<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------------------
GREAT LAKES REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
MARYLAND 36-3844714
<S> <C>
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
823 COMMERCE DRIVE, SUITE 300
OAK BROOK, ILLINOIS 60523
(630) 368-2900
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
RICHARD L. RASLEY
EXECUTIVE VICE PRESIDENT,
CO-GENERAL COUNSEL AND SECRETARY
GREAT LAKES REIT, INC.
823 COMMERCE DRIVE, SUITE 300
OAK BROOK, ILLINOIS 60523
(630) 368-2900
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------------------------------
Copies to:
TIMOTHY J. MELTON
JONES, DAY, REAVIS & POGUE
77 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60601-1692
(312) 782-3939
----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective as
determined by market conditions and other factors.
----------------------------------
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 of
1933, other than securities 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
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED(1) PRICE(2) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $.01 per share (3).................
Preferred Stock, par value $.01 per share (4).............. $300,000,000(5)(6) $88,500
</TABLE>
(1) This Registration Statement also covers contracts that may be issued by the
Registrant under which the counterparty may be required to purchase Common
Stock or Preferred Stock. Such contracts would be issued with the Common
Stock or Preferred Stock. In addition, Securities registered hereunder may
be sold separately, together or as units with other Securities registered
hereunder.
(2) Estimated for the sole purpose of calculating the registration fee. No
separate consideration will be received for shares of Common Stock that are
issued upon conversion of Preferred Stock. The aggregate maximum offering
price of all Securities issued pursuant to this Registration Statement will
not exceed $300,000,000.
(3) There are being registered hereunder an indeterminate number of shares of
Common Stock. There are also being registered hereunder an indeterminate
number of shares of Common Stock as may be issuable upon conversion of
Preferred Stock registered hereby.
(4) There are being registered hereunder an indeterminate number of shares of
Preferred Stock.
(5) Omitted pursuant to General Instruction II.D. of Form S-3 under the
Securities Act of 1933, as amended (the "Securities Act").
(6) Such amount represents the amount computed pursuant to Rule 457(c) under the
Securities Act for any Common Stock and the liquidation preference of any
Preferred Stock.
----------------------------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-22619
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 6, 1998
$300,000,000
GREAT LAKES REIT, INC.
PREFERRED STOCK
COMMON STOCK
---------------------
Great Lakes REIT, Inc. (the "Company") may offer from time to time, together
or separately, in one or more series, (i) shares of its preferred stock, par
value $.01 per share (the "Preferred Stock"), or (ii) shares of its common
stock, par value $.01 per share ("Common Stock"), with an aggregate public
offering price of up to $300,000,000 in amounts, at prices and on terms to be
determined at the time of offering. The Preferred Stock and Common Stock offered
hereby (collectively, the "Securities") may be offered separately or together,
in separate series, in amounts, at prices and on terms to be set forth in a
supplement to this Prospectus (a "Prospectus Supplement").
The accompanying Prospectus Supplement will set forth with regard to the
particular Securities in respect of which this Prospectus is being delivered,
such as, where applicable (i) in the case of Preferred Stock, the specific title
and stated value, number of shares, the dividend, liquidation, exchange,
redemption, conversion, voting and other rights, and the initial public offering
price, and (ii) in the case of Common Stock, the number of shares, the public
offering price and the terms of the offering thereof. The Prospectus Supplement
will also contain, as applicable, a discussion of the material United States
federal income tax considerations relating to the Securities in respect of which
this Prospectus is being delivered to the extent not contained herein.
The Company's Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "GL." The Prospectus Supplement will also contain
information, where applicable, as to any listing on a securities exchange of the
Preferred Stock covered by such Prospectus Supplement.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Company may sell Securities to or through underwriters, and also may
sell Securities directly to other purchasers or through agents. The accompanying
Prospectus Supplement will set forth the names of any underwriters or agents
involved in the sale of the Securities in respect of which this Prospectus is
being delivered, the amounts of Securities, if any, to be purchased by
underwriters and the compensation, if any, of such underwriters or agents. See
"Plan of Distribution" herein.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained at prescribed rates by writing the Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission. The Common
Stock is listed on the NYSE, and reports, proxy statements and other information
concerning the Company may also be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (the
"Registration Statement," which term shall include any amendments thereto) on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission, and to which reference is hereby made.
For further information, reference is hereby made to the Registration Statement
and the exhibits and schedules thereto.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are hereby incorporated by reference in this
Prospectus and shall be deemed to be a part hereof:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1997;
2. The Company's Current Report on Form 8-K/A, dated February 6, 1998,
filed with the Commission on February 20, 1998; and
3. The description of the Company's Common Stock set forth in the Company's
Registration Statement on Form 8-A filed with the Commission on April 21,
1997, as amended by the Company's Registration Statement on Form 8-A/A
filed with the Commission on November 17, 1997, including any amendment
or report filed for the purpose of updating such description.
All documents filed with the Commission by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Securities shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
their respective dates of filing. Any statement contained herein or in any
document incorporated or deemed to be incorporated shall be deemed to be
modified or superseded for all purposes of this Prospectus to the extent a
statement contained in this Prospectus or in any subsequently filed document
2
<PAGE>
that also is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON WRITTEN OR ORAL REQUEST
OF SUCH PERSON, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN
INCORPORATED BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS TO THE
INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS
INCORPORATES). REQUESTS SHOULD BE DIRECTED TO RICHARD L. RASLEY, EXECUTIVE VICE
PRESIDENT, CO-GENERAL COUNSEL AND SECRETARY, GREAT LAKES REIT, INC., AT THE
COMPANY'S PRINCIPAL EXECUTIVE OFFICES, 823 COMMERCE DRIVE, SUITE 300, OAK BROOK,
ILLINOIS 60523, TELEPHONE NUMBER (630) 368-2900. PERSONS REQUESTING COPIES OF
EXHIBITS TO SUCH DOCUMENTS THAT WERE NOT SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS WILL BE CHARGED THE COSTS OF REPRODUCTION AND MAILING.
THE COMPANY
IN 1996, GREAT LAKES REIT, INC. (THE "COMPANY") ORGANIZED GREAT LAKES REIT,
L.P. (THE "OPERATING PARTNERSHIP") AND HAS SUBSEQUENTLY TRANSFERRED ALL OF THE
PROPERTIES (AS DEFINED HEREIN) TO THE OPERATING PARTNERSHIP. AS THE SOLE GENERAL
PARTNER OF THE OPERATING PARTNERSHIP, THE COMPANY HAS EXCLUSIVE POWER TO MANAGE
AND CONDUCT THE BUSINESS OF THE OPERATING PARTNERSHIP, SUBJECT TO CERTAIN
LIMITED EXCEPTIONS. ALTHOUGH THE COMPANY AND THE OPERATING PARTNERSHIP ARE
SEPARATE ENTITIES, UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" REFER TO THE COMPANY AND THE OPERATING PARTNERSHIP,
COLLECTIVELY.
The Company is a fully integrated, self-administered and self-managed real
estate company focused on acquiring, renovating, owning and operating suburban
office and light industrial properties located within an approximate 500-mile
radius of metropolitan Chicago (the "Midwest Region"). As of March 31, 1998, the
Company owned and operated 34 properties (the "Properties") in suburban Chicago,
Milwaukee, Minneapolis, Detroit, Columbus and Cincinnati (the "Current
Markets"). The Properties contain approximately 4.1 million rentable square feet
leased to over 500 tenants in a variety of businesses. The Properties primarily
consist of Class A and Class B suburban office properties and range in size from
15,000 to 275,000 rentable square feet. The Company has elected to be treated
for federal income tax purposes as a real estate investment trust ("REIT").
The Company is a Maryland corporation and its principal executive offices
are located at 823 Commerce Drive, Suite 300, Oak Brook, Illinois 60523,
telephone number (630) 368-2900.
RISK FACTORS
Prospective investors should carefully consider, among other things, the
matters described below.
CONCENTRATION OF PROPERTIES IN MIDWEST REGION
All of the Properties are located in the Midwest Region, including 17
located in the suburban Chicago, Illinois area. Like other real estate markets,
these commercial real estate markets have experienced economic downturns in the
past, and future declines in any of these economies or real estate markets could
adversely affect the Company's funds available for distribution to stockholders.
The Company's financial performance and its ability to make distributions to
stockholders are therefore dependent on the economic conditions in the Midwest
Region, particularly in the Chicago area. The Company's revenues and the value
of its Properties may be affected by a number of factors, including local
economic conditions (which may be adversely impacted by business layoffs or
downsizing, industry slowdowns, changing demographics and other factors) and
local real estate conditions (such as oversupply of or reduced demand for
office, industrial and other competing commercial properties). There can be no
assurance that the economies of
3
<PAGE>
the Midwest Region or the Chicago area will continue to grow or that any future
growth will meet historical growth rates.
RISK THAT THE COMPANY MAY BE UNABLE TO RETAIN TENANTS OR RENT SPACE UPON LEASE
EXPIRATIONS
The Company will be subject to the risks that upon expiration, leases may
not be renewed, the space may not be relet or the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than the
expired lease terms. Leases on a total of approximately 13.3%, 11.6% and 14.4%
of the occupied rentable square feet of the Properties will expire in 1998, 1999
and 2000, respectively. If the Company is unable to promptly relet or renew
leases for all or a substantial portion of this space or if the rental rates
upon such renewal or reletting are significantly lower than expected, the
Company's cash flow and ability to make distributions to stockholders could be
adversely affected.
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE PROPERTIES; LACK OF
OPERATING HISTORY
All of the Properties have been under the Company's management for less than
five years and 20 of the Properties have been acquired since January 1, 1996.
The most recently acquired Properties may have characteristics or deficiencies
unknown to the Company that may impact their value or revenue potential. It is
also possible that the operating performance of the most recently acquired
Properties may decline under the Company's management.
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, the Company will be subject to risks
associated with managing new properties, including lease-up and tenant
retention. In addition, the Company's ability to manage its growth effectively
will require it to successfully integrate its new acquisitions into its existing
management structure. No assurances can be given that the Company will be able
to successfully integrate such properties or effectively manage additional
properties, or that newly acquired properties will perform as expected.
REAL ESTATE FINANCING RISKS
INABILITY TO REPAY OR REFINANCE INDEBTEDNESS AT MATURITY. The Company will
be subject to risks normally associated with debt financing, including the risk
that the Company's cash flow will be insufficient to meet required payments of
principal and interest and the risk that any indebtedness will not be able to be
refinanced or that the terms of any such refinancing will be less favorable than
the terms of the expiring indebtedness.
POTENTIAL EFFECT OF RISING INTEREST RATES ON COMPANY'S VARIABLE RATE
DEBT. Advances under the Company's bank credit facility (the "Credit Facility")
bear interest at variable rates and the indebtedness under certain other lines
of credit and existing mortgage notes are subject to periodic adjustments based
on the then current market interest rates. In addition, the Company may incur
other variable rate indebtedness in the future. Increases in interest rates on
such indebtedness would increase the Company's interest expense, which could
adversely affect the Company's cash flow and amounts available for distribution
to stockholders.
REAL ESTATE INVESTMENT RISKS
REAL ESTATE OWNERSHIP RISKS. Real property investments are subject to
varying degrees of risk. The yields available from equity investments in real
estate depend in large part on the amount of revenue generated and expenses
incurred. If the Company's real properties do not generate revenue sufficient to
meet operating expenses, including debt service, tenant improvements, leasing
commissions and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs and the Company's cash flow and ability
to make distributions to its stockholders would be adversely affected. The
Company's revenue and the value of its Properties may be adversely affected by a
number of factors, including the national economic climate; the local economic
climate; local real estate conditions; the
4
<PAGE>
perceptions of prospective tenants of the attractiveness of its Properties; the
ability of the Company to manage and maintain its real properties and secure
adequate insurance; and increased operating costs (including real estate taxes
and utilities). In addition, real estate values and income from properties are
also affected by such factors as applicable laws, including tax and
environmental laws, interest rate levels and the availability of capital.
ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are relatively
illiquid. Such illiquidity will tend to limit the ability of the Company to vary
its portfolio promptly in response to changes in economic or other conditions.
In addition, the Internal Revenue Code of 1986, as amended (the "Code"), limits
a REIT's ability to sell properties held for fewer than four years. This
limitation may adversely affect the Company's ability to sell properties.
IMPACT OF COMPETITION ON OCCUPANCY LEVELS AND RENTS CHARGED. Numerous
office properties compete with the Properties in attracting tenants to lease
space. Some of the competing properties may be newer, better located or owned by
parties better capitalized than the Company. The number of competitive
commercial properties in a particular area could have a material adverse effect
on (i) the ability to lease space in the Properties (or in newly acquired or
developed properties) and (ii) the rents charged.
POTENTIAL INCREASES IN CERTAIN TAXES AND REGULATORY COMPLIANCE
COSTS. Because increases in income, service or transfer taxes are generally not
passed through to tenants under leases, such increases may adversely affect the
Company's cash flow and its ability to make distributions to stockholders. The
Properties are also subject to various federal, state and local regulatory
requirements, such as requirements of the Americans with Disabilities Act (the
"ADA"), which requires all public accommodations and commercial facilities to
meet certain federal requirements related to access and use by disabled persons,
and state and local fire and life safety requirements. Compliance with the ADA
requirements could require removal of access barriers. Failure to comply with
all applicable regulatory requirements could result in the imposition of fines
by governmental authorities or awards of damages to private litigants. The
Company believes that the Properties are currently in substantial compliance
with all such regulatory requirements. However, there can be no assurance that
these requirements will not be changed or that new requirements will not be
imposed which would require significant unanticipated expenditures by the
Company that could have an adverse effect on the Company's cash flow and
distributions to stockholders.
IMPACT OF FINANCIAL CONDITION AND SOLVENCY OF TENANTS ON COMPANY'S CASH
FLOW. At any time, a tenant of the Properties may seek the protection of
bankruptcy laws, which could result in rejection and termination of such
tenant's lease and thereby cause a reduction in cash flow available for
distribution by the Company. Although the Company has not experienced material
losses from tenant bankruptcies, no assurance can be given that tenants will not
file for bankruptcy protection in the future or, if any tenants file, that they
will affirm their leases and continue to make rental payments in a timely
manner. In addition, a tenant from time to time may experience a downturn in its
business which may weaken its financial condition and result in a failure to
make rental payments when due. If tenant leases are not affirmed following
bankruptcy or if a tenant's financial condition weakens, the Company's revenues
and cash flows may be adversely affected.
RISKS OF ACQUISITION, RENOVATION AND DEVELOPMENT ACTIVITIES
The Company intends to continue acquiring office properties. Acquisitions of
office properties entail risk that investments will fail to perform in
accordance with expectations. Estimates of renovation costs and costs of
improvements to bring an acquired property up to standards established for the
market position intended for that property may prove inaccurate. In addition,
there are general investment risks associated with any new real estate
investment.
The Company may renovate or expand its Properties from time to time.
Renovation and expansion projects generally require expenditure of capital as
well as various government and other approvals, the receipt of which cannot be
assured. While policies with respect to renovation and expansion activities are
intended to limit some of the risks otherwise associated with such activities,
the Company would
5
<PAGE>
nevertheless incur certain risks, including expenditures of funds on, and
devotion of management's time to, projects which may not be completed.
The Company anticipates that future acquisitions and renovations will be
financed through a combination of advances under the Credit Facility, other
forms of secured or unsecured financing and issuances of securities and
interests in the Operating Partnership. If new projects are financed through
construction loans, there is a risk that, upon completion of construction,
permanent financing for these properties may not be available or may be
available only on disadvantageous terms.
While the Company has generally limited its acquisition, renovation,
management and leasing business primarily to the Midwest Region, it is possible
that the Company will in the future expand its business to new geographic
markets. The Company will not initially possess the same level of familiarity
with new markets outside of the Midwest Region, which could adversely affect its
ability to acquire, develop, manage or lease properties in any new markets.
Changing market conditions, including competition from other purchasers of
properties similar to the Properties, may diminish the Company's opportunities
for attractive acquisitions.
The Company also intends to review from time to time the possibility of
developing and constructing office buildings and other commercial properties in
accordance with the Company's development policies. In this regard, the Company,
in March 1998, announced its intention to pursue the development of a mid-sized
office building to be constructed in suburban Milwaukee. Risks associated with
the Company's development and construction activities may include: abandonment
of development opportunities; construction costs of a property exceeding
original estimates, possibly making the property uneconomical; occupancy rates
and rents at a newly completed property which are not sufficient to make the
property profitable; the unavailability of financing on favorable terms for
development of a property; and an inability to complete construction and
lease-up on schedule, resulting in increased debt service expense and
construction costs. In addition, new development activities, regardless of
whether they would ultimately be successful, typically require a substantial
portion of management's time and attention. Development activities would also be
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations.
EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON COMMON STOCK PRICE
Virtually all of the outstanding shares of Common Stock, other than shares
held by affiliates of the Company, are freely tradable. Shares of Common Stock
held by affiliates of the Company are subject to limitations on the volume that
may be sold other than sales pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder. The sale
or issuance or the potential for sale of additional shares by the Company, the
sale of shares held by affiliates or the sale of a significant number of shares
by other current holders could have an adverse impact on the market price of the
Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Richard A. May, the Company's Chief Executive Officer, Patrick R.
Hunt, the Company's President and Chief Operating Officer, Richard L. Rasley,
the Company's Executive Vice President, and Raymond M. Braun, the Company's
Senior Vice President-Acquisitions. The loss of their services could have a
material adverse effect on the Company's operations, financial condition and
results of operations.
6
<PAGE>
NO LIMITATION ON DEBT
The Company currently has a policy of incurring debt only if upon such
incurrence the total debt to total market capitalization ratio would be 50% or
less, but the organizational documents of the Company do not contain any
limitation on the amount of indebtedness the Company may incur. Accordingly, the
Board of Directors could alter that policy at any time. If that policy was
changed, the Company could become more highly leveraged, resulting in increased
debt service costs that could adversely affect the Company's cash flow and,
consequently, the amount available for distribution to stockholders and could
increase the risk of default on the Company's indebtedness.
The Company has established its debt policy relative to its total debt to
total market capitalization ratio rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
original cost
of real property, the Company's primary tangible assets) does not accurately
reflect its ability to borrow and to meet debt service requirements. The market
capitalization of the Company, however, is more variable than book value, and
does not necessarily reflect the fair market value of the underlying assets of
the Company. The Company also will consider factors other than market
capitalization in making decisions regarding the incurrence of indebtedness,
such as the purchase price of properties to be acquired with debt financing, the
estimated market value of its Properties upon refinancing and the ability of
particular Properties and the Company as a whole to generate sufficient cash
flow to cover expected debt service costs.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The Company's investment, financing, borrowing, distribution and conflicts
of interest policies and its policies with respect to all other activities will
be determined by the Company's Board of Directors. Although the Board of
Directors has no present intention to do so, it can amend, revise or eliminate
these policies at any time and from time to time at its discretion without a
vote of the stockholders. A change in any of these policies could adversely
affect the Company's financial condition or results of operations or the market
price of the Common Stock.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. The
Company elected to be taxed as a REIT under Sections 856 through 860 of the
Code, commencing with its taxable year ended December 31, 1993, and the Company
believes that it has been organized and has operated in such a manner so as to
qualify as a REIT for federal income tax purposes. Although the Company believes
that it will remain organized and will continue to operate so as to qualify as a
REIT, no assurance can be given that the Company has so qualified or will be
able to remain so qualified. Qualification as a REIT involves the satisfaction
of numerous requirements (in certain instances, on an annual and quarterly
basis) set forth in highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations, and may be
affected by various factual matters and circumstances not entirely within the
Company's control. In the case of a REIT, such as the Company, that holds
substantially all of its assets in partnership form, the complexity of these
Code provisions and the applicable Treasury Regulations that have been
promulgated thereunder is even greater. Further, no assurance can be given that
future legislation, new Treasury Regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. The Company, however, is not aware of any pending proposal to
amend the tax laws that would materially and adversely affect its ability to
operate in such a manner so as to qualify as a REIT.
If the Company were to fail to qualify as a REIT with respect to any taxable
year, the Company would not be allowed a deduction in computing its taxable
income for amounts distributed to its stockholders, and would be subject to
federal income tax (including any applicable alternative minimum tax) on its
7
<PAGE>
taxable income at regular corporate rates. As a result, any net earnings of the
Company available for investment or distribution to stockholders would be
reduced for the year or years involved because of the additional tax liability
of the Company, and distributions to stockholders would no longer be required to
be made. Moreover, unless entitled to relief under certain statutory provisions,
the Company would also be ineligible for qualification as a REIT for the four
taxable years following the year during which such qualification was lost.
Although the Company believes it has operated and currently intends to operate
in a manner designed to allow it to continue to qualify as a REIT, future
economic, market, legal, tax or other considerations may cause it to determine
that it is in the best interests of the Company and its stockholders to revoke
the REIT election.
OTHER TAX LIABILITIES. Even if the Company continues to qualify for and
maintains its REIT status, it may be subject to certain federal, state and local
taxes on its income and property.
EFFECT OF REIT DISTRIBUTION REQUIREMENTS
To maintain its status as a REIT for federal income tax purposes, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its taxable income (excluding any net capital gain and after
certain adjustments). In addition, the Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85% of its
ordinary income for such year plus 95% of its capital gain net income for such
year plus 100% of its undistributed income from prior taxable years.
The Company intends to make distributions to its stockholders to comply with
the 95% distribution requirement of the Code and to avoid the nondeductible
excise tax described above. The Company anticipates that cash flow from
operations, including its share of distributions from the Operating Partnership,
will be sufficient to enable it to pay its operating expenses and meet the
distribution requirements of a REIT, but no assurance can be given that this
will be the case. In addition, differences in timing between (i) the actual
receipt of income and the actual payment of expenses and (ii) the inclusion of
such income and the deduction of such expenses in arriving at taxable income of
the Company could leave the Company without sufficient cash to enable it to meet
the REIT distribution requirements. Similarly, if the IRS were to determine that
the Company had failed to comply with the 95% distribution requirement of the
Code for any taxable year, under certain circumstances, the Company would be
able to rectify that failure by paying "deficiency dividends" to its
stockholders, as well as interest to the IRS, in a later taxable year. The
amount of any such "deficiency dividends" and interest could exceed the
Company's available cash. Accordingly, the Company could be required to borrow
funds or liquidate investments on adverse terms to comply with such
requirements. The requirement to distribute a substantial portion of the
Company's taxable income could also cause the Company to have to distribute
amounts that would otherwise be spent on future acquisitions, unanticipated
capital expenditures or repayment of debt, which would require additional
borrowings or sales of assets to fund the costs of such items and could restrict
the Company's ability to expand at the same pace as it has historically or at a
pace necessary to remain competitive.
FAILURE OF OPERATING PARTNERSHIP TO QUALIFY AS A PARTNERSHIP FOR FEDERAL INCOME
TAX PURPOSES
The Company believes that the Operating Partnership has been organized as a
partnership and qualifies for treatment as such for federal income tax purposes.
If the Operating Partnership failed to qualify as a partnership for federal
income tax purposes and were instead taxable as a corporation, the Company would
cease to qualify as a REIT because of its inability to satisfy the REIT gross
income and asset tests (as set forth in the Code), and the Operating Partnership
would be subject to federal income tax (including any applicable minimum tax) on
its taxable income at regular corporate rates. The imposition of a corporate tax
on the Operating Partnership would also reduce the amount of cash available for
distribution to the Company and its stockholders.
8
<PAGE>
LIMITS ON CHANGES IN CONTROL
Certain provisions of the Company's charter (the "Charter") and bylaws (the
"Bylaws") may have the effect of delaying, deferring or preventing a third party
from making an acquisition proposal for the Company and may therefore inhibit a
change in control of the Company. For example, such provisions may (i) deter
tender offers for shares of the Company's stock, which offers may be attractive
to stockholders or (ii) deter purchases of large blocks of shares of the
Company's stock, thereby limiting the opportunity for stockholders to receive a
premium for their shares over then-prevailing market prices. These provisions
include the following:
LIMITS ON OWNERSHIP OF STOCK. For the Company to maintain its qualification
as a REIT for federal income tax purposes, not more than 50% in value of the
outstanding shares of stock of the Company may be owned, actually or
constructively (under the applicable attribution rules of the Code), by five or
fewer individuals (as defined in the Code to include certain tax-exempt entities
other than, in general, qualified domestic pension funds) at any time during the
last half of any taxable year of the Company (the "five or fewer requirement").
For taxable years of the Company beginning on or after January 1, 1998, however,
the Company's failure to satisfy the five or fewer requirement would no longer
result in the Company's disqualification as a REIT so long as the Company has
otherwise complied with the requirements under the Code and the applicable
Treasury Regulations for ascertaining the actual ownership of its outstanding
shares of stock and maintaining records of such ownership, and the Company did
not know, and would not have known by exercising reasonable diligence, that it
actually failed to meet the five for fewer requirement. In addition, if the
Company, or an actual or constructive owner of 10% or more of the Company,
actually or constructively (under the applicable attribution rules of the Code)
owns 10% or more of a tenant of the Company (or a tenant of any partnership in
which the Company is a partner), the rent received by the Company (either
directly or indirectly through any such partnership) from such tenant will not
be qualifying income for purposes of the REIT gross income tests of the Code.
The Charter, as amended and restated on September 23, 1997, and the Bylaws
contain certain restrictions on the ownership and transfer of shares of Common
Stock and Preferred Stock that are intended to prevent concentration of stock
ownership and thus to protect the Company against the risk of losing its REIT
status. These restrictions limit any person from acquiring actual or
constructive ownership of more than 9.9% (the "Aggregate Stock Ownership Limit")
in value of the outstanding shares of stock of the Company. The Board of
Directors, in its sole discretion, may exempt a proposed transferee from the
Aggregate Stock Ownership Limit. However, the Board of Directors may not grant
an exemption from the Aggregate Stock Ownership Limit to any proposed transferee
whose actual or constructive ownership of more than 9.9% in value of the
outstanding shares of stock of the Company would result in the termination of
the Company's status as a REIT under the Code. These restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interests of the Company to continue
to qualify as a REIT under the Code. The Aggregate Stock Ownership Limit may
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for shares of the Company's stock or otherwise be
in the best interests of the stockholders.
Prior to the amendment and restatement of the Charter in 1997, the
restrictions described above were contained only in the Bylaws, and the Charter
contained other more general restrictions on the ownership and transfer of
shares of the Company's stock. Although the Company believes that it has
satisfied the five or fewer requirement and the REIT gross income tests for each
of its taxable years commencing with its taxable year ended December 31, 1993,
the restrictions in the Charter prior to its amendment and the restrictions in
the Bylaws did not ensure that the Company in fact satisfied these requirements,
primarily because the provisions in the Charter did not operate automatically to
void any attempted transfer, acquisition or ownership of shares of the Company's
stock that would result in the disqualification of the Company as a REIT, but
instead required the Company's Board of Directors to take action to prohibit or
deem to be null and void any such attempted transfer, acquisition or ownership
of such shares or to purchase or redeem any such shares. Particularly after the
shares of Common Stock became publicly
9
<PAGE>
traded, the Board of Directors may not have become aware of attempted transfers,
acquisitions or ownership of Common Stock that would cause the Company to fail
to qualify as a REIT. Moreover, the restrictions on ownership and
transferability contained in the Bylaws may not be enforceable against holders
of Common Stock who became holders prior to the time that the restrictions were
added to the Bylaws in February 1997. If the Company failed to qualify as a REIT
with respect to any of its taxable years commencing prior to January 1, 1998,
the Company's status as a REIT would have terminated. As a result, the Company
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders, and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates.
ISSUANCE OF ADDITIONAL STOCK. The Charter authorizes the Board of Directors
to issue authorized but unissued shares of Common Stock and Preferred Stock and
to classify any unissued shares of Preferred Stock and to reclassify any
previously classified but unissued shares of any series of which no shares have
been issued. Prior to issuance of shares of each series, the Board of Directors
is required by the Maryland General Corporation Law, as amended ("MGCL"), and
the Charter to set, subject to the provisions of the Charter regarding
restriction on transfer of stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such series. The Board of Directors could authorize the issuance of shares of
Preferred Stock with terms and conditions that could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for Common Stock or otherwise be in
the best interest of the stockholders. As of March 2, 1998, there were
10,000,000 authorized but unissued shares of Preferred Stock and no shares of
Preferred Stock outstanding; the Company has no present plans to issue any
shares of Preferred Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER AND
BYLAWS
As more fully described below, the business combination provisions and the
control share acquisition provisions of the MGCL, the provisions of the Charter
on removal of directors, and the advance notice provisions of the Bylaws could
delay, defer or prevent a transaction or change in control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest. The following paragraphs summarize certain anti-takeover
effects of each of these items.
CLASSIFIED BOARD OF DIRECTORS. The Charter authorizes the Company to have a
Board of Directors with three classes, each class of directors serving staggered
three-year terms. Although the Company currently has no intention of
implementing a classified Board of Directors, the Board of Directors would have
the discretion to do so at any time pursuant to the Charter. Adoption of a
classified board of directors could delay, defer or prevent a transaction or
change in control of the Company that might involve a premium price for holders
of Common Stock or otherwise be in their best interest.
REMOVAL OF DIRECTORS. Pursuant to the Charter, a director may be removed
with or without cause by the affirmative vote of a majority of all the votes
entitled to be cast in the election of directors. This provision, when coupled
with the provision in the Bylaws authorizing the Board of Directors to fill
vacant directorships, precludes stockholders from removing incumbent directors
except upon an affirmative majority vote and filling the vacancies created by
such removal with their own nominees.
BUSINESS COMBINATIONS. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any person who beneficially owns ten percent or more
of the voting power of the corporation's shares or an affiliate of the
corporation 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 stock of the corporation (an "Interested
Stockholder") or an affiliate of such an Interested Stockholder are prohibited
for five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business
10
<PAGE>
combination generally must be recommended by the board of directors of such
corporation and approved by two super-majority votes of the stockholders. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by resolution of the board of directors of the corporation
prior to the time that the Interested Stockholder becomes an Interested
Stockholder.
Therefore, the business combination provisions of the MGCL will apply to any
business combination between the Company and any Interested Stockholder, unless
the Board of Directors adopts a resolution exempting the Company from the
business combination provisions of the MGCL or approving business combinations,
either specifically or generally. The Board of Directors currently is unaware of
any current or potential Interested Stockholder, so the Board of Directors has
no current plans for further action with respect to these provisions.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror, officers or by directors who are employees of the corporation.
"Control Shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror or with respect to
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions. The control share acquisition statute does not apply (a)
to shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction or (b) to acquisitions approved or
exempted by the charter or bylaws of the corporation.
The Bylaws provide that the Company and its shares of stock shall not be
governed by the control share acquisition statute. The Board of Directors may in
the future amend or eliminate this provision.
POSSIBLE LOSSES NOT COVERED BY INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance covering all of the Properties, with policy specifications
and insured limits that the Company believes are adequate and appropriate under
the circumstances. There are, however, certain types of losses that are not
generally insured because it is not economically feasible to insure against such
losses. Should an uninsured loss or a loss in excess of insured limits occur,
the Company could lose its capital invested in the Property, as well as the
anticipated future revenue from the Property and, in the case of debt with
recourse to the Company, would remain obligated for any mortgage debt or other
financial obligations related to the Property. Any such loss would materially
adversely affect the Company.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure properly to remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to
11
<PAGE>
borrow using such property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic substances at a disposal or treatment
facility also may be liable for the costs of removal or remediation of a release
of hazardous or toxic substances at such disposal or treatment facility, whether
or not such facility is owned or operated by such person. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs incurred in connection with the contamination.
Finally, the owner of a site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from such site.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that will influence the market price of the Common Stock
in public markets will be the distribution rate on the Common Stock. To the
extent distribution rates do not increase sufficiently in response to increasing
market interest rates, such an increase in interest rates may adversely affect
the market price of the Common Stock.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the net
proceeds from the sale of the Securities will be used for the acquisition and
development of additional office properties, as suitable opportunities arise,
for the repayment of certain outstanding indebtedness at such time, for capital
improvements to property and for working capital and other general corporate
purposes.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the years ended December 31, 1993, 1994, 1995, 1996 and 1997
was 5.28, 2.61, 2.05, 1.85 and 3.40, respectively.
The ratios of earnings to combined fixed charges and preferred stock
dividends were computed by dividing earnings by fixed charges. For this purpose,
earnings consist of income (loss) before gains from sales of property and
extraordinary items plus fixed charges. Fixed charges consist of interest
expense (including interest costs capitalized), the amortization of debt
issuance costs and rental expense deemed to represent interest expense. The
Company did not have any preferred stock dividend requirements at any time
during the five-year period ended December 31, 1997.
12
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Charter and the Bylaws, copies of which are exhibits to the
Registration Statement of which this Prospectus forms a part. See "Available
Information."
GENERAL
The Charter provides that the Company may issue up to 60,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock. As of March 2, 1998,
15,841,027 shares of Common Stock were issued and outstanding and no shares of
Preferred Stock were issued and outstanding. Under Maryland law, stockholders
generally are not liable for the corporation's debts or obligations.
COMMON STOCK
Subject to the preferential rights of any other class or series of stock and
to the provisions of the Charter regarding the restrictions on transfer of
stock, holders of shares of Common Stock are entitled to receive dividends on
such stock if, as and when authorized and declared by the Board of Directors of
the Company out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to its stockholders in
the event of its liquidation, dissolution or winding up after payment of or
adequate provision for all known debts and liabilities of the Company.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess the exclusive voting
power. There is no cumulative voting in the election of directors, which means
that the holders of a majority of the outstanding shares of Common Stock can
elect all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Subject to the provisions of the
Charter regarding the restrictions on transfer of stock, shares of Common Stock
will have equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Charter provides
that such transactions shall be effective and valid if taken or authorized by
the affirmative vote of stockholders holding a majority of all of the votes
entitled to be cast on the matter.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock 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 as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series of which no shares have been issued. Prior to
issuance of shares of each series, the Board of Directors is required by the
MGCL and the Charter to set, subject to the provisions of the Charter regarding
restriction on transfer of stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
13
<PAGE>
distributions, qualifications and terms or conditions of redemption for each
such series. The Board of Directors could authorize the issuance of additional
shares of Preferred Stock with terms and conditions that could have the effect
of delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. As of March 2, 1998, no shares of Preferred
Stock were outstanding and the Company has no present plans to issue any
Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified shares
of stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. The additional classes or series, as well as the Common Stock, will
be available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. Although the Board of Directors has no intention at the
present time of doing so, it could authorize the Company to issue a class or
series that could, depending upon the terms of such class or series, delay,
defer or prevent a transaction or a change in control of the Company that might
involve a premium price for holders of Common Stock or otherwise be in their
best interest.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, its shares of stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months (other than the first year for which an election
to be a REIT has been made) or during a proportionate part of a shorter taxable
year. Also, not more than 50% in value of the outstanding shares of stock may be
owned, actually or constructively (under the applicable attribution rules of the
Code), by five or fewer individuals (as defined in the Code to include certain
tax-exempt entities other than, in general, qualified domestic pension plans) at
any time during the last half of any taxable year of the Company (other than the
first year for which an election to be a REIT has been made). For taxable years
of the Company beginning after January 1, 1998, however, the Company's failure
to satisfy this requirement that the Company not be "closely held" would no
longer result in the Company's disqualification as a REIT so long as the Company
has otherwise complied with the requirements under the Code and the applicable
Treasury Regulations for ascertaining the actual ownership of its outstanding
shares of stock and maintaining records of such ownership, and the Company did
not know, and would not have known by exercising reasonable diligence, that it
actually failed to satisfy the requirement.
Because the Board of Directors believes it is at present essential for the
Company to qualify as a REIT, the Charter, subject to certain exceptions,
contains certain restrictions on the number of shares of stock of the Company
that a person may own. The Charter prohibits any person from acquiring or
holding, actually or constructively, shares of stock in excess of 9.9% in value
of the aggregate of the outstanding shares of stock of the Company (the
"Aggregate Stock Ownership Limit").
The Company's Board of Directors, in its sole discretion, may exempt a
person from the Aggregate Stock Ownership Limit (an "Excepted Holder"). However,
the Board of Directors may not grant such an exemption to any person whose
actual or constructive ownership of more than 9.9% in value of the outstanding
shares of stock of the Company would result in the Company being "closely held"
within the meaning of Section 856(h) of the Code or otherwise failing to qualify
as a REIT. In order to be considered by the Board of Directors as an Excepted
Holder, a person also must not own, actually or constructively, an interest in a
tenant of the Company (or a tenant of any entity owned or controlled by the
Company) that would cause the Company to own, actually or constructively, more
than a 9.9% interest in such a tenant. The person seeking an exemption must
represent to the satisfaction of the Board of Directors that it will
14
<PAGE>
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 Trust (as defined below). The Board of Directors 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 Directors in its sole
discretion, in order to determine or ensure the Company's status as a REIT.
The Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of the Company that would result in the
Company being "closely held" under Section 856(h) of the Code or otherwise cause
the Company to fail to qualify as a REIT and (b) any person from transferring
shares of stock of the Company if such transfer would result in shares of stock
of the Company being owned by fewer than 100 persons. Any person who acquires or
attempts or intends to acquire beneficial or constructive ownership of shares of
stock of the Company that will or may violate any of the foregoing restrictions
on transferability and ownership, or any person who would have owned shares of
stock of the Company that resulted in a transfer of such shares to the Trust, is
required to give notice immediately to the Company and provide the Company with
such other information as the Company may request in order to determine the
effect of such transfer on the Company's status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interests of the Company
to continue to qualify as a REIT.
If any transfer of shares of stock of the Company occurs which, if
effective, would result in any person beneficially or constructively owning
shares of stock of the Company in excess or in violation of the above transfer
or ownership limitations (a "Prohibited Owner"), then that number of shares of
stock of the Company the beneficial or constructive ownership of which otherwise
would cause such person to violate such limitations (rounded to the nearest
whole share) shall be automatically transferred to a trust (the "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. Such automatic transfer shall be deemed to be effective as of the close
of business on the Business Day (as defined in the Charter) prior to the date of
such violative transfer. Shares of stock held in the Trust shall be issued and
outstanding shares of stock of the Company. The Prohibited Owner shall not
benefit economically from ownership of any shares of stock held in the Trust,
shall have no rights to dividends and shall not possess any rights to vote or
other rights attributable to the shares of stock held in the Trust. The trustee
of the Trust (the "Trustee") shall have all voting rights and rights to
dividends or other distributions with respect to shares of stock held in the
Trust, which rights shall be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by the Company that shares of stock have been transferred to the
Trustee shall be paid by the recipient of such dividend or distribution to the
Trustee upon demand, and any dividend or other distribution authorized but
unpaid shall be paid when due to the Trustee. Any dividend or distribution so
paid to the Trustee shall be held in trust for the Charitable Beneficiary. The
Prohibited Owner shall have no voting rights with respect to shares of stock
held in the Trust and, subject to Maryland law, effective as of the date that
such shares of stock have been transferred to the Trust, the Trustee shall have
the authority (at the Trustee's sole discretion) (i) to rescind as void any vote
cast by a Prohibited Owner prior to the discovery by the Company that such
shares have been transferred to the Trust and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary. However, if the Company has already taken irreversible
corporate action, then the Trustee shall not have the authority to rescind and
recast such vote.
Within 20 days of receiving notice from the Company that shares of stock of
the Company have been transferred to the Trust, the Trustee shall sell the
shares of stock held in the Trust to a person, designated by the Trustee, whose
ownership of the shares will not violate the ownership limitations set forth in
the Charter. Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Prohibited Owner and to the Charitable Beneficiary as follows.
The Prohibited Owner shall 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
15
<PAGE>
event causing the shares to be held in the Trust (e.g., a gift, devise or other
such transaction), the Market Price (as defined in the Charter) of such shares
on the day of the event causing the shares to be held in the Trust and (ii) the
price per share received by the Trustee from the sale or other disposition of
the shares held in the Trust. Any net sale proceeds in excess of the amount
payable to the Prohibited Owner shall be paid immediately to the Charitable
Beneficiary. If, prior to the discovery by the Company that shares of stock have
been transferred to the Trust, such shares are sold by a Prohibited Owner, then
(i) such shares shall be deemed to have been sold on behalf of the Trust and
(ii) to the extent that the Prohibited Owner received an amount for such shares
that exceeds the amount that such Prohibited Owner was entitled to receive
pursuant to the aforementioned requirement, such excess shall be paid to the
Trustee upon demand.
In addition, shares of stock of the Company held in the Trust shall be
deemed to have been offered for sale to the Company, 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 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 the Company, or its designee, accepts such offer. The Company shall
have the right to accept such offer until the Trustee has sold the shares of
stock held in the Trust. Upon such a sale to the Company, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Prohibited Owner.
All certificates representing shares of stock of the Company will bear a
legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of the
Company's stock, including shares of Common Stock, within 30 days after the end
of each taxable year, is required to give written notice to the Company stating
the name and address of such owner, the number of shares of each class and
series of stock of the Company which the owner beneficially owns and a
description of the manner in which such shares are held. Each such owner shall
provide to the Company such additional information as the Company may request in
order to determine the effect, if any, of such beneficial ownership on the
Company's status as a REIT and to ensure compliance with the Aggregate Stock
Ownership Limit. In addition, each stockholder shall upon demand be required to
provide to the Company such information as the Company may request, in good
faith, in order to determine the Company'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 limits could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for shares
of stock of the Company or otherwise be in the best interests of the
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Securities is Gemisys Corporation.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the taxation of the Company and the material
federal income tax considerations that may be relevant to a prospective holder
of Securities is for general information only and does not constitute tax
advice. The summary sets forth the federal income tax consequences that are
likely to be material to a holder of Securities and has been prepared by Jones,
Day, Reavis & Pogue, special counsel to the Company. The tax treatment of a
holder of Securities will vary depending upon the holder's particular situation,
and the discussion contained herein does not purport to address all aspects of
federal income taxation that may be relevant to particular holders in light of
their personal investment or tax circumstances, or to certain types of holders
(including insurance companies, tax-exempt entities, financial institutions,
broker-dealers in securities or currencies or persons that hold Securities that
are a hedge or that are hedged against currency risks or that are part of a
straddle or conversion transaction)
16
<PAGE>
subject to special treatment under the federal income tax laws. The discussion
further assumes that Securities will be held as capital assets by the holders
thereof. Moreover, the discussion below does not consider the effect of any
foreign, state, local or other tax laws that may be applicable to a prospective
holder of Securities.
The statements in this discussion and the opinion of Jones, Day, Reavis &
Pogue set forth below are based on the provisions of the Code, existing,
temporary, and proposed Treasury Regulations promulgated thereunder, the
legislative history of the Code, administrative rulings and practices of the
Internal Revenue Service (the "IRS"), and judicial decisions, all as in effect
on April 1, 1998. No assurance can be given that future legislative, judicial,
or administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to
transactions entered into or contemplated prior to the effective date of such
changes. As used in this section, the term "Company" refers solely to Great
Lakes REIT, Inc., and does not include the Operating Partnership.
If the Company offers one or more series of Preferred Stock, there may be
tax consequences for the holders of such Preferred Stock not discussed herein.
For a discussion of any such additional consequences, see the applicable
Prospectus Supplement.
PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP, AND
SALE OF SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company elected to be taxed as a REIT commencing with its taxable year
ended December 31 1993, and the Company believes that, commencing with its
taxable year ended December 31, 1993, it has been organized and has operated in
such a manner so as to qualify for taxation as a REIT under Sections 856 through
860 of the Code and the applicable Treasury Regulations promulgated thereunder,
which together set forth the requirements for qualifying as a REIT. The Company
intends to remain organized and to continue to operate in such a manner so as to
qualify for taxation as a REIT for federal income tax purposes in the future,
but no assurance can be given that the Company has so qualified or will be able
to remain so qualified.
The Code sections and Treasury Regulations relating to the federal income
tax treatment of REITs and their stockholders are highly technical and complex.
The following discussion sets forth only the material aspects of those
provisions. This summary is qualified in its entirety by the applicable Code
sections, Treasury Regulations promulgated thereunder, and administrative and
judicial interpretations thereof.
The Taxpayer Relief Act of 1997 (the "1997 Act") made certain changes to the
Code sections governing the federal income taxation of REITs and their
stockholders, which are generally effective for the Company's taxable years
beginning on or after January 1, 1998. Some of these changes may be material to
a holder of Securities and are discussed below.
Jones, Day, Reavis & Pogue has acted as special counsel to the Company in
connection with the Registration Statement. In the opinion of Jones, Day, Reavis
& Pogue, commencing with the Company's taxable year ended December 31, 1993, the
Company has been organized and operated in conformity with the requirements for
qualification and taxation as a REIT under the Code, and the Company's proposed
method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code for its subsequent taxable
years. Investors should be aware, however, that opinions of counsel are not
binding upon the IRS or any court. It must also be emphasized that the opinion
of Jones, Day, Reavis & Pogue is based upon various assumptions and certain
representations made by the Company as to factual matters relating to the
organization and operation of the Company and the
17
<PAGE>
Operating Partnership and to their business and properties as set forth in this
Prospectus and in the documents incorporated herein by reference. Moreover, the
Company's continued qualification and taxation as a REIT depend upon the
Company's continuing ability to meet (through, among other things, actual annual
operating results, asset ownership, distribution levels and diversity of stock
ownership) the various qualification tests imposed by the Code discussed below.
Jones, Day, Reavis & Pogue will not review the Company's compliance with these
tests on an ongoing basis. Accordingly, no assurance can be given that the
actual results of the Company's operations for any particular taxable year will
satisfy the requirements for qualification and taxation as a REIT. See
"--Failure to Qualify."
TAXATION OF THE COMPANY
As a REIT, the Company generally is not subject to federal corporate income
tax on that portion of its net income that it currently distributes to its
stockholders. This treatment substantially eliminates the federal "double
taxation" on earnings (once at the corporate level and once again at the
stockholder level) that generally results from an investment in a regular
corporation. Even if, however, the Company continues to qualify for taxation as
a REIT, it will be subject to federal income tax in certain circumstances as
follows.
- The Company will be taxed at regular corporate rates on any undistributed
"REIT taxable income," including undistributed net capital gains.
- Under certain circumstances, the Company may be subject to the corporate
"alternative minimum tax" on its items of tax preference, if any.
- If the Company 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, the Company will be subject to tax on such income at
the highest regular corporate rate.
- If the Company has net income from "prohibited transactions" (which are,
in general, certain sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax.
- If the Company should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met,
the Company will be subject to a 100% tax on an amount equal to (i) the
gross income attributable to the greater of the amount by which the
Company failed the 75% or the 95% test, multiplied by (ii) a fraction
intended to reflect the Company's profitability.
- If the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior years, the Company will be subject
to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
- If, during the 10-year period (the "Recognition Period") beginning on the
first day of the first taxable year for which the Company qualified as a
REIT, the Company recognizes gain on the disposition of any asset held by
the Company as of the beginning of the Recognition Period, then, to the
extent of the excess of (i) the fair market value of such asset as of the
beginning of the Recognition Period, over (ii) the Company's adjusted tax
basis in such asset as of the beginning of such Recognition Period (the
"Built-In Gain"), such gain will be subject to tax at the highest regular
corporate rate; PROVIDED, HOWEVER, that the Company shall not be subject
to tax on recognized Built-In Gain with respect to assets held as of the
first day of the Recognition Period to the extent that the aggregate
amount of such recognized Built-In Gain exceeds the net aggregate amount
of the Company's unrealized Built-In Gain (I.E., aggregate unrealized
gains less aggregate unrealized losses) with respect to such assets as of
the first day of the Recognition Period.
18
<PAGE>
- If the Company acquires any asset from any corporation which is or has
been a C Corporation (I.E., generally a corporation subject to full
corporate-level tax) in certain transactions in which the tax basis of the
asset in the hands of the Company is determined by reference to the
adjusted tax basis of the asset (or any other property) in the hands of
the C corporation, and the Company subsequently recognizes gain on the
disposition of such asset during the Recognition Period beginning on the
date on which the asset was acquired by the Company, then the Built-In
Gain with respect to such asset will be subject to tax at the highest
regular corporate rate.
REQUIREMENTS FOR QUALIFICATION
ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust, or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) which would be taxable
as a domestic corporation, but for compliance with Sections 856 through 859 of
the Code; (iv) which is neither a financial institution nor an insurance company
subject to certain special provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) at any time during the last half
of any taxable year of the Company, not more than 50% in value of the
outstanding stock of which is owned, actually or constructively (under the
applicable attribution rules of the Code), by or for five or fewer individuals
(as defined in the Code to include certain tax-exempt entities other than, in
general, qualified domestic pension funds); (vii) which complied, for its
taxable years beginning on or prior to August 5, 1997, with certain record
keeping requirements of the Code and the Treasury Regulations promulgated
thereunder; and (viii) which meets certain other tests, described below,
regarding the nature of its gross income and assets. The Code provides that
conditions (i) through (iv), inclusive, must be met during the entire taxable
year and that condition (v) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. As a result of changes made by the 1997 Act, for taxable years of the
Company beginning on or after January 1, 1998, the Company will be treated as
having satisfied condition (vi) so long as it has otherwise complied with the
requirements under the Code and the applicable Treasury Regulations for
ascertaining the actual ownership of its outstanding shares of stock and
maintaining records of such ownership, and the Company did not know, and would
not have known by exercising reasonable diligence, that it actually failed to
meet the condition.
The Company believes that it has satisfied the conditions set forth above
for each of its taxable years commencing with the taxable year ended December
31, 1993, and that it will continue to do so. With respect to the stock
ownership requirements described in (v) and (vi) above, the Company's Charter
and Bylaws provide for restrictions on the ownership and transfer of shares of
Common Stock and Preferred Stock that are intended to assist the Company in
continuing to satisfy these requirements. Such ownership and transfer
restrictions are described above under the heading "Description of Capital
Stock--Restrictions on Transfer." It should be emphasized that the restrictions
in the Charter, prior to its amendment and restatement in September 1997, and
the restrictions in the Bylaws did not ensure that the Company in fact satisfied
the stock ownership requirements described above for its taxable years
commencing prior to January 1, 1998, primarily because the provisions in the
Charter did not operate automatically to void any attempted transfer,
acquisition or ownership of shares of the Company's stock that would result in
the disqualification of the Company as a REIT but instead required the Company's
Board of Directors to take action to prohibit or deem to be null and void any
such attempted transfer, acquisition or ownership of such shares or to purchase
or redeem any such shares. Particularly after the shares of Common Stock of the
Company became publicly traded, the Board of Directors may not have become aware
of attempted transfers, acquisitions or ownership of Common Stock that would
cause the Company to fail to qualify as a REIT. Moreover, the restrictions on
ownership and transferability contained in the Bylaws may not be enforceable
against holders of Common Stock who became holders prior to the time that the
restrictions were added to the Bylaws in February 1997. If the Company failed to
satisfy the stock ownership requirements for any of its taxable years commencing
prior to January 1, 1998, the Company's status as a
19
<PAGE>
REIT would have terminated, and the Company would not have been able to prevent
such termination. See "--Failure to Qualify."
QUALIFIED REIT SUBSIDIARIES. The Company has a number of wholly owned
subsidiaries. Section 856(i) of the Code provides that a corporation that is a
"qualified REIT subsidiary" will not be treated as a separate corporation, and
all assets, liabilities and items of income, deduction and credit of a
"qualified REIT subsidiary" will be treated as assets, liabilities and items (as
the case may be) of the REIT. Thus, in applying the requirements for REIT
qualification described herein, the Company's "qualified REIT subsidiaries" will
be ignored, and all assets, liabilities and items of income, deduction and
credit of such subsidiaries will be treated as assets, liabilities and items (as
the case may be) of the Company. The Company believes that all of its wholly
owned subsidiaries are "qualified REIT subsidiaries."
OWNERSHIP OF A PARTNERSHIP INTEREST. In the case of a REIT that is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
proportionate share. In addition, the character of the assets and gross income
of the partnership retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Accordingly, the Company's proportionate share of the
assets, liabilities and items of income of the Operating Partnership and any
other partnership or limited liability company in which the Company may be a
direct or indirect partner or member in the future will be treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements for REIT qualification described herein, provided that the
Operating Partnership and any other such partnerships or limited liability
companies are treated as partnerships for federal income tax purposes. See "--
Partnership Classification." The Company has direct control of the Operating
Partnership and has operated, and will continue to operate, it in a manner
consistent with the requirements for qualification as a REIT. Actions taken by
partnerships or limited liability companies in which the Company may own,
directly or indirectly, an interest in the future could affect the Company's
ability to satisfy the REIT gross income and asset tests and the determination
of whether the Company has net income from "prohibited transactions."
GROSS INCOME TESTS. To maintain its qualification as a REIT, the Company
must satisfy two gross income requirements annually. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating directly to real property or mortgages on real property (including
"rents from real property," which term generally includes expenses of the
Company that are paid or reimbursed by tenants, and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments and from (i) dividends, (ii) interest, (iii) gain from the sale or
other disposition of stock or securities, (iv) for taxable years of the Company
beginning on or after January 1, 1998, amounts received with respect to certain
hedging instruments that reduce interest rate risk associated with indebtedness
of the Company, or (v) any combination of the foregoing. For taxable years of
the Company ended on or before December 31, 1997, short-term gain from the sale
or other disposition of stock or securities, gain from prohibited transactions,
and gain from the sale or other disposition of real property held for less than
four years (apart from involuntary conversions and sales of foreclosure
property) must have represented less than 30% of the Company's gross income
(including gross income from prohibited transactions) for each such taxable
year. The 1997 Act eliminated this 30% test for the Company's taxable years
beginning on or after January 1, 1998.
For purposes of satisfying the 75% and 95% gross income tests described
above, rents received by the Company from a tenant will qualify as "rents from
real property" only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits derived by any
person from such property. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts
20
<PAGE>
or sales. Second, the Code provides that rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests if
the Company, or an actual or constructive owner of 10% or more of the Company,
actually or constructively owns a 10% or greater interest in such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property leased
in connection with a lease of real property is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property." Finally, for
rents received to qualify as "rents from real property," the Company generally
must not operate or manage the property or furnish or render services to the
tenants of such property (subject to a 1% de minimis exception described below),
other than through an independent contractor that is adequately compensated and
from whom the REIT derives no revenue. The Company may, however, directly
perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property.
As a result of changes made by the 1997 Act, if, for taxable years of the
Company beginning on or after January 1, 1998, the Company provides services to
a tenant, or otherwise in relation to the management of the property, that are
not usually or customarily provided in connection with the rental of space for
occupancy only ("impermissible tenant services"), amounts received or accrued by
the Company for any such services will not be treated as "rents from real
property" for purposes of the REIT gross income tests. However, the provision of
such impermissible tenant services will not cause other amounts received with
respect to the same property to fail to be treated as "rents from real property"
unless the amounts received or accrued in respect of the impermissible tenant
services for any taxable year exceed 1% of all amounts received or accrued,
directly or indirectly, by the Company during such taxable year with respect to
that property. Under the literal wording of Section 856 of the Code, if the 1%
threshold is exceeded, no amount received or accrued by the Company with respect
to the property will qualify as "rents from real property," even if the
impermissible tenant services are provided to some, but not all, of the tenants
of the property. For purposes of applying this de minimis rule, the amount that
the Company will be treated as having received or accrued for providing
impermissible tenant services may not be less than 150% of the Company's direct
cost of providing the services.
The Company has represented that it has not and will not in the future (i)
charge rent for any property that is based in whole or in part on the income or
profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above), (ii) rent any property to a Related
Party Tenant (unless the Board of Directors determines in its discretion that
the rent received from such Related Party Tenant is not material and will not
jeopardize the Company's status as a REIT), or (iii) derive rental income
attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than 15%
of the total rent received under the lease).
As noted above, the Charter and Bylaws provide for restrictions on the
ownership and transfer of the Company's stock that are intended, in part, to
assist the Company in satisfying the 75% and 95% gross income tests described
above by prohibiting owners of interests in a Related Party Tenant from owning
shares of stock of the Company if such stock ownership would jeopardize the
Company's status as a REIT. Prior to its amendment and restatement in September
1997, the provisions of the Charter, however, did not operate automatically to
prohibit the ownership of shares of the Company's stock that would result in the
disqualification of the Company as a REIT, but instead required the Board of
Directors to take action to prohibit or deem to be null and void any such
ownership of shares of stock or to purchase or redeem any such shares. Although
the Company believes that it has not in the past and does not currently rent any
property to a Related Party Tenant, there can be no assurance that, prior to its
taxable year commencing on January 1, 1998, the Board of Directors would have
become aware of ownership of stock by persons whose ownership of interests in
Related Party Tenants could have jeopardized the Company's status as a REIT.
Moreover, the restrictions on ownership contained in the Bylaws were adopted in
February 1997 and may not be enforceable against holders of Common Stock who
acquired such shares prior to the adoption of these Bylaw provisions.
21
<PAGE>
The Company has performed and will in the future perform certain services
with respect to the Properties for certain of its tenants. The Company believes
that the services it provides to tenants are usually and customarily rendered in
the geographic market of the Properties in connection with the rental of space
for occupancy only, and, accordingly, that the provision of such services has
not caused, and will not in the future cause, the rents received with respect to
the Properties to fail to qualify as "rents from real property" for purposes of
the 75% and 95% gross income tests described above. In the case of any services
provided to tenants that are not "usual and customary," the Company has
represented that either it has employed and intends to continue to employ
qualifying independent contractors to provide such services or that the amounts
received from the provision of such services fall within the 1% de minimis rule
described above.
The Company has received and will in the future receive fees for services,
or payments in the form of reimbursements for expenses incurred in the
performance of services, in either case provided to the Operating Partnership.
Although the law is not entirely clear, because the Company has a significant
capital interest directly and indirectly in the Operating Partnership, the
amount of such fees and reimbursements that is apportioned to the capital
interest of the Company in the Operating Partnership should not be treated as a
separate item of income and should be disregarded for purposes of the 75% and
95% gross income tests. The amount of such fees and reimbursements, on the other
hand, that is apportioned to the capital interests of other partners in the
Operating Partnership will generally result in nonqualifying income to the
Company under the 75% and 95% gross income tests. In addition, the Company has
received and will continue in the future to receive a de minimis amount of
management fees in exchange for the performance of certain services with respect
to properties that are owned entirely by third parties. All such third-party
management fees will constitute nonqualifying income for purposes of the 75% and
95% gross income tests.
The Company believes that the aggregate amount of nonqualifying income
(including such fees and reimbursements) in any taxable year has not exceeded
and will not in any future taxable year exceed the limits on non-qualifying
income under the 75% or 95% gross income tests. The Company intends to carefully
monitor its compliance with the 75% and 95% gross income tests. Should the
potential amount of non-qualifying income of the Company in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid non-qualification as a REIT.
The Company believes that it has satisfied the three gross income tests then
in effect for each of its taxable years during the period commencing with its
taxable year ended December 31, 1993 and ending with its taxable year ended
December 31, 1997. The Company intends to operate in a manner that will enable
it to continue to satisfy, consistent with the 1997 Act, the 75% and the 95%
gross income tests in the future.
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if (i) the Company's failure
to meet such test(s) was due to reasonable cause and not willful neglect, (ii)
the Company attaches a schedule of the sources of its income to its federal
income tax return for such taxable year, and (iii) any incorrect information on
the schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether, in all circumstances, the Company would be entitled
to the benefit of these relief provisions. For example, if the Company failed to
satisfy the gross income tests because non-qualifying income that the Company
intentionally earned exceeded the limits on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
If these relief provisions were inapplicable to a particular set of
circumstances involving the Company, the Company would cease to qualify as a
REIT. As discussed above in "--Taxation of the Company," even if these relief
provisions applied, a 100% tax would still be imposed on the greater of the
amount by which the Company failed the 75% or the 95% test, multiplied by a
fraction intended to reflect the Company's profitability. No similar mitigation
provision would apply to provide relief if the Company failed to satisfy the 30%
income test for
22
<PAGE>
a taxable year ended on or before December 31, 1997, and in such case, the
Company would have ceased to qualify as a REIT. See "--Failure to Qualify."
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships (or limited liability companies taxable as partnerships for federal
income tax purposes) in which the Company or one of its qualified REIT
subsidiaries owns an interest, and (ii) stock or debt instruments purchased with
the proceeds of a stock offering or long-term (at least five years) debt
offering of the Company and held for not more than one year following the
receipt by the Company of such proceeds), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities (except for interests in the Operating
Partnership, any other partnership (or limited liability company taxable as a
partnership for federal income tax purposes) in which the Company may or may be
deemed to be a direct or indirect partner (or member) in the future, and any
qualified REIT subsidiary of the Company).
For purposes of the three asset tests, the Company is deemed to own its
proportionate share of the assets of the Operating Partnership and any other
partnership (or limited liability company taxable as a partnership for federal
income tax purposes) in which the Company may or may be deemed to be a direct or
indirect partner (or member) in the future and 100% of the assets of each of its
qualified REIT subsidiaries. The Company's actual ownership interests in those
entities are disregarded.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failing to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including as a result of the
Company's increasing its interest in the Operating Partnership), the failure can
be cured by disposition of sufficient nonqualifying assets within 30 days after
the close of that quarter. The Company believes that it has satisfied the
requirements of the three asset tests described above for all relevant periods
commencing with its taxable year ended December 31, 1993. The Company has
further represented that it has maintained and intends to continue to maintain
adequate records of the value of its assets to ensure compliance with the asset
tests and to take such other actions within 30 days after the close of any
quarter as may be required to cure any noncompliance. If the Company fails to
cure noncompliance with the asset tests within such time period, the Company
would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. To maintain its qualification as a REIT,
the Company is required to distribute dividends (other than capital gain
dividends) qualifying for the dividends paid deduction (as defined in Section
561 of the Code) to its stockholders each year in an amount at least equal to
(i) the sum of (A) 95% of the Company's "REIT taxable income" (computed without
regard to the dividends paid deduction and the Company's net capital gain) plus
(B) 95% of the net income (after tax), if any, from foreclosure property, minus
(ii) the sum of certain items of non-cash income. In addition, if the Company
disposes of any asset during its Recognition Period, the Company will be
required to distribute at least 95% of the Built-in Gain (after tax), if any,
recognized on the disposition of such asset. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its federal income tax return for such
year and if paid on or before the first regular dividend payment after such
declaration.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax on the undistributed amounts at
regular ordinary or capital gains corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute during each calendar year
at least the sum of (i) 85%
23
<PAGE>
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, plus (iii) any undistributed taxable income from prior
years, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
The Company believes that it has made timely distributions sufficient to
satisfy all of the annual distribution requirements for each of its taxable
years commencing with its taxable year ended December 31, 1993. Prior to January
1, 1996, however, the Company maintained a dividend reinvestment and share
purchase plan pursuant to which shares of Common Stock were issued to certain of
the then existing stockholders of the Company. The IRS may challenge certain
operational aspects of the plan, and, if successful, such a challenge would
result in the Company having to pay "deficiency dividends" (as further discussed
below) to its stockholders, as well as interest to the IRS, to maintain the
Company's status as a REIT. While the amount of such "deficiency dividends" and
interest could be significant, the Company anticipates that it would be able to
obtain funds to pay these amounts from borrowings or other sources. For purposes
of its opinion regarding the Company's qualification as a REIT, Jones, Day,
Reavis & Pogue, special counsel to the Company, has assumed that in the event of
a successful challenge by the IRS, the Company would have sufficient funds to
pay and would use such funds to pay the amount of such "deficiency dividends"
and interest in a timely manner.
The Company intends to continue to make timely distributions sufficient to
satisfy all of the annual distribution requirements for its current and future
taxable years. In this regard, the Partnership Agreement requires the Company,
as general partner, to use its best efforts to cause the Operating Partnership
to distribute to its partners an amount sufficient to permit the Company to meet
these distribution requirements. It is expected that the Company's REIT taxable
income will be less than its cash flow due to the allowance of depreciation and
other non-cash charges in computing REIT taxable income. Accordingly, the
Company anticipates that it will generally have sufficient cash or liquid assets
to enable it to satisfy the distribution requirements described above. It is
possible, however, that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to the
insufficiency of cash flow from the Operating Partnership in a particular year
or to timing differences between the actual receipt of income and actual payment
of deductible expenses, on the one hand, and the inclusion of such income and
deduction of such expenses in computing the Company's REIT taxable income, on
the other hand. In the event that such an insufficiency or such timing
differences occur, in order to meet the 95% distribution requirement, the
Company may find it necessary to cause the Operating Partnership to arrange for
short-term, or possibly long-term, borrowings or to pay dividends in the form of
taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest to the IRS based upon the amount of any
deduction taken for deficiency dividends.
RECORD KEEPING REQUIREMENTS. Pursuant to applicable Treasury Regulations,
the Company must maintain certain records and request on an annual basis certain
information from its stockholders of record designed to disclose the actual
owners of its outstanding shares of stock. For taxable years of the Company
beginning on or after January 1, 1998, if the Company were to fail to comply
with these record keeping requirements, it would be subject to a $25,000 penalty
($50,000 in the case of an intentional violation) for each year of
non-compliance, subject to an exception if the Company were able to demonstrate
that its failure to comply was due to reasonable cause and not willful neglect.
For taxable years ended on or before December 31, 1997, noncompliance would have
resulted in the Company's failure to qualify as a REIT. See "--Requirements for
Qualification Organizational Requirements." The Company has represented that it
has complied with these record keeping requirements and intends to continue to
comply with such requirements in the future.
24
<PAGE>
PARTNERSHIP ANTI-ABUSE RULES. Treasury Regulations have been promulgated
under the partnership provisions of the Code that permit the IRS to
recharacterize transactions involving partnerships that purport to create tax
advantages that are inconsistent with the intent of the partnership provisions
of the Code. The scope and intended application of these Treasury Regulations
are unclear. Nonetheless, although the matter is not free from doubt, Jones,
Day, Reavis & Pogue believes that these Treasury Regulations do not adversely
affect the Company's ability to qualify as a REIT.
PENALTY TAX ON PROHIBITED TRANSACTIONS. Any gain realized by the Company on
the sale of any property held as inventory or other property held primarily for
sale to customers in the ordinary course of business (including the Company's
share of any such gain realized by the Operating Partnership) will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax. Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT for taxable
years of the Company commencing prior to January 1, 1998. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends on all
the facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold the Properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Properties (and other properties) and to make such
occasional sales of the Properties as are consistent with such investment
objectives. Based upon such investment objectives, the Company believes that in
general the Properties should not be considered inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
and that the amount of income from prohibited transactions, if any, will not be
material. There can be no assurance, however, that the IRS might not contend
that one or more of such sales is subject to the 100% penalty tax. See
"--Taxation of the Company."
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify as a REIT will not be required to be made and, if made,
will not be deductible by the Company. As a result, the Company's failure to
qualify as a REIT will reduce the cash available for distribution by the Company
to its stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to the Company's stockholders will be taxable as ordinary income
dividends to the extent of the Company's then current and accumulated earnings
and profits, 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, the Company also will be
ineligible for qualification as a REIT for the four taxable years following the
year during which such qualification was lost. It is not possible to determine
whether the Company would be entitled to such statutory relief in all
circumstances.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock or Preferred Stock (collectively, the "Shares") who (for U.S.
federal income tax purposes) is (i) a citizen or resident alien individual of
the United States, (ii) a corporation created or organized in or under the laws
of the United States or of any State thereof, (iii) an estate the income of
which is subject to U.S. federal income tax regardless of its source, or (iv) a
trust if a court within the United States is able to exercise primary
supervision over the trust's administration and one or more United States
persons have the authority to control all of the trust's substantial decisions.
DISTRIBUTIONS GENERALLY. As long as the Company qualifies as a REIT,
distributions made by the Company out of its current or accumulated earnings and
profits (and not designated as capital gain dividends) will constitute dividends
taxable to its taxable U.S. Stockholders as ordinary income. Such
25
<PAGE>
distributions will not be eligible for the dividends-received deduction in the
case of U.S. Stockholders that are corporations.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Stockholders
as long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held such holder's Shares. U.S. Stockholders that
are corporations will not be eligible for the dividends-received deduction with
respect to such dividends and, further, may be required to treat up to 20% of
certain capital gain dividends as ordinary income.
The 1997 Act made significant changes to the taxation of capital gains
recognized by individuals, trusts and estates. In November 1997, the IRS issued
Notice 97-64, which provides generally that the Company may classify portions of
its designated capital gain dividends for taxable years ending on or after May
7, 1997, as (i) a 20% rate gain distribution (taxable as long-term capital gain
in the 20% group), (ii) an unrecaptured section 1250 gain distribution (taxable
as long-term capital gain in the 25% group), or (iii) a 28% rate gain
distribution (taxable as long-term capital gain in the 28% group). For a
discussion of the 20%, 25% and 28% tax rates applicable to individuals, estates
and trusts, see "--Taxation of Taxable U.S. Stockholders--1997 Act Changes to
Capital Gains Rates." If the Company makes no designation, the entire amount of
any designated capital gain dividend will be treated as long-term capital gain
taxable at a rate of 28%. IRS Notice 97-64 also provides that the Company must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computations required by Section 1(h) of the
Code as if the Company were an individual whose ordinary income was subject to a
marginal federal income tax rate of at least 28%. Finally, the Notice provides
that the Company's capital gain designations will only be effective to the
extent that such designations comply with the principles of Revenue Ruling
89-81, which require that distributions made with respect to different classes
of shares not be composed disproportionately of dividends of a particular type.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted tax basis that such U.S.
Stockholder has in such holder's Shares by the amount of such distribution (but
not below zero), with distributions in excess of a U.S. Stockholder's adjusted
tax basis in such holder's Shares taxable as capital gains. For purposes of
determining the portion of distributions made with respect to separate classes
of Shares that will be treated as dividends for federal income tax purposes,
current and accumulated earnings and profits of the Company will be allocated
first to distributions resulting from priority rights of shares of Preferred
Stock before being allocated to other distributions. Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by the Company on or before
January 31 of the following calendar year. U.S. Stockholders may not include in
their own income tax returns any net operating losses or capital losses of the
Company.
The Company will be treated as having sufficient earnings and profits to
treat as dividends all distributions made by the Company during a calendar year
that are not in excess of the amount required to be distributed by the Company
for such year in order to avoid the imposition of the 4% excise tax discussed
above. See "--Requirements for Qualification--Annual Distribution Requirements."
Moreover, any "deficiency dividends" paid by the Company will be treated as
dividends (either ordinary or capital gain dividends, as the case may be) for
tax purposes, without regard to the amount of the Company's current and
accumulated earnings and profits. As a result, U.S. Stockholders may be required
to treat as taxable dividends certain distributions made by the Company that
would otherwise result in a tax-free return of capital.
26
<PAGE>
Distributions received from the Company and gain arising from the sale or
other disposition by a U.S. Stockholder of Shares will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions
received from the Company (to the extent they do not constitute a return of
capital) generally will be treated as investment income for purposes of
computing the investment interest deduction limitation. Gain arising from the
sale or other disposition of Shares, however, will not be treated as investment
income unless the U.S. Stockholder elects to reduce the amount of such holder's
total net capital gain eligible for the maximum applicable capital gains rate by
the amount of such gain with respect to the Shares.
UNDISTRIBUTED NET CAPITAL GAINS. As a result of changes made by the 1997
Act, for the Company's taxable years beginning on or after January 1, 1998, the
Company will have greater flexibility to retain, rather than distribute as
capital gain dividends, its net long-term capital gains, although the Company
will still be required to pay tax on such retained amounts. See "--Requirements
for Qualification--Annual Distribution Requirements." If the Company so elects
to retain its net long-term capital gains, U.S. Stockholders holding Shares as
of the close of the Company's taxable year will be required to include in their
income as long-term capital gains their proportionate share of such amount of
the undistributed net long-term capital gains as the Company may designate in a
written notice mailed to its stockholders within 60 days after the close of its
taxable year. The Company may not designate an amount in excess of the Company's
undistributed net capital gain for the year. Each U.S. Stockholder required to
include in income such holder's proportionate share of such designated
undistributed net capital gains would be deemed to have paid, in the taxable
year of the inclusion, the tax paid by the Company in respect of such
proportionate share of the designated amount, and would be allowed a credit or a
refund, as the case may be, for the tax deemed to have been paid by such holder.
Each such U.S. Stockholder would also be entitled to increase such holder's
adjusted tax basis in such holder's Shares by the excess of the amount of such
includible gains over the amount of the tax deemed paid by such holder in
respect of such gains. The earnings and profits of the Company, as well as the
earnings and profits of any U.S. Stockholder that is a corporation, would be
appropriately adjusted to take account of the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
SALE OR OTHER DISPOSITION OF SHARES. Upon any sale or other disposition of
Shares, a U.S. Stockholder will recognize gain or loss for federal income tax
purposes in an amount equal to the difference between (i) the amount of cash and
the fair market value of any property received on such sale or other
disposition, and (ii) the holder's adjusted tax basis in such Shares. For sales
or other dispositions after July 28, 1997, such gain or loss in the case of an
individual, trust or estate will be mid-term capital gain or loss if the Shares
have been held for more than one year but not more than 18 months and long-term
capital gain or loss if such Shares have been held for more than 18 months. Gain
or loss in the case of a corporation will be long-term gain or loss if the
Shares have been held for more than one year. In general, any loss recognized by
a U.S. Stockholder upon the sale or other disposition of Shares that have been
held 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 received
by such U.S. Stockholder from the Company which were required to be treated as
long-term capital gains. In the case of a U.S. Stockholder that is an
individual, trust or estate, the long-term capital loss will be apportioned
among the applicable long-term capital gain groups to the extent that
distributions received by such U.S. Stockholder were previously so treated.
1997 ACT CHANGES TO CAPITAL GAINS RATES. As previously noted, the 1997 Act
made significant changes to the taxation of capital gains recognized by
individuals, trusts and estates. Pursuant to the 1997 Act, the maximum rate of
tax on long-term capital gains (I.E., gains from the sale or exchange of capital
assets held for more than 18 months) of individuals, trusts and estates has been
reduced from 28% to 20%. The maximum rate of tax on mid-term capital gains
(I.E., gains from the sale or exchange of capital assets held for more than one
year but not more than 18 months) of such persons remains at 28%. The 1997 Act
also provides for a maximum rate of 25% for "unrecaptured Section 1250 gain"
(I.E., gain attributable to the depreciation of Section 1250 property) of
individuals, trusts and estates, special rules for "qualified 5-year
27
<PAGE>
gain," and certain other changes to prior law. Even lower rates apply for
taxpayers in the 15% marginal federal income tax bracket. The new rates for
individuals, trusts, and estates apply generally to sales or other dispositions
after May 6, 1997, although the changes in the long-term holding period are
effective for sales after July 28, 1998. The 1997 Act does not change the
taxation of capital gains recognized by corporations.
The 1997 Act authorizes the IRS to prescribe such regulations as may be
appropriate to apply the new capital gains tax rates to sales or exchanges of
capital assets by "pass-thru" entities, such as a REIT, and to sales or
exchanges of interests in such entities, but no such regulations have been
promulgated to date. For a discussion of how the new capital gains rules are to
apply to the taxation of distributions by the Company to its U.S. Stockholders
designated as capital gain dividends, see "--Taxation of Taxable U.S.
Stockholders--Distributions Generally" above. U.S. Stockholders are urged to
consult with their own tax advisors with respect to the new capital gains rules
in the 1997 Act.
BACKUP WITHHOLDING AND INFORMATION REPORTING. The Company will report to
its U.S. Stockholders and the IRS the amount of dividends paid during each
calendar year, and the amount of tax withheld on such dividends, if any. Under
the federal income tax backup withholding rules, a U.S. Stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, is able to demonstrate this fact to the Company,
or (b) provides a taxpayer identification number, certifies that such holder is
not subject to backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules. A U.S. Stockholder that does not
provide the Company with such holder's correct taxpayer identification number
may also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the U.S. Stockholder's federal income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain dividends paid to any stockholders who fail to certify their
non-foreign status to the Company. See "--Taxation of Non-U.S.
Stockholders--Backup Withholding and Information Reporting."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has issued a published revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Based on that ruling and the
analysis contained therein, distributions made by the Company to, as well as
gain from the sale or other disposition of Shares by, a U.S. Stockholder that is
a tax-exempt entity (such as an individual retirement account (an "IRA") or a
401(k) plan, but excluding certain types of tax-exempt entities dealt with
below) should not constitute UBTI unless such tax-exempt U.S. Stockholder has
financed the acquisition of its Shares with "acquisition indebtedness" and the
Shares are thus treated as "debt-financed property" within the meaning of
Section 514 of the Code, or such Shares are used in an unrelated trade or
business conducted by such tax-exempt stockholder.
Special rules apply to tax-exempt U.S. Stockholders that are social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans exempt from federal income
taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, of
the Code. In the case of these tax-exempt U.S. Stockholders, distributions made
by the Company and gain from the sale or other disposition of Shares will
generally constitute UBTI unless the tax-exempt stockholder is able properly to
deduct amounts set aside or placed in reserve for certain purposes so as to
offset the income and gain generated by its investment in Shares. Such
prospective tax-exempt investors should consult their own tax advisors
concerning these "set aside" and reserve requirements.
Special rules also apply to certain tax-exempt pension trusts (including
401(k) plans but excluding IRAs or government pension plans) that own more than
10% (by value) of the interests in a "pension-held REIT" at any time during a
taxable year. Such a pension trust must treat a certain percentage of all
distributions received from the REIT during the year as UBTI. The percentage is
equal to the ratio of the
28
<PAGE>
REIT's gross income (less direct expenses related thereto) derived from the
conduct of unrelated trades or businesses determined as if the REIT were itself
a tax-exempt pension trust, to the REIT's gross income (less direct expenses
related thereto) from all sources. The special rules will not apply to require a
pension trust to recharacterize a portion of its distributions received from the
REIT as UBTI unless the percentage computed is at least 5%.
A REIT will be treated as a "pension-held REIT" only if the REIT is
predominantly held by tax-exempt pension trusts and if the REIT would otherwise
fail to satisfy the "five or fewer" stock ownership requirement discussed above,
see "--Requirements for Qualification--Organizational Requirements," if the
stock of the REIT held by such tax-exempt pension trusts were not treated (under
Section 856(h)(3) of the Code) as being held directly by their respective
beneficiaries (instead of by the trusts themselves). A REIT is predominantly
held by tax-exempt pension trusts if at least one tax-exempt pension trust holds
more than 25% (by value) of the interests in the REIT or if one or more
tax-exempt pension trusts (each of which owns more than 10% (by value) of the
interests in the REIT) own in the aggregate more than 50% (by value) of the
interests in the REIT. The provisions requiring tax-exempt pension trusts to
treat a portion of distributions received from a REIT as UBTI will not apply to
the Company if it is able to satisfy the "five or fewer" stock ownership
requirement without relying upon the "look-through" exception for tax-exempt
pension trusts. The Company does not expect to be classified as a "pension-held
REIT." Because, however, the Common Stock is publicly traded, no assurance can
be given that the Company will not in fact be classified as a "pension-held
REIT" in the future.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of Shares by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships, or
foreign trusts or estates (collectively, "Non-U.S. Stockholders") are highly
complex, and no attempt is made herein to provide more than a brief summary of
such rules. Accordingly, the discussion does not address all aspects of U.S.
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Stockholder in light of such holder's
particular circumstances. Prospective Non-U.S. Stockholders should consult with
their own tax advisors to determine the impact of federal, state, local and
foreign income tax laws on an investment in Shares, including any reporting
requirements.
In general, a Non-U.S. Stockholder will be subject to regular U.S. federal
income taxation with respect to such holder's investment in Shares in the same
manner as a U.S. Stockholder (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. Stockholder of a trade or business in the United States
(or, if an income tax treaty applies, is attributable to a permanent
establishment maintained by such Non-U.S. Stockholder in the United States). A
Non-U.S. Stockholder that is a corporation and that receives income with respect
to its investment in Shares that is (or is treated as) "effectively connected"
with the conduct of a trade or business in the United States (or attributable to
a United States permanent establishment) 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 U.S. corporate income tax. The following discussion addresses
only the U.S. federal income taxation of Non-U.S. Stockholders whose investment
in Shares is not "effectively connected" with the conduct of a trade or business
in the United States (or attributable to a United States permanent
establishment). Prospective investors whose investment in Shares may be
"effectively connected" with the conduct of a United States trade or business
(or attributable to a United States permanent establishment) should consult
their own tax advisors as to the tax consequences thereof.
DISTRIBUTIONS GENERALLY. Distributions made by the Company to a Non-U.S.
Stockholder that are neither attributable to gain from the sale or exchange by
the Company of United States real property interests (as discussed below) nor
designated by the Company as capital gain dividends will be treated as ordinary
income dividends to the extent that they are made out of current or accumulated
earnings and
29
<PAGE>
profits of the Company. Generally, such distributions will be subject to
withholding of U.S. federal income tax on a gross basis (that is, without
allowance of deductions) at a 30% rate or such reduced rate as may be specified
by an applicable income tax treaty. Under certain treaties, however, reduced
withholding rates generally applicable to dividends do not apply to dividends
paid by a REIT such as the Company.
Under the Treasury Regulations currently in force, dividends paid to an
address in a foreign country are generally presumed to be paid to a resident of
such country (unless the payor has actual knowledge to the contrary) for
purposes of determining the applicability of the withholding tax discussed above
and the availability of a reduced treaty rate of withholding, if any. Under
newly issued Treasury Regulations, which will become effective for payments made
after December 31, 1999, however, a Non-U.S. Stockholder who wishes to claim the
benefit of an applicable reduced treaty rate of withholding will be required to
satisfy certain certification and other requirements, including the requirement
generally to file a properly completed IRS Form W-8 with the Company, the paying
agent, or such other entity as may be required to withhold tax. The new Treasury
Regulations also provide special rules for dividends paid to (i) foreign
intermediaries, (ii) U.S. or foreign wholly-owned entities that are disregarded
as entities separate from their owners for U.S. federal income tax purposes, or
(iii) flow-through entities or arrangements that are treated as fiscally
transparent for U.S. federal income tax purposes or under the laws of an
applicable income tax treaty jurisdiction or both. For example, in the case of
Shares held by a foreign partnership, the certification requirement will be
applied to the partners of the partnership, rather than the partnership itself,
although the partnership will also be required to provide certain information,
including a U.S. taxpayer identification number, and a look-through rule is
provided for tiered partnership structures. Non-U.S. Stockholders should consult
their own tax advisors regarding their ability to claim benefits under income
tax treaties with the United States.
Distributions made by the Company in excess of its current and accumulated
earnings and profits will not be taxable to a Non-U.S. Stockholder to the extent
that they do not exceed the adjusted tax basis that the holder has in such
holder's Shares, but instead will reduce the adjusted tax basis of such stock
(but not below zero). To the extent that such distributions exceed the adjusted
tax basis that a Non-U.S. Stockholder has in the holder's Shares, the amount of
such excess will be treated as gain from the sale or other disposition of such
Shares, the tax treatment of which is described below.
For withholding tax purposes, the Company is currently required to treat all
distributions as if made out of its current or accumulated earnings and profits
and thus intends to withhold tax at the rate of 30% (or a reduced treaty rate if
applicable) on the gross amount of any distribution (other than distributions
designated as capital gain dividends discussed below) made to a Non-U.S.
Stockholder. Under the newly issued Treasury Regulations referred to above, the
Company will not be required to withhold tax at the 30% rate on distributions
(or portions thereof) made after December 31, 1999 that it reasonably estimates
to be in excess of the Company's current and accumulated earnings and profits.
As a result, however, of a legislative change made by the Small Business Job
Protection Act of 1996, effective for distributions made after August 20, 1996,
the withholding requirements of the Foreign Investment in Real Property Tax Act
of 1980 ("FIRPTA") will apply to any distributions (or portions thereof) made by
the Company to Non-U.S. Stockholders in excess of the Company's current and
accumulated earnings and profits. Accordingly, if the Company were no longer
required to withhold tax at the 30% rate on such distributions, it would be
required to withhold tax under FIRPTA equal to 10% of the gross amount realized
by each Non-U.S. Stockholder with respect to any such distribution, including a
distribution made to a Non-U.S. Stockholder in excess of the Company's current
and accumulated earnings and profits but that did not exceed the Non-U.S.
Stockholder's adjusted tax basis in such holder's Shares and thus did not give
rise to any U.S. federal income tax. In any case, a Non-U.S. Stockholder may
seek a refund from the IRS, by filing an appropriate claim for refund, of any
amount withheld if it is subsequently determined that such distribution was, in
fact, in excess of the Company's then current and accumulated earnings and
profits and the amount withheld exceeded the Non-U.S. Stockholder's U.S. federal
income tax liability, if any, with respect to the distribution.
30
<PAGE>
Distributions made by the Company to a Non-U.S. Stockholder that are
designated by the Company at the time of distribution as capital gain dividends
(other than those arising from the sale or other disposition of a United States
real property interest) generally will not be subject to U.S. federal income
taxation unless the Non-U.S. Stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the calendar year
and either has a "tax home" (within the meaning of Section 911(d)(3) of the
Code) in the United States or maintains an office or other fixed place of
business within the United States to which such gain is attributable, in which
case the nonresident alien individual will be subject to a 30% withholding tax
on the amount of such individual's capital gains (unless an applicable income
tax treaty provides otherwise).
Distributions made by the Company to a Non-U.S. Stockholder that are
attributable to gain from the sale or other disposition by the Company of United
States real property interests will be taxed to the Non-U.S. Stockholder under
FIRPTA. Under FIRPTA, such distributions are taxed to a Non-U.S. Stockholder as
if such distributions were gains "effectively connected" with the conduct by
such holder of a trade or business within the United States. Accordingly, a
Non-U.S. Stockholder will be taxed on such distributions at the same capital
gains rates applicable to U.S. Stockholders (subject to any applicable
alternative minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals), without regard to whether such distributions
are designated by the Company as capital gain dividends. Distributions subject
to FIRPTA also may be subject to the 30% branch profits tax discussed above in
the case of a corporate Non-U.S. Stockholder that is not entitled to treaty
relief or exemption.
The Company will be required to withhold tax from any distribution to a
Non-U.S. Stockholder that could be designated by the Company as a capital gain
dividend in an amount equal to 35% of the gross distribution. The amount of tax
withheld is fully creditable against the Non-U.S. Stockholder's FIRPTA tax
liability, and if such amount exceeds the Non-U.S. Stockholder's U.S. federal
income tax liability for the applicable taxable year, the Non-U.S. Stockholder
may seek a refund of the excess from the IRS by filing an appropriate claim for
refund. In addition, if the Company designates as capital gain dividends
distributions previously made prior to the date of such designation and which,
at the time made, were not subject to withholding, the Company must treat as
capital gain dividends, and thus withhold 35% from, subsequent distributions
made on or after the date of such designation until the amount of such
distributions in the aggregate equals the amount of such prior distributions.
UNDISTRIBUTED NET CAPITAL GAINS. Although the law is not entirely clear, it
appears that amounts designated by the Company pursuant to the 1997 Act as
undistributed net capital gains in respect of Shares held by Non-U.S.
Stockholders (see "--Taxation of Taxable U.S. Stockholders--Undistributed Net
Capital Gains") would be treated in the same manner as actual distributions made
by the Company to such Non-U.S. Stockholders and designated as capital gain
dividends. In such case, a Non-U.S. Stockholder would be able to offset as a
credit against the U.S. federal income tax liability resulting from amounts so
designated by the Company, the Non-U.S. Stockholder's proportionate share of the
tax paid by the Company on such undistributed capital gains, and to receive from
the IRS a refund to the extent that such holder's proportionate share of such
tax exceeded the Non-U.S. Stockholder's actual U.S. federal income tax
liability.
SALE OR OTHER DISPOSITION OF SHARES. Gain recognized by a Non-U.S.
Stockholder upon the sale or other disposition of Shares generally will not be
subject to United States federal income taxation unless such Shares constitute
"United States real property interests" within the meaning of FIRPTA. The Shares
will not constitute "United States real property interests" so long as the
Company is a "domestically controlled REIT." A "domestically controlled REIT" is
a REIT in which at all times during a specified testing period less than 50% in
value of its stock is held directly or indirectly by Non-U.S. Stockholders. The
Company believes that it currently is and will continue to be a "domestically
controlled REIT," and therefore that the sale of Shares will not be subject to
taxation under FIRPTA. Because, however, the Company's outstanding shares of
Common Stock are publicly traded, no assurance can be given that the Company
will in fact continue to be a "domestically-controlled REIT" in the future.
Moreover, notwithstanding the foregoing,
31
<PAGE>
gain from the sale or other disposition of Shares not otherwise subject to
FIRPTA will still be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and either has a "tax home"
in the United States or maintains an office or other fixed place of business
within the United States to which such gain is attributable. In such case, the
nonresident alien individual would be subject to a 30% U.S. withholding tax on
the amount of such individual's capital gains (unless an applicable income tax
treaty provides otherwise).
If the Company does not qualify as, or ceases to be, a
"domestically-controlled REIT," gain arising from the sale or other disposition
by a Non-U.S. Stockholder of Shares would not be subject to United States
federal income taxation under FIRPTA as a sale of a "United States real property
interest" if (i) the Shares are "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (E.G., the New York
Stock Exchange on which the Common Stock is traded) and (ii) such Non-U.S.
Stockholder owned 5% or less of the total outstanding shares of the class of
stock represented by the Shares throughout the five-year period ending on the
date of the sale or other disposition. If gain on the sale or other disposition
of Shares were subject to taxation under FIRPTA, the Non-U.S. Stockholder would
be subject to regular U.S. federal income tax with respect to such gain in the
same manner as a U.S. Stockholder (as well as to any applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of foreign corporations), and the purchaser of the stock would be required
to withhold and remit to the IRS 10% of the gross purchase price.
BACKUP WITHHOLDING AND INFORMATION REPORTING. U.S. federal income tax
backup withholding (which generally is a withholding tax imposed at the rate of
31% on certain payments to persons who fail to furnish certain tax information
under the United States information reporting requirements) and information
reporting generally will not apply to distributions paid to Non-U.S.
Stockholders outside the United States that are treated as (i) dividends subject
to the 30% (or reduced treaty rate) withholding tax discussed above, (ii)
capital gain dividends, or (iii) distributions attributable to gain from the
sale or exchange by the Company of United States real property interests. Under
the newly issued Treasury Regulations referred to above, certain Non-U.S.
Stockholders who are not currently subject to backup withholding on dividend
payments will have to certify as to their non-U.S. status to avoid backup
withholding on dividends paid after December 31, 1999.
If a Non-U.S. Stockholder sells or otherwise disposes of Shares to or though
a U.S. office of a broker, the broker is required to file an information return
and is required to apply backup withholding at the rate of 31% unless the
Non-U.S. Stockholder has provided the broker with a certification, under
penalties of perjury, as to its non-U.S. status or has otherwise established its
entitlement to an exemption from backup withholding. If payment of the proceeds
from a sale or other disposition of Shares by a Non-U.S. Stockholder is made to
or through an office of a broker outside the United States, the broker generally
will not be required to apply backup withholding or file information returns,
except as provided below. Under the Treasury Regulations currently in effect,
information reporting (but not backup withholding) is required with respect to a
payment of proceeds from the sale or other disposition of Shares to or through a
foreign office of a broker that (a) is a United States person, (b) is a foreign
person that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business within the United States, or (c) is a "controlled
foreign corporation" (generally, a foreign corporation controlled by U.S.
Stockholders) for U.S. federal income tax purposes, unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Stockholder
(and the broker has no actual knowledge to the contrary) and certain other
conditions are met, or the stockholder otherwise establishes an exemption.
The newly issued Treasury Regulations, which will become effective for
payments made after December 31, 1999, expand the categories of brokers that
will be required to comply with the information reporting requirements with
respect to the payment of proceeds from the sale or other disposition of Shares
effected at an office outside the United States. As a result, information
reporting may apply to
32
<PAGE>
certain payments of proceeds from the sale or other disposition of Shares made
after December 31, 1999 to or through foreign offices of brokers that were
previously exempt. Under the new Treasury Regulations, however, backup
withholding will not be required with respect to the payment of proceeds from
the sale or other disposition of Shares effected at a foreign office of a broker
unless the broker has actual knowledge that the payee is not a Non-U.S.
Stockholder. Prospective Non-U.S. Stockholders should consult their own tax
advisors concerning these new Treasury Regulations and the effect of such
Treasury Regulations on their ownership of Shares.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against a
Non-U.S. Stockholder's U.S. federal income tax liability, if any, provided that
certain required information is furnished to the IRS.
ESTATE TAX. Shares owned, or treated as owned, by an individual who is
neither a citizen nor a resident (as specially determined for purposes of the
U.S. federal estate tax) of the United States at the time of death generally
will be includible in such individual's gross estate for U.S. federal estate tax
purposes and thus will be subject to U.S. federal estate tax, subject to certain
credits, at graduated rates of up to 55%, unless an applicable estate tax treaty
provides otherwise.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
The Company holds direct and indirect interests in the Operating
Partnership. The following discussion summarizes certain material federal income
tax considerations applicable solely to the Company's investment in the
Operating Partnership. The discussion does not address state or local tax laws
or any federal tax laws other than income tax laws.
PARTNERSHIP CLASSIFICATION
The Company has not requested, and does not intend to request, a ruling from
the IRS that the Operating Partnership will be classified as a partnership for
federal income tax purposes. Instead, Jones, Day, Reavis & Pogue is of the
opinion, based upon certain factual assumptions and representations made by the
Company as the general partner of the Operating Partnership, that the Operating
Partnership has been and will continue to be treated as a partnership for
federal income tax purposes and not as an association taxable as a corporation
or a publicly traded partnership. Unlike an IRS ruling, however, an opinion of
counsel is not binding on the IRS, and no assurance can be given that the IRS
will not challenge the status of the Operating Partnership as a partnership for
federal income tax purposes.
If for any reason the Operating Partnership were taxable as a corporation
rather than a partnership for federal income tax purposes, the character of the
Company's assets and items of gross income would change, and, as a result, the
Company would most likely be unable to satisfy the gross income and asset tests,
which would thus prevent the Company from qualifying as a REIT. See
"--Requirements for Qualification--Gross Income Tests," "--Requirements for
Qualification--Asset Tests" and "--Failure to Qualify." In addition, any change
in the status of the Operating Partnership for federal income tax purposes might
be treated as a taxable event, in which case the Company could incur a tax
liability without any related cash distribution from the Operating Partnership.
Further, if the Operating Partnership were to be treated as an association
taxable as a corporation, items of income, gain, deduction and credit of the
Operating Partnership would not pass through to its partners, including the
Company; instead, the Operating Partnership would be taxable as a corporation,
subject to entity-level taxation on its net income at regular corporate tax
rates. The partners of the Operating Partnership would be treated for federal
income tax purposes as stockholders, with distributions to such partners being
characterized as dividends.
The opinion of Jones, Day, Reavis & Pogue regarding the classification of
the Operating Partnership is based, in part, on Treasury Regulations issued in
final form in December 1996 governing the classification of a business entity as
a partnership or an association taxable as a corporation for federal income tax
purposes (the "Classification Regulations"). The Classification Regulations were
effective as of January 1,
33
<PAGE>
1997, and replaced the former four-factor test used to distinguish partnerships
from corporations for federal income tax purposes. In general, under the
Classification Regulations, a U.S. business entity that has at least two members
and that is not organized under a state or federal statute as a corporation, is
not described under a state statute as a joint-stock company or joint-stock
association and does not meet certain other narrow definitions set forth therein
(an "eligible entity"), may elect to be classified as either a partnership or an
association taxable as a corporation. The Classification Regulations also
provide for a "default" classification for such an eligible entity that applies
unless the entity files a classification election. Under the "default"
classification, such an entity will be classified as a partnership.
The classification of the Operating Partnership is governed entirely by the
Classification Regulations. Although the Operating Partnership was in existence
for state law purposes prior to January 1, 1997, it was not first treated for
federal income tax purposes as an entity separate from the Company until after
that date. Under the Classification Regulations, the Operating Partnership will
constitute an eligible entity and intends to be classified as a partnership. As
an eligible entity, the Operating Partnership will be so classified under the
default classification provisions of the Classification Regulations so long as
it does not file an election to be classified as an association taxable as a
corporation. The Operating Partnership has not filed, and does not in future
intend to file, such an election.
Notwithstanding the classification of a business entity formed as a
partnership under the Classification Regulations, such an entity will
nonetheless be treated as a corporation for federal income tax purposes if it is
a "publicly traded partnership." A publicly traded partnership is generally a
partnership the interests in which are either traded on an established
securities market or readily tradable on a secondary market (or the substantial
equivalent thereof). A publicly traded partnership will be treated as a
corporation for federal income tax purposes unless at least 90% of its gross
income for a taxable year consists of "qualifying income" under Section 7704(d)
of the Code, which generally includes any income that is qualifying income for
purposes of the 95% gross income test applicable to a REIT (the "90% Passive
Income Exception"). See "--Requirements for Qualification--Gross Income Tests."
Treasury Regulations effective for taxable years beginning after December
31, 1995, provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one such safe harbor (the "Private Placement
Exception"), interests in a partnership will not be treated as readily tradable
on a secondary market or the substantial equivalent thereof if (i) all interests
in the partnership were issued in a transaction (or transactions) that was not
required to be registered under the Securities Act, and (ii) the partnership
does not have more than 100 partners at any time during the partnership's
taxable year. In determining the number of partners in a partnership, a person
owning an interest in a flow-through entity (I.E., a partnership, grantor trust
or S corporation) that in turn owns an interest in a partnership will be treated
as a partner in such partnership for purposes of the 100 partner rule only if
(i) substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest in the partnership,
and (ii) a principal purpose of the use of the tiered arrangement is to permit
the partnership to satisfy the 100-partner limitation. Because no interests in
the Operating Partnership have been or are currently traded on an established
securities market and because the Operating Partnership should not be treated as
having more than 100 partners, the Company believes that the Operating
Partnership presently qualifies for the Private Placement Exception. The
Operating Partnership intends to monitor closely its compliance with the Private
Placement Exception to ensure that it remains applicable. Even if, however, the
Operating Partnership were considered to be a publicly traded partnership
because it was deemed to have more than 100 partners, the Operating Partnership
would not be treated as a corporation for federal income tax purposes if it
otherwise qualified for the 90% Passive Income Exception from such treatment.
34
<PAGE>
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
PARTNERS, NOT PARTNERSHIP, SUBJECT TO TAX. A partnership is not a separate
taxable entity for federal income tax purposes. Rather, partners are allocated
and required to include in gross income their proportionate share of the items
of income, gain, loss, deduction and credit of the partnership, without regard
to whether the partners receive any actual distributions from the partnership.
The Company will be required to take into account its allocable share of the
foregoing items of the Operating Partnership for purposes of the various REIT
gross income tests and in the computation of its "REIT taxable income." See
"--Requirements for Qualification--Gross Income Tests."
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of a partnership's taxable income and loss among its
partners, such allocations will be disregarded for federal income tax purposes
under Section 704(b) of the Code if they do not comply with the provisions of
Section 704(b) and the Treasury Regulations promulgated thereunder. If an
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. The allocations of taxable income and loss contained
in the Partnership Agreement are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Code, income, gain, loss, and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for federal income tax purposes in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at such time. Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership was
formed by way of contributions of appreciated property (including certain of the
Properties). Consequently the Partnership Agreement requires allocations of
income, gain, loss, and deduction attributable to such contributed properties to
be made in a manner that is consistent with Section 704(c) of the Code.
In general, Section 704(c) of the Code will cause the Company and other
limited partners of the Operating Partnership contributing properties or other
assets to the Operating Partnership with fair market values in excess of their
adjusted tax bases for federal income tax purposes to be allocated solely for
tax purposes lower amounts of annual depreciation deductions and increased
taxable income and gain on the sale of those properties or other assets than
would ordinarily be the case for economic or book purposes. These allocations
may cause the Company to recognize taxable income in excess of cash proceeds,
which might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "--Requirements for Qualification--Annual
Distribution Requirements."
The foregoing principles may also affect the calculation of the Company's
earnings and profits for purposes of determining the portion of the Company's
distributions that is taxable as a dividend. See "-- Taxation of Taxable U.S.
Stockholders." The application of these rules over time may result in a higher
portion of the Company's distributions being taxed as dividends than would have
been the case had the Operating Partnership purchased the contributed Properties
for cash.
TAX BASIS IN PARTNERSHIP INTEREST. The Company's adjusted tax basis in its
partnership interest in the Operating Partnership generally (i) will be equal to
the amount of cash and the adjusted tax basis of any other property contributed
to the Operating Partnership by the Company, (ii) will be increased by (A) the
Company's allocable share of the Operating Partnership's taxable income and (B)
the Company's allocable
35
<PAGE>
share of certain indebtedness of the Operating Partnership, and (iii) will be
reduced, but not below zero, by (A) the Company's allocable share of the
Operating Partnership's losses and (B) the amount of cash and the adjusted tax
basis of any other property distributed by the Operating Partnership to the
Company, including any constructive cash distributions resulting from a
reduction in the Company's allocable share of indebtedness of the Operating
Partnership.
If the Company's allocable share of the Operating Partnership's losses
exceeds the adjusted tax basis of the Company's partnership interest in the
Operating Partnership, the recognition of such excess loss for federal income
tax purposes will be deferred until such time and to the extent that the Company
has adjusted tax basis in its interest in the Operating Partnership. To the
extent that distributions made by the Operating Partnership to the Company, or
any decrease in the Company's share of indebtedness of the Operating Partnership
(each such decrease being considered a constructive cash distribution to the
Company), would exceed the Company's adjusted tax basis, such excess
distributions (including such constructive distributions) would constitute
taxable income to the Company, which normally would be characterized as capital
gain.
OTHER TAX CONSIDERATIONS
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX
CONSEQUENCES. Prospective holders of Securities should recognize that the
present federal income tax treatment of the Company may be modified by future
legislative, judicial or administrative actions or decisions at any time, which
may or may not be retroactive in effect. As a result, any such action or
decision could affect investments and commitments previously made. The rules
dealing with federal income taxation are constantly under review by persons
involved in the legislative process and by the IRS and the Treasury Department,
resulting in frequent statutory changes as well as the promulgation of new, or
revisions to existing, Treasury Regulations and revised interpretations of
established concepts. No prediction can be made as to the likelihood of the
passage of any new tax legislation or other provisions that could either
directly or indirectly affect the Company or holders of Securities. Accordingly,
it is always possible that revisions in federal income tax laws and
interpretations thereof could adversely affect the tax consequences of an
investment in Securities.
On February 2, 1998, the Treasury Department released the "General
Explanations of the Clinton Administration's Revenue Proposals for FY 1999" as
part of President Clinton's Budget Proposal for Fiscal Year 1999. Three of the
tax measures contained in the proposals would affect the taxation of REITs. The
first proposed change would limit the grandfathered status of existing "stapled"
or "paired-share" REITs. The second proposed change would restrict the ability
of a REIT to engage in impermissible active business activities indirectly
through a preferred stock subsidiary by prohibiting REITs from owning more than
10%, determined by voting power or value, of the outstanding stock of any single
issuer. Under current law, the percentage limitation is measured solely by
reference to voting power, without regard to value. The third proposed change
would affect closely held REITs by providing that no person (including a
corporation) may own more than 50%, determined by voting power or value, of the
outstanding shares of stock of a REIT. If enacted, the first proposed change,
which has already been incorporated in a revenue bill that has been introduced
in Congress, would not affect the Company because it is not a "stapled" REIT.
The second and third proposed changes, if enacted in the form proposed, would
not have a material adverse effect on the Company's financial condition, results
of operations or business prospects.
STATE AND LOCAL TAXES. The Company, the Operating Partnership and holders
of Securities may be subject to state or local taxation in various state or
local jurisdictions, including those in which they transact business or reside.
The state and local tax treatment of the Company, the Operating Partnership and
holders of Securities may not conform to the federal income consequences
discussed above. Consequently, prospective holders of Securities should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in Securities.
36
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell Securities to or through underwriters for public offer
and sale by them, and also may sell Common Stock offered hereby to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell
Securities upon terms and conditions set forth in the applicable Prospectus
Supplement. In connection with the sale of the Securities, underwriters may be
deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of the Securities for whom they may act as agent. Underwriters may
sell Securities to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions or commissions from the underwriters or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Securities may be deemed to
be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements to be entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant to
delayed delivery contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate principal amount of Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Securities covered by its
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United Sates to which such institution is subject and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for the Company in the ordinary course
of business.
37
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Jones, Day,
Reavis & Pogue, Chicago, Illinois, and certain matters of Maryland law,
including the validity of the Securities offered hereby, will be passed upon for
the Company by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. The
validity of any Securities issued hereunder may be passed upon for any
underwriters by the counsel named in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
the statements of revenues and certain expenses of TRI-ATRIA Office Building and
777 Eisenhower Plaza for the year ended December 31, 1996 appearing in the
Company's Current Report on Form 8-K/A dated February 6, 1998, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon included therein and incorporated herein by reference. Such consolidated
financial statements and statements of revenues and certain expenses are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY PERSON DEEMED TO BE AN UNDERWRITER
WITHIN THE MEANING OF THE SECURITIES ACT. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO SOME IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
The Company.................................... 3
Risk Factors................................... 3
Use of Proceeds................................ 12
Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends................. 12
Description of Capital Stock................... 13
Federal Income Tax Considerations.............. 16
Plan of Distribution........................... 37
Legal Matters.................................. 38
Experts........................................ 38
</TABLE>
$300,000,000
[LOGO]
GREAT LAKES REIT, INC.
PREFERRED STOCK
COMMON STOCK
---------------------
PROSPECTUS
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the
Company in connection with the issuance and distribution of the Securities being
registered hereby, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission registration
fee............................................. $ 88,500
Printing expenses................................. 100,000*
Accounting fees and expenses...................... 50,000*
Legal fees and expenses........................... 250,000*
Transfer Agent fees............................... 20,000*
Miscellaneous expenses............................ 241,500*
--------------
Total........................................... $ 750,000*
--------------
--------------
</TABLE>
- ------------------------
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporation Law, as amended (the "MGCL"), permits a
Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders
for money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The charter of the Company (the "Charter") contains such a
provision which eliminates such liability except to the extent required by the
MGCL.
The Charter obligates the Company to indemnify the directors and officers
(and former directors and officers) of the Company to the fullest extent
permitted by the MGCL. The bylaws of the Company (the "Bylaws") obligate it, 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
(a) any present or former director or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a director of the Company and at the request of the Company, serves or has
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service in
that capacity. The Charter and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors 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 (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) 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
II-1
<PAGE>
not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In addition, the MGCL requires the Company, as a condition to
advancing expenses, to obtain (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and (b)
a written statement by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met.
The Company has director and officer liability insurance under which each of
the Company's directors and officers is insured against certain liabilities.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement (for Common Stock).
*1.2 Form of Underwriting Agreement (for Preferred Stock).
4.1 Articles of Amendment and Restatement of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1997).
4.2 Amended and restated bylaws of the Company dated September 11, 1997
(incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3, as amended, Commission File No. 333-40129).
4.3 Registration Rights Agreement, dated as of August 20, 1996, by and among the
Company, Fortis Benefits Insurance Company, Morgan Stanley Institutional
Fund, Inc. - U.S. Real Estate Portfolio, Morgan Stanley SICAV Subsidiary
SA, Wellsford Karpf Zarrilli Ventures, L.L.C., Logan, Inc. and Pension
Trust Account No. 104972 Held by Bankers Trust Company as Trustee
(incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K dated August 28, 1996).
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding the validity of
the securities being registered.
8.1 Tax Opinion of Jones, Day, Reavis & Pogue.
12.1 Statement Regarding Computation of Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in their opinion
filed as Exhibit 5.1).
23.3 Consent of Jones, Day, Reavis & Pogue (included in their opinion filed as
Exhibit 8.1).
24.1 Power of Attorney.
</TABLE>
- ------------------------
* To be filed by amendment or on Form 8-K.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(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-2
<PAGE>
(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 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(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 registration statement is on Form S-3, Form S-8 or Form F-3, and 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
Commission by the registrant pursuant to Section 13 or 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 which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 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 the registration statement 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, 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 director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, 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 Chicago, State of Illinois on the 3rd day of April, 1998.
GREAT LAKES REIT, INC.
By: /s/ Richard A. May
-------------------------------------
Richard A. May
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
indicated and on the 3rd day of April, 1998.
SIGNATURE TITLE
- ----------------------------------- -----------------------------------
/s/ Richard A. May Chairman of the Board of Directors
- ----------------------------------- and Chief Executive Officer
Richard A. May (Principal Executive Officer)
/s/ Richard L. Rasley Executive Vice President,
- ----------------------------------- Secretary, Co-General Counsel and
Richard L. Rasley Director
Senior Vice President--Finance,
/s/ James Hicks Chief Financial Officer and
- ----------------------------------- Treasurer (Principal Financial
James Hicks Officer and Principal Accounting
Officer)
*
- ----------------------------------- Director
James J. Brinkerhoff
*
- ----------------------------------- Director
Daniel E. Josephs
*
- ----------------------------------- Director
Edward Lowenthal
*
- ----------------------------------- Director
Donald E. Phillips
*
- ----------------------------------- Director
Walter H. Teninga
Richard L. Rasley, by signing his name hereto, does hereby sign and execute
this Registration Statement on behalf of each of the above-named Directors of
Great Lakes REIT, Inc. pursuant to powers of attorney executed by each of such
Directors and filed with the Securities and Exchange Commission as an exhibit to
this Registration Statement.
*By /s/ Richard L. Rasley
- ----------------------------------- April 3, 1998
Richard L. Rasley
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement (for Common Stock).
*1.2 Form of Underwriting Agreement (for Preferred Stock).
4.1 Articles of Amendment and Restatement of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1997).
4.2 Amended and restated bylaws of the Company dated September 11, 1997
(incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3, as amended, Commission File No. 333-40129).
4.3 Registration Rights Agreement, dated as of August 20, 1996, by and among the
Company, Fortis Benefits Insurance Company, Morgan Stanley Institutional
Fund, Inc.-U.S. Real Estate Portfolio, Morgan Stanley SICAV Subsidiary SA,
Wellsford Karpf Zarrilli Ventures, L.L.C., Logan, Inc. and Pension Trust
Account No. 104972 Held by Bankers Trust Company as Trustee (incorporated by
reference to Exhibit 2 to the Company's Current Report on Form 8-K dated
August 28, 1996).
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding the validity of
the securities being registered.
8.1 Tax Opinion of Jones, Day, Reavis & Pogue.
12.1 Statement Regarding Computation of Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in their opinion
filed as Exhibit 5.1).
23.3 Consent of Jones, Day, Reavis & Pogue (included in their opinion filed as
Exhibit 8.1).
24.1 Power of Attorney.
</TABLE>
- ------------------------
* To be filed by amendment or on Form 8-K.
<PAGE>
Exhibit 5.1
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP]
April 6, 1998
Great Lakes REIT, Inc.
823 Commerce Drive, Suite 300
Oak Brook, Illinois 60523
Re: Registration Statement on Form S-3, filed
with the Securities and Exchange Commission
on April 6, 1998
Ladies and Gentlemen:
We have served as Maryland counsel to Great Lakes REIT, Inc., a Maryland
corporation (the "Company"), in connection with certain matters of Maryland
law arising out of the registration of the following securities of the
Company having an aggregate initial offering price of up to $300,000,000
(collectively, the "Securities"): (a) shares of preferred stock, par value
$.01 per share, of the Company ("Preferred Stock"), and (b) shares of common
stock, par value $.01 per share, of the Company ("Common Stock"), covered by
the above-referenced Registration Statement (the "Registration Statement"),
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "1933 Act").
Unless otherwise defined herein, capitalized terms used herein shall have the
meanings assigned to them in the Registration Statement.
In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (collectively, the "Documents"):
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 2
1. The Registration Statement and the related form of prospectus
included therein in the form in which it was transmitted to the Commission
under the 1933 Act;
2. The charter of the Company (the "Charter"), certified as of a
recent date by the State Department of Assessments and Taxation of Maryland
(the "SDAT");
3. The Bylaws of the Company, certified as of a recent date by its
Secretary;
4. Resolutions adopted by the Board of Directors of the Company (the
"Board") relating to the sale, issuance and registration of the Securities,
certified as of a recent date by the Secretary of the Company (the
"Resolutions");
5. The form of certificate representing a share of Common Stock,
certified as of a recent date by the Secretary of the Company;
6. A certificate of the SDAT as to the good standing of the Company,
dated as of a recent date;
7. A certificate executed by the Secretary of the Company, dated as of
the date hereof; and
8. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed, and so far
as is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf
of such individual or another person, is legally competent to do so.
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 3
2. Each individual executing any of the Documents on behalf of a
party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents
to which such party is a signatory, and such party's obligations set forth
therein are legal, valid and binding.
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all such Documents are genuine. All
public records reviewed or relied upon by us or on our behalf are true and
complete. All statements and information contained in the Documents are true
and complete. There are no oral or written modifications or amendments to
any Document, or waiver of any provision of any Document, by action or
omission of the parties or otherwise.
5. The Securities will not be transferred in violation of any
restriction or limitation contained in the Charter.
6. In accordance with the Resolutions, the issuance of, and certain
terms of, the Securities to be issued by the Company from time to time will
be approved by the Board or a duly authorized committee thereof in accordance
with the Maryland General Corporation Law (with such approval referred to
herein as the "Corporate Proceedings").
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 4
Based upon the foregoing, and subject to the assumptions, limitations
and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing under
and by virtue of the laws of the State of Maryland and is in good standing
with the SDAT.
2. Upon the completion of all Corporate Proceedings relating to the
Securities that are shares of Common Stock (including shares of Common Stock
which may be issued upon conversion of shares of Preferred Stock) (the
"Common Securities") and the due execution, countersignature and delivery of
certificates representing Common Securities and assuming that the sum of (a)
all shares of Common Stock issued as of the date hereof, (b) any shares of
Common Stock issued between the date hereof and the date on which any of the
Common Securities are actually issued (not including any of the Common
Securities), and (c) the Common Securities will not exceed the total number
of shares of Common Stock that the Company is authorized to issue, the Common
Securities are duly authorized and, if and when delivered against payment
therefor in accordance with the Resolutions and the Corporate Proceedings,
will be validly issued, fully paid and nonassessable.
3. Upon the completion of all Corporate Proceedings relating to the
Securities that are shares of Preferred Stock and the due execution,
countersignature and delivery of certificates representing Preferred
Securities and assuming that the sum of (a) all shares of Preferred Stock
issued as of the date hereof, (b) any shares of Preferred Stock issued
between the date hereof and the date on which any of the Preferred Securities
are actually issued (not including any of the Preferred Securities), and (c)
the Preferred Securities will not exceed the total number of shares of
Preferred Stock that the Company is authorized to issue, the Preferred
Securities are duly authorized and, if and when delivered against payment
therefor in accordance with the Resolutions and the Corporate Proceedings,
will be validly issued, fully paid and nonassessable.
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 5
The foregoing opinion is limited to the laws of the State of Maryland
and we do not express any opinion herein concerning any other law. The
opinion expressed herein is subject to the effect of judicial decisions which
may permit the introduction of parol evidence to modify the terms or the
interpretation of agreements. We express no opinion as to compliance with
the securities (or "blue sky") laws of the State of Maryland.
We assume no obligation to supplement this opinion if any applicable law
changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you for submission to the Commission
as an exhibit to the Registration Statement. Accordingly, it may not be
relied upon by, quoted in any manner to, or delivered to any other person or
entity without, in each instance, our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of
persons whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
<PAGE>
Exhibit 8.1
[LETTERHEAD OF JONES, DAY, REAVIS & POGUE]
April 6, 1998
Great Lakes REIT, Inc.
823 Commerce Drive, Suite 300
Oak Brook, Illinois 60523
Ladies and Gentlemen:
We have acted as special counsel to Great Lakes REIT, Inc., a
Maryland corporation (the "Company"), in connection with the Company's
Registration Statement on Form S-3 as filed with the Securities and Exchange
Commission on April 6, 1998 (the "Registration Statement"), and the
Prospectus (the "Prospectus") included therein. In connection with the
Registration Statement, you have requested our opinion regarding certain
federal income tax matters related to the Company. Capitalized terms used
herein and not otherwise defined shall have the meanings given to such terms
in the Prospectus.
In rendering our opinion, we have reviewed and relied upon (i) the
Registration Statement (including the exhibits thereto) and the Prospectus
and the documents incorporated therein by reference; (ii) the Charter of the
Company as amended through the date hereof (the "Charter"); (iii) the Bylaws
of the Company as amended through the date hereof (the "Bylaws"); (iv) the
Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, dated as of December 19, 1996, as amended by the First Amendment
thereto, dated as of February 6, 1997 (the "Partnership Agreement"); and (v)
such other documents, records, instruments and information provided by you as
we have deemed necessary or appropriate for purposes of rendering the
opinions contained herein.
In our review, we have assumed, with your consent, that all of the
representations and statements set forth in the documents we have reviewed
are true and correct, and that all of the obligations imposed by any such
documents on the parties thereto have been and will be performed or satisfied
in accordance with their terms. Moreover, we have assumed, with your
consent, that each of the Company and the Operating Partnership at all times
has been and will continue to be organized and operated in the manner
described in the Charter and the Partnership Agreement, respectively, and in
the Prospectus and the documents incorporated therein by reference. For
purposes of our review, we have also assumed, with your consent, the
genuineness of all signatures on original or certified copies of documents we
have examined, the legal capacity of natural persons, the authority of any
individual or individuals who executed any
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 2
such documents on behalf of any other person, the authenticity of all
documents submitted to us as originals and the conformity to original or
certified copies of all copies submitted to us as certified or reproduction
copies.
For purposes of rendering the opinions stated below, we have also
assumed, with your consent, the accuracy of the representations contained in
an officer's certificate (the "Officer's Certificate"), dated April 6, 1998,
executed by a duly authorized officer of the Company and delivered to us.
The representations contained in the Officer's Certificate generally relate
to the formation, ownership and operation of the Company and the Operating
Partnership. We have further assumed, with your consent, the accuracy of the
statements and descriptions of the Company's and the Operating Partnership's
past and future intended activities as described in the Prospectus and the
documents incorporated therein by reference.
We have assumed for purposes of this opinion, with your consent, that
the Company is duly incorporated, validly existing and in good standing under
the laws of the State of Maryland and that the Operating Partnership is duly
formed, validly existing and in good standing as a limited partnership under the
Delaware Revised Uniform Limited Partnership Act. In addition, if the Internal
Revenue Service (the "IRS") were to challenge successfully certain operational
aspects of the dividend reinvestment and share purchase plan that the Company
maintained prior to January 1, 1996, we have assumed, with your consent, that
the Company would have sufficient funds to pay and would use such funds to pay
in a timely manner "deficiency dividends" (within the meaning of Section 860(f)
of the Internal Revenue Code of 1986, as amended (the "Code")) to its
stockholders, as well as accrued interest with respect to such "deficiency
dividends" to the IRS, in an amount sufficient for the Company to satisfy, for
each relevant taxable year, the annual distribution requirement set forth in
Section 857(a)(1) of the Code applicable to a "real estate investment trust" (a
"REIT") under the Code and the Treasury Regulations promulgated thereunder. The
opinions set forth herein are based on the correctness of such assumptions.
Our opinion is based upon the current provisions of the Code, the
existing, temporary and currently proposed regulations promulgated thereunder by
the Treasury Department, existing administrative rulings and practices of the
IRS, and existing judicial decisions, all of which are subject to change at any
time. It should be noted that future legislative, judicial or administrative
actions, decisions or interpretations, which may or may not be retroactive in
effect, could materially affect the opinions contained herein.
Based upon the foregoing, and subject to the limitations,
qualifications and exceptions set forth herein, we are of the opinion that:
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 3
1. Commencing with the Company's taxable year ended December 31,
1993, and for all taxable periods thereafter, the Company has
been organized and has operated in conformity with the
requirements for qualification and taxation as a REIT under the
Code and the Treasury Regulations promulgated thereunder, and the
current and proposed organization and method of operation of the
Company and the Operating Partnership, as described in the
Prospectus and the documents incorporated therein by reference
and as represented in the Officer's Certificate, will enable the
Company to continue to meet the requirements for qualification
and taxation as a REIT for its current and subsequent taxable
years.
2. The Operating Partnership is properly classified as a partnership
for federal income tax purposes and not as an association taxable
as a corporation or as a "publicly traded partnership" within the
meaning of Section 7704 of the Code.
3. The discussion contained in the Prospectus under the heading
"Federal Income Tax Considerations," to the extent that it
constitutes matters of law or legal conclusions, is correct in
all material respects.
The Company's qualification and taxation as a REIT depend upon the
Company's ability to meet on a continuing basis, through actual annual
operating and other results, the various requirements under the Code and the
Treasury Regulations promulgated thereunder and described in the Prospectus
with regard to, among other things, the sources of its gross income, the
composition of its assets, the level of its distributions to stockholders,
and the diversity of its stock ownership. Jones, Day, Reavis & Pogue will
not review the Company's compliance with these requirements on a continuing
basis. Accordingly, no assurance can be given that the actual results of the
operations of the Company and the Operating Partnership, the sources of their
income, the nature of their assets, the level of the Company's distributions
to its stockholders and the diversity of the Company's stock ownership for
any given taxable year will satisfy the requirements under the Code and the
applicable Treasury Regulations for qualification and taxation as a REIT.
In particular, we would note that, although the Company's Charter and
Bylaws contain certain restrictions on the ownership and transfer of the
Company's capital stock that are intended to prevent concentration of stock
ownership and to assist the Company in satisfying the gross income tests, they
did not ensure that the Company in fact satisfied for each of its taxable years
commencing prior to January 1, 1998 (i) the requirement set forth in Section
856(a)(6) of the Code (as in effect during such taxable years) that the Company
not be closely held within the meaning of Section 856(h) of the Code, and (ii)
the 95% and 75% gross income tests set forth in Section 856(c)(2) and (3) of the
Code, primarily as a result of the fact that the provisions in the
<PAGE>
Great Lakes REIT, Inc.
April 6, 1998
Page 4
Company's Charter, prior to its amendment and restatement on September 23,
1997, did not operate automatically to void any attempted transfer,
acquisition or ownership of shares of the Company's stock that would result
in the disqualification of the Company as a REIT, but instead required the
Company's Board of Directors to take action to prohibit or deem to be null
and void any such attempted transfer, acquisition or ownership of such shares
or to purchase or redeem any such shares. Accordingly, there can be no
assurance that the Board of Directors would have become aware of attempted
transfers, acquisitions or ownership of shares of stock of the Company that
would cause the Company to fail to qualify as a REIT. Moreover, the
restrictions on ownership contained in the Bylaws may not be enforceable
against holders of shares of the Company's stock who acquired their shares
prior to the time that the restrictions were added to the Bylaws in February
1997.
Other than as expressly stated above, we express no opinion on any
issue relating to the Company or the Operating Partnership, or to any investment
therein. An opinion of counsel is not binding on the IRS or the courts and
there can be no assurance that the IRS will not take a contrary position with
respect to some or all of the conclusions set forth above.
The opinions expressed in this letter take into account laws,
interpretations of laws, and facts known to us as of the date of this letter.
We undertake no responsibility to advise you of changes in laws or
interpretations of laws or facts that come to our attention after the date
hereof. Further, the opinions set forth above represent our conclusions
based upon our review of the documents, facts and representations referred to
above. Any material amendments to such documents, changes in any significant
facts or inaccuracy of such representations could affect the opinions
referred to herein. Although we have made limited inquiries and
investigations regarding certain factual matters that we have deemed to be
necessary for purposes of rendering this opinion, we have not independently
investigated all of the facts relevant to the matters discussed in this
opinion.
This opinion is being delivered to you solely for your use in
connection with the Registration Statement. We hereby consent to the filing
of this opinion as an exhibit to the Registration Statement and to the use of
the name of our firm under the captions "Federal Income Tax Considerations"
and "Legal Matters" in the Prospectus filed as a part of the Registration
Statement.
Very truly yours,
/s/ Jones, Day, Reavis & Pogue
<PAGE>
Exhibit 12.1
Great Lakes REIT, Inc.
Computation of Ratios of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Income before gains on sale of properties $410,172 $1,987,787 $3,199,801 $4,709,142 $12,105,426
Interest expense 72,993 911,381 2,296,457 3,778,065 3,778,065
Amortization of deferred financing costs 2,925 33,744 130,500 427,375 818,497
Adjusted income $486,090 $2,932,912 $5,626,758 $8,914,582 $16,701,988
Total fixed charges $ 75,918 $ 945,125 $2,426,957 $4,205,440 $ 4,596,562
Ratio of earnings to fixed charges 6.40 3.10 2.32 2.12 3.63
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Great Lakes REIT,
Inc. for the registration of Common and Preferred Stock in the amount of $300
million and to the incorporation by reference therein of our reports indicated
below filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Financial Statements Date of Auditors' Report
- -------------------- ------------------------
<S> <C>
Consolidated financial statements and schedule of January 29, 1998, except for
Great Lakes REIT, Inc. included in its Annual Report Note 14 as to which the date is
(Form 10-K) for the year ended December 31, 1997 March 13, 1998
Statement of revenue and certain expenses of TRI- December 17, 1997
ATRIA Office Building for the year ended
December 31, 1996 included in the Current Report
(Form 8-K/A) of Great Lakes REIT, Inc. dated
February 6, 1998
Statement of revenue and certain expenses of December 19, 1997
777 Eisenhower Plaza for the year ended
December 31, 1996 included in the Current Report
(Form 8-K/A) of Great Lakes REIT, Inc. dated
February 6, 1998
</TABLE>
Ernst & Young LLP
Chicago, Illinois
April 3, 1998
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
(Regarding Form S-3)
The undersigned, as a director of Great Lakes REIT, Inc. (the
"Company"), does hereby constitute and appoint Richard A. May, Richard L.
Rasley and James Hicks, and each of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Company's Registration Statement on Form S-3 and any
and all amendments (including post-effective amendments) thereto, and to file
the same, with exhibits and schedules thereto, and other documents therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or his substitute,
may lawfully do or cause to be done by virtue hereof.
This power of attorney has been signed below by the following persons as
of the 27th day of March, 1998.
/s/ James J. Brinkerhoff
- --------------------------------
James J. Brinkerhoff
/s/ Daniel E. Josephs
- --------------------------------
Daniel E. Josephs
/s/ Edward Lowenthal
- --------------------------------
Edward Lowenthal
/s/ Donald E. Phillips
- --------------------------------
Donald E. Phillips
/s/ Walter H. Teninga
- --------------------------------
Walter H. Teninga
