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PROSPECTUS
389,976 Shares
BRANDYWINE REALTY TRUST
Common Shares of Beneficial Interest
This Prospectus relates to the offer and sale from time to time by the
holders thereof of up to 389,976 common shares of beneficial interest, par value
$.01 per share (the "Common Shares"), that may be issued by Brandywine Realty
Trust (the "Company") to holders of 389,976 units of limited partnership
("Units") in Brandywine Operating Partnership, L.P. (the "Operating
Partnership"), of which the Company is the sole general partner, if and to the
extent any such Units are redeemed for Common Shares. The Company is registering
for reoffer and resale by such holders (collectively, the "Selling
Shareholders") the Common Shares issuable upon the redemption of Units pursuant
to the terms of a registration rights agreement executed by the Company for
their benefit. The registration of the reoffer and resale of the Common Shares
does not necessarily mean that any of the Common Shares will be offered or sold
by the Selling Shareholders. The Units referenced in this paragraph were issued
by the Operating Partnership in a private transaction in December 1997.
The Company initially qualified to be taxed as a real estate investment
trust (a "REIT") for federal income tax purposes commencing with its taxable
year ended December 31, 1986 and has qualified to be taxed as a REIT for all
years subsequent to its 1986 tax year. The Common Shares are traded on the New
York Stock Exchange (the "NYSE") under the symbol "BDN." 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."
See "Risk Factors" beginning on page 4 of this Prospectus for 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.
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.
The Selling Shareholders from time to time may offer and sell the
Common Shares held by them directly or through agents or broker-dealers on terms
to be determined at the time of sale. To the extent required, the names of any
agent or broker-dealer and applicable commissions or discounts and any other
required information with respect to any particular offer will be set forth in
the section of this Prospectus entitled "Plan of Distribution" or an
accompanying Prospectus Supplement. Each of the Selling Shareholders reserves
the sole right to accept or reject, in whole or in part, any proposed purchase
of the Common Shares to be made directly or through agents.
The Company will not receive any of the proceeds from the sale of any
Common Shares by the Selling Shareholders, but has agreed to bear certain
expenses of registration of the Common Shares under Federal and state securities
laws.
The Selling Shareholders and any agents or broker-dealers that
participate with the Selling Shareholders in the distribution of Common Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions received by them
and any profit on the resale of the Shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
The date of this Prospectus is March 5, 1998.
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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 New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
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 Securities. 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, 1996, as amended by a Form 10-K/A No. 1;
b. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, as amended by a Form 10-Q/A No. 1, Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, and
Quarterly Report on Form 10-Q for the quarter ended November 30,
1997;
c. The Company's Current Reports on Form 8-K/A No. 1 dated February
5, 1997; Form 8-K dated February 7, 1997; Form 8-K/A No. 1 dated
February 13, 1997; Form 8-K/A No. 2 dated February 24, 1997; Form
8-K dated February 27, 1997; Form 8-K dated March 18, 1997; Form
8-K dated April 18, 1997; Form 8-K/A No. 1 dated April 29, 1997;
Form 8-K dated May 1, 1997; Form 8-K dated May 9, 1997; Form 8-K
dated June 9, 1997; Form 8-K dated June 26, 1997; Form 8-K dated
June 27, 1997; Form 8-K/A No. 1 dated July 21, 1997; Form 8-K
dated July 23, 1997; Form 8-K dated August 7, 1997; Form 8-K
dated August 22, 1997; Form 8-K dated September 10, 1997; Form
8-K dated September 11, 1997; Form 8-K dated October 3, 1997;
Form 8-K dated October 30, 1997; Form 8-K dated November 18,
1997; Form 8-K dated December 17, 1997; Form 8-K dated December
19, 1997; Form 8-K dated January 9, 1998; Form 8-K dated January
27, 1998; Form 8-K dated January 29, 1998; Form 8-K dated
February 12, 1998; Form 8-K dated February 23, 1998; and Form
8-K dated February 24, 1998;
d. The combined statements of revenue and certain expenses of the
Commonwealth of Pennsylvania State Employees' Retirement System
Acquisition Properties, the Delaware Corporate Center Acquisition
Property and the Equivest Management, Inc. Acquisition Properties
(700/800 Business Center Drive)
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for the year ended December 31, 1995 and the reports thereon of
the Company's independent public accountants contained on pages
F-50 through F-59, inclusive, of 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 November 25,
1996;
e. The description of the Common Shares contained in the Company's
Registration Statement on Form 8-A dated October 14, 1997 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 Common Shares to which this
Prospectus relates will be deemed to be incorporated by reference in and made a
part of this Prospectus from the date of filing such documents. Any statement
contained in this Prospectus or in a document incorporated or deemed to be
incorporated by reference in this Prospectus will 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 will not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. Subject to the
foregoing, all information appearing in this Prospectus 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: Brad
A. Molotsky, 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 in such
documents, appearing elsewhere and incorporated by reference in this Prospectus.
As used in this Prospectus, the term "Company" includes Brandywine Realty Trust
and its subsidiaries and affiliated entities, including the Operating
Partnership, unless the context indicates otherwise.
General
The Company is a self-administered, self-managed and fully integrated
REIT active in acquiring, developing, redeveloping, leasing and managing
suburban office and industrial properties. As of February 20, 1998, the
Company's portfolio included 126 office properties and 28 industrial facilities
(collectively, the "Properties") that contained an aggregate of approximately
10.0 million net rentable square feet and economic interests in six office
development entities. Certain of the Properties serve as flex facilities,
accommodating office use, warehouse space and research and development
activities. The Company also owns an interest in a commercial real estate
management services company (the "Management Company") that as of February 20,
1998 managed approximately 10.2 million net rentable square feet (including 152
of the Properties).
The Company carries on its activities directly and through
subsidiaries. As of the date of this Prospectus, the Company holds interests in
subsidiaries (including the Operating Partnership) that, in turn, either own the
Properties in fee or the economic interests thereof. 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 February 20, 1998, the Company held an
approximately 98.7% interest in, and was the sole general partner of, the
Operating Partnership.
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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.
RISK FACTORS
An investment in Common Shares involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in, or incorporated by reference in, this
Prospectus before making a decision to purchase Common Shares.
Limited Geographic Concentration
One hundred thirty six of the 154 Properties owned by the Company as of
February 20, 1998 are located in the Suburban Philadelphia Office and Industrial
Market (as defined below). In addition, a fundamental element of the Company's
growth strategy is to acquire additional properties in the Suburban Philadelphia
Office and Industrial Market. Consequently, the Company is dependent upon the
demand for office and other commercial space in the Suburban Philadelphia Office
and Industrial Market. The Company's revenue and the value of the Properties may
be affected by a number of factors in the Suburban Philadelphia Office and
Industrial 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 Suburban Philadelphia Office and Industrial
Market. The term "Suburban Philadelphia Office and Industrial Market" or
"Market" means the areas comprised of the following counties: Berks, Bucks,
Chester, Delaware, Lehigh, Montgomery and Northampton in Pennsylvania and
Burlington and Camden in New Jersey.
Risks Associated with the Recent Acquisition of Many of the Company's
Properties; Lack of Operating History
The Company is, as of the date of this Prospectus, experiencing a
period of rapid growth. One hundred fifty of the 154 Properties owned by the
Company as of February 20, 1998 were acquired since August 1, 1996. These
recently acquired Properties may have characteristics or deficiencies unknown to
the Company 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.
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, 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 and any other properties the Company may acquire in the future, and
the absence of significant expenditures relating to
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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 the 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 a 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.
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. Certain leases pertaining to the
Properties grant their tenants early termination rights upon payment of a
termination penalty. The Company has estimated the expenditures for new and
renewal leases for 1998 and 1999 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
expiring 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 lease 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 or any other property acquired by the
Company 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. Some 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.
Furthermore, purchase options and rights of first refusal held by certain
tenants at certain Properties may adversely affect the Company's ability to sell
such Properties.
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
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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, directly or indirectly, in all but
one of its Properties through the Operating Partnership. In addition, as of
February 20, 1998, the Company held economic interests in six office development
joint ventures that own or hold options to purchase an aggregate of
approximately 48 acres of land. The Company expects to continue to 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 present, including the possibility
that the Company's partners or coventurers 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. 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 neither be
able to pay distributions to its shareholders at expected levels nor 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, any one or more of 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.
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
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could adversely affect the Company's cash flow and, consequently, cash available
for distribution to shareholders 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 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 Suburban
Philadelphia Office and Industrial Market, it is possible that the Company will
in the future expand its business 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 and construction 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) the
unavailability of financing 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 Internal Revenue Service ("IRS") could contend that the Operating
Partnership's ownership of all of the non-voting
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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.
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 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 Company's cash flow will consist
primarily of its share of distributions from the Operating Partnership.
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) and
the effect of required debt amortization payments 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, state and
local income tax at regular corporate rates on its net taxable income, which
will include the Management Company's 9 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 -
Taxation of the Company as a REIT."
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.
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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
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 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 110 Summit Drive at the
Whitelands Business Park in Exton, Pennsylvania (the "Whitelands Property") and
the Affected Properties at the Paint Works (as defined below), the Company is
not 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 Whitelands 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 to shareholders. 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.
An environmental assessment has identified environmental contamination
at land acquired by the Company as part of its acquisition of certain Properties
that include 6 East Clementon and 1, 4, 5, 7 and 10 Foster Avenue and an
adjacent parking lot. These Properties (the "Affected Properties") and certain
non-affected Properties are commonly referred to as the Paint Works Corporate
Center ("Paint Works"). Volatile organic compounds, semi-volatile organic
compounds and metals were detected in the groundwater, surface soils and
sub-surface soils, principally on land acquired by the Company that is adjacent
to the buildings located on the Affected Properties. These contaminants are
associated with the use by prior owners and operators of the properties and are
believed to be associated with the historic use of the Affected Properties as a
paint and varnish factory since the mid-nineteenth century. The Affected
Properties have been the subject of investigation by the New Jersey Department
of Environmental Protection ("NJDEP") since the mid-1970's. The NJDEP has issued
two directives to the former owners and operators of the site, ordering them to
investigate and remediate the contamination at the site. The NJDEP has also
entered into two administrative consent orders (the "ACO's") with
Sherwin-Williams, the former owner and operator primarily responsible for the
environmental contamination at the site, pursuant to which Sherwin-Williams has
agreed to investigate and commence certain remediation. The NJDEP has provided
written assurances to the Company that the NJDEP will not require the Company to
investigate or remediate the site so long as Sherwin-Williams continues to
comply with the ACO's. In addition to the foregoing, the NJDEP has also issued a
letter of non-applicability for the remainder of the Paint Works properties
owned by the Company at the site. The Company has also been indemnified against
Sherwin-Williams' failure to comply with the ACO's and from any migration of the
aforesaid compounds onto the
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adjacent Company-owned properties which are not part of the Affected Properties
by PWCCW, a New Jersey general partnership, and Robert K. Scarborough
(collectively, "Scarborough"). In the event that Sherwin-Williams ceases to
comply with the ACO's and Scarborough is unable to fulfill its obligations under
its agreement with the Company, the Company could potentially be responsible for
costs associated with any remediation. Because the Company does not believe that
the occurrence of both of these events 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 on the Company, 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 those resulting 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.
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 applicable 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 of the Company, as
partners of a general partnership that holds 95% of the voting common stock of
the Management Company, have the ability to elect the board of directors of the
Management Company. The Company itself is not able to elect directors of the
Management Company. 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
in turn 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, authorized shares of beneficial interest
("Shares"), distributions, REIT status and operating policies, are 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
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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. These provisions include the
following:
Ownership Limit Necessary to Maintain REIT Qualification. In order for
the Company to maintain its qualification as a REIT under the Code, not more
than 50% in value of the Company's outstanding Shares may be owned, 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 limit
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.
Common and Preferred Shares. The Company's Declaration of Trust
authorizes the Board of Trustees to issue up to 105,000,000 shares of beneficial
interest of the Company, consisting of 100,000,000 Common Shares and 5,000,000
preferred shares and, in respect of the preferred shares, 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. 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. The Declaration of Trust may be
amended by the Board of Trustees, without shareholder approval, to increase or
decrease the aggregate number of authorized shares of any class.
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 ten percent or more of the voting power of
the trust's shares or an affiliate of the trust who, at any time within the
two-year period prior to the date in question, was the beneficial owner of ten
percent or more of the voting power of the then outstanding voting shares of
beneficial interest of the trust (an "Interested Shareholder") or an affiliate
of the Interested Shareholder 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
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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, The Nichols Company
("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 the Commonwealth of Pennsylvania State Employees' Retirement System
("SERS") and a voting trust established for its benefit (the "SERS Voting
Trust") and any of their respective affiliates or associates, and Morgan Stanley
Asset Management Inc. and two funds (the "Morgan Stanley Funds") managed by it
and any of their respective affiliates or associates from the business
combination statute. See "Certain Provisions of Maryland Law and 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 of beneficial interest owned
by the acquiror, by officers or by trustees who are employees of the trust. If
voting rights are not approved at a meeting of shareholders 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. 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.
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 February 20, 1998: (i) 455,039 Common
Shares for issuance upon conversion of units of limited partnership interest
("Units") in the Operating Partnership and (ii) 2,805,808 Common Shares for
issuance upon exercise of outstanding options and warrants. Options to purchase
1,737,261 of such Common Shares have been granted subject to shareholder
approval and, if not approved by shareholders, convert into share appreciation
rights exercisable for a cash payment from the Company. 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. 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.
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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.
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 the Registration
Statement of which this Prospectus is a part.
General
The Declaration of Trust of the Company provides that the Company is
authorized to issue up to 105,000,000 shares of beneficial interest of the
Company ("Shares"), consisting of 100,000,000 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 Declaration of Trust may be amended by the Board of Trustees, without
shareholder approval, to increase or decrease the aggregate number of authorized
Shares of any class. 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 any shareholder or former 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 on the
following matters: (i) election or removal of Trustees; (ii) amendment of the
Declaration of Trust (other than an amendment to increase or decrease the
aggregate number of authorized Shares of any class); (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.
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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 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 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 are fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, subject to 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.
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 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
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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 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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<PAGE>
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 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 of Trust 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.
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 certain mergers,
consolidations, share exchanges, or, in certain circumstances, asset transfers
or issuances or reclassifications of equity securities) between a Maryland real
estate investment trust and an Interested Shareholder or an affiliate of the
Interested Shareholder 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: (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 (or with whose
affiliate) 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.
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 of beneficial interest which, if aggregated with all other shares
previously acquired by such acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise 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.
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<PAGE>
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 for the control shares, 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 (i) increases or decreases in the aggregate
number of Shares of any class (which may be made by the Board of Trustees
without shareholder approval) and (ii) 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 Board of Trustees to terminate the Company and to discontinue the election
of the Company to 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, officers, employees or
agents of the Company must be approved by a majority of the Trustees who have no
interest in the contract or transaction.
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 the Maryland REIT Law.
The Company's Bylaws require it to indemnify, without requiring a
preliminary determination of the ultimate entitlement to indemnification, (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 such
status 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 such status as a shareholder or former shareholder. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. 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
applicable standard of conduct was not met. The Company's Bylaws also (i) permit
the Company, with the approval of its Trustees, 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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the Common Shares
sold by the Selling Shareholders nor will any such proceeds be available for use
by the Company or otherwise for the Company's benefit.
SELLING SHAREHOLDERS
The following table provides the names of and the number of Common
Shares beneficially owned by each Selling Shareholder as of February 15, 1998.
Since the Selling Shareholders may sell all, some or none of their Common
Shares, no estimate can be made of the aggregate number of Common Shares that
are to be offered hereby or that will be owned by each Selling Shareholder upon
completion of the offering to which this Prospectus relates. If, however, each
of the Selling Shareholders were to sell all of the Common Shares set across
from its name, the Selling Shareholder would no longer own any Common Shares,
except as otherwise indicated below.
The Common Shares offered by this Prospectus may be offered from time
to time by the Selling Shareholders named below:
<TABLE>
<CAPTION>
Number of Percentage of
Number of Common Common
Common Shares Shares Shares
Beneficially Number of Beneficially Beneficially
Owned Prior to Common Owned After Owned After
Name and Business Address Offering Shares Offered the Offering the Offering(1)
------------------------- -------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert K. Scarborough
7 Maple Lane
Collingswood, NJ 08108 265,384 265,384 0 0
M. Sean Scarborough
301 North Street
Ocean City, NJ 08226 60,576 60,576 0 0
R. Randle Scarborough
201 Horse Shoe Court
Cherry Hill, NJ 08034 59,578 59,578 0 0
Raymond J. Perkins
312 East Seabright
Ocean City, NJ 08226 2,536 2,536 0 0
Steven L. Shapiro 7,902 1,902 6,000 *
24 Southwood Drive
Cherry Hill, NJ 08003
</TABLE>
- ---------------------
* Less than one percent
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(1) Assumes that all Units eligible for redemption held by each named
person are redeemed into Common Shares. The total number of Common
Shares outstanding used in calculating the percentage of Common Shares
assumes that none of the Units eligible for redemption held by other
named persons are redeemed for Common Shares. Under the limited
partnership agreement of the Operating Partnership, the holder of a
Unit may require the Operating Partnership to redeem such Unit for
cash. At its option, the Company may assume the Operating Partnership's
obligation to redeem any such Unit and either pay the redemption price
in cash or deliver one Common Share. As indicated above, the
information in this Prospectus assumes that all Units are redeemed for
Common Shares.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of material Federal income tax considerations
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. The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations thereunder, the legislative history
of the Code, current administrative interpretations and practices of the IRS
(including its practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except with respect to a taxpayer that receives
such a ruling), and court decisions, all as of the date hereof. The Taxpayer
Relief Act of 1997 (the "1997 Act") was enacted on August 5, 1997. The 1997 Act
contains many provisions which generally make it easier to operate and to
continue to qualify as a REIT for taxable years beginning after the date of
enactment (which, for the Company, would be applicable commencing with its
taxable year beginning January 1, 1998).
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 remain qualified 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 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.
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(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;
(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
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<PAGE>
(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. Pursuant to the 1997 Act, for the
Company's taxable years commencing on and after January 1, 1998, if the Company
complies with regulatory rules pursuant to which it is required to send annual
letters to certain of its shareholders requesting information regarding the
actual ownership of its shares, but does not know, or exercising reasonable
diligence would not have known, whether it failed to meet the requirement that
it not be closely held, the Company will be treated as having met the "five or
fewer" requirement. If the Company were to fail to comply with these regulatory
rules for any year, it would be subject to a $25,000 penalty. If the Company's
failure to comply was due to intentional disregard of the requirements, the
penalty would be increased to $50,000. However, if the Company's failure to
comply was due to reasonable cause and not willful neglect, no penalty would be
imposed. 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 has formed several
qualified REIT subsidiaries and may in the future form one or more qualified
REIT subsidiaries. For the Company's 1997 taxable year, all of the stock of such
subsidiaries must be owned by the Company from the commencement of each such
subsidiary's existence. For taxable years of the Company beginning on and after
January 1, 1998, the Company must own all of the stock of each such subsidiary,
although it will not be required to own such stock of such subsidiary from the
commencement of such subsidiary's existence.
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, for taxable years beginning on or before August 5, 1997,
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.
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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 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"). For the Company's taxable year which begins
on January 1, 1998 and for all taxable years thereafter, only partners who own
25% or more of the capital or profits interest in a partnership are included in
the determination of whether a tenant is 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).
For taxable years of the Company beginning after August 5, 1997, if the
Company provides services to a tenant that are other than those usually or
customarily provided in connection with the rental of space for occupancy only,
amounts received or accrued by the Company for any such services will not be
treated as "rents from real property" for purposes of the REIT gross income
tests but will not cause other amounts received with respect to the property to
fail to be treated as "rents from real property" if the amounts received in
respect of such services, together with amounts received for certain management
services, do not exceed 1% of all amounts received or accrued by the Company
during the taxable year with respect to such property. If the 1% threshold is
exceeded, then all amounts received or accrued by the Company with respect to
the property will not qualify as "rents from real property," even if the
impermissible services are provided to some, but not all, of the tenants of the
property.
The Company has represented 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. In addition, 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
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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 if such test is not met for the taxable years of the
Company beginning before January 1, 1998, 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 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.
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Annual Distribution Requirements
The Company, in order to maintain its qualification 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 excess of the sum of
certain items of non-cash income (income attributable to leveled stepped rents,
original issue discount on purchase money debt, or a like-kind exchange that is
later determined to be taxable (plus, for the Company's 1998 taxable year and
thereafter, income from cancellation of indebtedness, original issue discount,
and coupon interest) over 5% of the amount determined under clause (i) above).
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 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.
For the Company's taxable year beginning on January 1, 1998 and for all
taxable years thereafter, undistributed capital gains may be so designated by
the Company and are includable in the income of the holders of Common Shares.
Such holders are treated as having paid the capital gains tax imposed on the
Company on the designated amounts included in their income as long-term capital
gains. Such shareholders would receive an increase in their basis for income
recognized and a decrease in their basis for taxes paid by the Company. See "-
Taxation of Taxable Domestic Shareholders."
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. 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
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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") .
Classification of the Operating Partnership and Title Holding, Partnerships as
Partnerships
As of the date of this Prospectus, the Company owns all of the
Properties or the economic interests therein 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. For taxable periods prior to January 1, 1997, an organization
formed as a partnership was treated as a partnership for Federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations used to distinguish
a partnership from a corporation for tax purposes. These four characteristics
were continuity of life, centralization of management, limited liability, and
free transferability of interests.
Neither the Operating Partnership nor any of the Title Holding
Partnerships requested a ruling from the IRS that they would be treated as
partnerships for Federal income tax purposes. The Company received 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.
Effective January 1, 1997, newly promulgated Treasury Regulations
eliminated the four-factor test described above and, instead, permit
partnerships and other non-corporate entities to be taxed as partnerships for
federal income tax purposes without regard to the number of corporate
characteristics possessed by such entity. Under those Regulations, both the
Operating Partnership and each of the Title Holding Partnerships will be
classified as partnerships for federal income tax purposes unless an affirmative
election is made by the entity to be taxed as a corporation. The Company has
represented that no such election has been made, or is anticipated to be made,
on behalf of the Operating Partnership or any of the Title Holding Partnerships.
Under a special transitional rule in the Treasury Regulations, the IRS will not
challenge the classification of an existing entity such as the Operating
Partnership or a Title Holding Partnership for periods prior to January 1, 1997
if: (i) the entity has a "reasonable basis" for its classification; (ii) the
entity and each of its members recognized the federal income tax consequences of
any change in classification of the entity made within the 60 months prior to
January 1, 1997; and (iii) neither the entity nor any of its members had been
notified in writing on or before May 8, 1996 that its classification was under
examination by the IRS. Neither the Operating Partnership nor any of the Title
Holding Partnerships changed their classification within the 60 month period
preceding May 8, 1996, nor was any one of them notified that their
classification as a partnership for federal income tax purposes was under
examination by the IRS.
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.
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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 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 different 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 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 40 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
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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.
As described above (see "--Tax Allocations with Respect to Contributed
Properties"), the Treasury Department's Regulations 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 tax basis 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
distribu tions 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 18 months).
Sale of Partnership Property
Generally, any gain realized by a partnership on the sale of property
held by the partnership for more than 18 months 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 assurance can be given,
however, that every property sale by the Partnerships will constitute a sale of
property held for investment.
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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 18 months 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.
For taxable years of the Company beginning after August 5, 1997, U.S.
shareholders holding Shares at the close of the Company's taxable year will be
required to include, in computing their long-term capital gains for the taxable
year in which the last day of the Company's taxable year falls, such amount as
the Company may designate in a written notice mailed to its shareholders. The
Company may not designate amounts in excess of the Company's undistributed net
capital gain for the taxable year. Each U.S. shareholder required to include
such a designated amount in determining such shareholder's long-term capital
gains will be deemed to have paid, in the taxable year of the inclusion, the tax
paid by the Company in respect of such undistributed net capital gains. U.S.
shareholders subject to these rules will be allowed a credit or a refund, as the
case may be, for the tax deemed to have been paid by such shareholders. U.S.
shareholders will increase their basis in their Shares by the difference between
the amount of such includible gains and the tax deemed paid by the shareholder
in respect of such gains.
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."
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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 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
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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. 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 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,
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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
This Prospectus relates to the offer and sale from time to time of
389,976 Common Shares that may be issued to holders of Units, if and to the
extent the holders of Units exchange them for Common Shares. The Company will
not receive any of the proceeds from the sale of any Common Shares by the
Selling Shareholders. The distribution of the Common Shares may be effected from
time to time in one or more underwritten transactions at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. Any such underwritten offering may be on a "best efforts" or a "firm
commitment" basis. In connection with any such underwritten offering,
underwriters or agents may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders or from purchasers of
Common Shares for whom they may act as agents. Underwriters may sell Common
Shares 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 agents.
Under agreements that may be entered into by the Company, underwriters,
dealers and agents who participate in the distribution of Common Shares may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which such underwriters, dealers or agents may be required to make
in respect thereof.
The Selling Shareholders and any underwriters, dealers or agents that
participate in the distribution of Common Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of Common Shares by them and any discounts, commissions or concessions
received by any such underwriters, dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act.
At a time a particular offer of Common Shares is made, a Prospectus
Supplement, if required, will be distributed that will set forth the name and
names of any underwriters, dealers or agents and any discounts, commissions and
other terms constituting compensation from the Selling Shareholders and any
other required information.
The sale of the Common Shares by the Selling Shareholders may also be
effected from time to time by selling the Common Shares directly to purchasers
or to or through broker-dealers. In connection with any such sale, any such
broker-dealer may act as agent for the Selling Shareholders or may purchase from
the Selling Shareholders all or a portion of the Common Shares as principal, and
any such sale may be made pursuant to any of the methods described below. Such
sales may be made on the NYSE or other exchanges on which the Common Shares are
then traded, in the over-the-counter market, in negotiated transactions or
otherwise at prices and at terms then prevailing or at prices related to the
then-current market prices or at prices otherwise negotiated.
The Common Shares may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such Common Shares as agent but may
position and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable NYSE or
other stock exchange rules; (d) ordinary brokerage transactions and transactions
in which any such broker-dealer solicits purchasers; (e) sales "at the market"
to or through a market maker or into an existing trading market, on an exchange
or otherwise, for such shares; and (f) sales in other ways not involving market
makers or established trading markets, including direct sales to purchasers. In
effecting sales, broker-dealers engaged by the Selling Shareholders may arrange
for other broker-dealers to participate. Broker-dealers will receive commissions
or other compensation from the Selling Shareholders in amounts to be negotiated
immediately prior to the sale that will not exceed those customary in the types
of transactions involved. Broker-dealers may also receive compensation from
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<PAGE>
purchasers of the Common Shares which is not expected to exceed that customary
in the types of transactions involved. The Common Shares may also be sold
pursuant to Rule 144 promulgated under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the Common Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Common Shares may not be
sold unless they have been registered or qualified for sale in such state or an
exemption from such registration or qualification requirement is available and
is complied with.
All expenses incident to the offering and sale of the Common Shares,
other than commissions, discounts and fees of underwriters, broker-dealers or
agents, will be paid by the Company. The Company has agreed to indemnify the
Selling Shareholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
EXPERTS
The audited financial statements and schedules (other than financial
statements identified in the next sentence) 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. The financial
statements with respect to 1000/2000 West Lincoln Drive, 3000 West Lincoln Drive
and 4000/5000 West Lincoln Drive incorporated by reference in this Prospectus
from the Current Report on Form 8-K of the Company, dated June 27, 1997, have
been audited by Zelenkofske, Axelrod & Company, Ltd., independent public
accountants, as indicated in their report and are included herein in reliance
upon the authority of said firm as experts in giving said report.
Future financial statements of the Company and the reports thereon of
the Company's independent public accountants also will be incorporated by
reference in this Prospectus in reliance upon the authority of that firm as
experts in giving those reports to the extent said firm has audited those
financial statements and consented to the use of their reports thereon.
LEGAL MATTERS
The validity of the issuance of the Common Shares offered hereby will
be passed upon for the Company by Pepper Hamilton LLP, Philadelphia,
Pennsylvania. Pepper Hamilton LLP will rely on Ballard Spahr Andrews &
Ingersoll, LLP, 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.
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No dealer, salesperson or other individual has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Selling Shareholders. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Shares, in any jurisdiction where, or to any person to whom, it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus nor
any offer or sale made hereunder shall, under any circumstances, create an
implication that there has not been any change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof.
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TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION.................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE............................................................. 2
THE COMPANY.............................................................. 3
RISK FACTORS............................................................. 4
DESCRIPTION OF SHARES OF
BENEFICIAL INTEREST...................................................... 13
CERTAIN PROVISIONS OF MARYLAND
LAW AND OF THE COMPANY'S DECLARATION OF TRUST AND BYLAWS................. 16
USE OF PROCEEDS.......................................................... 20
SELLING SHAREHOLDERS..................................................... 20
FEDERAL INCOME TAX CONSIDERATIONS........................................ 22
PLAN OF DISTRIBUTION..................................................... 34
EXPERTS.................................................................. 35
LEGAL MATTERS............................................................ 35
TAX MATTERS.............................................................. 35
===============================================================================
<PAGE>
===============================================================================
389,976 Common Shares
of
Beneficial Interest
BRANDYWINE REALTY
TRUST
------------
PROSPECTUS
------------
March 5, 1998
===============================================================================
