<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 2000
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CORPORATE OFFICE PROPERTIES TRUST
(Exact name of Registrant as specified in its charter)
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Maryland 8815 Centre Park Drive 23-2947217
(State or other jurisdiction of Suite 400 (IRS Employer
incorporation or organization) Columbia, Maryland 21045 Identification Number)
(410) 730-9092
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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CLAY W. HAMLIN, III
Chief Executive Officer
Corporate Office Properties Trust
8815 Centre Park Drive
Suite 400
Columbia, MD 21045
(410) 730-9092
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
John F. Bales, Esq. John H. Gurley
Morgan, Lewis & Bockius LLP Vice President & General Counsel
1701 Market Street Corporate Office Properties Trust
Philadelphia, PA 19103 8815 Centre Park Drive, Suite 400
(215) 963-5478 Columbia, MD 21045
(410) 992-7247
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, other than offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------ ------------------------- ------------------------- -------------------- -----------------------------
Proposed Maximum Offering Proposed Maximum
Title of Shares Price Aggregate
Being Registered Amount to be Registered Per Share Offering Price Amount of Registration Fee(2)
- ------------------------ ------------------------- ------------------------- -------------------- -----------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest, par 21,491,244 (1)(2) (1)(2) $53,191
value $.01 per share
- ------------------------ ------------------------- ------------------------- -------------------- -----------------------------
</TABLE>
(1) Estimated solely for purposes of determining the registration fee
pursuant to Rule 457(c) based on the average of the high and low sales
prices on the New York Stock Exchange on May 8, 2000 and at the time of
the filing of Registration Statement No. 333-60379.
(2) Of this total, $46,472 was paid at the time of the filing of
Registration Statement No. 333-60379 for the 19,843,178 shares covered
thereby at a maximum offering price then determined pursuant to Rule
457(c), of which 18,593,338 shares remain unsold. The balance of $6,719
is applicable to the 2,897,906 shares added by this Registration
Statement at a maximum offering price of $8.78125 per share and is
being paid upon the filing of this amendment.
This Registration Statement, which is a new Registration Statement, also
constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-60379 which was declared effective on February 4, 1999. Such Post-Effective
Amendment shall become effective concurrently with the effectiveness of this
Registration Statement and in accordance with Section 8(c) of the Securities Act
of 1933. Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
included in this Registration Statement is a combined Prospectus and relates to
this Registration Statement and Registration Statement 333-60379.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 10, 2000
CORPORATE OFFICE PROPERTIES TRUST
21,491,244 COMMON SHARES OF BENEFICIAL INTEREST
(PAR VALUE $.01 PER SHARE)
This is an offering of Common Shares of Corporate Office Properties
Trust. Corporate Office Properties Trust is referred to in this prospectus as
"we," "us" or "COPT." The Common Shares covered by this prospectus may be sold
by certain selling shareholders identified in this prospectus. The selling
shareholders currently own 7,767,657 Common Shares. The selling shareholders may
acquire the remaining 13,723,587 Common Shares covered by this prospectus either
by redeeming limited partnership interests which they own in our operating
partnership, Corporate Office Properties, L.P., in exchange for Common Shares,
or by converting our Series A Convertible Preferred Shares which they own into
Common Shares. You may find information pertaining to these shareholders under
the heading called "The Selling Shareholders" on page 10 of this prospectus.
-------------------
BEFORE INVESTING IN THE COMMON SHARES, YOU SHOULD REVIEW THE SECTION OF
THIS PROSPECTUS CALLED "RISK FACTORS" WHICH BEGINS ON PAGE 4.
-------------------
Our Common Shares are listed on the New York Stock Exchange under the
symbol "OFC." On May 8, 2000, the last sale price of our Common Shares, as
reported on the New York Stock Exchange, was $8.75. To ensure that we maintain
our qualification as a real estate investment trust, ownership by any person is
limited to 9.8% of the lesser of the number or value of outstanding Common
Shares, with certain exceptions.
-------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
We are registering most of these shares as required under the terms of
certain agreements between the selling shareholders and us to make the Common
Shares freely tradable. Registration of these Common Shares does not necessarily
mean that any of the shares will be offered or sold by the selling shareholders.
We will receive no proceeds of any sales of these Common Shares, but will incur
expenses in connection with the offering.
The selling shareholders from time to time may offer and sell the
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 a
prospectus supplement which will accompany this prospectus. The prospectus
supplement also may add, update or change information contained in this
prospectus.
The date of this prospectus is May 10, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY...............................................................3
OUR COMPANY...........................................................3
FORWARD-LOOKING STATEMENTS............................................3
RISK FACTORS..........................................................4
THE SELLING SHAREHOLDERS.............................................10
DESCRIPTION OF SHARES................................................11
FEDERAL INCOME TAX MATTERS...........................................21
PLAN OF DISTRIBUTION.................................................31
EXPERTS..............................................................32
LEGAL MATTERS........................................................32
WHERE YOU CAN FIND MORE INFORMATION..................................33
</TABLE>
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<PAGE>
SUMMARY
THIS PROSPECTUS SUMMARY CALLS YOUR ATTENTION TO SELECTED INFORMATION IN
THIS DOCUMENT, BUT IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO
YOU. TO UNDERSTAND US AND THE SECURITIES THAT MAY BE OFFERED THROUGH THIS
PROSPECTUS, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE
"RISK FACTORS" SECTION AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION CALLED
"WHERE YOU CAN FIND MORE INFORMATION" BEGINNING ON PAGE 33.
OUR COMPANY
GENERAL. We are a fully-integrated and self-managed real estate
investment trust ("REIT") that focuses principally on the ownership, management,
leasing, acquisition and development of suburban office buildings located in
select submarkets in the Mid-Atlantic region of the United States. As of
December 31, 1999, we:
- owned 77 suburban office properties in Maryland,
Pennsylvania and New Jersey containing approximately 5.9
million rentable square feet;
- owned two retail properties containing approximately 191,000
rentable square feet;
- achieved a 97.5% occupancy rate on our properties;
- had construction underway on five new buildings totaling
approximately 407,000 square feet that were 49% pre-leased
and redevelopment underway on a 75,000 square foot existing
building that was 100% pre-leased; and
- owned options to purchase 72 acres of land contiguous to
certain of our office properties from related parties.
We conduct almost all of our operations through our operating
partnership, Corporate Office Properties, L.P., a Delaware limited partnership,
for which we are the managing general partner. Our operating partnership owns
real estate both directly and through subsidiaries. Interests in our operating
partnership are in the form of Common and Preferred Units. As of December 31,
1999, we owned approximately 60% of the outstanding Common Units and
approximately 70% of the outstanding Preferred Units. The remaining Common and
Preferred Units in our operating partnership were owned by third parties, which
included certain of our officers and Trustees.
We believe that we are organized and have operated in a manner that
permits us to satisfy the requirements for taxation as a REIT under the Internal
Revenue Code of 1986, as amended, and we intend to continue to operate in such a
manner. If we qualify for taxation as a REIT, we generally will not be subject
to Federal income tax on our taxable income that is distributed to our
shareholders. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to its
shareholders at least 95% of its annual taxable income (excluding net capital
gains).
Our executive offices are located at 8815 Centre Park Drive, Suite 400,
Columbia, Maryland 21045 and our telephone number is (410) 730-9092.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS AND OUR DOCUMENTS INCORPORATED BY REFERENCE HEREIN
CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON OUR CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT FUTURE EVENTS AND FINANCIAL TRENDS AFFECTING THE
FINANCIAL CONDITION OF THE BUSINESS. STATEMENTS THAT ARE NOT HISTORICAL FACTS,
INCLUDING STATEMENTS ABOUT OUR BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE, EVENTS OR
RESULTS AND INVOLVE POTENTIAL RISKS AND UNCERTAINTIES. ACCORDINGLY, ACTUAL
RESULTS MAY DIFFER MATERIALLY. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTS THAT MAY AFFECT THESE EXPECTATIONS, ESTIMATES OR
PROJECTIONS INCLUDE, BUT ARE NOT LIMITED TO: OUR ABILITY TO BORROW ON FAVORABLE
TERMS; GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH WILL, AMONG OTHER THINGS
AFFECT OFFICE PROPERTY DEMAND AND RENTS, TENANT CREDITWORTHINESS, INTEREST RATES
AND FINANCING AVAILABILITY; ADVERSE CHANGES IN THE REAL ESTATE MARKETS
INCLUDING, AMONG OTHER THINGS, COMPETITION WITH OTHER COMPANIES; RISKS OF REAL
ESTATE ACQUISITION AND DEVELOPMENT; GOVERNMENTAL ACTIONS AND INITIATIVES;
ENVIRONMENTAL REQUIREMENTS; AND THE OTHER FACTORS DESCRIBED IN THIS PROSPECTUS
UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 4.
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RISK FACTORS
BEFORE YOU INVEST IN OUR SECURITIES, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS. WE HAVE DESCRIBED FOR YOU BELOW SOME OF THE RISKS INVOLVED IN
INVESTING IN THE COMMON SHARES WHICH MAY BE OFFERED UNDER THIS PROSPECTUS. A
WORD OF CAUTION: THE LIST BELOW IS NOT A COMPLETE LIST. YOU SHOULD CAREFULLY
CONSIDER EACH OF THESE FACTORS AND ALL OF THE INFORMATION BOTH IN THIS
PROSPECTUS AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION CALLED "WHERE YOU
CAN FIND MORE INFORMATION" BEGINNING ON PAGE 33.
WE MAY INCUR PROBLEMS WITH OUR REAL ESTATE FINANCING
GENERALLY. Our strategy is to operate with higher debt levels than most
other REITs. Our organizational documents do not limit the amount of
indebtedness that we may incur. Most of our properties have been mortgaged to
collateralize indebtedness. In addition, we will rely on borrowings to fund some
or all of the costs of new property acquisitions, capital expenditures and other
items.
As of December 31, 1999, our total outstanding debt was $399.6 million. Our
debt to total market capitalization ratio was 57.6% based upon the closing per
share market price for the Common Shares of $7.625 on December 31, 1999. Total
market capitalization is the sum of total debt plus the value of all outstanding
Common Shares and Common Units at such market price and the total Preferred
Shares and Preferred Units at their liquidation value.
Payments of principal and interest on our debt may leave us with
insufficient cash to operate our properties or pay distributions to our
shareholders required to maintain our qualification as a REIT. We are also
subject to the risks that:
- We may not be able to refinance our existing indebtedness, or
refinance on terms as favorable as the terms of our existing
indebtedness;
- Certain debt agreements of our Operating Partnership could
restrict the ability of our Operating Partnership to make cash
distributions to us, which could result in reduced distributions
to our shareholders or the need to incur additional debt to fund
distributions; and
- If we are unable to pay our debt service on time, our lenders
could foreclose on our properties securing such debt and in some
cases other properties and assets which we own. A number of our
loans are cross-collateralized, which means that separate groups
of properties from our portfolio secure each of these loans. More
importantly, almost all of our loans are cross-defaulted, which
means that failure to pay interest or principal on any of our
loans will create a default on certain of our other loans. In
addition, if we are in default and the value of the properties
securing a loan is less than the loan balance, the lender may
require payment from our other assets.
As of December 31, 1999, approximately 29.6% of our total debt had
adjustable interest rates. Consequently, if short term interest rates were to
rise, our debt service payments would increase, which would lower our net income
and could decrease our distributions to our shareholders.
WE MUST REFINANCE OUR MORTGAGE DEBT IN THE FUTURE. As of December 31, 1999,
our scheduled debt payments over the next five years, including maturities, are
as follows:
<TABLE>
<S> <C> <C> <C>
2000 $122,745,000 (1)
2001 85,680,000 (2)
2002 15,134,000
2003 3,665,000
2004 29,496,000
</TABLE>
(1) Includes $100.0 million maturity in October that may be extended for two
one-year terms, subject to certain conditions.
(2) Includes $24.7 million for four construction loans maturing that may be
extended for a one-year period, subject to certain conditions.
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<PAGE>
We do not expect our operations to generate enough cash flow to repay some
or all of this debt without additional borrowings or new equity investment. If
we cannot refinance, extend the debt due dates, or raise additional equity prior
to the date when our debt matures, we would default on our existing debt.
WE RELY ON A FEW TENANTS FOR MOST OF OUR REVENUE
As of December 31, 1999, ten tenants accounted for 45.0% of our annualized
office rents. Two of these tenants accounted for approximately 23.3% of our
total annualized office rents. Our largest tenant is the United States Federal
government, two agencies of which lease space in 13 of our office properties.
These leases represented approximately 15.5% of our total annualized office
rents as of December 31, 1999. Generally, these government leases provide for
one-year terms or provide for termination rights. The government may terminate
its leases if, among other reasons, the Congress of the United States fails to
provide funding. The Congress of the United States has appropriated funds for
these leases through September of 2000. The second largest tenant, Unisys
Corporation, represented 7.8% of our total annualized office rents as of
December 31, 1999 and 16.9% of our 1999 net operating income since Unisys pays
all of its property operating expenses directly. Unisys occupies space in three
of our office properties. If either the Federal government or Unisys fails to
make rental payments to us, or if the Federal government elects to terminate
several of its leases and the space cannot be re-leased on satisfactory terms,
our financial performance and ability to make expected distributions to
shareholders would be materially adversely affected.
OUR PROPERTIES ARE LOCATED MAINLY IN ONE REGION -- THE MID-ATLANTIC
All of our office properties are located in the Mid-Atlantic region of the
United States, and 56.4% of our total revenues for the year ended December 31,
1999 was earned from our office properties located in the Baltimore-Washington
Corridor. Consequently, we do not have a broad geographic distribution of our
properties. As a result, a decline in the real estate market or economic
conditions generally in the Mid-Atlantic region could have a material adverse
affect on our operations.
THE LEVEL OF OUR SHAREHOLDER DISTRIBUTIONS COULD DECLINE
We intend to make regular quarterly cash distributions to our shareholders.
However, distribution levels depend on a number of factors, some of which are
beyond our control.
Our loan agreements contain provisions which could restrict future
distributions. Our ability to sustain our current distribution level also will
be dependent, in part, on other matters including continued property occupancy
and profitability of tenants, the amount of future capital expenditures and
expenses relating to our properties, the level of leasing activity and future
rental rates, the strength of the commercial real estate market, competition,
the costs of compliance with environmental and other laws, our corporate
overhead levels, the amount of uninsured losses and our decisions whether to
reinvest rather than distribute available cash.
In addition, we can make distributions to the holders of our Common Shares
only after we make preferential distributions to the holders of our Series A and
B Preferred Shares. See "Description of Shares - Series A Preferred Shares" and
"- Series B Preferred Shares" beginning on page 12 . We also would likely have
to make prior distributions to third party holders of preferred units in our
operating partnership. See "Description of Shares - Operating Partnership Series
C Preferred Units" on page 17.
A THIRD PARTY COULD HAVE DIFFICULTY IN SEEKING TO ACQUIRE CONTROL OF US
CONSTELLATION'S COMMON SHARE OWNERSHIP AND OUR OWNERSHIP LIMITS ARE
IMPORTANT FACTORS. Constellation Real Estate, Inc. currently owns approximately
38.0% of our outstanding Common Shares. Under our charter, two-thirds of the
outstanding Common Shares must approve a merger, a sale of substantially all our
assets, any amendment to our charter, the removal of a Trustee and the
termination of COPT. Because Constellation Real Estate, Inc. owns more than
one-third of our voting shares, it has the ability to veto any of those
transactions, which could make it more difficult for any third party to acquire
control of us. Such change of control could involve a premium over the market
price for the Common Shares or other attributes that the shareholders may
consider desirable. In addition, our charter limits ownership of our Common
Shares by any single shareholder to 9.8% of the
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<PAGE>
number of the outstanding Common Shares or 9.8% of the value of the outstanding
Common Shares. We call these restrictions the "Ownership Limit." Our charter
allows our Board of Trustees to exempt shareholders from the Ownership Limit,
and the Board has exempted Constellation Real Estate, Inc. from the Ownership
Limit.
OUR CHARTER PROVIDES OTHER POTENTIAL DEFENSES. Subject to the requirements
of the New York Stock Exchange, the Board of Trustees has the authority without
shareholder approval to issue additional securities of COPT on terms that could
delay, defer or prevent a change in control of COPT. In addition, our Board has
the authority to reclassify any of our unissued Common Shares into Preferred
Shares. The Board may issue Preferred Shares with such preferences, rights,
powers and restrictions as the Board may determine. Our Board has already issued
the Series A Preferred Shares, which have features which make it harder for a
third party to acquire control of us. See "Description of Shares--Series A
Preferred Shares" beginning on page 12.
Our Board is divided into three classes of Trustees. The term of one class
of the Trustees will expire each year, at which time a successor class is
elected for a three-year term. Such staggered three-year terms make it more
difficult for a third party to acquire control of us. See "Description of
Shares--Classification of Board, Vacancies and Removal of Trustees" on page 19.
THE MARYLAND BUSINESS STATUTES ALSO IMPOSE POTENTIAL RESTRICTIONS. Various
Maryland laws may have the effect of discouraging offers to acquire us, even if
the acquisition would be advantageous to shareholders. Our Bylaws exempt us from
such laws, but our Board of Trustees can change our Bylaws at any time to make
these provisions applicable to us. See "Description of Shares--Possible
Antitakeover Effect of Certain Provisions of Maryland Law" on page 20.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY
GENERALLY. We earn income from renting our properties. Our operating costs
do not necessarily fluctuate in relation to changes in our rental revenue. This
means our costs will not necessarily decline even if our revenues do. Also, our
operating costs may increase while our revenues do not.
For new tenants or upon lease expiration for existing tenants, we generally
must make improvements and pay other tenant-related costs for which we may not
receive increased rents. We also make building-related capital improvements for
which tenants may not reimburse us.
If our properties do not generate income sufficient to meet our operating
expenses and capital costs, we may have to borrow additional amounts to cover
these costs. In such circumstances, we would likely have lower profits or
possibly incur losses. Moreover, there may be less or no cash available for
distributions to our shareholders.
OUR LEASE RENEWALS POSE CERTAIN UNCERTAINTIES. When leases expire at our
properties, our tenants may not renew or may renew but on terms less favorable
to us than the terms of the original lease. As of December 31, 1999, our
scheduled lease expirations, as a percentage of total annualized rents for the
next five years, were:
<TABLE>
<S> <C> <C>
2000 14.6%
2001 9.4%
2002 15.4%
2003 14.6%
2004 11.1%
</TABLE>
If a tenant leaves, we can expect to incur a vacancy for some period of
time as well as higher capital costs than if a tenant renews. In either case,
our net income and ability to make expected distributions to our shareholders
could be adversely affected.
COMPETITION MAY CAUSE DIFFICULTY IN OUR LEASING ACTIVITY. The commercial
real estate market is highly competitive. Numerous commercial properties compete
for tenants with our properties and our competitors are building additional
properties in the markets in which our properties are located. Some of these
competing properties may be newer or have more desirable locations than our
properties. If the market does not absorb newly constructed space, market
vacancies will increase and market rents may decline. As a result, we may have
difficulty
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leasing space at our properties and we may be forced to lower the rents we
charge on new leases to compete effectively.
COMPETITION MAY CAUSE DIFFICULTY IN OUR STRATEGY OF ACQUIRING NEW PROPERTY.
We compete for the purchase of commercial property with many entities, including
other publicly traded commercial REITs. Many of our competitors have
substantially greater financial resources than ours. In addition, our
competitors may be willing to accept lower returns on their investments. If our
competitors prevent us from buying the amount of properties that we have
targeted for acquisition, we may not be able to meet our property acquisition
and development goals.
OUR DEVELOPMENT AND CONSTRUCTION ACTIVITIES POSE CERTAIN RISKS. Although
the majority of our investments are in currently leased properties, to a lesser
extent we also develop properties, including some which are not fully
pre-leased. When we develop properties, we run the risks that development costs
will exceed our budgets, that we will experience construction or development
delays and that projected leasing will not occur.
WE ARE SUBJECT TO POSSIBLE ENVIRONMENTAL LIABILITIES. We are subject to
various Federal, state and local environmental laws. These laws can impose
liability on property owners or operators for the costs of removal or
remediation of certain hazardous substances released on a property, even if the
property owner was not responsible for the release of the hazardous substances.
The presence of hazardous substances on our properties may adversely affect
occupancy and our ability to sell or borrow against those properties. In
addition to the costs of government claims under environmental laws, private
plaintiffs may bring claims for personal injury or similar reasons. Various laws
also impose liability for the costs of removal or remediation of hazardous
substances at the disposal or treatment facility. Anyone who arranges for the
disposal or treatment of hazardous substances at such a facility is potentially
liable under such laws. These laws often impose liability whether or not the
facility is or ever was owned or operated by such person.
WE CANNOT SELL OUR PROPERTIES QUICKLY. Equity real estate investments like
our properties are relatively difficult to sell and convert to cash quickly.
Such illiquidity will tend to limit our ability to vary our portfolio of
properties promptly in response to changes in economic or other conditions. In
addition, the Internal Revenue Code imposes certain penalties on a REIT that
sells property held for less than four years. As a result, we may be unable to
sell a property at an advantageous time.
WE ARE SUBJECT TO OTHER POSSIBLE LIABILITIES. Our properties may be subject
to other risks relating to current or future laws including laws benefiting
disabled persons, and other state or local zoning, construction or other
regulations. These laws may require significant property modifications in the
future for which we may not have budgeted and could result in fines being levied
against us. In addition, although we believe that we adequately insure our
properties, we are subject to the risk that our insurance may not cover all of
the costs to restore a property which is damaged by a fire or other similar
catastrophic event. The occurrence of any of these events could have an adverse
impact on our cash flows and ability to make distributions to shareholders.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO CERTAIN TAX RISKS
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES. We
believe that since 1992 we have qualified for taxation as a REIT for Federal
income tax purposes. We plan to continue to meet the requirements for taxation
as a REIT. Many of these requirements, however, are highly technical and
complex. The determination that we are a REIT requires an analysis of various
factual matters and circumstances that may not be totally within our control.
For example, to qualify as a REIT, at least 95% of our gross income must come
from certain sources that are itemized in the REIT tax laws. We are also
required to distribute to shareholders at least 95% of our REIT taxable income
(excluding capital gains). The fact that we hold most of our assets through our
Operating Partnership and its subsidiaries further complicates the application
of the REIT requirements. Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the IRS might make changes
to the tax laws and regulations, and the courts might issue new rulings that
make it more difficult, or impossible for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to Federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first fail to qualify. If we fail to qualify as a REIT, we
would have to pay significant
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income taxes and would therefore have less money available for investments or
for distributions to our shareholders. This would likely have a significant
adverse effect on the value of our securities. In addition, we would no longer
be required to make any distributions to our shareholders.
WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS. As a REIT, we must distribute
95% of our annual taxable income, which limits the amount of cash we have
available for other business purposes, including amounts to fund our growth.
Also, it is possible that because of the differences between the time we
actually receive revenue or pay expenses and the period we report those items
for distribution purposes, we may have to borrow funds on a short-term basis to
meet the 95% distribution requirement. For taxable years beginning after
December 31, 2000, we will only be required to distribute 90% of our annual
taxable income in order to maintain REIT status.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES. Even if we qualify as a REIT,
we may be subject to certain Federal, state and local taxes on our income and
property. Any such taxes would reduce our operating cash flow.
When we purchased certain office properties located in Pennsylvania, we
only purchased 89% of the partnership which owned each property. The remaining
11% will be acquired by the operating partnership not later than December 2000.
This structure is intended to comply with informal advice from the Pennsylvania
Department of Revenue that such two-stage transfers are not subject to
Pennsylvania real estate transfer taxes. However, we have not obtained a formal
ruling from the Pennsylvania Department of Revenue on this issue. If the
Pennsylvania Department of Revenue were to successfully challenge this
structure, or the remaining interests were required to be transferred for
financing or other purposes prior to October 14, 2000, we would be subject to
Pennsylvania state and local transfer taxes of approximately $2.7 million.
SALES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO
DECLINE
As of December 31, 1999, 17,646,046 Common Shares were outstanding. This
prospectus registers approximately 2.9 million additional Common Shares. If we
issue a significant number of Common Shares in a short period of time, there
could be a decrease in the market price of the Common Shares.
WE LACK CONTROL OVER OUR MANAGEMENT COMPANY
We receive substantially all of the economic benefits of Corporate Office
Management, Inc. ("COMI"), the company which manages our properties. We are not
able to elect directors or officers of COMI because we hold only 1% of COMI's
voting stock and the balance of COMI's voting stock is owned by persons who are
not our officers or Trustees. Therefore, we cannot directly influence the
operations of COMI. As a result, the board of directors and management of COMI
may implement business policies or decisions that would not have been
implemented by us. These policies or decisions could be adverse to our interests
or lead to adverse financial results, which could adversely impact our net
operating income and cash flow.
Although we believe that the contracts between us and COMI for management
services are no less favorable to us than those which could be obtained from a
third party, such contracts are not the result of arm's length negotiations and,
therefore, we cannot assure you that those contracts are just as favorable.
CERTAIN OFFICERS AND TRUSTEES OF COPT HAVE POTENTIAL CONFLICTS OF INTEREST
The Chairman of our Board, our Chief Executive Officer, and certain other
officers own direct and indirect interests in office properties and other real
estate assets in which we have an interest. The interests of these persons may
give rise to certain conflicts of interest concerning the fulfillment of their
responsibilities as our officers and Trustees. We have adopted certain policies
designed to minimize conflicts of interest. We cannot assure you, however, that
these policies will be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made that might
fail to reflect fully the interests of all shareholders of COPT. For example,
the Chairman of our Board of Trustees and our Chief Executive Officer own a
significant share of the units of our Operating Partnership. If our Operating
Partnership sells or refinances certain of the properties that these officers
contributed to the Operating Partnership, they could suffer adverse tax
consequences. Therefore, they could oppose such a transaction.
8
<PAGE>
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent on the efforts of our Trustees and executive officers,
including Mr. Shidler, our Chairman of the Board of Trustees, Mr. Hamlin, our
Chief Executive Officer, and Mr. Griffin, our President. The loss of any of
their services could have an adverse effect on our operations. Although certain
of our officers have entered into employment agreements with us, we cannot
assure you that they will remain employed with us.
WE MAY CHANGE OUR POLICIES WITHOUT SHAREHOLDER APPROVAL
Our Board of Trustees determines all of our policies, including our
investment, financing and distribution policies. Although our Board of Trustees
has no current plans to do so, it may amend or revise these policies at any time
without a vote of our shareholders. Policy changes could adversely affect our
financial condition, results of operations, the market price of the Common
Shares or our ability to pay dividends or distributions.
9
<PAGE>
THE SELLING SHAREHOLDERS
The following table provides the names of the selling shareholders and the
maximum number of Common Shares that may be offered from time to time under this
prospectus by each of them or their respective donees or pledgees. The number of
Preferred and Common Units set forth under those headings in the table below
represents units of limited partnership interests in our Operating Partnership
which could be redeemed by the holder and, if we approve, exchanged for Common
Shares. Such units and the Common and Preferred Shares set forth under those
headings in the table constitute the amount of securities each selling
shareholder held prior to this offering. The number of shares set forth under
the heading "Total Common Shares" in the table below assumes the conversion of
all Preferred Units into Common Units and the exchange of all Common Units by
the holder for Common Shares and assumes the conversion of all Preferred Shares
into Common Shares by the holder of Preferred Shares. Because the selling
shareholders may sell or otherwise transfer less than all of their securities
pursuant to this prospectus or otherwise or may not tender their units in
exchange for Common Shares, we cannot estimate the number and percentage of
Common Shares that will be held by each selling shareholder after this offering.
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PREFERRED COMMON COMMON
UNITS (1) UNITS (2) SHARES (3) SHARES SHARES
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Jay H. Shidler (4)........................ 452,878 300,000 752,878
Shidler Equities L.P. (4)................. 2,995,439 2,995,439
Clay W. Hamlin, III (4)................... 587,292 300,000 887,292
LBCW Limited Partnership (4).............. 3,246,007 3,246,007
CHLB Partnership (4)...................... 212,316 212,316
Robert L. Denton (4)...................... 434,910 434,910
James K. Davis (4)........................ 51,589 51,589
John E. de B. Blockey, Trustee of the
John E. de Blockey Trust............... 300,625 300,625
Henry D. Bullock ......................... 116,553 116,553
The Frederick K. Ito Trust................ 29,140 29,140
The June Y. I. Ito........................ 29,135 29,135
Reger Investment Fund Ltd................. 268,671 268,671
Samuel Tang............................... 22,889 22,889
Denise J. Liszewski (4)................... 34,333 34,333
David P. Hartsfield (4)................... 30,519 30,519
Lawrence J. Taff.......................... 13,733 13,733
Kimberly F. Aquino........................ 5,874 5,874
Enterprise Nautical, Inc. (4)............. 100,000 136,864 236,864
Constellation Real Estate, Inc. (4)....... 984,308 7,030,793 8,876,174
M.O.R. XXIX Associates L.P................ 148,381 148,381
M.O.R. 44 Gateway Associates L.P.......... 1 1
John E. de B. Blockey and Sanda Juanita
Blockey................................ 50,476 50,476
John Parsinen............................. 90,000 90,000
John D. Parsinen, Jr...................... 10,000 24,658
New Parkway Domain Group Enterprises, LLC. 326,768 326,768
M.O.R. Commons, L.P....................... 7 7
United Properties Group, Incorporated..... 974,662 2,320,670
---------- --------- ---------- --------- ----------
Total................................. 974,662 9,557,536 984,308 7,767,657 21,491,244
========== ========= ========== ========= ==========
</TABLE>
(1) Preferred Units may be converted on or after December 21, 2000 into Common
Units of our Operating Partnership on the basis of 2.381 Common Units (subject
to adjustment) for each Preferred Unit being converted plus an amount of cash
equal to any accrued "priority return amount" as defined in the agreement
governing our Operating Partnership.
(2) Each holder of Common Units in our Operating Partnership has the right to
require the Operating Partnership to redeem all or a portion of such units. Our
Operating Partnership has the right, in its sole discretion, to deliver to such
redeeming holder for each Common Unit either one Common Share (subject to
adjustment) or a cash payment equal to the then fair market value of such share
determined by a formula set forth in the Operating Partnership agreement.
(3) These Preferred Shares are designated Series A Preferred Shares. Two of our
Trustees have been designated by Constellation Real Estate, Inc. pursuant to the
terms of these shares. For information on the conversion of Series A Preferred
Shares, you should refer to the discussion under the heading "Description of
Shares - Series A Preferred Shares" in the prospectus.
(4) Jay H. Shidler is the Chairman of the Board of COPT and is the controlling
partner of Shidler Equities L.P. Clay W. Hamlin, III is a Trustee and Chief
Executive Officer of COPT and is the controlling partner of LBCW Limited
Partnership and CHLB Partnership. Robert L. Denton is a COPT Trustee. James K.
Davis is Vice President, Acquisitions of COPT. David P. Hartsfield served as
Vice President of Development of Corporate Development Services, LLC, a wholly
owned subsidiary of COMI, within the past three years. Vernon R. Beck, who owns
all of the stock of Enterprise Nautical, Inc, served as Vice Chairman of the
Board of COPT within the past three years. Denise J. Liszewski has been the Vice
President, Administration of COPT within the past three years and is currently
an Assistant Secretary of COPT.
10
<PAGE>
DESCRIPTION OF SHARES
THE FOLLOWING SUMMARY OF THE TERMS OF THE SECURITIES OF CORPORATE OFFICE
PROPERTIES TRUST ("COPT") DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION OF TRUST AND THE
BYLAWS OF COPT, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART.
GENERAL
The Declaration of Trust provides that COPT may issue up to 45,000,000
Common Shares and 5,000,000 Preferred Shares of beneficial interest, par value
$0.01 per share (the "Preferred Shares"). As of December 31, 1999, there were
17,646,046 Common Shares, 984,308 Series A Convertible Preferred Shares of
beneficial interest (the "Series A Preferred Shares") and 1,250,000 Series B
Cumulative Redeemable Preferred Shares of beneficial interest (the "Series B
Preferred Shares") issued and outstanding. The Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of COPT, to amend the Declaration of Trust to increase or decrease
the aggregate number of shares of beneficial interest or the number of shares of
any class of shares of beneficial interest that COPT has authority to issue. The
additional shares of beneficial interest, which could include Common Shares,
will be available for issuance without further action by COPT's shareholders,
subject to the requirements of the New York Stock Exchange ("NYSE").
Both Title 8 of the Corporations and Associations Article of the Annotated
Code of Maryland, as amended (the "Maryland REIT Law") and the Declaration of
Trust provide that no shareholder of COPT will be personally liable for any
obligation of COPT solely as a result of such shareholder's status as a
shareholder of COPT. The Declaration of Trust provides that COPT shall have the
power, to the maximum extent permitted by Maryland law in effect from time to
time, to obligate itself to indemnify, and to pay or reimburse reasonable
expenses in advance of a final disposition of a proceeding to, any shareholder
or any former shareholder from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his status
as a present or former shareholder of COPT. The Bylaws of COPT obligate it, to
the maximum extent permitted by Maryland law, to indemnify any shareholder or
any former shareholder (including, without limitation, any individual who, while
a shareholder and at the request of COPT, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a trustee, director, officer,
partner, employee or agent of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
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 being a shareholder,
against reasonable expenses incurred by him in connection with the proceeding.
Inasmuch as COPT carries public liability insurance which it considers adequate,
any risk of personal liability to shareholders not covered by the Maryland REIT
Law is limited to situations in which COPT's assets plus its insurance coverage
would be insufficient to satisfy the claims against COPT and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of the Series A and B
Preferred Shares and any other shares or series of beneficial interest which
COPT may issue in the future and to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common Shares
are entitled to receive dividends on such shares if, as and when authorized and
declared by the Board of Trustees out of assets legally available therefor and
to share ratably in the assets of COPT legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of COPT.
Subject to the provisions of the Declaration of Trust regarding
restrictions on transfer of 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, and, except as
provided with respect to any other class or series of shares of beneficial
interest, the holders of such Common Shares possess the exclusive voting power.
There is no cumulative voting in the election of Trustees, which means that the
holders of a majority of the outstanding Common Shares can elect all of the
Trustees then standing for election. The Declaration of Trust provides for the
election of Trustees to staggered three-year terms. See the section below
entitled "Classificiation of Board,
11
<PAGE>
Vacancies and Removal of Trustees." Constellation Real Estate, Inc. is currently
entitled to appoint two of the nine Trustees. See section below entitled
"Description of Common Shares--Series A Preferred Shares".
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of COPT. Subject to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, the Common Shares have
equal dividend, distribution, liquidation and other rights.
The Declaration of Trust provides for approval by a majority of the votes
cast by holders of Common Shares entitled to vote on the matter in all
situations permitting or requiring action by the shareholders, except with
respect to: (i) the election of Trustees (which requires a plurality of all the
votes cast at a meeting of shareholders of COPT at which a quorum is present),
(ii) the removal of Trustees (which requires the affirmative vote of the holders
of two-thirds of the outstanding shares of beneficial interest of COPT entitled
to vote generally in the election of Trustees, which action can only be taken
for cause by vote at a shareholder meeting), (iii) the merger of COPT with
another entity or the sale (or other disposition) of all or substantially all of
the assets of COPT (which requires the affirmative vote of the holders of
two-thirds of the outstanding shares of beneficial interest entitled to vote on
the matter), (iv) the amendment of the Declaration of Trust (which requires the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter), (v) the termination of COPT (which requires the affirmative vote of
two-thirds of the outstanding shares of beneficial interest entitled to be cast
on the matter); and (vi) certain voting rights of Constellation Real Estate,
Inc. (See section below entitled "Series A Preferred Shares"). The Declaration
of Trust permits the Trustees, without any action by the holders of Common
Shares, (a) by a two-thirds vote, to amend the Declaration of Trust from time to
time to qualify as a real estate investment trust under the Code or the Maryland
REIT Law and (b) by a majority vote to amend the Declaration of Trust to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that COPT has
authority to issue.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to reclassify any
unissued shares of Common or Preferred Shares into other classes or series of
classes of shares and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such class or series. Thus, in addition to the Series A
Preferred Shares and Series B Preferred Shares, the Board of Trustees could
authorize the issuance of other Preferred Shares with terms and conditions which
could also have the effect of delaying, deferring or preventing a change in
control of COPT or other transaction that might involve a premium over the then
prevailing market price for Common Shares or other attributes that the
shareholders may consider to be desirable.
PREFERRED SHARES
Of the 5,000,000 Preferred Shares authorized, the Declaration of Trust
designates 1,025,000 as Series A Preferred Shares and 1,725,000 as Series B
Preferred Shares.
SERIES A PREFERRED SHARES
The outstanding 984,308 Series A Preferred Shares were issued to
Constellation Real Estate, Inc. We contributed the proceeds of the Series A
Preferred Share offering to our Operating Partnership in exchange for a number
of Series A Preferred Units equal to the number of Series A Preferred Shares
that we sold in the offering. The terms of the Series A Preferred Units are
substantially equivalent to the economic terms of the Series A Preferred Shares.
The terms of the Series A Preferred Shares are as follows:
VOTING RIGHTS. Except as set forth below and as required by applicable law,
the Series A Preferred Shares do not entitle the holder thereof to any vote. If
an amendment to COPT's Declaration of Trust or a reclassification of Preferred
Shares would amend, alter or repeal any of the rights, preferences or powers of
the Series A Preferred Shares, then the affirmative vote of holders of
two-thirds of the outstanding Series A Preferred Shares, voting as a separate
class, would be required for its adoption. Constellation Real Estate, Inc. has
the right to designate up to two
12
<PAGE>
members of the Board of Trustees depending on Constellation Real Estate, Inc.'s
ownership percentage of outstanding shares. This right is set forth as a term of
the Series A Preferred Shares, such that so long as Constellation Real Estate,
Inc. holds any Series A Preferred Shares (and it beneficially owns 30% of the
Common Shares), Constellation Real Estate, Inc. will have the right to designate
up to two Trustees. If Constellation Real Estate, Inc.'s Common Share beneficial
holdings fall below 30% but above 15%, Constellation Real Estate, Inc. may
designate one Trustee.
DIVIDENDS. Holders of Series A Preferred Shares will be entitled to
cumulative dividends, payable quarterly and in preference to dividends payable
on Common Shares, accruing from the date of issue, when, as and if declared by
the Board of Trustees out of funds legally available therefor, at the annual
rate of $1.375 per share, which is 5.5% of the $25.00 liquidation preference of
the Series A Preferred Shares.
LIQUIDATION. In the event of any liquidation, dissolution or winding-up of
COPT's affairs, holders of Series A Preferred Shares will be entitled to
receive, out of the assets of COPT legally available for distribution to its
shareholders, the sum of $25.00 for each Preferred Share, plus an amount equal
to all dividends accrued and unpaid on each such Series A Preferred Share up to
the date fixed for distribution, before any distribution may be made to holders
of COPT's Common Shares.
CONVERSION. The Series A Preferred Shares are convertible into Common
Shares on the basis of 1.8748 Common Shares for each Series A Preferred Share
(subject to adjustment upon certain events, such as dividends paid in Common
Shares) as follows:
<TABLE>
<CAPTION>
Series A Common Shares
Conversion Date Preferred Shares if converted
----------------------------- ---------------- -------------
<S> <C> <C>
September 28, 2000 865,566 1,622,763
October 22, 2000 72,509 135,940
December 30, 2000 46,233 86,678
---------------- -------------
Total 984,308 1,845,381
================ =============
</TABLE>
Notwithstanding the foregoing, Series A Preferred Shares held by
Constellation Real Estate, Inc. may not be converted into Common Shares if after
such conversion Constellation Real Estate, Inc. and its affiliates would own 45%
or more of COPT's outstanding Common Shares. In the event of such attempted
conversion, Constellation Real Estate, Inc. may elect to receive dividends
issued on the Common Shares it would have received if the conversion had been
completed, in lieu of dividends on its Preferred Shares.
ADDITIONAL PARITY AND JUNIOR SHARES. Any shares issued which are senior to
the Series A Preferred Shares require an affirmative vote of two-thirds of the
holders of Series A Preferred Shares. COPT may issue any class of capital shares
with voting rights which are on parity with or junior to the Series A Preferred
Shares without consent of the holders of Series A Preferred Shares. However, an
affirmative vote of two-thirds of the holders of Series A Preferred Shares is
required for any issuance or sale of greater than $50 million in Common Shares
at a price less than $9.50 per share.
SERIES B PREFERRED SHARES
The outstanding 1,250,000 Series B Preferred Shares were issued in a public
offering. We contributed the proceeds of the Series B Preferred Share offering
to our Operating Partnership in exchange for a number of Series B Preferred
Units equal to the number of Series B Preferred Shares that we sold in the
offering. The terms of the Series B Preferred Units are substantially equivalent
to the economic terms of the Series B Preferred Shares. The terms of the Series
B Preferred Shares are as follows:
RANKING. The Series B Preferred Shares, with respect to dividend rights and
rights upon our liquidation, dissolution or winding up, rank (i) prior or senior
to the Common Shares and any other class or series of our equity
13
<PAGE>
securities authorized or designated in the future if the holders of Series B
Preferred Shares shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up in preference or
priority to the holders of shares of such class or series ("Junior Shares");
(ii) on a parity with the Series A Convertible Preferred Shares and any other
class or series of our equity securities authorized or designated in the future
if the holders of such class or series of securities and the Series B Preferred
Shares shall be entitled to the receipt of dividends and of amounts
distributable upon liquidation, dissolution or winding up in proportion to their
respective amounts of accrued and unpaid dividends per share or liquidation
preferences, without preference or priority of one over the other ("Parity
Shares"); and (iii) junior to any class or series of our equity securities
authorized or designated in the future if the holders of such class or series
shall be entitled to the receipt of dividends and amounts distributable upon
liquidation, dissolution or winding up in preference or priority to the holders
of the Series B Preferred Shares ("Senior Shares").
DIVIDENDS. Holders of Series B Preferred Shares are entitled to receive,
when and as declared by our Board of Trustees, out of our funds legally
available for payment, quarterly cash dividends on the Series B Preferred Shares
at the rate of $2.50 per year per Series B Preferred Share. Such dividends are
cumulative from the date of original issue, whether or not in any dividend
period or periods such dividends shall be declared or there shall be funds
legally available for the payment of such dividends, and are payable quarterly
on January 15, April 15, July 15 and October 15 of each year (or, if not a
business day, the next succeeding business day) (each a "Dividend Payment
Date"). Any dividend payable on the Series B Preferred Shares for any partial
dividend period will be computed ratably on the basis of twelve 30-day months
and a 360-day year. Dividends are payable in arrears to holders of record as
they appear on our share records at the close of business on the applicable
record date, which are fixed by our Board of Trustees and which are not more
than 60 nor less than 10 days prior to such Dividend Payment Date. Holders of
Series B Preferred Shares are not entitled to receive any dividends in excess of
cumulative dividends on the Series B Preferred Shares. No interest, or sum of
money in lieu of interest, shall be payable in respect to any dividend payment
or payments on the Series B Preferred Shares that may be in arrears.
When dividends are not paid in full upon the Series B Preferred Shares or
any other class or series of Parity Shares, or a sum sufficient for such payment
is not set apart, all dividends declared upon the Series B Preferred Shares and
any Parity Shares shall be declared ratably in proportion to the respective
amounts of dividends accrued and unpaid on the Series B Preferred Shares and
accrued and unpaid on such Parity Shares. Except as set forth in the preceding
sentence, unless dividends on the Series B Preferred Shares equal to the full
amount of accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof has
been or contemporaneously is set apart for such payment, for all past dividend
periods, no dividends shall be declared or paid or set apart for payment by us
and no other distribution of cash or other property may be declared or made,
directly or indirectly, by us with respect to any Parity Shares. Unless
dividends equal to the full amount of all accrued and unpaid dividends on the
Series B Preferred Shares have been paid, or declared and set apart for payment,
for all past dividend periods, no dividends (other than dividends or
distributions paid in Junior Shares or options, warrants or rights to subscribe
for or purchase Junior Shares) may be declared or paid or set apart for payment
by us and no other distribution of cash or other property may be declared or
made, directly or indirectly, by us with respect to any Junior Shares, nor shall
any Junior Shares be redeemed, purchased or otherwise acquired (except for a
redemption, purchase or other acquisition of Common Shares made for purposes of
our employee incentive or benefit plan or any such plan of any of our
subsidiaries) for any consideration (or any monies be paid to or made available
for a sinking fund for the redemption of any such Junior Shares), directly or
indirectly, by us (except by conversion into or exchange for Junior Shares, or
options, warrants or rights to subscribe for or purchase Junior Shares), nor
shall any other cash or other property be paid or distributed to or for the
benefit of holders of Junior Shares. Notwithstanding the provisions described
above, we shall not be prohibited from (i) declaring or paying or setting apart
for payment any dividend or distribution on any Parity Shares or (ii) redeeming,
purchasing or otherwise acquiring any Parity Shares, in each case, if such
declaration, payment, redemption, purchase or other acquisition is necessary to
maintain our qualification as a REIT.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up, before any payment or distribution by us shall be
made to or set apart for the holders of any Junior Shares, the holders of Series
B Preferred Shares shall be entitled to receive a liquidation preference of
$25.00 per share (the "Series B Liquidation Preference"), plus an amount equal
to all accrued and unpaid dividends (whether or not earned or declared) to the
date of final distribution to such holders; but such holders shall not be
entitled to any further payment. Until the holders of the Series B Preferred
Shares have been paid the Series B Liquidation Preference in full, plus an
amount
14
<PAGE>
equal to all accrued and unpaid dividends (whether or not earned or declared) to
the date of final distribution to such holders, no payment shall be made to any
holder of Junior Shares upon our liquidation, dissolution or winding up. If upon
any liquidation, dissolution or winding up, our assets, or proceeds thereof,
distributable among the holders of Series B Preferred Shares shall be
insufficient to pay in full the above described preferential amount and
liquidating payments on any other shares of any class or series of Parity
Shares, then our assets, or the proceeds thereof, shall be distributed among the
holders of Series B Preferred Shares and any such other Parity Shares ratably in
the same proportion as the respective amounts that would be payable on such
Series B Preferred Shares and any such other Parity Shares if all amounts
payable thereon were paid in full. A voluntary or involuntary liquidation,
dissolution or winding up shall not include a consolidation or merger of us with
or into one or more other entities, a sale or transfer of all or substantially
all of our assets or a statutory share exchange. Upon any liquidation,
dissolution or winding up, after payment shall have been made in full to the
holders of Series B Preferred Shares and any Parity Shares, any other series or
class or classes of Junior Shares shall be entitled to receive any and all of
our assets remaining to be paid or distributed, and the holders of the Series B
Preferred Shares and any Parity Shares shall not be entitled to share therein.
OPTIONAL REDEMPTION. The Series B Preferred Shares will not be redeemable
by us prior to July 15, 2004 (except in certain limited circumstances relating
to our maintenance of our ability to qualify as a REIT as described in the
section entitled "Restrictions on Transfer"). On or after July 15, 2004, we may,
at our option, redeem the Series B Preferred Shares, in whole or from time to
time in part, at a cash redemption price equal to 100% of the Series B
Liquidation Preference, plus all accrued and unpaid dividends, if any, to the
redemption date. The redemption price for the Series B Preferred Shares (other
than any portion thereof consisting of accrued and unpaid dividends) shall be
payable solely with the proceeds from the sale of equity securities by us or our
Operating Partnership (whether or not such sale occurs concurrently with such
redemption). For purposes of the preceding sentence, "equity securities" means
any Common Shares, preferred shares, depositary shares, partnership or other
interests, participations or other ownership interests (however designated) and
any rights (other than debt securities convertible into or exchangeable at the
option of the holder for equity securities unless and to the extent such debt
securities are subsequently converted into equity securities) or options to
purchase any of the foregoing of or in us or our Operating Partnership.
In the event of a redemption of any Series B Preferred Shares, if the
redemption date occurs after a dividend record date and on or prior to the
related Dividend Payment Date, the dividend payable on such Dividend Payment
Date in respect of such Series B Preferred Shares called for redemption shall be
payable on such Dividend Payment Date to the holders of record at the close of
business on such dividend record date, and shall not be payable as part of the
redemption price for such Series B Preferred Shares. The redemption date shall
be selected by us and shall not be less than 30 days nor more than 60 days after
the date notice of redemption is sent by us. If full cumulative dividends on all
outstanding Series B Preferred Shares have not been paid or declared and set
apart for payment, no Series B Preferred Shares may be redeemed unless all
outstanding Series B Preferred Shares are simultaneously redeemed and neither we
nor any of our affiliates may purchase or acquire Series B Preferred Shares
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of Series B Preferred Shares.
If fewer than all the outstanding Series B Preferred Shares are to be
redeemed, we will select those Series B Preferred Shares to be redeemed pro rata
in proportion to the numbers of Series B Preferred Shares held by holders (with
adjustment to avoid redemption of fractional shares) or by lot or in such other
manner as the Board of Trustees may determine.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two consecutive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice shall be mailed by us not less than 30
days nor more than 60 days prior to the redemption date to each holder of record
of the Series B Preferred Shares to be redeemed by first class mail, postage
prepaid at such holder's address as the same appears on our share records. Any
notice which was mailed as described above shall be conclusively presumed to
have been duly given on the date mailed whether or not the holder receives the
notice. Each notice shall state: (i) the redemption date; (ii) the number of
Series B Preferred Shares to be redeemed; (iii) the place or places where
certificates for such Series B Preferred Shares are to be surrendered for cash;
and (iv) the redemption price payable on such redemption date, including,
without limitation, a statement as to whether or not accrued and unpaid
dividends will be (x) payable as part of the redemption price, or (y) payable on
the next Dividend Payment Date to the record holder at the close of business on
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the relevant record date as described above. From and after the redemption date
(unless we shall default in the payment of our redemption obligation), dividends
on the Series B Preferred Shares to be redeemed will cease to accrue, such
shares shall no longer be deemed to be outstanding and all rights of the holders
thereof shall cease (except (a) the right to receive the cash payable upon such
redemption without interest thereon, and (b) if the redemption date occurs after
a dividend record date and on or prior to the related Dividend Payment Date, the
right of record holders at the close of business on such record date to receive
the dividend payable on such Dividend Payment Date).
The Series B Preferred Shares will have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions except as
provided under the section entitled "Restrictions on Transfer."
Subject to applicable law and the limitation on purchases when dividends on
the Series B Preferred Shares are in arrears, we may, at any time and from time
to time, purchase any Series B Preferred Shares in the open market, by tender or
by private agreement.
VOTING RIGHTS. Holders of Series B Preferred Shares will not have any
voting rights, except as set forth below and except as otherwise required by
applicable law.
If and whenever dividends on any Series B Preferred Shares or any series or
class of Parity Shares shall be in arrears for six or more quarterly periods
(whether or not consecutive), the number of Trustees then constituting our Board
of Trustees shall be increased by two (if not already increased by reason of
similar types of provisions with respect to Parity Shares of any other class or
series which is entitled to similar voting rights (the "Voting Parity Shares")),
and the holders of Series B Preferred Shares, together with the holders of all
other Voting Parity Shares then entitled to exercise similar voting rights,
voting as a single class regardless of series, will be entitled to vote for the
election of the two additional Trustees at any annual meeting of shareholders or
at a special meeting of the holders of the Series B Preferred Shares and of the
Voting Parity Shares called for that purpose. At any time when such right to
elect Trustees separately shall have so vested, we must call such special
meeting upon the written request of the holders of record of not less than 20%
of the total number of Series B Preferred Shares and shares of any series of
Voting Parity Shares then outstanding. Such special meeting shall be held, in
the case of such written request, within 90 days after the delivery of such
request, provided that we shall not be required to call such a special meeting
if such request is received less than 120 days before the date fixed for the
next ensuing annual meeting of shareholders and the holders of Series B
Preferred Shares and such other Voting Parity Shares are offered the opportunity
to elect such Trustees at such annual meeting of shareholders. If, prior to the
end of the term of any Trustee so elected, a vacancy in the office of such
Trustee shall occur by reason of death, resignation, or disability, such vacancy
shall be filled for the unexpired term of such former Trustee by the appointment
of a new Trustee by the remaining Trustee or Trustees so elected. Whenever
dividends in arrears on outstanding Series B Preferred Shares and Voting Parity
Shares shall have been paid and dividends thereon for the current quarterly
dividend period shall have been paid or declared and set apart for payment, then
the right of the holders of the Series B Preferred Shares and Voting Parity
Shares to elect such additional two Trustees shall cease and the terms of office
of such Trustees shall terminate and the number of Trustees constituting our
Board of Trustees shall be reduced accordingly. Series A Preferred Shares are
not Voting Parity Shares. Holders of Series A Preferred Shares, as a separate
class, are entitled to elect two additional Trustees if we shall fail at any
time or from time to time to pay when due two consecutive quarterly dividend
payments on the Series A Preferred Shares, and such Trustees are entitled to
serve as Trustees thereafter until all accrued and unpaid dividends on the
Series A Preferred Shares have been paid in full.
The affirmative vote or consent of at least two-thirds of the votes
entitled to be cast by the holders of the outstanding Series B Preferred Shares
and the holders of all other classes or series of Voting Parity Shares entitled
to vote on such matters, voting as a single class, will be required to (i)
authorize, create, increase the authorized amount of, or issue any shares of any
class of Senior Shares or any security convertible into shares of any class of
Senior Shares, or (ii) amend, alter or repeal any provision of, or add any
provision to, our Declaration of Trust or Bylaws, if such action would
materially adversely affect the voting powers, rights or preferences of the
holders of the Series B Preferred Shares; provided, however, that no such vote
of the holders of Series B Preferred Shares shall be required if, at or prior to
the time such amendment, alteration or repeal is to take effect or the issuance
of any such Senior Shares or convertible security is to be made, as the case may
be, provisions are made for the redemption of all outstanding Series B Preferred
Shares. The amendment of or supplement to our Declaration of Trust to authorize,
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create, increase or decrease the authorized amount of or to issue Junior Shares,
Series B Preferred Shares or any shares of any class of Parity Shares shall not
be deemed to materially adversely affect the voting powers, rights or
preferences of the holders of Series B Preferred Shares. Holders of Series A
Preferred Shares do not vote with the holders of Series B Preferred Shares as a
single class with respect to the matters referred to above. With respect to
these matters, the holders of Series A Preferred Shares vote as a separate class
with the affirmative vote or consent of at least two-thirds of the votes
entitled to be cast by the holders of the Series A Preferred Shares being
required.
With respect to the exercise of the above-described voting rights, each
Series B Preferred Share has one (1) vote per share, except that when any other
class or series of preferred shares shall have the right to vote with the Series
B Preferred Shares as a single class, then the Series B Preferred Shares and
such other class or series shall have one quarter of one (0.25) vote per $25.00
of liquidation preference.
CONVERSION. The Series B Preferred Shares are not convertible into or
exchangeable for any other property or securities.
OPERATING PARTNERSHIP SERIES C PREFERRED UNITS
COPT conducts almost all of its operations through the Operating
Partnership, for which COPT is the managing general partner. Interests in the
Operating Partnership are in the form of Common and Preferred Units. As of
December 31, 1999, COPT owned approximately 60% of the outstanding Common Units
and 70% of the outstanding Preferred Units. The remaining Preferred Units in the
Operating Partnership were 974,662 Series C Preferred Units, owned by United
Properties Group, Incorporated, with terms as follows:
VOTING RIGHTS. Except in certain limited circumstances, at any time that
COPT holds less than 90% of the outstanding partnership units in the Operating
Partnership, any amendment to the Operating Partnership agreement must be
approved by the vote of a majority of the Common and Preferred Units not held by
COPT, each voting as a separate class. If COPT were to hold 90% or more of the
outstanding partnership units, COPT would have the right to amend the Operating
Partnership agreement without first seeking such unitholder approval.
LIQUIDATION. In the event of the dissolution of the Operating Partnership,
the holder of the Series C Preferred Units will be entitled to receive a $25
liquidation preference (the "Series C Liquidation Preference"), prior to any
liquidation payment to be made to the holders of the Common Units but PARI PASSU
with liquidation payments made to COPT as holder of the Series A and B Preferred
Units.
DISTRIBUTIONS. The holder of the Series C Preferred Units are entitled to
receive quarterly priority percentage return payments, prior to distributions
made to the holders of the Common Units but PARI PASSU with distributions made
to COPT as holder of the Series A and B Preferred Units, in an amount equal to a
percentage of the Series C Liquidation Preference, which percentage equals (a)
2.25% from December 21, 1999 to December 20, 2009, (b) 2.625% from December 21,
2009 to December 20, 2014, and (c) 3.00% thereafter.
CONVERSION. Beginning on December 22, 2000, the Series C Preferred Units
are convertible into Common Units at a conversion rate of 2.381 Common Units per
Series C Preferred Unit.
RESTRICTIONS ON TRANSFER
For COPT to qualify as a REIT under the Internal Revenue Code, its shares
of beneficial interest generally must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Also, not more than 50% of the
value of the outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) at any time during the last half of a taxable
year. This test is applied by "looking through" certain shareholders which are
not individuals (e.g., corporations or partnerships) to determine indirect
ownership of COPT by individuals.
The Declaration of Trust, subject to certain exceptions, contains certain
restrictions on the number of shares of beneficial interest of COPT that a
person may own. The Declaration of Trust provides that no person may own, or
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be deemed to own by virtue of the attribution provisions of the Internal Revenue
Code, more than 9.8% of the number or value of the outstanding shares of
beneficial interest of COPT. In addition, the Declaration of Trust prohibits any
person from acquiring or holding, directly or indirectly, Common Shares in
excess of 9.8% (in value or in number of shares, whichever is more restrictive)
of the aggregate of the outstanding Common Shares.
The Board of Trustees, in its sole discretion, may exempt a proposed
transferee from the 9.8% ownership limitation. However, the Board of Trustees
may not grant such an exemption to any person if such exemption would result in
COPT being "closely held" within the meaning of Section 856(h) of the Internal
Revenue Code or otherwise would result in COPT failing to qualify as a REIT. In
order to be considered by the Board of Trustees for an exemption, a person also
must not own, directly or indirectly, more than a 9.9% interest in a tenant of
COPT (or a tenant of any entity owned or controlled by COPT). The person seeking
an exemption must represent to the satisfaction of the Board of Trustees that it
will not violate the two aforementioned restrictions. The person also must agree
that any violation or attempted violation of any of the foregoing restrictions
will result in the automatic transfer of the shares of stock causing such
violation to the Share Trust (as defined below). The Board of Trustees may
require a ruling from the Internal Revenue Service or an opinion of counsel, in
either case in form and substance satisfactory to the Board of Trustees in its
sole discretion, in order to determine or ensure COPT's status as a REIT.
Constellation Real Estate, Inc., Mr. Jay H. Shidler and Mr. Clay W. Hamlin, III
are all Excepted Holders. However, as of December 31, 1999, Messrs. Shidler and
Hamlin collectively owned only 3.4% of the outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from beneficially
or constructively owning shares of beneficial interest of COPT that would result
in COPT being "closely held" under Section 856(h) of the Internal Revenue Code
or otherwise cause COPT to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of COPT if such transfer would result
in shares of beneficial interest of COPT being owned by fewer than 100 persons.
Any person who acquires or attempts or intends to acquire beneficial or
constructive ownership of shares of beneficial interest of COPT that will or may
violate any of the foregoing restrictions on transferability and ownership, or
any person who would have owned shares of the beneficial interest of COPT that
resulted in a transfer of shares to the Share Trust (as hereinafter defined), is
required to give notice immediately to COPT and provide COPT with such other
information as COPT may request in order to determine the effect of such
transfer on COPT's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Trustees determines
that it is no longer in the best interests of COPT to attempt to qualify, or to
continue to qualify, as a REIT.
If any transfer of shares of beneficial interest of COPT occurs which, if
effective, would result in any person beneficially or constructively owning
shares of beneficial interest of COPT in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of beneficial interest of COPT in excess of the ownership limit will
automatically be transferred to a trust (the "Share Trust") for the exclusive
benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"),
and the Prohibited Owner shall not acquire any rights in such shares. The
Prohibited Owner may not benefit economically from ownership of any shares of
beneficial interest held in the Share Trust, may have no rights to dividends and
may not possess any other rights attributable to the shares of beneficial
interest held in the Share Trust. The trustee of the Share Trust (the "Share
Trustee") will have all voting rights and rights to dividends or other
distributions with respect to shares of beneficial interest held in the Share
Trust, which rights will be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by COPT that shares of beneficial interest have been transferred to
the Share Trust will be paid by the recipient of such dividend or distribution
to the Share Trustee upon demand, and any dividend or other distribution
authorized but unpaid will be paid when due to the Share Trustee. Any dividend
or distribution so paid to the Share Trustee will be held in the Share Trust for
the Charitable Beneficiary. The Prohibited Owner will have no voting rights with
respect to shares of beneficial interest held in the Share Trust and, subject to
Maryland law, effective as of the date that such shares of beneficial interest
have been transferred to the Share Trust, the Share Trustee will have the
authority (at the Share Trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Owner prior to the discovery by COPT that such shares
have been transferred to the Share Trust and (ii) to recast such vote in
accordance with the desires of the Share Trustee acting for the benefit of the
Charitable Beneficiary. However, if COPT has already taken irreversible trust
action, then the Share Trustee will not have the authority to rescind and recast
such vote.
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Within 20 days of receiving notice from COPT that shares of beneficial
interest of COPT have been transferred to the Share Trust, the Share Trustee
will sell the shares of beneficial interest held in the Share Trust to a person,
designated by the Share Trustee, whose ownership of the shares will not violate
the ownership limitations set forth in the Declaration of Trust. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold will terminate and
the Share Trustee will distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as described below. The Prohibited Owner
will receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Share Trust
(e.g., a gift, devise or other such transaction), the Market Price (as defined
in the Declaration of Trust) of such shares on the day of the event causing the
shares to be received by the Share Trustee and (ii) the price per share received
by the Share Trustee from the sale or other disposition of the Common Shares
held in the Share Trust. Any net sale proceeds in excess of the amount payable
to the Prohibited Owner will be paid immediately to the Charitable Beneficiary.
If, prior to the discovery by COPT that shares of beneficial interest have been
transferred to the Share Trust, such shares are sold by a Prohibited Owner, then
(i) such shares will be deemed to have been sold on behalf of the Share Trust
and (ii) to the extent that the Prohibited Owner received an amount for shares
that exceeds the amount that such Prohibited Owner was entitled to receive as
described above, such excess will be paid to the Share Trustee upon demand.
In addition, shares of beneficial interest of COPT held in the Share Trust
will be deemed to have been offered for sale to COPT, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Share Trust (or, in the case
of a devise or gift, the Market Price at the time of such devise or gift) and
(ii) the Market Price on the date COPT, or its designee, accepts such offer.
COPT shall have the right to accept such offer until the Share Trustee has sold
the shares of beneficial interest held in the Share Trust. Upon such a sale to
COPT, the interest of the Charitable Beneficiary in the shares sold will
terminate and the Share Trustee will distribute the net proceeds of the sale to
the Prohibited Owner.
All certificates representing Common Shares will bear a legend referring to
the restrictions described above.
Every owner of more than 5% (or such other percentage as required by the
Internal Revenue Code or the regulations promulgated thereunder) of all classes
or series of COPT's shares of beneficial interest, including Common Shares, is
required to give written notice to COPT within 30 days after the end of each
taxable year stating the name and address of such owner, the number of shares of
each class and series of shares of beneficial interest of COPT which the owner
beneficially owns and a description of the manner in which such shares are held.
Each such owner shall provide to COPT such additional information as COPT may
request in order to determine the effect, if any, of such beneficial ownership
on COPT's status as a REIT and to ensure compliance with the 9.8% ownership
limitation. In addition, each shareholder shall upon demand be required to
provide to COPT such information as COPT may request, in good faith, in order to
determine COPT's status as a REIT and to comply with the requirements of any
taxing authority or governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a change in
control of COPT or other transaction that might involve a premium over the then
prevailing Market Price for the Common Shares or other attributes that the
shareholders may consider to be desirable.
CLASSIFICATION OF BOARD, VACANCIES AND REMOVAL OF TRUSTEES
The Declaration of Trust provides for a staggered Board of Trustees. COPT
presently has nine Trustees divided into three classes, with terms of three
years each. Constellation Real Estate, Inc. has appointed two Trustees, pursuant
to the terms of the Series A Preferred Shares. See section entitled "Description
of Shares - Series A Preferred Shares." Currently, the number of Trustees in
each class and the expiration of each class's term is as follows:
Class 1 2 Trustees Expires 2002
Class 2 3 Trustees Expires 2003
Class 3 4 Trustees Expires 2001
At each annual meeting of shareholders of COPT, successors of the class of
Trustees whose term expires at that meeting will be elected for a three-year
term and the Trustees in the other two classes will continue in office. A
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classified board may delay, defer or prevent a change in control of COPT or
other transaction that might involve a premium over the then prevailing market
price for the Common Shares or other attributes that the shareholders may
consider to be desirable. In addition, a classified Board could prevent
shareholders who do not agree with the policies of the Board of Trustees from
replacing a majority of the Board of Trustees for two years, except in the event
of removal for cause.
The Bylaws of COPT provide that any vacancy on the Board of Trustees may be
filled by a majority of the remaining Trustees. Any individual so elected
Trustee will hold office for the unexpired term of the Trustee he or she is
replacing. The Declaration of Trust provides that a Trustee may be removed at
any time only for cause upon the affirmative vote of at least two-thirds of the
votes entitled to be cast in the election of Trustees, but only by a vote taken
at a shareholder meeting. These provisions preclude shareholders from removing
incumbent Trustees, except for cause and upon a substantial affirmative vote,
and filling the vacancies created by such removal with their own nominees.
ADVANCE NOTICE OF NOMINATIONS AND NEW BUSINESS
The Bylaws provide that, with respect to an annual meeting of shareholders,
nominations of persons for election to the Board of Trustees and the proposal of
business to be considered by shareholders may be made only (a) pursuant to
COPT's notice of the meeting, (b) by the Board of Trustees or (c) by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws. With respect to special
meetings of shareholders, the Bylaws provide that only the business specified in
COPT's notice of meeting may be brought before the meeting of shareholders and
nominations of persons for election to the Board of Trustees may be made only
(a) pursuant to COPT's notice of the meeting, (b) by the Board of Trustees or
(c) provided that the Board of Trustees has determined that Trustees shall be
elected at such meeting, by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in the Bylaws.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW
The Maryland General Corporations Law ("MGCL") contains provisions that may
be deemed to have an antitakeover effect. The provisions applicable to COPT are
set forth below.
CERTAIN BUSINESS COMBINATIONS. Under the MGCL, as applicable to Maryland
real estate investment trusts, certain business combinations (including certain
mergers, consolidations, share exchanges and asset transfers and certain
issuances and reclassifications 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 such trust (an "Interested Shareholder"), or an
affiliate of such an 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 of such trust and approved by the affirmative votes of at
least (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the trust and (ii) two-thirds of the votes entitled to be cast by
holders of voting shares of the trust 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 Maryland law 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. The Board of Trustees has opted out of this
statute by resolution. The Board of Trustees may, however, rescind its
resolution at any time to make these provisions of Maryland law applicable to
COPT.
CONTROL SHARE PROVISIONS. The MGCL generally provides that control shares
of a Maryland real estate investment trust acquired in a control share
acquisition have no voting rights unless those rights are approved by a vote of
two-thirds of the disinterested shares (generally shares held by persons other
than the acquiror, officers or trustees who are employees of the trust). An
acquiror is deemed to own control shares the first time that the acquiror's
voting power in electing trustees equals or exceeds 20% of all such voting
power. Control shares do not
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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 Board of Trustees to call a special meeting of shareholders to be
held within 50 days of the demand to consider whether the control shares will
have voting rights. The trust may present the question at any shareholders'
meeting on its own initiative.
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. Fair value will be determined 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.
The control share provisions do not apply (a) to shares acquired in a
merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. The Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
COPT's shares of beneficial interest. The Board of Trustees may, however, amend
the Bylaws at any time to eliminate such provision, either prospectively or
retroactively.
DISSOLUTION OF THE COMPANY; TERMINATION OF REIT STATUS
The Declaration of Trust permits the termination of COPT and the
discontinuation of the operations of COPT by the affirmative vote of the holders
of not less than two-thirds of the outstanding Common Shares entitled to be cast
on the matter at a meeting of shareholders or by written consent. In addition,
the Declaration of Trust permits the termination of COPT's qualification as a
REIT if such qualification, in the opinion of the Board of Trustees, is no
longer advantageous to the shareholders.
FEDERAL INCOME TAX MATTERS
COPT was organized in 1988 and elected to be taxed as a REIT commencing
with its taxable year ended December 31, 1992. COPT believes that it was
organized and has operated in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code") and intends to continue
to operate in such a manner. No assurance can be given, however, that such
requirements have been or will continue to be met. The following is a summary of
the material Federal income tax considerations that may be relevant to COPT and
its shareholders, including the continued treatment of COPT as a REIT for
Federal income tax purposes. For purposes of this discussion of "FEDERAL INCOME
TAX MATTERS" the term "COPT" refers only to Corporate Office Properties Trust
and not to any other affiliated entities.
The following discussion is based on the law existing and in effect on the
date hereof, including the recently-enacted "Tax Relief Extension Act of 1999"
(the "TREA"), and COPT's qualification and taxation as a REIT will depend on
compliance with such law and with any future amendments or modifications to such
law. The qualification and taxation as a REIT will further depend upon the
ability to meet, on a continuing basis through actual operating results, the
various qualification tests imposed under the Code discussed below. No assurance
can be given that COPT will satisfy such tests on a continuing basis.
In brief, an entity that invests primarily in real estate can, if it meets
the REIT provisions of the Code described below, claim a tax deduction for the
dividends it pays to its shareholders. Such an entity generally is not taxed on
its "REIT taxable income" to the extent such income is currently distributed to
shareholders, thereby substantially eliminating the "double taxation" (i.e., at
both the entity and shareholder levels) that generally results from an
investment in an entity which is taxed as a corporation. However, as discussed
in greater detail below, such an
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entity remains subject to tax in certain circumstances even if it qualifies as a
REIT. Further, if the entity were to fail to qualify as a REIT in any year, it
would not be able to deduct any portion of the dividends it paid to its
shareholders and would be subject to full Federal corporate income taxation on
its earnings, thereby significantly reducing or eliminating the cash available
for distribution to its shareholders.
Morgan, Lewis & Bockius LLP has opined that, for Federal income tax
purposes, COPT has properly elected and otherwise qualified to be taxed as a
REIT under the Code for taxable years commencing on or after June 1, 1992 and
that its proposed method of operations as described in this prospectus and as
represented to Morgan, Lewis & Bockius LLP by COPT will enable COPT to continue
to satisfy the requirements for such qualification and taxation as a REIT under
the Code for future taxable years. This opinion, however, is based upon certain
factual assumptions and representations made by COPT. Moreover, such
qualification and taxation as a REIT depends upon the ability of COPT to meet,
for each taxable year, various tests imposed under the Code as discussed below,
and Morgan, Lewis & Bockius LLP has not reviewed in the past, and may not review
in the future, COPT's compliance with these tests. Accordingly, no assurance can
be given that the actual results of the operations of COPT for any particular
taxable year will satisfy such requirements.
TAXATION OF COPT
GENERAL. In any year in which COPT qualifies as a REIT, it will not
generally be subject to Federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. COPT will, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gains not distributed. Shareholders are required to include their proportionate
share of the REIT's undistributed long-term capital gain in income, but would
receive a credit for their share of any taxes paid on such gain by the REIT.
Notwithstanding its qualification as a REIT, COPT also may be subject to
taxation in certain other circumstances. If COPT should fail to satisfy either
the 75% or the 95% gross income test (each as discussed below), and nonetheless
maintains its qualification as a REIT because certain other requirements are
met, it will be subject to a 100% tax on the greater of the amount by which COPT
fails either the 75% or the 95% gross income test, multiplied by a fraction
intended to reflect COPT's profitability. (Under the TREA, effective for taxable
years after December 31, 2000, for purposes of this tax only, the 95% gross
income test will be changed to a 90% gross income test.) COPT will also be
subject to a tax of 100% on net income from any "prohibited transaction" (as
described below), and if COPT has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if COPT 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 capital gain net income
for such year and (iii) any undistributed taxable income from prior years, COPT
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. COPT also may be subject to the corporate
alternative minimum tax, as well as to tax in certain situations not presently
contemplated. COPT will use the calendar year both for Federal income tax
purposes, as is required of a REIT under the Code, and for financial reporting
purposes. Finally, under the TREA, for taxable years beginning after December
31, 2000, in the event that items of rent, interest or other deductible expenses
are paid to a REIT by a "taxable REIT subsidiary" (as defined below) of such
REIT, and such amounts are determined to be other than at arm's length, a REIT
may be subject to a 100% tax on the portion of such amounts treated as
excessive. Safe harbors exist for certain rental payments.
FAILURE TO QUALIFY. If COPT fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, COPT will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which COPT
fails to qualify as a REIT will not be deductible by COPT, nor generally will
they be required to be made under the Code. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, COPT
also will be disqualified from reelecting taxation as a REIT for the four
taxable years following the year during which qualification was lost.
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REIT QUALIFICATION REQUIREMENTS
In order to qualify as a REIT, COPT must meet the following requirements,
among others:
SHARE OWNERSHIP TESTS. COPT's shares of beneficial interest must be held by
a minimum of 100 persons for at least 335 days in each taxable year (or a
proportionate number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the outstanding shares of beneficial interest of COPT may be owned, directly or
indirectly and taking into account the effects of certain constructive ownership
rules, by five or fewer individuals, which for this purpose includes certain
tax-exempt entities (the "50% Limitation"). However, for purposes of this test,
any shares of beneficial interest held by a qualified domestic pension or other
retirement trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interest in such trust rather than by such trust.
In addition, for purposes of the 50% Limitation, shares of beneficial interest
owned, directly or indirectly, by a corporation will be considered as being
owned proportionately by its shareholders.
In order to attempt to ensure compliance with the foregoing share ownership
tests, COPT's Declaration of Trust places certain restrictions on the transfer
of its shares of beneficial interest to prevent additional concentration of
share ownership. Moreover, to evidence compliance with these requirements,
Treasury Regulations require COPT to maintain records which disclose the actual
ownership of its outstanding shares of beneficial interest. In fulfilling its
obligations to maintain records, COPT must and will demand written statements
each year from the record holders of designated percentages of its shares of
beneficial interest disclosing the actual owners of such shares of beneficial
interest (as prescribed by Treasury Regulations). A list of those persons
failing or refusing to comply with such demand must be maintained as part of
COPT's records. A shareholder failing or refusing to comply with COPT's written
demand must submit with his tax return a similar statement disclosing the actual
ownership of COPT shares of beneficial interest and certain other information.
Currently, Constellation Real Estate, Inc. owns approximately 38.0% of the
Common Shares outstanding, and 984,308 Series A Preferred Shares convertible
into 1,845,381 Common Shares. Under COPT's Declaration of Trust a person is
generally prohibited from owning more than 9.8% of the aggregate outstanding
Common Shares or more than 9.8% in value of the aggregate outstanding shares of
beneficial interest unless such person makes certain representations to the
Board of Trustees and the Board of Trustees ascertains that ownership of a
greater percentage of shares will not cause COPT to violate either the 50%
Limitation or the gross income tests described below. The Board of Trustees has
exempted Constellation Real Estate, Inc. from the 9.8% limitation set forth in
the Declaration of Trust and has determined that Constellation Real Estate, Inc.
may hold up to 45% of the outstanding Common Shares. The Board of Trustees has
determined, based upon representations made by Constellation Real Estate, Inc.,
that this will not result in a violation of the 50% Limitation or otherwise
adversely affect COPT's ability to qualify as a REIT for Federal income tax
purposes.
ASSET TESTS. At the close of each quarter of COPT's taxable year, COPT must
satisfy two tests relating to the nature of its assets (determined in accordance
with generally accepted accounting principles). First, at least 75% of the value
of COPT's total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other REITs, cash, cash
items, government securities and qualified temporary investments. Second,
although the remaining 25% of COPT's assets generally may be invested without
restriction, securities in this class may not exceed (i) in the case of
securities of any one non-government issuer, 5% of the value of COPT's total
assets (the "REIT Value Test") or (ii) 10% of the outstanding voting securities
of any one such issuer (the "Issuer Voting Stock Test") (effective for taxable
years beginning after December 31, 2000, securities in this class may also not
exceed 10% of the total value of any such issuer (the "Issuer Value Test")).
Under the TREA, effective for COPT's taxable years beginning after December 31,
2000, the REIT Value Test, the Issuer Voting Stock Test or the Issuer Value Test
will not apply to securities held by a REIT in a "taxable REIT subsidiary." A
taxable REIT subsidiary is any corporation in which the REIT owns stock and with
which the REIT makes a joint election to be so treated. Any corporation in which
a REIT owns, directly or indirectly, shares possessing more than 35% of the
voting power or value of such corporation will automatically be treated as a
taxable REIT subsidiary (other than certain corporations which are wholly-owned
by the REIT and are treated as "qualified REIT subsidiaries"). In addition,
certain debt securities held by a REIT will not be taken into account for
purposes of the Issuer Value Test. Finally, certain "grandfathering" rules also
exempt from the Issuer Value Test securities owned by the REIT on July 12, 1999.
Where COPT invests in a partnership (such as the Operating Partnership), it will
be deemed to own a
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proportionate share of the partnership's assets, and the partnership interest
will not constitute a security for purposes of these tests. Accordingly, COPT's
investment in real properties through its interests in the Operating Partnership
(which itself holds real properties through other partnerships) will constitute
an investment in qualified assets for purposes of the 75% asset test.
GROSS INCOME TESTS. There are two separate percentage tests relating to the
sources of COPT's gross income which must be satisfied for each taxable year.
For purposes of these tests, where COPT invests in a partnership, COPT will be
treated as receiving its share of the income and loss of the partnership, and
the gross income of the partnership will retain the same character in the hands
of COPT as it has in the hands of the partnership. The two tests are described
below.
THE 75% TEST. At least 75% of COPT's gross income for the taxable year must
be "qualifying income." Qualifying income generally includes: (i) rents from
real property (except as modified below); (ii) interest on obligations secured
by mortgages on, or interests in, real property; (iii) gains from the sale or
other disposition of interests in real property and real estate mortgages, other
than gain from property held primarily for sale to customers in the ordinary
course of COPT's trade or business ("dealer property"); (iv) dividends or other
distributions on shares in other REITS, as well as gain from the sale of such
shares; (v) abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of the mortgage secured by such property ("foreclosure property");
and (vii) commitment fees received for agreeing to make loans secured by
mortgages on real property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% gross income test (or the 95% gross income test
described below) if COPT, or an owner of 10% or more of COPT, directly or
constructively owns 10% or more of such tenant. Under the TREA, effective for
taxable years of COPT beginning after December 31, 2000, the foregoing rule will
not apply to rents received from a taxable REIT subsidiary, provided that either
(i) at least 90% of the leased property in respect of which COPT is receiving
such rents is occupied by persons other than such taxable REIT subsidiary or
(ii) such rents are received in respect of a "qualified lodging facility." In
addition, 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. Moreover, an amount received or accrued
will not qualify as rents from real property (or as interest income) for
purposes of the 75% and 95% gross income tests if it is based in whole or in
part on the income or profits of any person, although an amount received or
accrued generally will not be excluded from "rents from real property" solely by
reason of being based on a fixed percentage or percentages of receipts or sales.
Finally, for rents received to qualify as rents from real property for purposes
of the 75% and 95% gross income tests, COPT generally must not operate or manage
the property or furnish or render services to customers, other than through an
"independent contractor" from whom COPT derives no income, or through a taxable
REIT subsidiary, except that the "independent contractor" or taxable REIT
subsidiary requirement does not apply to the extent that the services provided
by COPT are "usually or customarily rendered" in connection with the rental of
space for occupancy only, and are not otherwise considered "rendered to the
occupant for his convenience." In addition, COPT may directly perform a de
minimis amount of non-customary services. COPT believes that the services
provided with regard to COPT's properties by the operating partnership (or its
agents) are now (and, it is believed, will in the future be) usual or customary
services. Any services that cannot be provided directly by the Operating
Partnership will be performed by independent contractors.
THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of COPT's gross income for the taxable year
must be derived from the above-described qualifying income or from dividends,
interest, or gains from the sale or other disposition of stock or other
securities that are not dealer property. Dividends and interest on obligations
not collateralized by an interest in real property are included for purposes of
the 95% test, but not for purposes of the 75% test. COPT intends to monitor
closely its non-qualifying income and anticipates that non-qualifying income
from its activities will not result in COPT failing to satisfy either the 75% or
95% gross income test.
For purposes of determining whether COPT complies with the 75% and the 95%
gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property); however, a sale of property will not be a prohibited
transaction if such property is
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held for at least four years and certain other requirements (relating to the
number of properties sold in a year, their tax bases and the cost of
improvements made thereto) are satisfied.
Even if COPT fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) COPT's failure to comply is due
to reasonable cause and not to willful neglect; (ii) COPT reports the nature and
amount of each item of its income included in the tests on a schedule attached
to its tax return; and (iii) any incorrect information on this schedule is not
due to fraud with intent to evade tax. If these relief provisions apply,
however, COPT will nonetheless be subject to a 100% tax on the greater of the
amount by which it fails either the 75% or 95% gross income test, multiplied by
a fraction intended to reflect COPT's profitability. Under the TREA, for COPT's
taxable years beginning after December 31, 2000, and only for purposes of
determining the applicability of such 100% tax, the 95% gross income test will
be changed to a 90% gross income test.
COMPLIANCE WITH INCOME TESTS. As of December 31, 1999, Constellation Real
Estate, Inc. and certain affiliated companies were obligated as tenants to pay
annual rent of approximately $861,000 with respect to properties owned by the
Operating Partnership. Some of this rental income may not constitute qualifying
rental income for purposes of the 75% and 95% gross income tests. COPT expects,
based on current rent levels, that receipt of such rental income will not cause
it to violate the 95% gross income test for the current taxable year. Aside from
this rental income, COPT does not expect that it will earn material amounts of
non-qualifying income from either Constellation Real Estate, Inc. or its
existing properties. Based on the foregoing, COPT expects that it will continue
to satisfy the 75% and 95% gross income tests. The fact that affiliates of
Constellation Real Estate, Inc. will be paying non-qualifying income may,
however, restrict the ability of COPT and the Operating Partnership to acquire
additional properties that generate non-qualifying income.
To avoid a violation of the 95% gross income test, the Operating
Partnership established Corporate Office Management, Inc. ("COMI") to own a 75%
interest in Corporate Realty Management, LLC, the Operating Partnership's
property management company ("CRM"). COMI also owns 100% of Corporate
Development Services, LLC ("CDS"), a company that provides construction and
development services predominantly to the Operating Partnership, and 80% of
Martin G. Knott and Associates, LLC ("MGK"), a company that provides heating and
air conditioning maintenance and repair services predominantly to third parties.
In addition, COMI had a service agreement, extending through March 2000, with
Constellation Real Estate, Inc. for development and other services, since income
from such services is also considered non-qualifying income.
The Operating Partnership currently holds indebtedness issued by COMI and
95% of the aggregate amount of voting and non-voting common stock issued by
COMI, but only holds 1% of the aggregate amount of voting common stock issued by
COMI. As discussed above, to satisfy the Issuer Voting Stock Test as in effect
prior to enactment of the TREA, COPT may not directly or indirectly hold 10% or
more of the voting stock of COMI.
Because it is a corporate entity (as opposed to a partnership) which is not
wholly-owned by COPT, the management fee and other service income earned by COMI
as a result of its ownership interest in CRM, CDS and MGK, or as a result of
management and other services performed by COMI or its subsidiaries, although it
is non-qualifying income, is not treated as non-qualifying income earned by COPT
for purposes of the 95% or 75% gross income tests. However, any interest or
dividends paid or distributed by COMI to the Operating Partnership is considered
qualifying income for purposes of the 95% test, but is not considered qualifying
income for purposes of the 75% test. To the extent that COMI earns net taxable
income from its activities, it is required to pay Federal and state income
taxes, which reduces the amount of dividends it is able to pay to the Operating
Partnership and its other shareholders.
Under the TREA, the Operating Partnership's ownership interest in COMI
would not satisfy the Issuer Value Test, because such interest represents more
than 10% of the total value of shares of all classes of stock in COMI.
Accordingly, absent the grandfathering rules discussed immediately below, the
interest in COMI owned by the Operating Partnership could jeopardize COPT's
status as a REIT, unless both COPT and COMI were to elect to treat COMI as a
taxable REIT subsidiary. Under the TREA, however, the Issuer Value Test does not
apply to securities held by a REIT on July 12, 1999. As the Operating
Partnership's interest in COMI was held on such date, such interest will not, by
itself, cause COPT to violate the Issuer Value Test or the REIT asset
qualification test described
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above. The foregoing grandfather rules cease to apply to securities of a
corporation on the first day after July 12, 1999 on which such corporation
either (i) engages in a substantial new line of business or (ii) acquires any
substantial new asset, other than, in each case, as a result of certain tax-free
exchange or reorganization transactions, or if additional securities in such
corporation are acquired after such date. Accordingly, if COMI were to engage in
a substantial new line of business or acquire a substantial new asset in a
taxable transaction (or if the Operating Partnership were to acquire additional
shares in COMI), in order to avoid violating the Issuer Value Test it would be
necessary for COPT and COMI to jointly elect to treat COMI as a taxable REIT
subsidiary. Such election would in turn invoke other provisions added to the
Code by the TREA, some of which could independently affect the ability of COPT
to maintain its status as a REIT.
COPT believes that the changes effected by the TREA, including the
imposition of the Issuer Value Test, do not currently affect the legal status of
its indirect investment in COMI, or its status as a REIT. COPT intends to
monitor closely COMI's activities, however, in order to anticipate the
possibility that COMI will cease to be eligible for grandfathering treatment
currently exempting it from the Issuer Value Test. In addition, COPT intends to
monitor this and any other legislation, proposed or enacted, to assess the
possible effect of any such legislation on its future operations and tax
profile.
COPT intends to continue to monitor its operations and investments in the
context of these standards so as to continue to satisfy the 75% and 95% gross
income tests. While the Operating Partnership or its affiliates provide certain
services with respect to the properties in which COPT owns interests and
possibly with respect to any newly acquired properties, COPT believes that for
purposes of the 75% and 95% gross income tests the services provided at such
properties and any other services and amenities provided by the Operating
Partnership or its agents with respect to such properties will be of the type
usually or customarily rendered in connection with the rental of space for
occupancy only and not rendered to the occupants of such properties. COPT
intends that services that cannot be provided directly by the Operating
Partnership or other agents will be performed by independent contractors.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, COPT is
required to distribute dividends to its shareholders each year in an amount at
least equal to (A) the sum of (i) 95% of COPT's REIT taxable income (computed
without regard to the dividends received deduction and COPT's net capital gain)
and (ii) 95% of the net income (after tax), if any, for foreclosure property,
minus (B) the sum of certain items of non-cash income. Under the TREA, for
COPT's taxable years beginning after December 31, 2000, the required
distributions will be calculated by reference to 90% of COPT's REIT taxable
income and net income from foreclosure property (as described above),
respectively. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before COPT timely files
its tax return for such year and if paid on or before the first regular dividend
payment after the declaration. To the extent that COPT does not distribute all
of its net capital gain or distributes at least 95% (90%, for taxable years
after 2000), but less than 100%, of its REIT taxable income, as adjusted, it
will be subject to tax on the undistributed amount at regular capital gain or
ordinary corporate tax rates, as the case may be.
COPT intends to make timely distributions sufficient to satisfy the annual
distribution requirements described in the first sentence of the preceding
paragraph. In this regard, the Operating Partnership agreement authorizes COPT
in its capacity 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 COPT to meet the distribution requirements. It is possible
that COPT may not have sufficient cash or other liquid assets to meet the
above-described distribution requirement, either due to timing differences
between the actual receipt of income and actual payment of expenses on the one
hand, and the inclusion of such income and deduction of such expenses in
computing COPT's REIT taxable income on the other hand, or for other reasons.
COPT will monitor closely the relationship between its REIT taxable income and
cash flow and, if necessary, intends to borrow funds (or cause the Operating
Partnership or other affiliates to borrow funds) in order to satisfy the
distribution requirement. However, there can be no assurance that such borrowing
would be available at such time.
If COPT fails to meet the above-described distribution requirement as a
result of an adjustment to COPT's tax return by the Service, COPT may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
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TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As long as COPT qualifies as a
REIT, distributions made to its taxable domestic shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will constitute dividends taxable as ordinary income, and corporate shareholders
will not be eligible for the dividends received deduction as to such amounts.
Distributions that are designated as capital gain dividends will be taxed as
gain from the sale or exchange of a capital asset (to the extent they do not
exceed COPT's actual net capital gain for the taxable year) without regard to
the period for which the shareholder has held its shares. In the event COPT
designates any portion of a dividend as a capital gain dividend, a shareholder's
share of such capital gain dividend would be an amount which bears the same
ratio to the total amount of dividends paid to such shareholder for the taxable
year as the total amount of capital gain dividends bears to the total amount of
all dividends paid on all classes of share for the taxable year. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. COPT may elect to retain and pay income tax
on any net long-term capital gain, in which case its domestic shareholders would
include in their income as long-term capital gain their proportionate share of
such undistributed net long-term capital gain. A domestic shareholder would also
receive a refundable tax credit for such shareholder's proportionate share of
the tax paid by COPT on such retained capital gains and an increase in its basis
in its shares in an amount equal to the difference between the undistributed
long-term capital gains and the amount of tax paid by COPT. See the section
below entitled "Capital Gains and Losses".
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 of beneficial interest, but rather
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a shareholder's shares of beneficial
interest, they will be included in income as short-term or long-term capital
gain (depending on the length of time the shares have been held), assuming the
shares are capital assets in the hands of the shareholder. In addition, any
dividend declared by COPT in October, November or December of any year and
payable to a shareholder of record on a specific date in any such month shall be
treated as both paid by COPT and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by COPT during January of
the following calendar year.
Domestic shareholders may not include in their individual income tax
returns any of COPT's net operating losses or capital losses. Instead, such
losses would be carried over by COPT for potential offset against future income
(subject to certain limitations). Distributions made by COPT and gain arising
from the sale or exchange of shares will not be treated as passive activity
income, and, as a result, shareholders generally will not be able to apply any
"passive losses" against such income and gain. In addition, taxable
distributions from COPT generally will be treated as investment income. Capital
gain dividends (including distributions treated as such) and capital gain from
the disposition of shares, however, will be treated as investment income only if
a shareholder so elects, in which case such capital gain will be taxed at
ordinary income rates. COPT will notify shareholders after the close of its
taxable year as to the portions of distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of COPT's shares of beneficial interest equal to the difference
between (i) the amount of cash and the fair market value of any property
received on such disposition, and (ii) the shareholder's adjusted basis of such
shares of beneficial interest. Such gain or loss generally will constitute
short-term capital gain or loss if the shareholder has not held such shares for
more than one year and long-term capital gain or loss if the shareholder has
held such shares for more than one year. See the section below entitled "Capital
Gains and Losses". Loss upon a sale or exchange of COPT's shares of beneficial
interest 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 of distributions from COPT required to be treated by such
shareholder as long-term capital gain.
CAPITAL GAINS AND LOSSES. The maximum marginal individual income tax rate
is 39.6%. The maximum tax rate on net capital gains applicable to individuals,
trusts and estates from the sale or exchange of capital assets held for more
than 18 months is 20%, and the maximum rate is reduced to 18% for assets
acquired after December 31, 2000 and held for more than five years. For
individuals, trusts and estates who would be subject to a maximum tax rate of
15%, the rate on net capital gains is reduced to 10%, and, effective for taxable
years commencing after
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December 31, 2000, the rate is reduced to 8% for assets held for more than five
years. The maximum rate for net capital gains attributable to the sale of
depreciable real property held for more than 18 months is 25% to the extent of
the deductions for depreciation (other than certain depreciation recapture
taxable as ordinary income) with respect to such property. The maximum rate of
capital gains tax for capital assets held more than one year but not more than
18 months is 28%. Accordingly, the tax rate differential between capital gain
and ordinary income for noncorporate taxpayers may be significant. In addition,
the characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against a noncorporate taxpayer's ordinary income only up to a
maximum annual amount of $3,000. Unused capital losses may be carried forward.
All net capital gain of a corporate taxpayer is subject to tax at ordinary
corporate rates. A corporate taxpayer can deduct capital losses only to the
extent of capital gains, with unused losses being carried back three years and
forward five years.
BACKUP WITHHOLDING. COPT will report to its domestic shareholders and the
IRS the amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption and otherwise complies with the applicable requirements of the backup
withholdings rules. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. The United States Treasury has
recently issued final regulations (the "Final Regulations") regarding the
withholding and information reporting rules discussed above. In general, the
Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify and modify reliance standards. The Final Regulations are generally
effective for payments made on or after January 1, 2000, subject to certain
transition rules. Prospective investors should consult their own tax advisors
concerning the adoption of the Final Regulations and the potential effect on
their ownership of COPT's shares of beneficial interest.
In addition, COPT may be required to withhold a portion of capital gain
distributions made to shareholders that fail to certify their non-foreign status
to COPT. See section below entitled "Taxation of Foreign Shareholders" .
TAXATION OF TAX-EXEMPT SHAREHOLDERS. The IRS has ruled that amounts
distributed as dividends by a REIT generally do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based on
that ruling, dividend income from COPT's shares of beneficial interest will not
be UBTI to a tax-exempt shareholder, provided that the tax-exempt shareholder
has not held its shares as "debt financed property" within the meaning of the
Code and such shares are not otherwise used in a trade or business. Similarly,
income from the sale of COPT's shares of beneficial interest will not constitute
UBTI unless such tax-exempt shareholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will be treated as UBTI as to any trust which is described
in Section 401(a) of the Code, is tax-exempt under Section 501(a) of the Code (a
"qualified trust") and which holds more than 10% (by value) of the interests in
the REIT. A REIT is a "pension held REIT" if (i) it would not have qualified as
a REIT but for the application of a "look-through" exception to the 50%
Limitation applicable to qualified trusts, and (ii) either (1) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(2) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (i) the gross income (less direct expenses
related thereto) of the REIT from unrelated trades or businesses (determined as
if the REIT were a qualified trust) to (ii) the total gross income (less direct
expenses related thereto) of the REIT. A de minimis exception applies where this
percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the 50% Limitation without relying upon the
"look-through" exception with respect to qualified trusts. As a result of
certain limitations on transfer and ownership of COPT's shares of beneficial
interest contained in the Charter, COPT does not expect to be classified as a
"pension held REIT."
TAXATION OF FOREIGN SHAREHOLDERS. The rules governing the United States
Federal income taxation of the ownership and disposition of COPT's shares of
beneficial interest by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively,
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"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 COPT'S SHARES
OF BENEFICIAL INTEREST, INCLUDING ANY REPORTING REQUIREMENTS, AS WELL AS THE TAX
TREATMENT OF SUCH AN INVESTMENT UNDER THEIR HOME COUNTRY LAWS.
In general, Non-U.S. Shareholders will be subject to regular United States
Federal income taxation with respect to their investment in COPT's shares of
beneficial interest in the same manner as a U.S. shareholder (I.E., at graduated
rates on a net basis, after allowance of deductions) if such investment is
"effectively connected" with the conduct by such Non-U.S. Shareholder of a trade
or business in the United States. A Non-U.S. Shareholder that is a corporation
and that receives income with respect to its investment in COPT's shares of
beneficial interest that is (or is treated as) "effectively connected" with the
conduct of a trade or business in the United States may also be subject to the
30% branch profits tax imposed under Section 884 of the Code, which is payable
in addition to the regular United States corporate income tax. The following
discussion addresses only the Federal income taxation of Non-U.S. Shareholders
whose investment in COPT's shares of beneficial interest is not "effectively
connected" with the conduct of a trade or business in the United States.
Prospective investors whose investment in COPT's shares of beneficial interest
may be "effectively connected" with the conduct of a United States trade or
business should consult their own tax advisors as to the tax consequences
thereof.
Distributions that are not attributable to gain from sales or exchanges of
United States real property interests and that are not designated by COPT as
capital gains dividends will be treated as dividends of ordinary income to the
extent that they are made out of COPT's current or accumulated earnings and
profits. Such distributions ordinarily will 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. Pursuant to the Final Regulations,
dividends paid to an address in a country outside the United States will no
longer be presumed to be paid to a resident of such country for purposes of
determining the applicability of withholding discussed above and the
availability of a reduced tax treaty rate. A Non-U.S. Shareholder who wishes to
claim the benefit of an applicable treaty rate will now be required to satisfy
certain certification and other requirements. Distributions that COPT makes in
excess of its current and accumulated earnings and profits will not be taxable
to a Non-U.S. Shareholder to the extent they do not exceed the adjusted basis of
such Non-U.S. Shareholder's shares, but rather will reduce the adjusted basis of
such shares (but not below zero). To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to
tax liability if such Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of shares, as described below.
For withholding tax purposes, COPT is currently required to treat all
distributions as if made out of its current or accumulated earnings and profits
and thus intends to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under the
Final Regulations, generally effective for distributions on or after January 1,
2000, COPT would not be required to withhold at the 30% rate on distributions
COPT reasonably estimates to be in excess of its current and accumulated
earnings and profits. If it cannot be determined at the time a distribution is
made whether such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to ordinary dividends. However, a Non-U.S. Shareholder may seek
a refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of its current or accumulated earnings and
profits, and the amount withheld exceeded the Non-U.S. Shareholder's United
States tax liability, if any, with respect to the distribution.
For any year in which COPT qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges 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,
these distributions are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with the conduct of a United States trade or business.
Non-U.S. Shareholders would thus be taxed at the normal capital gain rates
applicable to domestic shareholders (subject to applicable alternative minimum
tax and special alternative minimum tax in the case of nonresident alien
individuals), without regard as to whether such distributions are designated by
COPT as capital gain dividends. 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. COPT is required by Treasury
Regulations to
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withhold 35% of any distribution to a Non-U.S. Shareholder that could be
designated as a capital gain dividend. This amount is creditable against the
Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of COPT's shares of
beneficial interest generally will not be subject to United States taxation
unless such shares constitute a "United States real property interest" within
the meaning of FIRPTA. COPT's shares of beneficial interest will not constitute
a "United States real property interest" so long as COPT is a "domestically
controlled REIT." A "domestically controlled REIT" is generally a REIT in which
at all times during a specified testing period less than 50% in value of its
share was held directly or indirectly by Non-U.S. Shareholders. COPT believes
that it will be a "domestically controlled REIT" and therefore, the sale of
COPT's shares of beneficial interest will not be subject to taxation under
FIRPTA. However, because COPT's shares of beneficial interest will be publicly
traded, no assurance can be given that COPT will continue to be a "domestically
controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange
of its shares not otherwise subject to FIRPTA generally will be taxable to a
Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
If COPT does not qualify as or ceases to be a "domestically controlled
REIT," whether gain arising from the sale or exchange by a Non-U.S. Shareholder
of COPT's shares of beneficial interest would be subject to U.S. taxation under
FIRPTA will depend on whether the shares are "regularly traded" (as defined in
applicable Treasury Regulations) on an established securities market (such as
the NYSE on which COPT's shares of beneficial interest are traded) and on the
size of the selling Non-U.S. Shareholder's interest in COPT. If the gain on the
sale of COPT's shares of beneficial interest were to be subject to tax under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as a
domestic shareholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of foreign corporations), and the purchaser would be
required to withhold and remit to the IRS 10% of the purchase price. In
addition, if COPT is not a "domestically controlled REIT," distributions in
excess of its current and accumulated earnings and profits would be subject to
withholding at a rate of 10%.
Dividends paid in the United States with respect to COPT's shares of
beneficial interest, and proceeds from the sale of COPT's shares of beneficial
interest, through a United States broker (or certain brokers having significant
connections with the United States) may be subject to the information reporting
requirements of the Code. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% unless such shareholder (i)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (ii) provides a taxpayer identification
number and certifies as to no loss of exemption, and otherwise complies with the
applicable requirements of the backup withholding rules. Non-U.S. Shareholders
are generally exempt from information reporting and backup withholding, but may
be required to provide a properly completed Form W-8 or otherwise comply with
applicable certification and identification procedures in order to prove their
exemption. Any amount paid as backup withholding will be creditable against the
Non-U.S. Shareholder's United States income tax liability.
The Final Regulations, issued by the United States Treasury on October 6,
1997, affect the rules applicable to payments to foreign persons. In general,
the Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and modify
reliance standards. In addition, the Final Regulations also address certain
issues relating to intermediary certification procedures designed to simplify
compliance by withholding agents. The Final Regulations are generally effective
for payments made on or after January 1, 2000, subject to certain transition
rules. Prospective investors should consult their own tax advisors concerning
the adoption of the Final Regulations and the potential effect on their
ownership of COPT's shares of beneficial interest.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF THE OPERATING PARTNERSHIP ON REIT QUALIFICATION.
All of COPT's investments are through the operating partnership. COPT believes
that the operating partnership is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation). If, however, the
operating partnership were to
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be treated as an association taxable as a corporation, COPT would cease to
qualify as a REIT. Furthermore, in such a situation, the operating partnership
would be subject to corporate income taxes and COPT would not be able to deduct
its share of any losses generated by the operating partnership in computing its
taxable income.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The operating partnership
was formed, in part, by way of contributions of appreciated property. When
property is contributed to a partnership in exchange for an interest in the
partnership, the partnership generally takes a carryover basis in that property
for tax purposes equal to the adjusted basis of the contributing partner in the
property, rather than a basis equal to the fair market value of the property at
the time of contribution (this difference is referred to as a "Book-Tax
Difference"). The partnership agreement of the operating partnership requires
allocations of income, gain, loss and deduction with respect to contributed
Property to be made in a manner consistent with the special rules in Section
704(c) of the Code, and the regulations thereunder, which tend to eliminate the
Book-Tax Differences with respect to the contributed Properties over the
depreciable lives of the contributed Properties. However, because of certain
technical limitations, the special allocation rules of Section 704(c) may not
always entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed properties in the hands of the operating partnership
could cause COPT to be allocated lower amounts of depreciation and other
deductions for tax purposes than would be allocated to COPT if all properties
were to have a tax basis equal to their fair market value at the time of
acquisition. The foregoing principles also apply in determining its earnings and
profits for purposes of determining the portion of distributions taxable as
dividend income. The application of these rules over time may result in a higher
portion of distributions being taxed as dividends than would have occurred had
COPT purchased its interests in all properties at their agreed value.
Treasury Regulations under Section 704(c) of the Code allow partnerships to
use any reasonable method of accounting for Book-Tax Differences so that the
contributing partner receives the tax benefits and burdens of any built-in gain
or loss associated with the property. The operating partnership has determined
to use the "traditional method" (which is specifically approved in the Treasury
Regulations) for accounting for Book-Tax Differences with respect to the
Contributed Properties.
STATE AND LOCAL TAXES. COPT and its shareholders may be subject to state or
local taxation in various state or local jurisdictions, including those in which
COPT or they transact business or reside. The state and local tax treatment of
us and its shareholders may not conform to the Federal income tax consequences
discussed above. Consequently, prospective shareholders should consult with
their own tax advisors regarding the effect of state, local and other tax laws
of any investment in COPT's shares of beneficial interest.
PLAN OF DISTRIBUTION
COPT is registering the Common Shares pursuant to COPT's obligations
under registration rights agreements, but the registration of the Common Shares
does not necessarily mean that any of the Common Shares will be offered or sold
by the selling shareholders or their respective donees or pledgees hereunder.
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 underwritten offering, underwriters or agents may receive compensation
in the form of discounts, concessions or commissions from the selling
shareholders or from purchasers of the Common Shares. Underwriters may sell the
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.
The selling shareholders and any underwriters, dealers or agents that
participate in the distribution of the Common Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended,
(the "Securities Act"), and any profit on the sale of the Common Shares by them
and any discounts, commissions or concessions received by any such underwriters,
dealers or agents may be deemed to be underwriting discounts and commissions
under the Securities Act.
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At a time a particular offer of Common Shares is made by the selling
shareholders, 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 Common Shares by the selling shareholders may also be effected
from time to time by selling 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 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 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 pursuant to a prospectus supplement; (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 markers 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 purchasers of the Common Shares which is not
expected to exceed that customary in the types of transactions involved.
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.
COPT has agreed to pay all expenses incident to the offering and sale of the
Common Shares, other than commissions, discounts and fees of underwriters,
broker-dealers or agents. COPT has agreed to indemnify the selling shareholders
against certain losses, claims, damages, actions, liabilities, costs and
expenses, including liabilities under the Securities Act.
Each of the selling shareholders has agreed to indemnify COPT, its officers
and Trustees and each person who controls (within the meaning of the Securities
Act) COPT, and each of the other selling shareholders, against any losses,
claims, damages, liabilities and expenses arising under the securities laws in
connection with this offering with respect to written information furnished to
COPT by such selling shareholder; provided, however, that the indemnification
obligation is several, not joint, as to each selling shareholder.
EXPERTS
The financial statements incorporated in this prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1999, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the Common Shares offered hereby are being passed upon for
COPT by Morgan, Lewis & Bockius LLP. The opinion of counsel as described under
the heading "Federal Income Tax Matters" is being rendered by Morgan, Lewis &
Bockius LLP, which opinion is subject to various assumptions and is based on
current tax law.
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WHERE YOU CAN FIND MORE INFORMATION
COPT has filed a registration statement on Form S-3 with the Securities and
Exchange Commission in connection with this offering. In addition, COPT files
annual, quarterly, and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy the
registration statement and any other documents filed by COPT at the Securities
and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Room. COPT's
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at HTTP://WWW.SEC.GOV.
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. If a reference is
made in this prospectus or any prospectus supplement to any contract or other
document of COPT, the reference may not be complete and you should refer to the
exhibits that are a part of the registration statement for a copy of the
contract or document.
The Securities and Exchange Commission allows COPT to "incorporate by
reference" into this prospectus the information COPT files with the Commission,
which means that COPT can disclose important information to you by referring you
to those documents. Information incorporated by reference is part of this
prospectus. Later information filed with the Securities and Exchange Commission
will update and supersede this information.
COPT incorporates by reference the Annual Report on Form 10-K for the year
ended December 31, 1999 and any future filings made with the Securities and
Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until this offering is completed:
You may request a copy of these filings, at no cost, by contacting COPT,
Vice President-Investor Relations, 8815 Centre Park Drive, Suite 400, Columbia,
Maryland 21045, by telephone at 410-992-7324, by facsimile at 410-740-1174, or
by e-mail at [email protected].
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered are set forth in the following table (all amounts
except the registration fee are estimated):
<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission $ 53,191
Accountant's fees and expenses 10,000
Legal fees and expenses 35,000
Miscellaneous 20,000
---------
TOTAL $ 118,191
=========
</TABLE>
All expenses in connection with the issuance and distribution of the
securities being offered shall be borne by COPT.
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
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 (i) actual receipt of an improper benefit or profit
in money, property or services or (ii) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust contains such a provision limiting such liability to the
maximum extent permitted by Maryland law.
The Declaration of Trust authorizes COPT, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer or (b) any individual who, while a Trustee
of COPT and at the request of COPT, serves or has served another real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer, partner,
employee or agent of such entity from and against any claim or liability to
which such person may become subject or which such person may incur by reason of
service in such capacity. The Bylaws obligate COPT, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (i) any present or
former Trustee or officer who is made a party to the proceeding by reason of his
or her service in that capacity or (ii) any such Trustee or officer who, at the
request of COPT, serves or has served another real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer, partner, employee or agent of
such entity and who is made a party to the proceeding by reason of his service
in that capacity against any claim or liability to which he may become subject
by reason of his or her status as a present or former Trustee or officer of
COPT. The Declaration of Trust and the Bylaws also permit COPT to provide
indemnification to any person who served a predecessor of COPT in any of the
capacities described above and to any employee or agent of COPT or a predecessor
of COPT. The Bylaws require COPT to indemnify a Trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify, and to advance expenses to, its trustees and officers, to the same
extent as permitted by the MGCL for Trustees and officers of Maryland
corporations. The MGCL permits a corporation to indemnify its present and former
Trustees and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (i) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (a) was committed in bad faith or (b) was the result of active
and deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services or (iii) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. 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
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was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his or her
good-faith belief that he or she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or her
or on his or her behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. Under the MGCL, rights to indemnification and expenses are
nonexclusive, in that they need not be limited to those expressly provided by
statute.
The Maryland REIT Law and the Bylaws may permit indemnification for
liabilities arising under the Securities Act or the Exchange Act. The Board of
Trustees has been advised that, in the opinion of the Commission,
indemnification for liabilities arising under the Securities Act or the Exchange
Act is contrary to public policy and is therefore unenforceable, absent a
decision to the contrary by a court of appropriate jurisdiction.
ITEM 16. EXHIBITS.
EXHIBIT DESCRIPTION
NO.
4.1 Form of certificate for the Registrant's Common Shares of
Beneficial Interest, $0.01 par value per share (filed with the
Registrant's Registration Statement on Form S-4 (Commission
File No. 333-45649) and incorporated herein by reference.
4.2 Amended and Restated Declaration of Trust of Registrant (filed
with the Registrant's Registration Statement on Form S-4
(Commission File No. 333-45649) and incorporated herein by
reference).
4.3 Bylaws of Registrant (filed with the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference).
4.4 Form of certificate for the Registrant's Common Shares of
Beneficial Interest, $0.01 par value per share (filed with the
Registrant's Registration Statement on Form S-4 (Commission
File No. 333-45649) and incorporated herein by reference).
4.5 Articles Supplementary of Corporate Office Properties Trust
Series A Convertible Preferred Shares, dated September 28, 1998
(filed with the Registrant's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
4.6.1 Second Amended and Restated Limited Partnership Agreement of
the Operating Partnership dated December 7, 1999 (filed with
the Registrant's 1999 Annual Report on Form 10-K on March 16,
2000 and incorporated herein by reference).
4.6.2 First Amendment to Second Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
December 21, 1999 (filed with the Registrant's 1999 Annual
Report on From 10-K on March 16, 2000 and incorporated herein
by reference).
4.7 Articles Supplementary of Corporate Office Properties Trust
Series B Convertible Preferred Shares, dated July 2, 1999
(filed with the Company's Current Report on From 8-K on July 7,
1999 and incorporated herein by reference).
4.8 Amended and Restated Registration Rights Agreement, dated March
16, 1998, for the benefit of certain shareholders of the
Company (filed with Company's Quarterly Report on Form 10-Q
(Commission File No. 001-14023) on August 12, 1998 and
incorporated by reference).
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding the legality
of the securities being registered hereby.*
8.1 Opinion of Morgan, Lewis & Bockius LLP as to certain tax
matters.*
21.1 Subsidiaries of Registrant (filed with the Registrant's 1999
Annual Report on Form 10-K and incorporated herein by
reference).
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit
5.1).*
23.2 Consent of PricewaterhouseCoopers LLP.*
24.1 Powers of attorney (included on signature page to the
Registration Statement).
* TO BE FILED BY AMENDMENT.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
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(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10
(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value
of securities offered would not exceed that which
was registered) and any deviation from the low or
high end of the estimated maximum offering range
may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price
represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the information required to
be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with
or furnished to the Securities and Exchange Commission
by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered that remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for the
purpose of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by
reference in this Registration Statement shall be deemed to be
a new registration statement relating to the securities offered
herein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is
II-3
<PAGE>
asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Columbia, State of Maryland on May 10, 2000.
CORPORATE OFFICE PROPERTIES TRUST
By: /s/ Randall M. Griffin
-------------------------------------
Name: Randall M. Griffin
Title: President and Chief Operating Officer
By: /s/ Roger A. Waesche, Jr.
-------------------------------------
Name: Roger A. Waesche, Jr.
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
Trustees of Corporate Office Properties Trust hereby severally constitute
Randall M. Griffin and Roger A. Waesche, Jr., and each of them singly, our true
and lawful attorneys with full power to them, and each of them singly, to sign
for us and in our names in the capacities indicated below, and any and all
amendments (including post-effective amendments) to this registration statement
and to file the same with all exhibits thereto, and generally to do all such
things in our names and in our capacities as officers and Trustees to enable
Corporate Office Properties Trust to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, to said registration statement
and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ Jay H. Shidler Chairman of the Board and Trustee May 10, 2000
- -------------------------------------
Jay H. Shidler
/s/ Clay W. Hamlin, III Chief Executive Officer and Trustee May 10, 2000
- -------------------------------------
Clay W. Hamlin, III
/s/ Randall M. Griffin President and Chief Operating Officer May 10, 2000
- -------------------------------------
Randall M. Griffin (Principal Executive Officer)
/s/ Roger A. Waesche, Jr. Senior Vice President and Chief Financial Officer May 10, 2000
- -------------------------------------
Roger A. Waesche, Jr. (Principal Accounting and Financial Officer)
/s/ Betsy Z. Cohen Trustee May 10, 2000
- -------------------------------------
Betsy Z. Cohen
/s/ Robert L. Denton Trustee May 10, 2000
- -------------------------------------
Robert L. Denton
/s/ Kenneth S. Sweet, Jr. Trustee May 10, 2000
- -------------------------------------
Kenneth S. Sweet, Jr.
/s/ Steven D. Kesler Trustee May 10, 2000
- -------------------------------------
Steven D. Kesler
/s/ Edward A. Crooke Trustee May 10, 2000
- -------------------------------------
Edward A. Crooke
</TABLE>
