<PAGE> 1
PROSPECTUS SUPPLEMENT FILED PURSUANT TO RULE 424(B)(2)
(TO PROSPECTUS DATED APRIL 16, 1996) REGISTRATION NO. 333-1710
1,048,059 SHARES
[LOGO]
COMMON STOCK
----------
All of the shares of common stock, $0.01 par value per share (the "Common
Stock"), of Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company") offered hereby (the "Offering") are being sold by
the Company. The Common Stock is listed on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "MHC." On April 23, 1998, the last reported sale
price of the Common Stock on the NYSE was $25.4375 per share.
The Underwriter (as defined herein) has agreed to purchase the shares of
Common Stock from the Company at a price of $24.1020 per share, resulting in
aggregate proceeds to the Company of $25,230,318 after deducting payment of
expenses by the Company estimated to be $30,000, subject to the terms and
conditions set forth in the Underwriting Agreement (as defined herein). The
Underwriter intends to deposit the shares of Common Stock, valued at the last
reported sales price, with the trustee of the Equity Investor Fund Cohen &
Steers Realty Majors Portfolio (A Unit Investment Trust) (the "Trust") in
exchange for units in the Trust. The units of the Trust will be sold to
investors at a price based upon the net asset value of the securities in the
Trust. For purposes of this calculation, the value of the shares of Common
Stock as of the evaluation time for units of the Trust on April 23, 1998 was
$25.4375 per share. If all of the shares of Common Stock so deposited with the
Trust are valued at their reported last sale price on the NYSE on April 23,
1998, the aggregate underwriting commissions would be $1,399,683. See
"Underwriting." The Company has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
----------
SEE "RISK FACTORS" ON PAGES 4 TO 8 IN THE ACCOMPANYING PROSPECTUS AND "RECENT
DEVELOPMENTS" ON PAGE S-4 OF THIS PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as and if accepted by the Underwriter and subject to certain
conditions. It is expected that delivery of the Common Stock will be made in
New York City on or about April 29, 1998.
----------
MERRILL LYNCH & CO.
----------
The date of this Prospectus Supplement is April 23, 1998.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS
MARKET PRICE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
FORWARD LOOKING INFORMATION
This Prospectus Supplement and the accompanying Prospectus, including
information incorporated by reference herein and therein, contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21B of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company intends such 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, and is including this
statement for purposes of complying with these safe harbor provisions.
Forward-looking statements are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that could cause
actual results to differ materially from those in forward-looking statements
include, but are not limited to, those stated under the caption "Risk Factors"
set forth in the accompanying Prospectus, which should be considered in
evaluating forward-looking statements. Undue reliance should not be placed on
such statements.
THE COMPANY
The Company is a fully integrated company which owns and operates
manufactured home communities. Manufactured home communities are residential
developments designed and improved for the placement of detached, single-family
manufactured homes which are produced off-site and installed within the
community. The owner of each home leases the site on which it is located.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. In addition, these communities often provide a clubhouse for
social activities and recreation and other amenities, which may include
swimming pools, shuffleboard courts, tennis courts, laundry facilities and
cable television service. Utilities are provided or arranged for by the owner
of the community. Some communities provide water and sewer service through
public or private utilities, while others provide these services to residents
from on-site facilities.
The Company was formed to continue the property operations, business
objectives and acquisition strategies of an entity that had owned and operated
manufactured home communities since 1969. As of March 31, 1998, the Company
owned or controlled a portfolio of 125 manufactured home communities (the
"Properties") located throughout the United States containing 47,037
residential sites. The Properties are located in 25 states (with the number of
Properties in each state shown parenthetically) -- Florida (34), California
(21), Arizona (18), Colorado (10), Delaware (7), Nevada (4), Oregon (3), Kansas
(3), Missouri (3), Indiana (3), Illinois (2), Iowa (2), Utah (2), New York (2),
Maryland (1), Minnesota (1), Montana (1), New Mexico (1), Oklahoma (1),
Pennsylvania (1), Texas (1), Virginia (1), West Virginia (1), Michigan (1) and
Washington (1). In addition, as of March 31, 1998, the Company managed 7
communities containing 2810 residential sites. As of March 31, 1998, the
Company also owned two office buildings located in California.
The Company has approximately 900 full-time employees dedicated to
carrying out the Company's operating philosophy and strategies of value
enhancement and service to residents. The Company typically utilizes a one or
two-person management team (who reside at the Properties) for the on-site
management of each of the Properties. Typically, clerical and maintenance
workers are employed
S-2
<PAGE> 3
to assist these individuals in the management and care of the Properties.
Direct supervision of on-site management is the responsibility of the Company's
five regional vice presidents. These individuals have significant experience
in addressing the needs of residents and in finding or creating innovative
approaches to maximize value and increase cash flow from property operations.
Complementing this field management staff are approximately 55 corporate
employees who assist on-site management in all property functions.
The Company, formed in March 1993, is a Maryland corporation which has
elected to be taxed as a real estate investment trust ("REIT"). The Company
generally will not be subject to Federal income tax to the extent it
distributes its REIT taxable income to its stockholders. REITs are subject to
a number of organizational and operational requirements. If the Company fails
to qualify as a REIT, its income will be taxable at regular corporate rates.
Even if the Company qualifies for taxation as a REIT, the Company is subject to
certain state and local taxes on its income and property and Federal income and
excise taxes on its undistributed income.
The operations of the Company are conducted through certain entities which
are owned or controlled by the Company. MHC Operating Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations. Sub-partnerships of the Operating
Partnership were created to: (i) facilitate mortgage financing (the "Financing
Partnerships"); (ii) facilitate the Company's ability to provide financing to
the owners of manufactured home communities (the "Lending Partnership"); and
(iii) own the management operations of the Company (the "Management
Partnerships"). The Company also has a wholly-owned corporation which was
created to own the assets and operations of certain utility companies which
service the Properties ("MHC Systems").
In addition, since certain activities, if performed by the Company, may
not be qualifying REIT activities under the Internal Revenue Code of 1986, as
amended (the "Code"), the Company has invested in the non-voting preferred
stock of various corporations which engage in such activities. Realty Systems,
Inc. ("RSI") is engaged in the business of purchasing, selling, leasing and
financing manufactured homes that are located or will be located in properties
managed by the Company. RSI also provides brokerage services to residents at
such properties. Typically residents move from a community but do not relocate
their homes. RSI may provide brokerage services, in competition with other
local brokers, by seeking buyers for the homes. RSI also leases homes to
prospective residents with the expectation that the tenant eventually will
purchase the home. LP Management Corp. leases from the Operating Partnership
certain real property within or adjacent to certain of the Properties
consisting of golf courses, pro shops, restaurants and recreational vehicle
areas. LP Management Corp. pays a management fee to an independent contractor
who manages and operates these businesses. The Company believes that the
activities of RSI and LP Management Corp. (collectively, "Affiliates") benefit
the Company by maintaining and enhancing occupancy at the Properties. The
Company accounts for its investment in and advances to Affiliates using the
equity method of accounting.
The Company's executive offices are located at Two North Riverside Plaza,
Suite 800, Chicago, Illinois 60606, and its telephone number is (312) 474-1122.
The Company has regional management offices in Englewood (Denver), Colorado,
Clearwater (Tampa), Florida, Finksburg (Baltimore), Maryland, Phoenix, Arizona
and Roseville (Sacramento), California.
RECENT DEVELOPMENTS
Although REITs are prohibited from holding more than 10% of the voting
securities of any corporation, a REIT is not currently prohibited from holding
more than 10% of the value of the stock of a corporation, subject to the
general REIT asset requirements. See "Certain Federal Income Tax
Considerations" in this Prospectus Supplement. As a part of the Federal budget
for 1999, President
S-3
<PAGE> 4
Clinton has made several proposals affecting REITs. One such proposal, if
enacted in its present form, would prohibit a REIT from holding securities
representing more than 10% of the vote or value of all classes of stock of a
corporation, other than stock of a qualified REIT subsidiary or another REIT.
Although stock currently owned in existing subsidiaries, such as RSI, would be
grandfathered under such proposal, such subsidiaries would be prohibited from
acquiring substantial new assets or engaging in a new trade or business. If
enacted in its present form, the proposal may limit the future activities and
growth of the Company. At this time, it is not possible to predict whether any
proposals, as currently proposed or as modified by Congress, will be enacted.
See "Taxation of the Company - Clinton Administration's Proposed Changes to
REIT Asset Test."
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting
estimated underwriting discount and expenses) will be approximately
$25,230,318. The Company intends to use the net proceeds as working capital
for general corporate purposes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of all material Federal income tax
consequences to the Company and holders of Common Stock of the treatment of the
Company as a REIT. This Prospectus Supplement addresses the taxation of the
Company and the impact on the Company of its election to be taxed as a REIT.
The following discussion assumes that the Company continues to qualify as a
REIT during all relevant periods. Since these provisions are highly technical
and complex, and because the following discussion is not exhaustive of all
possible tax considerations, each prospective purchaser of Common Stock is
urged to consult his or its own tax advisor with respect to the Federal, state,
local, foreign and other tax consequences of the purchase, ownership and
disposition of the Common Stock. This discussion does not purport to deal with
the Federal income or other tax consequences applicable to all investors in
light of their particular investment circumstances or to all categories of
investors, some of whom may be subject to special rules (including, for
example, insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States). As discussed below, the Taxpayer Relief Act
of 1997 (the "1997 Act") contains certain changes to the REIT qualification
requirements and to the taxation of REITs that may be material to a holder of
Common Stock but which are effective only for the Company's taxable years
commencing on or after January 1, 1998. Capitalized terms used but not defined
herein have the meanings ascribed to them in the accompanying Prospectus.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING,
AND EACH PROSPECTIVE STOCKHOLDER IS ENCOURAGED TO CONSULT WITH HIS OR ITS TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
If certain detailed conditions imposed by the REIT provisions of the Code
are met, entities, such as the Company, that invest primarily in real estate
and that otherwise would be treated for Federal income tax purposes as
corporations generally are not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to stockholders. This treatment
substantially eliminates the "double taxation" (at the corporate and
stockholder levels) that generally results from the use of corporate investment
vehicles.
S-4
<PAGE> 5
If the Company fails to qualify as a REIT in any year, however, it will be
subject to Federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its stockholders would be reduced.
The Company elected REIT status commencing with its taxable year ended
December 31, 1993. In the opinion of Steptoe & Johnson LLP, which has acted as
special tax counsel to the Company, the Company was organized and has operated
in conformity with the requirements for qualification and taxation as a REIT
under the Code for its taxable years ended December 31, 1993, 1994, 1995, 1996
and 1997, and the Company's current organization and method of operation should
enable it to continue to meet the requirements for qualification and taxation
as a REIT. It must be emphasized that this opinion is based on various
assumptions relating to the organization and operation of the Company, the
Operating Partnership, the Management Partnerships, the Financing Partnerships,
the Lending Partnership, RSI, LP Management Corp. and De Anza Group, Inc.
(collectively, the "Management Corporations") and the various qualified REIT
subsidiaries wholly-owned by the Company (each a "QRS Corporation")
(collectively, the Management Partnerships, the Financing Partnerships, the
Lending Partnership, RSI, the Management Corporations and the QRS Corporations
may be referred to herein as the "Subsidiary Entities") and is conditioned upon
the accuracy of certain representations made by the Company and the Operating
Partnership to Steptoe & Johnson LLP as to certain relevant factual matters,
including matters related to (i) the organization, past operation, expected
future operation, and assets of the Company, the Operating Partnership and the
Subsidiary Entities, and (ii) that certain services rendered are those usually
or customarily rendered in connection with the rental of space for occupancy
only at particular manufactured home communities. The Company's qualification
and taxation as a REIT depend upon (i) the Company having met for each of its
taxable years, through actual annual operating and other results, the various
requirements under the Code and described in this Prospectus Supplement and the
accompanying Prospectus with regard to, among other things, the sources of its
gross income, the composition of its assets, the level of its distributions to
stockholders, and the diversity of its share ownership, and (ii) the Company's
ability to meet such requirements on a continuing basis. Steptoe & Johnson LLP
will not review the Company's compliance with these requirements on a
continuing basis. No assurance can be given that the actual results of the
operations of the Company, the Operating Partnership and the Subsidiary
Entities, the sources of their income, the nature of their assets, the level of
the Company's distributions to stockholders and the diversity of its share
ownership for any given taxable year will satisfy the requirements under the
Code for qualification and taxation as a REIT.
TAXATION OF THE COMPANY
General. In any year in which the Company qualifies as a REIT, in general
it will not be subject to Federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to stockholders. The
Company may, however, be subject to tax at normal corporate rates upon any
taxable income or capital gain not distributed.
If the Company should fail to satisfy either the 75% or the 95% gross
income test (as discussed below), and nonetheless maintains its qualification
as a REIT because certain other requirements are met, it will be subject to a
100% tax on the greater of the amount by which it fails the 75% or the 95%
test, multiplied by a fraction intended to reflect its profitability. The
Company will also be subject to a tax of 100% on net income from any
"prohibited transaction," as described below. In addition, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company may
also be subject to the corporate "alternative minimum tax," as well as tax in
certain situations and on certain
S-5
<PAGE> 6
transactions not presently contemplated. The Company will use the calendar
year both for Federal income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, the Company must meet, among others, the
following requirements:
Stock Ownership Test. -- The capital stock of the Company must be held by
a minimum of 100 persons for at least, approximately, 335 of the days in each
taxable year subsequent to 1993. In addition, at all times during the second
half of each taxable year subsequent to 1993, no more than 50% in value of the
capital stock of the Company may be owned, directly or indirectly and by
applying certain constructive ownership rules, by five or fewer individuals.
The Company believes that it has satisfied both of these tests, and it believes
it will continue to do so. In order to ensure compliance with this test, the
Company has placed certain restrictions on the transfer of its capital stock to
prevent further concentration of stock ownership. Moreover, to evidence
compliance with these requirements, the Company must maintain records which
disclose the actual ownership of its outstanding capital stock. In fulfilling
its obligations to maintain records, the Company must demand written statements
each year from the record holders of designated percentages of its capital
stock disclosing the actual owners of such capital stock. A list of those
persons failing or refusing to comply with such demand must be maintained as a
part of the Company's records. A stockholder failing or refusing to comply
with the Company's written demand must submit with his tax returns a similar
statement disclosing the actual ownership of capital stock and certain other
information. The Company's Charter provides restrictions regarding the
transfer of its capital stock that are intended to assist the Company in
continuing to satisfy the stock ownership requirements. See "Description of
Shares of Stock--Restrictions on Transfer" in the accompanying Prospectus.
Pursuant to the 1997 Act, for the Company's taxable years commencing on or
after January 1, 1998, if the Company complies with regulatory rules pursuant
to which it is required to send annual letters to holders of capital stock
requesting information regarding the actual ownership of capital stock, but
does not know, or exercising reasonable diligence would not have known, whether
it failed to meet the requirement that it not be closely held, the Company will
be treated as having met the requirement.
Asset Tests. -- At the close of each quarter of the Company's taxable
year, the Company must satisfy two tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by "real estate assets" (including any combination of interests in
real property, interests in mortgages on real property, and stock in other
REITs), cash, cash items and certain government securities. Second, although
the remaining 25% of the Company's assets generally may be invested without
restriction, securities in this class may not exceed either (i) 5% of the value
of the Company's total assets as to any one issuer (other than an interest in a
partnership) or (ii) 10% of the outstanding voting securities of any one issuer
(other than an interest in a partnership or stock of a qualified REIT
subsidiary or another REIT). Where the Company invests in a partnership, it
will be deemed to own a proportionate share of the partnership's assets in
accordance with its capital interest. The Company's investment in the
Properties through its interest in the Operating Partnership will constitute
qualified assets for purposes of the 75% asset test.
The Operating Partnership has not owned and will not own any of the voting
stock, but owns 100% of the non-voting stock, of the Management Corporations
and RSI. By virtue of its partnership interest in the Operating Partnership,
the Company is deemed to own its pro rata share of the assets of the Operating
Partnership, including the stock of the Management Corporations and RSI as
described above.
The Operating Partnership has not owned and will not own more than 10% of
the voting securities of the Management Corporations and RSI. In addition,
based upon its analysis of the estimated
S-6
<PAGE> 7
value of the stock of the Management Corporations and RSI owned by the
Operating Partnership relative to the estimated value of the other assets owned
by the Operating Partnership, the Company believes that its pro rata share of
the stock of the Management Corporations and RSI held by the Operating
Partnership together has not and will not exceed 5% of the total value of the
Company's assets. No independent appraisals have been obtained, however, to
support this conclusion. This 5% limitation must be satisfied not only on the
date that the Company first acquired stock of the Management Corporations and
RSI, but also at the end of each quarter in which the Company increases its
interest in the Management Corporations and RSI (including as a result of
increasing its interest in the Operating Partnership as a result of the
Offering, and as the holders of units of limited partnership interest in the
Operating Partnership ("OP Units") exercise their exchange rights). Although
the Company plans to take steps to ensure that it satisfies the 5% value test
for any quarter with respect to which retesting is to occur, there can be no
assurance that such steps always will be successful or will not require a
reduction in the Operating Partnership's overall interest in the Management
Corporations or RSI.
The Company's indirect interests as a general partner in the Financing
Partnerships and the Lending Partnership are held through the QRS Corporations,
each of which is organized and operated as a "qualified REIT subsidiary" within
the meaning of the Code. Qualified REIT subsidiaries are not treated as
separate entities from their parent REIT for Federal income tax purposes.
Instead, all assets, liabilities and items of income, deduction and credit of
the QRS Corporations will be treated as assets, liabilities and items of the
Company. The QRS Corporations therefore will not be subject to Federal
corporate income taxation, although they may be subject to state or local
taxation. In addition, the Company's ownership of the voting stock of each QRS
Corporation will not violate the general restriction against ownership of more
than 10% of the voting securities of any issuer. The Company may in the future
form one or more additional qualified REIT subsidiaries. For the Company's
1997 taxable year, all of the stock of such subsidiaries must be owned by the
Company from the commencement of each such subsidiary's existence. For taxable
years of the Company beginning on and after January 1, 1998, the Company must
own all of the stock of each such subsidiary, although it will not be required
to own such stock of such subsidiary from the commencement of such subsidiary's
existence.
Clinton Administration's Proposed Changes to REIT Asset Test. -- The
Clinton Administration's budget proposal announced on February 2, 1998 includes
a proposal to amend the REIT asset tests with respect to non-qualified REIT
subsidiaries, such as the Management Corporations and RSI. The proposal would
prohibit a REIT from owning more than 10% of the vote or value of the
outstanding stock of any non-qualified REIT subsidiary. Existing non-qualified
REIT subsidiaries would be grandfathered, and therefore subject only to the 5%
asset test and 10% voting securities test of current law (see "-- Taxation of
the Company -- Asset Tests"), except that such grandfathering would terminate
if the subsidiary engaged in a new trade or business or acquired substantial
new assets. As a result, if the proposal were to be enacted, the Management
Corporations and RSI would become subject to the new 10%-vote-and-value
limitation if they commenced new trade or business activities or acquired
substantial new assets after the specified effective date. The Company could
not satisfy the new test because it would be considered to own more than 10% of
the value of the stock of the Management Corporations and RSI. Accordingly,
the proposal, if enacted, would materially impede the ability of the Company to
engage in other activities without jeopardizing its REIT status.
Gross Income Tests. -- There are three separate percentage tests relating
to the sources of the Company's gross income which must be satisfied for each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its proportionate share
of the income and loss of the partnership, and the gross income of the
partnership will retain the same character in the hands of the Company as it
has in the hands of the partnership. See "--Tax Aspects of the Company's
Investments in Partnerships--General" below.
S-7
<PAGE> 8
1. The 75% Test. -- At least 75% of the Company's gross income for each
taxable year must be "qualifying income." Qualifying income generally includes
(i) rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interests in, real property;
(iii) gains from the sale or other disposition of interests in real property
and real estate mortgages, other than gain from property held primarily for
sale to customers in the ordinary course of the Company's trade or business
("dealer property"); (iv) dividends or other distributions on stock in other
REITs, as well as gain from the sale of such stock; (v) abatements and refunds
of real property taxes; (vi) income from the operation, and gain from the sale,
of real property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such real property ("foreclosure property"); (vii) commitment
fees received for agreeing to make loans collateralized by mortgages on real
property or to purchase or lease real property; and (viii) certain qualified
temporary investment income attributable to the investment of new capital
received by the Company in exchange for its stock (including Common Stock
issued pursuant to the Offering) during the one-year period following the
receipt of such new capital.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% gross income test (or the 95% gross income test
described below) if the Company, or a direct or indirect owner of 10% or more
of the stock of the Company, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). For the Company's taxable year which
begins on January 1, 1998 and for all taxable years thereafter, only partners
who own 25% or more of the capital or profits interest in a partnership are
included in the determination of whether a tenant is a "Related Party Tenant."
In addition, if rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal
property will not qualify as rents from real property. Moreover, an amount
received or accrued will not qualify as rents from real property (or as
interest income) for purposes of the 75% and 95% gross income tests if it is
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not fail to qualify as rents from
real property solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Finally, for rents received to qualify as
rents from real property, the Company generally must not operate or manage the
real property or furnish or render services to tenants, other than through an
"independent contractor" from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent
that the services provided by the Company are "usually or customarily rendered"
in connection with the rental of space for occupancy only, and are not
otherwise considered "rendered for the convenience of the occupant". Pursuant
to the 1997 Act, for the Company's taxable years commencing on or after January
1, 1998, rents received generally will qualify as rents from real property
notwithstanding the fact that the Company provides non-customary services so
long as the amount received for such services is de minimis. If the value of
the non-customary service income received with respect to a property (valued at
no less than 150% of the Company's direct costs of performing such services) is
1% or less of the total income derived from the property, then all rental
income with respect to the property, except the non-customary service income,
will qualify as "rents from real property."
The Company, through the Management Partnerships and RSI (none of which
are independent contractors), undertakes certain activities and provides
certain services with respect to the Properties and will do the same for any
newly acquired manufactured home community properties. The Company believes
that such activities and services (i) primarily benefit the Company by
maintaining and enhancing occupancy and/or (ii) are activities and services
usually or customarily rendered in connection with the rental of space in
manufactured home communities in the geographic market in which the particular
communities are located and are not services rendered primarily for the
convenience of the occupant. Accordingly, the Company believes that the
activities of the Management Partnerships and RSI have not caused and will not
cause the rents received with respect to the Properties to fail to qualify as
rents from
S-8
<PAGE> 9
real property for purposes of the 75% gross income test or for purposes of the
95% gross income test as described below.
2. The 95% Test. -- In addition to the requirement that the Company
derive at least 75% of its gross income from the sources listed above, at least
95% of the Company's gross income for the taxable year must be derived from the
above-described qualifying income, or from dividends, interest or gains from
the sale or disposition of stock or other securities that are not dealer
property. Dividends (including the Company's share of dividends paid by the
Management Corporations or RSI) and interest on any obligations not
collateralized by an interest in real property (including interest received on
a note receivable from RSI (the "RSI Note")if the RSI Note is not
collateralized by RSI's inventory and interests in notes secured by real
property) are included for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test. Similarly, for tax years beginning
prior to January 1, 1998, any payments made to the Company under an interest
rate swap or cap agreement entered into by the Company to hedge certain of its
variable rate indebtedness is included as qualifying income for purposes of the
95% gross income test, but not for purposes of the 75% gross income test. For
the Company's tax years commencing on or after January 1, 1998, such payments
made to the Company will so qualify even though the Company's indebtedness does
not bear interest at a variable rate, and payments pursuant to certain similar
financial instruments entered into to reduce interest rate risks will be
treated in a similar manner.
For purposes of determining whether the Company complies with the 75% and
95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property,
excluding certain dealer property held by the Company for at least four years
and excluding foreclosure property and, as a result of the 1997 Act, effective
for the Company's taxable year beginning January 1, 1998, dispositions of
property that occur due to involuntary conversion. See "--Taxation of the
Company--General" and "--Tax Aspects of the Company's Investments in
Partnerships-Sale of the Properties."
The Company's investment in the Properties, through the Operating
Partnership and the Financing Partnerships, in major part gives rise to rental
income qualifying under the 75% and 95% gross income tests. Gains on sales of
the Properties or of the Company's interest in the Operating Partnership or the
Financing Partnerships generally qualify under the 75% and 95% gross income
tests. The Company believes that income on its other investments, including
its indirect investment in the Management Corporations and in RSI, has not
resulted in the Company failing the 75% or 95% gross income test for any year,
and the Company anticipates that this will continue to be the case. The
Company has received a ruling from the Internal Revenue Service (the "Service")
that interest income received by the Operating Partnership with respect to the
RSI Note qualifies for purposes of the 75% gross income test provided that the
obligation is collateralized by RSI's inventory and interests in notes secured
by real property on the condition that the RSI Note constitutes the
indebtedness of RSI.
Even if the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
was due to reasonable cause and not to willful neglect; (ii) the Company
reports the nature and amount of each item of its income included in the tests
on a schedule attached to its tax return; and (iii) any incorrect information
on this schedule is not due to fraud with intent to evade tax. It is not
possible to state whether in all circumstances the Company would be entitled to
the benefit of these relief provisions. If these relief provisions apply, the
Company will, however, still be subject to a special tax based upon the greater
of the amount by which it fails either the 75% or 95% gross income test for
that year, less associated expenses. See "--Taxation of the Company--General."
S-9
<PAGE> 10
3. The 30% Test. -- The Company must derive less than 30% of its gross
income for each taxable year from the sale or other disposition of (i) real
property held for less than four years (other than foreclosure property and
involuntary conversions), (ii) stock or securities held for less than one year,
and (iii) property in a prohibited transaction. The 1997 Act repeals the 30%
gross income test for taxable years beginning after its enactment. Therefore,
the 30% gross income test will not apply for the Company's taxable year
beginning January 1, 1998 and thereafter. However if the 30% income test is
not met for the taxable years of the Company beginning before January 1, 1998,
the Company would cease to qualify as a REIT. See "--Failure to Qualify." The
Company has not had and does not anticipate that it will have any substantial
difficulty in complying with this test. For the purpose of applying the 30%
gross income test, the holding period of properties and other assets generally
will commence on the date the same are acquired.
Annual Distribution Requirements. -- The Company, in order to qualify as a
REIT, generally is required to make distributions (other than capital gain
distributions) to its stockholders each year in an amount at least equal to (A)
the sum of (i) 95% of the Company's REIT taxable income (computed without
regard to the dividends paid deduction and the Company's net capital gain) and
(ii) 95% of the net income (after tax), if any, from foreclosure property,
minus (B) the sum of certain items of non-cash income (including, as a result
of the 1997 Act, cancellation of indebtedness and original issue discount
income). Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. See "Taxation of Taxable Domestic
Stockholders--General." To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of its
REIT taxable income, as adjusted, it will be subject to tax on the
undistributed amount at regular corporate tax rates. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from
prior periods, the Company would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed.
The Company has made and intends to make timely distributions sufficient
to satisfy the annual distribution requirements. In this regard, the
Partnership Agreement of the Operating Partnership authorizes the Company, as
general partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that the
Company may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement, due to timing differences between the actual receipt
of income and actual payment of expenses on one hand, and the inclusion of such
income and deduction of such expenses in computing the Company's REIT taxable
income on the other hand, or if the amount of nondeductible expenses such as
principal amortization or capital expenditures exceed the amount of non-cash
deductions such as depreciation. In order to satisfy the 95% distribution
requirement, the Company will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, will borrow funds (or cause the
Operating Partnership or other affiliates to borrow funds) in order to satisfy
the distribution requirement.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
Failure to Qualify. -- If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions of the Code do not apply,
the Company will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions
to stockholders in any year in which the Company fails to so qualify will not
be required and, if made, will
S-10
<PAGE> 11
not be deductible by the Company. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be ineligible for qualification as a REIT for the four taxable years
following the year during which qualification was lost.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
General.The Company holds direct or indirect interests in the Operating
Partnership, the Management Partnerships, the Financing Partnerships and the
Lending Partnership and certain other partnerships (each individually a
"Partnership", and collectively the "Partnerships").
Tax Allocations with Respect to the Properties. -- Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership (such as certain of the Properties
contributed at the time of the Company's initial public offering) must be
allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such
unrealized gain or unrealized loss is generally equal to the difference between
the fair market value of contributed property at the time of contribution and
the adjusted tax basis of such property at the time of contribution (a
"Book-Tax Difference"). Such allocations are solely for Federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. The Operating Partnership and certain of the
Financing Partnerships were formed by way of contributions of appreciated
property. Consequently, the partnership agreements for such Partnerships
require such allocations to be made in a manner consistent with Section 704(c)
of the Code.
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes, and increased taxable income and gain
on sale by the Partnerships of the contributed assets, than would have been
allocated to them if the assets had a tax basis equal to their fair market
value at the time of contribution. The allocations will tend to eliminate the
Book-Tax Difference over the life of the Partnerships. However, the special
allocation rules of Section 704(c) of the Code as applied by the Company do not
always entirely rectify the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed assets in the hands of the Partnerships will cause the
Company to be allocated lower depreciation and other deductions, and possibly
greater amounts of taxable income in the event of a sale of such contributed
assets in excess of the economic or book income allocated to it as a result of
such sale. This may cause the Company to recognize taxable income in excess of
cash proceeds, which might adversely affect the Company's ability to comply
with the REIT distribution requirements. See "--Taxation of the
Company--Annual Distribution Requirements." In addition, to the extent that
the carryover basis of the contributed assets will cause the Company to have
greater current and accumulated earnings and profits, the amount, if any, of
distributions to stockholders that may be treated as a tax-free return of
capital will be reduced. See "--Taxation of Taxable Domestic
Stockholders--General."
With respect to any Property purchased or to be purchased by any of the
Partnerships subsequent to the formation of the Company, such Property will
initially have a tax basis equal to its fair market value and Section 704(c) of
the Code will not apply.
Sale of the Properties. -- The Company's share of any gain realized by a
Partnership on the sale of any dealer property generally will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax, and
will have an adverse effect upon the Company's ability to satisfy the income
tests for qualification as a REIT. See "--Taxation of the Company--General"
and "--Gross Income Tests--The 95% Test." Under existing law, whether property
is dealer property is a question of fact that depends
S-11
<PAGE> 12
on all the facts and circumstances with respect to the particular transaction.
The Partnerships have held and intend to hold the Properties for investment
with a view to long-term appreciation, to engage in the business of acquiring,
developing, owning and operating the Properties and other manufactured home
communities. In addition, the Partnerships may make such occasional sales of
the Properties as are consistent with the Company's investment objectives.
Based upon such investment objectives, the Company believes that in general the
Properties should not be considered dealer property and that the amount of
income from prohibited transactions, if any, will not be material.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
General. -- As long as the Company qualifies as a REIT, distributions made
to the Company's taxable domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for stockholders that are corporations.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its Common Stock.
On November 10, 1997, the Service issued IRS Notice 97-64, which provides
generally that the Company may classify portions of its designated capital
gains dividend as (i) a 20% rate gain distribution (which would be taxable to
taxable domestic stockholders who are individuals, estates or trusts at a
maximum rate of 20%), (ii) an unrecaptured Section 1250 gain distribution
(which would be taxable to taxable domestic stockholders who are individuals,
estates or trusts at a maximum rate of 25%), or (iii) a 28% rate gain
distribution (which would be taxable to taxable domestic stockholders who are
individuals, estates or trusts at a maximum rate of 28%). If no designation is
made, the entire designated capital gain dividend will be treated as a 28% rate
gain distribution. Notice 97-64 provides that a REIT must determine the
maximum amounts that it may designate as 20% and 25% rate capital gain
dividends by performing the computation required by the Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. Notice 97-64 further provides that designations made by the REIT
only will be effective to the extent that they comply with Revenue Ruling
89-81, which requires that distributions made to different classes of shares be
composed proportionately of dividends of a particular type. Distributions that
are properly designated by the Company as capital gain dividends will be
taxable to taxable corporate domestic stockholders as long-term capital gain
(to the extent that capital gains dividends do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
such corporate domestic stockholder has held its Common Stock. Corporate
domestic stockholders may, however, be required to treat up to 20% of certain
capital gain dividends as ordinary income.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of shares of beneficial
interest (the "Total Dividends"), then the portion of the Capital Gains Amount
that will be allocable to the holders of Common Stock will be the Capital Gains
Amount multiplied by a fraction, the numerator of which will be the total
dividends (within the meaning of the Code) paid or made available to the
holders of the Common Stock for the year and the denominator of which will be
the Total Dividends.
To the extent that the Company makes distributions in excess of current
and accumulated earnings and profits, these distributions are treated first as
a tax-free return of capital to the stockholder, reducing the tax basis of a
stockholder's Common Stock by the amount of such distribution (but not below
zero), with distributions in excess of the stockholder's tax basis taxable as
capital gains (if the Common Stock is held as a capital asset). In addition,
any dividend declared by the Company in October, November or December of any
year and payable to a stockholder of record on a specific date in any such
month shall
S-12
<PAGE> 13
be treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Stockholders may not
include in their individual income tax returns any net operating losses or
capital losses of the Company.
In general, upon any sale or other disposition of Common Stock, a
stockholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such Common Stock for tax purposes. Such
gain or loss will be capital gain or loss if the Common Stock has been held as
a capital asset. In the case of a stockholder that is a corporation, such
capital gain or loss will be long-term capital gain or loss if such Common
Stock has been held for more than one year. Generally, in the case of a
taxable domestic stockholder who is an individual or an estate or trust, such
capital gain or loss will be taxed (i) at a maximum rate of 20% if such Common
Stock has been held for more than 18 months; (ii) at a maximum rate of 28% if
such Common Stock has been held for more than one year but not more than 18
months; and (iii) for dispositions occurring after December 31, 2000, at a
maximum rate of 18% if the Common Stock has been held for more than five years.
The 1997 Act allows the Service to issue regulations relating to the manner in
which the 1997 Act's new capital gain rates will apply to sales of capital
assets by "pass-through entities," which include REITs such as the Company, and
to sales of interests in "pass-through entities." To date, the Service has not
issued such regulations (but see discussion of Notice 97-64 above), but if
issued, such regulations could affect the taxation of gain and loss realized on
the disposition of Common Stock. Stockholders are urged to consult with their
own tax advisors with respect to the new rules contained in the 1997 Act.
In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such Common Stock for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss, to the extent of distributions from the Company required to be treated by
such stockholder as long-term capital gains. For stockholders who are
individuals, trusts and estates, the long-term capital loss will be apportioned
among the 20%, 25% and 28% long-term capital gain rate groups to the extent
that distributions received by such stockholder were previously included in
such rate groups.
Pursuant to the 1997 Act, the Company may elect to require holders of
Common Stock to include the Company's undistributed net capital gains in their
income for the Company's taxable year beginning January 1, 1998 and thereafter.
If the Company makes such an election, holders of Common Stock will (i) include
in their income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have paid their proportionate
share of the tax paid by the Company on such undistributed capital gains and
thereby receive a credit or refund for such amount. A holder of Common Stock
will increase its basis in the Common Stock by the difference between the
amount of capital gain included in its income and the amount of the tax it is
deemed to have paid. The earnings and profits of the Company will be adjusted
appropriately.
In addition, distributions from the Company and gain from the disposition
of Common Stock will not be treated as "passive activity" income and therefore
stockholders will not be able to apply losses from "passive activities" to
offset such income.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Most tax-exempt employees' pension trusts are not subject to Federal
income tax except to the extent of their receipt of "unrelated business taxable
income" as defined in Section 512(a) of the Code ("UBTI"). Distributions by
the Company to a stockholder that is a tax-exempt entity should not constitute
UBTI, provided that the tax-exempt entity has not financed the acquisition of
its stock with "acquisition indebtedness" within the meaning of the Code and
the shares of Common Stock held by such stockholder
S-13
<PAGE> 14
are not otherwise used in an unrelated trade or business of the tax-exempt
entity. However, certain pension trusts that own more than 10% of a
"pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company, though, has not been and does not
expect to be treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated United States Federal
income tax consequences of the ownership and disposition of Common Stock
applicable to Non-United States Holders of such stock. A "Non-United States
Holder" is any person other than (i) a citizen or resident of the United
States, (ii) a domestic partnership or corporation, (iii) any estate (other
than a foreign estate the income of which, from sources without the United
States which are not effectively connected with the conduct of a trade or
business within the United States, is not includable in gross income under
subtitle A of the Code), or (iv) any trust, if a court within the United States
is able to exercise primary supervision over the administration of the trust,
and one or more United States persons have the authority to control all
substantial decisions of the trust. The discussion is based on current law and
is for general information only. The discussion addresses only certain and not
all aspects of United States Federal income taxation. Final regulations
dealing with withholding tax on income paid to foreign persons and related
matters (the "New Withholding Regulations") were promulgated on October 6,
1997. In general, the New Withholding Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify and modify reliance standards.
The New Withholding Regulations are generally effective for payments made on or
after January 1, 1999, subject to certain transition rules. The Service
announced on March 27, 1998 that it intends to amend the New Withholding
Regulations to provide that such regulations will generally be applicable
beginning January 1, 2000 and to provide certain new transition rules for
satisfying the withholding certificate or statement requirements of the New
Withholding Regulations. Accordingly, prospective Non-United States Holders
are urged to consult their tax advisors concerning the adoption of the New
Withholding Regulations.
Distributions From the Company. --
1.Ordinary Dividends. The portion of dividends received by Non-United
States Holders payable out of the Company's earnings and profits which are not
attributable to capital gains of the Company or of the Operating Partnership
and which are not effectively connected with a United States trade or business
of the Non-United States Holder will be subject to United States withholding
tax on a gross basis at the rate of 30% (unless reduced by treaty). Any
amounts withheld should be creditable against the Non-United States Holder's
United States Federal income tax liability. In general, Non-United States
Holders will not be considered engaged in a United States trade or business
solely as a result of their ownership of Common Stock. In cases where the
dividend income from a Non-United States Holder's investment in Common Stock is
(or is treated as) effectively connected with the Non-United States Holder's
conduct of a United States trade or business, the Non-United States Holder
generally will be subject to United States tax at graduated rates, in the same
manner as United States stockholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax (unless reduced by
treaty) in the case of a Non-United States Holder that is a foreign
corporation).
2.Non-Dividend Distributions. Distributions by the Company which are not
dividends out of the earnings and profits of the Company, and which do not
exceed the adjusted basis of the Non-United States Holder's Common Stock, will
not be subject to United States income tax but rather will reduce the adjusted
basis of such Common Stock. Nevertheless, the Company anticipates that tax at
the rate applicable to dividends will be withheld for all distributions to Non
United States Holders. However, the Non-United States Holder may seek a refund
of such amounts from the Service if it is determined that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
S-14
<PAGE> 15
To the extent such a distribution exceeds the adjusted basis of a Non-United
States Holder's Common Stock, it will give rise to tax liability if the
Non-United States Stockholder otherwise would be subject to tax on any gain
from the sale or disposition of his Common Stock as described below.
3.Capital Gain Dividends. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-United
States Holder, to the extent attributable to gains from dispositions of United
States Real Property Interests ("USRPIs") such as the Properties ("USRPI
Capital Gains"), will be considered effectively connected with a United States
trade or business of the Non-United States Holder and subject to United States
Federal income tax at the rate applicable to United States individuals or
corporations (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals) without
regard to whether such distribution is designated as a capital gain dividend.
In addition, the Company will be required to withhold tax equal to 35% (unless
reduced by treaty) of the amount of dividends to the extent such dividends
constitute USRPI Capital Gains. Any amounts withheld should be creditable
against the Non-United States Holder's United States Federal income tax
liability. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax (unless reduced by treaty) in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption.
Although the law is not entirely clear, it appears that amounts designated
by the Company pursuant to the 1997 Act as undistributed capital gains in
respect of shares would be treated with respect to Non-United States Holders in
the manner outlined in the preceding paragraph for actual distributions by the
Company of capital gain dividends. Under that approach, the Non-United States
Holders would be able to offset as a credit against their United States Federal
income tax liability resulting therefrom their proportionate share of the tax
paid by the Company on such undistributed capital gains (and to receive from
the Service a refund to the extent their proportionate share of such tax paid
by the Company were to exceed their actual United States Federal income tax
liability).
Dispositions of Common Stock. Unless the Common Stock constitutes a
USRPI, a sale of Common Stock by a Non-United States Holder generally will not
be subject to United States taxation under FIRPTA. The Common Stock will not
constitute a USRPI if the Company is a "domestically controlled REIT." A
domestically controlled REIT is a REIT in which, at all times during a
specified testing period, less than 50% in value of its stock is held directly
or indirectly by Non-United States Holders. The Company believes that it has
been and anticipates that it will continue to be a domestically controlled
REIT, and therefore that the sale of Common Stock by a Non-United States Holder
will not be subject to taxation under FIRPTA. Because the Common Stock will be
publicly traded, however, no assurance can be given that the Company will
continue to be a domestically controlled REIT. If the Company does not
constitute a domestically controlled REIT, a Non-United States Holder's sale of
Common Stock generally still will not be subject to tax under FIRPTA as a sale
of a USRPI provided that (i) the Common Stock is "regularly traded" (as defined
by applicable United States Treasury Department regulations) on an established
securities market (e.g., the NYSE, on which the Common Stock is listed) and
(ii) the selling Non-United States Holder held 5% or less of the outstanding
Common Stock at all times during a specified testing period.
If gain on the sale of Common Stock were subject to taxation under FIRPTA,
the Non-United States Holder would be subject to the same treatment as a United
States stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of Common Stock could be required to
withhold 10% of the purchase price and remit such amount to the Service.
Capital gains not subject to FIRPTA will nonetheless be taxable in the United
States to a Non-United States Holder in two cases: (i) if the Non-United States
Holder's investment in Common Stock is effectively connected with a United
States trade or business conducted by such Non-United States Holder, the
Non-United States Holder will be subject
S-15
<PAGE> 16
to the same treatment as a United States stockholder with respect to such gain,
or (ii) if the Non-United States Holder is a nonresident alien individual who
was present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, the nonresident alien individual
will be subject to a 30% tax on the individual's capital gain.
OTHER TAX CONSIDERATIONS
The Management Corporations and RSI. A portion of the cash to be used by
the Operating Partnership to fund distributions to its partners, including the
Company, comes from the Management Corporations and RSI through payments of
interest on the RSI Note and dividends on the non-voting stock of these
entities which is held by the Operating Partnership. The Management
Corporations and RSI pay Federal and state income tax at the full applicable
corporate rates. To the extent that the Management Corporations and RSI are
required to pay Federal, state or local taxes, the cash available for
distribution by the Company to stockholders will be reduced accordingly.
State and Local Taxes. The Company and its stockholders may be subject to
state or local taxation in various jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Common Stock.
UNDERWRITING
Subject to the terms and conditions contained in the terms agreement and
the related underwriting agreement (collectively, the "Underwriting
Agreement"), the Company has agreed to sell to Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the "Underwriter"), and the Underwriter has agreed to
purchase from the Company, all of the shares of Common Stock offered hereby
(the "Shares"). In the Underwriting Agreement, the Underwriter has agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Shares if any of the Shares are purchased.
The Underwriter intends to deposit the Shares with the Trust, a registered
unit investment trust under the Investment Company Act of 1940, as amended, for
which the Underwriter acts as sponsor and depositor, in exchange for units of
the Trust. The Underwriter is an affiliate of the Trust.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriter may be required to
make in respect thereof.
In connection with the Offering, the rules of the Securities and Exchange
Commission permit the Underwriter to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriter creates a short position in the Common Stock
in connection with the Offering (i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
Underwriter may reduce that short position by purchasing Common Stock in the
open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security be higher than it
might otherwise be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the
S-16
<PAGE> 17
Common Stock. In addition, neither the Company nor the Underwriter makes any
representation that the Underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
In the ordinary course of its businesses, the Underwriter provides
investment banking, advisory and other financial services to the Company and
the Operating Partnership for which they receive customary fees.
The Common Stock is listed on the NYSE under the symbol "MHC." The
Company has applied for listing of the shares of Common Stock offered hereby on
the NYSE.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois and
for the Underwriter by Brown & Wood LLP, New York, New York. In addition,
certain legal matters described under "Certain Federal Income Tax
Considerations", in this Prospectus Supplement and the accompanying Prospectus,
will be passed upon for the Company by Steptoe & Johnson LLP, Washington,
District of Columbia and certain matters regarding Maryland law will be passed
upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
S-17
<PAGE> 18
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the accompanying Prospectus in connection with the
offer made by this Prospectus Supplement and the accompanying Prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Company or the Underwriter. Neither the
delivery of this Prospectus Supplement and the accompanying Prospectus nor any
sale made hereunder and thereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus Supplement and the accompanying Prospectus do
not constitute an offer or solicitation by anyone in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
FORWARD LOOKING INFORMATION................................................. S-2
THE COMPANY................................................................. S-2
RECENT DEVELOPMENTS......................................................... S-3
USE OF PROCEEDS............................................................. S-4
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS............................................................. S-4
LEGAL MATTERS.............................................................. S-17
PROSPECTUS
Available Information......................................................... 2
Incorporation of Certain Information by
Reference.................................................................... 2
The Company................................................................... 3
Risk Factors.................................................................. 4
Use of Proceeds............................................................... 9
Description of Shares of Stock................................................ 9
Description of Depository Stock.............................................. 16
Description of Warrants...................................................... 19
Description of Rights........................................................ 20
Ratio of Earnings to Combined Fixed Charges.................................. 20
Federal Income Tax Considerations............................................ 21
Plan of Distribution......................................................... 28
Experts...................................................................... 30
Legal Matters................................................................ 30
</TABLE>
[LOGO]
1,048,059
SHARES OF
COMMON STOCK
---------------------
PROSPECTUS SUPPLEMENT
---------------------
MERRILL LYNCH & CO.
April 23, 1998
================================================================================
