<PAGE> 1
As filed with the Securities and Exchange Commission on December 13, 1999
REGISTRATION NO. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
LEXINGTON CORPORATE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 13-3717318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
355 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
TELEPHONE NUMBER (212) 692-7260
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------------
T. WILSON EGLIN
PRESIDENT AND CHIEF OPERATING OFFICER
LEXINGTON CORPORATE PROPERTIES TRUST
355 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 692-7260
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
BARRY A. BROOKS, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP
399 PARK AVENUE
NEW YORK, NEW YORK 10022-4697
(212) 318-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS
SOON AS POSSIBLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AND
FROM TIME TO TIME AS DETERMINED BY MARKET CONDITIONS.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act") other than securities
offered only in connection with dividend or interest reinvestment plans, please
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of to Be Offering Price Aggregate Offering Registration
Securities to Be Registered Registered per Share(1) Price Fee(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value $.0001 per 214,802 $10.00 $2,148,020 $567.07
share
==========================================================================================================
</TABLE>
(1) This estimate is based on the high and low sales prices on the New York
Stock Exchange of the Common Shares of Lexington Corporate Properties
Trust on December 9, 1999, pursuant to Rule 457(c) under the Securities
Act of 1933, as amended, and is made solely for purposes of determining
the registration fee.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
SUBJECT TO COMPLETION DATED DECEMBER 13, 1999
PROSPECTUS
214, 802 Shares
LEXINGTON CORPORATE PROPERTIES TRUST
Common Shares
THE COMPANY:
- - We are a self-managed and self-administered real estate investment
trust that acquires, owns and manages a geographically diversified
portfolio of net leased office, industrial and retail properties.
- - Lexington Corporate Properties Trust 355 Lexington Avenue New York, New
York 10017 (212) 692-7260
- - We are possibly issuing up to an aggregate 214, 802 Common Shares in
exchange for the redemption of an equal number of units of limited
partnership interests in our controlled subsidiary, Lepercq Corporate
Income Fund L.P. We will not receive proceeds from any Common Shares
which we may issue. We are not being assisted by any underwriter in
connection with the issuance of any Common Shares.
TRADING SYMBOL:
- - The Common Shares are listed on The New York Stock Exchange under the
symbol "LXP." On December 9, 1999, the last reported sale price of a
Common Share was $10.00.
-----------------------------------------------------
THIS INVESTMENT INVOLVES RISK. YOU SHOULD REVIEW "RISK FACTORS" BEGINNING ON
PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER PRIOR TO
INVESTING IN THE COMMON SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------------------------------
<PAGE> 3
TABLE OF CONTENTS
Page
Where You Can Find More Information.................................. 2
Forward-Looking Statements........................................... 3
Prospectus Summary................................................... 5
Risk Factors......................................................... 7
Description of Capital Shares....................................... 10
Description of Units................................................ 12
Registration Rights................................................. 16
Redemption of Units................................................. 16
Use of Proceeds..................................................... 25
Page
Distributions Of OP Units........................................... 25
The Company......................................................... 26
Management.......................................................... 29
Certain Relationships and Related Party
Transactions..................................................... 31
Federal Income Tax Considerations
of Holding Shares in a REIT...................................... 31
Plan of Distribution................................................ 41
Experts............................................................. 41
Legal Matters....................................................... 41
WHERE YOU CAN FIND MORE INFORMATION
Lexington Corporate Properties Trust (the "Company", "we" or "us") files
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). You may read and copy
any materials that we have filed with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We file information electronically with the SEC. The SEC maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The address
of the SEC's Internet site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934:
1. The Company's Annual Report on Form 10-K (Commission File No.
1-12386) for the year ended December 31, 1998, filed on March
5, 1999.
2. The Company's 1999 Proxy Statement on Schedule 14-A
(Commission File No. 1-12386), filed on April 14, 1999.
3. The Company's Quarterly Report on Form 10-Q (Commission File
No. 1-12386) for the quarter ended March 31, 1999, filed on
May 14, 1999.
4. The Company's Current Report on Form 8-K (Commission File No.
1-12386) as of July 14, 1999 filed on August 3, 1999.
2
<PAGE> 4
5. The Company's Quarterly Report on Form 10-Q (Commission File
No. 1-12386) for the quarter ended June 30, 1999 filed on
August 13, 1999.
6. The Company's Quarterly Report on Form 10-Q (Commission File
No. 1-12386) for the quarter ended September 30, 1999 filed on
November 12, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
T. Wilson Eglin, President
Lexington Corporate Properties Trust
355 Lexington Avenue
New York, New York 10017
(212) 692-7260
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information or representations provided in this
prospectus. We have not authorized anyone else to provide you with different
information. You should not assume that the information in this prospectus or
any supplement is accurate as of any date other than the date on the front of
those documents.
FORWARD-LOOKING STATEMENTS
In addition to historical information, we have made forward-looking
statements in this prospectus and in the documents incorporated by reference in
this prospectus, such as those pertaining to our capital resources, portfolio
performance and result of operations. "Forward-looking statements" are
projections, plans, objectives or assumptions about the Company. Forward-looking
statements involve numerous risks and uncertainties and you should not place
undue reliance on such statements since there can be no assurance that the
events or circumstances reflected in these statements will actually occur.
Certain such forward-looking statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should,"
"seeks," "approximately," "intends," "plans," "pro forma," "estimates," or
"anticipates" or the negative thereof or other variations thereof or comparable
terminology, or by discussions of strategy, plans or intentions. Such
forward-looking statements are necessarily dependent on assumptions, data or
methods that may be incorrect or imprecise and they may be incapable of being
realized. The following factors, among others, could cause actual results and
future events to differ materially from those set forth or contemplated in the
forward-looking statements: defaults or non-renewal of leases, increased
interest rates and operating costs, failure to obtain necessary outside
financing, difficulties in identifying properties to acquire and in effecting
acquisitions, failure to successfully integrate acquired properties and
operations, risks and uncertainties affecting property development and
construction (including, without limitation, construction delays, costs
overruns, inability to obtain necessary permits and public opposition to such
activities), failure to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the "Code"), environmental
uncertainties, risks related to natural disasters, financial market
fluctuations, changes in real estate and zoning laws and increases in real
property tax rates. Our success also depends upon economic trends generally,
including interest rates, income tax laws, governmental regulation, legislation,
population changes and those risk factors discussed in this prospectus under the
heading "Risk
3
<PAGE> 5
Factors." Readers are cautioned not to place undue reliance on forward-looking
statements, which reflect management's analysis only. We assume no obligation to
update forward-looking statements.
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and related Notes thereto
incorporated by reference into this prospectus. All references to the "Company,"
"we" or "us" refer to Lexington Corporate Properties Trust, a Maryland real
estate investment trust, and those entities owned or controlled, directly or
indirectly, by Lexington Corporate Properties Trust.
THE COMPANY
We are a self-managed and self-administered real estate investment trust
("REIT") that acquires, owns and manages a geographically diversified portfolio
of net leased office, industrial and retail properties. As of the date of this
prospectus, we own 65 properties or interests therein (the "Properties," and
each a "Property"). Substantially all of our leases are "net leases," under
which the tenant is responsible for all costs of real estate taxes, insurance,
ordinary maintenance and structural repairs. The Properties are located in 29
states, have approximately 11.4 million net rentable square feet and, under the
terms of their applicable leases, currently generate approximately $80.3 million
in annual rent. Our tenants, many of which are nationally recognized, include
Bank One Arizona, N.A., General Motors, Fleet Mortgage Group , Inc., Circuit
City Stores, Inc., The Hartford Fire Insurance Company, Honeywell, Inc., Kmart
Corporation, Lockheed Martin Corporation, Northwest Pipeline Corporation, Ryder
Integrated Logistics and Wal-Mart Stores, Inc.
Our senior executive officers average over 20 years of experience in the
real estate investment and net lease business. We have diversified our portfolio
by geographical location, tenant industry segment, lease term expiration and
property type with the intention of providing steady internal growth with low
volatility. We believe that such diversification should help insulate us from
regional recession, industry specific downturns and price fluctuations by
property type. Since January 1, 1999, we have also enhanced the value of our
portfolio by acquiring/investing in $80.5 million of properties, aggregating
approximately 0.8 million net rentable square feet and accounting for
approximately $8.9 million in annual rent. As part of our ongoing efforts, we
expect to continue to effect portfolio and individual property acquisitions,
either through joint ventures or for our own account, and dispositions, expand
existing Properties, attract investment grade quality tenants, extend lease
maturities in advance of expiration and refinance outstanding indebtedness, when
advisable.
The Company, through a predecessor entity, commenced operations in 1993 as
a REIT, with two operating partnership subsidiaries. This operating partnership
structure enables us to acquire property by issuing to a seller, as a form of
consideration, interests ("OP Units") in our subsidiary operating partnerships.
The OP Units are redeemable, after certain dates, for Common Shares. See
"Distributions On OP Units." We believe that this corporate structure
facilitates our ability to raise capital and to acquire portfolio and individual
properties by enabling us to structure transactions which may defer tax gains
for a contributor of property while preserving the Company's available cash for
other purposes, including the payment of distributions. We have used OP Units as
a form of consideration in connection with the acquisition of 22 of our
Properties.
5
<PAGE> 7
Our executive offices are located at 355 Lexington Avenue, New York, New
York 10017, and our telephone number is (212) 692-7260.
RISK FACTORS
An investment in the Common Shares offered hereby involves various risks.
For a discussion of factors that should be considered in evaluating such an
investment, see "Risk Factors" beginning on page 7.
SECURITIES TO BE OFFERED
This prospectus relates to the possible issuance by the Company of up to
214,802 shares (the "Redemption Shares") of common stock, par value $.0001 per
share ("Common Shares"), if and to the extent that, certain holders, elect to
tender up to an aggregate of 214,802 OP Units in the Lepercq Corporate Income
Fund L.P. ("LCIF" or the "Operating Partnership") for redemption commencing on
December 1, 1999 and quarterly thereafter. The Company is registering the
Redemption Shares for sale to permit the holders thereof to sell such shares
without restriction in the open market or otherwise, but the registration of
such shares does not necessarily mean that any of such Units will be tendered
for redemption or that any of such shares will be offered or sold by the holders
thereof.
The Unit Holders and any agents or broker-dealers that participate in the
distribution of Redemption Shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), and
any profit on the sale of Redemption Shares and any commissions received by any
such dealers or agents may be deemed to be underwriting commissions or discounts
under the Securities Act.
DISTRIBUTION POLICY
Distributions are paid to our shareholders on a quarterly basis if, as and
when declared by the Board of Trustees. Our current annualized distribution per
Common Share is $1.20. In order to maintain our status as a REIT, we must
distribute at least 95% of our "REIT taxable income" and 95% of any after-tax
net income from foreclosure properties, in each case less any excess non-cash
income, to our common shareholders. See "Federal Income Tax Considerations of
Holding Shares in a REIT." Although we expect to continue our policy of making
quarterly distributions, there can be no assurance that we will maintain
distributions at the current level.
6
<PAGE> 8
RISK FACTORS
Tax Impact to Unit Holders of Redemption of Units. LCIF's Partnership
Agreement provides that the redemption of Units will be treated by the Company,
the Operating Partnership and the redeeming Unit holder as a sale of the Units
by such Unit holder to the Company at the time of redemption. Such sale will be
fully taxable to the redeeming Unit holder. It is possible that the amount of
gain recognized or even the tax liability resulting from such gain could exceed
the fair market value of the redemption shares. See "Redemption of Units -- Tax
Treatment of Redemption of Units."
Risks Involved in Single Tenant Leases. We focus our acquisition
activities in net leased real properties or interests therein. Due to the fact
that our net leased real properties are leased to single tenants, the financial
failure of or other default by a tenant resulting in the termination of a lease
is likely to cause a significant reduction in the operating cash flow of the
lessor and might decrease the value of the property leased to such tenant. See
"The Company -- The Net Lease Real Estate Business."
Dependence on Major Tenants. Revenues from several of our tenants and/or
their guarantors constitute a significant percentage of our consolidated rental
revenues. Currently, our five largest tenants/guarantors, which occupy nine
Properties, represent 38.5% of annualized revenues. The default, financial
distress or bankruptcy of any of the tenants of such Properties could cause
interruptions in the receipt of lease revenues from such tenants and/or result
in vacancies in the respective Properties, which would reduce our revenues and
increase operating costs until the affected property is re-let, and could
decrease the ultimate sale value of each such Property. Upon the expiration of
the leases that are currently in place with respect to these Properties, we may
not be able to re-lease the vacant property at a comparable lease rate or
without incurring additional expenditures in connection with such re-leasing.
On March 8, 1999, we entered into an agreement with FirstPlus Financial
Group, Inc. ("FirstPlus"), our tenant in a Class-A 248,000 square foot office
building in Dallas, Texas, to defer a portion of its monthly rent. Under the
agreement FirstPlus deferred from March 1999 through June 1999 $100,000 of its
$268,632 monthly rent. The agreement has been extended through December 31, 1999
whereby $126,000 of each month's rent for July through December will be
deferred. These deferrals will be added with interest to future rental payments.
Currently, FirstPlus represents 2.6% of our annualized revenue. The FirstPlus
lease is scheduled to expire on August 31, 2012. In addition, a wholly owned
subsidiary of FirstPlus filed for Chapter 11 bankruptcy protection in March
1999.
Leverage. We have incurred, and may continue to incur, indebtedness
(secured and unsecured) in furtherance of our activities. Neither the
Declaration of Trust nor any policy statement formally adopted by the Board of
Trustees limits either the total amount of indebtedness or the specified
percentage of indebtedness (based upon the total market capitalization of the
Company) which may be incurred. Accordingly, we could become more highly
leveraged, resulting in increased risk of default on our obligations and in an
increase in debt service requirements which could adversely affect our financial
condition and results of operations and our ability to pay distributions. Our
current unsecured revolving credit facility with Fleet National Bank, as agent
(the "Credit Facility") contains various covenants which limit the amount of
secured and unsecured indebtedness we may incur.
Possible Inability to Refinance Balloon Payment on Mortgage Debt. A
significant number of our Properties are subject to mortgages with balloon
payments. As of the date of the prospectus, the scheduled balloon payments for
the remainder of 1999 and the next five calendar years are as follows:
7
<PAGE> 9
- 1999 - $0;
- 2000 - $15.1 million;
- 2001 - $1.0 million;
- 2002 - $10.6 million;
- 2003 - $0; and
- 2004 - $25.3 million
Our Credit Facility matures in 2001. Our ability to make such balloon payments
will depend upon our ability either to refinance the mortgage related thereto or
to sell the related property. Our ability to accomplish such goals will be
affected by various factors existing at the relevant time, such as the state of
the national and regional economies, local real estate conditions, available
mortgage rates, our equity in the mortgaged properties, our financial condition,
the operating history of the mortgaged properties and tax laws.
Uncertainties Relating to Lease Renewals and Re-letting of Space. We will
be subject to the risks that, upon expiration of leases for space located in our
Properties, the premises may not be re-let or the terms of re-letting (including
the cost of concessions to tenants) may be less favorable than current lease
terms. If we are unable to re-let promptly all or a substantial portion of our
commercial units or if the rental rates upon such re-letting were significantly
lower than expected rates, our net income and ability to make expected
distributions to our shareholders would be adversely affected. There can be no
assurance that we will be able to retain tenants in any of our Properties upon
the expiration of their leases. Our scheduled lease expirations, as a percentage
of annualized revenues for the remainder of 1999 and the next five years, are as
follows:
- 1999 - 0%;
- 2000 - 0.81%;
- 2001 - 3.32%;
- 2002 - 3.53%
- 2003 - 2.37%; and
- 2004 - 0.19%
Defaults on Cross-Collateralized Properties. Although we do not generally
cross-collateralize any of our Properties, we may determine to do so from time
to time. As of the date of this prospectus, two of our Properties in Florida are
cross-collateralized and 17 of our Properties are the subject of a segregated
pool of assets with respect to which commercial mortgage pass-through
certificates were issued. To the extent that any of our Properties are
cross-collateralized, any default by us under the mortgage relating to one such
Property will result in a default under the financing arrangements relating to
any other Property which also provides security for such mortgage.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local environmental laws, statutes, ordinances, rules and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, on, in or under such
property, as well as certain other potential costs relating to hazardous or
toxic substances (including government fines and penalties and damages for
injuries to persons and adjacent property). Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances. Such liability may be imposed on the
owner in connection with the activities of an operator of, or tenant at, the
property. The cost of any required remediation, removal, fines or personal or
property damages and the owner's liability therefore could exceed the value of
the property and/or the aggregate assets of the owner. In addition, the presence
of such substances, or the failure to properly dispose of or remove such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral, which, in turn, would
reduce our revenues and ability to make distributions.
8
<PAGE> 10
A property can also be adversely affected either through physical contamination
or by virtue of an adverse effect upon value attributable to the migration of
hazardous or toxic substances, or other contaminants that have or may have
emanated from other properties. Although our tenants are primarily responsible
for any environmental damages and claims related to the leased premises, in the
event of the bankruptcy or inability of the tenant of such premises to satisfy
any obligations with respect thereto, we may be required to satisfy such
obligations. In addition, under certain environmental laws, we, as the owner of
such properties, may be held directly liable for any such damages or claims
irrespective of the provisions of any lease.
From time to time, in connection with the conduct of our business, and
prior to the acquisition of any property from a third party or as required by
our financing sources, we authorize the preparation of Phase I environmental
reports and, when necessary, Phase II environmental reports, with respect to our
Properties. Based upon such environmental reports and our ongoing review of our
Properties, as of the date of this prospectus, we are not aware of any
environmental condition with respect to any of our Properties which we believe
would be reasonably likely to have a material adverse effect on us. There can be
no assurance, however, that the following will not expose us to material
liability in the future:
- the discovery of previously unknown environmental
conditions;
- changes in law;
- the conduct of tenants; or
- activities relating to properties in the vicinity of
the Properties.
Changes in laws increasing the potential liability for environmental conditions
existing on properties or increasing the restrictions on discharges or other
conditions may result in significant unanticipated expenditures or may otherwise
adversely affect the operations of our tenants, which could adversely affect our
financial condition or results of operations.
Risks Relating to Acquisitions. A significant element of our business
strategy is the enhancement of our portfolio through acquisitions of additional
properties through joint ventures or for our own account. The consummation of
any future acquisitions will be subject to satisfactory completion of our
extensive valuation analysis and due diligence review and to the negotiation of
definitive documentations. There can be no assurance that we will be able to
identify and acquire additional properties or that we will be able to finance
acquisitions in the future. In addition, there can be no assurance that any such
acquisition, if consummated, will be profitable for us. If we are unable to
consummate the acquisition of additional properties in the future, there can be
no assurance that we will be able to increase the cash available for
distribution to our shareholders.
Concentration of Ownership by Certain Investors. In three separate
closings in 1997, we sold 2,000,000 Class A Senior Cumulative Convertible
Preferred Shares of Beneficial Interest in the Company to Five Arrows Realty,
L.L.C. ("Five Arrows"). The Convertible Preferred Shares are convertible at
anytime into Common Shares on a one-to-one basis at $12.50 per share. In March
1997, we sold to an institutional investor in a private placement 8%
Exchangeable Redeemable Secured Notes in the aggregate principal amount of $25
million. The Exchangeable Notes are exchangeable at $13.00 per share for our
Common Shares beginning in 2000, subject to adjustment. Significant
concentrations of ownership by certain investors may allow such investors to
exert a greater influence over our management and affairs.
Uninsured Loss. We carry comprehensive liability, fire, extended coverage
and carry rent loss insurance on most of our Properties, with policy
specifications and insured limits customarily carried for similar properties.
However, with respect to certain of the Properties where the leases do not
provide for abatement of rent under any circumstances, we generally do not
maintain rent loss insurance. In addition, there are certain types of losses
(such as due to wars or acts of God) that generally are not insured because they
are either uninsurable or not economically insurable. Should an uninsured loss
or a loss in excess of insured limits occur, we could lose capital invested in a
Property, as well as the anticipated future revenues from a Property, while
remaining obligated for any mortgage indebtedness or other financial obligations
9
<PAGE> 11
related to the Property. Any such loss would adversely affect our financial
condition. We believe that the Properties are adequately insured in accordance
with industry standards.
Adverse Effects of Changes in Market Interest Rates. The trading prices of
equity securities issued by REITs have historically been affected by changes in
broader market interest rates, with increases in interest rates resulting in
decreases in trading prices, and decreases in interest rates resulting in
increases in such trading prices. An increase in market interest rates could
therefore adversely affect the trading prices of any equity securities issued by
us.
Competition. The real estate industry is highly competitive. Our principal
competitors include national REITs, many of which are substantially larger and
have substantially greater financial resources than us.
Failure to Qualify as a REIT. We believe that we have met the requirements
for qualification as a REIT for federal income tax purposes beginning with our
taxable year ended December 31, 1993 and we intend to continue to meet such
requirements in the future. However, qualification as a REIT involves the
application of highly technical and complex provisions of the Code, for which
there are only limited judicial or administrative interpretations. No assurance
can be given that we have qualified or will remain qualified as a REIT. The Code
provisions and income tax regulations applicable to REITs are more complex than
those applicable to corporations. The determination of various factual matters
and circumstances not entirely within our control may affect our ability to
continue to qualify as a REIT. In addition, no assurance can be given that
legislation, regulations, administrative interpretations or court decisions will
not significantly change the requirements for qualification as a REIT or the
federal income tax consequences of such qualification. If we do not qualify as a
REIT, we would not be allowed a deduction for distributions to shareholders in
computing our income subject to tax at the regular corporate rates. We also
could be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. Cash available for
distribution to our shareholders would be significantly reduced for each year in
which we do not qualify as a REIT. Although we currently intend to continue to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause us, without the consent of the shareholders, to
revoke the REIT election or to otherwise take action that would result in
disqualification.
DESCRIPTION OF CAPITAL SHARES
The description of the Company's Capital Shares set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Declaration of Trust and By-laws, copies of which are incorporated by
reference as exhibits to the Registration Statement of which this prospectus is
a part. See "Where You Can Find More Information."
AUTHORIZED CAPITAL
The Company has an aggregate of 40,000,000 authorized Common Shares,
40,000,000 Excess Shares and 10,000,000 undesignated Preferred Shares (2,000,000
of which have been designated Class A Senior Cumulative Convertible Preferred
Shares) available for issuance under its Declaration of Trust. Such shares
(other than reserved shares) may be issued from time to time by us in the
discretion of the Board of Trustees to raise additional capital, acquire assets,
including additional real properties, redeem or retire debt or for any other
business purpose. In addition, the undesignated Preferred Shares may be issued
in one or more additional classes with such designations, preferences and
relative participating, optional or other special rights including, without
limitation, preferential dividend or voting rights, and rights upon liquidation,
as shall be fixed by the Board of Trustees. Also, the Board of Trustees is
authorized to classify and reclassify any unissued capital shares by setting or
changing, in any one or more respects, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such capital shares. Such authority
includes, without limitation, subject to the provisions of the Declaration of
Trust, authority to classify or reclassify any unissued capital shares into a
class or
10
<PAGE> 12
classes of preferred shares, preferences shares, special shares or other shares,
and to divide and reclassify shares of any class into one or more series of such
class. In certain circumstances, the issuance of Preferred Shares, or the
exercise by the Board of Trustees of such rights to classify or reclassify
shares, could have the effect of deterring individuals or entities from making
tender offers for the Common Shares or seeking to change incumbent management.
As of the date of this prospectus, we have also filed with the Commission
a Registration Statement (Registration No. 333-49351) pursuant to which we may
offer, from time to time, in one or more series (i) Common Shares, (ii)
Preferred Shares and (iii) debt securities (the "Debt Securities"), which may be
senior or subordinated debt securities, with an aggregate public offering price
of up to $250,000,000. The Common Shares, Preferred Shares and Debt Securities
may be offered, separately or together, in separate classes or series, in
amounts, at prices and on terms to be determined from time to time. In addition,
we filed with the Commission Registration Statements (Registration Nos.
333-57853, 333-70217, 333-76709 and 333-85631) to register, for the possible
issuance by us, 5,981,429 Common Shares to redeem up to 5,981,429 units of
limited partnership interest in LCIF and Lepercq Corporate Income Fund II L.P.
Of these 5,981,429 possible redemptions, 1,024,394 have been redeemed as of the
date hereof.
DESCRIPTION OF COMMON SHARES
Under the Declaration of Trust, the Company has authority to issue
40,000,000 Common Shares, par value $.0001 per share. Under the Maryland General
Corporation Law (the "MGCL"), shareholders generally are not responsible for a
corporation's debts or obligations.
As of the date of this prospectus, the Company had outstanding 17,241,632
Common Shares and had reserved for possible issuance upon redemption of Units of
partnership interest in its operating partnerships an aggregate 5,767,891 Common
Shares. All of the Common Shares and any Common Shares issued upon redemption of
Units are tradable without restriction under the Securities Act (unless such
shares are held by affiliates of the Company), either pursuant to the
registration statement of which this prospectus is a part, pursuant to
registration rights granted by the Company or otherwise. See "Registration
Rights."
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of shares for future sale, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Shares (including shares issued upon the redemption of Units or the
exercise of options), or the perception that such sales could occur, could
adversely affect the prevailing market price of the shares.
DESCRIPTION OF PREFERRED SHARES
Under the Declaration of Trust, the Company has authority to issue
10,000,000 Preferred Shares, 2,000,000 of which, designated as Class A Senior
Cumulative Convertible Preferred Shares (the "Convertible Preferred Shares"),
are outstanding as of the date of this prospectus, as described below. Preferred
Shares may be issued from time to time, in one or more series, as authorized by
the Board of Trustees of the Company. Prior to the issuance of shares of each
series, the Board of Trustees is required by the MGCL and the Declaration of
Trust to fix for each series, subject to the provisions of the Declaration of
Trust regarding excess shares, $.0001 par value per share ("Excess Shares"), the
terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, as are permitted by MGCL. The Convertible Preferred
Shares are, and any other class of Preferred Shares will, if issued, be fully
paid and nonassessable and the Convertible Preferred Shares are not, and any
other class of Preferred Shares will not, if issued, be subject to preemptive
rights. The Board of Trustees could authorize the issuance of Preferred Shares
with terms and conditions that could have the effect of discouraging a takeover
or other transaction that holders of Common Shares might believe to be in their
best interests or in which holders of some, or a majority, of the Common Shares
might receive a premium for their shares over the then market price of such
Common Shares.
11
<PAGE> 13
TERMS OF CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED SHARES
In December 1996, the Company entered into an agreement with Five Arrows
providing for the sale of up to 2,000,000 Convertible Preferred Shares. In three
separate closings in 1997, the Company sold all 2,000,000 Convertible Preferred
Shares for an aggregate price of $25 million. The Convertible Preferred Shares,
which are convertible into Common Shares on a one-for-one basis at $12.50 per
share, subject to adjustment, are entitled to quarterly distributions equal to
the greater of $.295 per share or the product of 1.05 and the per share
quarterly distribution on Common Shares. The current quarterly dividend paid to
the holder of the Convertible Preferred Shares is $0.315 per share. The
Convertible Preferred Shares may be redeemed by the Company after December 31,
2001 at a 6% premium over the liquidation preference of $12.50 per share (plus
accrued and unpaid dividends), with such premium declining to zero on or after
December 31, 2011. Each Convertible Preferred Share is entitled to one vote and
holders are entitled to vote on all matters submitted to a vote of holders of
outstanding Common Shares. In connection with such sale, we have entered into
certain related agreements with Five Arrows, providing, among other things, for
certain demand and piggyback registration rights with respect to such shares and
the right to designate a member or members of the Board of Trustees of the
Company. Five Arrows' designee, John D. McGurk, is currently serving as a member
of our Board of Trustees.
TERMS OF EXCHANGEABLE NOTES
In March 1997, we sold to an institutional investor in a private placement
8% Exchangeable Redeemable Secured Notes (the "Exchangeable Notes") in the
aggregate principal amount of $25 million. The Exchangeable Notes are
exchangeable at $13.00 per share for the Company's Common Shares beginning in
2000, subject to adjustment.
TRANSFER AGENT
The transfer agent and registrar for the Common Shares is ChaseMellon
Shareholder Services LLC.
DESCRIPTION OF UNITS
The material terms of the Units, including a summary of certain provisions
of the Operating Partnership's Partnership Agreement (the "Partnership
Agreement"), are set forth below. The following description of the terms and
provisions of the Units and certain other matters does not purport to be
complete and is subject to and qualified in its entirety by reference to
applicable provisions of Delaware law and the Partnership Agreement. For a
comparison of the voting and other rights of holders of Units and our
shareholders, see "Redemption of Units -- Comparison of Ownership of Units and
Common Shares."
GENERAL
We are the sole stockholder of Lex GP-1, Inc., a Delaware corporation
which is the general partner of the Operating Partnership. We are also the sole
stockholder of Lex LP-1, Inc. ("Lex LP-1"), a Delaware corporation which holds,
as of the date of this prospectus, an approximately 76% limited partnership
interest in LCIF. We indirectly hold Units in the Operating Partnership through
these entities.
Holders of Units hold limited partnership interests in the Operating
Partnership, and all holders of Units are entitled to share in cash
distributions from, and in the profits and losses of, the Operating Partnership.
Each Unit may not receive distributions in the same amount as paid on each
Common Share.
Holders of Units have the rights to which limited partners are entitled
under the Partnership Agreement and the Delaware Revised Uniform Limited
Partnership Act (the "Act"). The Units have not been registered pursuant to the
federal or state securities laws and are not listed on any exchange or quoted on
any national market system.
12
<PAGE> 14
PURPOSES, BUSINESS AND MANAGEMENT
The purpose of the Operating Partnership includes the conduct of any
business that may be conducted lawfully by a limited partnership formed under
the Act, except that the Partnership Agreement requires the business of the
Operating Partnership to be conducted in such a manner that will permit us to
continue to be classified as a REIT under Sections 856 through 860 of the Code,
unless we cease to qualify as a REIT for reasons other than the conduct of the
business of the Operating Partnership. Subject to the foregoing limitation, the
Operating Partnership may enter into partnerships, joint ventures or similar
arrangements and may own interests in any other entity.
We, as sole stockholder of the general partner of the Operating
Partnership, have the exclusive power and authority to conduct the business of
the Operating Partnership subject to the consent of the limited partners in
certain limited circumstances discussed below. No limited partner may take part
in the operation, management or control of the business of the Operating
Partnership by virtue of being a holder of Units.
ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
The general partner may acquire assets directly and engage in activities
outside of the Operating Partnership, including activities in direct or indirect
competition with the Operating Partnership. Other persons (including officers,
trustees, employees, agents and other affiliates of the Company) are not
prohibited under the Partnership Agreement from engaging in other business
activities and will not be required to present any business opportunities to the
Operating Partnership.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for the distribution of Operating Cash
Flow, as determined in the manner provided in the Partnership Agreement, to the
Company and certain limited partners in proportion to their percentage interests
in the Operating Partnership. "Operating Cash Flow" means, for any period,
operating revenue from leases on real property investments, partnership
distributions with respect to partnerships in which the Operating Partnership
has interests and interest on uninvested funds and other cash investment
returns, less operating expenses, capital expenditures, regularly scheduled
principal and interest payments (exclusive of balloon payments due at maturity)
on outstanding mortgage and other indebtedness and any reserves established by
the general partner. Neither the Company nor the limited partners are entitled
to any preferential or disproportionate distributions of Operating Cash Flow and
in no event may a partner receive a distribution of Operating Cash Flow with
respect to a Unit if such partner is entitled to receive a distribution of
Operating Cash Flow with respect to a Common Share for which such Unit has been
redeemed or exchanged. The Partnership Agreement generally provides for the
allocation to the general partner and the limited partners of items of the
Operating Partnership's income and loss in accordance with their representative
percentage interests in the Operating Partnership.
BORROWING BY THE PARTNERSHIP
Without the consent of holders of a majority of Units held by limited
partners admitted to the Operating Partnership upon the acquisition of their
interests in Properties in exchange for Units in consideration therefore (the
"Special Limited Partners"), the general partner is not authorized to cause the
Operating Partnership to borrow money and to issue and guarantee debt.
REIMBURSEMENT OF COMPANY; TRANSACTIONS WITH THE GENERAL PARTNER AND ITS
AFFILIATES
Neither Lex GP-1 nor the Company receives any compensation for Lex GP-1's
services as general partner of the Operating Partnership. Lex GP-1 and Lex LP-1,
however, as partners in the Operating Partnership, have the same right to
allocations and distributions as other partners of the Operating Partnership. In
addition, the Operating Partnership will reimburse Lex GP-1 and the Company for
all
13
<PAGE> 15
expenses incurred by them related to the operation of, or for the benefit of,
the Operating Partnership. In the event that certain expenses are incurred for
the benefit of the Operating Partnership and other entities (including us), such
expenses are allocated by us, as sole stockholder of the general partner of the
Operating Partnership, to the Operating Partnership and such other entities in a
manner as we, as sole stockholder of the general partner of the Operating
Partnership, in our sole and absolute discretion deem fair and reasonable. The
Operating Partnership will reimburse us for all expenses incurred by us relating
to any other offering of additional Units or capital stock (in such case based
on the percentage of the net proceeds therefrom contributed to or otherwise made
available to the Operating Partnership). We have guaranteed the obligations of
the Operating Partnership in connection with the redemption of the Units
pursuant to this prospectus.
Except as expressly permitted by the Partnership Agreement, we and our
affiliates may not engage in any transactions with the Operating Partnership
except on terms that are fair and reasonable and no less favorable to the
Operating Partnership than would be obtained from an unaffiliated third party.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
Lex GP-1, as the general partner of the Operating Partnership, is
ultimately liable for all general recourse obligations of the Operating
Partnership to the extent not paid by the Operating Partnership. Lex GP-1 is not
liable for the nonrecourse obligations of the Operating Partnership.
The limited partners of the Operating Partnership are not required to make
additional contributions to the Operating Partnership. Assuming that a limited
partner does not take part in the control of the business of the Operating
Partnership and otherwise acts in conformity with the provisions of the
Partnership Agreement, the liability of the limited partner for obligations of
the Operating Partnership under the Partnership Agreement and the Act is
limited, subject to certain limited exceptions, generally to the loss of the
limited partner's investment in the Operating Partnership represented by his or
her Units. The Operating Partnership will operate in a manner the general
partner deems reasonable, necessary and appropriate to preserve the limited
liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that Lex GP-1, as general
partner of the Operating Partnership (and the Company as the sole stockholder of
the general partner of the Operating Partnership) will incur no liability to the
Operating Partnership or any limited partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if we
carried out our duties in good faith. In addition, Lex GP-1 and the Company are
not responsible for any misconduct or negligence on the part of their agents,
provided Lex GP-1 and the Company appointed such agents in good faith. Lex GP-1
and the Company may consult with legal counsel, accountants, appraisers,
management consultants, investment bankers and other consultants and advisors,
and any action it takes or omits to take in reliance upon the opinion of such
persons, as to matters that Lex GP-1 and the Company reasonably believe to be
within their professional or expert competence, shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
The Partnership Agreement also provides for indemnification of Lex GP-1
and the Company, the directors and officers of Lex GP-1 and the Company, and
such other persons as Lex GP-1 and the Company may from time to time designate
against any judgments, penalties, fines, settlements and reasonable expenses
actually incurred by such person in connection with the proceeding unless it is
established that: (1) the act or omission of the indemnified person was material
to the matter giving rise to the proceeding and either was committed in bad
faith or was the result of active and deliberate dishonesty; (2) the indemnified
person actually received an improper personal benefit in money, property or
services; or (3) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
14
<PAGE> 16
SALES OF ASSETS
Under the Partnership Agreement, Lex GP-1 generally has the exclusive
authority to determine whether, when and on what terms the assets of the
Operating Partnership will be sold. The Operating Partnership, however, is
prohibited under the Partnership Agreement and certain contractual agreements
from selling certain assets, except in certain limited circumstances. Lex GP-1
may not consent to a sale of all or substantially all of the assets of the
Operating Partnership and a merger of the Operating Partnership with another
entity requires the consent of holders of a majority of the outstanding Units
held by the Special Limited Partners.
REMOVAL OF THE GENERAL PARTNER; TRANSFER; TRANSFER OF THE GENERAL PARTNER'S
INTEREST
The Partnership Agreement provides that the limited partners may not
remove Lex GP-1 as general partner of the Operating Partnership. Lex GP-1 may
not transfer any of its interests as the general partner of the Operating
Partnership and the Company may not transfer any of its indirect interests as a
limited partner in the Operating Partnership except to each other or Lex LP-1
except in connection with a merger or sale of all or substantially all of its
assets. We also may not sell all or substantially all of our assets, or enter
into a merger, unless the sale or merger includes the sale of all or
substantially all of the assets of, or the merger of, the Operating Partnership
with partners of the Operating Partnership receiving substantially the same
consideration as holders of Common Shares.
RESTRICTIONS ON TRANSFER OF UNITS BY LIMITED PARTNERS
Unit holders now may transfer, subject to certain limitations, the
economic rights associated with their Units without the consent of the general
partner, thereby eliminating the ability of the general partner to block, except
in very limited circumstances, such assignments. However, a transferee will not
be admitted to the Operating Partnership as a substituted limited partner
without the consent of the general partner. In addition, Unit holders may
dispose of their Units by exercising their rights to have their Units redeemed
for Common Shares. See "Redemption of Units."
REDEMPTION OF UNITS
Subject to certain limitations and on certain specified dates, Unit
holders may require that the Operating Partnership redeem their Units, by
providing the Operating Partnership with a notice of redemption. This prospectus
relates to Common Shares that may be issued to holders of Units eligible for
redemption commencing on December 1, 1999 and quarterly thereafter. The
redeeming Unit holder will receive Common Shares in accordance with the terms
set forth in the Partnership Agreement.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
Lex GP-1 is authorized, in its sole and absolute discretion and without
the consent of the limited partners, to cause the Operating Partnership to issue
additional Units to itself, to the limited partners or to other persons for such
consideration and on such terms and conditions as Lex GP-1 deems appropriate. In
addition, Lex GP- 1 may cause the Operating Partnership to issue additional
partnership interests in different series or classes, which may be senior to the
Units. Subject to certain exceptions, no additional Units may be issued to the
Company, Lex GP-1 or Lex LP-1.
MEETINGS; VOTING
The Partnership Agreement provides that limited partners shall not take
part in the operation, management or control of the Operating Partnership's
business. The Partnership Agreement does not provide for annual meetings of the
limited partners, and the Operating Partnership does not anticipate calling such
meetings.
15
<PAGE> 17
AMENDMENT OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement may be amended with the consent of Lex GP-1, Lex
LP-1 and the Special Limited Partners representing a majority of Units held by
such Special Limited Partners. Notwithstanding the foregoing, Lex GP-1 has the
power, without the consent of the limited partners, to amend the Partnership
Agreement in certain limited circumstances.
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2093, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term, and its affairs wound up upon the
occurrence of the earliest of: (1) the withdrawal of Lex GP-1 as general partner
without the permitted transfer of the Company's interest to a successor general
partner (except in certain limited circumstances); (2) the sale of all or
substantially all of the Operating Partnership's assets and properties; (3) the
entry of a decree of judicial dissolution of the Operating Partnership pursuant
to the provisions of the Act or the entry of a final order for relief in a
bankruptcy proceeding of the general partner; or (4) the entry of a final
judgment ruling that the general partner is bankrupt or insolvent. Upon
dissolution, Lex GP-1, as general partner, or any liquidator will proceed to
liquidate the assets of the Operating Partnership and apply the proceeds
therefrom in the order of priority set forth in the Partnership Agreement.
REGISTRATION RIGHTS
We have filed the registration statement of which this prospectus is a
part pursuant to our obligations in conjunction with certain agreements entered
into in connection with the acquisition of certain properties. Under these
agreements, executed in conjunction with the parties listed therein, we are
obligated to use our reasonable efforts to keep the registration statement
continuously effective for a period expiring on the date on which all of the
Units covered by these agreements have been redeemed pursuant to the
registration statement. Any shares that have been sold pursuant to such
agreements, or have been otherwise transferred and new certificates for them
have been issued without legal restriction on further transfer of such shares,
will no longer be entitled to the benefits of those agreements.
We have no obligation under these agreements to retain any underwriter to
effect the sale of the shares covered thereby and the registration statement
shall not be available for use for an underwritten public offering of such
shares.
Pursuant to these agreements, we agreed to pay all expenses of effecting
the registration of the Redemption Shares (other than underwriting discounts and
commissions, fees and disbursements of counsel, and transfer taxes, if any)
pursuant to the registration statement.
REDEMPTION OF UNITS
GENERAL
Each Unit holder may, subject to certain limitations, require that the
Operating Partnership redeem his or her Units, by delivering a notice to the
Operating Partnership. We have provided a guaranty of the Operating
Partnership's obligations. Upon redemption, such Unit holder will receive one
Common Share (subject to certain anti-dilution adjustments) in exchange for each
Unit held by such holder.
The Operating Partnership and the Company will satisfy any redemption
right exercised by a Unit holder through our issuance of the Redemption Shares
pursuant to this prospectus or otherwise, whereupon we will acquire the Units
being redeemed and will become the owner of the Units. Such an acquisition of
Units by
16
<PAGE> 18
us will be treated as a sale of the Units by the redeeming Unit holders to us
for federal income tax purposes. See "--Tax Treatment of Redemption of Units"
below. Upon redemption, such Unit holder's right to receive distributions from
the Operating Partnership with respect to the Units redeemed will cease. The
Unit holder will have rights to dividend distributions as a shareholder of the
Company from the time of its acquisition of the Redemption Shares.
A Unit holder must notify Lex GP-1 and us of his or her desire to require
the Operating Partnership to redeem Units by sending a notice in the form
attached as an exhibit to the Partnership Agreement, a copy of which is
available from us. A Unit holder must request the redemption of all Units held
by such holder. No redemption can occur if the delivery of Redemption Shares
would be prohibited under the provisions of the Declaration of Trust designed to
protect our qualification as a REIT.
TAX TREATMENT OF REDEMPTION OF UNITS
The following discussion summarizes certain federal income tax
considerations that may be relevant to a limited partner who exercises his right
to redeem a Unit.
The Partnership Agreement provides that the redemption of Units will be
treated by us, the Operating Partnership and the redeeming Unit holder as a sale
of the Units by such Unit holder to us at the time of the redemption. Such sale
will be fully taxable to the redeeming Unit holder.
The determination of gain or loss from the sale or other disposition will
be based on the difference between the Unit holder's amount realized for tax
purposes and his tax basis in such Unit (the "Preliminary Gain"). The amount
realized will be measured by the fair market value of property received (e.g.,
Redemption Shares) plus the portion of the Operating Partnership's liabilities
allocable to the Unit sold. In general, a Unit holder's tax basis is based on
the cost of the Unit, adjusted for the holder's allocable share of Operating
Partnership's income, loss and distributions, and can be determined by reference
to the Operating Partnership's Schedule K-1's. To the extent that the amount
realized exceeds the Unit holder's basis for the Unit disposed of, such Unit
holder will recognize gain. It is possible that the amount of gain recognized or
even the tax liability resulting from such gain could exceed the fair market
value of the Redemption Shares received upon such disposition. EACH UNIT HOLDER
SHOULD CONSULT WITH ITS OWN TAX ADVISOR FOR THE SPECIFIC TAX CONSEQUENCES
RESULTING FROM A REDEMPTION OF ITS UNITS.
Generally, any gain recognized upon a sale or other disposition of Units
will be treated as gain attributable to the sale or disposition of a capital
asset. To the extent, however, that the amount realized upon the sale of a Unit
attributable to a Unit holder's share of "unrealized receivables" of the
Operating Partnerships (as defined in Section 751 of the Code) exceeds the basis
attributable to those assets, such excess will be treated as ordinary income.
Unrealized receivables include, to the extent not previously included in
Operating Partnership's income, any rights to payment for services rendered or
to be rendered. Unrealized receivables also include amounts that would be
subject to recapture as ordinary income if the Operating Partnership had sold
its assets at their fair market value at the time of the transfer of a Unit.
For individuals, trusts and estates, the maximum rate of tax on the net
capital gain from a sale or exchange of a long-term capital asset (i.e., a
capital asset held for more than 12 months) is 20%. The maximum rate for net
capital gains attributable to the sale of depreciable real property held for
more than 12 months is 25% to the extent of the prior depreciation deductions
for "unrecaptured Section 1250 gain" (that is, depreciation deductions not
otherwise recaptured as ordinary income under the existing depreciation
recapture rules).
The Taxpayer Relief Act of 1997 (the "1997 Act") provides the IRS with the
authority to issue regulations that could, among other things, apply these rates
on a look-through basis in the case of "pass-through" entities such as the
Operating Partnership. The IRS has recently issued proposed regulations (the
17
<PAGE> 19
"Proposed Regulations") that would result in the imposition of a 25% tax on
individuals, trusts and estates upon the sale or disposition of Units under
certain circumstances. In general, such Unit holders would be subject to a 25%
tax to the extent of their allocable share of unrecaptured Section 1250 gain
immediately prior to their sale or disposition of the Units (the "25% Amount").
Provided that the Units are held as a long-term capital asset, such Unit holders
would be subject to a maximum rate of tax of 20% of the difference, if any,
between the Preliminary Gain and the 25% Amount. Although proposed regulations
do not have any legal effect until adopted, they indicate the position of the
Internal Revenue Service. No assurances can be given that the Proposed
Regulations would not be applied retroactively if adopted.
There is a risk that a redemption by the Operating Partnership of Units
issued in exchange for a contribution of property to the Operating Partnership
may cause the original transfer of property to the Operating Partnership in
exchange for Units to be treated as a "disguised sale" of property. Section 707
of the Code and the Treasury Regulations thereunder (the "Disguised Sale
Regulations") generally provide that, unless one of the prescribed exceptions is
applicable, a partner's contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration (which may
include the assumption of or taking subject to a liability) from the partnership
to the partner will be presumed to be a sale, in whole or in part, of such
property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that, in the absence of an applicable exception,
if money or other consideration is transferred by a partnership to a partner
within two years of the partner's contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. The
Disguised Sale Regulations also provide that if two years have passed between
the transfer of money or other consideration and the contribution of property,
the transactions will be presumed not to be a sale unless the facts and
circumstances clearly establish that the transfers constitute a sale. EACH UNIT
HOLDER IS ADVISED TO CONSULT WITH ITS OWN TAX ADVISOR TO DETERMINE WHETHER A
REDEMPTION OF UNITS COULD BE SUBJECT TO THE DISGUISED SALE REGULATIONS.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
The information below highlights a number of the significant differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Shares, respectively. These comparisons are intended to assist
Unit holders of the Operating Partnership in understanding how their investment
will be changed if their Units are redeemed for Common Shares. This discussion
is summary in nature and does not constitute a complete discussion of these
matters, and Unit holders should carefully review the balance of this prospectus
and the registration statement of which this prospectus is a part for additional
important information about the Company.
THE OPERATING PARTNERSHIP THE COMPANY
FORM OF ORGANIZATION AND ASSETS OWNED
-------------------------------------
The Operating Partnership is We are a Maryland statutory real
organized as Delaware limited estate investment trust. We believe
partnership. The Operating that we have operated so as to
Partnership owns interests (directly qualify as a REIT under the Code,
through subsidiaries) in Properties. commencing with our taxable year
ended December 31, 1993, and intend
to continue to so operate. Our
interest in the Operating Partnership
gives us an indirect investment in
the properties owned by the Operating
Partnership. In addition, we own
(either directly or through interests
in subsidiaries other
18
<PAGE> 20
than the Operating Partnership)
interests in other Properties.
LENGTH OF INVESTMENT
--------------------
The Operating Partnership has a We have a perpetual term and intend
stated termination date of December to continue our operations for an
31, 2093. indefinite time period.
PURPOSE AND PERMITTED INVESTMENTS
---------------------------------
The Operating Partnership's purpose Under our Declaration of Trust, we
is to conduct any business that may may engage in any lawful activity
be lawfully conducted by a limited permitted by the General Corporation
partnership organized pursuant to the Law of the State of Maryland. We are
Act, provided that such business is permitted by the Partnership
to be conducted in a manner that Agreement to engage in activities not
permits the Company to be qualified related to the business of the
as a REIT unless the Company ceases Operating Partnership, including
to qualify as REIT. The Operating activities in direct or indirect
Partnership may not take, or refrain competition with the Operating
from taking, any action which, in the Partnership, and may own assets other
judgment of the general partner than its interest in the Operating
(which is wholly-owned by the Partnership and such other assets
Company) (i) could adversely affect necessary to carry out its
the ability of the Company to responsibilities under the
continue to qualify as a REIT, (ii) Partnership Agreement and its
could subject the general partner to Declaration of Trust. In addition, we
any additional taxes under Section have no obligation to present
857 or Section 4981 of the Code, or opportunities to the Operating
any other Section of the Code, or Partnership and the Unit holders have
(iii) could violate any law or no rights by virtue of the
regulation of any governmental body Partnership Agreement in any of our
(unless such action, or inaction, is outside business ventures.
specifically consented to by the
general partner).
ADDITIONAL EQUITY
-----------------
The Operating Partnership is authorized The Board of Trustees may issue, in
to issue Units and other partnership its discretion, additional equity
interests (including partnership securities consisting of Common
interests of different series or Shares or Preferred Shares; provided,
classes that may be senior to Units) that the total number of shares
as determined by the general partner, issued does not exceed the authorized
in its sole discretion. number of shares of capital stock set
forth in the Company's Declaration of
Trust. The proceeds of equity capital
raised by the Company are not
required to be contributed to the
Operating Partnership.
BORROWING POLICIES
------------------
The Operating Partnership has no We are not restricted under our
restrictions on borrowings, and the governing instrument from incurring
general partner has full power and borrowings. We are not required to
authority to borrow money on behalf incur our indebtedness through the
of the Operating Partnership. Operating Partnership.
19
<PAGE> 21
OTHER INVESTMENT RESTRICTIONS
-----------------------------
Other than restrictions precluding Neither the Company's Declaration of
investments by the Operating Trust nor its By-laws impose any
Partnership that would adversely restrictions upon the types of
affect the qualification of the investments made by us.
Company as a REIT, there are no
restrictions upon the Operating
Partnership's authority to enter into
certain transactions, including among
others, making investments, lending
Operating Partnership funds, or
reinvesting the Operating
Partnership's cash flow and net sale
or refinancing proceeds.
MANAGEMENT CONTROL
------------------
All management powers over the The Board of Trustees has exclusive
business and affairs of the Operating control over our business and affairs
Partnership are vested in the general subject only to the restrictions in
partner of the Operating Partnership, the Declaration of Trust and the
and no limited partner of the Bylaws. The Board of Trustees
Operating Partnership has any right consists of seven trustees, which
to participate in or exercise control number may be increased or decreased
or management power over the business by vote of at least a majority of the
and affairs of the Operating entire Board of Trustees pursuant to
Partnership except (1) the general the By-laws of the Trust, but may
partner of the Operating Partnership never be fewer than the minimum
may not dispose of all or permitted by the General Corporation
substantially all of the Operating Law of the State of Maryland. At each
Partnership's assets without the annual meeting of the shareholders,
consent of the holders of two-thirds the successors of the class of
of the outstanding Units, and (2) trustees whose terms expire at that
there are certain limitations on the meeting will be elected. The policies
ability of the general partner of the adopted by the Board of Trustees may
Operating Partnership to cause or be altered or eliminated without a
permit the Operating Partnership to vote of the shareholders.
dissolve. See "--Vote Required to Accordingly, except for their vote in
Dissolve the Operating Partnership or the elections of trustees,
the Company" below. The general shareholders have no control over our
partner may not be removed by the ordinary business policies.
limited partners of the Operating
Partnership with or without cause.
FIDUCIARY DUTIES
----------------
Under Delaware law, the general Under Maryland law, the trustees must
partner of the Operating Partnership perform their duties in good faith,
is accountable to the Operating in a manner that they reasonably
Partnership as a fiduciary and, believe to be in the best interests
consequently, is required to exercise of the Company and with the care of
good faith and integrity in all of an ordinarily prudent person in a
its dealings with respect to like position. Trustees of the
partnership affairs. However, under Company who act in such a manner
the Partnership Agreement, the generally will not be liable to the
general partner is under no Company for monetary damages arising
obligation to take into account the from their activities.
tax consequences to any partner of
any action taken by it, and the
general partner is not liable for
monetary damages for losses sustained
or liabilities incurred by partners
as a result of errors of judgment or
of any act or omission, provided that
the general partner has acted in good
faith.
20
<PAGE> 22
MANAGEMENT LIABILITY AND INDEMNIFICATION
----------------------------------------
As a matter of Delaware law, the The Company's Declaration of Trust
general partner has liability for the provides that the liability of the
payment of the obligations and debts Company's trustees and officers to
of the Operating Partnership unless the Company and its shareholders for
limitations upon such liability are money damages is limited to the
stated in the document or instrument fullest extent permitted under
evidencing the obligation. Under the Maryland law. The Declaration of
Partnership Agreement, the Operating Trust and state law provide
Partnership has agreed to indemnify indemnification to trustees and
the general partner and any director officers to the same extent that such
or officer of the general partner trustees and officers, whether
from and against all losses, claims, serving the Company, or, at its
damages, liabilities (joint or request, any other entity, to the
several) expenses (including legal full extent permitted under Maryland
fees and expenses), judgments, fines, law.
settlements and other amounts
incurred in connection with any
actions relating to the operations of
the Operating Partnership in which
the general partner or such director
or officer is involved, unless: (1)
the act was in bad faith and was
material to the action; (2) such
party received an improper personal
benefit; or (3) in the case of any
criminal proceeding, such party had
reasonable cause to believe the act
was unlawful. The reasonable expenses
incurred by an indemnitee may be
reimbursed by the Operating
Partnership in advance of the final
disposition of the proceeding upon
receipt by the Operating Partnership
of an affirmation by such indemnitee
of his, her or its good faith belief
that the standard of conduct
necessary for indemnification has
been met and an undertaking by such
indemnitee to repay the amount if it
is determined that such standard was
not met.
ANTI-TAKEOVER PROVISIONS
------------------------
Except in limited circumstances (see The Declaration of Trust and By-laws
"Voting Rights" below), the general of the Company contain a number of
partner of the Operating Partnership provisions that may have the effect
has exclusive management power over of delaying or discouraging an
the business and affairs of the unsolicited proposal for the
Operating Partnership. The general acquisition of the Company or the
partner may not be removed by the removal of incumbent management.
limited partners with or without These provisions include, among
cause. Under the Partnership others: (1) authorized capital shares
Agreement, a limited partner may that may be issued as Preferred
transfer his or her interest as a Shares in the discretion of the Board
limited partner (subject to certain of Trustees, with superior voting
limited exceptions set forth in the rights to the Common Shares; (2) a
Partnership Agreement), without requirement that trustees may be
obtaining the approval of the general removed only for cause and only by a
partner except that the general vote of holders of at least 80% of
partner may, in its sole discretion, the outstanding Common Shares; and
prevent the admission to the (3) provisions designed to avoid
Operating Partnership of substituted concentration of share ownership in a
limited partners. manner that would jeopardize our
status as a REIT under the Code.
21
<PAGE> 23
VOTING RIGHTS
-------------
All decisions relating to the The Company is managed and controlled
operation and management of the by a Board of Trustees presently
Operating Partnership are made by the consisting of seven members. Each
general partner. See "Description of trustee is to be elected by the
Units." As of the date of this shareholders at annual meetings of
prospectus, the Company held, through the Company. Maryland law requires
various subsidiaries, approximately that certain major corporate
76% of the outstanding limited transactions, including most
partner units in LCIF. As Units are amendments to the Declaration of
redeemed by partners, the Company's Trust, may not be consummated without
percentage ownership of the Operating the approval of shareholders as set
Partnership will increase. forth below. All Common Shares have
one vote, and the Declaration of
Trust permits the Board of Trustees
to classify and issue Preferred
Shares in one or more series having
voting power which may differ from
that of the Common Shares. See
"Description of Capital Shares."
The following is a comparison of the voting rights of the limited
partners of the Operating Partnership and the shareholders of the Company as
they relate to certain major transactions:
A. AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE DECLARATION OF TRUST.
The Partnership Agreement may be Amendments to the Company's
amended with the consent of Lex GP-1, Declaration of Trust must be approved
Lex LP-1 and the Special Limited by the Board of Trustees and
Partners representing a majority of generally by at least two-thirds of
Units held by such Special Limited the votes entitled to be cast at a
Partners. Certain amendments that meeting of shareholders.
affect the fundamental rights of a
limited partner must be approved by
each affected limited partner. In
addition, the general partner may,
without the consent of the limited
partners, amend the Partnership
Agreement as to certain ministerial
matters.
22
<PAGE> 24
B. VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY.
The Operating Partnership may be Under Maryland law, the Board of
dissolved upon the occurrence of Trustees must obtain approval of
certain events, none of which require holders of at least two-thirds of the
the consent of the limited partners. outstanding Common Shares in order to
dissolve the Company.
C. VOTE REQUIRED TO SELL ASSETS OR MERGE.
Under the Partnership Agreement, the Under Maryland law, the sale of all
sale, exchange, transfer or other or substantially all of the assets of
disposition of all or substantially the Company or merger or
all of the Operating Partnership's consolidation of the Company requires
assets or a merger or consolidation the approval of the Board of Trustees
of the Operating Partnership require and holders of two-thirds of the
the consent of holders of a majority outstanding Common Shares. No
of the outstanding Units held by the approval of the shareholders is
Special Limited Partners. The general required for the sale of less than
partner of the Operating Partnership all or substantially all of the
has the exclusive authority the sell Company's assets.
individual assets of the Operating
Partnership.
COMPENSATION, FEES AND DISTRIBUTIONS
------------------------------------
The general partner does not receive The non-employee trustees, with the
any compensation for its services as exception of John D. McGurk, and
general partner of the Operating officers of the Company receive
Partnership. As a partner in the compensation for their services.
Operating Partnership, however, the
general partner has the same right to
allocations and distributions as
other partners of the Operating
Partnership. In addition, the
Operating Partnership will reimburse
the general partner (and the Company)
for all expenses incurred relating to
the ongoing operation of the
Operating Partnership and any other
offering of additional partnership
interests in the Operating
Partnership.
LIABILITY OF INVESTORS
----------------------
Under the Partnership Agreement and Under Maryland law, shareholders are
applicable state law, the liability not personally liable for the debts
of the limited partners for the or obligations of the Company.
Operating Partnership's debts and
obligations is generally limited to
the amount of their investment in the
Operating Partnership.
NATURE OF INVESTMENT
--------------------
The Units constitute equity interests Common Shares constitute equity
entitling each limited partner to his interests in the Company. The Company
pro rata share of cash distributions is entitled to receive its pro rata
made to the limited partners of the share of distributions made by the
Operating Partnership. The Operating Operating Partnership with respect to
Partnership generally intends to the Units, and the distributions made
retain and reinvest proceeds of the by the other direct subsidiaries of
sale of property or excess the Company. Each shareholder will be
refinancing proceeds in its business. entitled to his pro rata share of any
dividends or
23
<PAGE> 25
distributions paid with respect to
the Common Shares. The dividends
payable to the shareholders are not
fixed in amount and are only paid if,
when and as declared by the Board of
Trustees. In order to continue to
qualify as a REIT, we generally must
distribute at least 95% of our net
taxable income (excluding capital
gains), and any taxable income
(including capital gains) not
distributed will be subject to
corporate income tax.
POTENTIAL DILUTION OF RIGHTS
----------------------------
The general partner of the Operating The Board of Trustees may issue, in
Partnership is authorized, in its its discretion, additional shares,
sole discretion and without limited and has the authority to issue from
partner approval, to cause the authorized capital a variety of other
Operating Partnership to issue equity securities of the Company with
additional limited partnership such powers, preferences and rights
interests and other equity securities as the Board of Trustees may
for any partnership purpose at any designate at the time. The issuance
time to the limited partners or to of additional shares of either Common
other persons (including the general Shares or other similar equity
partner on terms established by the securities may result in the dilution
general partner). of the interests of the shareholders.
LIQUIDITY
---------
Limited partners may generally The Redemption Shares will be freely
transfer their Units without the transferable as registered securities
general partner's consent, except under the Securities Act. The Common
that the general partner may, in its Shares are listed on the NYSE. The
sole discretion, prevent the breadth and strength of this
admission to the Operating secondary market will depend, among
Partnership of substituted limited other things, upon the number of
partners. Each limited partner has shares outstanding, the Company's
the right to tender his or her Units financial results and prospects, the
for redemption by the Operating general interest in the Company's and
Partnership. See "General" above. other real estate investments, and
the Company's dividend yield compared
to that of other debt and equity
securities.
FEDERAL INCOME TAXATION
-----------------------
The Operating Partnership is not We have elected to be taxed as a
subject to federal income taxes. REIT. So long as we qualify as a
Instead, each holder of Units REIT, we will be permitted to deduct
includes its allocable share of the distributions paid to our
Operating Partnership's taxable shareholders, which effectively will
income or loss in determining its reduce the "double taxation" that
individual federal income tax typically results when a corporation
liability. The maximum federal income earns income and distributes that
tax rate for individuals under income to its shareholders in the
current law is 39.6%. form of dividends. A qualified REIT,
however, is subject to federal income
tax on income that is not distributed
and also may be subject to federal
income and excise taxes in certain
circumstances. The maximum federal
income tax rate for corporations
under current law is 35%.
A Unit holder's share of income and Dividends paid by us will be treated
loss generated by the Operating as "portfolio" income and cannot be
Partnership generally is subject to offset with losses from "passive
the "passive activity" limitations. activities." The maximum federal
Under the income
24
<PAGE> 26
"passive activity" rules, income and tax rate for individuals under
loss from the Operating Partnership current law is 39.6%. Distributions
that is considered "passive income" made by us to our taxable domestic
generally can be offset against shareholders out of current or
income and loss from other accumulated earnings and profits will
investments that constitute "passive be taken into account by them as
activities." Cash distributions from ordinary income. Distributions that
the Operating Partnership is not are designated as capital gain
taxable to a holder of a Unit except dividends generally will be taxed as
to the extent such distributions long-term capital gain, subject to
exceed such holder's basis in its certain limitations. Distributions in
interest in the Operating Partnership excess of current or accumulated
(which will include such holder's earnings and profits will be treated
allocable share of the Operating as a non-taxable return of basis to
Partnership's taxable income and the extent of a shareholder's
nonrecourse debt). adjusted basis in its Common Shares,
with the excess taxed as capital
gain.
Each year, holders of Units will Each year, shareholders will receive
receive a Schedule K-1 containing an Internal Revenue Service Form 1099
detailed tax information for used by corporations to report
inclusion in preparing their federal dividends paid to their shareholders.
income tax returns.
Holders of Units are required, in Shareholders who are individuals
some cases, to file state income tax generally will not be required to
returns and/or pay state income taxes file state income tax returns and/or
in the states in which the Operating pay state income taxes outside of
Partnership owns property, even if their state of residence with respect
they are not residents of those to our operations and distributions.
states. We may be required to pay state
income taxes in certain states.
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the Redemption
Shares.
DISTRIBUTIONS OF OP UNITS
Our operating partnership's structure enables us to acquire property by
issuing to a seller, as a form of consideration, OP Units. All OP Units issued
as of this date are redeemable at certain times into Common Shares on a
one-for-one basis and certain of such OP Units require us to pay distributions
to the holders thereof (although certain OP Units currently outstanding do not
require current distributions). As a result, our cash available for distribution
to holders of Common Shares and Convertible Preferred Shares is reduced by the
amount of the distributions required by the terms of such OP Units, and the
number of Common Shares that will be outstanding in the future is expected to
increase, from time to time, as such OP Units and Convertible Preferred Shares
are redeemed for or converted into Common Shares. The general partner of the
Operating Partnership has the right to redeem the OP Units held by all, but not
less than all, of the OP Unit holders under certain circumstances, including but
not limited to a merger, sale of assets or other transaction by the Company or
such partnerships which would result in a change of beneficial ownership in the
Company or such partnerships by 50% or more.
As of the date of this prospectus, we have issued a total of 5,767,891 OP
Units of which, in addition to these 214,802 Units, 5,385,441 are also currently
redeemable for Common Shares. The average annualized distribution per OP Unit is
$1.09. Of the total OP Units, 1,499,867 OP Units are owned by our affiliates
including two members of our Board of Trustees.
25
<PAGE> 27
THE COMPANY
We are a self-managed and self-administered REIT that acquires, owns and
manages a geographically diversified portfolio of net leased office, industrial
and retail properties. As of the date of this prospectus, we own 65 properties
or interests therein (the "Properties," and each a "Property"). Substantially
all of our leases are "net leases," under which the tenant is responsible for
all costs of real estate taxes, insurance, ordinary maintenance and structural
repairs. The Properties are located in 29 states, have approximately 11.4
million net rentable square feet and, under the terms of their applicable
leases, currently generate approximately $80.3 million in annual rent. Our
portfolio is currently 100% leased. Our tenants, many of which are nationally
recognized, include Bank One, Arizona, N.A., General Motors, Fleet Mortgage
Group, Inc., Circuit City Stores, Inc., The Hartford Fire Insurance Company,
Honeywell, Inc., Kmart Corporation, Lockheed Martin Corporation, Northwest
Pipeline Corporation, Ryder Integrated Logistics and Wal-Mart Stores, Inc. We
believe that owning, acquiring and managing net leased properties results in
lower operating expenses for us than we otherwise would incur through
investments in properties which were not net leased.
Our senior executive officers average over 20 years of experience in the
real estate investment and net lease business. We have diversified our portfolio
by geographical location, tenant industry segment, lease term expiration and
property type with the intention of providing steady internal growth with low
volatility. We believe that such diversification should help insulate us from
regional recession, industry specific downturns and price fluctuations by
property type. Since January 1, 1999, we have also enhanced the value of its
portfolio by acquiring/investing in $80.5 million of properties, aggregating
approximately 0.8 million net rentable square feet and accounting for
approximately $8.9 million in annual rent. As part of our ongoing efforts, we
expect to continue to effect portfolio and individual property acquisitions and
dispositions, expand existing Properties, attract investment grade quality
tenants, extend lease maturities in advance of expiration and refinance
outstanding indebtedness when advisable.
THE NET LEASE REAL ESTATE BUSINESS
Under a typical net lease, the tenant is responsible for all costs of real
estate taxes, insurance and ordinary maintenance. Investments in net leased
properties can offer more predictable returns than investments in properties
which are not net leased, as rising costs of operating net leased properties are
typically absorbed by tenants. Investors in net leased properties have,
historically, included limited partnerships, REITs, pension funds and finance
subsidiaries of large corporations.
Net leased properties are often acquired in sale/leaseback transactions.
In a typical sale/leaseback transaction, the purchaser/landlord (such as the
Company) acquires a property from an operating company and simultaneously leases
the property back to the operating company under a long-term lease. A
sale/leaseback transaction is structured to provide the purchaser/landlord with
a consistent stream of income which typically increases periodically pursuant to
the lease. Sale/leaseback transactions are advantageous to the seller/tenant as
they (i) enable the seller/tenant to realize the value of its owned real estate
while continuing occupancy on a long-term basis; (ii) may provide the
seller/tenant with off-balance sheet financing; (iii) may provide the
seller/tenant with increased earnings by replacing generally higher depreciation
and mortgage interest costs with rental costs; and (iv) may reduce the
seller's/tenant's debt-to-equity ratio.
INTERNAL GROWTH; EFFECTIVELY MANAGING ASSETS
Leasing Strategies. We seek to extend our leases in advance of their
expiration in order to maintain a balanced lease rollover schedule.
Revenue Enhancing Property Expansions. We undertake expansions of our
Properties based on tenant requirements. We believe that selective property
expansions can provide us with attractive rates of return and actively seeks
such opportunities.
26
<PAGE> 28
Opportunistic Property Sales. We may determine to sell a Property, either
to the Property's existing tenant or to a third party, if we deem such
disposition to be in our best interest. During 1999, the Company sold five
Properties for $30.2 million resulting in a gain of $3.1 million. The
restrictions applicable to REITs may limit our ability to dispose of a property.
See "Federal Income Tax Considerations of Holding Shares in a REIT--Taxation of
the Company--Income Tests."
Tenant Relations. We maintain close contact with our tenants in order to
understand their future real estate needs. We monitor the financial, property
maintenance and other lease obligations of our tenants through a variety of
means, including periodic reviews of financial statements and physical
inspections of the Properties. We perform annual inspections of those Properties
where we have an ongoing obligation with respect to the maintenance of the
Property and for all Properties during each of the last three years immediately
prior to lease expiration. Biannual physical inspections are undertaken for all
other Properties.
ACQUISITION STRATEGIES
We seek to enhance our net lease property portfolio through acquisitions
of general purpose, efficient, well- located properties in growing markets. We
have diversified our portfolio by geographical location, tenant industry
segment, lease term expiration and property type with the intention of providing
steady internal growth with low volatility. We believe that such diversification
should help insulate us from regional recession, industry specific downturns and
price fluctuations by property type. Prior to effecting any acquisitions, we
analyze the (i) property's design, construction quality, efficiency,
functionality and location with respect to the immediate submarket, city and
region; (ii) lease integrity with respect to term, rental rate increases,
corporate guarantees and property maintenance provisions; (iii) present and
anticipated conditions in the local real estate market; and (iv) prospects for
selling or re-leasing the property on favorable terms in the event of a vacancy.
We also evaluate each potential tenant's financial strength, growth prospects,
competitive position within its respective industry and a property's strategic
location and function within a tenant's operations or distribution systems. We
believe that our comprehensive underwriting process is critical to the
assessment of long-term profitability of any investment by us.
Joint Venture Program. We recently formed a joint venture with the New
York State Common Retirement Fund (NYSCRF) to invest in single tenant high
quality office and industrial properties. The Company and NYSCRF will contribute
up to $50 million and $100 million, respectively, to the joint venture which
will leverage such equity by as much as $278 million. The Company's affiliate
will earn acquisition fees of 0.75% of the purchase price of each acquired
property and annual management fees of 2% of cash rent. During 1999, the joint
venture made its first investment by acquiring an interest in, through an $11
million participating note, a property net leased to Vastar Resources, Inc. The
purchase price of the property was $34.8 million and the Company's affiliate
earned a $261,000 acquisition fee.
Operating Partnership's Structure. The operating partnership's structure
enables us to acquire property by issuing to a seller, as a form of
consideration, OP Units. We believe that this structure facilitates our ability
to raise capital and to acquire portfolio and individual properties by enabling
us to structure transactions which may defer tax gains for a contributor of
property while preserving our available cash for other purposes, including the
payment of distributions. We have used OP Units as a form of consideration in
connection with the acquisition of 22 of our Properties.
Acquisitions of Portfolio and Individual Net Lease Properties. We seek to
acquire portfolio and individual properties that are leased to creditworthy
tenants under long-term net leases. We believe there is significantly less
competition for the acquisition of property portfolios containing a number of
net leased properties located in more than one geographic region than there is
for single properties. We also believe that our geographical diversification,
acquisition experience and access to capital will allow us to compete
effectively for the acquisition of such net leased properties.
27
<PAGE> 29
Sale/Leaseback Transactions. We seek to acquire portfolio and individual
net lease properties in sale/leaseback transactions. We selectively pursue
sale/leaseback transactions with creditworthy sellers/tenants with respect to
properties that are integral to the sellers'/tenants' ongoing operations. See
"--The Net Lease Real Estate Business."
Build-to-suit Properties. We may also acquire, after construction has been
completed, build-to-suit properties that are entirely pre-leased to their
intended corporate users before construction. As a result, we do not assume the
risk associated with the construction phase of a project.
Acquisitions from Affiliated Net Lease Partnerships. We believe that net
lease partnerships affiliated with us provide us with an opportunity to acquire
properties with which we are already familiar. We have acquired 14 Properties or
interests therein from our affiliated limited partnerships.
REIT QUALIFICATION REQUIREMENTS
We elected to be taxed as a REIT under Sections 856 through 860 of the
Code, effective for our taxable year ended December 31, 1993 and such election
has not been revoked or terminated. We believe that we have been organized and
have operated in a manner so as to qualify as a REIT for each of our taxable
years ending prior to the date hereof and our current and proposed method of
operation should enable us to continue to meet the requirements for
qualification and taxation as a REIT.
REORGANIZATION OF THE COMPANY AS A MARYLAND REAL ESTATE INVESTMENT TRUST
In December 1997, we reorganized as a Maryland business trust, in an
effort to reduce franchise taxes for us in certain jurisdictions in which we own
properties. The reorganization was effected by merging our predecessor, a
Maryland corporation, with and into us. In the merger, each outstanding share of
Common Stock and convertible preferred stock of our predecessor was converted
into one Common Share or Preferred Share, as the case may be, of the Company.
Each Common or Preferred Share entitles the holder thereof to the same voting
rights to which such shareholder was entitled prior to the merger.
28
<PAGE> 30
MANAGEMENT
Our trustees and senior executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
E. Robert Roskind 54 Chairman of the Board of Trustees and Co-Chief Executive
Officer(1)
Richard J. Rouse 53 Vice Chairman of the Board of Trustees and Co-Chief
Executive Officer
T. Wilson Eglin 35 President, Chief Operating Officer and Trustee
Patrick Carroll 35 Chief Financial Officer and Treasurer
Stephen C. Hagen 57 Senior Vice President
Paul R. Wood 39 Vice President, Chief Accounting Officer and Secretary
Janet M. Kaz 35 Vice President
Philip L. Kianka 42 Vice President
Natasha Roberts 32 Vice President
Carl D. Glickman 72 Trustee(1)(2)
Kevin W. Lynch 46 Trustee(2)(3)
John D. McGurk 55 Trustee(1)(3)
Seth M. Zachary 46 Trustee(3)
</TABLE>
- ----------------
(1) Member, Executive Committee of the Board of Trustees.
(2) Member, Audit Committee of the Board of Trustees.
(3) Member, Compensation Committee of the Board of Trustees.
E. ROBERT ROSKIND has served as the Chairman of the Board of Trustees
and Co-Chief Executive Officer of the Company since October 1993. He founded The
LCP Group, L.P. ("LCP") in 1973 and has been its Chairman since 1976. Prior to
founding LCP, Mr. Roskind headed the real estate net lease financing area of
Lehman Brothers Inc. He is also a general partner for a variety of entities
which serve as the general partner of various partnerships that hold net leased
real properties and other real estate or interests therein. Mr. Roskind is a
director of Berkshire Realty Company, Inc., Krupp Government Income Trust I and
Krupp Government Income Trust II.
RICHARD J. ROUSE became the Vice Chairman of the Board of Trustees in
April 1996, has served as the Co-Chief Executive Officer and a trustee of the
Company since October 1993, and was the President of the Company from October
1993 until April 1996. Mr. Rouse was also a managing director of LCP. He had
been associated with LCP since 1979 and had been engaged there in all aspects of
net lease finance, acquisition and syndication and corporate financing
transactions.
T. WILSON EGLIN became the President of the Company in April 1996,
has served as Chief Operating Officer of the Company since October 1993, has
been a trustee of the Company since May 1994, and was the Executive Vice
President of the Company from October 1993 until April 1996. Prior to his
association with the Company, Mr. Eglin had been associated with LCP since 1987
and had been its Vice President-Acquisitions from 1990 to 1993. In connection
with his responsibilities with LCP, Mr. Eglin was an officer of affiliated
companies that owned and managed over 400 net leased real properties and was
involved in all aspects of real estate acquisition and finance, principally in
net leased transactions.
PATRICK CARROLL became the Chief Financial Officer of the Company in
May 1998 and Treasurer in January 1999. From 1993 to May 1998, Mr. Carroll was a
Senior Manager in the real estate practice of Coopers & Lybrand L.L.P.,
servicing both publicly and privately-held real estate entities.
29
<PAGE> 31
STEPHEN C. HAGEN has served as Senior Vice President of the Company
since October 1996. From 1992 to 1994, Mr. Hagen was a principal of Pharus
Realty Investments, a money manager in real estate stocks, and served as Chief
Operating Officer of HRE Properties, a NYSE-listed REIT, from 1989 to 1992.
PAUL R. WOOD has served as Vice President, Chief Accounting Officer
and Secretary of the Company since October 1993. He had been associated with LCP
from 1988 to 1993 and from 1990 to 1993 had been responsible for all accounting
activities relating to the net leased properties managed by LCP and its
affiliates. Prior to joining LCP, Mr. Wood was, from 1987 to 1988, associated
with E.F. Hutton & Company Inc. as a senior accountant.
JANET M. KAZ has served as Vice President of the Company since May
1995, and prior thereto served as Asset Manager of the Company since October
1993. Prior to her association with the Company, Ms. Kaz had been a member of
LCP's property acquisition team from 1986 to 1990 and a member of LCP's asset
management team from 1991 to 1993. Ms. Kaz was involved in all aspects of real
estate acquisition, finance and management, principally in net leased
transactions.
PHILIP L. KIANKA joined the Company in 1997 as Vice President of
Asset Management. Prior to joining us, from 1985 through 1997, Mr. Kianka served
as a Vice President and Senior Asset Manager at Merrill Lynch Hubbard, Inc., a
real estate division of Merrill Lynch & Co., Inc. Mr. Kianka was involved with
real estate acquisitions, development and asset management for a national
portfolio of diversified properties.
NATASHA ROBERTS joined the Company in 1997 as Vice President -
Acquisition. Prior to joining us Ms. Roberts worked for Net Lease Partners
Realty Advisors (an affiliate of Mr. Roskind) from January 1995 to January 1997
and as licensed real estate broker from February 1992 to January 1995.
CARL D. GLICKMAN has served as a trustee and a Chairman of the
Executive Committee of the Board of Trustees of the Company since May 1994 and
as a member of the Compensation Committee of the Board of Trustees until May
1998. He has been President of The Glickman Organization since 1953. He is on
the Board of Directors of Alliance Tire & Rubber Co., Ltd., Bear, Stearns
Companies, Inc., Kuala Healthcare, Inc., Infu-Tech, Inc., Jerusalem Economic
Corporation Ltd. and OfficeMax Inc., as well as numerous private companies.
KEVIN W. LYNCH has served as a trustee of the Company since May 1996
and is a founder and principal of The Townsend Group, an institutional real
estate consulting firm founded in 1983. Prior to forming The Townsend Group, Mr.
Lynch was a Vice President for Stonehenge Capital Corporation. Mr. Lynch has
been involved in the commercial real estate industry since 1974, and is a
director of First Industrial Realty Trust.
JOHN D. McGURK became a member of the Board in January 1997 as the
designee of Five Arrows to the Board of Trustees. He is the founder and
President of Rothschild Realty, Inc., the advisor to Five Arrows. Prior to
starting Rothschild Realty, Inc. in 1981, Mr. McGurk served as a Regional Vice
President for The Prudential Insurance Company of America where he oversaw its
New York City real estate loan portfolio, equity holdings, joint ventures and
projects under development. Mr. McGurk is a member of the Urban Land Institute,
Pension Real Estate Association, Real Estate Board of New York and the National
Real Estate Association, and is the President of the Trustee Committee of the
Caedmon School.
SETH M. ZACHARY has served as a trustee and a member of the
Compensation Committee of the Board of Trustees of the Company since November
1993 and the Audit Committee until February 1999. Since 1987, he has been a
partner in the law firm of Paul, Hastings, Janofsky & Walker LLP, counsel to the
Company.
30
<PAGE> 32
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During 1998, we extended loans to each of Richard J. Rouse, Vice
Chairman of the Board of Trustees and Co-Chief Executive Officer, and T. Wilson
Eglin, President, Chief Operating Officer and a trustee, each in the amount of
$998,875, to fund the purchase by each of these individuals of 65,500 Common
Shares. These loans bear interest at a rate of 7.6% per annum, are secured by
the Common Shares purchased by each of such individuals and are scheduled to
mature in 2003.
FEDERAL INCOME TAX CONSIDERATIONS OF HOLDING SHARES IN A REIT
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Shares. The following
discussion is for general information purposes only, is not exhaustive of all
possible tax considerations and is not intended to be and should not be
construed as tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, this
discussion is intended to address only those federal income tax considerations
that are generally applicable for all security holders in the Company. It does
not discuss all of the aspects of federal income taxation that may be relevant
to a prospective security holder in light of his or her particular circumstances
or to certain types of security holders who are subject to special treatment
under the federal income tax laws including, without limitation, insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States.
The information in this section is based on the Code (including the
provisions of the 1997 Act, several of which are described herein), current,
temporary and proposed Treasury Regulations, the legislative history of the
Code, current administrative interpretations and practices of the IRS (including
its practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
adversely affect existing interpretations of current law. Any such change could
apply retroactively to transactions preceding the date of the change. The
Company has not received any rulings from the IRS concerning the tax treatment
of the Company. Thus no assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
EACH PROSPECTIVE PURCHASER OF THE SECURITIES IS ADVISED TO CONSULT
WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM
OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES OF AN ENTITY ELECTING
TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company elected to be taxed as a REIT under Sections 856
through 860 of the Code effective for its taxable year ended December 31, 1993.
The Company believes that it was organized, and has operated, in such a manner
so as to qualify for taxation as a REIT under the Code and intends to conduct
its operations so as to continue to qualify for taxation as a REIT. No
assurance, however, can be given that the Company has operated in a manner so as
to qualify or will be able to operate in such a manner so as to remain qualified
as a REIT. Qualification and taxation as a REIT depends upon the Company's
ability to meet on a continuing basis, through actual annual operating results,
the required distribution levels, diversity of share ownership and the various
qualification tests imposed under the Code discussed below, the results of which
will not be reviewed by Counsel. Given the highly complex nature of the rules
governing REITs,
31
<PAGE> 33
the ongoing importance of factual determinations, and the possibility of future
changes in circumstances of the Company, no assurance can be given that the
actual results of the Company's operations for any one taxable year have
satisfied or will continue to satisfy such requirements.
The following is a general summary of the Code provisions that govern
the federal income tax treatment of a REIT and its shareholders. These
provisions of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
If the Company qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income tax as follows: first, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
on foreclosure or otherwise on default on a loan secured by such real property
or a lease of such property) which is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but nonetheless has maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which the Company fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, 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
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e., a corporation generally
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent of such property's "built-in gain" (the excess of the fair market
value of such property at the time of the acquisition by the Company over the
adjusted basis of such property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in Internal
Revenue Service regulations that have not yet been promulgated).
Requirements for Qualification. A REIT is a corporation, trust or
association (i) which is managed by one or more trustees or directors, (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (iii) which would be taxable
as a domestic corporation, but for Sections 856 through 859 of the Code, (iv)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (v) the beneficial ownership of which is held by
100 or more persons, (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company expects to meet the ownership test immediately after the transaction
contemplated herein. The Company may redeem, at its
32
<PAGE> 34
option, a sufficient number of shares or restrict the transfer thereof to bring
or maintain the ownership of the shares in conformity with the requirements of
the Code. In addition, the Company's Declaration of Trust includes restrictions
regarding the transfer of its stock that are intended to assist the Company in
continuing to satisfy requirements (v) and (vi). Moreover, 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 its capital stock requesting information regarding the actual
ownership of its capital stock, and the Company does not know, or exercising
reasonable diligence would not have known, whether it failed to meet requirement
(vi) above, the Company will be treated as having met the requirement. See
"Description of Common Shares" and "Description of Preferred Shares."
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of each of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and items of gross income of the partnership will retain
the same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income tests and assets (as discussed
below). Thus, the Company's proportionate share of the assets, liabilities, and
items of gross income of the partnerships in which the Company owns an interest
are treated as assets, liabilities and items of the Company for purposes of
applying the requirements described herein.
Income Tests. In order to maintain qualification as a REIT, the
Company annually must satisfy certain gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of qualified temporary investments. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property investments,
dividends, interest and gain from the sale or disposition of stock or
securities.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or an owner of 10% or more of the REIT, actually
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property (subject to a de minimis exception applicable to the Company's tax
years commencing on and after January 1, 1998 as described below) or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue. The REIT may,
however, directly perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant" of the property ("Permissible
Services").
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 services that are not
Permissible Services so long as the amount received for such services meets a de
minimis standard. The amount received for "impermissible services" with respect
to a property (or, if services are available only to certain tenants, possibly
with respect to such tenants) cannot exceed one percent of all amounts received,
directly or indirectly, by the Company with respect to such property (or, if
services are available only to certain tenants, possibly with respect to such
tenants). The amount that the Company will be deemed to have
33
<PAGE> 35
received for performing "impermissible services" will be the greater of the
actual amounts so received or 150% of the direct cost to the Company of
providing those services.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if such failure was due to reasonable cause and not willful neglect,
it disclosed the nature and amounts of its items of gross income in a schedule
attached to its return, and any incorrect information on the schedule was not
due to fraud with intent to evade tax. A 100% penalty tax would be imposed on
the amount by which the Company failed the 75% or 95% test (whichever amount is
greater), less an amount which generally reflects expenses attributable to
earning the nonqualified income.
Subject to certain safe harbor exceptions, any gain realized by the
Company on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. Such prohibited transaction income may also have an adverse effect
upon the Company's ability to satisfy the income tests for qualification as a
REIT. Under existing law, whether property is held as inventory or primarily for
sale to customers in the ordinary course of a trade or business is a question of
fact that depends on all the facts and circumstances with respect to the
particular transaction.
Asset Tests. The Company must also satisfy three tests relating to
the nature of its assets every quarter. First, at least 75% of the value of the
Company's total assets must be represented by real estate assets (including (i)
its allocable share of real estate assets held by partnerships in which the
Company owns an interest or held by "qualified REIT subsidiaries" (as defined in
the Code) of the Company and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of an offering of equity securities or
a long-term (at least five years) debt offering of the Company, cash, cash items
and government securities). Second, not more than 25% of the Company's total
assets may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities. The Company expects that substantially
all of its assets will consist of (i) real properties, (ii) stock or debt
investments that earn qualified temporary investment income, (iii) other
qualified real estate assets, and (iv) cash, cash items and government
securities. The Company may also invest in securities of other entities,
provided that such investments will not prevent the Company from satisfying the
asset and income tests for REIT qualification set forth above.
If the Company inadvertently fails one or more of the asset tests at
the end of a calendar quarter, such a failure would not cause it to lose its
REIT status, provided that (i) it satisfied all of the asset tests at the close
of a preceding calendar quarter, and (ii) the discrepancy between the values of
the Company's assets and the standards imposed by the asset test either did not
exist immediately after the acquisition of any particular acquisition or was not
wholly partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company could
still avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
Annual Distribution Requirement. With respect to each taxable year,
the Company must distribute to its shareholders dividends (other than capital
gain dividends) in an amount at least equal to the sum of (a) 95% of its "REIT
Taxable income" (determined without regard to the deduction for dividends paid
and by excluding any net capital gain), and (b) 95% of any after-tax net income
from foreclosure property, minus the sum of certain items of "excess non-cash
income." REIT Taxable Income is generally computed in the same manner as taxable
income of ordinary corporations, with several adjustments, such as a deduction
allowed for dividends paid, but not for dividends received. "Excess non-cash
income" is the amount, if any, by which the sum of certain items of non-cash
income exceeds 5% of REIT Taxable Income for the taxable year (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain). With respect to the Company's taxable years commencing prior to
January 1, 1998, these items of non-cash
34
<PAGE> 36
income for which relief from the distribution requirement is provided are (i)
the excess of amounts includible in gross income due to the operation of Section
467 of the Code (relating to deferred rental agreements) over the amounts that
would have been includible without regard to such provision, (ii) income from
certain like-kind exchanges not eligible for tax-free treatment, and (iii) the
amounts includible on gross income with respect to the amount that original
issue discount obligations exceed the amount of money and fair market value of
other property received during the taxable year under such instruments. With
respect to the Company's tax years commencing on and after January 1, 1998,
"excess non-cash income" described in clause (iii) above applies equally to
REITs that use the accrual method of accounting for United States federal income
tax purposes.
The Company will be subject to tax on amounts not distributed at
regular United States federal corporate income tax rates. With respect to its
taxable years beginning on and after January 1, 1998, the Company may elect to
retain rather than distribute, net long-term capital gain, and be subject to
regular United States federal income tax thereon. For the consequences of such
an election to the REIT's shareholders, see "Taxation of Taxable Shareholders."
In addition, a nondeductible 4% excise tax is imposed on the excess of (i) 85%
of the Company's ordinary income for the year plus 95% of capital gain net
income for the year and the undistributed portion of the required distribution
for the prior year over (ii) the actual distribution to shareholders during the
year (if any). Net operating losses generated by the Company may be carried
forward but not carried back and used by the Company for 15 years (or 20 years
in the case of net operating losses generated in the Company's tax years
commencing on or after January 1, 1998) to reduce REIT Taxable Income and the
amount that the Company will be required to distribute in order to remain
qualified as a REIT. Net capital losses of the Company may be carried forward
for five years (but not carried back) and used to reduce capital gains.
In general, a distribution must be made during the taxable year to
which it relates to satisfy the distribution test and to be deducted in
computing REIT Taxable Income. However, the Company may elect to treat a
dividend declared and paid after the end of the year (a "subsequent declared
dividend") as paid during such year for purposes of complying with the
distribution test and computing REIT Taxable Income, if the dividend is (i)
declared before the regular or extended due date of the Company's tax return for
such year and (ii) paid not later than the date of the first regular dividend
payment made after the declaration (but in no case later than 12 months after
the end of the year). For purposes of computing the 4% excise tax, a subsequent
declared dividend is considered paid when actually distributed. Furthermore, any
dividend that is declared by the Company in October, November of December of a
calendar year, and payable to shareholders of record as of a specified date in
such month of such year will be deemed to have been paid by the Company (and
received by shareholders) on December 31 of such calendar year, but only if such
dividend is actually paid by the Company in January of the following calendar
year. For purposes of complying with the distribution test for a taxable year as
a result of an adjustment in certain of its items of income, gain or deduction
by the IRS, the Company may be permitted to remedy such failure by paying a
"deficiency dividend" in a later year together with interest and a penalty. Such
deficiency dividend may be included in the Company's deduction of dividends paid
for the earlier year for purposes of satisfying the distribution test. For
purposes of the 4% excise tax, the deficiency dividend is taken into account
when paid, and any income giving rise to the deficiency adjustment is treated as
arising when the deficiency dividend is paid.
The Company believes that it has distributed and intends to continue
to distribute to its shareholders an amount at least equal to 95% of the sum of
(i) its REIT Taxable Income (determined without regard to the deduction for
dividends paid and by excluding any net capital gains) and (ii) any after-tax
net income from foreclosure properties less any "excess non-cash income," as
those amounts are determined in good faith by the Company or its independent
accountants. However, it is possible that timing differences between the accrual
of income and its actual collection, and the need to make non-deductible
expenditures (such as capital improvements or principal payments on debt) may
cause the Company to recognize taxable income in excess of its net cash
receipts, thus increasing the difficulty of compliance with the distribution
requirement. In order to meet the 95% requirement, the Company might find it
necessary to arrange for short-term, or possibly long-term, borrowings.
35
<PAGE> 37
Failure to Qualify. If the Company fails to qualify as a REIT for any
taxable year, and if certain relief provisions of the Code do not apply, it
would be subject to federal income tax (including applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. As a result, the
Company's failure to qualify as a REIT would reduce the cash available for
distribution by the Company to its shareholders. In addition, if the Company
fails to qualify as a REIT, all distributions to shareholders will be taxable as
ordinary income, to the extent of the Company's current and accumulated earnings
and profits. Subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends-received deduction.
If the Company's failure to qualify as a REIT is not due to
reasonable cause but results from willful neglect, the Company would not be
permitted to elect REIT status for the four taxable years after the taxable year
for which such disqualification is effective. In the event the Company were to
fail to qualify as a REIT in one year and subsequently requalify in a later
year, the Company might be required to recognize taxable income based on the net
appreciation in value of its assets as a condition to requalification. In the
alternative, the Company may be taxed on the net appreciation in value of its
assets if it sells properties within ten years of the date the Company
requalifies as a REIT under federal income tax laws.
TAXATION OF TAXABLE SHAREHOLDERS
As used herein, the term "U.S. shareholder" means a holder of Common
or Preferred Shares who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity treated as a corporation or partnership for federal income tax
purposes created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's U.S. shareholders 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 corporate shareholders will not be eligible for the
dividends-received deductions as to such amounts. For purposes of computing the
Company's earnings and profits, depreciation for depreciable real estate will be
computed on a straight-line basis over a 40-year period. For purposes of
determining whether distributions on the Common Shares are out of current or
accumulated earnings and profits, the earnings and profits of the Company will
be allocated first to the Preferred Shares and second to the Common Shares.
There can be no assurance that the Company will have sufficient earnings and
profits to cover distributions on any Preferred Shares.
Distributions that are properly designated as capital gain dividends
will be taxed as gains from the sale or exchange of a capital asset held for
more than one year (to the extent they do not exceed the Company's actual net
capital gain for the taxable year) without regard to the period for which the
shareholder has held its shares. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income pursuant
to Section 291 of the Code. The Taxpayer Relief Act of 1997 (the "1997 Act")
changed significantly the taxation of capital gains by taxpayers who are
individuals, estates, or a trust. With respect to amounts designated as capital
gain distributions, the IRS has released Notice 97-64 describing temporary
regulations that will be issued to permit REITs to further designate such
capital gain dividends as (i) a 20% rate gain distribution, or (ii) an
unrecaptured Section 1250 gain distribution (taxed at a rate of 25%).
Distributions in excess of current and accumulated earnings and
profits will constitute a non-taxable return of capital to a shareholder to the
extent that such distributions do not exceed the adjusted basis of the
shareholder's shares, and will result in a corresponding reduction in the
shareholder's basis in the shares. Any reduction in a shareholder's tax basis
for its shares will increase the amount of taxable gain or decrease the
36
<PAGE> 38
deductible loss that will be realized upon the eventual disposition of the
shares. The Company will notify shareholders at the end of each year as to the
portions of the distributions which constitute ordinary income, capital gain or
a return of capital. Any portion of such distributions that exceed the adjusted
basis of a U.S. shareholder's shares will be taxed as capital gain from the
disposition of shares, provided that the shares are held as capital assets in
the hands of the U.S. shareholder.
Aside from the different income tax rates applicable to ordinary
income and capital gain dividends, regular and capital gain dividends from the
Company will be treated as dividend income for most other federal income tax
purposes. In particular, such dividends will be treated as "portfolio" income
for purposes of the passive activity loss limitation (including all individuals)
and generally will not be able to offset any "passive losses" against such
dividends. Dividends will be treated as investment income for purposes of the
investment interest limitation contained in Section 63(d) of the Code, which
limits the deductibility of interest expense incurred by noncorporate taxpayers
with respect to indebtedness attributable to certain investment assets.
In general, dividends paid by the Company will be taxable to
shareholders in the year in which they are received, except in the case of
dividends declared at the end of the year, but paid in the following January, as
discussed above.
In general, a domestic shareholder will realize capital gain or loss
on the disposition of shares equal to the difference between (i) the amount of
cash and the fair market value of any property received on such disposition and
(ii) the shareholder's adjusted basis of such shares. With respect to
dispositions occurring after December 31, 1997, in the case of a domestic
shareholder who is an individual or an estate or trust, such gain or loss will
be long-term capital gain or loss subject to a 20% tax rate if such shares have
been held for more than 12 months. In the case of a taxable U.S. shareholder
that is a corporation, such gain or loss will be long-term capital gain or loss
if such shares have been held for more than one year. Loss upon the sale or
exchange of shares by a shareholder who has held such shares for six months or
less (after applying certain holding period rules) will be treated as long-term
capital loss to the extent of distribution from the Company required to be
treated by such shareholder as long-term capital gain.
For the Company's taxable years commencing on or after January 1,
1998, the Company may elect to require the holders of shares to include the
Company's undistributed net long-term capital gains in their income. If the
Company makes such an election, the holders of shares 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 shares will
increase the basis in its shares by the difference between the amount of capital
gain included in its income and the amount of tax it is deemed to have paid. The
earnings and profits of the Company will be adjusted appropriately. With respect
to such long-term capital gain of a taxable domestic shareholder that is an
individual or an estate or a trust, the IRS has authority to issue regulations
that could apply the special tax rate applicable to sales of depreciable real
property by an individual or an estate or trust to the portion of the long-term
capital gains of an individual or an estate or trust attributable to deductions
for depreciation taken with respect to depreciable real property.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number and certifies as to no loss of
exemption from backup withholding. Amounts withheld as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any shareholders who fail to certify their non-foreign status to
37
<PAGE> 39
the Company. See "--Taxation of Non-U.S. Shareholders" below. Additional issues
may arise pertaining to information reporting and backup withholding with
respect to Non-U.S. Shareholders (persons other than (i) citizens or residents
of the United States, (ii) corporations, partnerships or other entities created
or organized under the laws of the United States or any political subdivision
thereof, and (iii) estates or trusts the income of which is subject to United
States federal income taxation regardless of its source) and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information and backup withholding requirements.
The Treasury Department has recently finalized regulations regarding
the withholding and information reporting rules discussed above. In general,
these regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify and modify reliance standards. These regulations generally are effective
for payments made after December 31, 2000, subject to certain transition rules.
TAXATION OF NON-U.S. SHAREHOLDERS
The following discussion is only a summary of the rules governing
United States federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships or other foreign estates or trusts
(collectively, "Non-U.S. Shareholders"). Prospective Non-U.S. Shareholders
should consult with their own tax advisors to determine the impact of federal,
state and local income tax laws with regard to an investment in shares,
including any reporting requirements.
Distributions that are not attributable to gain from sales or
exchanges by the Company of United States real property interests and not
designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
Certain tax treaties limit the extent to which dividends paid by a REIT can
qualify for a reduction of the withholding tax on dividends. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a Non-U.S. Shareholder to the extent that they do not exceed the
adjusted basis of the Shareholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the adjusted
basis of a Non-U.S. Shareholder's shares, they will give rise to tax liability
if the Non-U.S. Shareholder would otherwise be subject to tax on any gain from
the sale or disposition of his shares in the Company, as described below.
For withholding tax purposes, the Company currently is required to
treat all distributions as if made out of its current or accumulated earnings
and profits and thus intends to withhold at the rate of 30% (or a reduced treaty
rate if applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under the
final regulations (discussed above), generally effective for distributions after
December 31, 2000, the Company would be required to withhold at the 30% rate on
distributions it reasonably estimates to be in excess of the Company's current
and accumulated earnings and profits. If it cannot be determined at the time a
distribution is made whether such distribution will be in excess of current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to ordinary dividends. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or lower applicable treaty rate) will
be subject to withholding at a rate of 10%. However, the Non-U.S. Shareholder
may seek from the IRS a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Non-U.S. Shareholder's United States tax liability, if
any.
38
<PAGE> 40
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, a Non-U.S. Shareholder is taxed as if such gain were
effectively connected with a United States business. Non-U.S. Shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief. The Company is required by
applicable regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gains dividend regardless of the amount
actually designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Although the law is not entirely clear on the matter, 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-U.S.
Shareholders in the manner outlined in the preceding paragraph for actual
distributions by the Company of capital gain dividends. See "Taxation of
Shareholders -- Taxation of Taxable Shareholders." Under that approach, Non-U.S.
Shareholders 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 IRS 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).
Gain recognized by a Non-U.S. Shareholder upon a sale of shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during
specified testing period less than 50% in value of the share was held directly
or indirectly by foreign persons. It is anticipated that the Company will be a
"domestically controlled REIT." Therefore, the sale of shares will not be
subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and such gain is attributable to an office or
fixed place of business in the United States or such nonresident alien
individual has a "tax home" in the United States and such gain is not
attributable to an office or fixed place of business located outside the United
States or, if such gain is attributable to an office or fixed place of business
located outside the United States, it is not subject to foreign income tax equal
to at least 10% of such gain. If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to
the same treatment as U.S. Shareholders with respect to such gain (subject to
applicable alternative minimum tax, special alternative minimum tax in the case
of nonresident alien individuals and possible application of the 30% branch
profits tax in the case of foreign corporations) and the purchaser would be
required to withhold and remit to the Internal Revenue Service 10% of the
purchase price.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While investments
in real estate may generate UBTI, the Service has issued a published ruling to
the effect that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling and on the intention of the Company to invest its
assets in a manner that will avoid the recognition of UBTI by the Company,
amounts distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
shares in the Company with debt, a portion of its income from the Company, if
any, will constitute UBTI pursuant to the "debt-financed
39
<PAGE> 41
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code Section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions from
the Company as UBTI.
In addition, a pension trust that owns more than 10% of the Company
is required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension trust
to be treated as holding shares of the Company in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's shares or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's capital shares
collectively own more than 50% of the value of the Company's capital shares.
While an investment in the Company by an Exempt Organization
generally is not expected to result in UBTI except in the circumstances
described in the preceding paragraph, any gross UBTI that does arise from such
an investment will be combined with all other gross UBTI of the Exempt
Organization for a taxable year and reduced by all deductions attributable to
the UBTI plus $1,000. Any amount then remaining will constitute UBTI on which
the Exempt Organization will be subject to tax. If the gross income taken into
account in computing UBTI exceeds $1,000, the Exempt Organization is obligated
to file a tax return for such year on IRS Form 990-T. None of the Company, the
Board of Trustees, or any of their Affiliates expects to undertake the
preparation or filing of IRS Form 990-T for any Exempt Organization in
connection with an investment by such Exempt Organization in the Common Shares.
Generally, IRS Form 990-T must be filed with the Service by April 15 of the year
following the year to which it relates.
TAXATION OF REINVESTED DIVIDENDS
Those holders of Common Shares who elect to participate in the
Dividend Reinvestment Plan will be deemed to have received the gross amount of
dividends distributed on their behalf by the Plan Agent as agent for the
participants in such plan. Such deemed dividends will be treated as actual
dividends to such shareholders by the Company and will retain their character
and have the tax effects as described above. Participants that are subject to
federal income tax will thus be taxed as if they received such dividends despite
the fact that their distributions have been reinvested and, as a result, they
will not receive any cash with which to pay the resulting tax liability.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES
When property is contributed to a partnership in exchange for an interest
in the partnership, the partnership generally takes a carryover basis in that
property for tax purposes equal to the adjusted basis of the contributing
partner in the property, rather than a basis equal to the fair market value of
the property at the time of contribution (this difference is referred to as
"Book-Tax Difference"). Special rules under 704(c) of the Code and the
regulations thereunder tend to eliminate the Book-Tax Difference on an annual
basis or with respect to a specific taxable transaction such as a sale. Thus,
the carryover basis of the contributed properties in the hands of the
partnership could cause the Company (i) to be allocated lower amounts of
depreciation and other deductions for tax purposes than would be allocated to
the Company if all properties were to have a tax basis equal to their fair
market value at the time the properties were contributed to the partnership, and
(ii) possibly to be allocated taxable gain in the event of a sale of such
contributed properties in excess of the economic or book income allocated to the
Company as a result of such sale.
40
<PAGE> 42
PLAN OF DISTRIBUTION
This prospectus relates to the possible issuance by us of up to
214,802 Redemption Shares if, and to the extent that, holders of Units tender
such Units for redemption. We have registered the Redemption Shares for sale to
provide the holders thereof with freely tradable securities, but registration of
such shares does not necessarily mean that any of such shares will be offered or
sold by the holders thereof.
We will not receive any proceeds from the issuance of the Redemption
Shares to holders of Units upon receiving a notice of redemption (but we will
acquire from such holders the Units tendered for redemption). The Unit holders
and any agents or dealers that participate in the distribution of Redemption
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, and any profit on the sale of Redemption Shares or the
resale of the Common Shares and any commissions received by any such dealers or
agents might be deemed to be underwriting commissions or discounts under the
Securities Act of 1933, as amended.
We may from time to time issue up to 214,802 Redemption Shares upon
the acquisition of the Units tendered for redemption. We will acquire from each
exchanging Limited Partner a Unit in exchange for each Redemption Share that we
issue in connection with these acquisitions. Consequently, with each redemption,
our interest in the Operating Partnership will increase.
EXPERTS
The consolidated financial statements and the consolidated financial
statement schedule of the Company included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which have been incorporated by
reference into this prospectus, have been so incorporated in reliance on the
report of KPMG LLP, independent certified public accountants (incorporated by
reference) and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters, including the validity of the securities
described herein, will be passed upon for us by Paul, Hastings, Janofsky &
Walker LLP, New York, New York. Seth M. Zachary, a partner of Paul, Hastings,
Janofsky & Walker LLP, is presently serving as a member of the Board of Trustees
of the Company.
41
<PAGE> 43
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE REDEMPTION SHARES OFFERED HEREBY, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE REDEMPTION
SHARES OFFERED 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 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 ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
214,802 Shares
LEXINGTON CORPORATE
PROPERTIES TRUST
Common Shares
PROSPECTUS
December ___, 1999
- --------------------------------------------------------------------------------
<PAGE> 44
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the distribution of the securities
being registered are set forth in the following table (all amounts except the
registration fee are estimated):
<TABLE>
<S> <C>
Registration fee............................................ $ 567.07
Printing expenses........................................... 2,500.00
Legal fees and expenses..................................... 10,000.00
Accounting fees and expenses................................ 5,000.00
Miscellaneous............................................... 1,000.00
TOTAL.................................................. $19,067.07
</TABLE>
All expenses in connection with the issuance and distribution of the
securities being offered will be borne by the Company (other than selling
commissions, if any).
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The Company's trustees and officers are and will be indemnified under
Maryland law, the Declaration of Trust of the Company (the "Declaration"), and
the Partnership Agreement against certain liabilities. The Declaration requires
the Company to indemnify its trustees and officers to the fullest extent
permitted from time to time by the laws of Maryland. The Declaration also
provides that, to the fullest extent permitted under Maryland law, trustees and
officers of the Company will not be liable to the Company and its shareholders
for money damages.
Section 2-418 of the General Corporation Law of the State of Maryland
generally permits indemnification of any director made a party to any
proceedings by reason of service as a director unless it is established that (i)
the act or omission of such person was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; or (ii) such person actually received an improper
personal benefit in money property or services; or (iii) in the case of any
criminal proceeding, such person had reasonable cause to believe that the act or
omission was unlawful. The indemnity may include judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director in
connection with the proceeding; but, if the proceeding is one by or in the right
of the corporation, indemnification is not permitted with respect to any
proceeding in which the director has been adjudged to be liable to the
corporation, or if the proceeding is one charging improper personal benefit to
the director, whether or not involving action in the director's official
capacity, indemnification of the director is not permitted if the director was
adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction or upon a plea of nolo
contendere or its equivalent, or any entry of an order of probation prior to
judgment, creates a rebuttable presumption that the director did not meet the
requisite standard of conduct required for permitted indemnification. The
termination of any proceeding by judgment, order or settlement, however, does
not create a presumption that the director failed to meet the requisite standard
of conduct for permitted indemnification.
The Partnership Agreement also provides for indemnification of the
Company, or any trustee or officer of the Company, from and against all losses,
claims, damages, liabilities, joint or several, expenses (including legal fees),
fines, settlements and other amounts incurred in connection with any actions
relating to the operations of the Operating Partnership as set forth in the
Partnership Agreement.
The foregoing reference is necessarily subject to the complete text
of the Declaration of Trust and the statute referred to above and is qualified
in its entirety by reference thereto.
II-2
<PAGE> 45
The Company has also entered into Indemnification Agreements with
certain officers and trustees for the purpose of indemnifying such persons from
certain claims and action in their capacities as such.
ITEM 16. EXHIBITS.
There are filed with the Registration Statement the following
exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Declaration of Trust.*
3.2 By-laws.**
3.3 Fifth Amended and Restated Agreement of Limited Partnership of
Lepercq Corporate Income Fund L.P. dated as of December 31,
1996 as Supplemented as of March 10, 1997 to Include Pacific
Place Merger as Supplemented as of January 29, 1998 to Include
Phoenix and Savannah Contributions as Supplemented as of May 8,
1998 to Include Anchorage Contribution as Supplemented as of
June 19, 1998 to Include Trademark Lancaster Contribution as
Supplemented as of December 31, 1998 to Include Columbia
Contribution.***
3.4 Second Amended and Restated Agreement of Limited Partnership of Lepercq Corporate
Income Fund II L.P. dated as of August 27, 1998.***
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to the validity of the securities
being offered.
23.1 Consent of KPMG LLP.
23.2 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1).
</TABLE>
- -------------------
* Incorporated by reference to Exhibit No. 3.1 to the Company's Current
Report on Form 8-K filed on January 16, 1998.
** Incorporated by reference to Exhibit No. 3.2 to the Company's Annual
Report on Form 10-K filed on March 31, 1998.
*** Incorporated by reference to Exhibits No. 3.3 and 3.4 to the Company's
Amendment No. 1 to Form S-3 filed on September 10, 1999.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any acts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in
II-3
<PAGE> 46
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
herein do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the Commission by
the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of New York, state of New York, on December 13,
1999.
LEXINGTON CORPORATE PROPERTIES
TRUST
By: /s/ T. Wilson Eglin
---------------------
T. Wilson Eglin
President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints T. Wilson Eglin and E. Robert Roskind, jointly and
severally, his attorneys-in-fact, each with power of substitution for him in any
and all capacities, to sign any amendments to this Registration Statement, to
file the same, with the exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ E. Robert Roskind Chairman of the Board, Co-Chief Executive Officer December 13, 1999
E. Robert Roskind and Trustee (Principal Executive Officer)
/s/ Richard J. Rouse Vice Chairman, Co-Chief Executive Officer and December 13, 1999
Richard J. Rouse Trustee
/s/ T. Wilson Eglin President, Chief Operating Officer and Trustee December 13, 1999
T. Wilson Eglin
/s/ Patrick Carroll Chief Financial Officer and Treasurer December 13, 1999
Patrick Carroll
/s/ Paul R. Wood Vice President, Chief Accounting Officer and December 13, 1999
Paul R. Wood Secretary
</TABLE>
II-5
<PAGE> 48
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Carl D. Glickman Trustee December 13, 1999
Carl D. Glickman
/s/ Kevin W. Lynch Trustee December 13, 1999
Kevin W. Lynch
/s/ John D. McGurk Trustee December 13, 1999
John D. McGurk
/s/ Seth M. Zachary Trustee December 13, 1999
Seth M. Zachary
</TABLE>
II-6
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
3.1 Declaration of Trust.*
3.2 By-Laws. **
3.3 Fifth Amended and Restated Agreement of Limited Partnership of
Lepercq Corporate Income Fund L.P. dated as of December 31,
1996 as Supplemented as of March 10, 1997 to Include Pacific
Place Merger as Supplemented as of January 29, 1998 to Include
Phoenix and Savannah Contributions as Supplemented as of May
8, 1998 to Include Anchorage Contribution as Supplemented as
of June 19, 1998 to Include Trademark Lancaster Contribution
as Supplemented as of December 31, 1998 to Include Columbia
Contribution.***
3.4 Second Amended and Restated Agreement of Limited Partnership of Lepercq
Corporate Income Fund II L.P. dated as of August 27, 1998.***
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to the validity of the securities
being offered.
23.1 Consent of KPMG LLP.
23.2 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1).
</TABLE>
- --------------------------
* Incorporated by reference to Exhibit No. 3.1 to the Company's Current
Report on Form 8-K filed on January 16, 1998.
** Incorporated by reference to Exhibit No. 3.2 to the Company's Annual
Report on Form 10-K filed on March 31, 1998.
*** Incorporated by reference to Exhibits No. 3.3 and 3.4 to the Company's
Amendment No. 1 to Form S-3 filed on September 10, 1999.
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Paul, Hastings, Janofsky & Walker LLP]
December 9, 1999
Lexington Corporate Properties Trust
355 Lexington Avenue
New York, NY 10017
LEXINGTON CORPORATE PROPERTIES TRUST
REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to Lexington
Corporate Properties Trust, a Maryland real estate investment trust (the
"Issuer"), in connection with the Issuer's registration statement on Form S-3
(the "Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, relating to the offering by the
Issuer of up to 214,802 common shares of beneficial interest, par value $.0001
per share (the "Shares").
In connection with this opinion, we have examined copies or
originals of such documents, resolutions, certificates and instruments of the
Issuer as we have deemed necessary to form a basis for the opinion hereinafter
expressed. In addition, we have reviewed such other instruments and documents as
we have deemed necessary to form a basis for the opinion hereinafter expressed.
In our examination of the foregoing, we have assumed, without independent
investigation, (i) the genuineness of all signatures, and the authority of all
persons or entities signing all documents examined by us and (ii) the
authenticity of all documents submitted to us as originals and the conformity to
authentic original documents of all copies submitted to us as certified,
conformed or photostatic copies. With regard to certain factual matters, we have
relied, without independent investigation or verification, upon statements and
representations of representatives of the Issuer.
Based upon and subject to the foregoing, we are of the opinion, as
of the date hereof, that the Shares, when issued and delivered in the manner set
forth in the Registration Statement, will be legally issued, fully paid and
nonassessable.
<PAGE> 2
Lexington Corporate Properties Trust
December 9, 1999
Page 2
We hereby consent to being named as counsel to the Issuer in the
Registration Statement, to the references therein to our firm under the caption
"Legal Matters" and to the inclusion of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
Paul, Hastings, Janofsky & Walker LLP
<PAGE> 1
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Shareholders
Lexington Corporate Properties Trust:
We consent to the use of our report dated January 25, 1999 with respect to the
consolidated financial statements and consolidated financial statement schedule,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, incorporated by reference in this registration statement and to the
reference to our firm under the heading "Experts" in the registration statement.
/s/KPMG
New York, New York
December 9, 1999
