Trustees without notice to or a vote of the shareholders of the
Company. Accordingly, shareholders may not have control over changes in policies
of the Company and changes in the Company's policies may not fully serve the
interests of all shareholders. A change in these policies could adversely affect
the Company's distributions, financial condition, results of operations or the
market price of Common Shares.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Anthony A. Nichols, Sr. and Gerard H. Sweeney. While the Company
believes that it could find replacements for these key personnel, the loss of
their services could have an adverse effect on the operations of the Company.
Messrs. Nichols and Sweeney have entered into employment agreements with the
Company. However, these agreements do not restrict the ability of either Mr.
Nichols or Mr. Sweeney to become employed by a competitor of the Company
following termination of his employment with the Company.
LIMITS ON CHANGES IN CONTROL
Certain provisions of the Declaration of Trust and Bylaws of the Company
may have the effect of delaying, deferring, or preventing a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control of the Company. For example, such provisions may: (i) deter tender
offers for the Common Shares, which offers may be attractive to the
shareholders; or (ii) deter purchases of large blocks of Common Shares, thereby
limiting the opportunity for shareholders to receive a premium for their Common
Shares over then-prevailing market prices. See "Description of Shares of
Beneficial Interest" and "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws." These provisions include the
following:
Ownership Limit Necessary to Maintain REIT Qualification. In order for the
Company to maintain its qualification as a REIT, not more than 50% in value of
the Company's outstanding Shares may be owned,
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<PAGE> 22
actually or constructively, under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
tax-exempt entities, other than, in general, qualified domestic pension funds)
at any time during the last half of any taxable year (other than the first
taxable year for which the election to be taxed as a REIT has been made). In
order to protect the Company against the risk of losing REIT status due to the
concentration of ownership among its shareholders, the ownership limits (the
"Ownership Limits") adopted by the Board of Trustees pursuant to the Declaration
of Trust limits direct or indirect ownership to 9.8% in value of the outstanding
Shares, subject to certain exceptions. See "Description of Shares of Beneficial
Interest -- Restrictions on Transfer." The Board of Trustees could waive this
restriction with respect to a particular shareholder if it were satisfied, based
upon the advice of tax counsel, that ownership by such shareholder in excess of
the Ownership Limits would not jeopardize the Company's status as a REIT and the
Board of Trustees otherwise decided such action would be in the best interests
of the Company. Actual or constructive ownership of Common Shares in excess of
the Ownership Limits will cause the violative transfer or ownership to be void
with respect to the transferee or owner as to that number of shares in excess of
the Ownership Limits and such shares will be automatically transferred to a
trust for the benefit of a person to whom an interest in the Common Shares may
be permissibly transferred. Such transferee shall have no right to vote such
shares or be entitled to distributions with respect to such shares.
Preferred Shares. The Company's Declaration of Trust authorizes the Board
of Trustees to issue up to 5,000,000 Preferred Shares and to establish the
preferences, rights, and other terms (including the right to vote and the right
to convert into Common Shares) of any shares so issued. See "Description of
Shares of Beneficial Interest -- Shares -- Preferred Shares of Beneficial
Interest." In addition to the outstanding Series A Preferred Shares, the Board
of Trustees could establish a series of preferred shares that could have the
effect of delaying, deferring, or preventing a tender offer or a change in
control of the Company that might involve a premium price of the Common Shares
or otherwise be in the best interests of the shareholders.
Exemptions from the Maryland Business Combination Law. Under the Maryland
General Corporation Law, as amended ("MGCL"), as applicable to real estate
investment trusts, certain "business combinations" (including certain issuances
of equity securities) between a Maryland real estate investment trust and any
person who beneficially owns 10% or more of the voting power of the trust's
shares (an "Interested Shareholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Shareholder
becomes an Interested Shareholder. Thereafter, any such business combination
must be recommended by the board of trustees and approved by two super-majority
shareholder votes unless, among other conditions, the trust's common
shareholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Shareholder for its shares. These provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of trustees prior to the time that the Interested Shareholder becomes
an Interested Shareholder. Pursuant to the statute, the Company has exempted any
business combination involving SSI, TNC, Gerard H. Sweeney (the Company's
President and Chief Executive Officer) and any affiliate or associate of theirs
from the business combination statute and, consequently, the five-year
prohibition and the super-majority vote requirements described above will not
apply to business combinations between any of them and the Company. As a result,
SSI, TNC, Mr. Sweeney, and affiliates and associates thereof (including Anthony
A. Nichols, Sr., the Company's Chairman of the Board) may be able to enter into
business combinations with the Company, which may not be in the best interest of
the shareholders, without compliance by the Company with the super-majority vote
requirements and other provisions of the statute. In addition, the Company has
exempted any business combination involving SERS or the SERS Voting Trust and
any of their respective affiliates or associates, and Morgan Stanley Asset
Management Inc. and the Morgan Stanley Funds and any of the respective
affiliates or associates from the business combination statute. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and Bylaws
Business Combinations."
Maryland Control Share Acquisition Statute. The MGCL, as applicable to
real estate investment trusts, provides that "control shares" of a Maryland real
estate investment trust acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiror, by
officers or by trustees who are employees of
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<PAGE> 23
the trust. If voting rights are not approved at a meeting of shareholders, then,
subject to certain conditions and limitations, the issuer may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
shareholders meeting and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other shareholders may exercise appraisal rights.
Pursuant to the statute, the Company has exempted any and all acquisitions by
SSI, TNC, and any current or future affiliate or associate of theirs from the
control shares statute. As a result, SSI or TNC will be able to possess voting
power not generally available to other persons and the effect may be to further
solidify their control of the Company. In addition, pursuant to the statute, the
Company has exempted any and all acquisitions by SERS and the SERS Voting Trust
and any of their respective current or future affiliates or associates and
Morgan Stanley Asset Management Inc. and the Morgan Stanley Funds and any of
their respective current or future affiliates or associates from the control
shares statute. Certain Common Shares beneficially owned by Richard M. Osborne
have not been exempted from the statute. See "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws Control Share
Acquisitions."
EFFECT ON PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing prices for the Common
Shares. The Company has reserved as of January 1, 1997: (i) 399,567 Common
Shares for issuance upon conversion of Units; (ii) 762,104 Common Shares for
issuance upon exercise of outstanding options and warrants; and (iii) 1,606,060
Common Shares issuable upon conversion of the Series A Preferred Shares. No
prediction can be made regarding the effect that future sales of Company
securities will have on the market price of Common Shares.
EFFECT ON HOLDERS OF COMMON SHARES OF AN ISSUANCE OF PREFERRED SHARES
The Board of Trustees is empowered by the Company's Declaration of Trust to
designate and issue from time to time one or more classes or series of Preferred
Shares without shareholder approval. The Board of Trustees may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Shares so issued. See "Description of Shares of Beneficial
Interest -- Shares -- Preferred Shares of Beneficial Interest." Because the
Board of Trustees has the power to establish the preferences and rights of each
class or series of Preferred Shares, it may afford the holders in any series or
class of Preferred Shares preferences, distributions, powers and rights, voting
or otherwise, senior to the rights of holders of Common Shares.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that influences the market price of the Common Shares in
the public market is the annual distribution rate on the shares. Increasing
market interest rates may lead prospective purchasers of the Common Shares to
demand a higher annual distribution rate from future distributions. Such an
increase in the required distribution may adversely affect the market price of
the Common Shares.
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<PAGE> 24
RATIOS OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DISTRIBUTIONS
The following table sets forth the Company's ratios of earnings to combined
fixed charges and preferred share distributions for the periods shown. The ratio
of earnings to combined fixed charges and preferred share distributions
represents the number of times fixed charges were covered by earnings. The ratio
is computed by dividing fixed charges and preferred share distributions into
earnings before extraordinary items plus fixed charges. Fixed charges include
interest expense and amortization of debt issuance costs.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(2) (2) N/A(1) N/A(1) N/A(1)
</TABLE>
- ---------------
(1) Ratio cannot be computed as there were no fixed charges during fiscal years
1993, 1992 and 1991.
(2) Ratio calculated to be less than one-to-one coverage; the amount of the
deficiency to cover fixed charges is $824,000 and $1,841,000 for fiscal
years 1995 and 1994, respectively.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying Prospectus Supplement, the
Company will contribute or otherwise transfer the net proceeds of any sale of
Securities to the Operating Partnership in exchange for additional partnership
interests in the Operating Partnership, the economic terms of which will be
substantially identical to the Securities sold. The Operating Partnership will
use such net proceeds for general business purposes including, without
limitation, the repayment of certain outstanding debt and the acquisition of
office and industrial properties.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust and Bylaws of the Company,
as amended, which are incorporated by reference into this Registration
Statement.
GENERAL
The Declaration of Trust of the Company, as in effect on the date of this
Prospectus, provides that the Company is authorized to issue up to 30,000,000
shares of beneficial interest of the Company ("Shares"), consisting of
25,000,000 common shares of beneficial interest, par value $.01 per share
("Common Shares"), and 5,000,000 preferred shares of beneficial interest, par
value $.01 per share ("Preferred Shares"). The authorized Common Shares and
Preferred Shares are available for future issuance without further action by the
Company's shareholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which the Company's
securities may be listed or traded.
Both Maryland statutory law governing real estate investment trusts
organized under Maryland law (the "Maryland REIT Law") and the Company's
Declaration of Trust provide that no shareholder of the Company will be
personally liable, by reason of his status as a shareholder of the Company, for
any obligation of the Company. The Company's Bylaws further provide that the
Company shall indemnify each shareholder against any claim or liability to which
such shareholder may become subject by reason of his being or having been a
shareholder, and that the Company shall reimburse each shareholder who has been
successful, on the merits or otherwise, in the defense of a proceeding to which
he has been made a party by reason of his status as such for all reasonable
expenses incurred by him in connection with any such claim or liability. In
addition, it is a requirement of the Declaration of Trust that all written
contracts to which the Company is a party shall include a provision to the
effect that shareholders shall not be personally liable thereon.
The Declaration of Trust provides that, subject to the provisions of any
class or series of preferred shares then outstanding and to the mandatory
provisions of applicable law, the shareholders are entitled to vote only
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<PAGE> 25
on the following matters: (i) election or removal of Trustees; (ii) amendment of
the Declaration of Trust; (iii) a determination by the Trust to invest in
commodities contracts (other than interest rate futures intended to hedge the
Company against interest rate risk), engage in securities trading (as compared
to investment) activities or hold properties primarily for sale to customers in
the ordinary course of business; and (iv) a merger of the Company with another
entity. Except with respect to the foregoing, no action taken by the
shareholders of the Company at any meeting shall in any way bind the Board of
Trustees.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is The Bank of New
York.
SHARES
Common Shares of Beneficial Interest
Each outstanding Common Share entitles the holder thereof to one vote on
all matters submitted to a vote of shareholders, including the election of
Trustees. There is no cumulative voting in the election of Trustees, which means
that, subject to the voting rights of holders of Preferred Shares and such
voting rights as may be granted by the Board of Trustees in connection with
future issuances of Preferred Shares, the holders of a majority of the
outstanding Common Shares can elect all of the Trustees then standing for
election. Subject to the preferential rights of the holders of Preferred Shares
and such preferential rights as may be granted by the Board of Trustees of the
Company in connection with the future issuance, if any, of Preferred Shares,
holders of Common Shares are entitled to such distributions as may be declared
from time to time by the Board of Trustees out of funds legally available
therefor.
Holders of Common Shares have no conversion, exchange, redemption or
preemptive rights to subscribe to any securities of the Company. All outstanding
Common Shares will be fully paid and nonassessable. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, subject to
the preferential rights of the holders of Preferred Shares and such preferential
rights as may be granted by the Board of Trustees of the Company in connection
with the future issuance, if any, of Preferred Shares, holders of Common Shares
will be entitled to share ratably in the assets of the Company remaining after
provision for payment of liabilities to creditors. All Common Shares have equal
dividend, distribution, liquidation and other rights.
Preferred Shares of Beneficial Interest
The Preferred Shares authorized by the Company's Declaration of Trust may
be issued from time to time in one or more series. Prior to the issuance of
Preferred Shares of each such series, the Board of Trustees is required by the
Maryland REIT Law and the Company's Declaration of Trust to set for each series
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption, as are permitted by the Maryland REIT Law. Such rights, powers,
restrictions and limitations could include the right to receive specified
distributions and payments on liquidation prior to any such payments being made
to the holders of Common Shares. Under certain circumstances, the issuance of
Preferred Shares could have the effect of delaying, deferring or preventing a
change of control of the Company and may adversely affect the voting and other
rights of the holders of the Common Shares.
Classification or Reclassification of Preferred Shares
The Declaration of Trust authorizes the Trustees to classify or reclassify,
in one or more series, any unissued Preferred Shares by setting or changing the
number of Preferred Shares constituting such series and the designation,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications or terms or conditions of
redemption of such Preferred Shares.
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<PAGE> 26
PREFERRED SHARES
The Prospectus Supplement relating to any Preferred Shares offered thereby
will contain the specific terms thereof, including, without limitation:
(1) The title and stated value of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The distribution rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Shares;
(4) The date from which distributions on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Shares;
(6) The provision for a sinking fund, if any, for such Preferred
Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Common Shares of the Company, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(12) A discussion of all material federal income tax considerations,
if any, applicable to such Preferred Shares that are not discussed in this
Prospectus;
(13) The relative ranking and preferences of such Preferred Shares as
to distribution rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company;
(14) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
distribution rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT.
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<PAGE> 27
SERIES A PREFERRED SHARES
General
As of the date of this Prospectus, the Company has issued 481,818 Preferred
Shares, which are designated as Series A Convertible Preferred Shares ("Series A
Preferred Shares").
Dividends
In the event that the Company pays a dividend or makes any distribution
with respect to the Common Shares, regardless of the form of such distribution,
the holders of the Series A Preferred Shares shall be entitled to participate
with the holders of the Common Shares in all such dividends and distributions,
such that the holders of the Series A Preferred Shares shall receive, with
respect to each such Series A Preferred Share held, an amount equal to the
product of: (i) the dividend or distribution payable with respect to each such
Common Share multiplied by (ii) the number of Common Shares into which such
Series A Preferred Share is convertible as of the record date for such dividend
or distribution or the payment date with respect to such dividend or
distribution, if there is no record date. In the event that a Conversion
Approval (as defined below) has not occurred by July 1, 1997, then the holders
of the Preferred Shares shall be entitled to receive, with respect to each such
Series A Preferred Share held, an amount equal to the product of: (i) 120% of
the dividend or distribution payable with respect to each such Common Share
multiplied by (ii) the number of Common Shares into which such Series A
Preferred Share is convertible as of the record date for such dividend or
distribution or the payment date with respect to such dividend or distribution,
if there is no record date.
Liquidation Preference; Merger or Consolidation
In the event of any liquidation, dissolution or winding up of the Company
(a "Liquidation"), regardless of whether such event is voluntary or otherwise,
each Series A Preferred Share will entitle the holder to receive, before any
distributions are made on Common Shares, an amount equal to the greater of: (i)
the amount as would have been payable with respect to the Common Shares into
which such Series A Preferred Share would have been convertible immediately
prior to the Liquidation if a Conversion Approval had previously occurred and
(ii) the product of $16.50 multiplied by the number of Common Shares into which
such Series A Preferred Shares would have been convertible immediately prior to
the Liquidation if a Conversion Approval had previously occurred plus all
declared but unpaid dividends. In determining whether a distribution (other than
upon voluntary or involuntary liquidation), by dividend, redemption or other
acquisition of shares or otherwise, is permitted under applicable law, amounts
that would be needed if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of holders of
Series A Preferred Shares will not be added to the Company's total liabilities.
Upon a merger, consolidation or similar transaction involving the Company,
holders of Series A Preferred Shares will be entitled to receive such payments
as would have been made with respect to the Common Shares into which such Series
A Preferred Shares would have been convertible immediately prior to such event
if a Conversion Approval had previously occurred.
Redemption
In the event that a Conversion Approval has not occurred by July 1, 1998,
each holder of Series A Preferred Shares will have the right, at its option, to
require the Company to redeem from time to time all or a portion of the Series A
Preferred Shares held by it at a price per share equal to the Redemption Price.
The term "Redemption Price" means, in respect of a Series A Preferred Share, the
greater of: (i) the product of (a) $16.50 plus an amount (the "Return Amount")
equal to 8.0% of $16.50 per annum from the date of issuance of such Series A
Preferred Share to the redemption date thereof less an amount (not to exceed the
Return Amount) equal to distributions actually received by the holder on account
of such Series A Preferred Share and (b) the Conversion Number (as defined
below) and (ii) the product of the market price of a Common Share and the
Conversion Number. The term "Conversion Number" means the number of Common
Shares into which a Series A Preferred Share is, or Series A Preferred Shares
are, convertible. The
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Conversion Number, in respect of each Series A Preferred Share, is 3.33 and, in
respect of all Series A Preferred Shares, is 1,606,060.
Voting Rights
Except as otherwise provided by law and as indicated below, the holders of
Series A Preferred Shares shall be entitled to vote on all matters as to which
the holders of Common Shares shall be entitled to vote, together with the
holders of Common Shares as a single class, and shall be entitled to cast a
number of votes equal to the Conversion Number. Holders of Series A Preferred
Shares will not be entitled to vote on the unlimited convertibility of Series A
Preferred Shares into Common Shares.
Conversion Rights
Subject to the conditions set forth below, each holder of Series A
Preferred Shares shall have the right, at any time, at such holder's option, to
convert, without the payment of any additional consideration, each Series A
Preferred Share held by such holder into that number of non-assessable Common
Shares equal to the Conversion Number. Until Conversion Approval has occurred,
the number of Common Shares that may be issued in respect of the conversion of
Preferred Shares is limited to 181,325 in the aggregate. After Conversion
Approval, there are no limitations on the convertibility of the Series A
Preferred Shares into Common Shares. "Conversion Approval" means approval at a
meeting of shareholders of the unlimited conversion of Series A Preferred Shares
into Common Shares by a majority of the votes cast by holders of Common Shares.
Holders of Series A Preferred Shares have no right to vote on this matter.
If, at any time, the Company: (i) pays a dividend or makes a distribution
on any of its Shares in Common Shares; (ii) subdivides its outstanding Common
Shares into a greater number of Shares; (iii) combines outstanding Common Shares
into a smaller number of Shares; or (iv) issues Common Shares by classification
of any of its Shares, then the Conversion Number in effect immediately prior to
such action shall be adjusted such that the holders of Series A Preferred Shares
may receive upon conversion the number of Common Shares that such holders would
have owned immediately following such action if the holders had converted their
Series A Preferred Shares immediately prior to such action.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding Shares may be owned, directly or indirectly, by five or
fewer individuals (defined in the Code to include certain entities such as
qualified pension plans) during the last half of a taxable year and Shares must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months (or during a proportionate part of a shorter
taxable year).
Because the Board of Trustees believes it is at present essential for the
Company to continue to qualify as a REIT, the Declaration of Trust, subject to
certain exceptions, contains provisions that restrict the number of Shares that
a person may own and that are designed to safeguard the Company against an
inadvertent loss of REIT status. In order to prevent any shareholder from owning
Shares in an amount that would cause more than 50% in value of the outstanding
Shares to be held by five or fewer individuals, the Board, pursuant to authority
granted in the Declaration of Trust, has passed a resolution that, subject to
certain exceptions described below, provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
9.8% in value of the outstanding Shares, except for Safeguard Scientifics, Inc.
("SSI") which, pursuant to a separate agreement with the Company, may own no
more than 14.75% in value of the outstanding Shares (the "Ownership Limit"). The
Board of Trustees, subject to limitations, retains the authority to effect
additional increases to, or establish exemptions from, the Ownership Limit. The
Board of Trustees, pursuant to authority granted in the Declaration of Trust,
has passed a resolution that provides that, for purposes of determining
applicable ownership limitations: (i) the beneficiaries of SERS (in accord with
their actuarial interests therein), and not SERS or the SERS Voting Trust, shall
be deemed the direct owners of Shares held by the SERS Voting Trust, and (ii)
the owners of the Morgan Stanley Funds (in proportion to their ownership
therein), and not such Morgan Stanley Funds nor a related entity, shall be
deemed the direct
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owners of Shares held by such Morgan Stanley Funds.
In addition, pursuant to the Declaration of Trust, no purported transfer of
Shares may be given effect if it would result in ownership of all of the
outstanding Shares by fewer than 100 persons (determined without any reference
to the rules of attribution) or result in the Company being "closely held"
within the meaning of Section 856(h) of the Code (the "Ownership Restrictions").
In the event of a purported transfer or other event that would, if effective,
result in the ownership of Shares in violation of the Ownership Limit or the
Ownership Restrictions, such transfer would be deemed void ab initio and such
Shares would automatically be exchanged for "Excess Shares" authorized by the
Declaration of Trust, according to rules set forth in the Declaration of Trust,
to the extent necessary to ensure that the purported transfer or other event
does not result in the ownership of Shares in violation of the Ownership Limit
or the Ownership Restrictions.
Holders of Excess Shares are not entitled to voting rights (except to the
extent required by law), dividends or distributions. If, after the purported
transfer or other event resulting in an exchange of Shares for Excess Shares and
prior to the discovery by the Company of such exchange, dividends or
distributions are paid with respect to Shares that were exchanged for Excess
Shares, then such dividends or distributions would be repayable to the Company
upon demand. While outstanding, Excess Shares would be held in trust by the
Company for the benefit of the ultimate transferee of an interest in such trust,
as described below. While Excess Shares are held in trust, an interest in that
trust may be transferred by the purported transferee or other purported holder
with respect to such Excess Shares only to a person whose ownership of the
Shares would not violate the Ownership Limit or the Ownership Restrictions, at
which time the Excess Shares would be automatically exchanged for Shares of the
same type and class as the Shares for which the Excess Shares were originally
exchanged. The Declaration of Trust contains provisions that are designed to
ensure that the purported transferee or other purported holder of the Excess
Shares may not receive in return for such a transfer an amount that reflects any
appreciation in the Shares for which such Excess Shares were exchanged during
the period that such Excess Shares were outstanding. Any amount received by a
purported transferee or other purported holder in excess of the amount permitted
to be received would be required to be turned over to the Company.
The Declaration of Trust also provides that Excess Shares shall be deemed
to have been offered for sale to the Company, or its designee, which shall have
the right to accept such offer for a period of 90 days after the later of: (i)
the date of the purported transfer or event which resulted in an exchange of
Shares for such Excess Shares; and (ii) the date the Board of Trustees
determines that a purported transfer or other event resulting in an exchange of
Shares for such Excess Shares has occurred if the Company does not receive
notice of any such transfer. The price at which the Company may purchase such
Excess Shares would be equal to the lesser of: (i) in the case of Excess Shares
resulting from a purported transfer for value, the price per share in the
purported transfer that caused the automatic exchange for such Excess Shares or,
in the case of Excess Shares resulting from some other event, the market price
of such Shares on the date of the automatic exchange for Excess Shares; or (ii)
the market price of such Shares on the date that the Company accepts such Excess
Shares. Any dividend or distribution paid to a proposed transferee on Excess
Shares prior to the discovery by the Company that such Shares have been
transferred in violation of the provisions of the Declaration of Trust shall be
repaid to the Company upon demand. If the foregoing restrictions are determined
to be void or invalid by virtue of any legal decision, statute, rule or
regulation, then the intended transferee or holder of any Excess Shares may be
deemed, at the option of the Company, to have acted as an agent on behalf of the
Company in acquiring or holding such Excess Shares and to hold such Excess
Shares on behalf of the Company.
The Trustees may waive the Ownership Restrictions if evidence satisfactory
to the Trustees and the Company's tax counsel or tax accountants is presented
showing that such waiver will not jeopardize the Company's status as a REIT
under the Code. As a condition of such waiver, the Trustees may require that an
intended transferee give written notice to the Company, furnish such opinions of
counsel, affidavits, undertakings, agreements and information as may be required
by the Trustees and/or an undertaking from the applicant with respect to
preserving the status of the Company. The Ownership Restrictions will not apply
if the Company determines that it no longer will attempt to qualify, or continue
to qualify, as a REIT. Any transfer of Shares, or any security convertible into
Shares that would: (i) create a direct or indirect ownership
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of Shares in excess of the Ownership Limit; or (ii) result in the violation of
the Ownership Restrictions will be void with respect to the intended transferee
and will result in Excess Shares as described above.
Neither the Ownership Restrictions nor the Ownership Limit will be
automatically removed even if the REIT provisions of the Code are changed so as
no longer to contain any ownership concentration limitation or if the ownership
concentration limitation is increased. Except as otherwise described above, any
change in the Ownership Restrictions would require an amendment to the
Declaration of the Trust. Amendments to the Declaration require the affirmative
vote of holders owning not less than a majority of the outstanding Shares
entitled to vote thereon. In addition to preserving the Company's status as a
REIT, the Ownership Restrictions and the Ownership Limit may have the effect of
precluding an acquisition of control of the Company without the approval of the
Board of Trustees.
All persons who own, directly or by virtue of the applicable attribution
provisions of the Code, more than 4.0% of the value of any class of outstanding
Shares, must file an affidavit with the Company containing the information
specified in the Declaration by January 31 of each year. In addition, each
shareholder shall upon demand be required to disclose to the Company in writing
such information with respect to the direct, indirect and constructive ownership
of Shares as the Trustees deem necessary to comply with the provisions of the
Code applicable to REITs, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
The Ownership Limit could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Shares that are hereafter issued will bear a
legend referring to the restrictions and limitations described above.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Shares, as specified in the applicable Prospectus
Supplement. Preferred Shares of each series represented by Depositary Shares
will be deposited under a separate Deposit Agreement (each, a "Deposit
Agreement") among the Company, the depositary named therein (the "Preferred
Share Depositary") and the holders from time to time of the Depositary Receipts.
Subject to the terms of the Deposit Agreement, each owner of a Depositary
Receipt will be entitled, in proportion to the fractional interest of a share of
a particular series of Preferred Shares represented by the Depositary Shares
evidenced by such Depositary Receipt, to all the rights and preferences of the
Preferred Shares represented by such Depositary Shares (including distribution,
voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Shares by the Company to the Preferred Share
Depositary, the Company will cause the Preferred Share Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the following summary of the form thereof filed as an exhibit to
the Registration Statement of which this Prospectus is a part is qualified in
its entirety by reference thereto.
DISTRIBUTIONS
The Preferred Share Depositary will distribute all cash distributions
received in respect of the Preferred Shares to the record holders of Depositary
Receipts evidencing the related Depositary Shares in proportion to the number of
such Depositary Receipts owned by such holders, subject to certain obligations
of holders to file
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proofs, certificates and other information and to pay certain charges and
expenses to the Preferred Share Depositary.
In the event of a distribution other than in cash, the Preferred Share
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Share Depositary, unless the Preferred Share
Depositary determines that it is not feasible to make such distribution, in
which case the Preferred Share Depositary may, with the approval of the Company,
sell such property and distribute the net proceeds from such sale to such
holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Shares converted into Excess Shares.
WITHDRAWAL OF SHARES
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Share Depositary (unless the related Depositary Shares have
previously been called for redemption or converted into Excess Shares), the
holders thereof will be entitled to delivery at such office, to or upon such
holder's order, of the number of whole or fractional Preferred Shares and any
money or other property represented by the Depositary Shares evidenced by such
Depositary Receipts. Holders of Depositary Receipts will be entitled to receive
whole or fractional shares of the related Preferred Shares on the basis of the
proportion of the Preferred Shares represented by each Depositary Share as
specified in the applicable Prospectus Supplement, but holders of such Preferred
Shares will not thereafter be entitled to receive Depositary Shares therefor. If
the Depositary Receipts delivered by the holder evidence a number of Depositary
Shares in excess of the number of Depositary Shares representing the number of
Preferred Shares to be withdrawn, the Preferred Share Depositary will deliver to
such holder at the same time a new Depositary Receipt evidencing such excess
number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems Preferred Shares held by the Preferred Share
Depositary, the Preferred Share Depositary will redeem as of the same redemption
date the number of Depositary Shares representing the Preferred Shares so
redeemed, provided the Company shall have paid in full to the Preferred Share
Depositary the redemption price of the Preferred Shares to be redeemed plus an
amount equal to any accrued and unpaid distributions thereon to the date fixed
for redemption. The redemption price per Depositary Share will be equal to the
redemption price and any other amounts per share payable with respect to the
Preferred Shares. If fewer than all the Depositary Shares are to be redeemed,
the Depositary Shares to be redeemed will be selected pro rata (as nearly as may
be practicable without creating fractional Depositary Shares) or by any other
equitable method determined by the Company that will not result in the issuance
of any Excess Shares.
From and after the date fixed for redemption, all distributions in respect
of the Preferred Shares so called for redemption will cease to accrue, the
Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any monies payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the Preferred Share Depositary.
VOTING OF THE PREFERRED SHARES
Upon receipt of notice of any meeting at which the holders of the Preferred
Shares are entitled to vote, the Preferred Share Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Shares. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Shares) will be entitled to instruct the Preferred Share
Depositary as to the exercise of the voting rights pertaining to the amount of
Preferred Shares represented by such holder's Depositary Shares. The Preferred
Share Depositary will vote the amount of Preferred Shares
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represented by such Depositary Shares in accordance with such instructions, and
the Company will agree to take all reasonable action which may be deemed
necessary by the Preferred Share Depositary in order to enable the Preferred
Share Depositary to do so. The Preferred Share Depositary will abstain from
voting the amount of Preferred Shares represented by such Depositary Shares to
the extent it does not receive specific instructions from the holders of
Depositary Receipts evidencing such Depositary Shares. The Preferred Share
Depositary shall not be responsible for any failure to carry out any instruction
to vote, or for the manner or effect of any such vote made, as long as any such
action or non-action is in good faith and does not result from negligence or
willful misconduct of the Preferred Share Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each Preferred
Share represented by the Depositary Share evidenced by such Depositary Receipt,
as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED SHARES
The Depositary Shares, as such, are not convertible into Common Shares or
any other securities or property of the Company, except in connection with
certain conversions in connection with the preservation of the Company's status
as a REIT. Nevertheless, if so specified in the applicable Prospectus Supplement
relating to an offering of Depositary Shares, the Depositary Receipts may be
surrendered by holders thereof to the Preferred Share Depositary with written
instructions to the Preferred Share Depositary to instruct the Company to cause
conversion of the Preferred Shares represented by the Depositary Shares
evidenced by such Depositary Receipts into whole Common Shares, other Preferred
Shares (including Excess Shares) of the Company or other shares of beneficial
interest, and the Company has agreed that upon receipt of such instructions and
any amounts payable in respect thereof, it will cause the conversion thereof
utilizing the same procedures as those provided for delivery of Preferred Shares
to effect such conversion. If the Depositary Shares evidenced by a Depositary
Receipt are to be converted in part only, a new Depositary Receipt or Receipts
will be issued for any Depositary Shares not to be converted. No fractional
Common Shares will be issued upon conversion, and if such conversion will result
in a fractional share being issued, an amount will be paid in cash by the
Company equal to the value of the fractional interest based upon the closing
price of the Common Shares on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Shares and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Preferred Share
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts or that would be materially and
adversely inconsistent with the rights granted to the holders of the related
Preferred Shares will not be effective unless such amendment has been approved
by the existing holders of at least a majority of the Depositary Shares
evidenced by the Depositary Receipts then outstanding. No amendment shall impair
the right, subject to certain exceptions in the Depositary Agreement, of any
holder of Depositary Receipts to surrender any Depositary Receipt with
instructions to deliver to the holder the related Preferred Shares and all money
and other property, if any, represented thereby, except in order to comply with
law. Every holder of an outstanding Depositary Receipt at the time any such
amendment becomes effective shall be deemed, by continuing to hold such
Depositary Receipt, to consent and agree to such amendment and to be bound by
the Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Share Depositary if: (i) such
termination is necessary to assist in maintaining the Company's status as a REIT
or (ii) a majority of each series of Preferred Shares affected by such
termination consents to such termination, whereupon the Preferred Share
Depositary shall deliver or make available to each holder of Depositary
Receipts, upon surrender of the Depositary Receipts held by such holder, such
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number of whole or fractional Preferred Shares as are represented by the
Depositary Shares evidenced by such Depositary Receipts together with any other
property held by the Preferred Share Depositary with respect to such Depositary
Receipts. The Company has agreed that if the Deposit Agreement is terminated to
assist in maintaining the Company's status as a REIT, then, if the Depositary
Shares are listed on a national securities exchange, the Company will use its
best efforts to list the Preferred Shares issued upon surrender of the related
Depositary Shares on a national securities exchange. In addition, the Deposit
Agreement will automatically terminate if: (i) all outstanding Depositary Shares
shall have been redeemed, (ii) there shall have been a final distribution in
respect of the related Preferred Shares in connection with any liquidation,
dissolution or winding up of the Company and such distribution shall have been
distributed to the holders of Depositary Receipts evidencing the Depositary
Shares representing such Preferred Shares or (iii) each share of the related
Preferred Shares shall have been converted into shares of beneficial interest of
the Company not so represented by Depositary Shares.
CHARGES OF PREFERRED SHARE DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Share Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay certain other transfer and
other taxes and governmental charges as well as the fees and expenses of the
Preferred Share Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Share Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Share Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Share Depositary. A successor
Preferred Share Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Share Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Share Depositary with respect to the related Preferred Shares.
Neither the Preferred Share Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Preferred Share Depositary under the Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Shares represented by the Depositary Shares), gross negligence or willful
misconduct, and the Company and the Preferred Share Depositary will not be
obligated to prosecute or defend any legal proceeding in respect of any
Depositary Receipts, Depositary Shares or Preferred Shares represented thereby
unless satisfactory indemnity is furnished. The Company and the Preferred Share
Depositary may rely on written advice of counsel or accountants, or information
provided by persons presenting Preferred Shares represented thereby for deposit,
holders of Depositary Receipts or other persons believed in good faith to be
competent to give such information, and on documents believed in good faith to
be genuine and signed by a proper party.
In the event the Preferred Share Depositary shall receive conflicting
claims, requests or instructions from any holders of Depositary Receipts, on the
one hand, and the Company, on the other hand, the Preferred Share Depositary
shall be entitled to act on such claims, requests or instructions received from
the Company.
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DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Shares,
Depositary Shares or Common Shares. Warrants may be issued independently or
together with any Securities and may be attached to or separate from such
securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified therein ("Warrant Agent"). The Warrant Agent will
act solely as an agent of the Company in connection with the Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of Warrants.
The applicable Prospectus Supplement will describe the following terms,
where applicable, of the Warrants in respect of which this Prospectus is being
delivered: (i) the title of such Warrants; (ii) the aggregate number of such
Warrants; (iii) the price or prices at which such Warrants will be issued; (iv)
the currencies in which the price or prices of such Warrants may be payable; (v)
the designation, amount and terms of the Securities purchasable upon exercise of
such Warrants; (vi) the designation and terms of the other Securities with which
such Warrants are issued and the number of such Warrants issued with each such
security; (vii) if applicable, the date on and after which such Warrants and the
Securities purchasable upon exercise of such Warrants will be separately
transferable; (viii) the price or prices at which and currency or currencies in
which the Securities purchasable upon exercise of such Warrants may be
purchased; (ix) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire; (x) the minimum or
maximum amount of such Warrants which may be exercised at any one time; (xi)
information with respect to book-entry procedures, if any; (xii) a discussion of
certain Federal income tax considerations; and (xiii) any other material terms
of such Warrants, including terms, procedures and limitations relating to the
exchange and exercise of such Warrants.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the
Declaration of Trust and Bylaws of the Company, as amended, which are
incorporated by reference into this Registration Statement.
DURATION
Under the Company's Declaration of Trust, the Company has a perpetual term
and will continue perpetually subject to the authority of the Board of Trustees
to terminate the Company's existence and liquidate its assets and subject to
termination pursuant to the Maryland REIT Law.
BOARD OF TRUSTEES
The Company's Declaration of Trust provides that the number of Trustees of
the Company shall not be less than three nor more than 15. Any vacancy
(including a vacancy created by an increase in the number of Trustees) will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the Trustees (although less than a quorum). The
Trustees will each serve for a term of one year (except that an individual who
has been elected to fill a vacancy will hold office only until the next annual
meeting of shareholders and until his successor has been duly elected and
qualified).
The Declaration of Trust provides that a Trustee may be removed from office
only at a meeting of the shareholders called for that purpose, by the
affirmative vote of the holders of not less than a majority of the Shares
entitled to vote in the election of Trustees; provided, however, that in the
case of any Trustees elected solely by holders of a series of Preferred Shares,
such Trustees may be removed by the affirmative vote of a majority of the
Preferred Shares of that series then outstanding and entitled to vote in the
election of Trustees, voting together as a single class.
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MEETINGS OF SHAREHOLDERS
The Declaration of Trust requires the Company to hold an annual meeting of
shareholders for the election of Trustees and the transaction of any other
proper business. Special meetings of shareholders may be called upon the written
request of shareholders holding at least 10% of the Common Shares. Special
meetings of shareholders may also be called by the holders of Preferred Shares
to the extent, if any, determined by the Board of Trustees in connection with
the establishment of a class or series of Preferred Shares. Any action required
or permitted to be taken by shareholders must be taken at a duly called annual
or special meeting of shareholders and may not be effected by any consent in
writing of shareholders.
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including a merger, consolidation, share
exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland real estate investment
trust and any person who beneficially owns, directly or indirectly, 10% or more
of the voting power of the trust's shares (an "Interested Shareholder") must be:
(a) recommended by the trustees of such trust and (b) approved by the
affirmative vote of at least: (i) 80% of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest of the trust; and
(ii) two-thirds of the votes entitled to be cast by holders of outstanding
voting shares of beneficial interest other than shares held by the Interested
Shareholder with whom the business combination is to be effected, unless, among
other conditions, the trust's common shareholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Shareholder for its
shares. In addition, an Interested Shareholder or any affiliate thereof may not
engage in a "business combination" with the trust for a period of five years
following the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. These provisions of the MGCL do not apply, however, to
business combinations that are approved or exempted by the board of trustees of
the trust prior to the time that the Interested Shareholder becomes an
Interested Shareholder. An amendment to a Maryland REIT's declaration of trust
electing not to be subject to the foregoing requirements must be approved by the
affirmative vote of at least 80% of the votes entitled to be cast by holders of
outstanding voting shares of beneficial interest of the trust, voting together
as a single voting group, and two-thirds of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest other than shares of
beneficial interest held by Interested Shareholders. Any such amendment shall
not be effective until 18 months after the vote of shareholders and does not
apply to any business combination of the trust with an Interested Shareholder on
the date of the shareholder vote. The Board of Trustees has exempted any
business combinations involving SSI, TNC, Gerard H. Sweeney and their respective
affiliates from the business combination provisions of the MGCL and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, SSI, TNC, Gerard H. Sweeney and their respective affiliates may be
able to enter into business combinations that may not be in the best interest of
the shareholders without compliance by the Company with the super-majority vote
requirements and the other provisions of the statute. In addition, the Company
has exempted any business combination involving SERS or the SERS Voting Trust
and any of their respective existing or future affiliates and Morgan Stanley
Asset Management Inc. and the Morgan Stanley Funds and any of their respective
existing or future affiliates from the business combination provisions of the
MGCL.
The business combination statute could have the effect of delaying,
deferring or preventing offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts, provides
that "control shares" of a Maryland real estate investment trust acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter by
shareholders, excluding shares owned by the acquiror, by officers or by trustees
who are employees of the trust in question. "Control shares" are voting shares
which, if aggregated with all other shares previously acquired by such
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acquiror, would entitle the acquiror to exercise the voting power in the
election of trustees within one of the following ranges of voting power: (a)
one-fifth or more but less than one-third, (b) one-third or more but less than a
majority, or (c) a majority or more of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the trust's board of trustees to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares, except those for which voting rights have previously been
approved, for fair value determined, without regard to the absence of voting
rights, as of the date of the last control share acquisition by the acquiror or
of any meeting of shareholders at which the voting rights of such shares are
considered and not approved. If voting rights for control shares are approved at
a shareholders meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the trust is a party to the
transaction, or to acquisitions approved or exempted by the declaration of trust
or bylaws of the trust. Pursuant to the statute, the Company has exempted any
and all acquisitions of Shares by SSI, TNC and any current or future affiliate
or associate of theirs from the control share provisions of the MGCL. As a
result, SSI or TNC and their affiliates will be able to possess voting power not
generally available to other persons and the effect may be to further enhance
their ability to control the Company. In addition, pursuant to the statute, the
Company has exempted any and all acquisitions of Shares by SERS and the SERS
Voting Trust and any of their respective current or future affiliates or
associates and Morgan Stanley Asset Management Inc. and the Morgan Stanley Funds
and any of their respective current or future affiliates or associates from the
control share provisions of the MGCL.
The control share acquisition statute could have the effect of delaying,
deferring or preventing offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
AMENDMENT TO THE DECLARATION OF TRUST
The Company's Declaration of Trust may be amended only by the affirmative
vote of the holders of not less than a majority of the Shares then outstanding
and entitled to vote thereon, except for the provisions of the Declaration of
Trust relating to the MGCL provisions on business combinations, amendment of
which requires the affirmative vote of the holders of not less than 80% of the
Shares then outstanding and entitled to vote. In addition, in the event that the
Board of Trustees shall have determined, with the advice of counsel, that any
one or more of the provisions of the Company's Declaration of Trust (the
"Conflicting Provisions") are in conflict with the Maryland REIT Law, the Code
or other applicable Federal or state law(s), the Conflicting Provisions shall be
deemed never to have constituted a part of the Declaration of Trust, even
without any amendment thereof.
TERMINATION OF THE COMPANY AND REIT STATUS
Subject to the rights of any outstanding Preferred Shares and to the
provisions of the Maryland REIT Law, the Company's Declaration of Trust permits
the termination of the Company and the discontinuation of the election by the
Board of Trustees that the Company be taxed as a REIT.
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TRANSACTIONS BETWEEN THE COMPANY AND ITS TRUSTEES OR OFFICERS
The Company's Declaration of Trust provides that any contract or
transaction between the Company and one or more Trustees or officers of the
Company must be approved by a majority of the disinterested Trustees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by Maryland law.
The Company's Bylaws require it to indemnify (a) any present or former
Trustee, officer or shareholder who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of such status, against reasonable expenses incurred by him in connection with
the proceeding; (b) any present or former Trustee or officer against any claim
or liability to which he may become subject by reason of his status as such
unless it is established that (i) his act or omission was committed in bad faith
or was the result of active and deliberate dishonesty, (ii) he actually received
an improper personal benefit in money, property or services or (iii) in the case
of a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful; and (c) each shareholder or former shareholder against
any claim or liability to which he may be subject by reason of his status as a
shareholder or former shareholder. In addition, the Company's Bylaws require it
to pay or reimburse, in advance of final disposition of a proceeding, reasonable
expenses incurred by a present or former Trustee, officer or shareholder made a
party to a proceeding by reason of his status as a Trustee, officer or
shareholder provided that, in the case of a Trustee or officer, the Company
shall have received (i) a written affirmation by the Trustee or officer of his
good faith belief that he has met the applicable standard of conduct necessary
for indemnification by the Company as authorized by the Bylaws and (ii) a
written undertaking by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met. The Company's Bylaws also (i) permit the Company to provide
indemnification and payment or reimbursement of expenses to a present or former
Trustee, officer or shareholder who served a predecessor of the Company in such
capacity, and to any employee or agent of the Company or a predecessor of the
Company, (ii) provide that any indemnification or payment or reimbursement of
the expenses permitted by the Bylaws shall be furnished in accordance with the
procedures provided for indemnification and payment or reimbursement of expenses
under Section 2-418 of the MGCL for directors of Maryland corporations and (iii)
permit the Company to provide such other and further indemnification or payment
or reimbursement of expenses as may be permitted by the MGCL for directors of
Maryland corporations.
The limited partnership agreement of the Operating Partnership also
provides for indemnification by the Operating Partnership of the Company, as
general partner, and its Trustees and officers for any costs, expenses or
liabilities incurred by them by reason of any act performed by them for or on
behalf of the Operating Partnership or the Company, provided that such person's
actions were taken in good faith and in the belief that such conduct was in the
best interests of the Operating Partnership and that such person was not guilty
of fraud, willful misconduct or gross negligence.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Trustees and officers of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that, although
the validity and scope of the governing statute has not been tested in court, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.
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MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of material Federal income tax considerations is
based on current Federal income tax law and is for general information only and
is not tax advice. The following discussion summarizes all material federal
income tax considerations to a holder of Common Shares. The applicable
Prospectus Supplement will contain information about additional federal income
tax considerations, if any, relating to Securities other than Common Shares. In
the opinion of Arthur Andersen LLP, tax advisor to the Company (the "Tax
Advisor") the discussion below, insofar as it relates to Federal income tax
matters, is correct in all material respects, and fairly summarizes the federal
income tax considerations that are material to a shareholder. This discussion
does not purport to deal with all aspects of taxation that may be relevant to
particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the United
States, except to the extent discussed under "Taxation of Foreign Shareholders"
below) subject to special treatment under the Federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company first elected to be taxed as a REIT for its taxable year ended
December 31, 1986, and has operated and expects to continue to operate in such a
manner so as to qualify as a REIT for Federal income tax purposes. In the
opinion of the Tax Advisor, and based on certain representations made by the
Company relating to the organization and operation of the Company and the
Operating Partnership, the Company will continue to qualify as a REIT under the
Code. However, the opinion of the Tax Advisor is not binding upon the IRS and no
absolute assurance can be given that the Company will continue to operate in a
manner so as to remain qualified as a REIT.
The following is a general summary of the Code sections that govern the
Federal income tax treatment of a REIT and its shareholders. These sections of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof as currently in effect. There is no assurance that there
will not be future changes in the Code or administrative or judicial
interpretation thereof which could adversely affect the Company's ability to
continue to qualify as a REIT or adversely affect the taxation of holders of
Common Shares or which could further limit the amount of income the Company may
derive from the management, construction, development, leasing or sale of
properties owned by the Operating Partnership or by third parties or in
partnerships with third parties.
TAXATION OF THE COMPANY AS A REIT
An entity that qualifies for taxation as a REIT and distributes to its
shareholders at least 95% of its REIT taxable income is generally not subject to
Federal corporate income taxes on net income that it currently
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distributes to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a corporation. However, the Company will be subject to Federal
income tax as follows:
The Company will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
(i) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference, if any.
(ii) If the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property other than
foreclosure property held primarily for sale to customers in the ordinary
course of business) such income will be subject to a 100% tax. See "-- Sale
of Partnership Property."
(iii) If the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
(iv) If the Company should fail to distribute during each calendar
year at least the sum of (1) 85% of its REIT ordinary income for such year,
(2) 95% of its REIT capital gain net income for such year, and (3) any
undistributed taxable income from prior years, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts
actually distributed.
(v) If the Company has (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise or default on a loan
secured by the property) which is held primarily for sale to customers in
the ordinary course of business or (2) other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the
highest corporate rate.
(vi) If the Company acquires any asset from a C corporation (i.e.,
generally a corporation subject to tax at the corporate level) in a
transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property)
in the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Restriction
Period") beginning on the date on which such asset was acquired by the
Company then, pursuant to guidelines issued by the IRS, the excess of the
fair market value of such property at the beginning of the applicable
Restriction Period over the Company's adjusted basis in such asset as of
the beginning of such Restriction Period will be subject to a tax at the
highest regular corporate rate. The results described above with respect to
the recognition of built-in gain assume that the Company will make an
election pursuant to IRS Notice 88-19 or applicable future administrative
rules or Treasury Regulations to avail itself of the benefits of the
Restriction Period.
QUALIFICATION OF THE COMPANY AS A REIT
The Code defines a REIT as a corporation, trust or association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation but for Sections
856 through 859 of the Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(5) which has the calendar year as its taxable year;
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(6) the beneficial ownership of which is held by 100 or more persons;
(7) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
exempt organizations); and
(8) which meets certain income, asset and distribution tests,
described below.
Conditions (1) through (5), inclusive, must be satisfied during the entire
taxable year, and condition (6) must be satisfied 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. The Company has previously issued Common Shares in
sufficient proportions to allow it to satisfy requirements (6) and (7) (the "100
Shareholder" and "five-or-fewer" requirements), respectively. In addition, the
Company's Declaration of Trust provides restrictions regarding the transfer of
its Shares that are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (6) and (7) above. See "Description of
Shares of Beneficial Interest -- Restrictions on Transfer." However, these
restrictions may not ensure that the Company will, in all cases, be able to
satisfy the share ownership requirements described in (6) and (7) above. If the
Company fails to satisfy such share ownership requirements, the Company's status
as a REIT will terminate. See "-- Failure to Qualify."
A REIT is permitted to have a wholly-owned subsidiary (also referred to as
a "qualified REIT subsidiary"). A qualified REIT subsidiary is not treated as a
separate entity for Federal income tax purposes. Rather, all of the assets and
items of income, deductions and credit of a qualified REIT subsidiary are
treated as if they were those of the REIT. The Company may in the future form
one or more qualified REIT subsidiaries.
A REIT is deemed to own its proportionate share of the assets of a
partnership in which it is a partner and is deemed to receive its proportionate
share of the income of the partnership. Thus, the Company's proportionate share
of the assets and items of income of the Operating Partnership and each of the
Title Holding Partnerships will be treated as assets and items of income of the
Company for purposes of applying the requirements described herein, provided
that the Operating Partnership and its subsidiary partnerships are treated as
partnerships for Federal income tax purposes. In addition, the character of the
assets and gross income of such partnerships shall retain the same character in
the hands of the REIT for purposes of the requirements applicable to REITs under
the Code including satisfying the income tests and the asset tests. See "Income
Taxation of the Operating Partnership, the Title Holding Partnerships and Their
Partners."
INCOME TESTS
To maintain qualification as a REIT, there are three gross income
requirements that must be satisfied annually. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and interest on obligations secured by a mortgage on real
property) or from "qualified temporary investment income" (described below).
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from investments
qualifying under the 75% test above, and from dividends, interest, and gain from
the sale or disposition of stock or securities or from any combination of the
foregoing. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions, and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. In applying these tests, the Company will
be treated as realizing its share of any income and bearing its share of any
loss of the Operating Partnership and the character of such income or loss, as
well as other partnership items, will be determined at the partnership level.
Rents received by the Company will qualify as "rents from real property"
for purposes of satisfying the 75% and 95% gross income tests only if several
conditions are met. First the amount of rent must not be based
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in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or an
owner of 10% or more of the REIT, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the REIT does not derive
any income; provided, however, that the Company may directly perform certain
customary services (e.g., furnishing water, heat, light and air conditioning,
and cleaning windows, public entrances and lobbies) other than services which
are considered rendered to the occupant of the property (e.g., renting parking
spaces on a reserved basis to tenants).
It is expected that the Company's real estate investments, which include
its allocable share of income from the Operating Partnership, will give rise to
income that qualifies as "rents from real property" for purposes of the 75
percent and 95 percent gross income tests, other than rents received from a
Related Party Tenant. However, the Company has represented that the rents
received from Related Party Tenants, in addition to all other income which is
not qualifying income for the 75 percent and 95 percent gross income tests, does
not exceed five percent of the Company's gross income, and therefore, the
Company's status as a REIT should not be jeopardized.
The Company has represented that it does not and will not (i) charge rent
for any property that is based in whole or in part on the income or profits of
any person (other than being based on a percentage of receipts or sales); (ii)
receive rents in excess of a de minimis amount from Related Party Tenants; (iii)
derive rents attributable to personal property which constitute greater than 15%
of the total rents received under the lease; or (iv) perform services considered
to be rendered to the occupant of property, other than through an independent
contractor from whom the Company derives no income.
The Operating Partnership owns 5% of the voting common stock, and all of
the preferred stock of the Management Company, a corporation that is taxable as
a regular corporation. The Management Company performs management, development
and leasing services for the Operating Partnership and other real properties
owned in whole or in part by third parties. The income earned by and taxed to
the Management Company would be nonqualifying income if earned directly by the
Company. As a result of the corporate structure, the income will be earned by
and taxed to the Management Company and will be received by the Company only
indirectly as dividends. Although interest and dividends are generally
qualifying income under the 95% test, the IRS has announced a no-ruling policy
on this issue when the dividends and interest are earned in this manner.
If the Company fails to satisfy one or both of the 75% of 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if (i) the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its return, and
(iii) any incorrect information on the schedule was not due to fraud with intent
to evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of these relief provisions. As
discussed above in "Taxation of the Company as a REIT," even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
No similar mitigation provision applies to provide relief if the 30% income test
is failed, and in such case, the Company would cease to qualify as a REIT. See
"-- Failure to Qualify."
ASSET TESTS
In order for the Company to maintain its qualification as a REIT, at the
close of each quarter of its taxable year it must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of
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the Company's total assets must be represented by real estate assets (which for
this purpose include (i) its allocable share of real estate assets held by
partnerships in which the Company or a "qualified REIT subsidiary" of the
Company owns an interest and (ii) stock or debt instruments purchased with the
proceeds of a stock offering or a long-term (at least five years) debt offering
of the Company and held for not more than one year from the date the Company
receives such proceeds), cash, cash items, and government securities. Second,
not more than 25% of the Company's total assets may be represented by securities
other than those described above in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities (excluding securities of a qualified REIT
subsidiary, of which the REIT is required to own all of such stock, or another
REIT).
The Company anticipates that it will be able to comply with these asset
tests. The Company is deemed to hold directly its proportionate share of all
real estate and other assets of the Operating Partnership and should be
considered to hold its proportionate share of all assets deemed owned by the
Operating Partnership through its ownership of partnership interests in other
partnerships. As a result, the Company plans to hold more than 75% of its assets
as real estate assets. In addition, the Company does not plan to hold any
securities representing more than 10% of any one issuer's voting securities,
other than any qualified REIT subsidiary of the Company, nor securities of any
one issuer exceeding 5% of the value of the Company's gross assets (determined
in accordance with generally accepted accounting principles). As previously
discussed, the Company is deemed to own its proportionate share of the assets of
a partnership in which it is a partner so that the partnership interest, itself,
is not a security for purposes of this asset test.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such other action
will always be successful. If the Company fails to cure any noncompliance with
the asset test within such time period, its status as a REIT would be lost.
As noted above, one of the requirements for qualification as a REIT is that
a REIT not own more than 10 percent of the voting stock of a corporation other
than the stock of a qualified REIT subsidiary (of which the REIT is required to
own all of such stock) and stock in another REIT. The Operating Partnership will
own only approximately 5 percent of the voting stock and all of the non-voting
preferred stock of the Management Company and therefore will comply with this
rule. However, the IRS could contend that the Company's ownership, through its
interest in the Operating Partnership, of all of the non-voting preferred stock
in the Management Company should be viewed as voting stock because of its
substantial economic position in the Management Company. If the IRS were to be
successful in such a contention, the Company's status as a REIT would be lost
and the Company would become subject to federal, corporate income tax on its net
income, which would have a material adverse affect on the Company's cash
available for distribution. The Company does not have the ability to designate a
seat on the Board of Directors of the Management Company. The Company does not
believe that it will be viewed as owning in excess of 10 percent of the voting
stock of the Management Company.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the REIT's net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or
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before the first regular dividend payment after such declaration. To the extent
that the Company does not distribute all of its net capital gain or distributes
at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax on the undistributed amount at regular capital gains and
ordinary corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT net capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the limited partnership
agreement of the Operating Partnership authorizes the Company, as general
partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet the 95% distribution requirement due primarily to the expenditure of
cash for nondeductible items such as principal amortization or capital
expenditures and for the redemption of the Series A Preferred Shares if a
Conversion Approval has not occurred prior to July 1, 1998. (See "Description of
Shares of Beneficial Interest -- Preferred Shares"). In order to meet the 95%
distribution requirement, the Company may borrow or may cause the Operating
Partnership to arrange for short-term or other borrowing to permit the payment
of required distributions or attempt to declare a consent dividend, which is a
hypothetical distribution to holders of Common Shares out of the earnings and
profits of the Company. The effect of such a consent dividend (which, in
conjunction with distributions actually paid, must not be preferential to those
holders who agree to such treatment) would be that such holders would be treated
for federal income tax purposes as if they had received such amount in cash, and
they then had immediately contributed such amount back to the Company as
additional paid-in capital. This would result in taxable income to those holders
without the receipt of any actual cash distribution but would also increase
their tax basis in their Common Shares by the amount of the taxable income
recognized.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a certain year by paying "deficiency
dividends" to shareholders in a later year that may be included in the Company's
deduction for distributions paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay to the IRS interest based upon the
amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable to them as ordinary income, and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
INCOME TAXATION OF THE OPERATING PARTNERSHIP, THE TITLE HOLDING PARTNERSHIPS AND
THEIR PARTNERS
The following discussion summarizes certain Federal income tax
considerations applicable to the Company's investment in the Operating
Partnership and its subsidiary partnerships (referred to herein as the "Title
Holding Partnerships") .
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CLASSIFICATION OF THE OPERATING PARTNERSHIP AND TITLE HOLDING, PARTNERSHIPS AS
PARTNERSHIPS
The Company will hold a substantial part of its investments through the
Operating Partnership. The Company will be entitled to include in its income its
distributive share of the income and to deduct its distributive share of the
losses of the Operating Partnership (including the Operating Partnership's share
of the income or losses of the Title Holding Partnerships) only if the Operating
Partnership and the Title Holding Partnerships (collectively, the
"Partnerships") are classified for Federal income tax purposes as partnerships
rather than as associations taxable as corporations. An organization formed as a
partnership will be treated as a partnership for Federal income tax purposes
rather than as a corporation only if it has no more than two of the four
corporate characteristics that the Treasury Regulations use to distinguish a
partnership from a corporation for tax purposes. These four characteristics are
continuity of life, centralization of management, limited liability, and free
transferability of interests.
Neither the Operating Partnership nor any of the Title Holding Partnerships
has requested, nor do they intend to request, a ruling from the IRS that they
will be treated as partnerships for Federal income tax purposes. The Company
will receive an opinion of the Tax Advisor, which is not binding on the IRS,
that the Operating Partnership and the Title Holding Partnerships will each be
treated as partnerships for Federal income tax purposes and not as an
association or publicly traded partnership taxable as a corporation. The opinion
of the Tax Advisor is based on the provisions of the limited partnership
agreement of the Operating Partnership and the limited partnership agreements,
of the Title Holding Partnerships, respectively, and certain factual assumptions
and representations described in the opinion. There is no assurance that the IRS
will not challenge the status of the Operating Partnership or the Title Holding
Partnerships as partnerships for federal income tax purposes. If such challenge
were sustained by a court, the Operating Partnership and/or a Title Holding
Partnership could be treated as a corporation for federal income tax purposes.
If for any reason the Operating Partnership or a Title Holding Partnership
was classified as an association taxable as a corporation rather than as a
partnership for Federal income tax purposes, the Company would not be able to
satisfy the income and asset requirements for REIT status. See "-- Income Tests"
and "-- Asset Tests." In addition, any change in any such Partnership's status
for tax purposes might be treated as a taxable event, in which case the Company
might incur a tax liability without any related cash distribution. See
"-- Annual Distribution Requirements." Further, items of income and deduction of
any such Partnership would not pass through to its partner (e.g., the Company),
and its partners would be treated as shareholders for tax purposes. Any such
Partnership would be required to pay income tax at corporate tax rates on its
net income and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
Recently proposed Treasury Regulations (the "Proposed Regulations") would
eliminate the four-factor test described above and instead permit a partnership
or limited liability company to elect to be taxed as a partnership for federal
income tax purposes without regard to the number of corporate characteristics
possessed by such entity. The Proposed Regulations would apply for tax periods
beginning on or after the date that such regulations are finalized. Until such
time, the existing regulations will continue to apply. The Proposed Regulations
would not permit the IRS to challenge the classification of an existing
partnership or limited liability company for tax periods to which the existing
Treasury Regulations apply if (1) the entity had a reasonable basis for its
claimed classification, (2) the entity claimed that same classification in all
prior years and (3) as of the date that the Proposed Regulations were published,
neither the entity nor any member of the entity had been notified in writing
that the classification of the entity is under examination by the IRS.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
income and losses among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) and the
Treasury Regulations promulgated thereunder, which require that partnership
allocations respect the economic arrangement of the partners.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking
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into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The Operating
Partnership's allocations of taxable income and loss are intended to comply with
the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
The Company has represented that the fair market values of 19 of the
Properties contributed directly or indirectly to the Operating Partnership in a
transaction with SSI and TNC in August 1996 were higher than the tax basis of
such Properties. Pursuant to Section 704(c) of the Code, items of income, gain,
loss, and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated for Federal income tax purposes in a manner such that the
contributor is charged with or benefits from the unrealized gain or unrealized
loss associated with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at the time of
contribution (the "Pre-Contribution Gain or Loss"). The partnership agreement of
the Operating Partnership requires allocations of income, gain, loss and
deduction attributable to such contributed property to be made in a manner that
is consistent with Section 704(c) of the Code. Thus, if the Operating
Partnership sells contributed property at a gain or loss, such gain or loss will
be allocated to the contributing partners, and away from the Company, generally
to the extent of the Pre-Contribution Gain or Loss.
The Treasury Department has issued final and temporary regulations under
Section 704(c) of the Code (the "Regulations") which give partnerships great
flexibility in ensuring that a partner contributing property to a partnership
receives the tax burdens and benefits of any Pre-Contribution Gain or Loss
attributable to the contributed property. The Regulations permit partnerships to
use any "reasonable method" of accounting for Pre-Contribution Gain or Loss. The
Regulations specifically describe three reasonable methods, including (i) the
"traditional method" under current law, (ii) the traditional method with the use
of "curative allocations" which would permit distortions caused by
Pre-Contribution Gain or Loss to be rectified on an annual basis, and (iii) the
"remedial allocation method" which is similar to the traditional method with
"curative allocations." The Partnership Agreement permits the Company, as a
general partner, to select one of these methods to account for Pre-Contribution
Gain or Loss.
DEPRECIATION
The Operating Partnership's assets other than cash consist largely of
appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction generally retain the same depreciation
method and recovery period as they had in the hands of the partner who
contributed them to the partnership. Accordingly, the Operating Partnership's
depreciation deductions for its real property are based largely on the historic
tax depreciation schedules for the Properties prior to their contribution to the
Operating Partnership. The Properties are being depreciated over a range of 15
to 40 years using various methods of depreciation which were determined at the
time that each item of depreciable property was placed in service. Any real
property purchased by the Partnerships will be depreciated over at least 39
years. In certain instances where a partnership interest rather than real
property is contributed to the Partnership, the real property may not carry over
its recovery period but rather may, similarly, be subject to the lengthier
recovery period.
Section 704(c) of the Code requires that depreciation as well as gain and
loss be allocated in a manner so as to take into account the variation between
the fair market value and tax basis of the property contributed. Thus, because
most of the property contributed to the Operating Partnerships is appreciated,
the Company will generally receive allocations of tax depreciation in excess of
its percentage interest in the Operating Partnership. Depreciation with respect
to any property purchased by the Operating Partnership subsequent to the
admission of its partners, however, will be allocated among the partners in
accordance with their respective percentage interests in the Partnerships.
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As described above (See "-- Tax Allocations with Respect to Contributed
Properties"), the Treasury Department has recently issued Regulations which give
partnerships flexibility in ensuring that a partner contributing property to a
partnership receives the tax benefits and burdens of any Pre-Contribution Gain
or Loss attributable to the contributed property.
As described previously, the Company, as a general partner, may select any
permissible method to account for Pre-Contribution Gain or Loss. The use of
certain of these methods may result in the Company being allocated lower
depreciation deductions than if a different method were used. The resulting
higher taxable income and earnings and profits of the Company, as determined for
federal income tax purposes, should decrease the portion of distributions by the
Company which may be treated as a return of capital. See "-- Annual Distribution
Requirements."
BASIS IN OPERATING PARTNERSHIP INTEREST
The Company's adjusted tax basis in each of the partnerships in which it
has an interest generally (i) will be equal to the amount of cash and the basis
of any other property contributed to such partnership by the Company, (ii) will
be increased by (a) its allocable share of such partnership's income and (b) its
allocable share of any indebtedness of such partnership, and (iii) will be
reduced, but not below zero, by the Company's allocable share of (a) such
partnership's loss and (b) the amount of cash and the fair market value of any
property distributed to the Company and by constructive distributions resulting
from a reduction in the Company's share of indebtedness of such partnership.
If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss (or portion thereof) would not reduce the Company's adjusted tax basis
below zero. To the extent that distributions from a partnership to the Company,
or any decrease in the Company's share of the nonrecourse indebtedness of a
partnership (each such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions) would
constitute taxable income to the Company. Such distributions and constructive
distributions normally would be characterized as long-term capital gain if the
Company's interest in such partnership has been held for longer than the
long-term capital gain holding period (currently one year).
SALE OF PARTNERSHIP PROPERTY
Generally, any gain realized by a partnership on the sale of property held
by the partnership for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. However, under the requirements applicable to REITS under the Code,
the Company's share as a partner of any gain realized by the Operating
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. See "-- Taxation of the Company as a REIT." Such prohibited
transaction income will also have an adverse effect upon the Company's ability
to satisfy the income tests for REIT status. See "-- Income Tests." Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. A safe harbor to avoid classification as a prohibited transaction
exists as to real estate assets held for the production of rental income by a
REIT for at least four years where in any taxable year the REIT has made no more
than seven sales of property or, in the alternative, the aggregate of the
adjusted bases of all properties sold does not exceed 10% of the adjusted bases
of all of the REIT's properties during the year and the expenditures includible
in a property's net sales price. The Company, as general partner of the
Operating Partnership, has represented that the Operating Partnership and the
Title Holding Partnerships intend to hold the Properties for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating and leasing properties and to make such
occasional sales of the properties as are consistent with the Company's and the
Operating Partnership's investment objectives. No
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assurance can be given, however, that every property sale by the Partnerships
will constitute a sale of property held for investment.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be dividends taxable
to such U.S. shareholders as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held its shares
of beneficial interest. However, corporate shareholders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that distributions in excess of current and accumulated earnings
and profits exceed the adjusted basis of a shareholder's shares, such
distributions will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any losses
of the Company.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent such
shareholder has received distributions from the Company required to be treated
as long-term capital gain.
Distributions from the Company and gain from the disposition of Common
Shares will not be treated as passive activity income and, therefore,
shareholders may not be able to apply any "passive losses" against such income.
Dividends from the Company (to the extent they do not constitute a return of
capital or capital gain dividends) and, on an elective basis, capital gain
dividends and gain from the disposition of Common Shares will generally be
treated as investment income for purposes of the investment income limitation.
BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the IRS the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid unless such
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A shareholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to the Company. See "-- Taxation of Foreign
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Distributions by the Company to a shareholder that is a tax-exempt entity
should not constitute "unrelated business taxable income" ("UBTI"), as defined
in Section 512(a) of the Code provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the
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meaning of the Code and the shares are not otherwise used in an unrelated trade
or business of the tax-exempt entity.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in the
qualified trust, instead of treating the qualified trust as a single individual
(the "look-through exception"). A qualified trust that holds more than 10
percent of the shares of a REIT is required to treat a percentage of REIT
dividends as UBTI if the REIT incurs debt to acquire or improve real property.
This rule applies, however, only if (i) the qualification of the REIT depends
upon the application of the "look through" exception (described above) to the
restriction on REIT shareholdings by five or fewer individuals, including
qualified trusts (see "Description of Shares of Beneficial
Interest -- Restrictions on Transfer") and (ii) the REIT is "predominantly held"
by qualified trusts, i.e., if either (x) a single qualified trust holds more
than 25 percent by value of the interests in the REIT or (y) one or more
qualified trusts, each owning more than 10 percent by value, holds in the
aggregate more than 50 percent of the interests in the REIT. The percentage of
any dividend paid (or treated as paid) to such a qualified trust that is treated
as UBTI is equal to the amount of modified gross income (gross income less
directly connected expenses) from the unrelated trade or business of the REIT
(treating the REIT as if it were a qualified trust), divided by the total
modified gross income of the REIT. A de minimis exception applies where the
percentage is less than 5 percent.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of Federal, state and local income tax laws with regard to an
investment in Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a United States trade or business, the
Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. shareholders are taxed with respect to such
distributions (and may also be subject to the 30% branch profits tax in the case
of a shareholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a shareholder to the extent that such distributions do not exceed
the adjusted basis of the shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a Non-
Shareholder's shares, such distributions will give rise to tax liability if the
Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale
or disposition of his shares in the Company, as described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Shareholder as if
such gain were effectively connected with a United States business. Non-U.S.
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Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by the Company as a capital gains
dividend. The amount is creditable against the Non-U.S. Shareholder FIRPTA tax
liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the shares of beneficial interest was
held directly or indirectly by foreign persons. It is currently anticipated that
the Company will be a "domestically controlled REIT," and therefore the sale of
Shares will not be subject to taxation under FIRPTA. However, because the Common
Shares will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT." Gain not subject to FIRPTA will
be taxable to a Non-U.S. Shareholder if (i) investment in the shares is
effectively connected with the Non-U.S. Shareholder's United States 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 (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of Shares were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals).
STATEMENT OF STOCK OWNERSHIP
The Company is required to demand annual written statements from the record
holders of designated percentages of its Shares disclosing the actual owners of
the Shares. The Company must also maintain, within the Internal Revenue District
in which it is required to file its federal income tax return, permanent records
showing the information it has received as to the actual ownership of such
Shares and a list of those persons failing or refusing to comply with such
demand.
OTHER TAX CONSEQUENCES
The Company, the Operating Partnership, the Title Holding Partnerships and
the Company's shareholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company, the
Operating Partnership, the Title Holding Partnerships and the Company's
shareholders may not conform to the Federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Company.
POSSIBLE FEDERAL TAX DEVELOPMENTS
The rules dealing with Federal income taxation are constantly under review
by the IRS, the Treasury Department and Congress. New Federal tax legislation or
other provisions may be enacted into law or new interpretations, rulings,
Treasury Regulations or court decisions could be adopted, all of which could
adversely affect the taxation of the Company or of its shareholders. No
prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions or court decisions either directly or indirectly
affecting the Company or its shareholders. Consequently, the tax treatment
described herein may be modified prospectively or retroactively by legislative,
judicial or administrative action.
REAL ESTATE TRANSFER TAXES
The transfer to the Operating Partnership of certain limited partnership
interests in Title Holding Partnerships in August 1996 was structured as
transfers of 89% of the capital interests and 99% of the cash flow and profit
interests in the Title Holding Partnership with the residual interests to be
acquired by the
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Operating Partnership on or before September 1999. This transaction structure is
intended to comply with non-binding informal advice provided by the Pennsylvania
Department of Revenue to the effect that such transfers are not subject to
Pennsylvania real estate transfer taxes. However, the Company has not obtained a
formal ruling from the Pennsylvania Department of Revenue on this issue. If the
Operating Partnership desired or were required, for financing purposes or
otherwise, to acquire such residual interests before September 1999, or if the
use of this structure resulted in the imposition of Pennsylvania real estate
transfer taxes, the Operating Partnership could be required to pay such real
estate transfer taxes which are estimated at $640,000.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of the Securities,
underwriters may be deemed to have received compensation from the Company in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of the Securities for whom they may act as agent. Underwriters
may sell Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Securities may be deemed to
be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except:
(i) the purchase by an institution of the Securities covered by its Contracts
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may engage in transactions
with and perform services for the Company and its subsidiaries in the ordinary
course of business.
40
<PAGE> 51
EXPERTS
The audited financial statements and schedule of Brandywine Realty Trust
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement to the extent and for the periods indicated in their reports have been
audited by Arthur Andersen LLP, independent public accountants, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
LEGAL MATTERS
The validity of the issuance of the Common Shares offered hereby will be
passed upon for the Company by Pepper, Hamilton & Scheetz LLP, Philadelphia,
Pennsylvania. Pepper, Hamilton & Scheetz LLP will rely on Ballard Spahr Andrews
& Ingersoll, Baltimore, Maryland, as to certain matters of Maryland law.
TAX MATTERS
The opinion regarding the statements in this Prospectus under the caption
"Federal Income Tax Considerations" has been rendered by Arthur Andersen LLP,
independent public accountants, and has been referred to herein in reliance upon
the authority of such firm as experts in giving said opinion.
41
<PAGE> 52
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company........................... S-3
Recent Developments................... S-4
The Offering.......................... S-6
Use of Proceeds....................... S-6
Price Range of Common Shares and
Distribution History................ S-7
Underwriting.......................... S-8
Experts............................... S-9
Legal Matters......................... S-9
Tax Matters........................... S-9
Available Information................. S-9
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Risk Factors.......................... 4
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Distributions....................... 14
Use of Proceeds....................... 14
Description of Shares of Beneficial
Interest............................ 14
Description of Depositary Shares...... 20
Description of Warrants............... 24
Certain Provisions of Maryland Law and
of the Company's Declaration of
Trust and Bylaws.................... 24
Federal Income Tax Considerations..... 28
Plan of Distribution.................. 40
Experts............................... 41
Legal Matters......................... 41
Tax Matters........................... 41
</TABLE>
======================================================
======================================================
1,750,000 COMMON SHARES
OF
BENEFICIAL INTEREST
OF
BRANDYWINE REALTY
TRUST
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
======================================================
