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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OHIO 34-1723097
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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34555 CHAGRIN BLVD.
MORELAND HILLS, OHIO 44022
(440) 247-4700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SCOTT A. WOLSTEIN, PRESIDENT
DEVELOPERS DIVERSIFIED REALTY CORPORATION
34555 CHAGRIN BLVD.
MORELAND HILLS, OHIO 44022
(440) 247-4700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ALBERT T. ADAMS, ESQ.
BAKER & HOSTETLER LLP
3200 NATIONAL CITY CENTER
1900 EAST NINTH STREET
CLEVELAND, OHIO 44114
(216) 621-0200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At such
time or times after the effective date of this Registration Statement as the
Selling Shareholder shall determine.
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(b)
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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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Depositary Shares, each representing
1/10 of a share of 8.68% Class D
Preferred Shares, without par
value................................ 1,400,000 $25.00(1) $35,000,000(1) $9,730
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Common Shares, without par value....... 3,236,994 $16.78125(2) $54,320,806(2) $15,101(2)
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(1) The estimated maximum aggregate offering price of the Depositary Shares is
$25 per share, which represents the per share liquidation preference of such
shares.
(2) Estimated pursuant to Rule 457(c) solely for purposes of calculating the
amount of the registration fee, based upon the average of the high and low
prices of the Registrant's Common Shares on January 13, 1999, as reported on
the New York Stock Exchange.
------------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
SUBJECT TO COMPLETION, DATED JANUARY 14, 1999
PROSPECTUS
DEVELOPERS DIVERSIFIED REALTY CORPORATION
3,236,994 COMMON SHARES
1,400,000 DEPOSITARY SHARES, EACH REPRESENTING 1/10 OF A SHARE
OF 8.68% CLASS D CUMULATIVE REDEEMABLE PREFERRED SHARES
We offered and sold a warrant, which is exercisable for either our common
shares or our depositary shares, in a private placement in December 1998 (the
"Private Placement") pursuant to an exemption from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"). In the same
Private Placement, a partnership we control sold 1,400,000 of its Series A
preferred partnership units, which are, under certain circumstances at the
partnership's option, exchangeable for our common shares. The warrant is
exercisable, subject to adjustment, for an aggregate of either 1,618,497 of our
common shares or 1,400,000 of our depositary shares (each representing 1/10 of a
share of 8.68% Class D Preferred Shares, without par value). The partnership
units are exchangeable for, under certain circumstances at the partnership's
option, up to 1,618,497 of our common shares. The selling shareholder identified
in this prospectus is offering and selling up to (i) 3,236,994 common shares
issuable upon the exercise of the warrant or exchange of the partnership units
and (ii) 1,400,000 depositary shares issuable upon the exercise of the warrant
issued in the Private Placement. All proceeds from the sale of the common shares
or depositary shares under this prospectus will go to the selling shareholder
and we will not receive any proceeds from that sale. We have agreed to pay the
expenses of registration and of the sale of the shares.
Our common shares are listed on the New York Stock Exchange under the
symbol "DDR." The last reported sale price of our common shares on the New York
Stock Exchange on January 13, 1999 was $16.75 per share.
Beginning on page 3, we have set forth several "Risk Factors" that you
should consider. You should read the entire prospectus carefully before you make
your investment decision.
The selling shareholder, directly or through agents, dealers or
underwriters designated by it from time to time, may sell all or a portion of
its common shares or depositary shares offered hereby from time to time on terms
to be determined at the time of sale. To the extent required, the specific
number of common or depositary shares to be sold, the respective purchase prices
and public offering prices, the names of any agent, dealer or underwriter, and
any applicable commissions or discounts with respect to a particular offer will
be set forth in an accompanying prospectus supplement. See "Plan of
Distribution."
------------------------
We impose certain restrictions on the ownership of our common and preferred
shares so that we can maintain our qualification as a real estate investment
trust. You should read the information under the heading "Description of Common
Shares -- Restrictions on Ownership" and "Description of Class D Preferred
Shares and Depositary Shares -- Restrictions on Ownership" in this prospectus
for a description of those restrictions.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY , 1999
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The information in this prospectus is not complete and may be changed. The
selling shareholder may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING (OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS
SUPPLEMENT) AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR BY ANY UNDERWRITER, DEALER OR
AGENT. THIS PROSPECTUS AND ANY APPLICABLE PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file with the SEC at the SEC's public reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC also maintains a web site
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC
(http://www.sec.gov). You can inspect reports and other information we file at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
TABLE OF CONTENTS
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PAGE
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Where You Can Find More Information......................... 2
Forward-Looking Information................................. 3
Risk Factors................................................ 3
Incorporation of Certain Documents By Reference............. 5
The Company................................................. 5
Summary Selected Consolidated Financial Data................ 6
Use of Proceeds............................................. 8
Description of Common Shares................................ 8
Description of Class D Preferred Shares and Depositary
Shares.................................................... 10
Certain Anti-Takeover Provisions of Ohio Law................ 16
Federal Income Tax Considerations........................... 16
Ratio of Earnings to Combined Fixed Charges and Preferred
Share Dividends........................................... 28
Selling Shareholder......................................... 28
Plan of Distribution........................................ 29
Experts..................................................... 30
Legal Matters............................................... 30
</TABLE>
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FORWARD-LOOKING INFORMATION
This prospectus and the applicable prospectus supplement include and
incorporate by reference forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. We intend those forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "plan," "estimate," "project" or similar expressions. Our ability
to predict results or the actual effect of future plans or strategies is
inherently uncertain. Actual results could differ materially from those in
forward-looking statements because of, among other reasons, the factors
described under the caption "Risk Factors." We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
RISK FACTORS
Prospective investors should consider carefully, among other factors, the
matters described below before purchasing common shares or depositary shares.
THERE ARE RISKS INHERENT IN OUR REAL ESTATE INVESTMENTS
The Economic Performance and Value of Our Centers Depends on Many
Factors. The economic performance and value of our real estate holdings can be
affected by many factors, including the following:
- changes in national, regional and local economic climates;
- local conditions, such as an oversupply of space or a reduction in demand
for real estate in the area;
- the attractiveness of our properties to tenants;
- competition from other available space; and
- increased operating costs.
Our Real Estate Development Activities May Not Be Profitable. We intend to
continue to actively pursue shopping center development projects, including the
expansion of existing centers. Our current projects generally require the
expenditure of capital and various forms of government and other approvals. We
cannot be sure that we will always receive government and other approvals.
Consequently, we cannot be sure that any projects will be completed or that they
will be profitable.
We Depend on Rental Income from Real Property. Substantially all of our
income is derived from rental income from real property. As a result, our income
and funds for distribution would be negatively affected if a significant number
of our tenants were unable to meet their obligations to us or if we were unable
to lease a significant amount of space in our properties on economically
favorable lease terms. We cannot be sure that any tenant whose lease expires
will renew that lease or that we will be able to re-lease space on economically
advantageous terms.
Our Real Estate Investments Contain Environmental Risks. Under various
federal, state and local laws, ordinances and regulations, we may be considered
an owner or operator of
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real property or may have arranged for the disposal or treatment of hazardous or
toxic substances. As a result, we could become liable for the costs of removal
or remediation of certain hazardous substances released on or in our property.
We could also be liable for other costs that relate to hazardous or toxic
substances (including governmental fines and injuries to persons and property).
We could incur liability whether or not we knew of, or were responsible for, the
presence of the hazardous or toxic substances.
WE RELY ON MAJOR TENANTS
As of October 1, 1998, the annualized base rental revenues from Wal-Mart
and Kmart stores represented 5.8% and 4.2%, respectively, of the aggregate
annualized shopping center base rental revenues from the properties we owned or
had an interest in. These percentages include anchor tenant leases signed as of
October 1, 1998 relating to approximately 320,000 square feet, under which some
of the tenants have not yet occupied the subject space or commenced rental
payments.
We could be adversely affected if either Wal-Mart or Kmart files for
bankruptcy, becomes insolvent or experiences a significant downturn in its
business. In addition, we could be adversely affected if either Wal-Mart or
Kmart does not renew its leases as they expire.
We could also be adversely affected by a downturn in the business of
another major tenant. However, as of October 1, 1998, we received no more than
2.7% of our shopping center base rental revenues from any other single tenant.
OUR ARTICLES OF INCORPORATION CONTAIN LIMITATIONS ON ACQUISITION AND CHANGE IN
CONTROL
Our Articles of Incorporation (the "Articles") prohibit any person from
owning more than 5% of our outstanding common shares. That restriction is likely
to discourage third parties from acquiring control of us without consent of our
Board of Directors even if a change in control was in the best interests of
shareholders.
OUR ORGANIZATIONAL DOCUMENTS DO NOT LIMIT INCURRENCE OF DEBT
We intend to continue to maintain a conservative debt capitalization with a
ratio of debt to total market capitalization (the sum of the aggregate market
value of our common shares, the liquidation preference on any preferred shares
outstanding, and our total indebtedness) of less than 50%. Our organizational
documents do not contain any limitation on the amount or percentage of
indebtedness we may incur. However, the indenture and credit agreements that
govern certain of our outstanding indebtedness do contain limits on our ability
to incur additional indebtedness.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO OUR
SHAREHOLDERS
We intend to operate so as to qualify as a REIT under the Code. We believe
that we have been organized and have operated in a manner which would allow us
to qualify as a REIT under the Code beginning with our taxable year ended
December 31, 1993. However, it is possible that we have been organized or have
operated in a manner which would not allow us to qualify as a REIT, or that our
future operations could cause us to fail to qualify. Qualification as a REIT
requires us to satisfy numerous requirements (some on an annual and quarterly
basis) established under highly technical and complex Code provisions for which
there are only limited judicial and administrative interpretations, and involves
the
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determination of various factual matters and circumstances not entirely within
our control. For example, in order to qualify as a REIT, at least 95% of our
gross income in any year must be derived from qualifying sources, and we must
pay dividends to shareholders aggregating annually at least 95% of our REIT
taxable income (determined without regard to the dividends paid deduction and by
excluding capital gains). Legislation, new regulations, administrative
interpretations or court decisions could significantly change the tax laws with
respect to qualification as a REIT or the federal income tax consequences of
such qualification. However, we are not aware of any pending tax legislation
that would adversely affect our ability to operate as a REIT.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate rates. Unless we are entitled to relief
under certain statutory provisions, we would be disqualified from treatment as a
REIT for the four taxable years following the year during which we lost
qualification. If we lose our REIT status, our net earnings available for
investment or distribution to shareholders would be significantly reduced for
each of the years involved. In addition, we would no longer be required to make
distributions to shareholders. See "Certain Federal Income Tax Considerations
-- Failure to Qualify."
WE PAY SOME TAXES
Even if we qualify as a REIT, we will be subject to certain federal, state
and local taxes on our income and property. See "Certain Federal Income Tax
Considerations -- Other Tax Consequences."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information contained
in documents we file with the SEC, which means that we can disclose important
information to you by referring to those documents. The information incorporated
by reference is an important part of this prospectus. Any statement contained in
a document which is incorporated by reference in this prospectus is
automatically updated and superseded if information contained in this
prospectus, or information that we later file with the SEC, modifies or replaces
this information. We incorporate by reference the following documents we filed
with the SEC:
a. Annual Report on Form 10-K for the fiscal year ended December 31,
1997;
b. The description of the Company's common shares contained in the
Company's Registration Statement on Form 8-A dated January 26, 1993;
c. The description of the Company's depositary shares, each
representing 1/10 of a share of the Company's 8.68% Class D Cumulative
Redeemable Preferred Shares, without par value, contained in the Company's
Registration Statement on Form 8-A dated August 18, 1998;
d. Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1998, June 30, 1998, and September 30, 1998;
e. Current Report on Form 8-K dated February 25, 1998 and filed on
April 7, 1998 (as amended by Amendment No. 1 on Form 8-K/A dated February
25, 1998 and filed on April 23, 1998);
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f. Current Report on Form 8-K dated April 28, 1998 and filed on June
24, 1998;
g. Current Report on Form 8-K dated July 1, 1998 and filed on July 14,
1998;
h. Current Report on Form 8-K dated July 16, 1998 and filed on July
31, 1998;
i. Current Report on Form 8-K dated August 5, 1998 and filed on August
11, 1998; and
j. Current Report on Form 8-K dated September 10, 1998 and filed on
December 8, 1998.
To receive a free copy of any of the documents incorporated by reference in
this prospectus (other than exhibits, unless they are specifically incorporated
by reference in any such documents), call or write Developers Diversified Realty
Corporation, 34555 Chagrin Boulevard, Moreland Hills, Ohio 44022, Attention Joan
U. Allgood, Vice President and General Counsel, telephone number (440) 247-4700,
www.ddrc.com.
You should rely only on the information incorporated by reference or set
forth in this prospectus or the applicable prospectus supplement. We have not
authorized anyone else to provide you with different information. We may only
use this prospectus to sell securities if it is accompanied by a prospectus
supplement. We are only offering these securities in states where the offer is
permitted. You should not assume that the information in this prospectus or the
applicable prospectus supplement is accurate as of any date other than the dates
on the front of these documents.
THE COMPANY
We are a self-administered and self-managed real estate investment trust (a
"REIT") that was formed in November 1992 by the principals of the entities
comprising the Developers Diversified Group ("DDG") to continue the business of
DDG by acquiring, developing, redeveloping, owning, leasing and managing
shopping centers and business centers. We believe that our portfolio of shopping
center properties is one of the largest (measured by amount of total gross
leasable area ("GLA")) currently held by any publicly traded REIT. At October 1,
1998, we owned or had an interest in:
- 159 shopping centers (the "Properties"), encompassing approximately 40.4
million square feet of GLA, of which we own 32.1 million square feet; and
- several parcels of undeveloped land for future development and which are
typically located adjacent to shopping centers we own.
In addition to the properties we own or in which we have an interest, we
manage 22 properties owned by third parties, containing an aggregate of
approximately 2.4 million square feet of GLA.
Our shopping center properties are located in 35 states, principally in the
East and Midwest, with significant concentrations in Ohio, Florida, Utah,
Michigan and North Carolina.
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SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company. The following information should be read in conjunction
with the Consolidated Financial Statements and notes thereto and Management's
Discussion and Analysis, included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and its Quarterly Report on Form 10-Q for
the nine-month period ended September 30, 1998, incorporated by reference in
this prospectus.
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NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
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1998 1997 1997 1996 1995 1994 1993
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(IN THOUSANDS EXCEPT PER SHARE DATA)
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Operating Data:
Revenues from rental
operations................. $165,782 $120,992 $169,040 $130,905 $107,805 $81,974 $54,531
Expenses:
Rental operation
expenses................. 43,023 33,055 47,017 35,123 28,069 22,802 16,863
Depreciation and
amortization............. 31,638 23,509 32,313 25,062 21,865 16,211 10,393
Interest expense........... 41,917 25,460 35,558 29,888 29,595 21,423 15,060
-------- -------- -------- -------- -------- ------- -------
Total.................. 116,578 82,024 114,888 90,073 79,529 60,436 42,316
-------- -------- -------- -------- -------- ------- -------
Income from operations..... 49,204 38,968 54,152 40,832 28,276 21,538 12,215
Equity in net income (loss)
of joint ventures........ 10,323 8,535 10,893 8,710 486 (186) (347)
Minority equity
interests................ (1,628) (787) (1,049) -- -- -- --
Gain (loss) on sales of
real estate.............. (36) 3,526 3,526 -- 300 -- 122
Non-recurring charges
(1)...................... -- -- -- -- -- -- (2,641)
-------- -------- -------- -------- -------- ------- -------
Income before extraordinary
item..................... 57,863 50,242 67,522 49,542 29,062 21,352 9,349
Extraordinary items (2).... (882) -- -- -- (3,557) (216) (731)
-------- -------- -------- -------- -------- ------- -------
Net income................. $ 56,981 $ 50,242 $ 67,522 $ 49,542 $ 25,505 $21,136 $ 8,618
======== ======== ======== ======== ======== ======= =======
Net income applicable to
common shareholders........ $ 43,872 $ 39,592 $ 53,322 $ 35,342 $ 24,250 $21,136 $ 8,618
======== ======== ======== ======== ======== ======= =======
Per share data: (3)
Earnings per share
data -- Basic
Income before extraordinary
item..................... $ .79 $ .78 $ 1.03 $ .84 $ .74 $ .68 $ .41
Net income................. $ .78 $ .78 $ 1.03 $ .84 $ .65 $ .67 $ .38
Weighted average number of
common shares............ 56,500 50,844 51,760 42,294 37,560 31,612 22,766
Earnings per share
data -- Diluted
Income before extraordinary
item..................... $ .76 $ .77 $ 1.03 $ .84 $ .74 $ .67 $ .41
Net income................. $ .75 $ .77 $ 1.03 $ .84 $ .64 $ .67 $ .38
Weighted average number of
common shares............ 57,855 51,872 52,124 42,372 37,818 31,832 22,788
Cash distributions per common
share...................... $ .9825 $ .945 $ 1.26 $ 1.20 $ 1.08 $ .96 $ .71
Company GLA (square feet at end
of period)................... 32,095 24,371 25,190 21,104 19,932 13,773 10,358
Percent of Company GLA
leased....................... 95.9% 96.0% 96.1% 94.8% 95.8% 97.2% 96.5%
Number of shopping centers and
business center properties
including those owned through
joint ventures (at end of
period)...................... 159 121 123 112 113 91 76
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(1) The non-recurring charges relate to costs incurred in connection with the
transfer to the Company of its initial portfolio as part of the Company's
initial public offering (primarily transfer taxes and title insurance
costs).
(2) The extraordinary items relate to debt prepayment fees and write-off of
deferred finance costs.
(3) Effective August 3, 1998, the Company executed a two-for-one stock split for
shareholders of record on July 27, 1998. All per share information and
number of
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common shares outstanding reflects the stock split. Earnings per share data is
reflected for all years utilizing SFAS 128.
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SEPTEMBER 30, DECEMBER 31,
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1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- -------- -------- --------
(IN THOUSANDS)
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Balance Sheet Data:
Real estate, before
accumulated
depreciation.......... $1,857,746 $1,242,178 $1,325,742 $991,647 $848,373 $686,890 $459,049
Real estate, net........ 1,665,984 1,078,625 1,154,005 849,608 728,333 586,839 375,183
Advances to and
investments in joint
ventures.............. 231,835 122,996 136,267 106,796 83,190 8,710 9,078
Total assets............ 1,986,705 1,230,753 1,391,918 975,126 830,060 611,116 395,942
Total debt.............. 975,178 523,569 668,521 478,432 405,726 394,435 184,534
Shareholders' equity.... 840,124 652,440 669,050 469,336 404,161 203,058 197,118
Total Market Equity
(1)................... 1,117,803 1,083,142 1,208,800 954,728 714,443 502,440 455,366
</TABLE>
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(1) Represents number of common shares and operating partnership units
outstanding multiplied by the last reported sale price of the common shares
on the NYSE Composite Tape on the respective dates plus preferred shares at
liquidation value.
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USE OF PROCEEDS
The common or depositary shares offered hereby are being registered for the
account of the selling shareholder identified in this prospectus. See "Selling
Shareholder." All net proceeds from the sale of the common or depositary shares
will go to the selling shareholder. We will not receive any part of the proceeds
from such sales of shares.
DESCRIPTION OF COMMON SHARES
GENERAL
Our Articles authorize us to issue up to 100,000,000 common shares, without
par value. As of December 31, 1998, we had 61,289,186 common shares issued and
outstanding. In addition, we have reserved 2,583,981 common shares for issuance
upon the exercise of options under our employee share option plan (the "Stock
Option Plan"), 3,150,000 common shares for issuance under our Equity-Based Award
Plans and 930,000 common shares for issuance upon the exercise of options
granted to our directors and others. Our common shares are listed on the New
York Stock Exchange under the symbol "DDR." National City Bank, Cleveland, Ohio,
is the transfer agent and registrar of the common shares.
The following description of our common shares sets forth certain of their
general terms and provisions. The following description of our common shares is
in all respects subject to and qualified by reference to the applicable
provisions of the Articles and our Code of Regulations (the "Code of
Regulations").
Holders of our common shares are entitled to receive dividends when, as and
if declared by our Board of Directors, out of funds legally available therefor.
Any payment and declaration of dividends by us on our common shares and
purchases thereof will be subject to certain restrictions if we fail to pay
dividends on any outstanding preferred shares. See "Description of Class D
Preferred Shares and Depositary Shares." If we are liquidated, dissolved or
involved in any winding-up, the holders of our common shares are entitled to
receive ratably any assets remaining after we have fully paid all of our
liabilities, including the preferential amounts we owe with respect to any
preferred shares. Holders of our common shares possess ordinary voting rights,
with each share entitling the holder to one vote. Holders of our common shares
have cumulative voting rights in the election of directors. Holders of our
common shares do not have preemptive rights, which means that they have no right
to acquire any additional common shares that we may subsequently issue.
All of our common shares now outstanding are, and any common shares offered
hereby when issued will be, fully paid and nonassessable.
RESTRICTIONS ON OWNERSHIP
In order for us to qualify as a REIT under the Code, not more than 50% in
value of our outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals during the last half of a taxable year. Individual is
defined in the Code to include certain entities. In addition, our capital stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. Additionally, certain other requirements must be satisfied.
To assure that five or fewer individuals do not own more than 50% in value
of our outstanding common shares, our Articles provide that, subject to certain
exceptions, no holder
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may own, or be deemed to own by virtue of the attribution provisions of the
Code, more than 5% (the "Ownership Limit") of our outstanding common shares.
Shareholders whose ownership exceeded the Ownership Limit immediately after the
IPO may continue to own common shares in excess of the Ownership Limit and may
acquire additional shares through the Stock Option Plan, any dividend
reinvestment plan adopted by us (a "Dividend Reinvestment Plan") or from other
existing shareholders who exceed the Ownership Limit, but may not acquire
additional shares from those sources if the result would be that the five
largest beneficial owners of common shares hold more than 49.6% of our
outstanding common shares. In addition, because rent from a Related Party Tenant
(any tenant 10% of which is owned, directly or constructively, by a REIT,
including an owner of 10% or more of a REIT) is not qualifying rent for purposes
of the gross income tests under the Code, our Articles provide that no
individual or entity may own, or be deemed to own by virtue of the attribution
provisions of the Code (which differ from the attribution provisions applied to
the Ownership Limit), in excess of 9.8% of our outstanding common shares (the
"Related Party Limit"). Our Board of Directors may waive the Ownership Limit and
the Related Party Limit (the Related Party Limit has been waived with respect to
the shareholders who exceeded the Related Party Limit immediately after the IPO)
if an opinion of counsel or a ruling from the Internal Revenue Service is
provided to the Board of Directors to the effect that that ownership will not
then or in the future jeopardize our status as a REIT. As a condition of any
waiver, our Board of Directors will require appropriate representations and
undertakings from the applicant with respect to preserving our REIT status. We
granted the selling shareholder such a waiver for the shares issuable on the
exchange of partnership units and the exercise of the warrant as described on
the cover of this Prospectus.
The preceding restrictions on transferability and ownership of common
shares may not apply if our Board of Directors determines that it is no longer
in our best interests to continue to qualify as a REIT. The Ownership Limit and
the Related Party Limit will not be automatically removed even if the REIT
provisions of the Code are changed to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. In addition to preserving our status as a REIT, the effects of the
Ownership Limit and the Related Party Limit are to prevent any person or small
group of persons from acquiring unilateral control of us. Any change in the
Ownership Limit requires an amendment to the Articles, even if our Board of
Directors determines that maintenance of REIT status is no longer in our best
interests. Amendments to the Articles require the affirmative vote of holders
owning a majority of our outstanding common shares. If it is determined that an
amendment would materially and adversely affect the holders of any class of
preferred shares, that amendment also would require the affirmative vote of
holders of two-thirds of the affected class of preferred shares.
If common shares in excess of the Ownership Limit or the Related Party
Limit, or common shares which would cause the REIT to be beneficially or
constructively owned by less than 100 persons or would result in us being
"closely held" within the meaning of Section 856(h) of the Code, are issued or
transferred to any person, the issuance or transfer will be null and void to the
intended transferee. The intended transferee will not acquire rights to the
shares. Common shares transferred or proposed to be transferred in excess of the
Ownership Limit or the Related Party Limit or which would otherwise jeopardize
our REIT status ("Excess Shares") will be subject to repurchase by us. The
purchase price of any Excess Shares will be equal to the lesser of (i) the price
in the proposed transaction and (ii) the fair market value of the shares
reflected in the last reported sale price for the common shares on the trading
day immediately preceding the date on which we or our designee
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determine to exercise our repurchase right, if the shares are then listed on a
national securities exchange, or such price for the shares on the principal
exchange, if they are then listed on more than one national securities exchange,
or, if the common shares are not then listed on a national securities exchange,
the latest bid quotation for the common shares if they are then traded
over-the-counter, or, if such quotation is not available, the fair market value
as determined by our Board of Directors in good faith, on the last trading day
immediately preceding the day on which notice of the proposed purchase is sent
by us. From and after the date fixed for purchase of Excess Shares by us, the
holder of the Excess Shares will cease to be entitled to distribution, voting
rights and other benefits with respect to the Excess Shares except the right to
payment of the purchase price for the Excess Shares. Any dividend or
distribution paid to a proposed transferee on Excess Shares will be repaid to us
upon demand. If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Shares may be deemed, at our option, to have
acted as an agent on our behalf in acquiring the Excess Shares and to hold the
Excess Shares on our behalf.
All certificates representing our common shares bear a legend referring to
the restrictions described above.
Our Articles provide that all persons who own, directly or by virtue of the
attribution provisions of the Code, more than 5% of our outstanding common
shares must file an affidavit with us containing information specified in the
Articles each year by January 31. In addition, each of those shareholders will
upon demand be required to disclose to us in writing such information with
respect to the direct, indirect and constructive ownership of shares as our
Board of Directors deems necessary for us to comply with the provisions of the
Code as applicable to a REIT or to comply with the requirements of any taxing
authority or governmental agency.
DESCRIPTION OF CLASS D PREFERRED SHARES AND DEPOSITARY SHARES
GENERAL
Our Amended and Restated Articles of Incorporation (the "Articles")
authorize us to issue up to:
(i) 1,500,000 Class A Cumulative Redeemable Preferred Shares, without
par value (the "Class A Preferred Shares");
(ii) 1,500,000 Class B Cumulative Redeemable Preferred Shares, without
par value (the "Class B Preferred Shares");
(iii) 1,500,000 Class C Cumulative Redeemable Preferred Shares,
without par value (the "Class C Preferred Shares");
(iv) 1,500,000 Class D Cumulative Redeemable Preferred Shares, without
par value (the "Class D Preferred Shares");
(v) 1,500,000 Class E Cumulative Redeemable Preferred Shares, without
par value (the "Class E Preferred Shares"); and
(vi) 1,500,000 Noncumulative Redeemable Preferred Shares, without par
value (the "Noncumulative Preferred Shares") (the Class A Preferred Shares,
the Class B Preferred Shares, the Class C Preferred Shares, the Class D
Preferred Shares, the Class E
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Preferred Shares and the Noncumulative Preferred Shares, collectively, the
"Preferred Shares").
Our Board of Directors may issue Preferred Shares by amending our Articles
of Incorporation without any further vote or action by our shareholders. Our
Board may issue Preferred Shares in one or more series and may determine
designations, powers, preferences and rights of the shares of each series of
each class and the qualifications, limitations or restrictions on those shares.
These determinations may include but are not limited to the fixing of the
dividend rate or rates, conversion rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preferences, in each case, if any.
On August 13, 1998, we issued 2,160,000 Depositary Shares, each
representing 1/10 of a share of 8.68% Class D Cumulative Preferred Shares (the
"Depositary Shares"). On November 12, 1998, the Board authorized us to issue an
additional 1,400,000 Depositary Shares to the selling shareholder on exercise of
the warrant. The following summary of the terms and provisions of the Class D
Preferred Shares does not purport to be complete and is completely qualified by
reference to the applicable sections of the Articles, which are incorporated by
reference in this prospectus.
The transfer agent, registrar and dividend disbursing agent for the Class D
Preferred Shares is National City Bank, Cleveland, Ohio.
Each Depositary Share represents a fractional interest in a Class D
Preferred Share. The Class D Preferred Shares are deposited with National City
Bank, Cleveland, Ohio, as Depositary (the "Preferred Shares Depositary"). We are
party to a Deposit Agreement along with the Preferred Shares Depositary and the
holders from time to time of the depositary receipts (the "Depositary Receipts")
issued by the Preferred Shares Depositary thereunder. The Depositary Receipts
will evidence the Depositary Shares. Subject to the terms of the Deposit
Agreement, each holder of a Depositary Receipt evidencing a Depositary Share is
entitled to all the rights and preferences of a fractional interest in a Class D
Preferred Share (including dividend, voting, redemption and liquidation rights
and preferences as described below).
Application will be made to list the Depositary Shares on the New York
Stock Exchange. The Class D Preferred Shares will not be listed and we do not
expect that there will be any trading market for the Class D Preferred Shares
except as represented by the Depositary Shares. See "Plan of Distribution."
DIVIDENDS
Holders of the Class D Preferred Shares will be entitled to receive, when
and as declared by our Board of Directors, out of funds legally available for
the payment of dividends, cumulative preferential cash dividends. These cash
dividends will be paid at the rate of 8.68% of the liquidation preference per
year that is equivalent to $2.17 per year per Depositary Share. The dividends
are cumulative from the date of original issue and will be paid for the previous
quarter on the fifteenth day of each March, June, September and December or, if
not a business day, the next succeeding business day. All dividends payable on
the Class D Preferred Shares for any partial dividend period will be computed on
the basis of a 360-day year consisting of twelve 30-day months. The Preferred
Shares Depositary will distribute dividends received for the Class D Preferred
Shares to record holders of the Depositary Receipts as of the close of business
on the applicable record date. The record date
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will be the first day of the month in which the applicable dividend is to be
paid or on such other date that our Board of Directors chooses. If our Board
chooses another record date for the payment of dividends, that date will not be
more than 30 nor less than 10 days prior to the date the applicable dividend is
paid.
If we are party to any agreement which prohibits us from declaring a
dividend on the Class D Preferred Shares, paying a dividend or setting apart
such dividends for payment by us, our Board may not declare a dividend on the
Class D Preferred Shares, pay such a dividend or set apart such dividends for
payment by us. The same is true if any of our agreements states that declaring,
paying or setting apart a dividend on the Class D Preferred Shares would
constitute a breach of or a default under that agreement. In addition, our Board
cannot declare a dividend on the Class D Preferred Shares, pay a dividend or set
apart dividends for payment by us if that action is restricted or prohibited by
law.
Despite the restrictions described in the previous paragraph, dividends on
the Class D Preferred Shares will accumulate whether or not we have earnings,
whether or not there are funds legally available for the payment of the
dividends and whether or not the dividends are declared. Accumulated but unpaid
dividends on the Class D Preferred Shares will not bear interest. Holders of the
Class D Preferred Shares and the Depositary Shares will not be entitled to any
dividends in excess of full cumulative dividends as described above.
When dividends are not paid in full (or a sum sufficient for full payment
is not set apart) upon the preferred shares of any series and the shares of any
other series of preferred shares ranking on a parity as to dividends with that
series, all dividends declared upon preferred shares of that series and any
other series of preferred shares ranking on a parity as to dividends with those
preferred shares will be declared pro rata so that the amount of dividends
declared per share on the shares of such series of preferred shares will in all
cases bear to each other the same ratio that accrued dividends per share on the
preferred shares of that series (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods for Noncumulative Shares)
and those other series bear to each other. No interest, or sum of money in lieu
of interest, will be payable in respect of any dividend payment or payments on
preferred shares of that series which may be in arrears.
Any dividend payment made on the Class D Preferred Shares will first be
credited against the earliest accumulated but unpaid dividend which remains due
to the holder of any Depositary Shares.
RANKING
The Class D Preferred Shares rank equally with all of our other preferred
shares, whether currently issued or to be issued in the future, for purposes of
the payment of dividends and amounts upon liquidation (subject to dividends on
Noncumulative Shares being noncumulative). The Class D Preferred Shares rank
senior to our common shares.
LIQUIDATION PREFERENCE
If we ever voluntarily liquidate, dissolve or wind up our business, the
holders of the Class D Preferred Shares are entitled to be paid a liquidation
preference of $250 per share (equivalent to $25 per Depositary Share) out of our
assets, plus the amount of any accumulated and unpaid dividends to the date of
payment. The liquidation preference will be paid from amounts legally available
for distribution to our shareholders. The liquidation preference will be paid
before any distribution of assets is made to holders of common shares
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or any other capital shares that rank junior to the Class D Preferred Shares as
to liquidation rights. The holders of Class D Preferred Shares will have no
right or claim to any of our remaining assets after payment of the full amount
of the liquidating distributions to which they are entitled.
If liquidating distributions are made in full to all holders of preferred
shares, our remaining assets will be distributed among the holders of any other
classes or series of capital stock ranking junior to the preferred shares upon
liquidation, dissolution or winding up. The distributions will be made according
to the holders' respective rights and preferences and in each case according to
their respective numbers of shares. Our merger or consolidation into or with any
other corporation, or the sale, lease or conveyance of all or substantially all
of our assets, will not constitute a dissolution, liquidation or winding up.
REDEMPTION
The Class D Preferred Shares are not redeemable prior to August 20, 2003.
On and after August 20, 2003, we may, at our option, redeem the Class D
Preferred Shares after giving at least 30 days but not more than 60 days written
notice. The Preferred Shares Depositary will redeem the number of Depositary
Shares representing the redeemed Class D Preferred Shares after at least 30
days' written notice to the holders of those Depositary Shares. We may redeem
the Class D Preferred Shares, in whole or in part, at any time or from time to
time, for cash at a redemption price of $250 per share (equivalent to $25 per
Depositary Share), plus all accumulated and unpaid dividends on the Class D
Preferred Shares to the date fixed for redemption (except as provided below),
without interest. The redemption price of the Class D Preferred Shares (other
than the portion thereof consisting of accumulated and unpaid dividends) is
payable solely out of the sale proceeds of other of our capital shares, which
may include other series of preferred shares, and from no other source. For
purposes of the preceding sentence, "capital shares" means any equity securities
(including common shares and preferred shares), shares, interests, participation
or other ownership interests (however designated) and any rights (other than
debt securities convertible into or exchangeable for equity securities) or
options to purchase any of the foregoing. Holders of Depositary Receipts
evidencing Depositary Shares to be redeemed must surrender such Depositary
Receipts at the place designated in such notice and will be entitled to the
redemption price payable upon redemption following surrender. If fewer than all
the outstanding Depositary Shares are to be redeemed, the Depositary Shares to
be redeemed will be selected pro rata (as nearly as is practicable without
creating fractional Depositary Shares) or by any other equitable method that we
determine that will not result in the issuance of preferred shares in excess of
our ownership limits.
No Class D Preferred Shares can be redeemed unless:
(i) full cumulative dividends on all Class D Preferred Shares have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past
dividend periods and the then-current dividend period; and
(ii) all outstanding preferred shares are simultaneously redeemed.
This restriction on redemption will not, however, prevent the purchase or
acquisition of Class D Preferred Shares from persons owning 9.8% or more of any
series of our outstanding Class D Preferred Shares pursuant to provisions of the
Articles or pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding Class D Preferred
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Shares. We also may not purchase or otherwise acquire directly or indirectly any
Class D Preferred Shares (except by exchange for our capital shares ranking
junior to the Class D Preferred Shares as to dividends and upon liquidation)
unless full cumulative dividends on all outstanding Class D Preferred Shares
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period.
We will give the Depositary at least 60 days' prior written notice of
redemption of the deposited Class D Preferred Shares. In addition, we will give
notice of redemption by publication in a newspaper of general circulation in the
City of New York, the publication to be made once a week for two successive
weeks commencing at least 30 but no more than 60 days prior to the redemption
date. The Preferred Shares Depositary will mail a similar notice, postage
prepaid, at least 30 but no more than 60 days prior to the redemption date, to
the respective holders of record of the Depositary Shares to be redeemed at
their respective addresses as they appear on the records of the Preferred Shares
Depositary. Any failure by us or the Preferred Shares Depositary to give notice
or any defect in the notice or in the mailing of the notice will not affect the
validity of the proceedings for the redemption of any Class D Preferred Shares
except as to the holder to whom notice was defective or not given. Each notice
must state:
(i) the redemption date;
(ii) the redemption price;
(iii) the number of Class D Preferred Shares and the number of
Depositary Shares to be redeemed;
(iv) the place or places where the Depositary Receipts are to be
surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date.
The notice mailed to a holder must also specify the number of Class D Preferred
Shares to be redeemed if fewer than all the Class D Preferred Shares held by
such holder are to be redeemed.
The holders of Depositary Shares at the close of business on a dividend
record date will be entitled to receive the dividend payable with respect to the
underlying Class D Preferred Shares on the corresponding dividend payment date.
The holder will be so entitled despite the redemption of any of the holder's
shares between the dividend record date and the corresponding date the dividend
is paid or our default in the payment of the dividend due. We will make no
payment or allowance for unpaid dividends, whether or not in arrears, on Class D
Preferred Shares called for redemption except as provided above.
The Class D Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption (except as provided under
"Restrictions on Ownership" below).
We may not purchase or redeem less than all of a class of outstanding
preferred shares except in accordance with a stock purchase offer made to all
holders of record of the class, unless all dividends on that class of
outstanding preferred shares for previous and current dividend periods (except,
in the case of Noncumulative Shares, dividends for the current dividend period
only) have been declared and paid or funds set apart and all accrued sinking
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fund obligations applicable thereto have been complied with. However, we may
repurchase shares of capital stock in order to maintain our qualification as a
REIT under the Code.
If fewer than all of our outstanding shares of any class of preferred
shares are to be redeemed, we will determine the number of shares to be
redeemed. Our Board of Directors will determine the manner for selecting by lot
the shares to be redeemed.
If fewer than all the preferred shares of any series are to be redeemed,
the notice of redemption will also specify the number of preferred shares to be
redeemed from each holder. If notice of redemption of any preferred shares has
been given and if the funds necessary for such redemption have been set aside by
us in trust for the benefit of the holders of the preferred shares to be
redeemed, dividends will cease to accrue on such preferred shares. In addition,
the holders of preferred shares to be redeemed will cease to be shareholders
with respect to such shares and will have no right or claim against us with
respect to such shares as of the redemption date. However, those holders will
have the right to receive the redemption price without interest.
VOTING RIGHTS
Holders of preferred shares will not have any voting rights, except as
described below and as required by law. Each Class D Preferred Share is entitled
to one vote on any matter on which the Class D Preferred Shares may vote. As a
result, each Depositary Share will be entitled to 1/10 of a vote on those
matters.
If and when we are in default in the payment of (or, with respect to
Noncumulative Preferred Shares, have not paid or declared and set aside a sum
sufficient for the payment of) dividends on any series of any class of
outstanding preferred shares, for consecutive dividend payment periods which in
the aggregate contain at least 540 days, all holders of shares of that class,
voting separately as a class, together and combined with all other preferred
shares upon which like voting rights have been conferred and are exercisable,
will be entitled to elect a total of two members of our Board of Directors. This
voting right will be vested and any additional directors will serve until all
accrued and unpaid dividends (but, with respect to Noncumulative Preferred
Shares, only dividends for the then current dividend period) on those
outstanding preferred shares have been paid or declared and a sufficient sum set
aside for payment thereof.
The affirmative vote of the holders of at least two-thirds of a class of
outstanding preferred shares, voting separately as a class, is necessary to
effect either of the following:
(1) The authorization, creation or increase in the authorized number
of any shares, or any security convertible into shares, senior to that
class of preferred shares; or
(2) Any amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Articles or the
Code of Regulations which adversely and materially affects the preferences
or voting or other rights of the holders of that class of preferred shares
which are set forth in the Articles. However, an amendment of the Articles
to authorize, create or change the authorized or outstanding number of a
class of preferred shares or of any shares ranking on a parity with or
junior to that class of preferred shares does not adversely and materially
affect preferences or voting or other rights of the holders of that class
of preferred shares. In addition, amending the Code of Regulations to
change the number or classification of our directors does not adversely or
materially affect preferences or voting rights or other
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rights. Voting must be done in person at a meeting called for one of the
above purposes or in writing by proxy.
Without limiting the provisions described above, under Ohio law, holders of
each class of preferred shares will be entitled to vote as a class on any
amendment to the Articles, whether or not they are entitled to vote thereon by
the Articles, if the amendment would:
(1) increase or decrease the par value of the shares of that class;
(2) change the issued shares of that class into a lesser number of
shares of that class or into the same or different number of shares of
another class;
(3) change or add to the express terms of the shares of the class in
any manner substantially prejudicial to the holders of that class;
(4) change the express terms of any class of issued shares senior to
the voting class in any manner substantially prejudicial to the holders of
shares of the voting class;
(5) authorize shares of another class that are convertible into, or
authorize the conversion of shares of another class into, shares of the
voting class, or authorize the directors to fix or alter conversion rights
of shares of another class that are convertible into shares of the voting
class;
(6) reduce or eliminate our stated capital;
(7) substantially change our purposes; or
(8) change us into a nonprofit corporation.
If, and only to the extent that, (1) a class of preferred shares is issued
in more than one series and (2) Ohio law permits the holders of a series of a
class of capital shares to vote separately as a class, the affirmative vote of
the holders of at least two-thirds of each series of that class of outstanding
preferred shares, voting separately as a class, will be required for any
amendment, alteration or repeal, whether by merger, consolidation or otherwise,
of any of the provisions of the Articles or the Code of Regulations which
adversely and materially affects the preferences or voting or other rights of
the holders of such series as set forth in the Articles. However, the amendment
of the Articles so as to authorize, create or change the authorized or
outstanding number of a class of preferred shares or of any shares ranking equal
to or junior to that class of preferred shares does not adversely and materially
affect the preference or voting or other rights of the holders of such series.
In addition, amendment of the Code of Regulations to change the number or
classification of our directors does not adversely and materially affect the
preference or voting or other rights of the holders of such series.
The preceding voting provisions will not apply if, at or prior to the time
of the action with respect to which a vote would be required, all outstanding
shares of that series of preferred shares have been redeemed or called for
redemption and sufficient funds shall have been deposited in trust to effect
that redemption.
CONVERSION
The Class D Preferred Shares and the Depositary Shares are not convertible
into or exchangeable for any of our other property or securities.
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RESTRICTIONS ON OWNERSHIP
In order for us to qualify as a REIT under the Code, not more than 50% in
value of our outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals during the last half of a taxable year. Individual is
defined in the Code to include certain entities. In addition, our capital stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. We also must satisfy certain other requirements. For more information on
restrictions on ownership, see "Description of Common Shares -- Restrictions on
Ownership."
To assure that five or fewer individuals do not own more than 50% in value
of our outstanding preferred shares, the Articles provide that, subject to
certain exceptions, no one may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.8% (the "Preferred Shares
Ownership Limit") of any series of any class of our outstanding preferred
shares. In addition, because rent from a Related Party Tenant is not qualifying
rent for purposes of the gross income tests under the Code, the Articles provide
that no individual or entity may own, or be deemed to own by virtue of the
attribution provisions of the Code, in excess of 9.8% of our outstanding shares
of any series of any class of preferred shares (the "Preferred Shares Related
Party Limit"). See "Description of Common Shares -- Restrictions on Ownership".
The attribution provisions of the Code applied to Related Party Tenants differ
from the attribution provisions applied to the preferred shares Ownership Limit.
A Related Party Tenant is any tenant of which 10% is owned, directly or
constructively, by a REIT, including an owner of 10% or more of a REIT. Our
Board of Directors may waive the preferred shares Ownership Limit and the
preferred shares Related Party Limit if it obtains such representations and
undertakings from the applicant with respect to preserving our REIT status as
are reasonably necessary to ascertain that such ownership will not jeopardize
our REIT status. We granted the selling shareholder such a waiver for the shares
issuable on the exchange of partnership units and the exercise of the warrant as
described on the cover of this prospectus.
The preceding restrictions on transferability and ownership of preferred
shares may not apply if our Board of Directors determines that it is no longer
in our best interests to attempt to qualify, or to continue to qualify, as a
REIT. Even if the REIT provisions of the Code are changed so as to no longer
contain any ownership concentration limitation or if the ownership concentration
limitation is increased, the Preferred Shares Ownership Limit and the preferred
shares Related Party Limit will not be automatically removed. Any change in the
Preferred Shares Ownership Limit requires an amendment to the Articles, even if
our Board of Directors determines that maintenance of REIT status is no longer
in our best interests. Amendments to our Articles require the affirmative vote
of holders owning a majority of our outstanding common shares. If it is
determined that an amendment would materially and adversely affect the holders
of any class of preferred shares, that amendment would also require the
affirmative vote of holders of two-thirds of the affected class of preferred
shares.
If preferred shares in excess of the Preferred Shares Ownership Limit or
the Preferred Shares Related Party Limit are issued or transferred to any
person, such issuance or transfer will be null and void to the intended
transferee, and the intended transferee will acquire no rights to the shares. In
addition, if an issuance or transfer would cause our shares to be beneficially
or constructively owned by fewer than 100 persons or would result in our being
"closely held" within the meaning of Section 856(h) of the Code, the issuance or
transfer
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will be null and void to the intended transferee, and the intended transferee
will acquire no rights to the shares. Preferred shares transferred or proposed
to be transferred in excess of the preferred shares Ownership Limit or the
preferred shares Related Party Limit or which would otherwise jeopardize our
REIT status will be subject to repurchase by us. The purchase price of such
preferred shares will be equal to the lesser of (i) the price in such proposed
transaction and (ii) the fair market value of such shares reflected in the last
reported sales price for the shares on the trading day immediately preceding the
date on which we or our designee determine to exercise our repurchase right if
the shares are listed on a national securities exchange, or such price for the
shares on the principal exchange if the shares are then listed on more than one
national securities exchange. If the shares are not listed on a national
securities exchange, the purchase price will be equal to the lesser of (i) the
price in such proposed transaction and (ii) the latest bid quotation for the
shares if the shares are then traded over-the-counter, or, if such quotation is
not available, the fair market value as determined by our Board of Directors in
good faith, on the last trading day immediately preceding the day on which
notice of the proposed purchase is sent by us. From and after the date fixed for
our purchase of such preferred shares, the holder will cease to be entitled to
distributions, voting rights and other benefits with respect to such shares
except the right to payment of the purchase price for the shares. Any dividend
or distribution paid to a proposed transferee on such preferred shares must be
repaid to us upon demand. If the foregoing transfer restrictions are determined
to be void or invalid by virtue of any legal decision, statute, rule or
regulation, then the intended transferee of any such preferred shares may be
deemed, at our option, to have acted as our agent in acquiring the preferred
shares and to hold the preferred shares on our behalf.
All certificates for preferred shares will bear a legend referring to the
restrictions described above.
Our Articles provide that all persons who own, directly or by virtue of the
attribution provisions of the Code, more than 5% of the preferred shares must
upon demand disclose to us in writing such information with respect to the
direct, indirect and constructive ownership of shares that our Board of
Directors deems necessary for us to comply with the provisions of the Code as
applicable to a REIT or to comply with the requirements of any taxing authority
or governmental agency.
CERTAIN ANTI-TAKEOVER PROVISIONS OF OHIO LAW
Certain provisions of Ohio law may have the effect of discouraging or
rendering more difficult an unsolicited acquisition of a corporation or its
capital stock to the extent the corporation is subject to those provisions. We
have opted out of one such provision. We remain subject to the provisions
described below.
Chapter 1704 of the Ohio Revised Code prohibits certain transactions,
including mergers, sales of assets, issuances or purchases of securities,
liquidation or dissolution, or reclassifications of the then outstanding shares
of an Ohio corporation with fifty or more shareholders involving, or for the
benefit of, certain holders of shares representing 10% or more of the voting
power of the corporation (any such shareholder, a "10% Shareholder"), unless:
(i) the transaction is approved by the directors before the 10%
Shareholder becomes a 10% Shareholder;
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(ii) the acquisition of 10% of the voting power is approved by the
directors before the 10% Shareholder becomes a 10% Shareholder; or
(iii) the transaction involves a 10% Shareholder who has been a 10%
Shareholder for at least three years and is approved by holders of
two-thirds of our voting power and the holders of a majority of the voting
power not owned by the 10% Shareholder, or certain price and form of
consideration requirements are met.
Chapter 1704 of the Ohio Revised Code may have the effect of deterring
certain potential acquisitions of us which might be beneficial to shareholders.
Section 1701.041 of the Ohio Revised Code regulates certain "control bids"
for corporations in Ohio with fifty or more shareholders that have significant
Ohio contacts and permits the Ohio Division of Securities to suspend a control
bid if certain information is not provided to offerees.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations
regarding the Company and the common stock we are registering is based on
current law, is for general information only and is not tax advice.
The information set forth below, to the extent that it constitutes matters
of law, summaries of legal matters or legal conclusions, is the opinion of Baker
& Hostetler LLP. The tax treatment to holders of common shares will vary
depending on a holder's particular situation and this discussion does not
purport to deal with all aspects of taxation that may be relevant to a holder of
common shares in light of his or her personal investments or tax circumstances,
or to certain types of shareholders subject to special treatment under the
federal income tax laws except to the extent discussed under the headings
"-- Taxation of Tax-Exempt Shareholders" and "-- Taxation of Non-U.S.
Shareholders." Shareholders subject to special treatment include, without
limitation, insurance companies, financial institutions or broker-dealers,
tax-exempt organizations, shareholders holding securities as part of a
conversion transaction, or a hedge or hedging transaction or as a position in a
straddle for tax purposes, foreign corporations or partnerships and persons who
are not citizens or residents of the United States. In addition, the summary
below does not consider the effect of any foreign, state, local or other tax
laws that may be applicable to holders of our common shares.
The information in this section is based on the Code, current, temporary
and proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, current administrative interpretations and practices of the
Internal Revenue Service (the "IRS") (including its practices and policies as
expressed in certain private letter rulings which are not binding on the IRS
except with respect to the particular taxpayers who requested and received such
rulings), and court decisions, all as of the date of this prospectus. Future
legislation, Treasury Regulations, administrative interpretations and practices
and/or court decisions may adversely affect, perhaps retroactively, the tax
considerations described herein. We have not requested, and do not plan to
request, any rulings from the IRS concerning our tax treatment and the
statements in this prospectus are not binding on the IRS or a court. Thus, we
can provide no assurance that these statements will not be challenged by the IRS
or sustained by a court if challenged by the IRS.
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YOU ARE ADVISED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF THE ACQUISITION, OWNERSHIP AND SALE OF OUR COMMON SHARES,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
DISPOSITION, ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. We elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with our taxable year ended December 31, 1993. We believe
we have been organized and have operated in a manner which allows us to qualify
for taxation as a REIT under the Code commencing with our taxable year ended
December 31, 1993. We intend to continue to operate in this manner. However, our
qualification and taxation as a REIT depends upon our ability to meet (through
actual annual operating results, asset diversification, distribution levels and
diversity of stock ownership) the various qualification tests imposed under the
Code. Accordingly, there is no assurance that we have operated or will continue
to operate in a manner so as to qualify or remain qualified as a REIT. See
"-- Failure to Qualify."
The sections of the Code that relate to the qualification and operation as
a REIT are highly technical and complex. The following sets forth the material
aspects of the sections of the Code that govern the federal income tax treatment
of a REIT and its shareholders. This summary is qualified in its entirety by the
applicable Code provisions, relevant rules and regulations promulgated under the
Code, and administrative and judicial interpretations of the Code.
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on our net income that is currently distributed
to our shareholders. This treatment substantially eliminates the "double
taxation" (once at the corporate level when earned and once again at the
shareholder level when distributed) that generally results from investment in a
corporation. However, the Company will be subject to federal income tax as
follows:
First, we will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
Second, we may be subject to the "alternative minimum tax" on our
items of tax preference under certain circumstances.
Third, if we have (a) net income from the sale or other disposition of
"foreclosure property" (defined generally as property we acquired through
foreclosure or after a default on a loan secured by the property or a lease
of the property) which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from
foreclosure property, we will be subject to tax at the highest corporate
rate on this income.
Fourth, we will be subject to a 100% tax on any net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property).
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Fifth, we will be subject to a 100% tax on an amount equal to (a) the
gross income attributable to the greater of the amount by which we fail the
75% or 95% gross income test multiplied by (b) a fraction intended to
reflect our profitability, if we fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but have maintained our
qualification as a REIT because we satisfied certain other requirements.
Sixth, we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed if we fail to
distribute during each calendar year at least the sum of (i) 85% of our
REIT ordinary income for the year, (ii) 95% of our REIT capital gain net
income for the year (other than certain long-term capital gains for which
we make a Capital Gains Designation (defined below) and on which we pay the
tax), and (iii) any undistributed taxable income from prior periods.
Seventh, if we acquire any asset (a "Built-In Gain Asset") from a
corporation which is or has been a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in a transaction in which
the basis of the Built-In Gain Asset in our hands is determined by
reference to the basis of the asset in the hands of the C corporation, and
we subsequently recognize gain on the disposition of the asset during the
ten-year period (the "Recognition Period") beginning on the date on which
we acquired the asset, then we will be subject to tax at the highest
regular corporate tax rate on this gain to the extent of the Built-In Gain
(i.e., the excess of (a) the fair market value of the asset over (b) our
adjusted basis in the asset, in each case determined as of the beginning of
the Recognition Period). The results described in this paragraph with
respect to the recognition of Built-In Gain assume that we will make an
election pursuant to IRS Notice 88-19.
Requirements for Qualification as a REIT. The Code defines a REIT as a
corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) that issues transferable shares or transferable certificates to
evidence its beneficial ownership;
(3) that would be taxable as a domestic corporation, but for Sections
856 through 859 of the Code;
(4) that is not a financial institution or an insurance company within
the meaning of certain provisions of the Code;
(5) that is beneficially owned by 100 or more persons;
(6) not more than 50% in value of the outstanding stock of which is
owned, actually or constructively, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of each
taxable year; and
(7) that meets certain other tests, described below, regarding the
nature of its income and assets and the amount of its distributions.
The Code provides that conditions (1) to (4), inclusive, must be met during
the entire taxable year and that condition (5) must be met during at least 335
days of a taxable year of twelve months, or during a proportionate part of a
taxable year of less than twelve months. Conditions (5) and (6) do not apply
until after the first taxable year for which an election is made to be taxed as
a REIT. For purposes of condition (6), pension funds and certain other
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tax-exempt entities are treated as individuals, subject to a "look-through"
exception with respect to pension funds.
We believe that we have satisfied each of the above conditions. In
addition, our charter provides for restrictions regarding ownership and transfer
of shares. These restrictions are intended to assist us in continuing to satisfy
the share ownership requirements described in (5) and (6) above. These ownership
and transfer restrictions are described in "Description of Capital Stock
-- Restrictions on Ownership and Transfer of Capital Stock." These
restrictions, however, may not ensure that we will, in all cases, be able to
satisfy the share ownership requirements described in (5) and (6) above. If we
fail to satisfy these share ownership requirements, our status as a REIT will
terminate. However, if we comply with the rules contained in applicable Treasury
Regulations that require us to ascertain the actual ownership of our shares and
we do not know, or would not have known through the exercise of reasonable
diligence, that we failed to meet the requirement described in condition (6)
above, we will be treated as having met this requirement. See "-- Failure to
Qualify."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. We have and will continue to have a calendar
taxable year.
Ownership of Interests in Partnerships and Qualified REIT Subsidiaries. In
the case of a REIT which is a partner in a partnership, IRS regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership. Also, the REIT will be deemed to be entitled to the income of the
partnership attributable to its proportionate share. The character of the assets
and gross income of the partnership retains 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. Thus, our proportionate share of the assets
and items of income of partnerships and limited liability companies in which we
own, directly or indirectly through other partnerships or limited liability
companies, less than all of the outstanding ownership interests, are treated as
our assets and items of income for purposes of applying the requirements
described in this prospectus (including the income and asset tests described
below).
The Company owns 100% of the stock of a number of corporate subsidiaries
that are qualified REIT subsidiaries (each, a "QRS") and may acquire stock of
one or more new subsidiaries. A corporation will qualify as a QRS if 100% of its
stock is held by the Company. A QRS will not be treated as a separate
corporation, and all assets, liabilities and items of income, deduction and
credit of a QRS will be treated as assets, liabilities and such items (as the
case may be) of the Company for all purposes of the Code, including the REIT
qualification tests. For this reason, references under "Certain Federal Income
Tax Considerations" to our income and assets shall include the income and assets
of any QRS. A QRS will not be subject to federal income tax, and our ownership
of the voting stock of a QRS will not violate the restrictions against ownership
of securities of any one issuer which constitute more than 10% of such issuer's
voting securities or more than 5% of the value of our total assets, as described
below under " -- Asset Tests."
Income Tests. We must satisfy two gross income requirements annually to
maintain our qualification as a REIT. First, in each taxable year we must derive
directly or indirectly at least 75% of our gross income (excluding gross income
from prohibited transactions) from investments relating to real property or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
each taxable year we must derive at least 95% of our gross income
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(excluding gross income from prohibited transactions) from these real property
investments, dividends, interest and gain from the sale or disposition of stock
or securities (or from any combination of the foregoing). The term "interest"
generally does not include any amount received or accrued (directly or
indirectly) if the determination of the amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales.
Rents we receive will qualify as "rents from real property" in satisfying
the gross income requirements for a REIT described above only if the following
conditions are met:
- The amount of rent must not be based in whole or in part on the income or
profits of any person. However, an amount received or accrued generally
will not be excluded from the term "rents from real property" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales;
- 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
REIT, or an actual or constructive owner of 10% or more of the REIT,
actually or constructively owns 10% or more of the interests in such
tenant (a "Related Party Tenant");
- 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 personal
property will not qualify as "rents from real property"; and
- For rents received to qualify as "rents from real property," the REIT
generally must not operate or manage the property or furnish or render
services to the tenants of the property (subject to a 1% de minimis
exception), other than through an independent contractor from whom the
REIT derives no revenue. The REIT 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.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for the year if we are
entitled to relief under certain provisions of the Code. Generally, we may avail
ourselves of the relief provisions if:
(i) our failure to meet these tests was due to reasonable cause and
not due to willful neglect;
(ii) we attach a schedule of the sources of our income to our federal
income tax return; and
(iii) any incorrect information on the schedule was not due to fraud
with intent to evade tax.
We do not intend to 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 heretofore described), and we do not
intend to rent any 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). We directly perform services under
certain of our leases, but such services are not rendered to the occupant of the
property. Furthermore these services are usual and customary management services
provided by landlords renting space for occupancy in the geographic areas in
which we own property.
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To the extent that the performance of any services provided by us would cause
amounts received from our tenants to be excluded from rents from real property,
we intend to hire independent contractors from whom we drive no revenue to
perform such services.
It is not possible, however, to state whether in all circumstances we would
be entitled to the benefit of these relief provisions. For example, if we fail
to satisfy the gross income tests because nonqualifying income that we
intentionally incur exceeds the limits on nonqualifying income, the IRS could
conclude that our failure to satisfy the tests was not due to reasonable cause.
If these relief provisions do not apply to a particular set of circumstances, we
will not qualify as a REIT. As discussed above in "-- Taxation of the Company
-- General," even if these relief provisions apply, and we retain our status as
a REIT, a tax would be imposed with respect to our excess net income. We may not
always be able to maintain compliance with the gross income tests for REIT
qualification despite our periodic monitoring of our income.
Prohibited Transaction Income. Any gain realized by us on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. 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 surrounding the particular transaction.
Asset Tests. At the close of each quarter of our taxable year, we also must
satisfy three tests relating to the nature and diversification of our assets.
First, at least 75% of the value of our total assets must be represented by real
estate assets, cash, cash items and government securities. For purposes of this
test, real estate assets include stock or debt instruments that are purchased
with the proceeds of a stock offering or a long-term (at least five years)
public debt offering, but only for the one-year period beginning on the date we
receive such proceeds. Second, not more than 25% of our total assets may be
represented by securities, other than those securities includable in the 75%
asset test. Third, of the investments included in the 25% asset class, the value
of any one issuer's securities may not exceed 5% of the value of our total
assets and we may not own more than 10% of any one issuer's outstanding voting
securities.
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If we fail
to satisfy the asset tests because we acquire securities or other property
during a quarter, we can cure this failure by disposing of sufficient
nonqualifying assets within 30 days after the close of that quarter. We believe
we have maintained and intend to continue to maintain adequate records of the
value of our assets to ensure compliance with the asset tests and to take such
other actions within the 30 days after the close of any quarter as may be
required to cure any noncompliance. If we fail to cure noncompliance with the
asset tests within this time period, we would cease to qualify as a REIT.
Annual Distribution Requirements. To maintain our qualification as a REIT,
we are required to distribute dividends (other than capital gain dividends) to
our shareholders in an amount at least equal to the sum of 95% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) and 95% of our net income (after tax), if any, from
foreclosure property, minus the excess of the sum of certain items of noncash
income (i.e., income attributable to leveled stepped rents, original issue
discount on
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purchase money debt, or a like-kind exchange that is later determined to be
taxable) over 5% of "REIT taxable income" as described above.
These distributions must be paid in the taxable year to which they relate,
or in the following taxable year if they are declared before we timely file our
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. Except as provided below, these distributions
are taxable to our shareholders (other than tax-exempt entities, as discussed
below) in the year in which paid. This is so even though these distributions
relate to the prior year for purposes of our 95% distribution requirement. The
amount distributed must not be preferential -- e.g., every shareholder of the
class of stock to which a distribution is made must be treated the same as every
other shareholder of that class, and no class of stock may be treated otherwise
than in accordance with its dividend rights as a class. To the extent that we do
not distribute all of our net capital gain or distribute at least 95%, but less
than 100%, of our "REIT taxable income," as adjusted, we will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates. We believe we
have made and intend to continue to make timely distributions sufficient to
satisfy these annual distribution requirements.
We generally expect that our REIT taxable income will be less than our cash
flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, we anticipate that we will generally
have sufficient cash or liquid assets to enable us to satisfy the distribution
requirements described above. However, from time to time, we may not have
sufficient cash or other liquid assets to meet these distribution requirements
due to timing differences between the actual receipt of income and actual
payment of deductible expenses, and the inclusion of income and deduction of
expenses in arriving at our taxable income. If these timing differences occur,
in order to meet the distribution requirements, we may need to arrange for
short-term, or possibly long-term, borrowings or need to pay dividends in the
form of taxable stock dividends.
Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends. However, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
Furthermore, we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed if we should fail to
distribute during each calendar year (or in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year) at least the sum of
85% of our REIT ordinary income for such year, 95% of our REIT capital gain
income for the year (other than certain long-term capital gains for which we
make a Capital Gains Designation and on which we pay the tax) and any
undistributed taxable income from prior periods. Any REIT taxable income and net
capital gain on which this excise tax is imposed for any year is treated as an
amount distributed during that year for purposes of calculating such tax.
Earnings and Profits Distribution Requirement. In order to qualify as a
REIT, we cannot have at the end of any taxable year any undistributed "earnings
and profits" that are attributable to a "C corporation" taxable year (i.e., a
year in which a corporation is neither a REIT nor an S corporation).
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FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to shareholders in any year in which we fail to qualify
will not be deductible by us and we will not be required to distribute any
amounts to our shareholders. As a result, our failure to qualify as a REIT would
reduce the cash available for distribution by us to our shareholders. In
addition, if we fail to qualify as a REIT, all distributions to shareholders
will be taxable as ordinary income to the extent of our current and accumulated
earnings and profits, and subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which we lost our qualification. It is not possible to state whether
in all circumstances we would be entitled to this statutory relief.
TAX ASPECTS OF JOINT VENTURES
General. We hold certain investments indirectly through partnerships,
limited liability companies, and joint ventures (the "Joint Ventures"). In
general, partnerships and limited liability companies in which we own an
interest are "pass-through" entities which are not subject to federal income
tax. Rather, partners or owners are allocated their proportionate shares of the
items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. We will include in our income our
proportionate share of the foregoing partnership or limited liability company
items for purposes of the various REIT income tests and in the computation of
our REIT taxable income.
Entity Classification. Our interests in the Joint Ventures involve special
tax considerations, including the possibility of a challenge by the IRS of the
status of a Joint Venture as a partnership (as opposed to an association taxable
as a corporation) for federal income tax purposes. If a Joint Venture were
treated as an association, it would be taxable as a corporation and therefore be
subject to an entity-level tax on its income. In such a situation, the character
of our assets and items of gross income would change and preclude us from
satisfying the asset tests and possibly the income tests (see " -- Taxation of
the Company -- Asset Tests" and "-- Income Tests"). This, in turn, would prevent
us from qualifying as a REIT. See "-- Failure to Qualify" for a discussion of
the effect of our failure to meet these tests for a taxable year. In addition, a
change in a Joint Venture's status for tax purposes might be treated as a
taxable event. If so, we might incur a tax liability without any related cash
distributions.
Treasury Regulations that apply for tax periods beginning on or after
January 1, 1997 provide that a domestic business entity not otherwise classified
as a corporation and which has at least two members (an "Eligible Entity") may
elect to be taxed as a partnership for federal income tax purposes. Unless it
elects otherwise, an Eligible Entity in existence prior to January 1, 1997 will
have the same classification for federal income tax purposes that it claimed
under the entity classification Treasury Regulations in effect prior to this
date. In addition, an Eligible Entity which did not exist, or did not claim a
classification, prior to January 1, 1997, will be classified as a partnership
for federal income tax purposes unless it elects otherwise. We believe all of
our Joint Ventures will be classified as partnerships for federal income tax
purposes.
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TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used below, the term "U.S. Shareholder" means a holder of common shares
who (for United States federal income tax purposes):
(i) is a citizen or resident of the United States;
(ii) is a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any state thereof
or in the District of Columbia, unless, in the case of a partnership,
Treasury Regulations provide otherwise;
(iii) is an estate the income of which is subject to United States
federal income taxation regardless of its source; or
(iv) is a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial decisions
of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
Regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to this date that elect to continue to be treated as
United States persons, shall also be considered U.S. Shareholders.
Distributions Generally. As long as we qualify as a REIT, distributions out
of our current or accumulated earnings and profits, other than capital gain
dividends discussed below, will constitute dividends taxable to our taxable U.S.
Shareholders as ordinary income. These distributions will not be eligible for
the dividends-received deduction in the case of U.S. Shareholders that are
corporations. For purposes of determining whether distributions to holders of
common shares are out of current or accumulated earnings and profits, our
earnings and profits will be allocated first to the outstanding preferred shares
(if any) and then to the common shares.
To the extent that we make distributions in excess of our current and
accumulated earnings and profits, these distributions will be treated first as a
tax-free return of capital to each U.S. Shareholder. This treatment will reduce
the adjusted basis which each U.S. Shareholder has in his shares of stock for
tax purposes by the amount of the distribution (but not below zero).
Distributions in excess of a U.S. Shareholder's adjusted basis in his shares
will be taxable as capital gains (provided that the shares have been held as a
capital asset) and will be taxable as long-term capital gain if the shares have
been held for more than one year. Dividends we declare in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any of these months shall be treated as both paid by us and received by the
shareholder on December 31 of that year, provided we actually pay the dividend
on or before January 31 of the following calendar year. Shareholders may not
include in their own income tax returns any of our net operating losses or
capital losses.
Capital Gain Distributions. Distributions that we properly designate as
capital gain dividends (and undistributed amounts for which we properly make a
Capital Gains Designation) will be taxable to taxable U.S. Shareholders as gains
(to the extent that they do not exceed our actual net capital gain for the
taxable year) from the sale or disposition of a capital asset. Depending on the
period of time we have held the assets which produced these gains, and on
certain designations, if any, which we may make, these gains may be taxable to
non-corporate U.S. Shareholders at a 20% or 25% rate. U.S. Shareholders that are
corporations may, however, be required to treat up to 20% of certain capital
gain dividends
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as ordinary income. For a discussion of the manner in which that portion of any
dividends designated as capital gain dividends will be allocated among the
holders of our preferred shares and common shares, see "-- Description of
Capital Stock."
The Taxpayer Relief Act of 1997 (as modified by the Internal Revenue
Service Restructuring and Reform Act of 1998, which was signed into law on July
22, 1998) made certain changes to the Code with respect to taxation of long-term
capital gains earned by taxpayers other than corporations. In general, for sales
made after January 1, 1998, the maximum tax rate for individual taxpayers on net
long-term capital gains (i.e., the excess of net long-term capital gain over net
short-term capital loss) is lowered to 20% for most assets. This 20% rate
applies to sales on or after January 1, 1998 only if the asset was held for more
than 12 months at the time of disposition. Also, so-called "unrecaptured section
1250 gain" is subject to a maximum Federal income tax rate of 25%. "Unrecaptured
section 1250 gain" generally includes the long-term capital gain realized on the
sale of a real property asset described in Section 1250 of the Code, but not in
excess of the amount of depreciation (less the gain, if any, treated as ordinary
income under Code Section 1250) taken on such asset. A rate of 18% instead of
20% will apply after December 31, 2000 for assets held more than five years.
However, the 18% rate applies only to assets acquired after December 31, 2000
unless the taxpayer elects to treat an asset held prior to such date as sold for
market value on January 1, 2001. In the case of individuals whose ordinary
income is taxed at a 15% rate, the 20% rate is reduced to 10% and the 10% rate
for assets held more than five years is reduced to 8%.
Certain aspects of the new legislation are currently unclear, including how
the reduced rates will apply to gains earned by REITs such as us. Until the IRS
issues some guidance, it is unclear whether or how the 20% or 10% rate will
apply to distributions of long-term capital gains by us. The Taxpayer Relief Act
of 1997 gives the IRS authority to apply the Act's new rules on taxation of
capital gains to sales by pass-through entities, including REITs. It is possible
that the IRS could provide in such regulations, as it did in IRS Notice 97-64
(superseded by the Internal Revenue Service Restructuring and Reform Act of
1998), that REIT capital gain dividends must be determined by looking through to
the assets sold by the REIT and treated by REIT shareholders as "long-term
capital gain" and "unrecaptured section 1250 gain" to the extent of such
respective gain realized by the REIT. No regulations have yet been issued. Such
regulations, if and when issued, may have a retroactive effect.
Shareholders should consult their tax advisors with regard to (i) the
application of the changes made by the Taxpayer Relief Act of 1997 and the
Internal Revenue Service Restructuring and Reform Act of 1998 with respect to
taxation of capital gains and capital gain dividends and (ii) state, local and
foreign taxes on capital gains.
Passive Activity Losses and Investment Interest Limitations. Distributions
we make and gain arising from the sale or exchange by a U.S. Shareholder of our
shares will not be treated as passive activity income. As a result, U.S.
Shareholders generally will not be able to apply any "passive losses" against
this income or gain. Distributions we make (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 limitation. Gain arising from the sale or
other disposition of our shares, however, will not be treated as investment
income under certain circumstances.
Retention of Net Long-Term Capital Gains. We may elect to retain, rather
than distribute as a capital gain dividend, our net long-term capital gains. If
we make this election
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<PAGE> 31
a "Capital Gains Designation", we would pay tax on our retained net long-term
capital gains. In addition, to the extent we make a Capital Gains Designation, a
U.S. Shareholder generally would:
(i) include its proportionate share of our undistributed long-term
capital gains in computing its long-term capital gains in its return for
its taxable year in which the last day of our taxable year falls (subject
to certain limitations as to the amount that is includable);
(ii) be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. Shareholder's long-term capital
gains;
(iii) receive a credit or refund for the amount of tax deemed paid by
it;
(iv) increase the adjusted basis of its common shares by the
difference between the amount of includable gains and the tax deemed to
have been paid by it; and
(v) in the case of a U.S. Shareholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital
gains in accordance with Treasury Regulations to be prescribed by the IRS.
DISPOSITIONS OF COMMON SHARES
If you are a U.S. Shareholder and you sell or dispose of your common
shares, you will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between the amount of cash and the fair market
value of any property you receive on the sale or other disposition and your
adjusted basis in the shares for tax purposes. This gain or loss will be capital
if you have held the common shares as a capital asset and will be long-term
capital gain or loss if you have held the common shares for more than one year.
However, if you are a U.S. Shareholder and you recognize loss upon the sale or
other disposition of common shares that you have held for six months or less
(after applying certain holding period rules), the loss you recognize will be
treated as a long-term capital loss, to the extent you received distributions
from us which were required to be treated as long-term capital gains.
BACKUP WITHHOLDING
We report to our U.S. Shareholders and the IRS the amount of dividends paid
during each calendar year, and the amount of any tax withheld. Under the backup
withholding rules, a shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless the holder is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. Shareholder that does not
provide us with his correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Backup withholding is not an additional tax.
Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status. See "-- Taxation of Non-U.S. Shareholders."
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<PAGE> 32
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, dividend income from us will not be
UBTI to a tax-exempt shareholder, so long as the tax-exempt shareholder (except
certain tax-exempt shareholders described below) has not held its shares as
"debt financed property" within the meaning of the Code (generally, common
shares, the acquisition of which was financed through a borrowing by the tax
exempt shareholder) and the shares are not otherwise used in a trade or
business. Similarly, income from the sale of shares will not constitute UBTI
unless a tax-exempt shareholder has held its shares as "debt financed property"
within the meaning of the Code or has used the shares in its trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in our shares will constitute UBTI unless the organization is able to
properly deduct amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its investment in our shares. These
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to certain types of trusts which
hold more than 10% (by value) of the interests in the REIT.
A REIT will not be a "pension held REIT" if it is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception with
respect to certain trusts. We do not expect to be classified as a "pension held
REIT."
TAXATION OF NON-U.S. SHAREHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of common shares by
persons that are not U.S. Shareholders ("Non-U.S. Shareholders"). In general,
Non-U.S. Shareholders may be subject to special tax withholding requirements on
distributions from the Company and with respect to their sale or other
disposition of common shares of the Company, except to the extent reduced or
eliminated by an income tax treaty between the United States and the Non-U.S.
Shareholder's country. A Non-U.S. Shareholder who is a shareholder of record and
is eligible for reduction or elimination of withholding must file an appropriate
form with the Company in order to claim such treatment. Non-U.S. Shareholders
should consult their own tax advisors concerning the federal income tax
consequences to them of an acquisition of common shares, including the federal
income tax treatment of dispositions of interests in, and the receipt of
distributions from, the Company.
OTHER TAX CONSEQUENCES
State and Local Tax Consequences. We may be subject to state or local
taxation or withholding in various state or local jurisdictions, including those
in which we transact business and our shareholders may be subject to state or
local taxation or withholding in various state or local jurisdictions, including
those in which they reside. Our state and local tax treatment may not conform to
the federal income tax consequences discussed above. In
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<PAGE> 33
addition, your state and local tax treatment may not conform to the federal
income tax consequences discussed above. Consequently, you should consult your
own tax advisors regarding the effect of state and local tax laws on an
investment in our shares.
Federal Estate Tax. Shares owned or treated as owned by an individual who
is not a citizen or a "resident" (as specifically defined for U.S. Federal
estate tax purposes) of the United States at the time of death will be
includable in the individual's gross estate for U.S. Federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise. Such
individual's estate may be subject to U.S. Federal estate tax on the property
includable in the estate for U.S. Federal estate tax purposes.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to a prospective purchaser (including a prospective purchaser that is
not an employee benefit plan which is subject to ERISA, but is a tax-qualified
retirement plan or an individual retirement account, individual retirement
annuity, medical savings account or education individual retirement account
(collectively, an "IRA")). This discussion does not purport to deal with all
aspects of ERISA or Section 4975 of the Code or, to the extent not preempted,
state law that may be relevant to particular employee benefit plan shareholders
(including plans subject to Title I of ERISA, other employee benefit plans and
IRAs subject to the prohibited transaction provisions of Section 4975 of the
Code, and governmental plans and church plans that are exempt from ERISA and
Section 4975 of the Code but that may be subject to state law requirements),
depending on their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX QUALIFIED RETIREMENT PLAN,
AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA (WHEN
APPLICABLE), SECTION 4975 OF THE INTERNAL REVENUE CODE, AND (TO THE EXTENT NOT
PRE-EMPTED) STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF COMMON
SHARES BY SUCH PLAN OR IRA. Plans should also consider the entire discussion
under the heading "Certain Federal Income Tax Considerations," because material
contained in that section is potentially relevant to any decision by an employee
benefit plan, tax-qualified retirement plan or IRA to purchase our common
shares.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in shares of
common shares is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require
that:
(i) an ERISA Plan fiduciary make investments that are prudent and in
the best interests of the ERISA Plan's participants and beneficiaries;
(ii) an ERISA Plan fiduciary make investments that are diversified in
order to reduce the risk of large losses, unless it is clearly prudent for
the fiduciary not to do so;
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(iii) an ERISA Plan's investments are authorized under ERISA and the
terms of the governing documents of the ERISA Plan; and
(iv) the fiduciary not cause the ERISA Plan to enter into transactions
that are prohibited under Section 406 of ERISA and not exempt under
Sections 407 or 408 of ERISA.
In determining whether an investment in common shares is prudent for
purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider
all of the facts and circumstances, including whether the investment is
reasonably designed to meet the objectives of the ERISA Plan (or that part of
the ERISA Plan's portfolio for which the fiduciary has investment
responsibility), taking into consideration the risk of loss and opportunity for
gain (or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan (or portfolio), and the liquidity and
current return of the ERISA Plan (or portfolio). A fiduciary should also take
into account the nature of our business, the length of our operating history and
other matters described under "Risk Factors."
The owner of an IRA or the fiduciary of an employee benefit plan not
subject to Title I of ERISA (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are either authorized or
not prohibited by the appropriate governing documents, not prohibited under
Section 4975 of the Code and permitted under applicable state law. Government
plans and church plans are examples of Non-ERISA Plans, as are plans that do not
cover any common law employees.
STATUS OF THE COMPANY UNDER ERISA
A prohibited transaction may occur if our assets are deemed to be assets of
the investing ERISA Plans and disqualified persons directly or indirectly deal
with such assets. In certain circumstances where an ERISA Plan holds an interest
in an entity, the assets of the entity are deemed to be ERISA Plan assets (the
"look-through rule"). Under those circumstances, any person that exercises
authority or control with respect to the management or disposition of the assets
is an ERISA Plan fiduciary. ERISA Plan assets are not defined in ERISA or the
Code, but the United States Department of Labor has issued regulations,
effective March 13, 1987, that outline the circumstances under which an ERISA
Plan's interest in an entity will be subject to the look-through rule.
The Department of Labor regulations apply only to the purchase by an ERISA
Plan of an "equity interest" in an entity, such as stock of a REIT. However, the
Department of Labor regulations provide an exception to the look-through rule
for equity interests that are "publicly-offered securities." The Department of
Labor regulations also provide exceptions to the look-through rule for equity
interests in certain types of entities, including any entity which qualifies as
either a "real estate operating company" (a "REOC") or a "venture capital
operating company" (a "VCOC").
Under the Department of Labor regulations, a "publicly-offered security" is
a security that is:
(i) freely transferable;
(ii) part of a class of securities that is widely-held; and
(iii) either part of a class of securities that is registered under
section 12(b) or 12(g) of the Exchange Act or sold to an ERISA Plan as part
of an offering of securities to the
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<PAGE> 35
public pursuant to an effective registration statement under the Securities
Act so long as the class of securities of which such security is a part is
timely registered under the Exchange Act after the end of the fiscal year
of the issuer during which the offering of such securities to the public
occurred.
Whether a security is considered "freely transferable" depends on the facts
and circumstances of each case. Under the Department of Labor regulations, if
the security is part of an offering in which the minimum investment is $10,000
or less, then any restriction on or prohibition against any transfer or
assignment of such security for the purposes of preventing a termination or
reclassification of the entity for federal or state tax purposes will not
ordinarily prevent the security from being considered freely transferable.
Additionally, limitations or restrictions on the transfer or assignment of a
security which are created or imposed by persons other than the issuer of the
security or persons acting for or on behalf of the issuer will ordinarily not
prevent the security from being considered freely transferable. A class of
securities is considered "widely-held" if it is a class of securities that is
owned by 100 or more investors independent of the issuer and of one another.
Under the Department of Labor regulations, a REOC is defined as an entity
which on certain testing dates has at least 50% of its assets (other than
short-term investments pending long-term commitment or distribution to
investors), valued at cost, invested in real estate which is managed or
developed and with respect to which the entity has the right to substantially
participate directly in the management or development activities and which, in
the ordinary course of its business, is engaged directly in real estate
management or development activities. A VCOC is defined as an entity which on
certain testing dates has at least 50% of its assets (other than short-term
investments pending long-term commitment or distribution to investors), valued
at cost, invested in one or more operating companies with respect to which the
entity has management rights and which, in the ordinary course of its business,
actually exercises its management rights with respect to one or more of the
operating companies in which it invests.
We expect that the common shares offered in this prospectus will meet the
criteria of the publicly-offered security exception to the look-through rule.
The common shares should be considered to be freely transferable, as the minimum
investment will be less than $10,000 and the only stock transfer restrictions
consist of (1) those required under federal tax laws to maintain our status as a
REIT, (2) resale restrictions under applicable federal securities laws with
respect to securities not purchased pursuant to this prospectus, (3) those owned
by our officers, directors and other affiliates, and (4) voluntary restrictions
agreed to by the selling shareholders regarding volume limitations. In addition,
we expect the common shares to be held by 100 or more investors and we expect
that at least 100 or more of these investors will be independent of us and of
one another. Also, the common shares will be part of an offering of securities
to the public pursuant to an effective registration statement under the
Securities Act and the common shares is registered under the Exchange Act.
Finally, even if the publicly-offered security exception did not apply, we have
management rights with respect to the Joint Ventures and conduct our affairs in
such a manner that we will qualify as either a REOC or VCOC under the Department
of Labor regulations. Accordingly, we believe that if an ERISA Plan purchases
the common shares, our assets should not be deemed to be ERISA Plan assets and,
therefore, that any person who exercises authority or control with respect to
our assets should not be an ERISA Plan fiduciary.
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RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
Our ratio of earnings to combined fixed charges and preferred share
dividends for the nine-month period ended September 30, 1998 and the fiscal
years ended December 31, 1997, December 31, 1996, December 31, 1995, December
31, 1994 and December 31, 1993 were as follows:
<TABLE>
<CAPTION>
TIME PERIOD RATIO
----------- -----
<S> <C>
December 31, 1993...................................... 1.65
December 31, 1994...................................... 1.91
December 31, 1995...................................... 1.64
December 31, 1996...................................... 1.65
December 31, 1997...................................... 1.91
Nine-month period ended September 30, 1998............. 1.63
</TABLE>
Earnings have been calculated by adding fixed charges (excluding
capitalized interest and preferred dividends) and the minority interest in the
income of majority owned joint ventures that have fixed charges and subtracting
any undistributed net income of joint ventures accounted for using the equity
method of accounting from income or loss before income taxes and extraordinary
items for purposes of computing these ratios. Fixed charges consist of interest
costs, whether expensed or capitalized, the interest component of rental
expense, and amortization of debt discounts and issue costs, whether expensed or
capitalized.
SELLING SHAREHOLDER
The following table sets forth certain information regarding beneficial
ownership of our common shares and depositary shares by the selling shareholder
as of January 14, 1999, as adjusted to reflect the sale by the selling
shareholder of shares offered by this prospectus. Prior to the sale of the
warrant and the Series A preferred partnership units to the selling shareholder,
the selling shareholder was the beneficial owner of 67,100 of our common shares.
<TABLE>
<CAPTION>
COMMON OR DEPOSITARY COMMON OR
SHARES DEPOSITARY SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING COMMON DEPOSITARY AFTER OFFERING
------------------------- SHARES SHARES TO BE ------------------
HOLDER NUMBER PERCENT TO BE SOLD SOLD NUMBER PERCENT
------ ----------- ----------- ----------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
AEW Targeted Common: Common:
Securities Fund,
LP(1) 3,304,094 5.39% 3,236,994(2) 1,400,000 -- --
Depositary: Depositary:
1,400,000 39%
</TABLE>
- ---------------
(1) AEW Targeted Securities Fund, LP is a partnership of which AEW TSF, L.L.C.
is the General Partner. AEW TSF, Inc., a wholly owned subsidiary of AEW
Capital Management, L.P., is the manager-member of AEW TSF, L.L.C. AEW
Capital Management, Inc. is the general partner of AEW Capital Management,
L.P. As such, AEW TSF, L.L.C., AEW TSF, Inc., AEW Capital Management, L.P.,
and AEW Capital Management, Inc. may be deemed to beneficially own the
Common Shares and Depositary Shares referred to in the table above. In
addition, AEW Capital Management,
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L.P., and AEW Capital Management, Inc. also beneficially own 67,100 of our
common shares.
(2) This includes 1,618,497 of our common shares which the partnership that we
control may elect to give to the selling shareholder as a substitute for
cash in exchange for the Series A preferred partnership units.
PLAN OF DISTRIBUTION
The selling shareholder or any donee or pledgee of the selling shareholder
may sell or distribute the shares offered by this prospectus directly to
purchasers as principal or through one or more underwriters, brokers, dealers or
agents from time to time in one or more transactions. These transactions may
involve crosses or block transactions. The selling shareholder may also sell or
distribute the shares offered herein:
(i) on any exchange or in the over-the-counter market;
(ii) in transactions other than in the over-the-counter market;
(iii) through the writing of put or call options (whether those
options are listed on an options exchange or otherwise) relating to the
shares offered by this prospectus, or the short sales of the offered
shares;
(iv) through the distribution of the shares to its partners, members
or shareholders; or
(v) through any combination of the above.
Any of those transactions may be conducted at market prices prevailing at the
time of sale, at prices related to the prevailing market prices, at varying
prices determined at the time of sale or at negotiated or fixed prices, in each
case as determined by the selling shareholder or by agreement between the
selling shareholder and underwriters, brokers, dealers or agents, or purchasers.
If the selling shareholder effects transactions by selling securities to or
through underwriters, brokers, dealers or agents, those underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling shareholder or commissions from purchasers of
securities for whom it may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The selling
shareholder and any brokers, dealers or agents that participate in the
distribution of the securities may be deemed to be underwriters, and any profit
on the sale of the securities by them and any discounts, concessions or
commissions received by any underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
The selling shareholder may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in short
sales of our common shares in the course of hedging the positions they assume
with the selling shareholder. The selling shareholder may also enter into
options or other transactions with broker-dealers or other financial
institutions of securities offered hereby, which securities the broker-dealers
or other financial institutions may resell pursuant to this prospectus (as
supplemented or amended to reflect the transaction).
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<PAGE> 38
The common shares and depositary shares may be sold in certain states only
through registered or licensed brokers or dealers. In addition, the securities
may not be sold in certain states unless the securities have been registered or
qualified for sale therein or an exemption from registration or qualification is
available and is complied with.
The selling shareholder may also resell all or a portion of the securities
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided it meets the criteria and conforms to the requirements of such Rule.
We will pay all of the costs, expenses and fees incident to the
registration, offering and sale of the securities to the public hereunder other
than commissions, fees and discounts of underwriters, brokers, dealers and
agents. We have agreed to indemnify the selling shareholder and any underwriters
against certain liabilities, including liabilities under the Securities Act. We
will not receive any of the proceeds from the sale of any of the securities by
the selling shareholder.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of Developers Diversified Realty Corporation for
the year ended December 31, 1997, the audited historical financial statements
included on pages F-2 through F-10 of the Company's Current Report on Form 8-K
dated April 28, 1998 , the historical financial statements included on pages F-3
through F-23 of the Company's Current Report on Form 8-K dated February 25, 1998
and the historical financial statements included on pages F-2 through F-7 of the
Company's Current Report on Form 8-K dated November 7, 1997 have been so
incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the preferred shares, depositary shares, and common shares
will be passed upon for us by Baker & Hostetler LLP, Cleveland, Ohio. Albert T.
Adams, one of our directors, is a partner of Baker & Hostetler LLP.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 25,478
NYSE listing fee............................................ $ 11,400
Accounting fees and expenses................................ $ 15,000
Legal fees and expenses (other than Blue Sky)............... $ 50,000
Printing and engraving expenses............................. $ 2,000
Transfer agent's and registrar's fees and expenses.......... $ 5,000
Miscellaneous Expenses...................................... $ 1,122
--------
Total............................................. $110,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Ohio Revised Code (the "Ohio Code") authorizes Ohio corporations to
indemnify officers and directors from liability if the officer or director acted
in good faith and in a manner reasonably believed by the officer or director to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal actions, if the officer or director had no reason to believe his
action was unlawful. In the case of an action by or on behalf of a corporation,
indemnification may not be made (i) if the person seeking indemnification is
adjudged liable for negligence or misconduct, unless the court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnification, or (ii) if liability asserted against such person concerns
certain unlawful distributions. The indemnification provisions of the Ohio Code
require indemnification if a director or officer has been successful on the
merits or otherwise in defense of any action, suit or proceeding that he was a
party to by reason of the fact that he is or was a director or officer of the
corporation. The indemnification authorized under Ohio law is not exclusive and
is in addition to any other rights granted to officers and directors under the
articles of incorporation or code of regulations of the corporation or any
agreement between officers and directors and the corporation. A corporation may
purchase and maintain insurance or furnish similar protection on behalf of any
officer or director against any liability asserted against him and incurred by
him in his capacity, or arising out of the status, as an officer or director,
whether or not the corporation would have the power to indemnify him against
such liability under the Ohio Code.
The Registrant's Code of Regulations provides for the indemnification of
directors and officers of the Registrant to the maximum extent permitted by Ohio
law as authorized by the Board of Directors of the Registrant and for the
advancement of expenses incurred in connection with the defense of any action,
suit or proceeding that he was a party to by reason of the fact that he is or
was a director or officer of the Registrant upon the receipt of an undertaking
to repay such amount unless it is ultimately determined that the director or
officer is entitled to indemnification.
The Registrant maintains a directors' and officers' insurance policy which
insures the directors and officers of the Registrant from claims arising out of
an alleged wrongful act by such persons in their respective capacities as
directors and officers of the Registrant, subject to certain exceptions.
The Registrant has entered into indemnification agreements with its
directors and officers which provide for indemnification to the fullest extent
permitted under Ohio law.
Reference is made to Section 6 of the separate Underwriting Agreements,
copies of which are filed herewith as Exhibits 1(a), 1(b) and 1(c), for
information concerning indemnification arrangements among the Registrant and the
Underwriters.
II-1
<PAGE> 40
ITEM 16. EXHIBITS.
<TABLE>
<C> <S> <C>
4(a) -- Specimen Certificate for Common Shares (1)
4(b) -- Form of Class D Preferred Share Certificate (2)
4(c) -- Form of Depositary Receipt(2)
5 -- Opinion of Baker & Hostetler LLP
8 -- Opinion of Baker & Hostetler LLP regarding tax matters
12 -- Calculation of Ratio of Earnings to Combined Fixed Charges
and Preferred Share Dividends
23(a) -- Consent of PricewaterhouseCoopers LLP
23(b) -- Consent of Baker & Hostetler LLP (included in Exhibit 5)
27 -- Financial Data Schedule (3)
</TABLE>
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (No. 33-78773) filed with the Commission on May 10, 1994.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form 8-A filed with the Commission on August 18, 1998 (File No. 001-11690).
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998 (File No. 001-11690).
ITEM 17. UNDERTAKINGS.
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) 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 this
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement;
provided, however, that subparagraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this 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 herein, 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.
The undersigned Registrant hereby further undertakes that, for the 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 Section
II-2
<PAGE> 41
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
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 provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such 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 such Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE> 42
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cleveland, State of Ohio, on the 12th day of January,
1999.
DEVELOPERS DIVERSIFIED REALTY
CORPORATION
By: /s/ SCOTT A. WOLSTEIN
-------------------------------------
Scott A. Wolstein, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Scott A. Wolstein, James A. Schoff and Albert T.
Adams or any one of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacitates, to sign any and all pre- or
post-effective amendments to this Registration Statement (and any registration
statement filed pursuant to Rule 462(b) under the Securities Act), and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C>
/s/ SCOTT A. WOLSTEIN Chairman of the Board, Chief Executive Officer
- ------------------------------------------------ and Director (Principal Executive Officer)
Scott A. Wolstein
/s/ JAMES A. SCHOFF Vice Chairman of the Board, Chief Investment
- ------------------------------------------------ Officer and Director
James A. Schoff
/s/ WILLIAM H. SCHAFER Vice President and Chief Financial Officer
- ------------------------------------------------ (Principal Financial Officer and Principal
William H. Schafer Accounting Officer)
/s/ WILLIAM N. HULETT III Director
- ------------------------------------------------
William N. Hulett III
Director
- ------------------------------------------------
Ethan Penner
/s/ ALBERT T. ADAMS Director
- ------------------------------------------------
Albert T. Adams
/s/ DEAN S. ADLER Director
- ------------------------------------------------
Dean S. Adler
/s/ BARRY A. SHOLEM Director
- ------------------------------------------------
Barry A. Sholem
</TABLE>
II-4
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ------- ------------------- ------
<C> <S> <C> <C>
4(a) -- Specimen Certificate for Common Shares (1)
4(b) -- Form of Class D Preferred Share Certificate (2)
4(c) -- Form of Depositary Receipt(2)
5 -- Opinion of Baker & Hostetler LLP
8 -- Opinion of Baker & Hostetler LLP regarding tax matters
12 -- Calculation of Ratio of Earnings to Combined Fixed Charges
and Preferred Share Dividends
23(a) -- Consent of PricewaterhouseCoopers LLP
23(b) -- Consent of Baker & Hostetler LLP (included in Exhibit 5)
27 -- Financial Data Schedule (3)
</TABLE>
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (No. 33-78773) filed with the Commission on May 10, 1994.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form 8-A filed with the Commission on August 18, 1998 (File No. 001-11690).
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998 (File No. 001-11690).
<PAGE> 1
Exhibit 5
BAKER & HOSTETLER
1900 EAST NINTH STREET
CLEVELAND, OHIO 44114-3485
January 13, 1999
Developers Diversified Realty Corporation
34555 Chagrin Boulevard
Moreland Hills, Ohio 44022
Gentlemen:
As counsel for Developers Diversified Realty Corporation, an Ohio
corporation (the "Company"), we are furnishing this opinion in connection with
the registration pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), of up to: (i) 3,236,994 common shares, without par value (the
"Common Shares"), of the Company and (ii) 1,400,000 of the Company's depositary
shares, each representing 1/10 of a share of the Company's 8.68% Class D
Cumulative Redeemable Preferred Shares (the "Depositary Shares"), pursuant to a
Registration Statement of the Company on Form S-3 (the "Registration Statement")
filed with the Securities and Exchange Commission (the "Commission"). This
opinion is being provided at your request in connection with the filing of the
Registration Statement.
The Common Shares may be issued by the Company from time to time as
follows: (i) up to 1,618,497 shares may be issued by the Company pursuant to the
exercise or put of a warrant, dated December 9, 1998 (the "Warrant"), that the
Company sold to AEW Targeted Securities Fund L.P. (the "Selling Shareholder")
and (ii) up to 1,618,497 shares may be issued by the Company in exchange for up
to 1,400,000 Series A Preferred Partnership Units (the "Partnership Units") of
DDRC Great Northern Limited Partnership, an Ohio limited partnership, tendered
for exchange. The up to 1,400,000 Depositary Shares may be issued by the Company
from time to time pursuant to the exercise of the Warrant.
In connection with the foregoing, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of those
documents and instruments filed as exhibits to the Registration Statement, the
Amended and Restated Articles of Incorporation of the Company, the Code of
Regulations of the Company, as amended, and such records of the corporate
proceedings of the Company and such other documents as we considered necessary
to render this opinion.
Based on the foregoing, we are of the opinion that when the Common
Shares and Depositary Shares shall have been issued and sold as described in the
Registration Statement, including the Prospectus Supplement relating to those
Common Shares or Depositary Shares, those Common Shares or Depositary Shares
will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus that is a part of the Registration Statement. In
giving that consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission.
Very truly yours,
/s/ Baker & Hostetler LLP
<PAGE> 1
Exhibit 8
BAKER & HOSTETLER LLP
1900 E. Ninth Street
Cleveland, OH 44114-3485
January 13, 1999
Developer's Diversified Realty Corporation
34555 Chagrin Blvd.
Moreland Hills, Ohio 44022
RE: STATUS AS A REIT
Ladies and Gentlemen:
In connection with the registration statement on Form S-3 (the
"Registration Statement") being filed by you on the date hereof with the
Securities and Exchange Commission, you have requested our opinion regarding
whether the Company has been organized in conformity with the requirements for
qualification as a real estate investment trust ("REIT"), and whether its method
of operation has enabled the Company to meet, and will enable it to continue to
meet, the requirements for qualification and taxation as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). This opinion is based on
various assumptions and is conditioned upon certain representations made by the
Company as to factual matters as set forth in the Registration Statement and the
registration statements on Forms S-3 and S-11 previously filed with the
Securities and Exchange Commission (the "Prior Registrations"). In addition, the
Company has provided a representation letter and certificate ("Representation
Letter") certifying, among other items, that it has made a timely election to be
taxed as a REIT under the Code commencing with its initial taxable year ended
December 31, 1993, and that commencing with the first taxable year that the
Company has elected to be taxed as a REIT, the Company has operated and will
continue to operate in accordance with the method of operation described in the
Registration Statement and the Prior Registrations.
Based on such assumptions and representations, it is our
opinion that the Company has qualified as a REIT for its taxable years ended
December 31, 1993 through December 31, 1997, and the Company is organized in
conformity with the requirements for qualification as a REIT and the Company's
method of operation has enabled it and will continue to enable it to meet the
requirements for qualification and taxation as a REIT under the Code, provided
the Company meets and continues to meet the asset composition, source of income,
shareholder diversification, distributions and other requirements of the Code
necessary for the Company to qualify as a REIT.
<PAGE> 2
January 13, 1999
Page 2
This opinion is based on various statutory provisions and
regulations promulgated thereunder, in effect on the date hereof, and the
interpretations of such provisions and regulations by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation
from the factual statements set forth in the Registration Statement, the Prior
Registrations or the Representation Letter may affect the conclusions stated
herein. Moreover, the Company's qualification and taxation as a REIT depends
upon the Company's ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code, the results of which have not been and will not be
reviewed by Baker & Hostetler LLP. Accordingly, no assurance can be given that
the actual results of the Company's operations for any one taxable year will
satisfy such requirements. We wish to point out that our opinion is not binding
on the Internal Revenue Service and, without limiting our opinion, we note that
there can be no assurance that all of the requirements for qualification as a
REIT for any particular taxable year have in fact been met until the return for
such taxable year has been reviewed by the Internal Revenue Service or the
period for such review has expired.
This opinion is limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any state or
locality. We undertake no obligation to update the opinions expressed herein
after the date of this letter. This opinion is rendered to the addressee of this
letter solely for the purpose referred to in the first paragraph hereof, and may
not be relied on or referred to by any other person or entity or by any
addressee for any other purpose without the express written consent of this
Firm. We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement.
Very truly yours,
Baker & Hostetler LLP
<PAGE> 1
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE
DIVIDENDS
(Amounts in Thousands)
<TABLE>
<CAPTION> Nine Months
Year Ended December 31, Ended
-------------------------------------------------- September 30,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Pretax income from continuing operations $9,349 $21,352 $25,505 $49,542 $67,522 $ 56,981
========= ======= ======= ======= ======== ========
Fixed charges:
Interest expense including amortization of deferred costs
and capitalized interest $15,100 $22,496 $32,107 $33,188 $40,598 $50,124
Ground Rent 33% $44 $44 $44 $43 $56 $78
Preferred Dividends -- -- $1,255 $14,200 $14,200 $12,255
Proportionate share of fixed charges of 50% owned joint
ventures accounted for using equity method of accounting -- -- -- $1,750 -- --
------- ------- ------- ------- ------- -------
Total fixed costs $15,144 $22,540 $33,406 $49,181 $54,854 $62,457
------- ------- ------- ------- ------- -------
Capitalized interest during the period ($40) ($1,073) ($2,512) ($3,300) ($3,991) ($6,579)
Preferred Dividends -- -- ($1,255) ($14,200) ($14,200) ($12,255)
Amortization of capitalized interest during the period $133 $135 $170 $255 $498 $373
Majority-owned subsidiary adjustments -- -- -- -- $1,048 $1,628
Equity Company Adjustments $347 $186 ($486) ($8,709) ($10,893) ($10,323)
$8,276 $10,050 $9,581
------- ------- ------- ------- ------- -------
Earnings before income taxes and fixed charges $24,933 $43,140 $54,828 $81,045 $104,888 $101,863
========= ======= ======= ======= ======== ========
Ratio of earnings to Fixed charges $1.65 $1.91 $1.64 $1.65 $1.91 $1.63
========= ======= ======= ======= ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
February 12, 1998, which appears in the Developers Diversified Realty
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997,
our reports dated June 16, 1998 relating to the statements of revenue and
certain expenses of The Family Center Properties and The Sansone Properties,
which appear in the Current Report on Form 8-K of Developers Diversified Realty
Corporation dated April 28, 1998, our report dated April 14, 1998 relating to
the statement of revenue and certain expenses of Belair Centre, which appears in
the Current Report on Form 8-K of Developers Diversified Realty Corporation
dated February 25, 1998, our reports dated January 18, 1998 relating to the
statements of revenue and certain expenses of The Columbus Properties, Sun
Center, Dublin Village Center, Washington Park Plaza and Lennox Town Center,
which appear in the Current Report on Form 8-K of Developers Diversified Realty
Corporation dated February 25, 1998, and our reports dated October 7, 1997 and
July 28, 1997 relating to the statements of revenue and certain expenses of
Spring Creek Centre and Cooks Corner, respectively, which appear in the Current
Report on Form 8-K of Developers Diversified Realty Corporation dated November
7, 1997. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
January 13, 1999
