Filed Pursuant to Rule 424(b)(2)
File No. 333-4556
PROSPECTUS
434,890 Shares
STORAGE USA, INC.
Common Stock
This Prospectus relates to the possible issuance by
Storage USA, Inc. (the "Company") of up to 434,890 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 434,890 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 10, 1996.
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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
quarterended 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 and August 2, 1996, and 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 (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 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
<PAGE>
free from doubt. In that event, the redeeming Partner would be
treated as realizing an amount equal to the sum 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
<PAGE>
of property to a partnership and a simultaneous or
subsequent transfer of money or other consideration (including
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 any time 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
amount by which the Company fails the 75% or 95% gross income
test. 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.
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
<PAGE>
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 will be
ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiaries will be treated as
assets, liabilities, and items of income, deduction, and credit
of the Company. The Trust is a qualified REIT subsidiary. The
Trust, therefore, will not be 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.
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
<PAGE>
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%, 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 for each taxable year by the Company 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 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 revenue for purposes of the 95% test), the Company
does not own directly or indirectly 10% or more of any tenant, or
lease any space in a manner 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.
The Company, through the Partnership (which is not an
independent contractor), provides certain services with respect
to the facilities and 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
<PAGE>
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 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 in the facilities, through the
Partnership, in major part gives rise to rental income qualifying
under the 75% and 95% gross income tests. Gains on sales of the
facilities or of the Company's interest in the Partnership will
generally qualify under 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."
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.
<PAGE>
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 excess of 75% or 95% of the
Company's gross income over its qualifying income in the relevant
category, whichever is greater. No such relief is available for
violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of its 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,
temporary investments in stock or debt instruments 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 requirement, 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 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 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
requirements 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 requirements either did
<PAGE>
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 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 or 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.
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.
<PAGE>
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 generally is
effective for all transactions relating to a partnership
occurring on and after May 12, 1994.
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.
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.
<PAGE>
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 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
<PAGE>
may be deducted against an individual's ordinary income only up
to a maximum annual deduction 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 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
<PAGE>
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. In August 1996, the U.S. Congress passed the
Small Business Job Protection Act of 1996, which would require
the Company to withhold 10% of any distribution in excess of the
Company's current and accumulated earnings and profits. That
statute will be effective for distributions made after the date
of enactment. However, 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.
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 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." 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
<PAGE>
(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 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
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.
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 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 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
<PAGE>
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-type 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 satisfy the income and asset requirements for REIT
status. 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.
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.
<PAGE>
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 it acquired
in 1994 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 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
<PAGE>
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 Operating 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 Operating Partnership owns 100% of the nonvoting
stock of Franchise, which represents a 97.5% economic interest
therein. By virtue of its ownership of the Operating
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 Operating 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
Company owns 5% of the voting securities of Subsidiary Corp., but
does not own, directly or through the Operating Partnership, any
of the voting securities of Franchise. In addition, the Company
believes that neither its proportionate share of the value of the
securities of Subsidiary Corp. held by the Operating Partnership,
nor its proportionate share of the value of the securities of
Franchise held by the Operating Partnership exceeds 5% of the
total value of the Company's assets. If the Service were to
challenge successfully these determinations, however, the Company
likely would fail to qualify as a REIT.
<PAGE>
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 April
21, 1995, 27,280 of the Units were issued by the Partnership to
the holders, and, on May 19, 1995, 407,610 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,
and Form 8-K/A, dated July 17, 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. 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, 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, 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 STORAGE USA, INC.
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE. .. 1 434,890 Shares
THE COMPANY. . . . . . . . 2 COMMON STOCK
DESCRIPTION OF CAPITAL
STOCK . . . . . . . . . . . 2
RESTRICTIONS ON TRANSFER
OF CAPITAL STOCK. . . . . . 3
REDEMPTION OF UNITS. . . . 4 PROSPECTUS
FEDERAL INCOME TAX
CONSIDERATIONS. . . . . . . 13
PLAN OF DISTRIBUTION . . . 28 October 10, 1996
EXPERTS. . . . . . . . . . 28
LEGAL MATTERS. . . . . . . 28
<PAGE>
