FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 333-33984
PROSPECTUS
MID-ATLANTIC REALTY TRUST
222,624 Common Shares of Beneficial Interest
Mid-Atlantic Realty Trust is a real estate investment trust or "REIT"
which owns, acquires, develops, redevelops, leases and manages primarily
neighborhood or community shopping centers in the Middle Atlantic region of the
United States. All of our interests in commercial properties are held directly
or indirectly by MART Limited Partnership, and substantially all of our
operations relating to these properties are conducted through that partnership,
which we refer to as the "Operating Partnership."
In March 1999, we acquired a 1% general partnership interest and an
88% limited partnership interest from the partners of the Saucon Valley
Partnership, which owns a retail shopping center called Saucon Valley Square in
Lower Saucon, Pennsylvania. The Saucon Valley Partners were Louis P. Pektor, III
and Lewis D. Ronca, who we refer to collectively as the "Saucon Valley Partners"
or the "selling shareholders." The consideration for the partnership interests
was the issuance by the Operating Partnership of 198,136 of its units of limited
partnership interest, which we refer to as the "OP Units."
The Operating Partnership has a call option to purchase the remaining
11% of limited partnership interests in exchange for 24,488 OP Units, which is
exercisable until September 18, 2002. The Saucon Valley Partners have a
corresponding put option to sell the 11% interests to the Operating Partnership
for one year commencing April 19, 2002 for the same number of OP Units. The
Operating Partnership currently intends to exercise the call option.
This prospectus relates to the offer and sale by the selling
shareholders, assuming exercise of the put or call option, of up to 222,624 of
our common shares of beneficial interest. We will issue these shares only to the
extent that:
o the selling shareholders exercise their rights to tender their OP Units for
cash,
o we exercise our rights to assume the obligation to the selling
shareholders, and
o we exercise our right to issue common shares instead of cash.
Our common shares are listed on the NYSE under the symbol "MRR."
We will not receive any proceeds from the issuance of the common
shares to the Saucon Valley Partners or the sale of the common shares by them.
We will acquire OP Units in exchange for any common shares that we may issue to
the Saucon Valley Partners pursuant to this prospectus.
See "Risk Factors" beginning on page 4 for certain information that
should be considered by prospective shareholders.
These securities have not been approved or disapproved by the
Securities and Exchange Commission or any state securities commission nor has
the commission or any state securities commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The Attorney General of the State of New York has not passed on or
endorsed the merits of this offering. Any representation to the contrary is
unlawful.
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The date of this Prospectus is April 20, 2000.
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No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus in connection with the offer contained in this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company, the Operating Partnership, the Selling
Shareholders or any underwriters, agents or dealers. This Prospectus does not
constitute an offer to sell or solicitation of any offer to buy securities in
any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company or the Operating Partnership since
the date hereof or the information contained herein is correct at any time
subsequent to the date hereof.
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TABLE OF CONTENTS
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Page
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Available Information..........................................................3
Incorporation of Certain Documents By Reference................................3
Summary........................................................................4
Risk Factors...................................................................4
Description of Common Shares..................................................10
Registration Rights...........................................................13
Federal Income Tax Considerations.............................................14
Selling Shareholders..........................................................23
Plan of Distribution..........................................................23
Legal Matters.................................................................24
Experts.......................................................................24
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AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act,
and in accordance with the Exchange Act we file reports, proxy statements and
other information with the SEC. The reports, proxy statements and other
information on file can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the SEC's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained
at the prescribed rates from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. The SEC also maintains a web
site that contains reports, proxy statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http:\\www.sec.gov. The common shares are listed on the NYSE under the symbol
"MRR" and any reports, proxy statements and other information concerning us can
be inspected at the offices of the NYSE, 20 Broad Street, 17th Floor, New York,
New York 10005.
We have filed a registration statement with the SEC on Form S-3 under
the Securities Act, with respect to the securities offered by this prospectus.
This prospectus, which constitutes part of the registration statement, omits
some information contained in the registration statement and the exhibits to the
registration statement on file with the SEC pursuant to the Securities Act and
the rules and regulations of the SEC under the Securities Act. For further
information with respect to us and the common shares, reference is made to the
registration statement. We will describe the material provisions of any contract
or other document referred to in this document.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference the documents listed below have
which have been filed by us with the SEC under file number 1-12286:
o our Annual Report on Form 10-K for the fiscal year ended December 31, 1999;
o description of the common shares included in our Registration Statement on
Form 8-A dated August 24, 1993, and the information thereby incorporated by
reference contained in our Registration Statement on Form S-11, dated July
22, 1993; and
We are also incorporating all documents we file pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and before the termination of the offering made by this prospectus. Any
statement in a document referenced in part or in whole shall be deemed to be
modified or superseded for purposes of the registration statement and this
prospectus to the extent that the statement is modified or superseded by the
registration statement and this prospectus. Any statement that has been modified
or superseded by this prospectus shall not be deemed to constitute a part of
this prospectus beyond the extent of the portion of the modified or superseded.
We will provide a copy of any document incorporated by reference,
other than exhibits to those documents unless the exhibits are specifically
incorporated by reference into the documents that this prospectus incorporates
by reference free of charge to any person who receives a prospectus upon written
or oral request. Requests should be directed to the Secretary, 170 W. Ridgely
Road, Suite 300, Lutherville, Maryland 21093, telephone number (410) 684-2000.
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SUMMARY
This summary only highlights the more detailed information appearing
elsewhere in this prospectus or incorporated in this prospectus by reference. As
this is a summary, it may not contain all information that is important to you.
Our Company
We are a REIT which owns, acquires, develops, redevelops, leases and
manages primarily neighborhood or community shopping centers in the Middle
Atlantic region of the United States. We also own other commercial properties
and seven undeveloped parcels of land totaling approximately 147 acres. The
properties have a gross leasable area of approximately 4.9 million square feet
and were 92% leased at March 1, 2000. We have an equity interest in 35 shopping
centers, 29 of which are wholly owned by us.
All of our interests in the properties are held directly or
indirectly by, and substantially all of our operations relating to the
properties are conducted through, the Operating Partnership. We control the
Operating Partnership as the sole general partner and, therefore, have the
exclusive power to manage and conduct the business of the Operating Partnership,
subject to certain exceptions. We own approximately 82% of the OP Units.
On July 1, 1997 we converted into an "umbrella partnership real
estate investment trust" or "UPREIT" structure, which will permit us to use OP
Units as consideration in property acquisitions, thereby providing certain tax
deferral benefits to sellers.
We are organized under the laws of the State of Maryland. The
executive offices of both us and the Operating Partnership are located at 170 W.
Ridgely Road, Suite 300, Lutherville, Maryland 21093, (410) 684-2000.
Securities to be Offered
The Saucon Valley Partners were given the right to redeem their OP
Units at any time after March 19, 2000. At our option, we may assume the payment
obligation at any time and pay it in cash or, in our discretion, we may
substitute our common shares in redemption of the OP Units on a one share for
one OP Unit basis. We have granted registration rights to the selling
shareholders pursuant to which we will register common shares acquired by them
upon redemption of OP Units. The Operating Partnership has a call option to
purchase the remaining 11% of the limited partnership interests in exchange for
OP Units and the Saucon Valley Partners have a put option to sell the 11%
interest to the Operating Partnership for the same number of OP Units. The
registration statement of which this prospectus is a part registers 222,624 of
the common shares that may be issued in redemption of the OP Units issued to the
Saucon Valley Partners or issuable to them in the future for their remaining 11%
interest in the Saucon Valley Partnership.
RISK FACTORS
Statements in this document filed with the SEC include forward
looking statements under the federal securities laws. Statements that are not
historical in nature, including the words "anticipate," "estimate," "should,"
"expect," "believe," "intend," and similar expressions, are intended to identify
forward-looking statements. While these statements reflect our good faith belief
based on current expectations, estimates and projections about (among other
things) the industry and the markets in which we operate, they are not
guarantees of future performance, involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward looking statements, and should not be relied upon as predictions of
future events. In making these cautionary
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statements, we are not committed to addressing or updating each factor in future
filings of communications regarding our business or results, or addressing how
any of these factors may have caused results to differ from discussions or
information contained in previous filings or communications. The following is a
discussion of factors that could impact future results.
Industry Risks
Real property investments are subject to changes in general
economic conditions.
Real property investments are subject to varying types and degrees
of risk that may hinder or otherwise affect our ability to generate revenues.
These risks could reduce the amount of cash available for distributions to
shareholders.
Any of the following factors could affect the value of our real
estate and our ability to generate revenues:
o changes in the general economic climate;
o local conditions (such as an oversupply of space or a reduction in demand
for real estate in an area);
o competition from other shopping centers, properties, developers or real
estate owners;
o variable operating costs;
o government regulations;
o changes in interest rates;
o the availability of financing; and
o potential liability due to changes in environmental and other laws.
Real estate investments are relatively illiquid.
Real estate investments are relatively illiquid and, therefore, our
ability to react promptly in response to changes in economic or other conditions
will be limited. In addition, the Internal Revenue Code limits our ability to
sell property held for less than four years.
We may not be able to re-lease properties upon the expiration of
existing leases.
Upon the expiration of leases, tenants may not renew leases and we
may not be able to re-lease properties or the terms of the renewal or re-lease,
including the costs of required renovations or concessions to tenants, may be
less favorable than current lease terms. Our operating cash flow would decrease
if we were unable to promptly re-lease all or a substantial portion of this
space, if the rental rates upon the re-lease were significantly lower than
expected, or if resources for costs of the re-leasing prove inadequate.
If tenants are unable to meet their obligations to us our cash flow
would be adversely affected.
If a significant number of tenants are unable to meet their
obligations to us, the cash receipts and cash available for distribution will
decrease. A tenant may experience a downturn in its business which may weaken
its financial condition and result in a reduction or failure to make rental
payments when due. If a lessee or sublessee defaults in its obligations to us,
we may be delayed in enforcing our
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rights as lessor or sublessor. In addition, we may incur substantial costs and
experience significant delays associated with protecting our investment,
including costs incurred in renovating and re-leasing the property.
At any time, one or more of our tenants may seek the protection of
the bankruptcy laws, which could result in the rejection and termination of
their lease. We are subject to risks that:
o any present tenant that has filed for bankruptcy protection will not
continue making payments under its lease;
o any tenant may file for bankruptcy protection in the future; or
o any tenants that file for bankruptcy protection may not continue to make
rental payments in a timely manner.
Losses from earthquakes and other natural disasters are uninsurable or
insurable only at costs that are not economically justifiable.
We carry comprehensive liability, fire, flood, extended coverage and rental
loss insurance with policy specifications and insured limits that are customary
for similar properties. Losses from catastrophic events and natural disasters
like wars or earthquakes, however, are uninsurable or insurable only at costs
that are not economically justifiable. If an uninsured loss occurs, we may lose
both our invested capital and anticipated profits from the property.
Nevertheless, we would still be obligated to repay any recourse mortgage
indebtedness on the property.
We are subject to risks associated with debt financing and existing
debt maturities.
We are subject to a variety of risks associated with debt financing.
Examples of these risks include the following:
o our cash from operating activities may be insufficient to meet required
payments;
o we may be unable to pay or refinance indebtedness on our properties;
o if interest rates or other factors result in higher interest rates on
refinancing, these factors will diminish our returns on development and
redevelopment activities, reduce cash from operating activities, and hamper
our ability to make distributions to shareholders;
o if we are unable to secure refinancing of indebtedness on acceptable terms,
we may be forced to dispose of properties upon disadvantageous terms, which
may cause losses and affect our funds from operations; and
o if properties are mortgaged to secure payment of indebtedness and we are
unable to meet payments, the mortgagee may foreclose upon the properties,
resulting in a loss of income and a valuable asset to us.
Because many of our competitors have greater capital resources, we may be
at a disadvantage with regard to exploiting land development, property
acquisition and tenant opportunities.
Based on total assets and annual revenues, we are smaller than many of the
numerous commercial developers, real estate companies and other owners of real
estate that compete with us in seeking land for development, properties for
acquisition and tenants for properties. We are even smaller
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than many of our competitors that operate in the region in which our properties
are located. Many of these competitors may have greater capital and resources
than us, and this fact could impair our ability to acquire properties in the
future.
We may become liable for the costs of removal or remediation of certain
environmentally hazardous or toxic substances under federal, state or local
laws.
Under various federal, state and local laws, ordinances and regulations, we
may become liable for the cost of removal or remediation of certain hazardous or
toxic substances on or in our real property. Liability may be imposed regardless
of whether we or the tenant knew of, or was responsible for, the presence of
such hazardous or toxic substances. The costs of any required remediation or
removal of environmentally hazardous substances may be substantial, and our
liability as to any property is generally not limited under those laws,
ordinances and regulations. The liability could exceed the value of our property
and/or aggregate assets. The presence of, or the failure to properly remediate,
substances when released may adversely affect our ability to sell the affected
real estate or to borrow using the real estate as collateral. At the time of
this filing, we had not been notified by any governmental authority of any
non-compliance, liability or other claim in connection with any of our
properties, and we are not aware of any other environmental condition with
respect to any of the our portfolio properties that we believe would have a
material adverse effect on our business, assets or results of operations.
However, we cannot assure that there are no potential environmental liabilities,
that no environmental liabilities may develop, that no prior owner created any
material environmental condition not known to us, or that future uses or
conditions, including, without limitation, changes in applicable environmental
laws and regulations, will not result in liability.
We may incur significant costs complying with the Americans with
Disabilities Act.
We must comply with Title III of the Americans with Disabilities Act. To
comply with the ADA's requirements, we may be required to remove structural,
architectural or communication barriers to handicapped access and utilization in
certain public areas of our properties. Noncompliance could result in injunctive
relief, imposition of fines or an award of damages to private litigants. If we
are required to make changes to bring any of the properties into compliance with
the ADA, expenses associated with these changes could adversely affect our
ability to make expected distributions to shareholders. We believe that our
competitors face similar costs to comply with the requirements of the ADA.
The ownership limitations on REITs create an anti-takeover effect.
To maintain our qualification as a REIT not more than 50% in value of our
outstanding common shares may be owned, actually or constructively, by five or
fewer individuals. In addition, the Internal Revenue Code imposes certain other
limitations on the ownership of the shares of a REIT. For the purpose of
preserving our tax status as a REIT, our charter prohibits actual or
constructive ownership of more than 9.9% of the outstanding shares, either in
the aggregate or of any class, by any person, unless waived by the board of
trustees. In addition, the beneficial ownership limitations restrict the
ownership, under applicable attribution rules of the Internal Revenue Code, of
more than 9.9% of the outstanding shares, either in the aggregate or of any
class. The rules addressing constructive ownership are complex and may cause
shares owned, actually or constructively, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of the outstanding
shares, either in the aggregate or of any class, by an individual or entity,
could cause that individual or entity (or another individual or entity) to
constructively own more than 9.9% of the outstanding shares. This situation
would subject such shares to the beneficial ownership limitations. Actual or
constructive ownership of shares in excess of such limits would either cause the
violative transfer of ownership to be void or cause such shares to be converted
to Excess Shares (as defined below).
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The ownership restrictions have the effect of deterring non-negotiated
acquisitions of us, and proxy fights for us by third parties. Limiting the
ownership of our shares may discourage a change of control and may also:
o deter tender offers for the common shares, which offers may be attractive
to the shareholders,
o limit the opportunity for shareholders to receive a premium for the common
shares that might otherwise exist if an investor attempted to assemble a
block of shares in excess of the 9.9% beneficial ownership limitation, or
o limit the opportunity for shareholders to effect a change in our control.
We may not qualify as a REIT in the future causing us to be taxed at
regular corporate rates and reducing the amount of cash for distribution.
We believe that we have operated in a manner that permits us to qualify as
a REIT under the Internal Revenue Code for each taxable year since our formation
as a REIT in 1993. Qualification as a REIT, however, involves the application of
highly technical and complex Internal Revenue Code provisions for which there
are only limited judicial or administrative interpretations. In addition, REIT
qualification involves the 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 distribute annually to shareholders 95% (90% for
tax years beginning after December 31, 2000) of our REIT taxable income,
excluding net capital gains. Therefore, although we believe that we are
organized and operating in a manner that permits us to remain qualified as a
REIT, we cannot guarantee that we will be able to continue to operate in such a
manner. In addition, if we are audited by the IRS with respect to any past
year, the IRS may challenge our qualification as a REIT for that year.
Similarly, new legislation, regulations, administrative interpretations or
court decisions may change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of that qualification. We are not aware,
however, of any currently pending tax legislation that would adversely affect
our ability to continue to operate as a REIT.
If we fail to qualify as a REIT, we will be subject to federal income tax
on taxable income at regular corporate rates. Increased tax liability in a given
year could significantly reduce, or possibly eliminate, the amount of cash we
have available for investment or distribution to shareholders for that year. In
addition, we will also be disqualified from treatment as a REIT for the next
four taxable years, unless we are entitled to relief under other statutory
provisions.
If we do not qualify as a REIT, we will no longer be required to make
annual distributions to shareholders. To the extent that we made distributions
to shareholders in anticipation of our qualifying as a REIT, we might be
required to borrow funds or to liquidate some of our investments to pay the
applicable tax. Our failure to qualify as a REIT would also constitute a default
under certain of our debt obligations and would significantly reduce the market
value of our shares.
Company Risks
Our performance depends on the economic conditions of the Middle Atlantic
Area where most of our properties are located.
Our performance depends on the economic conditions in markets in which our
properties are concentrated. Since most of our properties are located in the
Middle Atlantic area, our results could be adversely affected if conditions,
such as an oversupply of space or a reduction in demand for real estate,
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in the Middle Atlantic area become more competitive than other geographic areas.
The existence of these conditions could have a greater adverse impact on us than
on a real estate company with properties in a number of different geographic
areas.
Our organizational documents do not place limits on the incurrence of debt.
Our documents do not limit the amount of indebtedness that we may incur.
Although our board of trustees attempts to maintain a balance between total
outstanding indebtedness and the value of our portfolio (for example, a ratio of
debt to real estate value of 50% or less), it could alter this balance at any
time. If we become more highly leveraged, then the resulting increase in debt
service could diminish our ability to make expected distributions to
shareholders and make payments on outstanding indebtedness. If we default on our
obligations under any outstanding indebtedness, we could lose our interest in
any properties that secure that indebtedness.
We may need to borrow money to qualify as a REIT.
Our ability to make distributions to shareholders could be diminished by
increased debt service obligations if we need to borrow money in order to
maintain our REIT qualification. For example, differences in timing between when
we receive income and when we have to pay expenses could require us to borrow
money to meet the requirement that we distribute to shareholders at least 95% of
our net taxable income excluding net capital gain each year. The incurrence of
large expenses also could require us to borrow money to meet this requirement.
We might need to borrow money for these purposes even if we believe that market
conditions are not favorable for such borrowings. In other words, we may have to
borrow money on unfavorable terms.
We cannot avoid risks inherent in development and acquisition activities.
Developing or expanding existing properties in our real estate portfolio is an
integral part of our strategy for maintaining and enhancing the value of our
portfolio. We may also choose to acquire additional properties in the future.
While our policies with respect to developing and expanding properties are
intended to limit some of the risks otherwise associated with property
acquisition such as not starting construction on a project prior to obtaining a
commitment from an anchor tenant, we nevertheless will incur risks, including
risks related to delays in construction and lease-up, costs of materials,
financing availability, volatility in interest rates and labor availability.
In addition, once a property is acquired, the renovation and improvement
costs we incur in bringing an acquired property up to market standards may
exceed our estimates, and the property may fail to perform as expected.
Maryland law may prevent or discourage a change in control.
The Maryland General Corporation Law establishes special restrictions
against "business combinations" between a Maryland corporation and "interested
shareholders" or their affiliates unless an exemption is applicable. The
business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any offers to
acquire us, even if our acquisition would be in our shareholders' best
interests.
Maryland law also provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of beneficial interest owned by the acquiror, by
officers or by trustees who are employees of the corporation. The control share
statute could have the effect of discouraging offers to acquire us and of
increasing the difficulty of consummating any control share acquisitions, even
if our acquisition would be in our shareholders' best interests.
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Increased market interest rates could reduce share prices.
The annual dividend rate on shares as a percentage of its market price may
influence the trading price of stock. Also, an increase in market interest rates
may lead purchasers to demand a higher annual dividend rate, which could lower
the market price of the shares. A decrease in the market price of the shares
could reduce our ability to raise additional equity in the public markets.
DESCRIPTION OF COMMON SHARES
The summary of the terms of our capital stock set forth below does
not purport to be complete. For a detailed, complete description, please see our
declaration of trust and bylaws, each as amended and restated, copies of which
are exhibits to the registration statement of which this prospectus is a part.
General
Our declaration of trust authorizes us to issue up to 102,000,000
shares, consisting of 100,000,000 of common shares and 2,000,000 of preferred
shares, and other types or classes of shares of beneficial interest as the
trustees may create and authorize from time to time. No preferred shares are
outstanding and we have no present plans to issue any preferred shares.
Our common shareholders shall be entitled to vote only on the
following matters:
o election or removal of trustees;
o amendment of the declaration of trust;
o our termination; and
o our merger or consolidation, exchange of our shares or the sale or
disposition of all or substantially all of our assets.
Except for the election or removal of trustees, which requires the
approval of holders of a majority of the common shares present at a meeting at
which a quorum is present, each of the other matters requires the affirmative
approval of holders of two-thirds of the common shares issued and outstanding
and entitled to vote upon the matter. Except with respect to the foregoing
matters, no action taken by the shareholders at any meeting shall in any way
bind the trustees.
Both Maryland statutory law governing REITs and our declaration of
trust provide that no shareholder is personally liable for any of our
obligations. Our bylaws further provide that we must indemnify each shareholder
against any claim or liability to which the shareholder may become subject by
reason of his being or having been a shareholder, and reimburse each shareholder
for all legal and other expenses reasonably incurred by him in connection with
any claim or liability. In addition, it is our policy to include a clause in our
contracts which provide that shareholders assume no personal liability for
obligations entered into on our behalf. However, with respect to tort claims,
contractual claims where shareholder liability is not so negated, claims for
taxes and certain statutory liability, the shareholder may, in some
jurisdictions, be personally liable to the extent that we do not satisfy the
claims. Inasmuch as we will carry public liability insurance which we consider
adequate, any risk of personal liability to shareholders is limited to
situations in which our assets plus our insurance coverage would be insufficient
to satisfy the claims against us and our shareholders.
The transfer agent and registrar for the common shares is the
Continental Stock Transfer and Trust Company, New York, New York.
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Common Shares. Each outstanding common share entitles the holder to
one vote on all matters submitted to a vote of shareholders, including the
election of trustees. There is no cumulative voting in the election of trustees,
which means that the holders of a majority of the outstanding shares can elect
all of the trustees then standing for election. Holders of common shares are
entitled to distributions as may be declared from time to time by the trustees
out of funds legally available for distribution.
Holders of common shares have no conversion, redemption or preemptive
rights to subscribe for any securities. All outstanding common shares will be
fully paid and nonassessable. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common shares will be entitled to share
ratably in the assets that remains after provision for payment of liabilities to
creditors and preferential rights of the preferred shares, if any.
Common shares shall have equal dividend, distribution, liquidation
and other rights, and shall have no preference, preemptive, appraisal,
conversion or exchange rights.
Preferred Shares. The preferred shares authorized by our declaration
of trust may be issued from time to time in one or more series in such amounts
and with such preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption as may be fixed by the trustees. Under certain
circumstances, the issuance of preferred shares could have the effect of
delaying, deferring or preventing a change of our control and may adversely
affect the voting and other rights of the holders of the common shares. No
preferred shares are outstanding and we have no present plans to issue any
common shares or preferred shares.
Classification or Reclassification of Common Shares or Preferred
Shares. The declaration of trust authorizes the trustees to classify or
reclassify any unissued shares, including common shares or preferred shares, by
setting or changing the designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications or
terms or conditions of redemption of any common shares or preferred shares.
Excess Shares. The declaration of trust provides that no holder may
own, or be deemed to own, under the applicable attribution rules of the Internal
Revenue Code, common shares in excess of the beneficial ownership limitations or
the constructive ownership limitations, which we refer to in this prospectus as
the "ownership limit." In the event of a purported transfer or other event that
would, if effective, result in violation of the ownership limit or our
disqualification as a REIT, the common shares to be issued in the purported
transaction would automatically be converted into "Excess Shares." Excess Shares
are common shares automatically transferred to a special trust that we maintain
to the extent necessary to ensure that the purported transfer does not result in
our disqualification as a REIT.
A purported transferee of common shares converted into Excess Shares
is not entitled to voting rights, except to the extent required by law, or to
any dividends, distributions or other rights as a shareholder. If, after the
purported transfer resulting in a conversion of common shares into Excess Shares
and prior to our discovery of the purported transfer, dividends or distributions
are paid with respect to the common shares, then any such dividends or
distributions are to be repaid to us upon demand. We will hold Excess Shares for
the benefit of the ultimate transferee of an interest in trust. While Excess
Shares are held in trust, an interest in that trust may be transferred by the
purported transferee or other purported holder with respect to the Excess Shares
only to a person whose ownership of the common shares will not violate the
ownership limit and to whom the transfer will not constitute a prohibited
transfer, at which time the Excess Shares will be automatically converted into
common shares of the same type and class as the common shares for which the
Excess Shares were originally converted. The declaration of trust contains
provisions that are designed to ensure that the purported transferee or other
purported holder of the Excess Shares may not receive in return for the transfer
an amount that reflects any appreciation in the common shares for which the
Excess Shares were converted during the period that the Excess Shares were
outstanding. Any amount received by
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a purported transferee or other purported holder in excess of the amount
permitted to be received must be turned over to us.
Restrictions on Ownership and Transfer
To qualify as a REIT under the Internal Revenue Code, not more than
50% of its outstanding common shares may be owned, directly or indirectly, by
five or fewer individuals during the last half of a taxable year; the common
shares 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; and certain percentages of our gross income must be from
particular activities. See "Federal Income Tax Considerations - Federal Income
Taxation" In order to prevent any shareholder from owning common shares in an
amount which would cause more than 50% in number or value of our outstanding
common shares to be held by five or fewer individuals our declaration of trust
contains beneficial ownership limitations that, with certain exceptions,
restrict shareholders from owning, under the applicable attribution rules of the
Internal Revenue Code (which we refer to herein as the attribution rules), more
than 9.9% of the outstanding common shares, in number or value, either in the
aggregate or of any class.
Under our declaration of trust, shareholders who own more than 9.9%
of the outstanding common shares, in number or value, either in the aggregate or
of any class determined under the attribution rules shall have their shares over
the 9.9% ownership limitation converted into Excess Shares. In the event that
five or fewer persons would, but for the exchange described below, own under the
attribution rules more than 49.9% of the of the common shares, then, to the
extent necessary to prevent that ownership from exceeding 49.9% , common shares
owned by that shareholder in excess of 9.9% will be automatically converted into
Excess Shares on the day prior to the date that the ownership would otherwise
have risen above 49.9%. See "Description of Common Shares - General Excess
Shares" above.
Under the Internal Revenue Code, rental income received by a REIT
from persons as to which the REIT is treated, under the applicable attribution
rules, as owning a 10% or greater interest does not constitute qualifying income
for purposes of the income requirements that REITs must satisfy. See "Federal
Income Tax Considerations for Holders of Common Shares - Federal Income Taxation
of MART - Income Tests." For these purposes, a REIT is treated as owning any
stock owned, under the applicable attribution rules, by a person that owns 10%
or more of the value of the outstanding common shares of the REIT. In order to
ensure that our rental income will not be treated as nonqualifying income, under
the rules described above, and thus to ensure that there will not be an
individual loss of REIT status as a result of the ownership of common shares by
a tenant, or a person that holds an interest in a tenant, the declaration of
trust also contains constructive ownership limitations that restrict, with
certain exceptions, shareholders from owning, under the applicable attribution
rules (which are different from those applicable with respect to the beneficial
ownership limitations), more than 9.9% of the outstanding common shares, in
number or value, either in the aggregate or of any class. Subject to certain
exceptions, our declaration of trust also contains restrictions that are
designed to ensure that the shareholders who own common shares in excess of the
constructive ownership limitations will not, in the aggregate, own an interest
in a tenant or subtenant of the REIT of sufficient magnitude to cause rental
income received, directly or indirectly, by the REIT from the tenant or
subtenant to be treated as nonqualifying income for purposes of the income
requirements that REITs must satisfy.
For purposes of calculating the common shares owned by a shareholder
to determine the applicability of the beneficial and constructive ownership
limitations, the beneficial ownership rules contained in Regulation 13D
promulgated under the Securities Exchange Act will be applied. Accordingly, all
rights to acquire common shares and all securities convertible into common
shares will be deemed to have been exercised or converted, as the case may be.
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The trustees may waive the beneficial or the constructive ownership
limitations, if evidence satisfactory to the trustees and our tax counsel is
presented showing that the waiver will not jeopardize our status as a REIT under
the Internal Revenue Code and we will not be otherwise adversely affected. As a
condition of the waiver, an intended transferee must give us written notice and
must furnish necessary opinions of counsel, affidavits, undertakings, agreements
and information as may be required by the trustees. If, in our opinion, the
requested waiver raises significant issues which could adversely affect our
status as a REIT for federal income tax purposes, then the trustees will require
an opinion of counsel with respect to the issues prior to granting the waiver.
The foregoing restrictions on transferability and ownership will not apply if
the trustees determine that it is no longer in our best interests to attempt to
qualify, or to continue to qualify, as a REIT.
Our declaration of trust provides that we may , by notice to the
holder of Excess Shares, purchase any or all Excess Shares resulting from any
transfer or other event. The price at which we may purchase the Excess Shares
shall be equal to, in the case of Excess Shares resulting from a purported
transfer for value, the price per share in the purported transfer that caused
the automatic exchange for the Excess Shares, or, in the case of Excess Shares
resulting from some other event, the lesser of the market price of the common
shares on the date of the automatic conversion into Excess Shares, or the market
price of the common shares on the date we accept the offer to purchase the
Excess Shares. Any dividend or distribution paid to a proposed transferee of
Excess Shares prior to our discovery that the common shares have been
transferred in violation of the provisions of our declaration of trust shall 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 or our holder 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 persons who own, directly or by virtue of the attribution rules,
more than 9.9% in number or value either in the aggregate or of any class of the
outstanding common shares must give us written notice containing the information
specified in the declaration of trust by January 31 of each year. In addition,
each shareholder shall upon demand be required to disclose to us in writing this
information with respect to the direct, indirect and constructive ownership of
beneficial interests as the trustees deem necessary to comply with the
provisions of the Internal Revenue Code applicable to a REIT, to comply with the
requirements of any taxing authority or governmental agency or to determine any
compliance.
REGISTRATION RIGHTS
Shelf Registration
In the contribution agreement, we agreed to prepare and file a shelf
registration statement to register the issuance and resale, if required, of
common shares which may be issued to the selling shareholders in exchange for
their OP Units. We agreed to use our best efforts to cause this registration
statement to be declared effective and to keep the registration statement
continuously effective for a period of four years, which is the shelf period.
The shelf period may be extended for an additional number of days equal to the
number of business days during the pendency of all suspension periods and
blackout periods.
Demand Registration
At any time following the fifth anniversary of the closing, the
selling shareholders may request that we file a registration statement for their
benefit on Form S-3 covering the registration of at least 100,000
common shares. We agreed to use our best efforts to cause the demand
registration to become effective within 45 days after the date the registration
request was made and to remain in effect for at least 90 days. We will be
obligated to effect only two demand registrations.
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Piggyback Registration
If we propose to file a registration statement under the Securities
Act with respect to a primary offering of our shares for our own account,
excluding registration statements in connection with employee or director
benefit or compensation plans, a business combination, exchange offer, or rights
offering to existing holders, or a shelf registration, then we will give written
notice of the proposed offering to the selling shareholders as soon as
practicable and we will use our best efforts to include in the proposed offering
the shares issuable upon the exchange of their OP Units, unless we reasonably
determine that the inclusion of the shares would have a material adverse effect
on us, our shareholders or the offering.
FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF COMMON SHARES
We believe that we qualify to be taxed as a REIT and we intend to
remain qualified to be taxed as a REIT for federal income tax purposes under the
Internal Revenue Code, commencing with our taxable year ended December 31, 1993.
The following discussion addresses the material tax considerations relevant to
our taxation and summarizes certain federal income tax consequences that may be
relevant to certain shareholders. However, the actual tax consequences of
holding particular securities that we issue may vary in light of a prospective
securities holder's particular facts and circumstances. Certain holders, such as
tax-exempt entities, insurance companies and financial institutions, are
generally subject to special rules. In addition, the following discussion does
not discuss issues under any foreign, state or local tax laws. The tax treatment
of a holder of any of the securities offered by prospectus supplements will vary
depending upon the terms of the specific securities owned by the holder, as well
as his particular situation. Gordon, Feinblatt, Rothman, Hoffberger & Hollander,
LLC has acted as our tax counsel in connection with the filing of this
prospectus. This summary is qualified in its entirety by the applicable Internal
Revenue Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations of the Internal Revenue Code. No
rulings have been obtained or are expected to be obtained from the IRS
concerning any of the matters discussed herein. It should be noted that the
Internal Revenue Code, rules, regulations, and administrative and judicial
interpretations are all subject to change (possibly on a retroactive basis).
Each investor is advised to consult the applicable prospectus
supplement, as well as with his own tax advisor, regarding the tax consequences
to him of the acquisition, ownership and sale of the common shares, including
the federal, state, local, foreign and other tax consequences of such
acquisition, ownership and sale and of potential changes in applicable tax laws.
It is the opinion of Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC that we are organized and are operating in conformity with the
requirements for qualification and taxation as a REIT commencing with our
taxable year ended December 31, 1993, and our method of operation will enable us
to continue to meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code. It must be emphasized that this opinion is
based on various assumptions and is conditioned upon certain representations
made by us as to certain factual matters. Moreover, such qualification and
taxation as a REIT depends upon our ability to meet, through actual annual (and
with respect to certain tests quarterly) operating results, the various income,
asset, distribution, stock ownership and other tests discussed below, the
results of which will not be reviewed by Gordon, Feinblatt, Rothman, Hoffberger
& Hollander, LLC. Accordingly, no assurance can be given that the actual results
of our operations for any one taxable year (or quarter) will satisfy these
requirements.
If we initially failed to elect or qualify for taxation as a REIT or
cease to qualify as a REIT, and the relief provisions do not apply, our income
that is distributed to shareholders would be subject to the "double taxation" on
earnings (once at the corporate level and again at the shareholder level) that
generally results from investment in a corporation. Failure to qualify and to
maintain qualification as a REIT would force us to reduce significantly our
distributions and possibly incur substantial indebtedness or liquidate
substantial investments in order to pay the resulting corporate taxes. In
addition, once having obtained REIT status and
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having lost that status, we would not be eligible to elect REIT status for the
four subsequent taxable years, unless our failure to maintain our qualification
was due to reasonable cause and not willful neglect, and certain other
requirements were satisfied. In order to elect to again be taxed as a REIT, just
as with the original election, we would be required to distribute all of our
earnings and profits accumulated in any non-REIT taxable year.
Federal Income Taxation
General. If we qualify for tax treatment as a REIT income to the
extent currently distributed to our shareholders would not be subject to federal
corporate taxation. However, we will be subject to federal income tax as
follows:
o First, we will be taxed at regular corporate rates on our undistributed
REIT taxable income, (as defined below) including undistributed net capital
gains.
o Second, under certain circumstances, we may be subject to the "alternative
minimum tax" on our items of tax preference to the extent that tax exceeds
our regular tax.
o Third, if we have net income from the sale or other disposition of
"foreclosure property" that we held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on that
income.
o Fourth, any net income that we have from prohibited transactions (which
are, in general, certain sales or other dispositions of property other than
foreclosure property held primarily for sale to customers in the ordinary
course of business) will be subject to a 100% tax.
o Fifth, if we should fail to satisfy either the 75% or 95% gross income
tests (as discussed below), and have nonetheless maintained our
qualification as a REIT because other requirements have been met, we will
be subject to a 100% tax on the net income attributable to the greater of
the amount by which we fail the 75% or 95% test, multiplied by a fraction
intended to reflect our profitability.
o Sixth, if we fail to distribute during each year at least the sum of 85% of
our REIT ordinary income for that year, 95% of our REIT capital gain net
income for that year, and any undistributed taxable income from preceding
periods, we will be subject to a nondeductible 4% excise tax on the excess
of the required distribution over the amounts actually distributed.
o Seventh, if during the 10-year period commencing on the first day of the
first taxable year that the we qualify as a REIT, we recognize a gain from
the disposition of an asset we held at the beginning of that period, or
during the 10-year period commencing on the date we acquired appreciated
property from a Subchapter C corporation in a transaction in which we
inherit the tax basis in that asset from the Subchapter C corporation and
we recognize a gain from the disposition of that asset, then we will be
subject to tax at the highest regular corporate rate on the lesser of (a)
the recognized gain or (b) the excess, if any, of the fair market value
over the adjusted basis of any such asset as of the beginning of such
10-year period (the "built-in-gain").
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Moreover, the aggregate built-in-gain during the 10-year period cannot exceed
the total net built-in-gain of all assets at the beginning of the 10-year
period. Subject to certain limitations, we may, to the extent available, utilize
any pre-REIT net operating loss carry forwards to offset recognized gains.
The Internal Revenue Code defines a REIT as a corporation, trust or
association: (1) that is managed by one or more trustees or directors; (2) where
the beneficial ownership is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (3) which (except for certain provisions of
the Internal Revenue Code) would be taxable as a domestic corporation; (4) which
is neither a financial institution nor an insurance company pursuant to certain
provisions of the Internal Revenue Code; (5) whose beneficial ownership is held
by 100 or more persons; (6) that during the last half of each taxable year, not
more than 50% in value of the outstanding shares are owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities); and (7) that meets certain other tests,
described below, regarding its income and assets.
The requirements and conditions set forth in the first four
provisions above, inclusive, must be met during each day of the taxable year;
and the requirements set forth in the fifth provision must be met during at
least 335 days of a taxable year of 12 months, or during the proportionate part
of a taxable year of less than 12 months.
For tax years beginning after December 31, 2000 if a REIT has
redetermined rents, redetermined deductions and/or excess interest, such amounts
will be subject to a 100% tax. Redetermined rents means rents from real property
the amount of which would be reduced on distribution, apportionment, or
allocation under the Internal Revenue Code to clearly reflect income as a result
of services furnished or rendered by a taxable REIT subsidiary which the REIT
owns to one of its tenants, subject to certain exceptions. Redetermined
deductions means deductions (other than redetermined rents) of a taxable REIT
subsidiary which the REIT owns, if the amount of the deductions would be
decreased on distribution or apportionment or allocation under the Internal
Revenue Code to clearly reflect income between the subsidiary and its parent.
Excess interest means any deductions for interest payments by a taxable REIT
subsidiary to its parent REIT to the extent that the interest payments are in
excess of a rate that is commercially reasonable.
We are owned by more than 100 persons and management has represented
that not more than 50% in number or value of our outstanding stock is owned by
five or fewer individuals. Moreover, our declaration of trust provides for
restrictions regarding ownership of our common shares, which will assist us in
continuing to satisfy the beneficial ownership requirements described above.
See "Description of Common Shares - Restrictions on Ownership and Transfer."
We own and operate a number of properties through wholly-owned
subsidiaries. The Internal Revenue Code provides that a corporation which is a
"qualified REIT subsidiary" shall not be treated as a separate corporation, and
all assets, liabilities and items of income, deduction and credit of a qualified
REIT subsidiary shall be treated as assets, liabilities, and those items (as the
case may be) of the REIT. A qualified REIT subsidiary is any corporation (other
than a taxable REIT subsidiary) in which we own 100% of the stock. In addition,
we will be deemed to own our proportionate share of the assets and liabilities
of any partnership in which we are partner. For taxable years beginning after
December 31, 2000 the Internal Revenue Code allows REITs to own "taxable REIT
subsidiaries." A taxable REIT subsidiary is a corporation (other than a real
estate investment trust) in which a REIT directly or indirectly owns stock and
which the corporation and the REIT jointly elect to be treated as a taxable REIT
subsidiary. It also includes with respect to any REIT, any corporation other
than a real estate investment trust with respect to which a taxable REIT
subsidiary of the REIT owns directly or indirectly (1) securities possessing
more that 35% of the total voting power of the outstanding securities of such
corporation, or (2) securities having a value of more than 35% of the total
value of the outstanding securities of such corporation.
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Income Tests. There are two percentage tests relating to the sources
of our gross income. First, at least 75% of our gross income (excluding gross
income from prohibited transactions) must be directly or indirectly derived each
taxable year from investments relating to real property or mortgages on real
property or certain temporary investments. Second, at least 95% of our gross
income (excluding gross income from prohibited transactions) must be directly or
indirectly derived each taxable year from any of the sources qualifying for the
75% test or from dividends, interest, and gain from the sale or disposition of
stock or securities.
In applying these tests, if we invest in a partnership, we will be
treated as realizing our share of the gross income of the partnership, and the
character of that income, as well as other partnership items, will be determined
at the partnership level. The term "interest" generally does not include any
amount if the determination of that amount depends in whole or in part on the
income or profits of any person, although an amount generally will not be
excluded from the term "interest" solely by reason of being based on a fixed
percentage of receipts or sales.
The term "prohibited transaction" means a sale or other distribution
of property which would constitute stock in trade of the taxpayer, property
which would properly be included in inventory of the taxpayer or property held
by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, which is not foreclosure property. However, a prohibited
transaction does not include a sale of property which is a real estate asset as
defined below if all of the following conditions are satisfied:
o the REIT has held the property for at least four years;
o aggregate expenditures made by the REIT, or any partner of the REIT, during
the four year period preceding the date of sale which are includable in the
basis of the property do not exceed 30% of the net selling price of the
property;
o during a taxable year the REIT does not make more than seven sales of
property (other than foreclosure property), or the aggregate adjusted basis
(as determined for purposes of computing earnings and profits) of
properties (other than foreclosure property) sold during the taxable year
does not exceed 10% of the aggregate basis (as so determined) of all of the
assets of the REIT as of the beginning of the taxable year;
o in the case of property, which consists of land or improvements, not
acquired through foreclosure or deed in lieu of foreclosure, or lease
termination, the REIT has held the property for not less than four years
for production of rental income; and
o if the requirement of the first clause of the third bullet point is not
satisfied, substantially all of the marketing and development expenditures
with respect to the property were made through an independent contractor
(as defined in Internal Revenue Code) from whom the REIT itself does not
derive or receive any income.
Rents that we receive qualify as "rents from real property" for
purposes of satisfying the gross income tests for a REIT only if several
conditions are met.
o First, the amount of rent must not be based in whole or in part on the
income or profits of any person, although rents generally will not be
excluded merely because they are based on a fixed percentage of receipts or
sales.
o Second, for taxable years beginning on or before December 31, 2000, rents
received from a tenant will not qualify as "rents from real property" if
the REIT, or an owner of 10% or more of the REIT, also directly or
constructively owns 10% or more of that
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tenant. For taxable years beginning after December 31, 2000, amounts paid
to us from a taxable REIT subsidiary which we own will not be excluded from
rents from real property under this rule if at least 90% of the leased
space of the property is rented to persons other than taxable REIT
subsidiaries which we own and tenants in which the REIT, or an owner of 10%
or more of the REIT also directly or constructively owns 10% or more,
provided that the exception only applies to the extent that the amounts
paid to us as rents from real property with respect to such property are
substantially comparable to such rents by the other tenants of our property
for comparable space.
o Third, if rent attributable to personal property leased in connection with
a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to that personal
property will not qualify as "rents from real property."
o Fourth, for rents to qualify as "rents from real property," the REIT
generally must not operate or manage the property or furnish or render
impermissible services to the tenants of that property, other than through
an independent contractor from whom the REIT derives no income; provided,
however, we may directly perform certain services other than services which
are considered rendered to the occupant of the property. Services furnished
or rendered or management or operation provided, through an independent
contractor from whom we do not derive or receive any income is not treated
as furnished, rendered, or provided by us. For tax years beginning after
December 31, 2000 such services which are provided by a taxable REIT
subsidiary which we own will also not be treated as provided by us if the
taxable REIT subsidiary satisfies certain rules described below.
In determining whether a REIT satisfies the income tests, a REIT's
rental income from a property will not cease to qualify as "rents from real
property" merely because the REIT performs services for a tenant other than
permitted customary services if the amount that the REIT is deemed to have
received as a result of performing impermissible services does not exceed 1% of
all amounts received directly or indirectly by the REIT with respect to such
property. The amount that a REIT will be deemed to have received for performing
impermissible services will be at least 150% of the direct cost to the REIT of
providing those services. We have represented that we do not charge rent for any
property that is based in whole or in part on the income or profits of any
person other than rent based on a percentage of receipts or sales, as described
above, and that we do not rent any property to a related party tenant as
described above. The constructive ownership restrictions described above will
assist us in satisfying this requirement. See "Description of Common Shares -
Restrictions on Ownership and Transfer." Finally, we directly perform services
under certain of our leases.
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 that year
if we are eligible for relief under certain provisions of the Internal Revenue
Code. These relief provisions will be generally available if our failure to meet
these tests were due to reasonable cause and not due to willful neglect. It is
not now possible to determine the circumstances under which we may be entitled
to the benefit of these relief provisions. If these relief provisions apply, a
special tax is imposed on the greater of the amount by which we failed the 75%
test or the 95% test.
Asset Tests. At the close of each quarter of our taxable year, we
must also satisfy several 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 (including receivables
arising in the ordinary course of our operation) and government securities. For
these purposes, a REIT's assets include its allocable share of assets held by
partnerships in which the REIT owns an interest and is held by qualified REIT
subsidiaries of the REIT. It also includes stock or debt instruments held for
not more than one year which were purchased
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with the proceeds of a stock offering or long-term (at least five years) debt
offering of the REIT. Second, not more than 25% of our total assets may be
represented by securities other than those includable in the 75% asset class.
Moreover, for taxable years beginning on or before December 31, 2000, of the
investments included in the 25% asset class, the value of any one issuer's
securities that we own may not exceed 5% of our total assets and we may not own
more than 10% of any one issuer's outstanding voting securities. For taxable
years beginning after December 31, 2000 not more than 20% of the value of our
assets may be represented by the securities of one or more taxable REIT
subsidiaries and except with respect to a taxable REIT subsidiary and securities
includable in the 75% assets class, not more than 5% of the value of our total
assets may be represented by the securities of any one issuer, and we may not
hold securities possessing more than 10% of the total voting power or 10% of the
total value of the outstanding securities of any one issuer.
If we inadvertently fail to satisfy one or more of the asset tests at
the end of the calendar quarter, we would still not lose our REIT status,
provided that we satisfied all of the asset tests at the close of the preceding
quarter, and the discrepancy between the value of our assets and the standards
imposed by the asset tests either did not exist immediately after the
acquisition of any particular asset or was not wholly or partly caused by that
type of acquisition.
We have numerous wholly owned subsidiaries. All of our current
subsidiaries should be treated as "qualified REIT subsidiaries" and we do not
currently own any interests in any taxable REIT subsidiary. As noted above,
qualified REIT subsidiaries will not be treated as separate corporations for
federal income tax purposes pursuant to the provisions of the Internal Revenue
Code . Thus, for these purposes, we will not own more than 10% of the
outstanding securities of any one issuer as a result of the ownership of our
subsidiaries.
Dividend Requirements
In order to qualify as a REIT, we are required to make distributions
(other than capital gain dividends) to our shareholders in an amount at least
equal to the sum of:
o For taxable years on or before December 31, 2000, 95% (and for taxable
years beginning after December 31, 2000, 90%) of our "REIT taxable income"
(computed without regard to the dividends paid deduction and our net
capital gain), and
o For taxable years on or before December 31, 2000, 95% (and for taxable
years beginning after December 31, 2000, 90%) of the after tax net income,
if any, from foreclosure property, minus
o the sum of certain items of non-cash income.
REIT taxable income means the taxable income of a real estate
investment trust adjusted as follows: (1) the deductions for corporations
relating to dividends received are not allowed; (2) the deductions for dividends
paid shall be allowed but shall be computed without regard to that portion of
the deduction which is attributable to the amount excluded under number (4)
below; (3) taxable income shall be computed without regard to the computation of
tax on a change of annual accounting period; (4) tax shall be excluded in the
amount equal to the net income from foreclosure property; (5) taxes imposed for
failure to meet the 95% or 75% income tests are deducted; (6) net income derived
from prohibited transactions are excluded; and (7) for taxable years beginning
after December 31, 2000, taxes imposed on redetermined rents, redetermined
deductions and excess interest is deducted.
In addition, we will be required to distribute (for taxable years
beginning on or before December 31, 2000) at least 95% (and for taxable years
beginning after December 31, 2000, at least 90%) of any built-
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in-gain (after tax) we may recognize during the 10-year period commencing on the
date we acquired assets with a built-in gain from a Subchapter C corporation in
a carryover basis transaction. This distribution must be paid in the taxable
year to which it relates, or in the following taxable year if declared before we
timely file our tax return for that year and if paid on or before the first
regular distribution payment after that declaration. To the extent that we do
not distribute all of our net capital gain or distribute at least 95% (90% for
tax years beginning after December 31, 2000), but less than 100%, of our REIT
taxable income, as adjusted, we will be subject to tax on that amount at regular
corporate tax rates. Finally, as discussed above, we may be subjected to an
excise tax if we fail to meet certain other distribution requirements.
It is possible that we may, from time to time, not have sufficient
cash or other liquid assets to meet the 95% (90% for tax years beginning after
December 31, 2000) distribution requirement due to timing differences between
the actual receipt of income and actual payment of deductible expenses, and the
inclusion of that income and deduction of those expenses in arriving at our
taxable income. In the event that these timing differences occur, we may find it
necessary to arrange for borrowings or pay taxable stock dividends in order to
meet the 95% (90% for tax years beginning after December 31, 2000) requirement.
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
distributions paid for the earlier year. Thus, although we may be able to avoid
being taxed on amounts distributed as deficiency distributions, we will be
required to pay interest based upon the amount of any deduction taken for
deficiency distributions.
Failure to Qualify as a Real Estate Investment Trust
Our election to be treated as a REIT will be automatically terminated
if we fail to meet the requirements described above. In that event, we will be
subject to tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates, and we cannot deduct distributions to
shareholders. All distributions to shareholders will be taxable as ordinary
income to the extent of current and accumulated earnings and profits and will be
eligible for the 70% dividends received deduction for corporations. We will not
be eligible again to elect REIT status until the fifth taxable year which begins
after the year for which our election was terminated unless we did not willfully
fail to file a timely return with respect to the termination taxable year,
inclusion of incorrect information in that return was not due to fraud with
intent to evade tax, and we established that failure to meet the requirement was
due to reasonable cause and not willful neglect. Failure to qualify for even one
year could result in our incurring substantial indebtedness (to the extent
borrowings are feasible) or liquidating substantial investments in order to pay
the resulting taxes.
Federal Income Taxation of Shareholders
General. As long as we qualify for taxation as a REIT, distributions
made to our shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be includable by the shareholders
as ordinary income for federal income tax purposes. None of these distributions
will be eligible for the dividends received deduction for corporate
shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed our actual
net capital gain for the taxable year) without regard to the period for which
the shareholder has held his shares. Thus, subject to certain limitations,
capital gains dividends received by an individual U.S. shareholder may be
eligible for the 20% tax rates on capital gains. In addition, the IRS has the
authority to issue regulations requiring that capital gains attributable to
unrecaptured Internal Revenue Code Section 1250 gain be taxed at the 25% rate.
Unrecaptured Internal Revenue Code Section 1250 gain is gain from the sale of
depreciable real property which would be subject to depreciation recapture if
the property was personal property.
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Corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. A REIT may elect to retain and pay
income tax on any net long-term capital gains and require its shareholders to
include such undistributed net capital gains in their income. If a REIT makes
such an election, the REIT's shareholders would receive a tax credit
attributable to their share of capital gains tax paid by a REIT on the
undistributed net capital gains that were included in the shareholders' income,
and such shareholders will receive an increase in the basis of their shares in
the amount of undistributed net capital gain included in their income reduced by
the amount of the credit.
Distributions in excess of current or accumulated earnings and
profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's common shares. Shareholders will
be required to reduce the tax basis of their common shares by the amount of such
distributions until such basis has been reduced to zero, after which such
distributions will be taxable at capital gain rates (except with respect to a
shareholder who holds his common shares as a dealer). The tax basis as so
reduced will be used in computing the capital gain or loss, if any, realized
upon the sale of the common shares. Shareholders may not include in their
individual federal income tax returns any of our net operating losses or capital
losses. In addition, any distribution declared by the REIT in October, November
or December of any year payable to a shareholder of record on a specified date
in any such month shall be treated as both paid by the REIT and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the REIT no later than January 31 of the following year. The REIT may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their non-foreign status to the REIT.
Foreign Shareholders. In general, each foreign corporation,
partnership and nonresident alien individual that does not hold its, his or her
REIT shares in connection with the conduct of a United States trade or business,
will be subject to a 30% tax (or lesser amount, as provided by an applicable
income tax treaty) on all ordinary dividends paid with respect to such REIT
shares. The REIT itself will be required to withhold and pay over such tax. If a
foreign shareholder holds the shareholder's REIT shares in connection with the
conduct of a United States trade or business, and provides the REIT with a
properly executed Form 4224, the shareholder will be subject to tax on ordinary
dividends in the same manner as a United States person and the REIT will not
withhold any distributions to the shareholder. Distributions in excess of our
current and accumulated earnings and profits will not be taxable to a non-U.S.
shareholder to the extent they do not exceed the adjusted basis of the
shareholder's common shares. Rather, such distributions will reduce the adjusted
basis of the common shares, but not below zero. To the extent that the
distributions exceed the adjusted basis of a non-U.S. shareholder's common
shares, they will give rise to tax liability if the non-US shareholder would
otherwise be subject to tax on any gain from the sale or disposition of our
common shares described below. If, at the time the distribution was made, it
cannot be determined whether the distribution will be in excess of current and
accumulated earnings and profits, the distributions will be subject to
withholding at the same rate as a dividend. However, such amounts would be
refundable if it is subsequently determined that the distribution was in excess
of our current and accumulated earnings and profits.
To the extent a foreign shareholder receives REIT distributions
attributable to the sale or exchange of United States real property interests
held by the REIT, each foreign shareholder will be treated as having engaged in
a United States trade or business and, therefore, will be subject to United
States federal income tax in the same manner as a United States person on such
distributions. The REIT (or the United States nominees of a foreign shareholder)
must withhold 35% of all distributions to a foreign shareholder attributable to
the disposition of United States real property interests which are designated as
capital gain dividends, unless the foreign shareholder has provided the REIT (or
its United States nominee) with a statement claiming a withholding exemption
from the IRS. A foreign shareholder will be entitled to a credit against his
United States income tax equal to the amount so withheld.
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Generally, a foreign person will not be subject to United States
income tax on any gain recognized upon a sale or exchange of such person's REIT
shares. However, if the REIT does not qualify as a "domestically controlled
REIT", a non-U.S. shareholder will be subject to tax on gain recognized upon the
sale of the shares. A domestically controlled REIT is defined as a REIT in which
at all times during a specified testing period less than 50% in number or value
of the shares are held directly or indirectly by foreign persons. It is
anticipated that we will qualify as a domestically controlled REIT. Non-U.S.
shareholders will also be taxed on gain recognized from the sale of their shares
in the REIT if (1) the investment in such shares is effectively connected with
the non-U.S. shareholder's United States trade or business, in which case a
shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (2) the non-U.S. shareholder is a non-resident alien
who is present in the United States for 183 days or more during the taxable year
and has a tax home in the United States, in which case the non-resident alien
will be subject to a 30% tax on the individual's capital gain.
Foreign persons contemplating an investment in REIT shares should
consult their home country tax advisors concerning the tax treatment of such
investment under their home country laws, including their ability, if any, to
obtain a tax credit for any United States taxes paid.
Backup Withholding. The REIT will report to its shareholders and the
IRS the amount of distributions paid during each calendar year, and the amount
of tax withheld, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to
distributions paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) has provided a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that does
not provide the REIT with a correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the shareholder's income tax liability.
Tax-Exempt Shareholders. The IRS has ruled that amounts distributed
as distributions by a REIT to a certain tax exempt pension trust did not
constitute unrelated business taxable income. Although rulings are merely
interpretations of law by the IRS and may be revoked or modified, based on this
analysis, indebtedness incurred by the REIT in connection with the acquisition
of an investment should not cause any income derived from the investment to be
treated as unrelated business taxable income to a Tax Exempt Entity. For
purposes of satisfying the closely held prohibition of the Internal Revenue
Code, a pension trust will not be treated as a single individual. Rather, the
beneficiaries of the pension trust are treated as owning the REIT's shares in
proportion to their respective interests in the trust. However, if the REIT
qualifies as a REIT only by application of this look through rule, any pension
trust which owns more than 10% by value of the interests in the REIT may be
required to treat a percentage of the dividends from the REIT as unrelated
business taxable income. The dividends will be treated as unrelated business
taxable income if at least one pension trust holds more than 25% by value of the
interest of the REIT, or one or more pension trusts (each of which hold more
than 10% by value of the interests in the REIT) hold in the aggregate more than
50% by value of the interests in the REIT. The percentage treated as unrelated
business taxable income is the gross income of the REIT that is derived from an
unrelated trade or business determined as if the REIT were a pension trust
divided by the gross income of the REIT for the year in which the dividends are
paid. If the percentage so determined is less that 5%, none of the dividends
will be treated as unrelated business taxable income. We do not believe that any
pension trust owns 10% or more of our shares.
A Tax Exempt Entity that incurs indebtedness to finance its purchase
of shares, however, will have unrelated business taxable income by virtue of the
acquisition indebtedness rules. Tax exempt organizations contemplating an
investment in REIT shares should consult their individual tax advisors
concerning the tax treatment of such investment.
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State and Local Taxation
We and our shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which we or our
shareholders transact business or reside. Consequently, before you make an
investment in us, you should consult your own tax advisors regarding the effect
of state and local tax laws on that investment.
SELLING SHAREHOLDERS
As described elsewhere herein, selling shareholders are only those
persons who may receive common shares upon the exchange of 222,624 OP Units
acquired pursuant to the contribution agreement including common shares issued
upon exercise of the call or put. The following table provides the number of OP
Units held by or issuable to each selling shareholder and, therefore, the
maximum number of common shares issuable upon exchange of the OP Units. We do
not currently expect to issue more than 222,624 common shares in redemption of
OP Units.
The 222,624 common shares offered by this prospectus may be offered from
time to time to the selling shareholders named below.
Call or Put
Name OP Units Owned OP Units Total
---- -------------- -------- -----
Louis D. Pektor, III 99,068 12,244 111,312
Lewis D. Ronca 99,068 12,244 111,312
====== ====== =======
198,136 24,486 222,624
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale by the selling
shareholders of up to 222,624 common shares, par value $.01 per share, assuming
exercise of the put or call option.
We have registered the common shares for sale to permit the holders
of the common shares to sell the shares without restriction in the open market
or otherwise, but registration of the shares does not necessarily mean that any
of the shares will be offered or sold by the holders thereof.
We will not receive any cash proceeds from the offering by the
selling shareholders or from the issuance of the common shares to holders of OP
Units upon receiving a notice of redemption. We will acquire one OP Unit from an
exchanging partner, in exchange for each redemption share that we issue.
Consequently, with each redemption, our interest in the Operating Partnership
will increase.
Secondary shares may be sold from time to time by the selling
shareholders, or by their pledgees, donees, transferees or other successors in
interest. Secondary share sales may be made on the NYSE, in the over-the-counter
market or otherwise, at prices and at terms then prevailing or at prices related
to the then current market price, or in negotiated transactions. Secondary
shares may be sold by the selling shareholders by one or more of the following:
o a block trade in which the broker-dealer so engaged will attempt to sell
the secondary shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
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o purchase of the secondary shares by a broker-dealer as principal and resale
by the broker-dealer for its account pursuant to this prospectus; and
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
In effecting sales, broker-dealers engaged by the selling shareholders may
arrange for other broker-dealers to participate in the resales.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sales. The broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with the sales, and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any common shares covered by
this prospectus which qualify for sale pursuant to Rule 144 under the Securities
Act may be sold under Rule 144 rather than pursuant to this prospectus.
All costs, expenses and fees in connection with the registration of
the common shares, including any secondary shares sold by the selling
shareholders, will be borne by us. Commissions and discounts, if any,
attributable to the sales of secondary shares by the selling shareholders, and
the expenses of counsel for the selling shareholders, if any, will be borne by
the selling shareholders, if any.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Gordon,
Feinblatt, Rothman, Hoffberger & Hollander, LLC, Baltimore, Maryland. Marc P.
Blum, one of our trustees, and LeRoy E. Hoffberger, Chairman of the Board of
Trustees, are Of Counsel to the firm.
EXPERTS
The financial statements and schedule of Mid-Atlantic Realty Trust as
of December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
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