<PAGE>
As filed with the Securities and Exchange Commission on January 12, 1998
REGISTRATION STATEMENT NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
AVALON PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 06-13791111
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 River Road
Wilton, CT 06897
203-761-6500
(Address, including zip code, and telephone number, including area code of
Registrant's principal executive offices)
Thomas J. Sargeant
Chief Financial Officer, Treasurer and Secretary
Avalon Properties, Inc.
15 River Road
Wilton, Connecticut 06897
(203) 761-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
_____________________________
Copy to:
John O. Newell, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
(617) 570-1475
_____________________________
Approximate date of commencement of proposed sale to the public: From time to
time after this registration statement becomes effective, as determined by the
Unitholders.
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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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>
====================================================================================================================================
Title of Shares Being Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Registered Amount Being Registered Price Per Share(1) Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 25,271 $30.00 $758,130 $224
====================================================================================================================================
</TABLE>
(1) This estimate is based on the high and low sales prices on the New York
Stock Exchange of the Common Stock of Avalon Properties, Inc. on January 8,
1998, 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ 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 nor +
+ 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS DATED JANUARY 12, 1998
SUBJECT TO COMPLETION
PROSPECTUS
- ----------
25,271 SHARES
AVALON PROPERTIES, INC.
COMMON STOCK
____________
Avalon Properties, Inc. (the "Company") is an integrated operating company,
concentrating on apartment community acquisition, construction, development and
management in high barrier-to-entry markets, which currently include the Mid-
Atlantic, Midwest and Northeast regions of the United States, with seven
offices located throughout its regions. The Company is a self-administered and
self-managed real estate investment trust (a "REIT"). The Company is a Maryland
corporation and its Common Stock is listed on the New York Stock Exchange under
the symbol "AVN."
This Prospectus relates to the possible issuance by the Company of up to
25,271 shares (the "Redemption Shares") of common stock, par value $.01 per
share ("Common Stock"), of the Company, if and to the extent that Quincy Station
Apartments Limited Partnership, a Virginia limited partnership, Ballston Place
Associates Limited Partnership, a Virginia limited partnership and Awbrey's Road
II Associates Limited Partnership, a Virginia limited partnership (collectively,
the "Ballston Partnerships"), the holders of an aggregate of 25,270.75 units of
limited partnership interest ("Units") in Avalon Ballston II, L.P. (the
"DownREIT Partnership"), or any permitted transferee of the Ballston
Partnerships (each, a "Unitholder" and collectively, the "Unitholders")
exchanges such Units for Redemption Shares. The Units were issued to the
Ballston Partnerships on January 13, 1997 in connection with the acquisition of
two apartment communities located in Arlington, Virginia (the "Ballston
Properties"). The Ballston Partnerships may not, without the prior written
consent of the DownREIT Partnership, exchange ("Transfer") the Units until
January 14, 1998.
The Unitholders and any agents, dealers or underwriters that participate
with the Unitholders in the distribution of the shares of Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), in which case any commissions received by such
agents, dealers or underwriters and any profit on the resale of the shares of
Common Stock purchased by them may be deemed underwriting commissions or
discounts under the Securities Act. See "Registration Rights" for
indemnification arrangements between the Company and the Unitholders.
Pursuant to the agreement of limited partnership of the DownREIT
Partnership (the "Partnership Agreement"), a Unitholder may after January 13,
1998, tender not less than 1,000 of its Units (or if such Unitholder holds less
than 1,000 Units, all of its Units) to the DownREIT Partnership for redemption
for the cash equivalent of a like number of shares of Common Stock (subject to
certain adjustments in the case of stock splits, stock dividends or similar
distributions); provided, however, that the Company may, in its sole and
absolute discretion, acquire any Units so tendered for an equivalent number of
shares of Common Stock (subject to certain adjustments in the case of stock
splits, stock dividends or similar distributions).
The Company anticipates that it generally will elect to acquire directly
Units tendered for redemption and to issue Common Stock pursuant to this
Prospectus in exchange therefor rather than paying cash. As a result, the
Company may from time to time issue up to 25,271 Redemption Shares upon the
acquisition of Units tendered to the DownREIT Partnership for redemption.
Accordingly, the Company is registering the Redemption Shares to provide
Unitholders with freely tradeable securities upon redemption.
The Company will not receive any proceeds from the issuance of any
Redemption Shares, but will acquire Units tendered to the DownREIT Partnership
for redemption for which it elects to issue Redemption Shares. With each such
acquisition, the Company's interest in the DownREIT Partnership will increase.
To ensure that the Company remains a qualified as a REIT, the Company's
Articles of Incorporation provide, subject to certain exceptions, that no holder
may own, or be deemed to own by virtue of the attribution provisions of the
Code, more than 9.8% of the value of the Company's outstanding equity
securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_________________________
The date of this Prospectus is January __, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC" or "Commission") a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Redemption Shares. This Prospectus, which constitutes part
of the Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies may be obtained at the prescribed rates
from the Public Reference Section of the Commission at its principal office in
Washington, D.C. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company files information electronically with the Commission, and the
Commission maintains a Web Site that contains reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission. The address of the Commission's
Web Site is (http://www.sec.gov).
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such materials
can be obtained by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
In addition, the Common Stock is listed on the New York Stock Exchange (the
"NYSE"), and such materials can be inspected and copied at the NYSE, 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996, filed with the Commission pursuant to the Exchange Act, including all
amendments thereto.
2. The Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, June 30 and September 30, 1997, filed with the Commission pursuant to
the Exchange Act, including all amendments thereto.
3. The Company's Current Reports on Form 8-K, filed with the Commission
on October 15, November 24, December 12 and December 22, 1997 pursuant to the
Exchange Act, including all amendments thereto.
4. The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A filed with the Commission pursuant to the
Exchange Act, including all amendments and reports updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of all shares of Common Stock registered
hereunder shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement
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<PAGE>
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents.
Written requests should be mailed to Thomas J. Sargeant, Chief Financial
Officer, Avalon Properties, Inc., 2900 Eisenhower Avenue, Alexandria, Virginia
22314. Telephone requests may be directed to (703) 329-6300.
3
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus, including any related Prospectus Supplement and the
documents incorporated herein and therein by reference, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The words "believe,"
"expect," "anticipate," "intend," "estimate," "assume" and other similar
expressions which are predictions of or indicate future events and trends and
which do not relate solely to historical matters identify forward-looking
statements. In addition, information concerning construction, occupancy and
completion of the Company's apartment communities and financial information,
including information concerning construction budgets, Funds from Operations,
and EBITDA, relating to periods after the date of this Prospectus or the related
Prospectus Supplement, are forward-looking statements. Reliance should not be
placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are in some cases beyond the
control of the Company and may cause the actual results, performance or
achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such forward-
looking statements.
Factors that might cause such a difference include, but are not limited to,
the following: the Company may fail to secure or abandon development
opportunities; construction costs of a community may exceed original estimates;
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs and reduced rental
revenues; occupancy rates and market rents may be adversely affected by local
economic and market conditions which are beyond management's control; financing
may not be available, or may not be available on favorable terms; the Company's
cash flow may be insufficient to meet required payments of principal and
interest; and existing indebtedness may mature in an unfavorable credit
environment, preventing such indebtedness from being refinanced, or, if
refinanced, causing such refinancing to occur on terms that are not as favorable
as the terms of existing indebtedness. In addition, the factors described under
"Risk Factors," below, may result in such differences. Prospective purchasers of
the Securities offered hereby should carefully review all of these factors.
RISK FACTORS
An investment in the Securities involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained or incorporated by reference in this
Prospectus and the applicable Prospectus Supplement before making a decision to
purchase any Securities.
TAX CONSEQUENCES TO UNITHOLDERS OF EXCHANGE OF UNITS
In the event that the Company exercises its right to acquire Units tendered
for redemption in exchange for cash or Redemption Shares, the Company's
acquisition of such Units will be treated for tax purposes as a sale of the
Units. Such a sale will be fully taxable to the Unitholder and the Unitholder
will be treated as realizing for tax purposes an amount equal to the sum of the
cash received or the value of the Redemption Shares received in the exchange
plus the amount of any DownREIT Partnership liabilities allocable to the
exchanged Units at the time of the redemption or exchange. It is possible that
the amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and the value of other property (i.e.,
Redemption Shares) received upon such disposition. See "Description of Units and
Redemption of Units--Tax Consequences of Redemption." In addition, the ability
of the Unitholder to sell a substantial number of Redemption Shares in order to
raise cash to pay tax liabilities associated with the redemption of Units may be
limited as a result of fluctuations in the market price of the Common Stock, and
the price the Unitholder receives for such shares may not equal the value of its
Units at the time of redemption or exchange.
In the event that the Company does not exercise its right to acquire Units
tendered for redemption in exchange for cash or Redemption Shares, and such
Units are redeemed by the DownREIT Partnership for cash, the tax consequences
may differ. See "Description of Units and Redemption of Units."
4
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POTENTIAL CHANGE IN INVESTMENT UPON REDEMPTION OF UNITS
If a Unitholder exercises its right to require the redemption of all or a
portion of its Units, the Unitholder may receive cash or, at the option of the
Company, Redemption Shares in exchange for its Units. If the Unitholder receives
cash from either the DownREIT Partnership or the Company, the Unitholder will
not have any interest in the Company or the DownREIT Partnership (except to the
extent that it retains Units) and will not benefit from any subsequent increases
in the value of Common Stock and will not receive any future distributions from
the Company or the DownREIT Partnership (unless the Unitholder retains or
acquires in the future additional Common Stock or Units). If the Unitholder
receives Common Stock, the Unitholder will become a stockholder of the Company
rather than a holder of Units in the DownREIT Partnership. See "Description of
Units and Redemption of Units--Comparison of Ownership of Units and Common
Stock."
RISKS ASSOCIATED WITH THE ADDITION OF A SUBSTANTIAL NUMBER OF NEW COMMUNITIES
The Company is currently experiencing a period of accelerated growth. The
Company's ability to manage its growth effectively will require the Company,
among other things, to successfully apply its experience in managing its
existing portfolio to an increased number of communities. In addition, the
Company will be required to successfully manage the integration of a substantial
number of new management and operations personnel. There can be no assurance
that the Company will be able to integrate and manage these operations
effectively or maintain or improve its historical financial performance.
RISKS ASSOCIATED WITH NEW MARKETS
The Company is currently expanding its operations beyond its current Mid-
Atlantic and Northeast market areas into certain Midwest markets, and it is
possible that the Company may enter other new markets in the future. The Company
may make other selected acquisitions in markets outside of its current market
areas from time to time if appropriate opportunities arise. The Company's
historical experience is in the Mid-Atlantic and Northeast market areas, and the
Company's experience in these market areas does not ensure that it will be able
to operate successfully in new market areas. Like the risks associated with the
addition of a substantial number of new communities, entry into new market areas
will require, among other things, the Company to successfully apply its
experience to new market areas. Some of the risks related to entry into new
markets include, among others: (i) a lack of market knowledge and understanding
of the local economies; (ii) an inability to obtain land for development or to
identify acquisition opportunities; (iii) an inability to obtain construction
tradespeople; and (iv) an unfamiliarity with local governmental and permitting
procedures.
PORTFOLIO ACQUISITION RISKS
The Company has increasingly emphasized, and intends to continue to
emphasize, acquisitions of multiple apartment communities in single transactions
in order to reduce acquisition expenses per apartment community and to enable
the Company to gain a critical mass of assets that provides operating leverage.
However, portfolio acquisitions are more complex than single-property
acquisitions, and the risk that a multiple-property acquisition will not close
may be greater than in a single-property acquisition. In addition, the Company's
costs for a portfolio acquisition that does not close are generally greater than
for an individual acquisition that does not close. If the Company fails to close
portfolio acquisitions, its ability to increase its Funds from Operations will
be limited and a charge to earnings for costs related to the failed acquisition
may occur.
Portfolio acquisitions may also result in the Company owning apartment
communities in geographically dispersed markets that are geographically removed
from the Company's principal markets. This geographic diversity will place
additional demands on the Company's ability to manage such operations.
Another risk associated with portfolio acquisitions is that a seller may
require that a group of apartment communities be purchased as a package, even
though one or more of the apartment communities in the portfolio does not meet
the Company's investment criteria. In such cases, the Company may attempt to
make a joint bid with another buyer, or the Company may purchase a portfolio of
apartment communities with the intent to subsequently dispose of those which do
not meet its criteria. In the case of joint bids, however, it is possible that
the other buyer may default in its obligations, which increases the risk that
the acquisition may not close, with the adverse consequences described above. In
cases where the Company intends to dispose of apartment communities it does not
wish to own,
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there can be no assurance as to how quickly the Company could sell or exchange
such apartment communities or the terms on which they could be sold or
exchanged. In addition, any gains on the sale of such apartment communities
within four years of the date of acquisition could be subject to a 100% tax.
RISKS OF DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES
The Company intends to actively continue development and construction of
multifamily apartment communities. There can be no assurance that the Company
will undertake to develop any particular site or that it will be able to
complete such development if it is undertaken. Risks associated with the
Company's development and construction activities include: development
opportunities may be abandoned; construction costs of a community may exceed
original estimates, possibly making the community uneconomical; occupancy rates
and rents at a newly completed community may not be sufficient to make the
community profitable; financing may not be available on favorable terms for
development of a community; and construction and lease-up may not be completed
on schedule, resulting in increased debt service expense and construction costs.
Development activities are also subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy, and other required governmental permits and authorization.
The Company intends to continue to acquire multifamily apartment
communities on a select basis. Acquisitions of multifamily communities entail
risks that investments will fail to perform in accordance with expectations.
Estimates of the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate.
The Company anticipates that future developments and acquisitions will be
financed, in whole or in part, under lines of credit or other forms of secured
or unsecured financing or through the issuance of additional equity by the
Company. The use of equity financing, rather than debt, for future developments
or acquisitions could have a dilutive effect on the interests of existing
stockholders of the Company. If new developments are financed through
construction loans, there is a risk that, upon completion of construction,
permanent financing for newly developed communities may not be available or may
be available only on disadvantageous terms.
REAL ESTATE FINANCING RISKS
No Limitation on Debt. The Company currently has a policy of incurring debt
only if upon such incurrence the ratio of debt to total market capitalization
(i.e., the total consolidated debt of the Company as a percentage of the market
value of issued and outstanding equity securities plus total consolidated debt)
would be 50% or less, but the organizational documents of the Company do not
contain any limitation on the amount of indebtedness the Company may incur.
Accordingly, the Company's Board of Directors could alter or eliminate this
policy.
Existing Debt Maturities, Balloon Payments and Refinancing Risks. The
Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest. Because the Company anticipates
that only a small portion of the principal of the Company's indebtedness will be
repaid prior to maturity, it will be necessary for the Company to refinance
debt. Accordingly, there is a risk that existing indebtedness will not be able
to be refinanced or that the terms of such refinancing will not be as favorable
as the terms of the existing indebtedness.
Risk of Rising Interest Rates. The Company has incurred and expects in the
future to incur floating rate indebtedness under credit facilities or in
connection with the construction of multifamily apartment communities, as well
as for other purposes. Accordingly, increases in interest rates would increase
the Company's interest costs (to the extent that the related indebtedness was
not protected by interest rate protection arrangements).
Bond Compliance Requirements. Certain of the Company's multifamily
apartment communities are financed with obligations issued by various local
government agencies or instrumentalities, the interest on which is exempt from
Federal income taxation. These obligations are commonly referred to as "tax-
exempt bonds." Under the terms of tax-exempt bonds, the Company must comply with
various restrictions on the use of the properties, including that a percentage
of apartments be made available to low and middle income households. The bond
compliance requirements in effect, and the requirements of any future tax-exempt
bond financing utilized by the Company, may have the effect of limiting the
Company's income from properties subject to the financing. In addition, certain
of the tax-exempt bond financing documents require that a financial institution
(the "credit enhancer") guarantee payment of principal of, and interest on, the
bonds, which may take the form of a letter of credit, surety bond, guarantee
agreement or
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other additional collateral. If the credit enhancer defaults in its credit
enhancement obligations, or the Company is unable to renew the applicable credit
enhancement or otherwise post satisfactory collateral, a default will occur
under the applicable tax-exempt bonds and the property could be foreclosed upon.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. If the Company's communities do not generate revenues sufficient to meet
operating expenses, including debt service and capital expenditures, the
Company's cash flow and ability to make distributions to its stockholders will
be adversely affected. A multifamily apartment community's revenues and value
may be adversely affected by the general economic climate; the local economic
climate (including the fiscal condition of the relevant governmental bodies);
local real estate conditions (such as oversupply of or reduced demand for
apartment homes); the perceptions by prospective residents of the safety,
convenience and attractiveness of the communities or neighborhoods in which they
are located and the quality of local schools and other amenities; the ability of
the owner to provide adequate management, maintenance and insurance; and
increased operating costs (including real estate taxes and utilities). Certain
significant expenditures associated with each equity investment (such as
mortgage payments, if any, real estate taxes, insurance and maintenance costs)
are generally not reduced when circumstances cause a reduction in income from
the investment.
Dependence on Primary Markets. The Company's multifamily apartment
communities are located in the Mid-Atlantic and Northeast regions of the United
States and the Company's performance and its ability to perform its obligations
with respect to the Securities or make distributions to stockholders could be
adversely affected by economic and social conditions in these geographic areas.
Market Illiquidity. Equity real estate investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Internal Revenue Code of 1986, as amended (the "Code") limits the
Company's ability to sell properties held for fewer than four years, which may
affect the Company's ability to sell properties without adversely affecting
returns to its stockholders.
Competition. There are numerous housing alternatives that compete with the
Company's multifamily apartment communities in attracting residents. These
communities compete directly with other multifamily rental apartments and single
family homes or condominiums that are available for rent or purchase in the
markets in which the communities are located. In addition, other competitors
for development and acquisitions of properties, including other REITs, may have
greater resources than the Company.
Operating Risks. The Company's multifamily apartment communities are
subject to all operating risks common to multifamily apartment communities in
general. Increases in unemployment or in the supply of apartment homes in the
areas in which the communities are located might adversely affect occupancy or
rental rates. Increases in operating costs due to inflation and other factors
may not necessarily be offset by increased rents. Residents may be unable or
unwilling to pay rent increases. Future enactment of rent control or rent
stabilization laws or other laws regulating multifamily housing may reduce
rental revenue or increase operating costs. If operating expenses increase, the
local rental market may limit the extent to which rents may be increased to meet
increased expenses without decreasing occupancy rates.
Affordable Housing Laws. Certain of the Company's communities are, and will
be in the future, subject to Federal, state and local statutes or other
restrictions requiring that a percentage of apartments be made available to low
and middle income households. These laws and obligations, as well as any changes
thereto making it more difficult to meet such requirements, or a reduction in or
elimination of certain financing advantages available to those persons
satisfying such requirements, could adversely affect the Company's profitability
and its ability to develop certain communities in the future.
RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS AND JOINT VENTURES
Instead of purchasing properties directly, the Company may invest as a
partner or a co-venturer. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partner or co-venturer might become bankrupt,
that such partner or co-venturer might at any time have economic or other
business interests or goals which are inconsistent with the business interests
or goals of the Company, and that such partner or co-venturer may be in a
position to take action contrary to the
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instructions or the requests of the Company or contrary to the Company's
policies or objectives, including the Company's policy with respect to
maintaining its qualification as a REIT. Such investments may also have the
potential risk of impasse on decisions because neither the partner nor the co-
venturer would have full control over the partnership or joint venture. The
Company will, however, seek to maintain sufficient control of such partnerships
or joint ventures to permit the Company's objectives to be achieved. There is no
limitation under the Company's organizational documents as to the amount of
available funds that may be invested in partnerships or joint ventures.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment, financing and borrowing policies of the Company and its
policies with respect to all other activities, including termination of
qualification as a REIT, growth, debt, capitalization, dividends and operations,
will be determined by the Board of Directors. Although the Board of Directors
has no present intention to do so, these policies may be amended or revised at
any time and from time to time at the discretion of the Board of Directors
without a vote of the stockholders of the Company. A change in these policies
could adversely affect the Company's financial condition, results of operations
or the market price of the Securities.
LIMITS ON CHANGES IN CONTROL
Certain provisions contained in the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") and the Company's Amended and
Restated Bylaws (the "Bylaws") and under Maryland law may have the effect of
discouraging a third party from making an acquisition proposal for the Company
and may thereby inhibit a change in control of the Company. For example, such
provisions may (i) deter tender offers for the Common Stock, which offers may be
attractive to the stockholders, or (ii) deter purchases of large blocks of
Common Stock, thereby limiting the opportunity for stockholders to receive a
premium for their Common Stock over then-prevailing market prices. These
provisions include the following:
Preferred Stock. The Articles of Incorporation authorize the Board of
Directors to issue up to 20 million shares of Preferred Stock and to establish
the preferences and rights (including the right to vote and the right to convert
into Common Stock) of any Preferred Stock issued.
Ownership Limit. In order for the Company to maintain its qualification as
a REIT, not more than 50% in value of its outstanding equity securities may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code). For the purpose of preserving the Company's REIT qualification, the
Articles of Incorporation, subject to certain exceptions, provide that no holder
may acquire or own, directly or indirectly, beneficial ownership of more than
9.8% of the aggregate value of all outstanding equity securities of the Company.
Although the Board of Directors of the Company presently has no intention to do
so, the Board of Directors could waive this restriction if it were satisfied,
based upon the advice of tax- counsel, that ownership in excess of this limit
would not jeopardize the Company's status as a REIT and the Board of Directors
otherwise decided such action would be in the best interests of the Company.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The Company intends at all times to operate so as to qualify as a REIT
under the Code. Although management of the Company believes that the Company is
organized and operates in such a manner, no assurance can be given that the
Company qualifies or will remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may effect the Company's ability to qualify as a REIT. If
the Company fails to qualify as a REIT, it will be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. In addition, unless entitled to relief under certain
statutory provisions, the Company will be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification is
lost. The additional tax would significantly reduce the cash flow available for
distribution to stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local environmental laws, a current or
previous owner or operator of real estate may be required (typically regardless
of knowledge or responsibility) to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property and may be held liable
to a governmental entity or
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to third parties for property damage and for investigation and clean-up costs
incurred by such parties in connection with the contamination, which may be
substantial. The presence of such substances (or the failure to properly
remediate the contamination) may adversely effect the owner's ability to borrow
against, sell or rent such property.
POSSIBLE ADVERSE IMPACT OF MARKET CONDITIONS ON MARKET PRICE
The market value of the Securities could be substantially affected by
general market conditions, including changes in interest rates. A continued
increase in market interest rates would lead purchasers of Debt Securities and
may lead purchasers of Common Stock or Preferred Stock to demand a higher annual
yield, which could adversely affect the market price of the outstanding Common
Stock and other Securities. Moreover, numerous other factors, such as
government regulatory action and changes in tax laws, could have a significant
impact on the future market price of the Common Stock or other Securities.
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THE COMPANY
Avalon Properties, Inc. (the "Company") is an integrated operating company,
concentrating on apartment community acquisition, construction, development and
management in high barrier-to-entry markets, which currently include the Mid-
Atlantic, Midwest and Northeast regions of the United States, with seven offices
located throughout its regions. The Company is a self-administered and self-
managed real estate investment trust (a "REIT"). At December 31, 1997, the
Company owned or had an ownership interest in 64 multifamily apartment
communities containing a total of 19,318 apartment homes. As of December 31,
1997, the Company's established communities had a physical occupancy rate of
96.2%. In addition, at December 31, 1997, the Company owned or had an ownership
interest in nine apartment communities under construction, which the Company
anticipates will contain a total of 2,422 apartment homes, with estimated
completion dates from the second quarter of 1998 through the third quarter of
1999. As of December 31, 1997, the Company owned land for one development
community, and also owned rights to acquire 18 parcels of land.
The Company's executive offices are located at 15 River Road, Wilton,
Connecticut 06897 and its telephone number at that location is 203-761-6500.
DESCRIPTION OF COMMON STOCK
The description of the Company's Common Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws, each as amended and restated,
copies of which are exhibits to the Registration Statement of which this
Prospectus is a part. See "Available Information."
Under its Articles of Incorporation, the Company has authority to issue up
to 150 million shares of stock, consisting of 80 million shares of Common Stock,
par value $.01 per share, 50 million shares of "Excess Stock" (as described
under "Restrictions on Transfer" below), par value $.01 per share, and 20
million shares of Preferred Stock, par value $.01 per share. Under Maryland
law, stockholders generally are not responsible for the corporation's debts or
obligations. At December 31, 1997 there were issued and outstanding 41,975,240
shares of Common Stock, 4,455,000 shares of Series A Cumulative Redeemable
Preferred Stock, par value $.01 per share, and 4,300,000 shares of Series B
Cumulative Redeemable Preferred Stock, par value $.01 per share. An aggregate of
an additional 3,299,500 shares of Common Stock have been reserved for issuance
under the 1993 Stock Option and Incentive Plan and the 1995 Equity Incentive
Plan. The Common Stock is listed on the NYSE under the symbol "AVN."
GENERAL
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Company's Articles of Incorporation regarding
Excess Stock, holders of shares of Common Stock are entitled to receive
dividends on Common Stock if, as and when authorized and declared by the Board
of Directors of the Company out of assets legally available therefor and to
share ratably in the assets of the Company legally available for distribution to
its stockholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
the Company.
Subject to the provisions of the Company's Articles of Incorporation
regarding Excess Stock, each outstanding share of Common Stock entitles the
holder to one vote on all matters submitted to a vote of stockholders, including
the election of directors, and, except as otherwise required by law or except as
provided with respect to any other class or series of stock, the holders of
Common Stock will possess exclusive voting power. There is no cumulative voting
in the election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election, and the holders of the remaining shares of Common Stock will not
be able to elect any directors.
Holders of Common Stock have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company.
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The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
information.
Subject to the provisions of the Company's Articles of Incorporation
regarding Excess Stock, all shares of Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
Pursuant to the Maryland General Corporation Law ("MGCL"), a corporation
generally cannot dissolve, amend its Articles of Incorporation, merge, sell all
or substantially all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business unless approved by
the affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes to be cast on the matter) is set forth in the
corporation's Articles of Incorporation. The Company's Articles of
Incorporation do not provide for a lesser percentage in such situations.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities. See "Restrictions on Transfers of Capital
Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year (other than the
first year), and such capital stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months (other than the
first year) or during a proportionate part of a shorter taxable year. See
"Federal Income Tax Considerations." To ensure that the Company remains a
qualified REIT, the Articles of Incorporation, subject to certain exceptions,
provide that no holder may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% (the "Ownership Limit") of the Company's
capital stock. The Board of Directors may waive the Ownership Limit if evidence
satisfactory to the Board of Directors and the Company's tax counsel is
presented that the changes in ownership will not then or in the future
jeopardize the Company's status as a REIT. Any transfer of capital stock or any
security convertible into capital stock that would create a direct or indirect
ownership of capital stock in excess of the Ownership Limit or that would result
in the disqualification of the Company as a REIT, including any transfer that
results in the capital stock being owned by fewer than 100 persons or results in
the Company being "closely held" within the meaning of Section 856(h) of the
Code, shall be null and void, and the intended transferee will acquire no rights
to the capital stock. The foregoing restrictions on transferability and
ownership will not apply if the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
Capital stock owned, or deemed to be owned, or transferred to a stockholder
in excess of the Ownership Limit will automatically be exchanged for shares of
Excess Stock that will be transferred, by operation of law, to the Company as
trustee of a trust for the exclusive benefit of the transferees to whom such
capital stock may be ultimately transferred without violating the Ownership
Limit. While the Excess Stock is held in trust, it will not be entitled to
vote, it will not be considered for purposes of any stockholder vote or the
determination of a quorum for such vote, and, except upon liquidation, it will
not be entitled to participate in dividends or other
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distributions. Any dividend or distribution paid to a proposed transferee of
Excess Stock prior to the discovery by the Company that capital stock has been
transferred in violation of the provisions of the Company's Articles of
Incorporation shall be repaid to the Company upon demand. The Excess Stock is
not treasury stock, but rather constitutes a separate class of issued and
outstanding stock of the Company. The original transferee-stockholder may, at
any time the Excess Stock is held by the Company in trust, transfer the interest
in the trust representing the Excess Stock to any individual whose ownership of
the capital stock exchanged into such Excess Stock would be permitted under the
Ownership Limit, at a price not in excess of the price paid by the original
transferee-stockholder for the capital stock that was exchanged in Excess Stock.
Immediately upon the transfer to the permitted transferee, the Excess Stock will
automatically be exchanged for capital stock of the class from which it was
converted. If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Stock may be deemed, at the option of the
Company, to have acted as an agent on behalf of the Company in acquiring the
Excess Stock and to hold the Excess Stock on behalf of the Company.
In addition to the foregoing transfer restrictions, the Company will have
the right, for a period of 90 days during the time any Excess Stock is held by
the Company in trust, to purchase all or any portion of the Excess Stock from
the original transferee-stockholder for the lesser of the price paid for the
capital stock by the original transferee-stockholder or the market price (as
determined in the manner set forth in the Articles of Incorporation) of the
capital stock on the date the Company exercises its option to purchase. The 90-
day period begins on the date on which the Company receives written notice of
the transfer or other event resulting in the exchange of capital stock for
Excess Stock.
Each stockholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of beneficial interests as the Board of Directors deems necessary to
comply with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
This ownership limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that the
maintenance of REIT status is no longer in the best interests of the Company.
DESCRIPTION OF UNITS AND REDEMPTION OF UNITS
GENERAL
At any time after January 13, 1998, Unitholders may, subject to certain
limitations, require the DownREIT Partnership to redeem all or a portion of
their Units (the "Redemption Right"). This Redemption Right shall be exercised
pursuant to a notice of redemption delivered to the DownREIT Partnership, with a
copy delivered to the Company. Upon redemption, a Unitholder will receive for
each Unit redeemed cash in an amount equal to the market value (as defined
below) of one share of Common Stock (subject to certain adjustments in the event
of stock dividends, stock splits or similar distributions); provided, however,
that the Company may, in its sole discretion, by notice to the Unitholder within
ten business days after receipt of the notice of redemption, elect to acquire
any Unit presented to the DownREIT Partnership for redemption for one share of
Common Stock (subject to the same adjustments). The market value of the Common
Stock for purposes of redeeming Units will be equal to the average of the
closing trading price of the Common Stock for the five trading days prior to the
day on which the redemption notice was received by the DownREIT Partnership.
The Company anticipates that it generally will elect to acquire any Units
presented to the DownREIT Partnership for redemption by the issuance of the
Redemption Shares. Such an acquisition by the Company will be treated as a sale
of the Units to the Company for Federal income tax purposes. See "--Tax
Consequences of Redemption," below. Upon a redemption for cash, a Unitholder's
right to receive distributions with respect to the Units redeemed will cease.
Upon the receipt of Redemption Shares, a Unitholder will have rights as a
stockholder of the Company, including the right to receive dividends from the
time of its acquisition of the Redemption Shares.
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A Unitholder must notify the Company of its desire to require the DownREIT
Partnership to redeem Units. A Unitholder must request the redemption of at
least 1,000 Units. No redemption can occur if the delivery of Redemption Shares
would be prohibited under the provisions of the Company's Articles of
Incorporation to protect the Company's qualification as a REIT.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes certain Federal income tax
considerations that may be relevant to a Unitholder should it exercise its right
to redeem its Units.
Tax Treatment of Exchange or Redemption of Units. If the Company elects to
purchase Units tendered for redemption, the Partnership Agreement provides that
each of the Unitholder, the DownREIT Partnership and the Company shall treat the
transaction between the Unitholder and the Company as a sale of Units by the
Unitholder at the time of such redemption. Such sale will be fully taxable to
the Unitholder and the Unitholder will be treated as realizing for tax purposes
an amount equal to the sum of the cash value or the value of the Common Stock
received in the exchange plus the amount of any DownREIT Partnership liabilities
allocable to the redeemed Units at the time of the redemption. The determination
of the amount of gain or loss is discussed more fully below. If the Company does
not elect to purchase a Unitholder's Units tendered for redemption and the
DownREIT Partnership redeems such Units for cash that the Company contributes to
the DownREIT Partnership to effect such redemption, the redemption likely also
would be treated for tax purposes as a sale of such Units to the Company in a
fully taxable transaction, although the matter is not free from doubt. In that
event, the Unitholder would be treated as realizing an amount equal to the sum
of the cash received in the exchange plus the amount of any DownREIT Partnership
liabilities allocable to the redeemed Units at the time of the redemption. The
determination of the amount and character of gain or loss in the event of such a
sale is discussed more fully below. See "--Tax Treatment of Disposition of Units
by a Limited Partner Generally." If the Company does not elect to purchase Units
tendered for redemption and the DownREIT Partnership redeems a Unitholder's
Units for cash that is not contributed by the Company to effect the redemption,
the tax consequences would be the same as described in the previous paragraph,
except that, if the DownREIT Partnership redeems less than all of a Unitholder's
Units, the Unitholder would not be permitted to recognize any loss occurring on
the transaction and would recognize taxable gain only to the extent that the
cash, plus the amount of any DownREIT Partnership liabilities allocable to the
redeemed Units, exceeded the Unitholder's adjusted basis in all of its Units
immediately before the redemption. In addition, the potential application of
certain "disguised sale" rules, discussed below, could alter the tax treatment
of Units redeemed for cash.
If the Company contributes cash to the DownREIT Partnership to effect a
redemption, and in the event that the redemption transaction is treated as the
redemption of a Unitholder's Units by the DownREIT Partnership rather than a
sale of Units to the Company, the income tax consequences to the Unitholder
would be as described in the preceding paragraph.
Tax Treatment of Disposition of Units by a Limited Partner Generally. If a
Unit is disposed of in a manner that is treated as a sale of the Unit, or a
limited partner otherwise disposes of a Unit, the determination of gain or loss
from the sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the adjusted tax basis in such
Unit. See "--Basis of Units." Upon the sale of a Unit, the "amount realized"
will be measured by the sum of the cash and fair market value of other property
(i.e., Redemption Shares) received plus the amount of any DownREIT Partnership
liabilities allocable to the Units sold. To the extent that the amount of cash
or property received plus the allocable share of any DownREIT Partnership
liabilities exceeds the limited partner's adjusted tax basis in the Units
disposed of, such limited partner will recognize gain. It is possible that the
amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and/or the value of any other property (i.e.,
Redemption Shares) received upon such disposition.
Except as described below, 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 limited partner's share of "unrealized
receivables" of the DownREIT Partnership (as defined in Section 751 of the Code)
exceeds the basis attributed to those assets, such excess will be treated as
ordinary income. Unrealized receivables include, to the extent not previously
included in
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DownREIT 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 DownREIT Partnership had sold its assets
at their fair market value at the time of the transfer of a Unit.
Basis of Units. In general, a Unitholder who acquired his Units by
contribution of property and/or money to the DownREIT Partnership had an initial
tax basis in his Units ("Initial Basis") equal to the sum of (i) the amount of
money contributed (or deemed contributed as described below) and (ii) his
adjusted tax basis in any other property contributed in exchange for such Units,
and less the amount of any money distributed (or deemed distributed, as
described below) in connection with the acquisition of the Units. The Initial
Basis of Units acquired by other means would have been determined under the
general rules of the Code, including the partnership provisions, governing the
determination of tax basis. Other rules, including the "disguised sale" rules
discussed below, also may affect Initial Basis, and Unitholders are urged to
consult their own tax advisors regarding their Initial Basis. Generally, a
limited partner's Initial Basis in his Units is increased by (i) such limited
partner's share of DownREIT Partnership taxable and tax-exempt income and (ii)
increases in such limited partner's allocable share of liabilities of the
DownREIT Partnership. Conversely, a limited partner's basis in his Units is
decreased (but not below zero) by (A) such limited partner's share of DownREIT
Partnership distributions, (B) decreases in such limited partner's allocable
share of liabilities of the DownREIT Partnership, (C) such limited partner's
share of losses of the DownREIT Partnership and (D) such limited partner's share
of nondeductible expenditures of the DownREIT Partnership that are not
chargeable to capital account.
Potential Application of the Disguised Sale Regulations to a Redemption of
Units. There is a risk that a redemption by the DownREIT Partnership of Units
issued in exchange for a contribution of property to the DownREIT Partnership
may cause the original transfer of property to the DownREIT Partnership in
exchange for Units to be treated as a "disguised sale" of property. Section 707
of the Code and the Treasury Regulations thereunder (the "Disguised Sale
Regulations") generally provide that, unless one of the prescribed exceptions is
applicable, a partner's contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration (which may
include the assumption of or taking subject to a liability) from the partnership
to the partner will be presumed to be a sale, in whole or in part, of such
property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that, in the absence of an applicable exception,
if money or other consideration is transferred by a partnership to a partner
within two years of the partner's contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. The
Disguised Sale Regulations also provide that if two years have passed between
the transfer of money or other consideration and the contribution of property,
the transactions will be presumed not to be a sale unless the facts and
circumstances clearly establish that the transfers constitute a sale.
Accordingly, if a Unit is redeemed by the DownREIT Partnership from a
Unitholder who holds Units that were issued in exchange for a contribution of
property to the DownREIT Partnership, the Internal Revenue Service (the "IRS")
could contend that the Disguised Sale Regulations apply because the Unitholder
will thus receive cash subsequent to a previous contribution of property to the
DownREIT Partnership. In that event, the IRS could contend that the contribution
was taxable as a disguised sale under the Disguised Sale Regulations. Any gain
recognized thereby may be eligible for installment reporting under Section 453
of the Code, subject to certain limitations. In addition, in such event, the
Disguised Sale Regulations might apply to cause a portion of the proceeds
received by a redeeming Unitholder to be characterized as original issue
discount on a deferred obligation which would be taxable as interest income in
accordance with the provisions of Section 1272 of the Code. Each Unitholder is
advised to consult its own tax advisors to determine whether redemption of its
Units could be subject to the Disguised Sale Regulations.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON STOCK
The nature of an investment in Common Stock of the Company is generally
economically similar to an investment in Units in the DownREIT Partnership.
There are, however, some differences between ownership of Units and ownership of
Common Stock, some of which may be material to investors. The information below
highlights a number of significant differences between the DownREIT Partnership
and the Company relating to, among other things, form of organization, permitted
investments, policies and restrictions, management
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structure, compensation and fees, investor rights and Federal income taxation
and compares certain legal rights associated with the ownership of Units and
Common Stock, respectively. These comparisons are intended to assist Unitholders
in understanding how their investment and related rights will be changed if
their Units are acquired for Common Stock. This discussion is summary in nature
and does not constitute a complete discussion of these matters, and investors
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.
Form of Organization and Assets Owned. The DownREIT Partnership is
organized as a Delaware limited partnership. The Company's operations of the
Ballston Properties are conducted through the DownREIT Partnership.
Avalon Ballston II, Inc., a Maryland corporation and a wholly-owned
subsidiary of the Company (the "General Partner"), holds the sole general
partnership interest in the DownREIT Partnership, which gives the Company an
indirect investment in the Ballston Properties and other assets owned by the
DownREIT Partnership. The General Partner currently has an approximate 99%
economic interest in the DownREIT Partnership, and such interest will increase
as Units are redeemed for cash or acquired by the Company.
The Company is a business corporation incorporated under the laws of the
State of Maryland.
Length of Investment. The DownREIT Partnership has a stated termination
date of December 31, 2096, although it may be terminated earlier under certain
circumstances. The Company has a perpetual term and intends to continue its
operations for an indefinite time period.
Purchase and Permitted Investments. The purpose of the DownREIT Partnership
includes owning, operating, managing, improving, repairing, renting, mortgaging,
refinancing, selling, conveying and otherwise dealing with the Ballston
Properties and any assets that are incidental or related to the ownership of the
Ballston Properties, except that the Partnership Agreement requires the business
of the DownREIT Partnership to be conducted in such a manner that will permit
the Company to be classified as a REIT for Federal income tax purposes.
Under its Articles of Incorporation, the Company may engage in any lawful
activity permitted under the Maryland General Corporation Law.
Additional Equity. The Board of Directors of the Company may authorize the
issuance of shares of capital stock of any class, whether now or hereafter
authorized, or securities or rights, convertible into shares of capital stock,
for such consideration as the Board of Directors may deem advisable, subject to
such restrictions or limitations as may be set forth in the Company's Bylaws.
The DownREIT Partnership is prohibited from admitting additional limited
partners, but the General Partner may contribute additional capital to the
DownREIT Partnership and issue additional partnership interests to the General
Partner from time to time.
Borrowing Policies. Until January 13, 2007, the DownREIT Partnership shall
maintain an amount of partnership debt equal to $11,200,000.00 (or such lesser
amount as the partners may agree in good faith) (the "Minimum Debt"); provided
that the DownREIT Partnership may maintain an amount of debt in excess of the
Minimum Debt, refinance the Minimum Debt and make loans to the affiliates of the
DownREIT Partnership, the General Partner and the Company so long as the Company
complies with certain conditions including a covenant to guaranty the quarterly
priority distributions to the limited partners of the DownREIT Partnership.
The Company is not restricted under its governing instruments from
incurring borrowings. The Company has, however, adopted a policy that currently
limits total borrowings to 50% of the total market capitalization of the
Company. See "Risk Factors--Real Estate Financing Risks--No Limitation on Debt."
The foregoing reflects the Company's general policy over time and is not
intended to operate in a manner that inappropriately restricts the Company's
ability to raise additional capital, including additional debt, to implement its
planned growth, to pursue attractive acquisition opportunities that may arise or
to otherwise act in a manner that the Board of Directors believes to be in the
best interests of the Company and its stockholders. The Board of
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Directors, with the assistance of management of the Company, may reevaluate from
time to time its debt and other capitalization policies in light of then current
economic conditions, including the relative costs of debt and equity capital,
the market value of its Properties, growth and acquisition opportunities, and
the market value of its equity securities in relation to the Company's view of
the market value of its Properties, and may from time to time modify its debt
policy. Such modification may include increasing or decreasing its general ratio
of debt to total market capitalization or substituting another measuring
standard.
Other Restrictions. The DownREIT Partnership shall not, prior to January
13, 2007, sell, convey, exchange or contribute the Ballston Properties in a
transaction that causes gain recognition under Section 752 (or any other
Section) of the Code, provided that the DownREIT Partnership may sell, convey,
exchange or contribute the Ballston Properties in a "like-kind" exchange under
Section 1031 of the Code so long as the Company complies with certain
conditions, including a covenant to guaranty the quarterly priority
distributions to the limited partners of the DownREIT Partnership.
Neither the Company's Articles of Incorporation nor its Bylaws impose any
similar restriction on the sale of its properties or debt restrictions.
Management Control. All management powers over the business and affairs of
the DownREIT Partnership are vested in the General Partner, and no limited
partner of the DownREIT Partnership has any right to participate in or exercise
control or management power over the business and affairs of the DownREIT
Partnership. The General Partner may not be removed as general partner by the
limited partners with or without cause.
The Board of Directors has exclusive control over the Company's business
and affairs subject only to the restrictions in the Articles of Incorporation
and the Bylaws. The Board of Directors is classified into three classes. At each
annual meeting of the stockholders, the successors of the class of directors
whose terms expire at that meeting will be elected. The policies adopted by the
Board of Directors may be altered or eliminated without advice of the
stockholders. Accordingly, except for their vote in the elections of directors,
stockholders have no control over the ordinary business policies of the Company.
Management Liability and Indemnification. The Partnership Agreement
generally provides that the General Partner will incur no liability to the
DownREIT Partnership or any partner for losses sustained or liabilities incurred
as a result of errors in judgment or of any act or omission if the General
Partner acted in good faith. In addition, the General Partner is not responsible
for any misconduct or negligence on the part of its agents provided the General
Partner appointed such agents in good faith. The General Partner 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 which the
General Partner reasonably believes 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 the General Partner, the Directors, trustees and
officers of the General Partner, any guarantors of the Operations Partnership's
indebtedness and such other persons as the General Partner may from time to time
designate, against any and all losses, claims, damages, liabilities, expenses,
judgments, fines, settlements and other amounts arising from any and all claims,
demands, actions, suits or proceedings that relate to the operations of the
DownREIT Partnership in which such person may be involved.
The Company's Articles of Incorporation and Bylaws provide certain
limitations on the liability of the Company's Directors and officers for
monetary damages to the Company. The Articles of Incorporation permit, and the
Bylaws obligate, the Company to indemnify its Directors and officers against
certain liabilities incurred in connection with their service in such
capacities. These provisions could reduce the legal remedies available to the
Company and the stockholders against these individuals.
The Company's Bylaws require it to indemnify its officers, Directors and
certain other parties to the full extent permitted from time to time by Maryland
law, subject to certain exceptions. The MGCL permits a corporation to indemnify
(a) any present or former Director or officer who has been successful, on the
merits or otherwise, in the defense of a proceeding to which he was made a party
by reason of his service in that
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capacity, against reasonable expenses incurred by him in connection with the
proceeding and (b) any present or former Director or officer against any claim
or liability unless it is established that (i) his act or omission was committed
in bad faith or was the result of active or deliberate dishonesty, (ii) he
actually received an improper personal benefit in money, property or services or
(iii) in the case of a criminal proceeding, he had reasonable cause to believe
that his act or omission was unlawful. The Maryland General Corporation Law also
permits the Company to provide indemnification and advance expenses to a present
or former Director or officer who served a predecessor of the Company in such
capacity, and to any employer or agent of the Company or a predecessor of the
Company.
The Company has entered into indemnification agreements with each of its
executive officers and Directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and Directors to the full
extent permitted by law and advance to the officers and Directors all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. Under these agreements, the Company must also
indemnify and advance all expenses incurred by officers and Directors seeking to
enforce their rights under the indemnification agreements and may cover officers
and Directors under the Company's Directors' and officers' liability insurance.
Although the form of indemnification agreement offers substantially the same
scope of coverage afforded by law, it provides additional assurance to Directors
and officers that indemnification will be available because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides. It is the position of the SEC
that indemnification of directors and officers for liabilities under the
Securities Act is against public policy and unenforceable pursuant to Section 14
of the Securities Act.
Anti-takeover Provisions. The General Partner has exclusive management
power over the business and affairs of the DownREIT Partnership. The General
Partner may not be removed as general partner by the limited partners with or
without cause.
The Articles of Incorporation and Bylaws of the Company and Maryland law
contain a number of provisions that may have the effect of delaying or
discouraging an unsolicited proposal for the acquisition of the Company or the
removal of incumbent management.
Voting Rights. Under the Partnership Agreement, the limited partners do not
have voting rights relating to the operation and management of the DownREIT
Partnership except in connection with matters, as described more fully below,
involving certain amendments to the Partnership Agreement.
Stockholders of the Company have the right to vote, among other things, on
a merger or sale of substantially all of the assets of the Company, certain
amendments to the Articles of Incorporation and dissolution of the Company. The
Company is managed and controlled by a Board of Directors consisting of three
classes having staggered terms of office. Each class is to be elected by the
stockholders at annual meetings of the Company. Each share of Common Stock has
one vote, and the Articles of Incorporation permit the Board of Directors to
classify and issue preferred stock in one or more series having voting power
which may differ from that of the Common Stock.
Amendment of the Partnership Agreement or the Company's Articles of
Incorporation. Amendments to the Partnership Agreement may be proposed solely
by the General Partner, and generally require approval of limited partners
holding a majority of the outstanding limited partner interests. Certain
amendments that would, among other things, convert a limited partner's interest
into a general partner's interest, increase the liability of a limited partner,
alter the interest of any limited partner to priority distributions, alter or
modify the redemption right described herein, cause the termination of the
DownREIT Partnership at a time inconsistent with the terms of the Partnership
Agreement or amend the section in the Partnership Agreement relating to
amendments must be approved by the General Partner and each limited partner that
would be adversely affected by any such amendment.
Amendments to the Company's Articles of Incorporation must be approved by
affirmative vote of the holders of not less than two-thirds of all votes
entitled to be cast on the matter.
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Vote Required to Dissolve the DownREIT Partnership or the Company. Under
Delaware law, the DownREIT Partnership may be dissolved, other than in
accordance with the terms of the Partnership Agreement, only upon the unanimous
vote of the limited partners. Under Maryland law, the Board of Directors must
obtain the approval of holders of not less than two-thirds of all outstanding
shares of capital stock of the Company in order to dissolve the Company.
Compensation, Fees and Distributions. The General Partner does not receive
any compensation for its services as general partner of the DownREIT
Partnership. As a partner in the DownREIT Partnership, however, the General
Partner has the right to allocations and distributions as the general partner of
the DownREIT Partnership. In addition, the DownREIT Partnership will reimburse
the General Partner for all expenses incurred relating to the ownership and
operation of, or for the benefit of, the DownREIT Partnership.
The Directors and officers of the Company receive compensation for their
services.
Liability of Investors. Under the Partnership Agreement and applicable
Delaware law, the liability of the limited partners for the DownREIT
Partnership's debts and obligations is generally limited to the amount of their
investment in the DownREIT Partnership.
Under Maryland law, stockholders generally are not personally liable for
the debts or obligations of the Company. See "Description of Capital Stock--
General."
Distributions. The Partnership Agreement generally provides that each
limited partner is entitled to a quarterly priority distribution out of the
DownREIT Partnership's available cash in an amount equal to 7% on the capital
contribution of such limited partner (less any distributions reducing such
capital amount pursuant to the terms of the Partnership Agreement). In
addition, the General Partner may receive a quarterly distribution in an amount
equal to 20% on its capital contribution to the DownREIT Partnership (plus or
minus any changes in such capital contribution amount), provided that there is
sufficient available cash from the Company's operations to pay the limited
partners' priority return first.
Stockholders of the Company receive dividends if, as and when declared by
the Board of Directors in its discretion, taking into consideration the
Company's Funds from Operations, its financial condition, capital requirements,
annual distribution requirements under the REIT provisions of the Code and any
other factors the Board of Directors deems relevant. As a result, stockholders
may receive dividends that are greater or lesser than the distributions to
limited partners in the DownREIT Partnership, and dividends will vary as a
percentage of the value of the underlying shares of Common Stock as the market
value of the Common Stock changes from time to time.
Shares of Common Stock constitute equity interests in the Company. Each
stockholder will be entitled to his pro rata share of any dividends or
distributions paid with respect to Common Stock. The dividends payable to the
stockholders are not fixed in amount and are paid only if, when and as declared
by the Board of Directors. In order to qualify as a REIT, the Company must
distribute at least 95% of its taxable income (excluding capital gains), and any
taxable income (including capital gains) not distributed will be subject to
corporate income tax.
Potential Dilution of Rights. The Board of Directors of the Company may
issue, in its discretion, additional shares of Common Stock and has the
authority to issue from the authorized capital stock a variety of other equity
securities of the Company with such powers, preferences and rights as the Board
of Directors may designate at the time. The issuance of additional shares of
Common Stock or other similar equity securities may result in the dilution of
interests of the stockholders. The limited partners of the DownREIT Partnership
are not subject to similar dilution concerns because the DownREIT Partnership is
prohibited from issuing additional limited partnership interests and because
each limited partner is entitled to a priority distribution on a quarterly
basis.
Liquidity. Subject to certain limited exceptions, the General Partner may
refuse to consent in its sole discretion to the admission of a substituted
limited partner of any transferee of Units. If the Company does in fact refuse
to consent to the admission of a transferee as a substituted limited partner,
the transferee will be
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considered an assignee of an economic interest in the DownREIT Partnership but
will not be a holder of Units for any other purpose and will not be entitled to
vote, redeem the units or vote as a limited partner; provided that if the
transferee provides certain investment documentation requested by the General
Partner, such transferee shall be entitled to receive quarterly priority
distributions and shall have the right to redeem the Units.
The Common Stock is listed on the NYSE. The breadth and strength of this
market will depend, among other things, upon the number of shares outstanding,
the Company's financial results and prospects, the general interest in the
Company's real estate investments and the Company's dividend yield compared to
that of other debt and equity securities.
REGISTRATION RIGHTS
The registration of the Redemption Shares pursuant to this Registration
Statement of which this Prospectus is a part will discharge the Company's
obligations with respect to such Redemption Shares to the Unitholders under the
terms of a Registration Rights Agreement dated as of January 13, 1997 (the
"Registration Rights Agreement") which the Company entered into in connection
with the issuance of the Units. The following summary does not purport to be
complete and is qualified in its entirety by reference to the Registration
Rights Agreement.
Pursuant to the terms of the Registration Right Agreement, within forty-
five days following the first date on which a limited partner receives Common
Stock following a redemption of its Units, the Company shall cause to be filed a
"shelf registration statement" (a "Shelf Registration") covering the Redemption
Shares. The Registration Rights Agreement requires the Company to use its
reasonable efforts to keep such Shelf Registration effective until the earliest
of (a) one year following the date on which all Units have been redeemed or (b)
January 13, 2008. As long as the Registration Statement of which this Prospectus
is a part remains effective, the Redemption Shares held by the Unitholders when
issued by the Company pursuant to this Prospectus will no longer be entitled to
the benefits of the Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, the Company has agreed to
pay all expenses incurred in the registration of the Redemption Shares (other
than brokerage and underwriting commissions and taxes of any kind and other than
for any legal, accounting and other expenses incurred by the Unitholders
thereunder). The Company also has agreed subject to certainm limitations to
indemnify the Unitholders under the Registration Rights Agreements and their
officers, directors, employees, agents, representatives and affiliates and any
persons or entities who control the Unitholders within the meaning of the
Securities Act and each other person or entity subject to liability because of
his, her or its connection with a Unitholder against any and all losses, claims,
damages, actions, liabilities, costs and expenses arising out of or based upon
any untrue statement or alleged untrue statement of material fact contained in
the Registration Statement or this Prospectus, or any omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. In addition, the Unitholders have agreed
to indemnify the Company and its Directors, officers, employees, agents,
representatives and affiliates and any person who controls the Company within
the meaning of the Securities Act, and each other person subject to liability
because of his, her or its connection with the Company, against all losses,
claims, damages, actions, liabilities, costs and expenses arising out of or
based upon any untrue statement or alleged untrue statement of material fact
contained in either the Registration Statement or this Prospectus, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made not misleading, insofar as such
statement or omission arose out of or was based upon information regarding the
Unitholder or its plan of distribution which has furnished to the Company by the
Unitholder expressly for use therein or the failure by the Unitholders to
deliver or cause to be delivered this Prospectus or any amendment or supplement
hereto to any purchaser from the Unitholders of shares covered by the
Registration Statement.
FEDERAL INCOME TAX CONSIDERATIONS
The Company believes it has operated, and the Company intends to continue
to operate, in such a manner as to qualify as a REIT under the Code, but no
assurance can be given that it will at all times so qualify.
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The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a brief and general summary of the material federal
income tax considerations of an investment in the Company's Common Stock.
Goodwin, Procter & Hoar LLP has acted as counsel to the Company and has
reviewed this summary and is of the opinion that to the extent that it
constitutes matters of law, summaries of legal matters, or legal conclusions,
this summary is accurate in all material respects. For the particular provisions
that govern the federal income tax treatment of the Company and its
stockholders, reference is made to Sections 856 through 860 of the Code and the
regulations thereunder. The following summary is qualified in its entirety by
such reference.
The statements in this discussion and the opinion of Goodwin, Procter &
Hoar LLP are based on current provisions of the Code, Treasury Regulations, the
legislative history of the Code, existing administrative rulings and practices
of the Internal Revenue Service (the "Service"), and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH INVESTOR IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE COMPANY'S COMMON
STOCK.
TAXATION OF THE COMPANY
Under the Code, if certain requirements are met in a taxable year, a REIT
generally will not be subject to federal income tax with respect to income that
it distributes to its stockholders. However, the Company may be subject to
federal income tax under certain circumstances including taxes at regular
corporate rates on any undistributed REIT taxable income (including
undistributed capital gains), the "alternative minimum tax" on its items of tax
preference, and taxes imposed on income and gain generated by certain
extraordinary transactions. If the Company fails to qualify during any taxable
year as a REIT, unless certain relief provisions are available, it will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates, which could have a material adverse effect
upon its stockholders.
In addition to meeting a number of technical requirements, including
requirements regarding distributions to shareholders, diversification of
ownership and record keeping, to qualify as a REIT the Company must meet certain
tests regarding the nature of its assets and its gross income. The Company is
largely restricted under these tests to holding "real estate assets" (as defined
in the Code) for investment (and not for resale) and relatively small amounts of
investment securities. Accordingly, the Company's ability to diversify its
holdings outside of investments in real estate is limited. The requirements of
the statutory tests also impose certain requirements on the Company's leases
with its tenants, including restrictions on the Company's ability to provide
noncustomary services to its tenants. Because the Company's proportionate share
of the assets and items of income of the DownREIT Partnership and its subsidiary
partnerships are treated as assets and gross income of the Company, the same
restrictions apply to the operations and investments of the DownREIT Partnership
and the subsidiary partnerships. Further, changes in law, or in the
interpretation of the law, may change the nature and effect of these
restrictions or add additional restrictions to the manner in which the Company
conducts its business.
In the opinion of Goodwin, Procter & Hoar LLP, commencing with the taxable
year ending December 31, 1994, the Company has been organized and operated in
conformity with the requirements for qualification and taxation as a REIT under
the Code, and the Company's proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code. Investors should be aware, however, that opinions of counsel are not
binding upon the Service or any court. Moreover, Goodwin, Procter & Hoar LLP's
opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties, and the future
conduct of the Company's business. The Company's qualification and taxation as a
REIT depends upon the Company's ability to meet on a continuing basis, through
actual annual operating results, the income requirements, the distribution
levels, stock ownership, and other various qualification tests imposed under the
Code. Goodwin, Procter & Hoar LLP has not reviewed and will not
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review the Company's compliance with those tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operation for any particular taxable year have satisfied or will satisfy such
requirements.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of any political subdivision thereof,
(iii) an estate, the income of which is subject to United States federal income
taxation regardless of its source, or (iv) a trust, if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust, and that (v) is not an entity that has
special status under the Code (such as a tax-exempt organization or a dealer in
securities). Subject to the discussion below regarding changes to the capital
gains tax rates, distributions that are designated as capital gain dividends
will be taxed as long-term capital gains (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 his Common Stock. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Stock, but
rather will reduce the adjusted basis of such stock. To the extent that such
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a shareholder's Common Stock, such distributions will be
included in income as long-term capital gain (or, in the case of individuals,
mid-term capital gain if the shares of Common Stock have been held for more than
12 months but not more than 18 months or short-term capital gain if the shares
of Common Stock have been held for one year or less) assuming the shares of
Common Stock are a capital asset in the hands of the shareholder. In addition,
any distribution declared by the Company in October, November, or December of
any year and payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which the shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of shares of Common Stock (or distributions treated
as such) will be treated as investment income only if the shareholder so elects,
in which case such capital gains will be taxed at ordinary income rates. The
Company will notify shareholders after the close of the Company's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and capital gain.
The Company may elect to retain and pay income tax on its net long-term
capital gains received during the taxable year. For taxable years beginning
after December 31, 1997, if the Company so elects for a taxable year, the
Company's shareholders would include in income as long-term capital gains their
proportionate share of such portion of the Company's undistributed long-term
capital gains for the taxable year as the Company may designate. A stockholder
would be deemed to have paid his share of the tax paid by the Company on such
undistributed capital gains, which would be credited or refunded to the
shareholder. The shareholder's basis in his shares of Common Stock would be
increased by the amount of undistributed long-term capital gains (less the
capital gains tax paid by the Company) included in the stockholder's long-term
capital gains.
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The Taxpayer Relief Act of 1997 (the "Act") alters the taxation of capital
gain income. Under the Act, individuals who hold certain investments for more
than 18 months may be taxed at a maximum long-term capital gain rate of 20% on
the sale or exchange of those investments. Individuals who hold certain assets
for more than 12 months but less than 18 months may be taxed at a maximum mid-
term capital gain rate of 28% on the sale or exchange of those investments. The
Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for
individuals, special rules for "qualified 5-year gain," as well as other changes
to prior law. The Act allows the IRS to prescribe regulations on how the Act's
new capital gain rates will apply to sales of capital assets by "pass-thru
entities," which include REITs such as the Company. To date regulations have not
yet been prescribed. However, IRS Notice 97-64 describes temporary regulations
that will be issued in regard to the proper treatment of capital gain dividends
and undistributed capital gains of REITs and gives interim guidance that should
be followed in this area until further notice. To the extent that the Company
has net capital gain for a taxable year, dividends paid during the year (or that
are deemed to be paid for taxable years beginning after December 31, 1997) may
be designated by it as capital gain dividends. In general, a capital gain
dividend is treated by the shareholders as a gain from the sale or exchange of a
capital asset held for more than one year. If the Company designates a dividend
as a capital gain dividend for a taxable year ending on or after May 7, 1997, it
may also designate the dividend as a 20% rate gain distribution, an unrecaptured
section 1250 gain distribution, or a 28% rate gain distribution. Unless
specifically designated otherwise by the Company, a distribution designated as a
capital gain dividend will be taxable as a 28% rate gain distribution. If any
capital gain dividend is received on or after May 7, 1997, but is treated as
being paid during a taxable year that ends on or before that date, the dividend
will be taxable as a 28% rate gain distribution. This interim guidance may be
changed in the future. As a result, prospective investors are urged to consult
their own tax advisors with respect to the proper treatment of capital gain
dividends and undistributed capital gains.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
shares of Common Stock by a shareholder who is not a dealer in securities will
be treated as long-term capital gain or loss if the shares of Common Stock have
been held for more than 12 months, (or, in the case of individuals, mid-term
capital gain or loss if the shares have been held for more than 12 months but
not more than 18 months and long-term capital gain or loss if the shares have
been held for more than 12 months) and otherwise as short-term capital gain or
loss. However, any loss upon a sale or exchange of shares of Common Stock by a
shareholder who has held such stock for six months or less (after applying
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from the Company or undistributed capital gains
required to be treated by such shareholder as long-term capital gain. All or a
portion of any loss realized upon a taxable disposition of shares of Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the Service the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid 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 to any shareholders
who fail to certify their nonforeign status to the Company. The Service issued
proposed regulations in April 1996 regarding the backup withholding rules. These
proposed regulations would alter the current system of backup withholding
compliance.
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,
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they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, amounts
distributed by the Company to an Exempt Organization generally should not
constitute UBTI. However, if any Exempt Organization finances its acquisition of
Common Stock with debt, a portion of its income from the Company 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, in certain
circumstances, a pension trust that owns more than 10% of the Company's stock is
required to treat a percentage of the dividends from the Company as UBTI.
Investors are urged to consult their own tax advisors with respect to the
appropriateness of an investment in the Common Stock offered hereby and with
respect to the tax consequences arising under federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax consequences
resulting from such investor's own tax characteristics. In particular, foreign
investors should consult their own tax advisors concerning the tax consequences
of an investment in the Company, including the possibility of United States
income tax withholding on Company distributions.
PLAN OF DISTRIBUTION
The Company will not receive any proceeds from the issuance of any
Redemption Shares, but will acquire Units tendered to the DownREIT Partnership
for redemption for which it elects to issue Redemption Shares. The shares of
Common Stock offered hereby may be sold from time to time on the NYSE on terms
to be determined at the time of such sales.
The shares of Common Stock offered hereby may be sold from time to time in
one or more transactions at a fixed offering price, which may be changed, or at
varying prices determined at the time of sale or at negotiated prices.
The Company will pay substantially all the expenses incurred by the
Unitholders and the Company incident to the Offering, but excluding any
underwriting discounts, commissions, and transfer taxes.
The Company has agreed to indemnify the Unitholders against certain
liabilities, including certain liabilities under the Securities Act. See
"Registration Rights."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts, a limited liability partnership
including professional corporations, as corporate, securities and tax counsel to
the Company.
EXPERTS
The consolidated financial statements and financial statement schedule of
Avalon Properties, Inc. as of December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994 included in the Company's Annual Report on Form
10-K and the combined statement of revenue and certain operating expenses of
certain communities acquired during 1997 included in the Current Reports on Form
8-K, Filed on October 15 and November 24, 1997, and incorporated by reference
herein, have been incorporated herein in reliance on the reports of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH 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 DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION......................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE................................... 2
RISK FACTORS.................................. 4
FORWARD-LOOKING STATEMENTS.................... 4
THE COMPANY................................... 10
DESCRIPTION OF COMMON STOCK................... 10
RESTRICTIONS ON TRANSFERS OF COMMON STOCK..... 11
DESCRIPTION OF UNITS AND REDEMPTION OF UNITS.. 12
REGISTRATION RIGHTS........................... 19
FEDERAL INCOME TAX CONSIDERATIONS............. 19
PLAN OF DISTRIBUTION.......................... 23
EXPERTS....................................... 23
LEGAL MATTERS................................. 23
</TABLE>
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25,271 SHARES
AVALON PROPERTIES, INC.
COMMON STOCK
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PROSPECTUS
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JANUARY __, 1998
===============================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
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The following table sets forth the estimated fees and expenses payable by
the Company in connection with the issuance and distribution of the Common Stock
registered hereby (all amounts except the registration fee are estimated):
Registration................................... $ 220
Printing and duplicating expenses.............. 5,000
Legal fees and expenses (other than Blue Sky).. 25,000
Accounting fees and expenses................... 5,000
Miscellaneous.................................. 10,000
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TOTAL....................................... $45,220
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
The Company's Articles of Incorporation and Bylaws, each as amended and
restated, provide certain limitations on the liability of the Company's
directors and officers for monetary damages to the Company. The Articles of
Incorporation and the Bylaws obligate the Company to indemnify its directors and
officers, and permit the Company to indemnify its employees and other agents,
against certain liabilities incurred in connection with their service in such
capacities. These provisions could reduce the legal remedies available to the
Company and the stockholders against these individuals.
The Company's Bylaws generally require it to indemnify its officers,
directors and certain other parties to the fullest extent permitted from time to
time by Maryland law, subject to certain limitations. The Maryland General
Corporation Law ("MGCL") permits a corporation to indemnify (a) any present or
former director or officer who has been successful, on the merits or otherwise,
in the defense of a proceeding to which he was made a party by reason of his
service in that capacity, against reasonable expenses incurred by him in
connection with the proceeding and (b) any present or former director or officer
against any claim or liability unless it is established that (i) his act or
omission was committed in bad faith or was the result of active or deliberate
dishonesty, (ii) he actually received an improper personal benefit in money,
property or services or (iii) in the case of a criminal proceeding, he had
reasonable cause to believe that his act or omission was unlawful. The MGCL
also permits the Company to provide indemnification and advance expenses to a
present or former director or officer who served a predecessor of the Company in
such capacity, and to any employee or agent of the Company or a predecessor of
the Company.
The stockholders of the Company have approved, and the Company has entered
into, indemnification agreements with each of the Company's officers and
directors. The indemnification agreements generally require, subject to certain
limitations, that the Company indemnify its officers and directors to the
fullest extent permitted by law and advance to the officers and directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company must also indemnify and advance
all expenses incurred by officers and directors seeking to enforce their rights
under the indemnification agreements and cover officers and directors under the
Company's directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides assurance to directors and officers that
indemnification will be available because such contracts cannot be modified
unilaterally in the future by the Board of Directors or the Stockholders to
eliminate the rights they provide.
II-1
<PAGE>
ITEM 16. EXHIBITS
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4.1 Amended and Restated Articles of Incorporation. (Incorporated by reference
to Exhibit 3.1 of the Current Report on Form 8-K of Avalon Properties,
Inc., filed on October 23, 1996.)
4.2 Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3(ii) of
the Current Report on Form 8-K of Avalon Properties, Inc., filed on
December 4, 1996.)
5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the Common
Stock being registered.
8.1 Opinion of Goodwin, Procter & Hoar LLP as to certain tax matters.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
23.2 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
24.1 Power of Attorney (included on the signature page hereto).
ITEM 17. UNDERTAKINGS
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(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;
(ii) To reflect in the prospectus any facts 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; 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 by the undersigned
registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the 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 registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act 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.
II-2
<PAGE>
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities 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 director, 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 Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Avalon
Properties, Inc. 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 Alexandria, Virginia, on the 12th day of
January, 1998
Avalon Properties, Inc.
By: /s/ Thomas J. Sargeant
--------------------------------
Thomas J. Sargeant, Chief
Financial Officer,
Treasurer and Secretary
Each person whose signature appears below constitutes and appoints Richard
L. Michaux, Charles H. Berman and Thomas J. Sargeant, and each of them, as his
or her true and lawful attorney-in-fact and agent, with full power of
substitution, for him or her and in his or her name, place and stead, in any and
all capacities to sign any or all amendments or post-effective amendments to
this registration statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his or her substitute, may lawfully 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.
Signature Capacity Date
/s/ Richard L. Michaux Chairman of the Board, Chief
- ----------------------------- Executive Officer and Director
Richard L. Michaux (Principal Executive Officer) January 12, 1998
/s/ Charles H. Berman President, Chief Operating
- ----------------------------- Officer and Director January 12, 1998
CHARLES H. BERMAN
/s/ Michael A. Futterman Director January 12, 1998
- -----------------------------
MICHAEL A. FUTTERMAN
/s/ Christopher B. Leinberger Director January 12, 1998
- -----------------------------
CHRISTOPHER B. LEINBERGER
/s/ Richard W. Miller Director January 12, 1998
- -----------------------------
Richard W. Miller
/s/ Allan D. Schuster Director January 12, 1998
- -----------------------------
Allan D. Schuster
/s/ Thomas J. Sargeant Chief Financial Officer, January 12, 1998
- ----------------------------- Treasurer and Secretary
Thomas J. Sargeant (Principal Financial
Officer and Principal
Accounting Officer)
<PAGE>
EXHIBIT INDEX
4.1 Amended and Restated Articles of Incorporation. (Incorporated by reference
to Exhibit 3.1 of the Current Report on Form 8-K of Avalon Properties,
Inc., filed on October 23, 1996.)
4.2 Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3(ii) of
the Current Report on Form 8-K of Avalon Properties, Inc., filed on
December 4, 1996.)
5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the
Securities being registered.
8.1 Opinion of Goodwin, Procter & Hoar LLP as to certain tax matters.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
23.2 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
24.1 Power of Attorney (included on the signature page hereto).
<PAGE>
EXHIBIT 5.1
Goodwin, Procter & Hoar LLP
Counselors at Law
Exchange Place
Boston, Massachusetts 02109-2881
January 12, 1998
Avalon Properties, Inc.
15 River Road
Wilton, CT 06897
Re: Legality of Securities to be Registered Under Registration Statement on
Form S-3
Ladies and Gentlemen:
This opinion is furnished in connection with the registration on Form S-3
(the "Registration Statement") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), of up to 25,271 shares of common stock, $.01 par
value (the "Common Stock") of Avalon Properties, Inc. (the "Company"). The
Common Stock registered pursuant to the Registration Statement (the "Redemption
Shares") may be issued by the Company if, and to the extent, holders of limited
partnership interest ("Units") in Avalon Ballston II, L.P. (the "DownREIT
Partnership") tender such Units to the DownREIT Partnership for redemption and
the Company exercises its contractual right to acquire such tendered Units for
Common Stock.
In connection with rendering this opinion, we have examined the Articles of
Incorporation of the Company and the Articles Supplementary of the Company, each
as amended and restated to the date hereof and on file with the Maryland State
Department of Assessments and Taxation; the Bylaws of the Company, as amended
and restated to the date hereof and filed with the Securities and Exchange
Commission; the Agreement of Limited Partnership of the DownREIT Partnership, as
amended and restated to the date hereof (the "Partnership Agreement"); such
records of the corporate and partnership proceedings of the Company and the
DownREIT Partnership, respectively, as we deemed material; the Registration
Statement and the exhibits thereto; and such other certificates, receipts,
records and documents as we considered necessary for the purposes of this
opinion. In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as certified, photostatic or facsimile copies, the authenticity
of the originals of such copies and the authenticity of telephonic confirmations
of public officials and others. As to facts material to our opinion, we have
relied upon certificates or telephonic confirmations of public officials and
certificates, documents, statements and other information of the Company or
representatives or officers thereof.
We are attorneys admitted to practice in The Commonwealth of Massachusetts.
We express no opinion concerning the laws of any jurisdictions other than the
laws of the United States of America, the laws of The Commonwealth of
Massachusetts, the Maryland General Corporation Law and the Delaware Revised
Uniform Limited Partnership Act, and also express no opinion with respect to the
blue sky or securities laws of any state, including Massachusetts, Maryland and
Delaware.
Based upon the foregoing, we are of the opinion that:
1. When the Registration Statement relating to the Redemption Shares has
become effective under the Securities Act and the Redemption Shares have been
duly issued and exchanged for Units tendered to the DownREIT Partnership for
redemption in accordance with the provisions of the Partnership Agreement as
described in the Registration Statement, such Redemption Shares will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us with respect to this opinion
under the heading "Legal Matters" in the Prospectus which is a part of such
Registration Statement.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
GOODWIN, PROCTER & HOAR LLP
<PAGE>
EXHIBIT 8.1
Goodwin, Procter & Hoar LLP
Counselors at Law
Exchange Place
Boston, Massachusetts 02109-2881
January 12, 1998
Avalon Properties, Inc.
15 River Road
Wilton, CT 06897
Re: Certain Federal Income Tax Matters
Ladies and Gentlemen:
This opinion is delivered to you in our capacity as counsel to Avalon
Properties, Inc. (the "Company") in connection with the Company's registration
statement on Form S-3 (the "Registration Statement") filed by the Company with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, of up to 25,271 shares of common stock, $.01 par value, of the Company.
This opinion relates to the Company's qualification for federal income tax
purposes as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
In rendering the following opinion, we have examined the Registration
Statement, the Articles of Incorporation and Bylaws of the Company, and such
other records, certificates and documents as we have deemed necessary or
appropriate for purposes of rendering the opinion set forth herein. We also have
relied upon the representations of the Company and the DownREIT Partnership
regarding the manner in which the Company has been and will continue to be owned
and operated. We have neither independently investigated nor verified such
representations, and we assume that such representations are true, correct and
complete and that all representations made "to the best of the knowledge and
belief" of any person(s) or party(ies) or with similar qualification are and
will be true, correct and complete as if made without such qualification. We
assume that the Company has been and will be operated in accordance with
applicable laws and the terms and conditions of applicable documents. In
addition, we have relied on certain additional facts and assumptions described
below.
In rendering the opinion set forth herein, we have assumed (i) the
genuineness of all signatures on documents we have examined, (ii) the
authenticity of all documents submitted to us as originals, (iii) the conformity
to the original documents of all documents submitted to us as copies, (iv) the
conformity of final documents to all documents submitted to us as drafts, (v)
the authority and capacity of the individual or individuals who executed any
such documents on behalf of any person, (vi) the accuracy and completeness of
all records made available to us, and (vii) the factual accuracy of all
representations, warranties and other statements made by all parties. We also
have assumed, without investigation, that all documents, certificates,
warranties and covenants on which we have relied in rendering the opinion set
forth below and that were given or dated earlier than the date of this letter
continue to remain accurate, insofar as relevant to the opinion set forth
herein, from such earlier date through and including the date of this letter.
The discussion and conclusions set forth below are based upon the Code, the
Income Tax Regulations and Procedure and Administration Regulations promulgated
thereunder and existing administrative and judicial interpretations thereof, all
of which are subject to change. No assurance can therefore be given that the
federal income tax consequences described below will not be altered in the
future.
Based upon and subject to the foregoing, and provided that the Company
continues to meet the applicable asset composition, source of income,
shareholder diversification, distribution, recordkeeping and other requirements
of the Code necessary for a corporation to qualify as a REIT, we are of the
opinion that:
1. Commencing with the Company's first taxable year ended December 31,
1993, the Company has been organized in conformity with the requirements for
qualification as a "real estate investment trust" under the Code, and the
Company's proposed method of operation, as described in the representations
referred to above, will enable it to continue to meet the requirements for
qualification and taxation as a "real estate investment trust" under the Code.
2. The statements in the Registration Statement set forth under the
captions "Federal Income Tax Considerations" and "Description of Units and
Redemption of Units--Tax Consequences of Redemption," to the extent such
information constitutes matters of law, summaries of legal matters or legal
conclusions, have been reviewed by us and are accurate in all material respects.
<PAGE>
We express no opinion herein other than those expressly set forth herein.
You should recognize that our opinion is not binding on the Internal Revenue
Service (the "IRS") and that the IRS may disagree with the opinion contained
herein. Although we believe that our opinion will be sustained if challenged,
there can be no assurance that this will be the case. The opinion expressed
herein is based upon the law as it currently exists. Consequently, future
changes in the law may cause the federal income tax treatment of the
transactions described herein to be materially and adversely different from that
described above.
We consent to being named as counsel to the Company in the Registration
Statement, to the references in the Registration Statement to our firm and to
the inclusion of a copy of this opinion letter as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
GOODWIN, PROCTER & HOAR LLP
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this post-effective amendment to
the registration statement on Form S-3 of (i) our report dated January 16, 1997
on our audit of the consolidated financial statements and financial statement
schedule of Avalon Properties, Inc. as of December 31, 1996 and 1995, and for
each of the years in the three year period ended December 31, 1996 and (ii) our
reports dated September 22, 1997 and November 20, 1997 on our audits of the
combined statements of revenue and certain operating expenses of the Acquisition
Communities for the year ended December 31, 1996. In addition, we consent to
the reference to our Firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
New York, New York
January 12, 1998
