Filed Pursuant to Rule 424(b)(2)
File No. 333-13385
PROSPECTUS
54,596 Shares
STORAGE USA, INC.
Common Stock
This Prospectus relates to the possible issuance by
Storage USA, Inc. (the "Company") of up to 54,596 shares (the
"Redemption Shares") of common stock, par value $.01 per share
("Common Stock"), of the Company if, and to the extent that,
current holders of 54,596 units of limited partnership interest
("Units") in SUSA Partnership, L.P. (the "Partnership"), of which
the Company is the sole general partner and currently owns an
approximately 94% interest, tender such Units for redemption and
the Company elects to redeem the Units for shares of Common
Stock. The Partnership issued the Units in connection with the
acquisition of self-storage facilities. Under the Second Amended
and Restated Agreement of Limited Partnership of the Partnership
(the "Partnership Agreement"), the Units are redeemable by the
holders thereof for, at the Company's election, cash or, on a
one-for-one basis, shares of Common Stock. See "Redemption of
Units" and "Plan of Distribution."
The Common Stock is traded on the New York Stock
Exchange under the symbol "SUS." To ensure compliance with
certain requirements related to the Company's qualification as a
real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended, the Company's Amended Charter limits
the number of shares of Common Stock that may be owned by
any single person or affiliated group to 9.8% of the outstanding
Common Stock (the "Ownership Limitation") and restricts the
transferability of shares of Common Stock if the purported
transfer would prevent the Company from qualifying as a REIT.
See "Description of Capital Stock."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK
HAS NOT PASSED ON OR ENDORSED THE MERITS
OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
The date of this Prospectus is October 15, 1996.
<PAGE>
AVAILABLE INFORMATION
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, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements
and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New
York, New York 10048, and can also be inspected and copied at the
offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the
prescribed fees or from the Commission's site on the World Wide
Web at http://www.sec.gov.
This Prospectus is part of a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the
"Registration Statement"), filed by the Company with the
Commission under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the
information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules of the
Commission. For further information, reference is made to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the
Commission (Commission File No. 001-12910) under the Exchange Act
are hereby incorporated by reference in this Prospectus: (i) the
Company's Annual Report on Form 10-K for the period ended
December 31, 1995, as amended by Form 10-K/A filed June 28, 1996;
(ii) the Company's Quarterly Reports on Form 10-Q for the quarter
ended March 31, 1996, as amended by Form 10-Q/A filed June 28,
1996, and for the quarter ended June 30, 1996; (iii) the
Company's Current Reports on Form 8-K filed on March 7, April 1,
April 5, the Company's Current Report on Form 8-K filed on June
21, 1996, as amended by the Current Report on Form 8-K/A filed on
July 17, 1996 and the Company's Current Report on Form 8-K filed
on August 2, 1996, as amended by the Current Report on Form 8-K/A
filed on September 16, 1996; and (iv) the description of the
Common Stock contained in the Company's Registration Statement on
Form 8-A filed on March 15, 1994, under the Exchange Act,
including any reports filed under the Exchange Act for the
purpose of updating such description. All documents filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to the termination of the offering of all of
the Common Stock shall be deemed to be incorporated by reference
herein.
Any statement contained herein or 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 contained herein or in any other
subsequently filed document, as the case may be, which also is or
is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide on request and without charge to
each person to whom this Prospectus is delivered a copy (without
exhibits) of any or all documents incorporated by reference into
this Prospectus. Requests for such copies should be directed to
Storage USA, Inc., 10440 Little Patuxent Parkway, Suite 1100,
Columbia, Maryland 21044, Attention: Secretary (telephone
401/730-9500).
<PAGE>
THE COMPANY
Storage USA, Inc. is a self-managed, self-advised real
estate investment trust ("REIT") engaged in the management,
acquisition and development of self-storage facilities. The
Company conducts its business through SUSA Partnership, L.P. in
which it is the sole general partner (the "General Partner") and
owns, directly and through a wholly-owned subsidiary,
approximately a 94% general partnership interest. The Company's
self-storage facilities operate under the Storage USA name and
offer low-cost, easily accessible and enclosed storage space for
personal and business use, primarily on a month-to-month basis.
All of the Company's facilities are fenced, have locked gates,
are lighted at night and have computer-controlled gates that
permit certain tenants to access their storage units 24 hours a
day or are being upgraded to those standards.
The Company is incorporated in Tennessee. Its executive
offices are located at 10440 Little Patuxent Parkway, Suite 1100,
Columbia, Maryland 21044, and its telephone number is (410)
730-9500.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 150,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of
Preferred Stock, $.01 par value. The following information with
respect to the capital stock of the Company is subject to the
detailed provisions of the Company's Amended Charter (the
"Charter") and Amended and Restated Bylaws (the "Bylaws"), as
currently in effect. These statements do not purport to be
complete, or to give full effect to the provisions of statutory
or common law, and are subject to, and are qualified in their
entirety by reference to, the terms of the Charter and Bylaws,
which are incorporated by reference as exhibits to the
Registration Statement.
Common Stock
The holders of Common Stock are entitled to one vote per
share on all matters voted on by shareholders, including
elections of directors. Except as otherwise required by law or
provided in any resolution adopted by the Board of Directors with
respect to any series of Preferred Stock, the holders of such
shares of Common Stock exclusively possess all voting power. The
Charter does not provide for cumulative voting in the election of
directors. Subject to any preferential rights of any outstanding
series of Preferred Stock, the holders of Common Stock are
entitled to such distributions as may be declared from time to
time by the Board of Directors from funds available therefor, and
upon liquidation are entitled to receive pro rata all assets of
the Company available for distribution to such holders. All
shares of Common Stock issued hereunder will be fully paid and
nonassessable, and the holders thereof will not have preemptive
rights.
The Transfer Agent for the Common Stock is First Union
National Bank of North Carolina, Charlotte, North Carolina. The
Common Stock is traded on the NYSE under the symbol "SUS." The
Company will apply to the NYSE to list any additional shares of
Common Stock to be issued from time to time pursuant to this
Prospectus and the Company anticipates that such shares will be
so listed.
Preferred Stock
Under the Charter, the Board of Directors of the Company is
authorized, without further shareholder action, to provide for
the issuance of up to 5,000,000 shares of Preferred Stock, in
such series, with such preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or other provisions, as may be fixed by the Board
of Directors.
<PAGE>
RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
For the Company to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), shares of capital
stock must be held by a minimum of 100 persons for at least 335
days in each taxable year following its 1994 taxable year or
during a proportionate part of a shorter taxable year. In
addition, at all times during the second half of each taxable
year following its 1994 taxable year, no more than 50% in value
of the shares of beneficial interest of the Company may be owned,
directly or indirectly and by applying certain constructive
ownership rules, by five or fewer individuals (the "5/50 Rule").
Because the Board of Directors believes it is essential for the
Company to continue to qualify as a REIT, the Charter restricts
the acquisition of shares of Common Stock (the "Ownership
Limitation").
The Ownership Limitation provides that, subject to certain
exceptions specified in the Charter, no shareholder may own, or
be deemed to own by virtue of the attribution provisions of the
Code, more than 9.8% of the outstanding shares of Common Stock.
Pursuant to a Strategic Alliance Agreement, dated as of March
19, 1996, among the Company, Security Capital U.S. Realty and
Security Capital Holdings S.A. (together with Security Capital
U.S. Realty, "Security Capital"), the Board of Directors of the
Company proposed, and the shareholders approved, an amendment to
the Charter that provides that Security Capital and its
affiliates may beneficially own, in the aggregate, up to 37.5%
of the common stock of the Company (the "Special Shareholder
Limit"). The Ownership Limitation prevents any non-U.S. holder
(other than Security Capital and its affiliates) from acquiring
additional shares of the Company's capital stock if, as a result
of such acquisition, the Company would fail to qualify as a
domestically-controlled REIT (computed assuming that Security
Capital owns the maximum percentage of the Company's capital
stock that it is permitted to own under the Special Shareholder
Limit).
The Ownership Limitation also provides that if any holder of
capital stock of the Company purports to transfer shares to a
person or there is a change in the capital structure of the
Company, and either the purported transfer or the change in
capital structure would result in the Company failing to qualify
as a REIT, or such transfer or the change in capital structure
would cause the transferee to hold shares in excess of the
applicable ownership limit, then the capital stock being
transferred (or in the case of an event other than a transfer,
the capital stock beneficially owned) that would cause one or
more of the restrictions on ownership or transfer to be violated
shall be automatically transferred to a trust for the benefit of
a designated charitable beneficiary. The purported transferee of
such shares shall have no right to receive dividends or other
distributions with respect to such shares and shall have no right
to vote such shares. Any dividends or other distributions paid
to such purported transferee prior to the discovery by the
Company that the shares have been transferred to a trust shall be
paid upon demand to the trustee of the trust for the benefit of
the charitable beneficiary. The trustee of the trust will have
all rights to dividends with respect to shares of capital stock
held in trust, which rights will be exercised for the exclusive
benefit of the charitable beneficiary. Any dividends or
distributions paid over to the trustee will be held in trust for
the charitable beneficiary. The trustee shall designate a
transferee of such stock so long as the ownership of such shares
of stock by the transferee would not violate the restrictions on
ownership or transfer. Upon the sale of such shares, the
purported transferee shall receive the lesser of (A)(i) the price
per share such purported transferee paid for the capital stock in
the purported transfer that resulted in the transfer of shares of
capital stock to the trust, or (ii) if the transfer or other
event that resulted in the transfer of shares of capital stock to
the trust was not a transaction in which the purported record
transferee gave full value for such shares, a price per share
equal to the market price on the date of the purported transfer
or other event that resulted in the transfer of the shares to the
trust, and (B) the price per share received by the trustee from
the sale or other disposition of the shares held in the trust.
The Board of Directors may grant an exemption for the
Ownership Limitation to any person so requesting, so long as (A)
the Board has determined that such exemption will not result in
the Company being "closely held" within the meaning of Section
856(h) of the Code, and (B) such person provides to the Board
such representations and undertakings as the Board may require.
<PAGE>
REDEMPTION OF UNITS
Redemption Rights for Limited Partnership Units
Pursuant to the Partnership Agreement, the limited partners
of the Partnership (the "Limited Partners") generally have the
right to cause the redemption (the "Redemption Rights") of their
interests in the Partnership. Each Limited Partner may, subject
to certain limitations, require that the Partnership redeem all
or a portion of his Units at any time after one year from the
date the Units were acquired by delivering a notice of exercise
of redemption right to the Company. The form of notice is an
exhibit to the Partnership Agreement. Upon redemption, each
Limited Partner will receive, at the option of the Company,
either (i) a number of shares of Common Stock equal to the number
of Units redeemed (subject to certain anti-dilution adjustments)
or (ii) cash in an amount equal to the market value of the number
of shares of Common Stock he would have received pursuant
to clause (i) above. The market value of the Common Stock for
this purpose will be equal to the average of the closing trading
prices of the Company's Common Stock (or substitute information,
if no such closing prices are available) for the ten consecutive
trading days before the day on which the redemption notice was
received by the Partnership. The redemption price will be paid
in cash in the event that the issuance of Common Stock to the
redeeming Limited Partner would (i) result in such partner or any
other person owning, directly or indirectly, Common Stock in
excess of the Ownership Limitation, (ii) result in Common Stock
being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h)
of the Code, (iv) cause the Company to own, actually or
constructively, 10% or more of the ownership interests in a
tenant of the Company's or the Partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Code, or (v)
cause the acquisition of Common Stock by such partner to be
"integrated" with any other distribution of Common Stock for
purposes of complying with the registration provisions of the
Securities Act of 1933, as amended. A Limited Partner must
request the redemption of at least 500 Units (or all of the Units
held by such holder, if less than 500 are so held).
In lieu of the Partnership redeeming Units, the Company, in
its sole discretion, has the right to assume directly and satisfy
the redemption right of a Limited Partner described in the
preceding paragraph. The Company anticipates that it generally
will elect to assume directly and satisfy any redemption right
exercised by a Limited Partner through the issuance of shares
of Common Stock by the Company (the Redemption Shares) pursuant
to this Prospectus, whereupon the Company will acquire the Units
being redeemed. Such an acquisition will be treated as a sale of
the Units to the Company for federal income tax purposes. See
"-- Tax Consequences of Redemption." Upon redemption, a Limited
Partner's right to receive distributions with respect to the
Units redeemed will cease.
Tax Consequences of Redemption
The following discussion summarizes certain federal income
tax considerations that may be relevant to a Limited Partner who
exercises his right to require the redemption of his Units.
Tax Treatment of Redemption of Units. If the Company
assumes and performs the redemption obligation, the Partnership
Agreement provides that the redemption will be treated by the
Company, the Partnership, and the redeeming Limited Partner as a
sale of Units by such Limited Partner to the Company at the time
of such redemption. In that event, such sale will be fully
taxable to the redeeming Limited Partner and such redeeming
Limited Partner will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the Common
Stock received in connection with the redemption plus the amount
of any Partnership liabilities allocable to the redeemed Units at
the time of the redemption. If the Company does not elect to
assume the obligation to redeem a Limited Partner's Units and the
Partnership redeems such Units for cash or shares of Common Stock
that the Company contributes to the Partnership to effect such
redemption, the redemption likely would be treated for tax
purposes as a sale of such Units in a fully taxable transaction,
although the matter is not free from doubt. In that event, the
redeeming Partner would be treated as realizing an amount equal
to the sum
<PAGE>
of the cash or the value of the shares of Common Stock
received in connection with the redemption plus the amount
of any Partnership liabilities allocable to the redeemed Units at
the time of the redemption. The determination of the amount of
gain or loss in the event of sale treatment is discussed more
fully below.
If the Partnership chooses to redeem a Limited Partner'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
Partnership redeems less than all of the Units held by a Limited
Partner, the Limited Partner 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
Partnership liabilities allocable to the redeemed Units, exceeded
the Limited Partner's adjusted basis in all of such Limited
Partner's Units immediately before the redemption.
Tax Treatment of Disposition of Units by Limited Partner
Generally. If a Unit is redeemed in a manner that is treated as
a sale of the Unit, or a Limited Partner otherwise disposes of a
Unit (other than in a transaction that is treated as a redemption
for tax purposes), the determination of gain or loss from such
sale or other disposition will be based on the difference between
the amount considered realized for tax purposes and the 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 (e.g., Redemption Shares)
received plus the amount of any Partnership liabilities allocable
to the Unit sold. To the extent that the amount of cash or the
fair market value of property received plus the allocable share
of any Partnership liabilities exceeds the Limited Partner's
basis in the Unit 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 the value of any other
property (e.g., 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 that is attributable to a Limited Partner's share of
"unrealized receivables" of the Partnership (as defined in
Section 751 of the Code) exceeds the basis attributable to those
assets, such excess will be treated as ordinary income.
Unrealized receivables include, to the extent not
previously included in 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 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 Limited Partner who was
deemed at the time of the transactions resulting in
the issuance of the Units to have received his Units upon
liquidation of a partnership will have an initial tax basis
in his Units ("Initial Basis") equal to his basis in his
partnership interest at the time of such liquidation. Similarly,
in general, a Limited Partner who at the time of the transactions
resulting in the issuance of the Units contributed
a partnership interest to the Partnership in exchange for Units
will have an Initial Basis in the Units equal to his
basis in the contributed partnership interest. A Limited
Partner's Initial Basis in his Units generally is increased
by (i) such Limited Partner's share of Partnership taxable income
and (ii) increases in his share of liabilities of the
Partnership (including any increase in his share of liabilities
occurring in connection with the transactions resulting
in the issuance of the Units). Generally, such Limited Partner's
basis in his Units is decreased (but not below zero)
by (A) his share of Partnership distributions, (B) decreases in
his share of liabilities of the Partnership (including
any decrease in his share of liabilities of the Partnership
occurring in connection with the transactions resulting in
the issuance of the Units), (C) his share of losses of
the Partnership and (D) his share of nondeductible expenditures
of the Partnership that are not chargeable to capital.
Potential Application of Disguised Sale Regulations to a
Redemption of Units. There is a risk that a redemption of Units
may cause the original transfer of property to the Partnership in
exchange for Units to be treated as a "disguised sale" of
property. 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 (including
<PAGE>
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 to the partnership, the transactions
will be, when viewed together, 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 from
a partnership to a partner 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 Partnership, the
Service could contend that the Disguised Sale Regulations apply
because the redeeming Limited Partner will receive cash or
shares of Common Stock subsequent to his previous contribution
of property to the Partnership. If the Service were to make
successfully such an assertion, the transactions in connection
with the issuance of the Units themselves could be 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.
Comparison of Ownership of Units and Shares of Common Stock
Generally, the nature of an investment in shares of Common
Stock of the Company is substantially equivalent economically to
an investment in Units in the Partnership. Since the
Partnership makes distributions to its partners on a per Unit
basis and the Company owns one Unit for each outstanding share
of Common Stock, a holder of a share of Common Stock generally
receives the same distribution that a holder of a Unit receives,
and shareholders and Unit holders generally share in the risks
and rewards of ownership in the enterprise being conducted by
the Company (through the Partnership). However, there are some
differences between ownership of Units and ownership of shares
of Common Stock, some of which may be material to investors.
The information below highlights a number of the significant
differences between the Partnership and the Company and compares
certain legal rights associated with the ownership of Units and
Common Stock, respectively. These comparisons are intended to
assist Limited Partners of the Partnership in understanding how
their investment will be changed if their Units are redeemed for
Common Stock. This discussion is summary in nature and does not
constitute a complete discussion of these matters. Holders of
Units 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 Partnership is
organized as a Tennessee limited partnership. The Company is a
Tennessee corporation. The Company elected to be taxed as a REIT
under the Code effective for its taxable year ended December 31,
1994 and intends to maintain its qualification as a REIT.
Length of Investment. The Partnership has a stated
termination date of December 31, 2054, 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.
Additional Equity. The Partnership is authorized to issue
Units and other partnership interests to the partners or to other
persons for such consideration and on such terms and conditions
as the General Partner, in its sole discretion, may deem
appropriate. In addition, the General Partner may cause the
Partnership to issue additional Units, or other partnership
interests in one or more different series or classes which may be
senior to the Units, to the General Partner, in conjunction with
the offering of securities of the Company having substantially
similar rights, in which the proceeds thereof are contributed to
the Partnership. Consideration for additional partnership
interests may be cash or other property or other assets permitted
by Tennessee law.
<PAGE>
Under the Charter, the total number of shares of all classes
of stock that the Company has the authority to issue is
150,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock. No shares of Preferred Stock are outstanding as
of the date of this Prospectus. As long as the Partnership is in
existence, the proceeds of all equity capital raised by the
Company will be contributed to the Partnership in exchange for
Units or other interests in the Partnership.
Management and Control. All management and control over the
business of the Partnership are vested in the General Partner of
the Partnership, and no Limited Partner of the Partnership has
any right to participate in or exercise management or control
over the business of the Partnership. Upon the occurrence of an
event of bankruptcy or the dissolution of the General Partner,
such General Partner shall be deemed to be removed automatically;
otherwise, the General Partner may not be removed by the Limited
Partners with or without cause.
The Board of Directors has exclusive control over the
Company's business and affairs subject to the restrictions in the
Charter and Bylaws. The Board of Directors has adopted certain
policies with respect to acquisition, development, investing,
financing and conflict of interest, but these policies may be
altered or eliminated without a vote of the shareholders.
Accordingly, except for their vote in the elections of directors,
shareholders have no control over the ordinary business policies
of the Company.
Fiduciary Duties. Under Tennessee law, the General Partner
of the Partnership is accountable to the Partnership as a
fiduciary and, consequently, is required to exercise good faith
in all of its dealings with respect to partnership affairs.
However, under the Partnership Agreement, the General Partner is
under no obligation to take into account the tax consequences to
any Limited Partner of any action taken by it, and the General
Partner will have no liability to a Limited Partner as a result
of any liabilities or damages incurred or suffered by or benefits
not derived by a Limited Partner as a result of an action or
inaction of the General Partner so long as the General Partner
acted in good faith.
Under Tennessee law, the Company's directors must perform
their duties in good faith, in a manner that they believe to be
in the best interests of the Company and with the care an
ordinarily prudent person in a like situation would exercise
under similar circumstances. Directors of the Company who act in
such a manner generally will not be liable to the Company for
monetary damages arising from their activities.
Management Limitation of Liability and Indemnification. The
Partnership Agreement generally provides that the General Partner
will incur no liability for monetary damages to the Partnership
or any Limited Partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or
omission if 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, consultants,
real estate brokers and such other persons 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 and officers of the General Partner, and
such other persons as the General Partner may from time to time
designate, against any and all losses, claims, damages,
liabilities (joint or several), expenses (including reasonable
legal fees and expenses), judgments, fines, settlements, and
other amounts arising from any and all claims, demands, actions,
suits or proceedings, whether civil, criminal, administrative or
investigative, that relate to the operations of the Partnership
in which such person may be involved, or is threatened to be
involved, provided that the Partnership shall not indemnify any
such person (i) for an act or omission of such person that was
material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) if such person actually received an
improper benefit in money, property or services or (iii) in the
case of any criminal proceeding, if such person had reasonable
cause to believe that the act or omission was unlawful. Any
indemnification will be made only out of assets of the
Partnership.
<PAGE>
The Company's Charter obligates it to indemnify and advance
expenses to present and former directors and officers to the
maximum extent permitted by Tennessee law. The Tennessee
Business Corporation Act ("TBCA") permits a corporation to
indemnify its present and former directors and officers, among
others, against judgments, settlements, penalties, fines or
reasonable expenses incurred with respect to a proceeding to
which they may be made a party by reason of their service in
those or other capacities if (i) such persons conducted
themselves in good faith, (ii) they reasonably believed, in the
case of conduct in their official capacities with the
corporation, that their conduct was in its best interests and, in
all other cases, that their conduct was at least not opposed to
its best interests, and (iii) in the case of any criminal
proceeding, they had no reasonable cause to believe that their
conduct was unlawful. Any indemnification by the Company
pursuant to the provisions of the Charter described above will
be paid out of the assets of the Company and will not be
recoverable from the shareholders.
The TCBA permits the charter of a Tennessee corporation to
include a provision eliminating or limiting the personal
liability of its directors to the corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director,
except that such provision cannot eliminate or limit the
liability of a director (i) for any breach of the director's duty
of loyalty to the corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, or (iii) for
unlawful distributions that exceed what could have been
distributed without violating the TBCA or the corporation's
charter. The Company's Charter contains a provision eliminating
the personal liability of its directors or officers to the
Company or its shareholders for money damages to the maximum
extent permitted by Tennessee law from time to time.
Anti-Takeover Provisions. Except in limited circumstances,
the General Partner of the Partnership has exclusive management
power over the business and affairs of the Partnership. The
General Partner may not be removed by the Limited Partners with
or without cause. Under the Partnership Agreement, the General
Partner may, in its sole discretion, prevent a Limited Partner
from transferring his interest or any rights as a Limited
Partner except in certain limited circumstances. The General
Partner may exercise this right of approval to deter,
delay or hamper attempts by persons to acquire a controlling
interest in the Partnership.
In addition to the Ownership Limitation described above
under "Restrictions on Transfer of Capital Stock," the Company's
Charter contains certain other provisions that may have an
anti-takeover effect. The Charter divides the Board of Directors
into three classes, each constituting approximately one-third of
the total number of directors and with the classes serving
three-year staggered terms. The classification of directors has
the effect of making it more difficult for shareholders to change
the composition of the Board of Directors and may discourage a
third party from accumulating large blocks of the Company's stock
or attempting to gain control of the Company. Accordingly,
shareholders could be deprived of certain opportunities to sell
their shares at a higher market price than otherwise might be the
case.
In addition, Tennessee has adopted a series of statutes
which may have an anti-takeover effect and may delay or prevent a
tender offer or takeover attempt that a shareholder might
consider in its best interest. Under the Tennessee Investor
Protection Act, unless a Tennessee corporation's board of
directors has recommended a takeover offer to shareholders which
was made on substantially equal terms to all shareholders, no
offeror beneficially owning 5% or more of any class of equity
securities of the offeree company, any of which was purchased
within one year prior to the proposed takeover offer, may offer
to acquire any class of equity security of an offeree
company pursuant to a tender offer if after the acquisition
thereof the offeror would be directly or indirectly a
beneficial owner of more than 10% of any class of outstanding
equity securities of the company (a "Takeover Offer"). However,
this prohibition does not apply if the offeror, before making
such purchase, has made a public announcement of his intention
with respect to changing or influencing the management or control
of the offeree company, has made a full, fair and effective
disclosure of such intention to the person from whom he intends
to acquire such securities and has filed with the Tennessee
Commissioner of Commerce and Insurance (the "Commissioner") and
the offeree company a statement signifying such intentions and
containing such additional information as the Commissioner by
rule prescribes. Such an offeror must provide that any equity
securities of an offeree company deposited or tendered pursuant
to a Takeover Offer may be withdrawn by an offeree at any time
<PAGE>
within seven days from the date the offer has become effective
following filing with the Commissioner and the offeree company
and public announcement of the terms or after 60 days from the
date the offer has become effective. If an offeror makes a
Takeover Offer for less than all the outstanding equity
securities of any class, and if the number of securities tendered
is greater than the number the offeror has offered to accept and
pay for, the securities shall be accepted pro rata. If an
offeror varies the terms of a Takeover Offer before its
expiration date by increasing the consideration offered to
offerees, the offeror shall pay the increased consideration for
all equity securities accepted, whether accepted before or after
the variation in the terms of the offer.
Under the Tennessee Business Combination Act, subject to
certain exceptions, no Tennessee corporation may engage in any
"business combination" with an "interested shareholder" for a
period of five years following the date that such shareholder
became an interested shareholder unless prior to such date the
board of directors of the corporation approved either the
business combination or the transaction which resulted in the
shareholder becoming an interested shareholder.
"Business combination" is defined by the statute as any (i)
merger or consolidation; (ii) share exchange; (iii) sale, lease,
exchange, mortgage, pledge or other transfer of assets
representing 10% or more of (A) the aggregate market value of the
corporation's consolidated assets, (B) the aggregate market value
of the corporation's shares, or (C) the corporation's
consolidated net income; (iv) issuance or transfer of shares from
the corporation to the interested shareholder; (v) plan of
liquidation or dissolution proposed by the interested
shareholder; (vi) transaction or recapitalization which increases
the proportionate share of any outstanding voting securities
owned or controlled by the interested shareholder; or (vii)
financing arrangement whereby any interested shareholder
receives, directly or indirectly, a benefit, except
proportionately as a shareholder.
"Interested shareholder" is defined as (i) any person that
is the beneficial owner, directly or indirectly of 10% or more of
the voting power of any class or series of outstanding voting
stock of the corporation or (ii) an affiliate or associate of the
corporation who at any time within the five-year period
immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the voting power
of any class or series of the outstanding voting stock of the
corporation. Consummation of a business combination that is
subject to the five-year moratorium is permitted after such
period when the transaction complies with all applicable charter
and bylaw requirements and either (i) is approved by the holders
of two-thirds of the voting stock not beneficially voting owned
by the interested shareholder, or (ii) meets certain fair price
criteria.
The Tennessee Greenmail Act prohibits a Tennessee
corporation from purchasing, directly or indirectly,
any of its shares at a price above the market value of such
shares (defined as the average of the highest and lowest
closing market price for such shares during the 30 trading days
preceding the purchase and sale of the shares or preceding the
commencement of announcement or a tender offer if the seller of
such shares has commenced a tender offer or announced an
intention to seek control of the corporation) from any person who
holds more than 3% of the class of securities to be purchased if
such person has held such shares for less than two years, unless
the purchase has been approved by the affirmative vote of a
majority of the outstanding shares of each class of voting
stock issued by the corporation or the corporation makes an
offer, of at least equal value per share, to all holders
of shares of such class.
The Tennessee Control Share Acquisition Act provides that
"control shares" of a Tennessee corporation acquired in a
"control share acquisition" have the same voting rights as all
other shares of the same class or series only if approved at an
annual or special meeting by the holders of a majority of all
shares entitled to vote generally with respect to the election of
directors, but excluding shares of stock owned by an acquiring
person, officers, and employees of the corporation who are also
directors. "Control shares" are voting shares of stock which, if
aggregated with all of the other shares of stock previously
acquired by the person, would entitle the acquiror to
exercise or direct the exercise of voting power in electing
directors within one of the following ranges of voting
power: (i) one-fifth (1/5) or more but less than one-third (1/3)
of all voting power; (ii) one-third (1/3) or more but
less than a majority of all voting power; or (iii) a majority or
more of all voting power. Control shares do not include shares
that the acquiring person is then entitled to vote as a result of
having previously obtained shareholder
<PAGE>
approval. A "control share acquisition" means the acquisition,
directly or indirectly, by any person of ownership of, or the
power to direct the exercise of voting power with respect to,
issued and outstanding control shares.
A person who has made or proposes to make a control share
acquisition, upon the satisfaction of certain conditions
(including an undertaking to pay expenses and deliver a control
share acquisition statement to the corporation), may compel the
board of directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights to
be accorded the control shares acquired or to be acquired in the
control share acquisition. If no request for a special meeting
of shareholders is made, consideration of the voting rights to be
accorded the control shares acquired or to be acquired in the
control share acquisition shall be presented at the next annual
or special meeting of shareholders.
If voting rights are not approved at the shareholders'
meeting or if the acquiring person does not deliver a control
share acquisition statement as permitted by the act, then,
subject to certain conditions and limitations, the corporation
may redeem all but not less than all of the control shares
acquired in a control share acquisition, at anytime during the
period ending 60 days after the last acquisition of control
shares by an acquiring person, from the acquiring person for the
fair value of such shares. If a control share acquisition
statement is filed, fair value is determined as of the effective
date of the vote of the shareholders denying voting rights to the
acquiring person or,if no such statement is filed, as of the date
of the last acquisition of control shares by the acquiring person
without regard to the effect of the denial of voting rights. If
voting rights for control shares are approved at a shareholders
meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all shareholders who have not voted
in favor of granting such voting rights to the acquiring person
may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights includes
consideration of the valuations, future events or transactions
bearing upon the corporation's value to the acquiring shareholder
as described in any valuations, projections or estimates made by
or on behalf of the acquiring person or his associates.
The Tennessee Control Share Acquisition Act does not apply
to shares acquired in a merger, consolidation or share exchange
if the corporation is a party to the transaction.
The Company's Bylaws contain a provision exempting from the
Tennessee Control Share Acquisition Act any and all such
acquisitions by any person of the Company's shares of capital
stock. There can be no assurance that such provision will not be
amended or eliminated at any point in the future.
Voting Rights. Under the Partnership Agreement, the Limited
Partners have voting rights only as to the continuation of the
Partnership in certain circumstances and certain amendments of
the Partnership Agreement, as described more fully below.
Otherwise, all decisions relating to the operation and management
of the Partnership are made by the General Partner. As of June
30, 1996, the Company held approximately 94% of the outstanding
interests in the Partnership. As Units held by Limited Partners
are redeemed, the Company's percentage ownership of the
Partnership will increase. If additional Units are issued to
third parties, the Company's percentage ownership of the
Partnership will decrease.
Shareholders of the Company have the right to vote on, among
other things, a merger or sale of substantially all of the assets
of the Company, certain amendments to the Charter and dissolution
of the Company. All shares of Common Stock have one vote, and the
Charter permits 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. See"Description of
Capital Stock."
Amendment of the Partnership Agreement or the Charter. The
Partnership Agreement may be amended by the General Partner
without the consent of the Limited Partners in any respect,
except that certain amendments affecting the fundamental rights
of a Limited Partner must be approved by consent of Limited
Partners holding more than 51% of the Units. Such consent is
required for any amendment that would (i) affect the Redemption
Rights, (ii) adversely affect the rights of Limited Partners to
receive distributions payable to them under the Partnership
<PAGE>
Agreement, (iii) alter the Partnership's profit and loss
allocations, or (iv) impose any obligation upon the Limited
Partners to make additional capital contributions to the
Partnership.
The Charter may be amended by the affirmative vote of the
holders of a majority of the outstanding shares of the Common
Stock, with the shareholders voting as a class with one vote per
share (or the written consent of such majority if such a vote
becomes permissible under Tennessee law); provided, that the
Charter provision providing for the classification of the Board
of Directors may not be amended, altered, changed or repealed
without the affirmative vote of at least 80% of the members of
the Board of Directors or the affirmative vote of holders of 75%
of the outstanding shares of capital stock entitled to vote
generally in the election of directors voting as a class. The
Company's Bylaws may be amended by the Board of Directors or by
vote of the holders of a majority of the outstanding shares,
provided that certain provisions, including the provisions with
respect to the staggered terms of the Board of Directors, cannot
be amended without the affirmative vote of 80% of the members of
the entire Board of Directors or the holders of 75% of the
outstanding shares of capital stock entitled to vote generally in
the election of the directors.
Vote Required to Dissolve the Partnership or the Company. At
any time prior to December 31, 2054 (upon which date the
Partnership shall terminate), the General Partner may elect to
dissolve the Partnership in its sole discretion. Such
dissolution shall also occur upon (i) the bankruptcy, dissolution
or withdrawal of the General Partner (unless the Limited Partners
unanimously elect to continue the Partnership), (ii) the passage
of 90 days after the sale or other disposition of all or
substantially all the assets of the Partnership or (iii) the
redemption of all of the outstanding Units (other than those held
by the General Partner, if any).
Under Tennessee law, the Board of Directors generally must
recommend and the holders of a majority of the outstanding Common
Stock entitled to vote must approve any proposal in order to
dissolve the Company.
Vote Required to Sell Assets or Merge. Under the
Partnership Agreement, the sale, exchange, transfer or other
disposition of all or substantially all of the Partnership's
assets or merger or consolidation of the Partnership requires
only the consent of the General Partner. Under Tennessee law,
any merger or share exchange of the Company requires the separate
approval of the Board of Directors and each group of shareholders
entitled to vote on such matter by a majority of all votes
entitled to be cast by such group. Under Tennessee law, the sale
of all or substantially all of the assets of the Company
otherwise than in the normal course of business requires the
approval of the Board of Directors and holders of a majority of
the outstanding shares of Common Stock. No approval of the
shareholders is required for the sale of the Company's assets in
the usual and regular course of business.
Compensation, Fees and Distributions. The Company does not
receive any compensation for its services as General Partner of
the Partnership. As a partner in the Partnership, however, the
General Partner has the same right to allocations and
distributions as other partners of the Partnership. In addition,
the Partnership will reimburse the General Partner for all
expenses incurred relating to the ongoing operation of the
Partnership and any offering of partnership interests in the
Partnership or capital stock of the Company.
Liability of Investors. Under the Partnership Agreement and
applicable state law, the liability of the Limited Partners for
the Partnership's debts and obligations is generally limited to
the amount of their investment in the Partnership and Limited
Partners are generally not liable for any debts, liabilities,
contracts or obligations of the Partnership.
Under Tennessee law, the Company's shareholders are not
personally liable for the debts or obligations of the Company.
<PAGE>
Nature of Investments. The Units constitute equity
interests entitling each Limited Partner to his pro rata
share of cash distributions made to the Limited Partners of the
Partnership. The Partnership generally intends to
retain and reinvest in its business proceeds of the sale of
property or excess refinancing proceeds.
The shares of Common Stock constitute equity interests in
the Company. The Company is entitled to receive its pro rata
share of distributions made by the Partnership with respect to
the Units, and each shareholder will be entitled to his pro rata
share of any dividends or distributions paid with respect to the
Common Stock. The dividends payable to the shareholders are not
fixed in amount and are only paid 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 annual taxable
income (excluding capital gains), and any taxable income
(including capital gains) not distributed will be subject
to corporate income tax.
Potential Dilution of Rights. The General Partner of the
Partnership is authorized, in its sole discretion and without the
consent of the Limited Partners, to cause the Partnership to
issue additional limited partnership interests and other equity
securities for any partnership purpose at any time to the Limited
Partners or to other persons on terms and conditions established
by the General Partner.
The Board of Directors of the Company may issue, in its
discretion, additional shares of Common Stock and a variety of
other equity securities of the Company with such powers,
preferences and rights as the Board of Directors may designate.
The issuance of additional shares of either Common Stock or other
similar or senior equity securities may result in the dilution of
the interests of the shareholders.
Liquidity. Subject to certain exceptions, a Limited Partner
may not transfer all or any portion of his Units without (i)
obtaining the prior written consent of the General Partner, which
consent may be withheld in the sole and absolute discretion of
the General Partner, and (ii) meeting certain other requirements
set forth in the Partnership Agreement. Notwithstanding the
foregoing, subject to certain restrictions, a Limited Partner may
transfer Units to (i) a member of a Limited Partner's Immediate
Family or a trust for the benefit of a member of a Limited
Partner's Immediate Family in a donative transfer or (ii) if such
Limited Partner is a corporation or other business entity, any of
its Affiliates or subsidiaries or to any successor in interest of
such Limited Partner. Limited Partners should expect to hold
their Units until they redeem them for cash or shares of Common
Stock, or until the Partnership terminates. The right of a
transferee to become a substituted Limited Partner also is
subject to the consent of the General Partner, which consent may
be withheld in its sole and absolute discretion. If the General
Partner does not consent to the admission of a transferee, the
transferee will succeed to all economic rights and
benefits attributable to such Units (including the right of
redemption) but will not become a Limited Partner or
possess any other rights of Limited Partners (including the right
to vote on or consent to actions of the Partnership).
The General Partner may require, as a condition of any transfer,
that the transferring Limited Partner assume all
costs incurred by the Partnership in connection with such
transfer.
Federal Income Taxation. The Partnership is not subject to
federal income taxes. Instead, each holder of an interest in the
Partnership includes its allocable share of the Partnership's
taxable income or loss in determining its individual federal
income tax liability. As of June 30, 1996, the maximum federal
income tax rate for individuals was 39.6%. Income and loss from
the Partnership generally is subject to the "passive activity"
limitations. Under the "passive activity" rules, income and loss
from the Partnership that is considered "passive" income or loss
generally can be offset against income and loss (including
passive loss carry-forwards from prior years) from other
investments that constitute "passive activities" (unless the
Partnership is considered a "publicly traded partnership,"
in which case income and loss from the Partnership can only be
offset against other income and loss from the Partnership).
Income of the Partnership, however, that is attributable to
dividends or interest does not qualify as passive income and
cannot be offset with losses and deductions from a "passive
activity." Cash distributions from the Partnership are not
taxable to a holder of Units except to the extent they exceed
such holder's basis in its interest in the Partnership (which
will include such holder's allocable share of the Partnership's
debt). Each year, holders of Units will receive a Schedule K-1
tax form containing detailed tax information for inclusion in
preparing their
<PAGE>
federal income tax returns. Holders of Units are required in
some cases to file state income tax returns and/or pay state
income taxes in the states in which the Partnership owns
property, even if they are not residents of those states,
and in some such states the Partnership is required to remit a
withholding tax with respect to distributions to such
nonresidents.
The Company elected to be taxed as a REIT effective for its
taxable year ended December 31, 1994. So long as it qualifies as
a REIT, the Company generally will be permitted to deduct
distributions paid to its shareholders, which effectively will
reduce (or eliminate) the "double taxation" that typically
results when a corporation earns income and distributes that
income to its shareholders in the form of dividends. A REIT,
however, is subject to federal income tax on income that is not
distributed and also may be subject to federal income
and excise taxes in certain circumstances. The maximum federal
income tax rate for corporations currently is 35% and for
individuals is 39.6%. Dividends paid by the Company will
be treated as "portfolio" income and cannot be offset with losses
from "passive activities." Distributions made by the Company to
its taxable domestic shareholders out of current or accumulated
earnings and profits will be taken into account by them as
ordinary income. Distributions that are designated as capital
gain dividends generally will be taxed as long-term capital gain,
subject to certain limitations. Distributions in excess of
current and accumulated earnings and profits will be treated as a
non-taxable return of capital to the extent of a shareholder's
adjusted basis in its Common Stock, and the excess over a
shareholder's adjusted basis will be taxed as capital
gain. Each year, shareholders of the Company (other than certain
types of institutional investors) will receive IRS Form 1099,
which is used by corporations to report dividends paid to their
shareholders. Shareholders who are individuals generally should
not be required to file state income tax returns and/or pay state
income taxes outside of their state of residence with respect to
the Company's operations and distributions. The Company may be
required to pay state income taxes in certain states.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax
considerations that may be relevant to a prospective
holder of the Common Stock is based on current law, is for
general information only, and is not tax advice. The
discussion contained herein does not purport to deal with all
aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including
insurance companies, tax exempt organizations, financial
institutions or broker-dealers, foreign corporations, and
persons who are not citizens or residents of the United States)
subject to special treatment under the federal income
tax laws.
The statements in this discussion are based on current
provisions of the Code, existing, temporary, and currently
proposed Treasury regulations promulgated under the
Code (the "Treasury Regulations"), the legislative
history of the Code, existing administrative rulings and
practices of 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. Unless
otherwise provided in this discussion, the term "Partnership"
includes all Subsidiary Partnerships.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE
PURCHASE, OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF THE
COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES
IN APPLICABLE TAX LAWS.
<PAGE>
Taxation of the Company
The Company made an election to be taxed as a REIT under
sections 856 through 860 of the Code, effective for its taxable
year ended December 31, 1994. The Company believes that,
commencing with such taxable year, it has been organized and has
operated in such a manner as to qualify for taxation as a REIT
under the Code, and the Company intends to continue to operate in
such a manner, but no assurance can be given that the Company
will operate in a manner so as to qualify or remain qualified as
a REIT.
The sections of the Code relating to qualification and
operation as a REIT are highly technical and complex. The
following discussion sets forth the material aspects of the
Code sections that govern the federal income tax treatment of a
REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations,
and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income
tax on its net income that is distributed currently to its
shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and
shareholder levels) that generally results from investment
in a corporation. However, the Company will be subject to
federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company
may be subject to the "alternative minimum tax" on its items of
tax preference. Third, if the Company has (i) net income from
the sale or other disposition of "foreclosure property" that is
held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property)
held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if
the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be
subject to a 100% tax on the net income attributable to the
greater of the amounts by which the Company fails the
75% and 95% gross income tests. Sixth, if the Company should
fail to distribute during each calendar year at least
the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such
year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset
from a C corporation (i.e., a corporation generally subject to
full corporate-level tax) in a transaction in which the basis of
the asset in the Company's hands is determined by reference to
the basis of the asset (or any other asset) in the hands of the C
corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on
which such asset was acquired by the Company, then to the extent
of such asset's "built-in gain" (i.e., the excess of the fair
market value of such asset at the time of acquisition by the
Company over the adjusted basis in such asset at such time), the
Company will be subject to tax at the highest regular corporate
rate applicable (as provided in Treasury Regulations that have
not yet been promulgated). The results described above with
respect to the recognition of "built-in gain" assume that the
Company would make an election pursuant to IRS Notice 88-19 if it
were to make any such acquisition.
<PAGE>
Requirements for Qualification
The Code defines a REIT as a corporation, trust or
association (i) that is managed by one or more trustees
or directors; (ii) the beneficial ownership of which is evidenced
by transferable shares, or by transferable certificates
of beneficial interest; (iii) that would be taxable as a domestic
corporation, but for sections 856 through 860 of the Code; (iv)
that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) not more
than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of
each taxable year (the "5/50 Rule"); (vii) that makes an election
to be a REIT (or has made such election for a previous taxable
year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar
year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations;
and (ix) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides
that conditions (i) to (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first
taxable year for which an election is made by the Company to be
taxed as a REIT. The Company believes that it has issued
sufficient shares of Common Stock with sufficient diversity of
ownership to allow it to satisfy requirements (v) and (vi). In
addition, the Company's Charter provides for restrictions
regarding transfer of the Common Stock that are intended to
assist the Company in continuing to satisfy the stock ownership
requirements described in (v) and (vi) above. Such transfer
restrictions are described above under "Restrictions on
Transfer of Capital Stock."
For purposes of determining stock ownership under the 5/50
Rule, a supplemental unemployment compensation benefits plan, a
private foundation, or a portion of a trust permanently set aside
or used exclusively for charitable purposes generally is
considered an individual. A trust that is a qualified trust
under Code section 401(a), however, generally is not considered
an individual and the beneficiaries of such trust are treated as
holding shares of a REIT in proportion to their actuarial
interests in the trust for purposes of the 5/50 Rule.
The Company currently has one direct corporate subsidiary,
Storage USA Trust, a Maryland real estate investment trust (the
"Trust"), and may have additional subsidiaries in the future.
Code section 856(i) provides that a corporation that is a
"qualified REIT subsidiary" will not be treated as a separate
corporation, and all assets, liabilities, and items of income,
deduction, and credit of a qualified REIT subsidiary will be
treated as assets, liabilities, and items of income, deduction,
and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by
the REIT at all times during the period such corporation has been
in existence. Thus, in applying the requirements described
herein, any qualified REIT subsidiaries of the Company
are ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiaries are treated
as assets, liabilities, and items of income, deduction, and
credit of the Company. The Trust is a qualified REIT
subsidiary. The Trust, therefore, is not subject to federal
corporate income taxation, although it may be subject
to state and local taxation.
In the case of a REIT that is a partner in a partnership,
Treasury Regulations provide that the REIT will be deemed to own
its proportionate share of the assets of the partnership and will
be deemed to be entitled to the gross income of the partnership
attributable to such share. In addition, the assets and gross
income of the partnership will retain the same character in the
hands of the REIT for purposes of section 856 of the Code,
including satisfying the gross income and asset tests described
below. Thus, the Company's proportionate share of the assets,
liabilities, and items of income of the Partnership and of any
other partnership in which the Company has acquired or will
acquire an interest, directly or indirectly (a "Subsidiary
Partnership"), are treated as assets and gross income of the
Company for purposes of applying the requirements described
herein.
<PAGE>
Income Tests
In order for the Company to maintain its qualification as a
REIT, there are three requirements relating to the Company's
gross income that must be satisfied annually. First, at least
75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain
circumstances, interest) or temporary investment income. Second,
at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year
must be derived from such real property or temporary investments,
and from dividends, other types of interest, and gain from the
sale or disposition of stock or securities, or from any
combination of the foregoing. Third, not more that 30% of the
Company's gross income (including gross income from prohibited
transactions) for each taxable year may be gain from the sale or
other disposition of (i) stock or securities held for less than
one year, (ii) dealer property that is not foreclosure property,
and (iii) certain real property held for less than four years
(apart from involuntary conversions and sales of foreclosure
property).
Rents received by the Company will qualify as "rents from
real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First,
the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code
provides that rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests
if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will
not qualify as "rents from real property." Finally, for rents
received to qualify as "rents from real property," the
Company generally must not operate or manage the property or
furnish or render services to the tenants of such property, other
than through an "independent contractor" who is adequately
compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are customarily
furnished or rendered in connection with the rental of real
property for occupancy only and are not otherwise considered
"rendered to the occupant."
The Company, through the Partnership, derives the bulk of
its revenues from rent from storage unit leases, additional first
month rent, and late charges attributable to such rents
(collectively, the "Primary Revenues"). Additional revenues are
derived from ancillary services such as moving truck rental
commissions, packing and shipping commissions, rent from leasing
space utilized for sales of locks and packing supplies to SUSA
Management, Inc., a Tennessee corporation ("Subsidiary Corp.") 5%
of whose voting stock and 94% of whose nonvoting stock (which
together constitute 99% of the beneficial economic interest
therein) are owned by the Partnership, rent from vehicle and boat
storage leases (including additional first month rent and late
charges attributable thereto), and similar items (collectively,
the "Ancillary Revenues"). The Company also receives
dividends from Subsidiary Corp. and Storage USA Franchise Corp.,
a Tennessee corporation ("Franchise"), 100% of whose nonvoting
stock, which represents 97.5% of the beneficial economic interest
therein, is owned by the Partnership. The Company believes that,
other than the late charges attributable to rent, which are
treated as interest that qualifies for the 95% gross income test,
but not the 75% gross income test, the Primary Revenues
qualify as rents from real property for purposes of both the 75%
test and the 95% test and that dividends from Subsidiary Corp.
and Franchise (the "Nonqualified Subsidiaries") qualify as
dividends for purposes of the 95% test. Furthermore, the Company
believes that the Ancillary Revenues and other types of
potentially nonqualifying gross income earned by the Company in
each taxable year are equal to, and will continue to be equal to,
less than 5% of the Company's total gross income and, thus, that
such items of income do not adversely affect the Company's
qualification as a REIT.
Other than with respect to its leasing arrangement with
Subsidiary Corp. with respect to the sale of lock and packing
supplies (the revenue from which the Company will treat as
nonqualifying income for purposes of the
<PAGE>
75% and 95% tests), the Company does not own, directly or
indirectly, 10% or more of any tenant or receive any
rent based on the income or profits of any tenant. Furthermore,
the Company believes that any personal property rented in
connection with its storage facilities is well within
the 15% restriction. However, in order for the Primary
Revenues to constitute "rents from real property," the Company
must not provide services to its tenants that are not customarily
furnished or rendered in connection with the rental of the
self-storage units, other than through an independent contractor.
The Company, through the Partnership (which is not an
independent contractor), provides certain services with respect
to the facilities and will provide certain services with respect
to any newly acquired self-storage facilities. Such services
include (i) common area services, such as cleaning and
maintaining public entrances, exits, stairways, walkways, lobbies
and restrooms, removing snow and debris, collecting trash, and
painting the exteriors of the facilities and common areas, (ii)
providing general security for the facilities, (iii) cleaning and
repairing of units at the facilities as tenants move in and out,
(iv) at the request of the tenant, and without additional charge,
accepting delivery of goods from carriers or unlocking a
particular unit when goods are delivered to a facility (however,
the Partnership does not otherwise assist tenants in the storage
or removal of goods or belongings from the units), (v) permitting
tenants to use the fax machine at a facility for occasional local
faxes without additional charge and for occasional long-distance
faxes for a nominal charge, (vi) maintaining underground
utilities and structural elements of the facilities, (vii) paying
real and personal property taxes or the cost of replacing or
refurbishing personal property with respect to real and personal
property owned by the Partnership at a facility, (viii) for a
fee, acting as an agent for moving truck rental companies for
tenants of certain facilities and walk-in customers, (ix) for a
fee, providing packing and shipping services to tenants of
certain facilities and walk-in customers, and (x) at a few
facilities, allowing tenants to use trucks owned by the Company
or the Partnership to move their goods and belongings into and
out of the units without additional charge. The Company believes
that the services provided by the Partnership are customarily
furnished or rendered in connection with the rental of space
for occupancy only by self-storage facilities in the geographic
areas in which its facilities are located.
The Company's investment, through the Partnership, in the
facilities in major part gives rise to rental income that is
qualifying income for purposes of the 75% and 95% gross income
tests. Gains on sales of the facilities (other than from
prohibited transactions, as described below) or of the Company's
interest in the Partnership generally will be qualifying income
for purposes of the 75% and 95% gross income tests. The
Company anticipates that income on its other investments,
including its indirect investments in the Nonqualified
Subsidiaries, will not result in the Company failing the 75% or
95% gross income test for any year.
The term "interest" generally does not include any amount
received or accrued (directly or indirectly) if the determination
of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of
receipts or sales.
Any gross income derived from a prohibited transaction is
taken into account in applying the 30% income test necessary to
qualify as a REIT (and the net income from that transaction is
subject to a 100% tax). The term "prohibited transaction"
generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. The
Company and the Partnership believe that no asset owned by the
Company or the Partnership is held for sale to customers and that
a sale of any such asset will not be in the ordinary course of
business of the Company or the Partnership. Whether property is
held "primarily for sale to customers in the ordinary course of a
trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company and
the Partnership have complied, and will continue to comply, with
the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions.
Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor
provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
<PAGE>
It is possible that, from time to time, the Company or the
Partnership will enter into hedging transactions with respect to
one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including interest
rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the
Company or the Partnership enters into an interest rate swap or
cap contract to hedge any variable rate indebtedness incurred to
acquire or carry real estate assets, any periodic income or gain
from the disposition of such contract should be qualifying income
for purposes of the 95% gross income test, but not the 75%
gross income test. Furthermore, any such contract would be
considered a "security" for purposes of applying the
30% gross income test. To the extent that the Company or the
Partnership hedges with other types of financial instruments or
in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the
various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner
that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless
qualify as a REIT for such year if it is entitled to relief under
certain provisions of the Code. Those relief provisions
generally will be available if (i) the Company's failure to meet
such tests is due to reasonable cause and not due to willful
neglect, (ii) the Company attaches a schedule of the sources of
its income to its return, and (iii) any incorrect information on
the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief
provisions. As discussed above in "Federal Income Tax
Considerations-Taxation of the Company," even if those
relief provisions apply, a 100% tax would be imposed with respect
to the net income attributable to the greater of the amounts by
which the Company fails the 75% and 95% income tests. No such
relief is available for violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of each taxable
year, also must satisfy two tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total
assets must be represented by cash or cash items (including
certain receivables), government securities, or "real estate
assets," including, in cases where the Company raises new capital
through stock or long-term (at least five-year) debt offerings,
stock or debt instruments attributable to the temporary
investment of such new capital during the one-year period
following the Company's receipt of such capital. The term "real
estate assets" also includes real property (including interests
in real property and interests in mortgages on real property) and
shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land or
improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural
components of such buildings or structures), a leasehold in land
or improvements thereon, and an option to acquire land or
improvements thereon (or a leasehold in land or improvements
thereon). Second, of the investments not included in the 75%
asset class, the value of any one issuer's securities owned by
the Company (other than its ownership interest in the
Partnership, the Trust, or any other qualified REIT subsidiary)
may not exceed 5% of the value of the Company's total assets,
and the Company may not own more than 10% of any one issuer's
outstanding voting securities (except for its ownership interest
in the Partnership, the Trust, or any other qualified REIT
subsidiary).
The Partnership owns 5% of the voting stock and 94% of the
nonvoting stock of Subsidiary Corp. (which together constitute
99% of the beneficial economic interest therein). In addition,
the Partnership owns 100% of the nonvoting stock of Franchise,
which represents 97.5% of the beneficial economic interest
therein. By virtue of its partnership interest in the
Partnership, the Company is deemed to own its pro rata share of
the assets of the Partnership, including the stock of Subsidiary
Corp. and Franchise held by the Partnership.
The Partnership does not own more than 10% of the voting
securities of either Nonqualified Subsidiary. In addition, based
upon its analysis of the estimated value of the stock of each
Nonqualified Subsidiary owned by the Partnership relative to the
estimated value of the other assets owned by the Company, the
Company believes that neither its pro rata share of the stock of
Subsidiary Corp., nor its pro rata share of the stock of
Franchise, exceeds 5% of the total value of the Company's assets.
No independent appraisals have been obtained to support
<PAGE>
this conclusion. This 5% limitation must be satisfied at the end
of each quarter in which the Company or the Partnership increases
its interest in a Nonqualified Subsidiary (including as a result
of the Company increasing its interest in the Partnership in
connection with a stock offering or as Limited Partners of the
Partnership exercise their Redemption Rights). Although the
Company plans to take steps to ensure that it satisfies the 5%
asset test for any quarter with respect to which retesting is to
occur, there can be no assurance that such steps will always be
successful or will not require a reduction in the Partnership's
overall interest in a Nonqualified Subsidiary. The Company does
not expect to own securities of any other issuer in excess of the
restrictions set forth above. Nevertheless, if the Service were
to challenge successfully the tax status of the Partnership as a
partnership for federal income tax purposes, since the Company
owns more than 10% of the voting interests in such entity, the
Company likely would cease to qualify as a REIT. See "Federal
Income Tax Considerations - Tax Aspects of the Company's
Investments in the Partnership and Subsidiary Partnerships."
If the Company should fail to satisfy the asset tests at the
end of a calendar quarter, such a failure would not cause it to
lose its REIT status if (i) it satisfied all of the asset tests
at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of the Company's assets and the
asset tests either did not exist immediately after the
acquisition of any particular asset or was not wholly or partly
caused by such an acquisition (i.e., the discrepancy arose from
changes in the market values of its assets). If the condition
described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the
quarter in which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to
distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (A)
95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of
the net income (after tax), if any, from foreclosure property,
minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before
the Company timely files its tax return for such year and if paid
on or before the first regular dividend payment date after such
declaration. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains
corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be
subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed. The
Company has made, and will continue to make, timely distributions
sufficient to satisfy all annual distribution requirements.
It is possible that, from time to time, the Company may
experience timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the
inclusion of that income and deduction of such expenses in
arriving at its REIT taxable income. Further, it is possible
that, from time to time, the Company may be allocated a share of
net capital gain attributable to the sale of depreciated property
that exceeds its allocable share of cash attributable to that
sale. Therefore, the Company may have less cash available for
distribution than is necessary to meet its annual 95%
distribution requirement or to avoid corporate income tax or the
excise tax imposed on certain undistributed income. In such a
situation, the Company may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds
through the issuance of additional shares of Common Stock or
shares of preferred stock.
Under certain circumstances, the Company may be able to
rectify a failure to meet the distribution requirement for a year
by paying "deficiency dividends" to its shareholders in a later
year, which may be included in the Company's deduction for
dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest
based upon the amount of any deduction taken for deficiency
dividends.
<PAGE>
Special Distribution Requirement
Prior to becoming a REIT, the Company and all corporations
previously merged into the Company were taxable as S corporations
pursuant to elections made at the inception of each such
corporation. The Code provides that, in the case of a
corporation that succeeded to the "earnings and profits" of a
corporation that was not taxed as a REIT for all of its taxable
years beginning after February 28, 1986, such corporation is
eligible to make a REIT election for a taxable year only if, as
of the close of such year, it has no earnings and profits
accumulated in any year in which it was not a REIT. If the
Company had any such non-REIT earnings and profits, it would
have to make a distribution equal to the non-REIT earnings and
profits to preserve its REIT status. Since the Company was
taxable as an S corporation from its inception and has not
succeeded to the non-REIT earnings and profits of any other
corporation, this special distribution requirement will not
apply.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, in order to be
able to elect to be taxed as a REIT, the Company must maintain
certain records and request on an annual basis certain
information from its shareholders designed to disclose the actual
ownership of its outstanding stock. The Company has complied,
and will continue to comply, with such requirements.
Partnership Anti-Abuse Rule
A final regulation (the "Anti-Abuse Rule") under the
partnership provisions of the Code (the "Partnership
Provisions") authorizes the Service, in certain abusive
transactions involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as the
Service deems appropriate. The Anti-Abuse Rule applies
where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a
principal purpose of substantially reducing the present value of
the partners' aggregate federal tax liability in a manner
inconsistent with the intent of the Partnership Provisions. The
Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible arrangement that
accurately reflects the partners' economic agreement and clearly
reflects the partners' income without incurring any entity-level
tax. The purposes for structuring a transaction involving a
partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business
purpose for a transaction and the claimed tax benefits resulting
from the transaction. A reduction in the present value of the
partners' aggregate federal tax liability through the use of a
partnership does not, by itself, establish inconsistency with the
intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a
corporation that elects to be taxed as a REIT contributes
substantially all of the proceeds from a public offering to a
partnership in exchange for a general partnership interest. The
limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed
their respective aggregate bases in such property. In addition,
some of the limited partners have the right, beginning two years
after the formation of the partnership, to require the redemption
of their limited partnership interests in exchange for cash or
REIT stock (at the REIT's option) equal to the fair market value
of their respective interests in the partnership at the time of
the redemption. The example concludes that the use of the
partnership is not inconsistent with the intent of the
Partnership Provisions and, thus, cannot be recast by the
Service. However, because the Anti-Abuse Rule is extraordinarily
broad in scope and is applied based on an analysis of all of the
facts and circumstances, there can be no assurance that the
Service will not attempt to apply the Anti-Abuse Rule to the
Company. If the conditions of the Anti-Abuse Rule are met, the
Service is authorized to take appropriate enforcement action,
including disregarding the Partnership for federal tax purposes
or treating one or more of the partners as nonpartners. Any such
action potentially could jeopardize the Company's status as
a REIT.
<PAGE>
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in
any taxable year and the relief provisions do not apply, the
Company will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to the shareholders in
any year in which the Company fails to qualify will
not be deductible by the Company nor will they be required to be
made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of
the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as
a REIT. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief.
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, or (iii) an estate or trust the income of which is
subject to U.S. federal income taxation regardless of its source.
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
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 short-term capital gain if the Common Stock has
been held for one year or less) assuming the Common Stock is 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 the 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 and gain
from the disposition of Common Stock generally will be treated as
investment income for purposes of the investment interest
limitations. 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.
Taxation of Shareholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable
disposition of the Common Stock by a shareholder who
is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Stock has been held for
more than one year and otherwise as short-term capital gain or
loss. However, any loss upon a sale or exchange of Common Stock
by a shareholder who has held such stock for six months or less
(after applying certain holding
<PAGE>
period rules), will be treated as a long-term capital loss to the
extent of distributions from the Company 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 the Common
Stock may be disallowed if other Common Stock is purchased within
30 days before or after the disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one
year in order for gain or loss derived from its sale or exchange
to be treated as long-term capital gain or loss. The highest
marginal individual income tax rate is 39.6%, and the tax rate on
net capital gains applicable to individuals is 28%. Thus, the
tax rate differential between capital gain and ordinary income
for individuals may be significant. In addition, the
characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by
capital gains may be deducted against an individual's ordinary
income only up to a maximum annual amount of $3,000. Unused
capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates.
A corporate taxpayer can deduct capital losses only to the extent
of capital gains, with unused losses being carried back three
years and forward five years.
Information Reporting Requirements and Backup Withholding
The Company will report to its U.S. shareholders and to 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 as applied
to Non-U.S. Shareholders (as defined herein). Those proposed
regulations would alter the current system of backup withholding
compliance. See "Federal Income Tax Considerations - Taxation of
Non-U.S. Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension
and profit sharing trusts and individual retirement accounts
("Exempt Organizations"), generally are exempt from federal
income taxation. However, they are subject to taxation on their
unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued
a published ruling that dividend distributions by a REIT to an
exempt employee pension trust do not constitute UBTI, provided
that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust.
Based on that ruling, amounts distributed by the Company
to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of
the 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 (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived from an unrelated trade or business
(determined as if the Company were a pension trust) divided by
the gross income of the Company for the year in which the
dividends are paid. The UBTI rule applies to a pension
trust holding more than 10% of the Company's stock only if (i)
the UBTI Percentage is at least 5%, (ii) the
<PAGE>
Company qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to
be treated as holding shares of the Company in proportion to
their actuarial interests in the pension trust, and (iii) either
(A) one pension trust owns more than 25% of the value of the
Company's shares or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's shares
collectively own more than 50% of the value of the Company's
shares.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of
nonresident alien individuals, foreign corporations,
foreign partnerships, and other foreign shareholders
(collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a summary of
such rules. PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT
WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL,
STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT
IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not
attributable to gain from sales or exchanges by the Company of
U.S. real property interests and are not designated by
the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and
profits of the Company. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross
amount of the distribution unless an applicable tax treaty
reduces or eliminates that tax. However, if income from
the investment in the Common Stock is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a U.S. trade
or business, the Non-U.S. Shareholder generally will be subject
to federal income tax at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such distributions
(and also may be subject to the 30% branch profits tax in the
case of a Non-U.S. Shareholder that is a foreign corporation).
The Company expects to withhold U.S. income tax at the rate of
30% on the gross amount of any such distributions made to a
Non-U.S. Shareholder unless (i) a lower treaty rate applies and
any required form evidencing eligibility for that reduced rate is
filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is
effectively connected income. The Service issued proposed
regulations in April 1996 that would modify the manner in which
the Company complies with the withholding requirements.
Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a shareholder to
the extent that such distributions 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
distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's
Common Stock, such distributions will give rise to tax liability
if the Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of his Common Stock, as
described below. Because it generally cannot be determined
at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated
earnings and profits, the entire amount of any distribution
normally will be subject to withholding. However, amounts so
withheld are refundable to the extent it is determined
subsequently that such distribution was, in fact, in excess of
the current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business
Job Protection Act of 1996, which requires the Company to
withhold 10% of any distribution in excess of the Company's
current and accumulated earnings and profits. That statute is
effective for distributions made after August 20, 1996.
Consequently, although the Company intends to withhold at a rate
of 30% on the entire amount of any distribution, to the extent
that the Company does not do so, any portion of a distribution
not subject to withholding at a rate of 30% will be subject
to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT,
distributions that are attributable to gain from sales or
exchanges by the Company of U.S. real property interests
will be taxed to a Non-U.S. Shareholder under the provisions of
the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain
from sales of U.S. real property interests are taxed to a
Non-U.S. Shareholder as if such gain were effectively connected
with a U.S. business. Non-U.S. Shareholders thus would be taxed
at the
<PAGE>
normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien
individuals). Distributions subject to FIRPTA also may
be subject to a 30% branch profits tax in the hands of a foreign
corporate shareholder not entitled to treaty relief or exemption.
The Company is required by currently applicable Treasury
Regulations to withhold 35% of any distribution that is
designated by the Company as a capital gains dividend. The
amount withheld is creditable against the Non-U.S. Shareholder's
FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his
Common Stock generally will not be taxed under FIRPTA if the
Company is a "domestically controlled REIT," defined generally as
a REIT in which at all times during a specified testing period
less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is currently anticipated that
the Company will be a "domestically controlled REIT" and,
therefore, the sale of the Common Stock will not be subject to
taxation under FIRPTA. However, because the Common Stock
will be publicly traded, no assurance can be given that the
Company will continue to be a "domestically controlled
REIT." The Company's Charter provides for restrictions regarding
transfer of the Common Stock that are intended to assist the
Company in continuing to be a "domestically controlled REIT."
Furthermore, gain not subject to FIRPTA will be taxable to a
Non-U.S. Shareholder if (i) investment in the Common Stock is
effectively connected with the Non-U.S. Shareholder's U.S. trade
or business, in which case the Non-U.S. Shareholder will be
subject to the same treatment as U.S. shareholders with respect
to such gain, or (ii) the Non-U.S. Shareholder is a nonresident
alien individual who was present in the United States for 183
days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the
gain on the sale of the Common Stock were to be subject to
taxation under FIRPTA, the Non-U.S. Shareholder will be subject
to the same treatment as U.S. shareholders with respect to such
gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch
profits tax in the case of foreign corporations). IN ADDITION,
NON-U.S. SHAREHOLDERS SHOULD BE AWARE THAT, IN THE PAST,
LEGISLATIVE PROPOSALS HAVE BEEN MADE THAT WOULD HAVE SUBJECTED
NON-U.S. PERSONS TO U.S. TAX IN CERTAIN CIRCUMSTANCES ON THEIR
GAINS FROM THE SALE OF STOCK IN U.S. CORPORATIONS. THERE CAN BE
NO ASSURANCE THAT A SIMILAR PROPOSAL WILL NOT BE ENACTED INTO
LAW
IN A FORM DETRIMENTAL TO FOREIGN HOLDERS OF THE COMMON STOCK.
Other Tax Consequences
State and Local Taxes
The Company, the Trust, the Partnership, a Subsidiary
Partnership, or the Company's shareholders may be subject to
state or local taxation in various state or local jurisdictions,
including those in which it or they own property, transact
business, or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal
income tax consequences discussed above. In addition, the
Company, the Trust, the Partnership, or a Subsidiary Partnership
may be subject to certain state and local taxes imposed on owners
of property, such as ad valorem property taxes, transfer taxes,
and rent taxes. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND
LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
Tax Aspects of the Company's Investments in the Partnership and
Subsidiary Partnerships
The following discussion summarizes certain federal income
tax considerations applicable to the Company's direct or indirect
investments in the Partnership and the Subsidiary Partnerships
(each individually a "Partnership" and, collectively, the
"Partnerships"). The discussion does not cover state or local
tax laws or any federal tax laws other than income tax laws.
<PAGE>
Classification as Partnerships
The Company is entitled to include in its income its
distributive share of each Partnership's income and to deduct its
distributive share of each Partnership's losses only if the
Partnerships are classified for federal income tax purposes as
partnerships rather than as Corporations or associations taxable
as corporations. An organization formed as a partnership will be
treated as a partnership, rather than as a corporation, for
federal income tax purposes if it (i) has no more than two of the
four corporate characteristics that the Treasury Regulations use
to distinguish a partnership from a corporation for tax purposes
and (ii) is not a "publicly traded" partnership. Those four
corporate characteristics are continuity of life, centralization
of management, limited liability, and free transferability of
interests. A publicly traded partnership is a partnership whose
interests are traded on an established securities market or are
readily tradable on a secondary market (or the substantial
equivalent thereof). A publicly traded partnership will not,
however, be treated as a corporation for any taxable year if 90%
or more of the partnership's gross income for such year consists
of certain passive-type income, including (as may be relevant
here) real property rents, gains from the sale or other
disposition of real property, interest, and dividends (the "90%
Passive Income Exception").
The U.S. Department of the Treasury recently issued
regulations effective for taxable years beginning after
December 31, 1995 (the "PTP Regulations") that provide limited
safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors (the
"Private Placement Exclusion"), interests in a partnership will
not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if (i) all interests in the
partnership were issued in a transaction (or transactions) that
was not required to be registered under the Securities Act of
1933, as amended, and (ii) the partnership does not have more
than 100 partners at any time during the partnership's taxable
year. In determining the number of partners in a partnership, a
person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an
interest in the partnership is treated as a partner in such
partnership only if (i) substantially all of the value of the
owner's interest in the flow-through entity is attributable to
the flow-through entity's interest (direct or indirect) in the
partnership and (ii) a principal purpose of the use of the tiered
arrangement is to permit the partnership to satisfy the 100-
partner limitation. Each Partnership qualifies for the Private
Placement Exclusion.
If a Partnership is considered a publicly traded partnership
under the PTP Regulations because it is deemed to have more than
100 partners, such Partnership should not be treated as a
corporation because it should be eligible for the 90% Passive
Income Exception. If, however, for any reason a Partnership
were taxable as a corporation, rather than as a partnership, for
federal income tax purposes, the Company would not be able to
qualify as a REIT. See "Federal Income Tax Considerations -
Requirements for Qualification - Income Tests" and "-
Requirements for Qualification - Asset Tests." In addition, any
change in a Partnership's status for tax purposes might be
treated as a taxable event, in which case the Company might incur
tax liability without any related cash distribution. See
"Federal Income Tax Considerations - Requirements for
Qualification - Distribution Requirements." Further, items of
income and deduction of such Partnership would not pass through
to its partners, and its partners would be treated as
stockholders for tax purposes. Consequently, such Partnership
would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such
Partnership's taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not the Partnerships, Subject to Tax. A
partnership is not a taxable entity for federal income
tax purposes. Rather, the Company is required to take into
account its allocable share of each Partnership's income,
gains, losses, deductions, and credits for any taxable year of
such Partnership ending within or with the taxable year
of the Company, without regard to whether the Company has
received or will receive any distribution from such
Partnership.
<PAGE>
Partnership Allocations. Although a partnership agreement
generally will determine the allocation of income and losses
among partners, such allocations will be disregarded for tax
purposes under section 704(b) of the Code if they do not comply
with the provisions of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder. If an allocation is
not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined
by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with
respect to such item. Each Partnership's allocations of taxable
income, gain, and loss are intended to comply with the
requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties.
Pursuant to section 704(c) of the Code, income, gain, loss, and
deduction attributable to appreciated or depreciated property
that is contributed to a partnership in exchange for an interest
in the partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of contributed property
at the time of contribution, and the adjusted tax basis of such
property at the time of contribution (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and
do not affect the book capital accounts or other economic or
legal arrangements among the partners. The Partnership was
formed by way of contributions of appreciated property and has
received contributions of appreciated property since the
Company's initial public offering. Consequently, the Partnership
Agreement requires such allocations to be made in a manner
consistent with section 704(c) of the Code.
In general, the carryover basis of the facilities
contributed by the Company to the Partnership will cause
the Company to be allocated lower depreciation and other
deductions, and possibly amounts of taxable income, in
the event of a sale of such a facility, in excess of the economic
or book income allocated to it as a result of such
sale. While this will tend to eliminate the Book-Tax Differences
over the life of the Partnership, the special
allocation rules of section 704(c) do not always entirely rectify
the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale.
Therefore, elimination of Book-Tax Differences with respect
to the facilities contributed by the Company may cause the
Company to recognize taxable income in excess of its
proportionate share of the cash proceeds, which might adversely
affect the Company's ability to comply with the
REIT distribution requirements. See "Federal Income Tax
Considerations -- Requirements for Qualification --
Distribution Requirements."
The U.S. Department of the Treasury recently issued
regulations requiring partnerships to use a "reasonable
method" for allocating items affected by section 704(c) of the
Code and outlining several reasonable allocation methods. The
Partnership has elected to use the "traditional method" for
allocating Code section 704(c) items with respect to the
properties that it acquires in exchange for Units.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally will be allocated among
the partners in accordance with their respective interests in the
Partnership, except to the extent that the Partnership is
required under Code section 704(c) to use a method for allocating
tax depreciation deductions attributable to contributed
properties that results in the Company receiving a
disproportionate share of such deductions. In addition, gain on
sale of a facility that has been contributed (in whole or in
part) to the Partnership will be specially allocated to the
contributing partners to the extent of any "built-in" gain with
respect to such facility for federal income tax purposes. The
application of section 704(c) to the Partnership is not entirely
clear, however, and may be affected by Treasury Regulations
promulgated in the future.
Basis in Partnership Interest. The Company's adjusted tax
basis in its partnership interest in the Partnership generally is
equal to (i) the amount of cash and the basis of any other
property contributed to the Partnership by the Company, (ii)
increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership,
and (iii) reduced, but not below zero, by (A) the Company's
allocable share of the Partnership's loss and (B) the amount of
cash distributed to the Company, and by constructive
distributions resulting from a reduction in the Company's share
of indebtedness of the Partnership.
If the allocation of the Company's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the
Company's partnership interest in the Partnership below zero, the
recognition of such loss will be deferred until such time as the
recognition of such loss would not reduce the Company's adjusted
tax basis below
<PAGE>
zero. To the extent that the Partnership's distributions, or any
decrease in the Company's share of the indebtedness of the
Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such
constructive distributions) constitute taxable income to the
Company. Such distributions and constructive distributions
normally will be characterized as capital gain, and, if the
Company's partnership interest in the Partnership has been held
for longer than the long-term capital gain holding period
(currently one year), the distributions and constructive
distributions will constitute long-term capital gain.
Depreciation Deductions Available to the Partnerships. The
Partnerships have acquired equity interests in facilities, and
expect to acquire additional facilities in the future, for cash.
To that extent, a Partnership's initial basis in such a facility
for federal income tax purpose generally equals the purchase
price paid by the Partnership. The Partnerships depreciate or
will depreciate such depreciable property for federal income tax
purposes under the alternative depreciation system of
depreciation ("ADS"). Under ADS, the Partnerships generally
depreciate or will depreciate furnishings and equipment over a
10-year recovery period using a straight line method and a
half-year convention. If, however, a Partnership places more
than 40% of its furnishings and equipment in service during
the last three months of a taxable year, a mid-quarter
depreciation convention must be used for the furnishings and
equipment placed in service during that year. Under ADS, the
Partnerships generally depreciate or will depreciate
buildings and improvements over a 40-year recovery period using a
straight line method and a mid-month convention. However, to the
extent that a Partnership has acquired or will acquire equity
interests in facilities in exchange for partnership interests in
the Partnership, the Partnership's initial basis in each such
facility for federal income tax purposes should be the same as
the transferor's basis in that facility on the date of
acquisition. The Partnerships depreciate or will depreciate such
depreciable property for federal income tax purposes under ADS.
Although the law is not entirely clear, the Partnerships
depreciate or will depreciate such depreciable property for
federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors. A
Partnership's tax depreciation deductions will be allocated among
the partners in accordance with their respective interests in the
Partnership (except to the extent that the Partnership is
required under Code section 704(c) to use a method of allocating
depreciation deductions attributable to the contributed
properties that results in the Company receiving a
disproportionate share of such deductions.)
Sale of a Partnership's Property
Generally, any gain realized by a Partnership on the sale of
property held by the Partnership for more than one year will be
long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. Any gain
recognized by a Partnership on the disposition of contributed
properties will be allocated first to the partners of the
Partnership under section 704(c) of the Code to the extent of
their "built-in gain" on those properties for federal income tax
purposes. The partners' "built-in gain" on the contributed
properties sold will equal the excess of the partners'
proportionate share of the book value of those properties over
the partners' tax basis allocable to those properties at the time
of the sale. Any remaining gain recognized by the Partnership
on the disposition of the contributed properties, and any gain
recognized by the Partnership or the disposition of the other
properties, will be allocated among the partners in accordance
with their respective percentage interests in the Partnership.
The Company's share of any gain realized by a Partnership on
the sale of any property held by the Partnership as inventory or
other property held primarily for sale to customers in the
ordinary course of the Partnership's trade or business will be
treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income also
may have an adverse effect upon the Company's ability to
satisfy the income tests for REIT status. See "Federal Income
Tax Considerations - Requirements for Qualification
- - Income Tests." The Company, however, does not presently intend
to allow any Partnership to acquire or hold any property that
represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or such
Partnership's trade or business.
Nonqualified Subsidiaries
The Partnership owns 94% of the nonvoting stock, and 5% of
the voting stock, of Subsidiary Corp., representing in the
aggregate a 99% economic interest therein. In addition, the
Partnership owns 100% of the
<PAGE>
nonvoting stock of Franchise, which represents a 97.5% economic
interest therein. By virtue of its ownership of the Partnership,
the Company is considered to own its pro rata share of the stock
of the Nonqualified Subsidiaries.
As noted above, for the Company to qualify as a REIT the
Company's proportionate share of the value of the securities of
each Nonqualified Subsidiary held by the Partnership may not
exceed 5% of the total value of the Company's assets. In
addition, the Company's proportionate share of each Nonqualified
Subsidiary's equity securities may not constitute more than 10%
of the voting securities of such Nonqualified Subsidiary. The
Partnership owns 5% of the voting securities of Subsidiary Corp.,
but does not own any of the voting securities of Franchise. The
Company believes that neither its proportionate share of the
value of the securities of Subsidiary Corp. held by the
Partnership, nor its proportionate share of the value of the
securities of Franchise held by the Partnership exceeds 5% of the
total value of the Company's assets. If the Service were to
challenge successfully those determinations, however, the Company
likely would fail to qualify as a REIT.
Each Nonqualified Subsidiary will be organized as a
corporation and will pay federal, state, and local income taxes
on its taxable income at normal corporate rates. Any such taxes
will reduce amounts available for distribution by such
Nonqualified Subsidiary, which in turn will reduce amounts
available for distribution to the Company's stockholders.
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by the
Company of the Redemption Shares if, and to the extent that, the
holders of Units tender such Units for redemption and the Company
elects to redeem the Units for shares of Common Stock. On
September 8, 1995, 3,372 of the Units were issued by the
Partnership to the holders and on September 15, 1995, 51,224 of
the Units were issued by the Partnership to the holders. The
Company is registering the issuance of the Redemption Shares to
make it possible to provide the Unit holders with freely
tradeable securities upon redemption of their Units. However,
registration of such shares does not necessarily mean that any of
such shares will be issued by the Company or offered or sold by
such Unit holder.
The Company may from time to time issue Redemption Shares
upon redemption of Units tendered for redemption. The Company
will acquire the exchanging partner's Units in exchange for each
Redemption Share that the Company issues in connection with these
acquisitions. Consequently, with each such redemption, the
Company's interest in the Partnership will increase.
EXPERTS
The consolidated financial statements of the Company
incorporated by reference in its annual report on Form 10-K for
the period ended December 31, 1995, and the financial summaries
included in the Current Reports on Form 8-K, dated April 5, 1996,
Form 8-K/A, dated July 17, 1996 and Form 8-K/A, dated September
16, 1996, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report thereon
included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock
offered pursuant to this Prospectus will be passed upon for the
Company by Hunton & Williams.
<PAGE>
No dealer, salesperson
or other individual has
been authorized to give
any information or to
make any representations
other than those contained
in this Prospectus in
connection with the offering
covered by this Prospectus. STORAGE USA, INC.
If given or made, such
information or
representations
must not be relied upon
as having been
authorized by the Company.
This Prospectus does not
constitute an offer to sell,
or a solicitation of an offer
to buy, the Common Stock,
in any jurisdiction where, 54,596 Shares
or to any person to whom,
it is unlawful to make any
such offer or solicitation.
Neither the delivery of this
Prospectus nor any offer or
sale made hereunder shall, Common Stock
under any circumstances,
create an implication that
there has not been any change
in the facts set forth in
this Prospectus or in the
affairs of the Company
since the date hereof.
_____________________
TABLE OF CONTENTS
_____________________
Page
AVAILABLE INFORMATION. . . 1
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE . . 1
THE COMPANY. . . . . . . . 2
DESCRIPTION OF PROSPECTUS
CAPITAL STOCK . . . . . . 2
RESTRICTIONS ON TRANSFER
OF CAPITAL STOCK . . . . . 3
REDEMPTION OF UNITS. . . . 4
FEDERAL INCOME TAX
CONSIDERATIONS . . . . . . 13
PLAN OF DISTRIBUTION . . . 28
EXPERTS. . . . . . . . . . 28
LEGAL MATTERS. . . . . . . 28 October 15, 1996
