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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1999
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LEXINGTON CORPORATE PROPERTIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 13-3717318
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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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)
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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)
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COPIES TO:
BARRY A. BROOKS, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP
399 PARK AVENUE
NEW YORK, NEW YORK 10022-4697
(212) 318-6000
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE REGISTRATION FEE(1)
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Common Shares, par value $.0001 per
share................................... 605,444 $11.31 $6,847,572 $1,903.63
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(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 April 19, 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.
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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.
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PROSPECTUS
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605,444 SHARES
LEXINGTON CORPORATE
PROPERTIES TRUST
COMMON SHARES
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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 issuing Common Shares in exchange for the redemption of an equal number
of units of limited partnership interests in one of our controlled
subsidiaries. We will not receive proceeds from any Common Shares which may be
issued. 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 April 19, 1999, the last reported sale price of a Common Share was
$11.00.
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THIS INVESTMENT INVOLVES RISK. YOU SHOULD REVIEW "RISK FACTORS" BEGINNING
ON PAGE 5 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.
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April [ ], 1999
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TABLE OF CONTENTS
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PAGE
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Where You Can Find More Information... 1
Forward-Looking Statements............ 2
Prospectus Summary.................... 3
Risk Factors.......................... 5
Description of Capital Shares......... 8
Description of Units.................. 10
Registration Rights................... 13
Redemption of Units................... 14
Use of Proceeds....................... 22
Distributions On OP Units............. 22
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The Company........................... 22
Management............................ 25
Certain Relationships and Related
Transactions........................ 27
Federal Income Tax Considerations of
Holding Shares in a REIT............ 27
Plan of Distribution.................. 37
Experts............................... 37
Legal Matters......................... 37
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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.
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.
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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 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.
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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 67 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 11.1 million net rentable square feet and, under the
terms of their applicable leases, currently generate approximately $75.6 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 17 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, 1998, we have also enhanced the value of our
portfolio by acquiring $216.1 million of properties, aggregating approximately
3.9 million net rentable square feet and accounting for approximately $24.3
million in annual rent. In addition, we have entered into an agreement to
purchase an additional property for $38.7 million, which is a build-to-suit
property currently under construction and expected to be ready for delivery no
later than January 2000. 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 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.
Our executive offices are located at 355 Lexington Avenue, New York, New
York 10017, and our telephone number is (212) 692-7260.
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RISK FACTORS
An investment in the Common Shares offered hereby (the "Redemption Shares")
involves various risks. For a discussion of factors that should be considered in
evaluating such an investment, see "Risk Factors" beginning on page 5.
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.
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RISK FACTORS
Tax Impact to Unit Holders of Redemption of Units. Lepercq Corporate
Income Fund L.P.'s ("LCIF" or the "Operating Partnership") Partnership Agreement
provides that the redemption of Units will be treated by the Company, LCIF 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. 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 38.3% 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 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 will defer from March 1999 through June 1999 $100,000 of its
$268,632 monthly rent. This deferral will be added with interest to future
rental payments. FirstPlus represents 3.85% of our 1999 scheduled cash rents.
The FirstPlus lease is scheduled to expire on August 31, 2012, however,
FirstPlus announced that it was discontinuing operations in Dallas. 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 next five calendar years are as follows:
- 1999 - $0;
- 2000 - $13.1 million;
- 2001 - $1.0 million;
- 2002 - $9.6 million; and
- 2003 - $0.
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.
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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 next five years, are as follows:
- 1999 - 0%;
- 2000 - 0.87%;
- 2001 - 4.33%;
- 2002 - 3.77%; and
- 2003 - 2.53%.
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. 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.
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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. The consummation of any future acquisition will be subject to
satisfactory completion of our extensive valuation analysis and due diligence
review and to the negotiation of definitive documentation. 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
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
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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 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 and 333-70217 ) to register, for the possible issuance by us,
3,646,758 Common Shares to redeem up to 3,646,758 units of limited partnership
interest in LCIF. Of these 3,646,758 Common Shares, 610,223 have been issued 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 17,151,442
Common Shares and had reserved for possible issuance upon redemption of Units of
partnership interest in its operating partnerships an additional 6,176,871
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."
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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.
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.
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DESCRIPTION OF UNITS
The material terms of the Units, including a summary of certain provisions
of LCIF'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 73.0% limited partnership
interest in the Operating Partnership. We indirectly hold Units in the Operating
Partnership through these entities.
Holders of Units hold limited partner 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.
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
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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 Operating Partnership 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 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
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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.
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. The redeeming Unit holder
will receive Common Shares in accordance with the terms set forth in the
Partnership Agreement.
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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.
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.
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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, whereupon we will acquire the Units being redeemed
and will become the owner of the Units. Such an acquisition of Units by 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 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 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 Partnership (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 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 occurring after December 31, 1997 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
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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 not yet issued such regulations, and if it
does not issue such regulations in the future, the rate of tax that would apply
to the disposition of a Unit by an individual, trust or estate would be
determined based upon the period of time over which such individual, trust or
estate held such Unit, (i.e., whether the Unit is a long-term capital asset or a
short-term capital asset). No assurances can be provided that the IRS will not
issue regulations that would provide that the rate of tax that would apply to
the disposition of a Unit by an individual, trust or estate would be determined
based upon the nature of the assets of the Operating Partnership and the periods
of time over which the Operating Partnership held such assets. Moreover, no
assurances can be provided that such regulations would not be applied
retroactively. If such regulations were to apply to the disposition of a Unit,
any gain on such disposition likely would be treated partly as gain from the
sale of a long-term capital asset, partly as gain from the sale of a short-term
capital asset and partly as gain from the sale of depreciable real property.
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.
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<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
FORM OF ORGANIZATION AND ASSETS OWNED
The Operating Partnership is organized as a Delaware We are a Maryland statutory real estate investment
limited partnership. The Operating Partnership owns trust. We believe that we have operated so as to
interests (directly through subsidiaries) in qualify as a REIT under the Code, commencing with our
Properties. 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 than the Operating
Partnership) interests in other Properties.
LENGTH OF INVESTMENT
The Operating Partnership has a stated termination We have a perpetual term and intend to continue our
date of December 31, 2093. operations for an indefinite time period.
PURPOSE AND PERMITTED INVESTMENTS
The Operating Partnership's purpose is to conduct any Under our Declaration of Trust, we may engage in any
business that may be lawfully conducted by a limited lawful activity permitted by the General Corporation
partnership organized pursuant to the Act, provided Law of the State of Maryland. We are permitted by the
that such business is to be conducted in a manner Partnership Agreement to engage in activities not
that permits the Company to be qualified as a REIT related to the business of the Operating Partnership,
unless the Company ceases to qualify as REIT. The including activities in direct or indirect
Operating Partnership may not take, or refrain from competition with the Operating Partnership, and may
taking, any action which, in the judgment of the own assets other than its interest in the Operating
general partner (which is wholly-owned by the Company Partnership and such other assets necessary to carry
) (i) could adversely affect the ability of the out its responsibilities under the Partnership
Company to continue to qualify as a REIT, (ii) could Agreement and its Declaration of Trust. In addition,
subject the general partner to any additional taxes we have no obligation to present opportunities to the
under Section 857 or Section 4981 of the Code, or any Operating Partnership and the Unit holders have no
other Section of the Code, or (iii) could violate any rights by virtue of the Partnership Agreement in any
law or regulation of any governmental body (unless of our outside business ventures.
such action, or inaction, is specifically consented
to by the general partner).
ADDITIONAL EQUITY
The Operating Partnership is authorized to issue The Board of Trustees may issue, in its discretion,
Units and other partnership interests (including additional equity securities consisting of Common
partnership interests of different series or classes Shares or Preferred Shares; provided, that the total
that may be senior to Units) as determined by the number of shares issued does not exceed the
general partner, in its sole discretion. authorized 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.
</TABLE>
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<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
BORROWING POLICIES
The Operating Partnership has no restrictions on We are not restricted under our governing instrument
borrowings, and the general partner has full power from incurring borrowings. We are not required to
and authority to borrow money on behalf of the incur our indebtedness through the Operating
Operating Partnership. Partnership.
OTHER INVESTMENT RESTRICTIONS
Other than restrictions precluding investments by the Neither the Company's Declaration of Trust nor its
Operating Partnership that would adversely affect the By-laws impose any restrictions upon the types of
qualification of the Company as a REIT, there are not investments made by us.
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 business and affairs The Board of Trustees has exclusive control over our
of the Operating Partnership are vested in the business and affairs subject only to the restrictions
general partner of the Operating Partnership, and no in the Declaration of Trust and the By- laws. The
limited partner of the Operating Partnership has any Board of Trustees consists of seven trustees, which
right to participate in or exercise control or number may be increased or decreased by vote of at
management power over the business and affairs of the least a majority of the entire Board of Trustees
Operating Partnership except (1) the general partner pursuant to the By-laws of the Trust, but may never
of the Operating Partnership may not dispose of all be fewer than the minimum permitted by the General
or substantially all of the Operating Partnership's Corporation Law of the State of Maryland. At each
assets without the consent of the holders of annual meeting of the shareholders, the successors of
two-thirds of the outstanding Units, and (2) there the class of trustees whose terms expire at that
are certain limitations on the ability of the general meeting will be elected. The policies adopted by the
partner of the Operating Partnership to cause or Board of Trustees may be altered or eliminated
permit the Operating Partnership to dissolve. See without a vote of the shareholders. Accordingly,
"--Vote Required to Dissolve the Operating except for their vote in the elections of trustees,
Partnership or the Company" below. The general shareholders have no control over our ordinary
partner may not be removed by the limited partners of business policies.
the Operating Partnership with or without cause.
FIDUCIARY DUTIES
Under Delaware law, the general partner of the Under Maryland law, the trustees must perform their
Operating Partnership is accountable to the Operating duties in good faith, in a manner that they
Partnership as a fiduciary and, consequently, is reasonably believe to be in the best interests of the
required to exercise good faith and integrity in all Company and with the care of an ordinarily prudent
of its dealings with respect to partnership affairs. person in a like position. Trustees of the Company
However, under the Partnership Agreement, the general who act in such a manner generally will not be liable
partner is under no obligation to take into account to the Company for monetary damages arising from
the tax consequences to any partner of any action their activities.
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
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
omission, provided that the general partner has acted
in good faith.
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of Delaware law, the general partner has The Company's Declaration of Trust provides that the
liability for the payment of the obligations and liability of the Company's trustees and officers to
debts of the Operating Partnership unless limitations the Company and its shareholders for money damages is
upon such liability are stated in the document or limited to the fullest extent permitted under
instrument evidencing the obligation. Under the Maryland law. The Declaration of Trust and state law
Partnership Agreement, the Operating Partnership has provide indemnification to trustees and officers to
agreed to indemnify the general partner and any the same extent that such trustees and officers,
director or officer of the general partner from and whether serving the Company, or, at its request, any
against all losses, claims, damages, liabilities other entity, to the full extent permitted under
(joint or several) expenses (including legal fees and Maryland law.
expenses), judgments, fines, 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 "Voting Rights' The Declaration of Trust and By-laws of the Company
below), the general partner of the Operating contain a number of provisions that may have the
Partnership has exclusive management power over the effect of delaying or discouraging an unsolicited
business and affairs of the Operating Partnership. proposal for the acquisition of the Company or the
The general partner may not be removed by the limited removal of incumbent management. These provisions
partners with or without cause. Under the Partnership include, among others: (1) authorized capital shares
Agreement, a limited partner may transfer his or her that may be issued as Preferred Shares in the
interest as a limited partner (subject to certain discretion of the Board of Trustees, with superior
limited exceptions set forth in the Partnership voting rights to the Common Shares; (2) a requirement
Agreement), without obtaining the approval of the that trustees may be removed only for cause and only
general partner except that the general partner may, by a vote of holders of at least 80% of the
in its sole discretion, prevent the admission to the outstanding Common Shares; and (3) provisions
Operating Partnership of substituted limited designed to avoid concentration of share ownership in
partners. a manner that
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
would jeopardize our status as a REIT under the Code.
VOTING RIGHTS
All decisions relating to the operation and The Company is managed and controlled by a Board of
management of the Operating Partnership are made by Trustees presently consisting of seven members. Each
the general partner. See "Description of Units." As trustee is to be elected by the shareholders at
of the date of this prospectus, the Company held, annual meetings of the Company. Maryland law requires
through various subsidiaries, approximately 73.0% of that certain major corporate transactions, including
the outstanding limited partner units in LCIF. As most amendments to the Declaration of Trust, may not
Units are redeemed by partners, the Company's be consummated without the approval of shareholders
percentage ownership of LCIF will increase. as set 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 amended with the Amendments to the Company's Declaration of Trust must
consent of Lex GP-1, Lex LP-1 and the Special Limited be approved by the Board of Trustees and generally by
Partners representing a majority of Units held by at least two-thirds of the votes entitled to be cast
such Special Limited Partners. Certain amendments at a meeting of shareholders.
that 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.
B. VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY.
The Operating Partnership may be dissolved upon the Under Maryland law, the Board of Trustees must obtain
occurrence of certain events, none of which require approval of 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 sale, exchange, Under Maryland law, the sale of all or substantially
transfer or other disposition of all or substantially all of the assets of the Company or merger or
all of the Operating Partnership's assets or a merger consolidation of the Company requires the approval of
or consolidation of the Operating Partnership the Board of Trustees and holders of two-thirds of
requires the consent of holders of a majority of the the outstanding Common Shares. No approval of the
outstanding Units held by the Special Limited shareholders is required for the sale of less than
Partners. The general partner of the Operating all or substantially all of the Company's assets.
Partnership has the exclusive
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
authority the sell individual assets of the Operating
Partnership.
COMPENSATION, FEES AND DISTRIBUTIONS
The general partner does not receive any compensation The non-employee trustees, with the exception of John
for its services as general partner of the Operating D. McGurk, and officers of the Company receive
Partnership. As a partner in the Operating compensation for their services.
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 applicable state Under Maryland law, shareholders are not personally
law, the liability of the limited partners for the liable for the debts 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 entitling each Common Shares constitute equity interests in the
limited partner to his pro rata share of cash Company. The Company is entitled to receive its pro
distributions made to the limited partners of the rata share of distributions made by the Operating
Operating Partnership. The Operating Partnership Partnership with respect to the Units, and the
generally intends to retain and reinvest proceeds of distributions made by the other direct subsidiaries
the sale of property or excess refinancing proceeds of the Company. Each shareholder will be entitled to
in its business. his pro rata share of any dividends or 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 Partnership is The Board of Trustees may issue, in its discretion,
authorized, in its sole discretion and without additional shares, and has the authority to issue
limited partner approval, to cause the Operating from authorized capital a variety of other equity
Partnership to issue additional limited partnership securities of the Company with such powers,
interests and other equity securities for any preferences and rights as the Board of Trustees may
partnership purpose at any time to the limited designate at the time. The issuance of additional
partners or to other persons (including the general shares of either Common Shares or other similar
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
partner on terms established by the general partner). equity securities may result in the dilution of the
interests of the shareholders.
LIQUIDITY
Limited partners may generally transfer their Units The Redemption Shares will be freely transferable as
without the general partner's consent, except that registered securities under the Securities Act. The
the general partner may, in its sole discretion, Common Shares are listed on the NYSE. The breadth and
prevent the admission to the Operating Partnership of strength of this secondary market will depend, among
substituted limited partners. Each limited partner other things, upon the number of shares outstanding,
has the right to tender his or her Units for the Company's financial results and prospects, the
redemption by the Operating Partnership. See general interest in the Company's and other real
"General" above. 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 subject to federal We have elected to be taxed as a REIT. So long as we
income taxes. Instead, each holder of Units includes qualify as a REIT, we will be permitted to deduct
its allocable share of the Operating Partnership's distributions paid to our shareholders, which
taxable income or loss in determining its individual effectively will reduce the "double taxation" that
federal income tax liability. The maximum federal typically results when a corporation earns income and
income tax rate for individuals under current law is distributes that income to its shareholders in the
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 loss generated by Dividends paid by us will be treated as "portfolio'
the Operating Partnership generally is subject to the income and cannot be offset with losses from "passive
"passive activity" limitations. Under the "passive activities." The maximum federal income tax rate for
activity" rules, income and loss from the Operating individuals under current law is 39.6%. Distributions
Partnership that is considered "passive income' made by us to our taxable domestic shareholders out
generally can be offset against income and loss from of current or accumulated earnings and profits will
other investments that constitute "passive be taken into account by them as ordinary income.
activities." Cash distributions from the Operating Distributions that are designated as capital gain
Partnership are not taxable to a holder of a Unit dividends generally will be taxed as long-term
except to the extent such distributions exceed such capital gain, subject to certain limitations.
holder's basis in its interest in the Operating Distributions in excess of current or accumulated
Partnership (which will include such holder's earnings and profits will be treated as a non-taxable
allocable share of the Operating Partnership's return of basis to the extent of a shareholder's
taxable income and nonrecourse debt). adjusted basis in its Common Shares, with the excess
taxed as capital gain.
Each year, holders of Units will receive a Schedule Each year, shareholders will receive an Internal
K-1 containing detailed tax information for inclusion Revenue Service Form 1099 used by corporations to
in preparing their federal income tax returns. report dividends paid to their shareholders.
Holders of Units are required, in some cases, to file Shareholders who are individuals generally will not
state income tax returns and/or pay state income be required to file state income tax returns and/or
taxes in the states in which the Operating pay state income taxes outside of their state of
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP THE COMPANY
<S> <C>
Partnership owns property, even if they are not residence with respect to our operations and
residents of those states. distributions. We may be required to pay state income
taxes in certain states.
</TABLE>
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the Redemption
Shares.
DISTRIBUTIONS ON OP UNITS
Our operating partnership 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 partnership by 50% or more.
As of the date of this prospectus, we have issued a total of 6,176,871 OP
Units of which, in addition to these 605,444 Units, 3,205,644 are also currently
redeemable for Common Shares. The average annualized distribution per OP Unit is
$1.10. Of the total OP Units, 1,499,867 OP Units are owned by our affiliates
including two members of our Board of Trustees.
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 67 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 11.1
million net rentable square feet and, under the terms of their applicable
leases, currently generate approximately $75.6 million in annual rent. Our
portfolio is currently 98.5% 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 17 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, 1998, we have also enhanced the value of its
portfolio by acquiring $216.1 million of properties, aggregating approximately
3.9 million net rentable square feet and accounting for approximately $24.3
million in annual rent. In addition, we have entered into an agreement to
purchase an additional property for $38.7 million, which is a build-to-suit
property currently under construction and expected to be ready for delivery no
later than January 2000. As part of our ongoing efforts, we expect to continue
to effect portfolio and individual property acquisitions and dispositions,
expand existing
22
<PAGE> 25
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.
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. Since 1993, we have sold three
properties. As of the date of this prospectus, the Company has entered into
letters of intent to sell three of its Properties for $10.25 million which were
originally purchased for $9.19 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
23
<PAGE> 26
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.
Operating Partnership Structure. The operating partnership 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.
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. We have entered into
an agreement to acquire our third build-to-suit property with an expected
delivery no later than January 2000.
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.
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<PAGE> 27
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........................... 34 President, Chief Operating Officer and
Trustee
Patrick Carroll........................... 35 Chief Financial Officer and Treasurer
Stephen C. Hagen.......................... 56 Senior Vice President
Paul R. Wood.............................. 38 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
own and manage 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.
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.
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<PAGE> 28
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 Audit Committee
and Compensation Committee of the Board of Trustees of the Company since
November 1993. Since 1987, he has been a partner in the law firm of Paul,
Hastings, Janofsky & Walker LLP, counsel to the Company.
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<PAGE> 29
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.
During 1998, we also issued an aggregate of 1,187,228 OP Units to certain
officers and an officer's affiliates in exchange for their interests in certain
partnerships and related contractual obligations. Of such OP Units, 627,874 were
issued to E. Robert Roskind, Chairman of the Board of Trustees and Co-Chief
Executive Officer, 519,058 were issued to affiliates of Mr. Roskind and 40,296
were issued to Richard J. Rouse, Vice Chairman of the Board of Trustees and
Co-Chief Executive Officer.
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
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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, 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
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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 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
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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 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
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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.
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
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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 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
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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 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
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reliance standards. These regulations generally are effective for payments made
after December 31, 1999, 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 on or
after January 1, 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.
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.
34
<PAGE> 37
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 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
35
<PAGE> 38
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.
OTHER TAX CONSIDERATIONS
Entity Classification. A significant number of the Company's investments
are held through partnerships. If any such partnerships were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and might
preclude the Company from qualifying as a REIT.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability, and (iv) free transferability of interests.
Under final Treasury Regulations which became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability company will be taxed as a partnership for federal income
tax purposes, unless it specifically elects otherwise. The Regulations provide
that the IRS will not challenge the classification of an existing partnership or
limited liability company for tax periods prior to January 1, 1997 so long as
(1) the entity had a reasonable basis for its claimed classification, (2) the
entity and all its members recognized the federal income tax consequences of any
changes in the entity's classification within the 60 months prior to January 1,
1997, and (3) neither the entity nor any member of the entity had been notified
in writing on or before May 8, 1996, that the classification of the entity was
under examination by the IRS.
The Company believes that each partnership in which it holds an interest
(either directly or indirectly) is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation).
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
36
<PAGE> 39
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.
PLAN OF DISTRIBUTION
This prospectus relates to the possible issuance by us of the 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 by them and any
commissions received by any such dealers or agents might be deemed to be
underwriting commissions under the Securities Act of 1933, as amended.
We may from time to time issue up to 605,444 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.
37
<PAGE> 40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
605,444 SHARES
LEXINGTON CORPORATE
PROPERTIES TRUST
COMMON SHARES
PROSPECTUS
April [ ], 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 41
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............................................ $ 1,903.63
Printing expenses........................................... 2,500.00
Legal fees and expenses..................................... 10,000.00
Accounting fees and expenses................................ 5,000.00
Miscellaneous............................................... 1,000.00
TOTAL............................................. $20,403.63
</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.
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.
II-1
<PAGE> 42
ITEM 16. EXHIBITS.
There are filed with the Registration Statement the following exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3.1 Declaration of Trust.*
3.2 By-laws.**
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.
ITEM 17. UNDERTAKINGS.
(i) 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 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
II-2
<PAGE> 43
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-3
<PAGE> 44
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 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 April 21, 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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ E. ROBERT ROSKIND Chairman of the Board, Co-Chief April 21, 1999
- --------------------------------------------------- Executive Officer and Trustee
E. Robert Roskind (Principal Executive Officer)
/s/ RICHARD J. ROUSE Vice Chairman, Co-Chief Executive April 21, 1999
- --------------------------------------------------- Officer and Trustee
Richard J. Rouse
/s/ T. WILSON EGLIN President, Chief Operating Officer April 21, 1999
- --------------------------------------------------- and Trustee
T. Wilson Eglin
/s/ PATRICK CARROLL Chief Financial Officer and April 21, 1999
- --------------------------------------------------- Treasurer
Patrick Carroll
/s/ PAUL R. WOOD Vice President, Chief Accounting April 21, 1999
- --------------------------------------------------- Officer and Secretary
Paul R. Wood
/s/ CARL D. GLICKMAN Trustee April 21, 1999
- ---------------------------------------------------
Carl D. Glickman
</TABLE>
II-4
<PAGE> 45
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ KEVIN W. LYNCH Trustee April 21, 1999
- ---------------------------------------------------
Kevin W. Lynch
/s/ JOHN D. MCGURK Trustee April 21, 1999
- ---------------------------------------------------
John D. McGurk
/s/ SETH M. ZACHARY Trustee April 21, 1999
- ---------------------------------------------------
Seth M. Zachary
</TABLE>
II-5
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NO.
- ----------- ----------- ----
<C> <S> <C>
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>
<PAGE> 1
Exhibit 5.1
[Letterhead of Paul, Hastings, Janofsky & Walker LLP]
April 21, 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 605,444 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
April 21, 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
<PAGE> 1
The Shareholders
Lexington Corporate Properties Turst:
We consent to the use of our reports incorporated by reference in this
prospectus and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG LLP
New York, New York
April 19, 1999
