<PAGE> 1
As filed with the Securities and Exchange Commission on January 7, 1999
REGISTRATION NO. _______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
LEXINGTON CORPORATE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 13-3717318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
355 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
TELEPHONE NUMBER (212) 692-7260
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------------
T. WILSON EGLIN
PRESIDENT AND CHIEF OPERATING OFFICER
LEXINGTON CORPORATE PROPERTIES TRUST
355 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 692-7260
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
BARRY A. BROOKS, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP
399 PARK AVENUE
NEW YORK, NEW YORK 10022-4697
(212) 318-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS POSSIBLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AND FROM
TIME TO TIME AS DETERMINED BY MARKET CONDITIONS.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act") other than securities offered only in
connection with dividend or interest reinvestment plans, please check the
following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE FEE(1)
--------------------------- ---------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
COMMON SHARES, PAR VALUE $.0001 PER 1,817,458 $12.69 $23,063,542.02 $6,411.66
SHARE
</TABLE>
(1) THIS ESTIMATE IS BASED ON THE HIGH AND LOW SALES PRICES ON THE NEW YORK
STOCK EXCHANGE OF THE COMMON SHARES OF LEXINGTON CORPORATE PROPERTIES
TRUST ON JANUARY 4, 1999, PURSUANT TO RULE 457(c) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND IS MADE SOLELY FOR PURPOSES OF DETERMINING THE
REGISTRATION FEE.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED JANUARY 7, 1999
PROSPECTUS
- --------------------------------------------------------------------------------
1,817,458 Shares
LEXINGTON CORPORATE PROPERTIES TRUST
Common Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THE COMPANY:
- We are a self-managed and self- - We are issuing Common Shares in
administered real estate investment trust exchange for the redemption of an equal
that acquires, owns and manages a number of units of limited partnership
geographically diversified portfolio of interests in one of our controlled
net leased office, industrial and retail subsidiaries. We will not receive
properties. 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:
- - Lexington Corporate Properties Trust - The Common Shares are listed on The
355 Lexington Avenue New York Stock Exchange under the
New York, New York 10017 symbol "LXP." On January 4, 1999,
(212) 692-7260 the last reported sale price of a
Common Share was $12.875.
</TABLE>
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THIS INVESTMENT INVOLVES RISK. YOU SHOULD REVIEW "RISK FACTORS" BEGINNING ON
PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER PRIOR TO
INVESTING IN THE COMMON SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------------------------------
<PAGE> 3
TABLE OF CONTENTS
Page
Where You Can Find More Information......................................... 2
Forward-Looking Statements.................................................. 3
Prospectus Summary.......................................................... 4
Risk Factors................................................................ 6
Description of Capital Shares............................................... 9
Description of Units........................................................ 11
Registration Rights......................................................... 15
Redemption of Units......................................................... 16
Use of Proceeds............................................................. 28
Distributions On OP Units................................................... 28
The Company................................................................. 29
Management.................................................................. 32
Certain Relationships and Related
Transactions............................................................. 34
Federal Income Tax Considerations
of Holding Shares in a REIT.............................................. 34
Plan of Distribution........................................................ 47
Experts..................................................................... 47
Legal Matters............................................................... 48
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 Quarterly Report on Form 10-Q (Commission File
No. 1-12386) for the quarter ended March 31, 1998, filed on
May 15, 1998.
2. The Company's Quarterly Report on Form 10-Q (Commission File
No. 1-12386) for the quarter ended June 30, 1998, filed on
August 14, 1998.
3. The Company's Quarterly Report on Form 10-Q (Commission File
No. 1-12386) for the quarter ended September 30, 1998, filed
on November 12, 1998.
4. The Company's Annual Report on Form 10-K (Commission File No.
1-12386) for the year ended December 31, 1997, filed on March
31, 1998.
5. The Company's Current Report on Form 8-K (Commission File No.
1-12386), filed on January 16, 1998.
6. The Company's Current Report on Form 8-K (Commission File No.
1-12386), filed on July 1, 1998.
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7. The Company's Current Report on Form 8-K (Commission File No.
1-12386), filed on September 11, 1998.
8. The Company's 1998 Proxy Statement on Schedule 14-A
(Commission File No. 1-12386), filed on April 22, 1998.
You may request a copy of these filings, at no cost, by
writing or telephoning us at the following address:
T. Wilson Eglin, President
Lexington Corporate Properties Trust
355 Lexington Avenue
New York, New York 10017
(212) 692-7260
This prospectus is part of a registration statement we filed
with the SEC. You should rely only on the information or representations
provided in this prospectus. We have not authorized anyone else to provide you
with different information. You should not assume that the information in this
prospectus or any supplement is accurate as of any date other than the date on
the front of those documents.
FORWARD-LOOKING STATEMENTS
In addition to historical information, we have made
forward-looking statements in this prospectus and in the documents incorporated
by reference in this prospectus, such as those pertaining to our capital
resources, portfolio performance and result of operations. "Forward-looking
statements" are projections, plans, objectives or assumptions about the Company.
Forward-looking statements involve numerous risks and uncertainties and you
should not place undue reliance on such statements since there can be no
assurance that the events or circumstances reflected in these statements will
actually occur. Certain such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other variations
thereof or comparable terminology, or by discussions of strategy, plans or
intentions. Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may be
incapable of being realized. The following factors, among others, could cause
actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: defaults or non-renewal of
leases, increased interest rates and operating costs, failure to obtain
necessary outside financing, difficulties in identifying properties to acquire
and in effecting acquisitions, failure to successfully integrate acquired
properties and operations, risks and uncertainties affecting property
development and construction (including, without limitation, construction
delays, costs overruns, inability to obtain necessary permits and public
opposition to such activities), failure to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code"),
environmental uncertainties, risks related to natural disasters, financial
market fluctuations, changes in real estate and zoning laws and increases in
real property tax rates. Our success also depends upon economic trends
generally, including interest rates, income tax laws, governmental regulation,
legislation, population changes and those risk factors discussed in this
prospectus under the heading "Risk 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 66 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 10.9 million net rentable square
feet and, under the terms of their applicable leases, currently generate
approximately $75.2 million in annual rent. Our tenants, many of which are
nationally recognized, include Bank One Arizona, N.A., 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 $207.7 million of properties, aggregating
approximately 3.7 million net rentable square feet and accounting for
approximately $23.3 million in annual rent. In addition, we have entered into an
agreement to purchase an additional property for $36.2 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 principal 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 6.
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. Our five largest tenants/guarantors, which occupy
nine Properties, represent 39.3% 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.
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. Scheduled balloon payments for the next five years are as
follows:
- 1999 - $5.6 million;
- 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
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us. There can be no assurance, however, that the following will not expose us to
material liability in the future:
- the discovery of previously unknown environmental conditions;
- changes in law;
- the conduct of tenants; or
- activities relating to properties in the vicinity of the
Properties.
Changes in laws increasing the potential liability for environmental conditions
existing on properties or increasing the restrictions on discharges or other
conditions may result in significant unanticipated expenditures or may otherwise
adversely affect the operations of our tenants, which could adversely affect our
financial condition or results of operations.
Risks Relating to Acquisitions. A significant element of our
business strategy is the enhancement of our portfolio through acquisitions of
additional properties. 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 the year 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.
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Competition. The real estate industry is highly competitive.
Our principal competitors include national REITs, many of which are
substantially larger and have substantially greater financial resources than us.
Failure to Qualify as a REIT. We believe that we have met the
requirements for qualification as a REIT for federal income tax purposes
beginning with our taxable year ended December 31, 1993 and we intend to
continue to meet such requirements in the future. However, qualification as a
REIT involves the application of highly technical and complex provisions of the
Code, for which there are only limited judicial or administrative
interpretations. No assurance can be given that we have qualified or will remain
qualified as a REIT. The Code provisions and income tax regulations applicable
to REITs are more complex than those applicable to corporations. The
determination of various factual matters and circumstances not entirely within
our control may affect our ability to continue to qualify as a REIT. In
addition, no assurance can be given that legislation, regulations,
administrative interpretations or court decisions will not significantly change
the requirements for qualification as a REIT or the federal income tax
consequences of such qualification. If we do not qualify as a REIT, we would not
be allowed a deduction for distributions to shareholders in computing our income
subject to tax at the regular corporate rates. We also could be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification was lost. Cash available for distribution to our
shareholders would be significantly reduced for each year in which we do not
qualify as a REIT. Although we currently intend to continue to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause us, without the consent of the shareholders, to revoke
the REIT election or to otherwise take action that would result in
disqualification.
DESCRIPTION OF CAPITAL SHARES
The description of the Company's Capital Shares set forth
below does not purport to be complete and is qualified in its entirety by
reference to the Company's Declaration of Trust and By-laws, copies of which are
incorporated by reference as exhibits to the Registration Statement of which
this prospectus is a part. See "Where You Can Find More Information."
AUTHORIZED CAPITAL
The Company has an aggregate of 40,000,000 authorized Common
Shares, 40,000,000 Excess Shares and 10,000,000 undesignated Preferred Shares
(2,000,000 of which have been designated Class A Senior Cumulative Convertible
Preferred Shares) available for issuance under its Declaration of Trust. Such
shares (other than reserved shares) may be issued from time to time by us in the
discretion of the Board of Trustees to raise additional capital, acquire assets,
including additional real properties, redeem or retire debt or for any other
business purpose. In addition, the undesignated Preferred Shares may be issued
in one or more additional classes with such designations, preferences and
relative participating, optional or other special rights including, without
limitation, preferential dividend or voting rights, and rights upon liquidation,
as shall be fixed by the Board of Trustees. Also, the Board of Trustees is
authorized to classify and reclassify any unissued capital shares by setting or
changing, in any one or more respects, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such capital shares. Such authority
includes, without limitation, subject to the provisions of the Declaration of
Trust, authority to classify or reclassify any unissued capital shares into a
class or 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.
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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 a Registration Statement (Registration
No. 333-57853) to register, for the possible issuance by us, 1,829,300 Common
Shares to redeem up to 1,829,300 units of limited partnership interest in LCIF.
Of the Common Shares so registered, 525,433 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
17,173,532 Common Shares and had reserved for possible issuance upon redemption
of Units of partnership interest in its operating partnerships an additional
6,253,114 Common Shares. All of the Common Shares and any Common Shares issued
upon redemption of Units are tradable without restriction under the Securities
Act (unless such shares are held by affiliates of the Company), either pursuant
to the registration statement of which this prospectus is a part, pursuant to
registration rights granted by the Company or otherwise. See "Registration
Rights."
No prediction can be made as to the effect, if any, that
future sales of Common Shares, or the availability of shares for future sale,
will have on the market price prevailing from time to time. Sales of substantial
amounts of Common Shares (including shares issued upon the redemption of Units
or the exercise of options), or the perception that such sales could occur,
could adversely affect the prevailing market price of the shares.
DESCRIPTION OF PREFERRED SHARES
Under the Declaration of Trust, the Company has authority to
issue 10,000,000 Preferred Shares, 2,000,000 of which, designated as Class A
Senior Cumulative Convertible Preferred Shares (the "Convertible Preferred
Shares"), are outstanding as of the date of this prospectus, as described below.
Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Trustees of the Company. Prior to the issuance of
shares of each series, the Board of Trustees is required by the MGCL and the
Declaration of Trust to fix for each series, subject to the provisions of the
Declaration of Trust regarding excess shares, $.0001 par value per share
("Excess Shares"), the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, as are permitted by MGCL.
The Convertible Preferred Shares are, and any other class of Preferred Shares
will, if issued, be fully paid and nonassessable and the Convertible Preferred
Shares are not, and any other class of Preferred Shares will not, if issued, be
subject to preemptive rights. The Board of Trustees could authorize the issuance
of Preferred Shares with terms and conditions that could have the effect of
discouraging a takeover or other transaction that holders of Common Shares might
believe to be in their best interests or in which holders of some, or a
majority, of the Common Shares might receive a premium for their shares over the
then market price of such Common Shares.
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<PAGE> 12
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 five years 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 the year 2000, subject to adjustment.
TRANSFER AGENT
The transfer agent and registrar for the Common Shares is
ChaseMellon Shareholder Services LLC.
DESCRIPTION OF UNITS
The material terms of the Units, including a summary of
certain provisions of 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, a 73.0% limited partnership
interest in the Operating Partnership. We indirectly hold Units in the Operating
Partnership through these entities.
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<PAGE> 13
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, directors, employees, agents and other affiliates of the Company) are
not prohibited under the Partnership Agreement from engaging in other business
activities and will not be required to present any business opportunities to the
Operating Partnership.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for the distribution of
Operating Cash Flow, as determined in the manner provided in the Partnership
Agreement, to the Company and certain limited partners in proportion to their
percentage interests in the Operating Partnership. "Operating Cash Flow" means,
for any period, operating revenue from leases on real property investments,
partnership distributions with respect to partnerships in which the Operating
Partnership has interests and interest on uninvested funds and other cash
investment returns, less operating expenses, capital expenditures, regularly
scheduled principal and interest payments (exclusive of balloon payments due at
maturity) on outstanding mortgage and other indebtedness and any reserves
established by the general partner. Neither the Company nor the limited partners
are entitled to any preferential or disproportionate distributions of Operating
Cash Flow and in no event may a partner receive a distribution of Operating Cash
Flow with respect to a Unit if such partner is entitled to receive a
distribution of Operating Cash Flow with respect to a Common Share for which
such Unit has been redeemed or exchanged. The Partnership Agreement generally
provides for the allocation to the general partner and the limited partners of
items of Operating Partnership income and loss in accordance with their
representative percentage interests in the Operating Partnership.
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<PAGE> 14
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). The Operating Partnership also will reimburse us for all expenses
we incur in connection with the registration statement of which this prospectus
is a part. 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
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<PAGE> 15
in good faith. In addition, Lex GP-1 and the Company are not responsible for any
misconduct or negligence on the part of their agents, provided Lex GP-1 and the
Company appointed such agents in good faith. Lex GP-1 and the Company may
consult with legal counsel, accountants, appraisers, management consultants,
investment bankers and other consultants and advisors, and any action it takes
or omits to take in reliance upon the opinion of such persons, as to matters
that Lex GP-1 and the Company reasonably believe to be within their professional
or expert competence, shall be conclusively presumed to have been done or
omitted in good faith and in accordance with such opinion.
The Partnership Agreement also provides for indemnification of
Lex GP-1 and the Company, the directors and officers of Lex GP-1 and the
Company, and such other persons as Lex GP-1 and the Company may from time to
time designate against any judgments, penalties, fines, settlements and
reasonable expenses actually incurred by such person in connection with the
proceeding unless it is established that: (1) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (2) the indemnified person actually received an improper personal
benefit in money, property or services; or (3) in the case of any criminal
proceeding, the indemnified person had reasonable cause to believe that the act
or omission was unlawful.
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."
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<PAGE> 16
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. See "Redemption of Units."
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
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<PAGE> 17
expiring on the date on which all of the Common Shares covered by these
agreements have been sold pursuant to the registration statement or Rule 144(k)
of the Securities Act. Any shares that have been sold pursuant to such
agreements, or have been otherwise transferred and new certificates for them
have been issued without legal restriction on further transfer of such shares,
will no longer be entitled to the benefits of those agreements.
We have no obligation under these agreements to retain any
underwriter to effect the sale of the shares covered thereby and the
registration statement shall not be available for use for an underwritten public
offering of such shares.
Pursuant to these agreements, we agreed to pay all expenses of
effecting the registration of the Redemption Shares (other than underwriting
discounts and commissions, fees and disbursements of counsel, and transfer
taxes, if any) pursuant to the registration statement.
REDEMPTION OF UNITS
GENERAL
Each Unit holder may, subject to certain limitations, require
that the Operating Partnership redeem his or her Units, by delivering a notice
to the Operating Partnership. We have provided a guaranty of the Operating
Partnership's obligations. Upon redemption, such Unit holder will receive one
Common Share (subject to certain anti-dilution adjustments) in exchange for each
Unit held by such holder.
The Operating Partnership and the Company will satisfy any
redemption right exercised by a Unit holder through our issuance of the
Redemption Shares pursuant to this prospectus, 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
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<PAGE> 18
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 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
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presumed to be a sale, in whole or in part, of such property by the partner to
the partnership. Further, the Disguised Sale Regulations provide generally that,
in the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a sale of the
contributed property unless the facts and circumstances clearly establish that
the transfers do not constitute a sale. The Disguised Sale Regulations also
provide that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will be
presumed not to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale. EACH UNIT HOLDER IS ADVISED TO CONSULT
WITH ITS OWN TAX ADVISOR TO DETERMINE WHETHER A REDEMPTION OF UNITS COULD BE
SUBJECT TO THE DISGUISED SALE REGULATIONS.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
The information below highlights a number of the significant
differences between the Operating Partnership and the Company relating to, among
other things, form of organization, permitted investments, policies and
restrictions, management structure, compensation and fees, investor rights and
federal income taxation, and compares certain legal rights associated with the
ownership of Units and Common Shares, respectively. These comparisons are
intended to assist Unit holders of the Operating Partnership in understanding
how their investment will be changed if their Units are redeemed for Common
Shares. This discussion is summary in nature and does not constitute a complete
discussion of these matters, and Unit holders should carefully review the
balance of this prospectus and the registration statement of which this
prospectus is a part for additional important information about the Company.
THE OPERATING PARTNERSHIP THE COMPANY
FORM OF ORGANIZATION AND ASSETS OWNED
<TABLE>
<S> <C>
The Operating Partnership is We are a Maryland statutory
organized as a Delaware limited real estate investment trust.
partnership. The Operating We believe that we have
Partnership owns interests operated so as to qualify as a
(directly through subsidiaries) in REIT under the Code, commencing
Properties. with our taxable year ended
December 31, 1993, and intend to
continue to so operate. Our
interest in the Operating
Partnership gives us an indirect
investment in the properties owned
by the Operating Partnership. In
addition, we own (either directly
or through interests in subsidiaries
other than the Operating Partnership)
interests in other Properties.
</TABLE>
LENGTH OF INVESTMENT
<TABLE>
<S> <C>
The Operating Partnership has a We have a perpetual term and
stated termination date of intend to continue our
December 31, 2093. operations for an indefinite
time period.
</TABLE>
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<PAGE> 20
PURPOSE AND PERMITTED INVESTMENTS
<TABLE>
<S> <C>
The Operating Partnership's Under our Declaration of Trust,
purpose is to conduct any business we may engage in any lawful
that may be lawfully conducted by activity permitted by the
a limited partnership organized General Corporation Law of the
pursuant to the Act, provided that State of Maryland. We are
such business is to be conducted permitted by the Partnership
in a manner that permits the Agreement to engage in
Company to be qualified as a REIT activities not related to the
unless the Company ceases to business of the Operating
qualify as REIT. The Operating Partnership, including
Partnership may not take, or activities in direct or
refrain from taking, any action indirect competition with the
which, in the judgment of the Operating Partnership, and may
general partner (which is own assets other than its
wholly-owned by the Company) (i) interest in the Operating
could adversely affect the Partnership and such other
ability of the Company to continue assets necessary to carry out
to qualify as a REIT, (ii) could its responsibilities under the
subject the general partner to any Partnership Agreement and its
additional taxes under Section 857 Declaration of Trust. In
or Section 4981 of the Code, or addition, we have no obligation
any other Section of the Code, or to present opportunities to the
(iii) could violate any law or Operating Partnership and the
regulation of any governmental Unit holders have no rights by
body (unless such action, or virtue of the Partnership
inaction, is specifically Agreement in any of our outside
consented to by the general business ventures.
partner).
</TABLE>
ADDITIONAL EQUITY
<TABLE>
<S> <C>
The Operating Partnership is The Board of Trustees may
authorized to issue Units and issue, in its discretion,
other partnership interests additional equity securities
(including partnership interests consisting of Common Shares or
of different series or classes Preferred Shares; provided,
that may be senior to Units) as that the total number of shares
determined by the general partner, issued does not exceed the
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>
BORROWING POLICIES
<TABLE>
<S> <C>
The Operating Partnership has no We are not restricted under our
restrictions on borrowings, and governing instrument from
the general partner has full power incurring borrowings. We are
and authority to borrow money on not required to incur our
behalf of the Operating indebtedness through the
Partnership. Operating Partnership.
</TABLE>
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OTHER INVESTMENT RESTRICTIONS
<TABLE>
<S> <C>
Other than restrictions precluding Neither the Company's
investments by the Operating Declaration of Trust nor its
Partnership that would adversely By-laws impose any restrictions
affect the qualification of the upon the types of investments
Company as a REIT, there are not 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.
</TABLE>
MANAGEMENT CONTROL
<TABLE>
<S> <C>
All management powers over the The Board of Trustees has
business and affairs of the exclusive control over our
Operating Partnership are vested business and affairs subject
in the general partner of the only to the restrictions in the
Operating Partnership, and no Declaration of Trust and the
limited partner of the Operating By-laws. The Board of Trustees
Partnership has any right to consists of seven trustees,
participate in or exercise control which number may be increased
or management power over the or decreased by vote of at
business and affairs of the least a majority of the entire
Operating Partnership except (1) Board of Trustees pursuant to
the general partner of the the By-laws of the Trust, but
Operating Partnership may not may never be fewer than the
dispose of all or substantially minimum permitted by the
all of the Operating Partnership's General Corporation Law of the
assets without the consent of the State of Maryland. At each
holders of two-thirds of the annual meeting of the
outstanding Units, and (2) there shareholders, the successors of
are certain limitations on the the class of trustees whose
ability of the general partner of terms expire at that meeting
the Operating Partnership to cause will be elected. The policies
or permit the Operating adopted by the Board of
Partnership to dissolve. See Trustees may be altered or
"--Vote Required to Dissolve the eliminated without a vote of
Operating Partnership or the the shareholders. Accordingly,
Company" below. The general except for their vote in the
partner may not be removed by the elections of trustees,
limited partners of the Operating shareholders have no control
Partnership with or without cause. over our ordinary business
policies.
</TABLE>
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<PAGE> 22
FIDUCIARY DUTIES
<TABLE>
<S> <C>
Under Delaware law, the general Under Maryland law, the
partner of the Operating trustees must perform their
Partnership is accountable to the duties in good faith, in a
Operating Partnership as a manner that they reasonably
fiduciary and, consequently, is believe to be in the best
required to exercise good faith interests of the Company and
and integrity in all of its with the care of an ordinarily
dealings with respect to prudent person in a like
partnership affairs. However, position. Trustees of the
under the Partnership Agreement, Company who act in such a
the general partner is under no manner generally will not be
obligation to take into account liable to the Company for
the tax consequences to any monetary damages arising from
partner of any action taken by it, their activities.
and the general partner is not
liable for monetary damages for
losses sustained or liabilities
incurred by partners as a result
of errors of judgment or of any
act or omission, provided that the
general partner has acted in good
faith.
</TABLE>
21
<PAGE> 23
MANAGEMENT LIABILITY AND INDEMNIFICATION
<TABLE>
<S> <C>
As a matter of Delaware law, the The Company's Declaration of
general partner has liability for Trust provides that the
the payment of the obligations and liability of the Company's
debts of the Operating Partnership trustees and officers to the
unless limitations upon such Company and its shareholders
liability are stated in the document for money damages is limited to
or instrument evidencing the the fullest extent permitted
obligation. Under the Partnership under Maryland law. The
Agreement, the Operating Partnership Declaration of Trust and state
has agreed to indemnify the general law provide indemnification to
partner and any director or officer trustees and officers to the
of the general partner from and same extent that such trustees
against all losses, claims, damages, and officers, whether serving
liabilities (joint or several) the Company, or, at its
expenses (including legal fees and request, any other entity, to
expenses), judgments, fines, the full extent permitted under
settlements and other amounts Maryland law.
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.
</TABLE>
22
<PAGE> 24
ANTI-TAKEOVER PROVISIONS
<TABLE>
<S> <C>
Except in limited circumstances The Declaration of Trust and
(see "Voting Rights" below), the By-laws of the Company contain a
general partner of the Operating number of provisions that may
Partnership has exclusive have the effect of delaying or
management power over the discouraging an unsolicited
business and affairs of the proposal for the acquisition of
Operating Partnership. The the Company or the removal of
general partner may not be incumbent management. These
removed by the limited partners provisions include, among
with or without cause. Under others: (1) authorized capital
the Partnership Agreement, a shares that may be issued as
limited partner may transfer his Preferred Shares in the
or her interest as a limited discretion of the Board of
partner (subject to certain Trustees, with superior voting
limited exceptions set forth in rights to the Common Shares; (2)
the Partnership Agreement), a requirement that trustees may
without obtaining the approval be removed only for cause and
of the general partner except only by a vote of holders of at
that the general partner may, in least 80% of the outstanding
its sole discretion, prevent the Common Shares; and (3)
admission to the Operating provisions designed to avoid
Partnership of substituted concentration of share ownership
limited partners. in a manner that would
jeopardize our status as a REIT
under the Code.
</TABLE>
VOTING RIGHTS
<TABLE>
<S> <C>
All decisions relating to the The Company is managed and
operation and management of the controlled by a Board of
Operating Partnership are made Trustees presently consisting of
by the general partner. See seven members. Each trustee is
"Description of Units." As of to be elected by the
the date of this prospectus, the shareholders at annual meetings
Company held, through various of the Company. Maryland law
subsidiaries, approximately requires that certain major
73.0% of the outstanding limited corporate transactions,
partner units in LCIF. As Units including most amendments to the
are redeemed by partners, the Declaration of Trust, may not be
Company's percentage ownership consummated without the approval
of LCIF will increase. of shareholders 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."
</TABLE>
23
<PAGE> 25
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.
<TABLE>
<S> <C>
The Partnership Agreement may be Amendments to the Company's
amended with the consent of Lex Declaration of Trust must be
GP-1, Lex LP-1 and the Special approved by the Board of Trustees
Limited Partners representing a and generally by at least
majority of Units held by such two-thirds of the votes entitled
Special Limited Partners. to be cast at a meeting of
Certain amendments that affect shareholders.
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.
</TABLE>
B. VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY.
<TABLE>
<S> <C>
The Operating Partnership may be Under Maryland law, the Board of
dissolved upon the occurrence of Trustees must obtain approval of
certain events, none of which holders of at least two-thirds of
require the consent of the limited the outstanding Common Shares in
partners. order to dissolve the Company.
</TABLE>
C. VOTE REQUIRED TO SELL ASSETS OR MERGE.
<TABLE>
<S> <C>
Under the Partnership Agreement, Under Maryland law, the sale of
the sale, exchange, transfer or all or substantially all of the
other disposition of all or assets of the Company or merger
substantially all of the or consolidation of the Company
Operating Partnership's assets requires the approval of the
or a merger or consolidation of Board of Trustees and holders of
the Operating Partnership two-thirds of the outstanding
requires the consent of holders Common Shares. No approval of
of a majority of the outstanding the shareholders is required for
Units held by the Special the sale of less than all or
Limited Partners. The general substantially all of the
partner of the Operating Company's assets.
Partnership has the exclusive
authority the sell individual
assets of the Operating
Partnership.
</TABLE>
24
<PAGE> 26
COMPENSATION, FEES AND DISTRIBUTIONS
<TABLE>
<S> <C>
The general partner does not The non-employee trustees and
receive any compensation for its officers of the Company receive
services as general partner of compensation for their services.
the Operating Partnership. As a
partner in the Operating
Partnership, however, the
general partner has the same
right to allocations and
distributions as other partners
of the Operating Partnership.
In addition, the Operating
Partnership will reimburse the
general partner (and the
Company) for all expenses
incurred relating to the ongoing
operation of the Operating
Partnership and any other
offering of additional
partnership interests in the
Operating Partnership.
</TABLE>
LIABILITY OF INVESTORS
<TABLE>
<S> <C>
Under the Partnership Agreement Under Maryland law, shareholders
and applicable state law, the are not personally liable for
liability of the limited the debts or obligations of the
partners for the Operating Company.
Partnership's debts and
obligations is generally limited
to the amount of their
investment in the Operating
Partnership.
</TABLE>
NATURE OF INVESTMENT
<TABLE>
<S> <C>
The Units constitute equity Common Shares constitute equity
interests entitling each limited interests in the Company. The
partner to his pro rata share of Company is entitled to receive
cash distributions made to the its pro rata share of distributions
limited partners of the made by the Operating Partnership
Operating Partnership. The with respect to the Units, and the
Operating Partnership generally distributions made by the other
intends to retain and reinvest direct subsidiaries of the Company.
proceeds of the sale of property Each shareholder will be entitled to
or excess refinancing proceeds his pro rata share of any dividends
in its business. 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
</TABLE>
25
<PAGE> 27
<TABLE>
<S> <C>
gains) not distributed will be subject to
corporate income tax.
</TABLE>
POTENTIAL DILUTION OF RIGHTS
<TABLE>
<S> <C>
The general partner of the The Board of Trustees may issue,
Operating Partnership is in its discretion, additional
authorized, in its sole shares, and has the authority to
discretion and without limited issue from authorized capital a
partner approval, to cause the variety of other equity
Operating Partnership to issue securities of the Company with
additional limited partnership such powers, preferences and
interests and other equity rights as the Board of Trustees
securities for any partnership may designate at the time. The
purpose at any time to the issuance of additional shares
limited partners or to other of either Common Shares or
persons (including the general other similar equity securities
partner on terms established by may result in the dilution of
the general partner). the interests of the
shareholders.
</TABLE>
LIQUIDITY
<TABLE>
<S> <C>
Limited partners may generally The Redemption Shares will be
transfer their Units without the freely transferable as
general partner's consent, registered securities under the
except that the general partner Securities Act. The Common
may, in its sole discretion, Shares are listed on the NYSE.
prevent the admission to the The breadth and strength of this
Operating Partnership of secondary market will depend,
substituted limited partners. among other things, upon the
Each limited partner has the number of shares outstanding,
right to tender his or her Units the Company's financial results
for redemption by the Operating and prospects, the general
Partnership. See "General" above. interest in the Company's and
other real estate investments, and the
Company's dividend yield compared to that
of other debt and equity securities.
</TABLE>
FEDERAL INCOME TAXATION
<TABLE>
<S> <C>
The Operating Partnership is not We have elected to be taxed as a
subject to federal income taxes. REIT. So long as we qualify as
Instead, each holder of Units a REIT, we will be permitted to
includes its allocable share of deduct distributions paid to our
the Operating Partnership's shareholders, which effectively
taxable income or loss in will reduce the "double
determining its individual taxation" that typically results
federal income tax liability. when a corporation earns income
The maximum federal income tax and distributes that income to
rate for individuals under its shareholders in the form of
current law is 39.6%. dividends. A qualified REIT,
however, is subject to federal
income tax on income that is not
distributed and also may be
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C>
subject to federal income and
excise taxes in certain
circumstances. The maximum
federal income tax rate for
corporations under current law
is 35%.
</TABLE>
<TABLE>
<S> <C>
A Unit holder's share of income Dividends paid by us will be
and loss generated by the treated as "portfolio" income
Operating Partnership generally and cannot be offset with losses
is subject to the "passive from "passive activities." The
activity" limitations. Under the maximum federal income tax rate
"passive activity" rules, income for individuals under current
and loss from the Operating law is 39.6%. Distributions
Partnership that is considered made by us to our taxable
"passive income" generally can domestic shareholders out of
be offset against income and current or accumulated earnings
loss from other investments that and profits will be taken into
constitute "passive activities." account by them as ordinary
Cash distributions from the income. Distributions that are
Operating Partnership are not designated as capital gain
taxable to a holder of a Unit dividends generally will be
except to the extent such taxed as long-term capital gain,
distributions exceed such subject to certain limitations.
holder's basis in its interest Distributions in excess of
in the Operating Partnership current or accumulated earnings
(which will include such and profits will be treated as a
holder's allocable share of the non-taxable return of basis to
Operating Partnership's taxable the extent of a shareholder's
income and nonrecourse debt). adjusted basis in its Common
Shares, with the excess taxed as
capital gain.
Each year, holders of Units will Each year, shareholders will
receive a Schedule K-1 receive an Internal Revenue Service Form
containing detailed tax 1099 used by corporations to report
information for inclusion in dividends paid to their shareholders.
preparing their federal income
tax returns.
Holders of Units are required, Shareholders who are individuals
in some cases, to file state generally will not be required
income tax returns and/or pay to file state income tax returns
state income taxes in the states and/or pay state income taxes
in which the Operating outside of their state of
Partnership owns property, even residence with respect to our
if they are not residents of operations and distributions.
those states. We may be required to pay state
income taxes in certain states.
</TABLE>
27
<PAGE> 29
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 6,253,114
OP Units of which, in addition to these 1,817,458 Units, 1,472,976 are also
currently redeemable for Common Shares. The average annualized distribution per
OP Unit is $1.09. Of the total OP Units, 1,627,026 OP Units are owned by our
affiliates including two members of our Board of Trustees.
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<PAGE> 30
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 66
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 10.9 million net rentable square feet and, under the terms of
their applicable leases, currently generate approximately $75.2 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., 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 $207.7 million of properties, aggregating approximately
3.7 million net rentable square feet and accounting for approximately $23.3
million in annual rent. In addition, we have entered into an agreement to
purchase an additional property for $36.2 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 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
29
<PAGE> 31
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 two properties.
The restrictions applicable to REITs may limit our ability to dispose of a
property. See "Federal Income Tax Considerations of Holding Shares in a
REIT--Taxation of the Company--Income Tests."
Tenant Relations. We maintain close contact with our tenants in order
to understand their future real estate needs. We monitor the financial, property
maintenance and other lease obligations of our tenants through a variety of
means, including periodic reviews of financial statements and physical
inspections of the Properties. We perform annual inspections of those Properties
where we have an ongoing obligation with respect to the maintenance of the
Property and for all Properties during each of the last three years immediately
prior to lease expiration. Biannual physical inspections are undertaken for all
other Properties.
ACQUISITION STRATEGIES
We seek to enhance our net lease property portfolio through
acquisitions of general purpose, efficient, well-located properties in growing
markets. We have diversified our portfolio by geographical location, tenant
industry segment, lease term expiration and property type with the intention of
providing steady internal growth with low volatility. We believe that such
diversification should help insulate us from regional recession, industry
specific downturns and price fluctuations by property type. Prior to effecting
any acquisitions, we analyze the (i) property's design, construction quality,
efficiency, functionality and location with respect to the immediate submarket,
city and region; (ii) lease integrity with respect to term, rental rate
increases, corporate guarantees and property maintenance provisions; (iii)
present and anticipated conditions in the local real estate market; and (iv)
prospects for selling or re-leasing the property on favorable terms in the event
of a vacancy. We also evaluate each potential tenant's financial strength,
growth prospects, competitive position within its respective industry and a
property's strategic location and function within a tenant's operations or
distribution systems. We believe that our comprehensive underwriting process is
critical to the assessment of long-term profitability of any investment by us.
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
30
<PAGE> 32
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.
31
<PAGE> 33
MANAGEMENT
Our trustees and senior executive officers are as follows:
NAME AGE OFFICE
- ---- --- ------
E. Robert Roskind 53 Chairman of the Board of Trustees and Co-Chief
Executive Officer(1)
Richard J. Rouse 52 Vice Chairman of the Board of Trustees and
Co-Chief Executive Officer
T. Wilson Eglin 34 President, Chief Operating Officer and Trustee
Patrick Carroll 34 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
Carl D. Glickman 72 Trustee(1)(2)
Kevin W. Lynch 45 Trustee(2)(3)
John D. McGurk 54 Trustee(1)(2)(3)
Seth M. Zachary 45 Trustee(2)(3)
(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
32
<PAGE> 34
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 December 1998. 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.
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.
CARL D. GLICKMAN has served as a trustee and a member of the Audit
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. (an
affiliate of Bear, Stearns & Co. Inc.), Continental Health Affiliates, Inc.,
Franklin Corporation, 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.
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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.
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 1,314,387 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, 646,217 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
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institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States.
The information in this section is based on the Code (including the
provisions of the 1997 Act, several of which are described herein), current,
temporary and proposed Treasury Regulations, the legislative history of the
Code, current administrative interpretations and practices of the IRS (including
its practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
adversely affect existing interpretations of current law. Any such change could
apply retroactively to transactions preceding the date of the change. The
Company has not received any rulings from the IRS concerning the tax treatment
of the Company. Thus no assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
EACH PROSPECTIVE PURCHASER OF THE SECURITIES IS ADVISED TO CONSULT WITH
HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER
OF THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES OF AN ENTITY ELECTING TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company elected to be taxed as a REIT under Sections 856
through 860 of the Code effective for its taxable year ended December 31, 1993.
The Company believes that it was organized, and has operated, in such a manner
so as to qualify for taxation as a REIT under the Code and intends to conduct
its operations so as to continue to qualify for taxation as a REIT. No
assurance, however, can be given that the Company has operated in a manner so as
to qualify or will be able to operate in such a manner so as to remain qualified
as a REIT. Qualification and taxation as a REIT depends upon the Company's
ability to meet on a continuing basis, through actual annual operating results,
the required distribution levels, diversity of share ownership and the various
qualification tests imposed under the Code discussed below, the results of which
will not be reviewed by Counsel. Given the highly complex nature of the rules
governing REITs, 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.
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If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a corporation. However, the Company will be subject to federal
income tax as follows: first, the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its items of tax preference. Third, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" (which is, in general, property acquired on foreclosure or otherwise
on default on a loan secured by such real property or a lease of such property)
which is held primarily for sale to customers in the ordinary course of business
or (ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company has
net income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test multiplied by (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate level tax) in a transaction in which the basis of the asset in
the Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the 10-year period beginning on the
date on which such asset was acquired by the Company, then, to the extent of
such property's "built-in gain" (the excess of the fair market value of such
property at the time of the acquisition by the Company over the adjusted basis
of such property at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Internal Revenue Service
regulations that have not yet been promulgated).
Requirements for Qualification. A REIT is a corporation, trust or
association (i) which is managed by one or more trustees or directors, (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (iii) which would be taxable
as a domestic corporation, but for Sections 856 through 859 of the Code, (iv)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (v) the beneficial ownership of which is held by
100 or more persons, (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company expects to meet the ownership test immediately after the transaction
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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
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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 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
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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 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
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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 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.
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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
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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 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.
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<PAGE> 44
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 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.
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<PAGE> 45
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.
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
44
<PAGE> 46
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
45
<PAGE> 47
pension trust owns more than 25% of the value of the Company's shares or (B) a
group of pension trusts individually holding more than 10% of the value of the
Company's capital shares collectively own more than 50% of the value of the
Company's capital shares.
While an investment in the Company by an Exempt Organization generally
is not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that does arise from such an investment will
be combined with all other gross UBTI of the Exempt Organization for a taxable
year and reduced by all deductions attributable to the UBTI plus $1,000. Any
amount then remaining will constitute UBTI on which the Exempt Organization will
be subject to tax. If the gross income taken into account in computing UBTI
exceeds $1,000, the Exempt Organization is obligated to file a tax return for
such year on IRS Form 990-T. None of the Company, the Board of Trustees, or any
of their Affiliates expects to undertake the preparation or filing of IRS Form
990-T for any Exempt Organization in connection with an investment by such
Exempt Organization in the Common Shares. Generally, IRS Form 990-T must be
filed with the Service by April 15 of the year following the year to which it
relates.
TAXATION OF REINVESTED DIVIDENDS
Those holders of Common Shares who elect to participate in the Dividend
Reinvestment Plan will be deemed to have received the gross amount of dividends
distributed on their behalf by the Plan Agent as agent for the participants in
such plan. Such deemed dividends will be treated as actual dividends to such
shareholders by the Company and will retain their character and have the tax
effects as described above. Participants that are subject to federal income tax
will thus be taxed as if they received such dividends despite the fact that
their distributions have been reinvested and, as a result, they will not receive
any cash with which to pay the resulting tax liability.
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
46
<PAGE> 48
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 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 1,817,458 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
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<PAGE> 49
December 31, 1997 and the statements of historical summary of revenue and
certain operating expenses included in the Company's Current Reports on Form 8-K
filed on July 1, 1998 and September 11, 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.
48
<PAGE> 50
================================================================================
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.
1,817,458 Shares
LEXINGTON CORPORATE
PROPERTIES TRUST
Common Shares
PROSPECTUS
January ___, 1999
================================================================================
<PAGE> 51
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........................................... $ 6,411.66
Printing expenses.......................................... 2,500.00
Legal fees and expenses.................................... 20,000.00
Accounting fees and expenses............................... 8,000.00
Miscellaneous.............................................. 1,588.34
TOTAL.................................................. $38,500.00
</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
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<PAGE> 52
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.
ITEM 16. EXHIBITS.
There are filed with the Registration Statement the following
exhibits:
EXHIBIT NO. DESCRIPTION
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).
24.1 Power of Attorney (included in Part II of this Registration
Statement).
* 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.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any acts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in
II-2
<PAGE> 53
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
herein do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the Commission
by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 54
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 January 5, 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 Executive Officer January 5, 1999
- -----------------------
E. Robert Roskind and Trustee (Principal Executive Officer)
/s/ Richard J. Rouse Vice Chairman, Co-Chief Executive Officer and January 5, 1999
- -----------------------
Richard J. Rouse Trustee
/s/ T. Wilson Eglin President, Chief Operating Officer and Trustee January 5, 1999
- -----------------------
T. Wilson Eglin
/s/ Patrick Carroll Chief Financial Officer and Treasurer January 5, 1999
- -----------------------
Patrick Carroll
/s/ Paul R. Wood Vice President, Chief Accounting Officer and January 5, 1999
- -----------------------
Paul R. Wood Secretary
</TABLE>
II-4
<PAGE> 55
Signature Capacity Date
--------- -------- ----
/s/ Carl D. Glickman Trustee January 5, 1999
Carl D. Glickman
/s/ Kevin W. Lynch Trustee January 5, 1999
Kevin W. Lynch
/s/ John D. McGurk Trustee January 5, 1999
John D. McGurk
/s/ Seth M. Zachary Trustee January 5, 1999
Seth M. Zachary
II-5
<PAGE> 56
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
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).
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Paul, Hastings, Janofsky & Walker LLP]
January 5, 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 1,817,458 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
January 5, 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
EXHIBIT 23.1
The Shareholders
Lexington Corporate Properties Trust:
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.
/s/ KPMG LLP
New York, New York
January 5, 1999
