As filed with the Securities and Exchange Commission on May 29, 1998
Registration No. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STORAGE USA, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1251239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10440 Little Patuxent Parkway
Suite 1100
Columbia, Maryland 21044
(410) 730-9500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Mr. Dean Jernigan
Chairman and Chief Executive Officer
Storage USA, Inc.
10440 Little Patuxent Parkway
Suite 1100
Columbia, Maryland 21044
(410) 730-9500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
Mr. Randall S. Parks
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.[ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
Securities Act registration statement number of earlier effective registration
statement for the same offering.[ ]
If this form is a post effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
<S> <C>
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Proposed Maximum Proposed Maximum
Title of Each Class of Aggregate Amount to Offering Price Per Aggregate Offering Amount of
Securities to be Registered be Registered Unit (1) Price (1) Registration Fee (2)
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Common Stock, par value
$.01 per share 528,090 $36.68 $19,370,341 $5,869
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, based upon the average of the high and low sales prices for the
Common Stock on the New York Stock Exchange on May 27, 1998.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
[RED HERRING]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED May 29, 1998
528,090 Shares
STORAGE USA, INC.
Common Stock
This Prospectus relates to the possible issuance by Storage USA, Inc.
(the "Company") of up to 528,090 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 528,090 units of limited partnership interest
("Units") in SUSA Partnership, L.P. (the "Partnership"), of which the Company is
the sole general partner and owned, directly and indirectly, an approximately
__% interest at May __, 1998, 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, as amended, (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,
with certain exceptions, 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 "Restrictions on Transfer of Capital Stock."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York,
New York 10048, and can also be inspected and copied at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed
fees or from the Commission's site on the World Wide Web at http://www.sec.gov.
This Prospectus is part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement"), filed by the Company with the Commission under the Securities Act
of 1933, as amended (the "Securities Act"). This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules of the Commission. For further
information, reference is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
(Commission File No. 001-12910) under the Exchange Act are hereby incorporated
by reference in this Prospectus: (i) the Company's Annual Report on Form 10-K
for the period ended December 31, 1997; (ii) the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 filed on May 15, 1998; (iii) the
Company's Current Report on Form 8-K/A filed on January 20, 1998, the Company's
Current Report on Form 8-K filed on January 26, 1998, the Company's Current
Report on Form 8-K/A filed on February 17, 1998, the Company's Current Report on
Form 8-K filed March 6, 1998, and the Company's Current Report on Form 8-K/A
filed on March 25, 1998; (iv) the description of the Common Stock contained in
the Company's Registration Statement on Form 8-A filed on March 15, 1994, under
the Exchange Act, including any reports filed under the Exchange Act for the
purpose of updating such description. All documents filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of the offering of all of the Common Stock shall be deemed to be
incorporated by reference herein.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document, as the case may
be, which also is or is deemed to be incorporated by reference herein, modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide on request and without charge to each person
to whom this Prospectus is delivered a copy (without exhibits) of any or all
documents incorporated by reference into this Prospectus. Requests for such
copies should be directed to Storage USA, Inc., 10440 Little Patuxent Parkway,
Suite 1100, Columbia, Maryland 21044, Attention: Secretary (telephone
401/730-9500).
<PAGE>
THE COMPANY
Storage USA, Inc. is a self-managed, self-advised real estate
investment trust ("REIT") engaged in the management, acquisition and development
of self-storage facilities. The Company conducts its business through SUSA
Partnership, L.P. in which it is the sole general partner (the "General
Partner") and owns, directly and through a wholly-owned subsidiary, an
approximately __% partnership interest at May __, 1998. The Company's
self-storage facilities operate under the Storage USA*R* 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.
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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 or 9.8% of the outstanding shares of any series of
Preferred 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 42.5% of the Common
Stock outstanding (the "Special Shareholder Limit"). At March 31, 1998, Security
Capital held approximately __% of the Common Stock outstanding. 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 (determined 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 from 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
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<PAGE>
"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.
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 Company. 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
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<PAGE>
would be treated for tax purposes as a sale of such Units in a fully taxable
transaction, although the matter is not free from doubt. In that event, the
redeeming Partner would be treated as realizing an amount equal to the sum 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 realized 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 or other property to the Partnership in exchange for
Units will have an Initial Basis in the Units equal to his basis in the
contributed partnership interest or other property. 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
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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.
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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.
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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
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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
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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. The Company held
approximately 93% at March 31, 1997 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
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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.
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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 takes into
account its allocable share of the Partnership's taxable income or loss in
determining its federal income tax liability. As of April 1, 1997, 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 Units (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
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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 and/or franchise 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 investors in light of their personal
investment or tax circumstances, or to certain types of investors (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 Internal
Revenue Service (the "Service"), and judicial decisions. No assurance can be
given that future legislative, judicial or administrative actions or decisions,
which may be retroactive in effect, will not affect the accuracy of any
statements in this Prospectus with respect to the transactions entered into or
contemplated prior to the effective date of such changes.
EACH 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.
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. The discussion is qualified in its entirety by the
applicable Code provisions, Treasury Regulations and administrative and
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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 an 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 undistributed 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 an amount equal
to the gross income attributable to the greater of the amounts by which the
Company fails the 75% OR 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitablity. 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. To the extent that the
Company elects to retain and pay income tax on its net capital gain, any such
retained amounts will be treated as distributed for purposes of the 4% excise
tax. 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
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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 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.
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The Company currently has one direct corporate subsidiary, Storage USA
Trust, a Maryland real estate investment trust (the "Trust"), and may have
additional corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" is not treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a qualified REIT subsidiary are 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 is held by
the REIT. Thus, in applying the requirements described herein, any qualified
REIT subsidiaries of the Company are ignored, and all assets, liabilities and
items of income, deduction and credit of such subsidiaries are treated as
assets, liabilities, and items of income, deduction, and credit of the Company.
The Trust is a qualified REIT subsidiary. The Trust, therefore, is not subject
to federal corporate income taxation, although it may be subject to state and
local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership and is 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 the
subsidiary partnerships of the Partnership (each, 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 two 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.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a
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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." In addition, the Company may
provide noncustomary services other than through an "independent contractor" if
the value of such services does not exceed 1% of the Company's gross income from
the property where such services are provided. For that purpose, such services
may not be valued at less than 150% of the Company's direct cost of providing
the services.
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"). The Company
derives additional revenues 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 ("Management"), 5% of whose voting stock and 94% of whose nonvoting
stock (which together constitute 97.5% 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 Management, Storage USA Franchise Corp., a Tennessee
corporation ("Franchise"), and Storage USA Construction, Inc., a Tennessee
corporation ("Construction"). The Partnership owns 100% of the nonvoting stock
of each of Franchise and Construction, representing 97.5% of the beneficial
economic interest of each of Franchise and Construction. The Company believes
that, other than the late charges attributable to rent, which are treated as
interest that qualifies for the 95% gross income test, but not the 75% gross
income test, the Primary
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Revenues qualify as rents from real property and that dividends from Management,
Franchise and Construction (the "Nonqualified Subsidiaries") are qualifying
income for purposes of the 95% gross income test. Furthermore, the Company
believes that the Ancillary Revenues and other types of potentially
nonqualifying gross income earned by the Company in each taxable year are equal
to, and will continue to be equal to, less than 5% of the Company's total gross
income and, thus, that such items of income do not adversely affect the
Company's qualification as a REIT.
The Company does not receive any rent that is based on the income or
profits of any person. In addition, other than with respect to its leasing
arrangement with Management with respect to the sale of lock and packing
supplies (the revenue from which the Company treats as nonqualifying income for
purposes of the 75% and 95% gross income tests), the Company does not own,
directly or indirectly, 10% or more of any tenant or receive any rent based on
the income or profits of any tenant. Furthermore, the Company believes that any
personal property leased 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
(other than services that qualify for the 1% de minimis exception) to its
tenants that are not customarily furnished or rendered in connection with the
rental of the self-storage units, other than through an independent contractor.
The Company, through the Partnership and the Subsidiary Partnerships
(each, a "Partnership") (which are not independent contractors), provides
certain services with respect to the facilities. Such services include (i)
common area services, such as cleaning and maintaining public entrances, exits,
stairways, walkways, lobbies and rest rooms, removing snow and debris,
collecting trash and painting the exteriors of the facilities and common areas,
(ii) providing general security for the facilities, (iii) cleaning and repairing
of units at the facilities as tenants move in and out, (iv) at the request of
the tenant, and without additional charge, accepting delivery of goods from
carriers or unlocking a particular unit when goods are delivered to a facility
(however, the Partnerships do not otherwise assist tenants in the storage or
removal of goods or belongings from the units), (v) permitting tenants to use
the facsimile machine at a facility for sending occasional local facsimiles
without additional charge and for sending occasional long-distance facsimiles
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 a Partnership at a facility, (viii) for a fee, acting
as an agent for moving truck rental companies for tenants of certain facilities
and walk-in customers, (ix) for a fee, providing packing and shipping services
to tenants of certain facilities and walk-in customers and (x) at a few
facilities, allowing tenants to use trucks owned by the Company or a
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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
Partnerships are customarily furnished or rendered in connection with the rental
of space for occupancy only by self-storage facilities in the geographic areas
in which its facilities are located.
The Company's investment, through the Partnerships, in the facilities
in major part gives rise to rental income that is qualifying income for purposes
of the 75% and 95% gross income tests. Gains on sales of the facilities (other
than from prohibited transactions, as described below) or of the Company's
interests in the Partnerships generally will be qualifying income for purposes
of the 75% and 95% gross income tests. The Company anticipates that income on
its other investments, including its indirect investments in the Nonqualified
Subsidiaries, will not result in the Company failing the 75% or 95% gross income
test for any year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
The net income derived from any prohibited 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
believes that no asset owned by the Company or a 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 a 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
Partnerships 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 Partnerships 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 a 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,
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futures or forward contracts, and options. To the extent that the Company or a
Partnership enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or similar financial instrument to hedge the
interest rate risk with respect to indebtedness incurred or to be incurred to
acquire or carry real estate assets, any periodic income or gain from the
disposition of such contract will be qualifying or to be incurred income for
purposes of the 95% gross income test, but not the 75% gross income test. To the
extent that the Company or a 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 gross income tests
that apply to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if (i) the Company's failure
to meet such tests is due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its income to its return
and (iii) any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of those relief
provisions. As discussed above in "Federal Income Tax Considerations-Taxation of
the Company," even if those relief provisions apply, a 100% tax would be imposed
with respect to an amount equal to the gross income attributable to the greater
of the amounts by which the Company fails the 75% and 95% income tests,
multiplied by a fraction intended to reflect the Company's profitability.
Asset Tests
The Company, at the close of each quarter of each taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, or "real estate
assets," including, in cases where the Company raises new capital through stock
or long-term (at least five-year) debt offerings, stock or debt instruments
attributable to the temporary investment of such new capital during the one-year
period following the Company's receipt of such capital. The term "real estate
assets" also includes real property (including interests in real property and
interests in mortgages on real property) and shares of other REITs. For purposes
of the 75% asset test, the term "interest in real property" includes an interest
of 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 of land
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or improvements thereon, and an option to acquire land or improvements thereon
(or a leasehold of land or improvements thereon). Second, of the investments not
included in the 75% asset class, the value of any one issuer's securities owned
by the Company (other than its ownership interest in the Partnerships, the Trust
and any other qualified REIT subsidiary) may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its ownership interest in the
Partnerships, the Trust and any other qualified REIT subsidiary). See
"Nonqualified Subsidiares and Proposed Tax Legislation."
The Partnership owns 5% of the voting stock and 94% of the nonvoting
stock of Management (which together constitute 97.5% of the beneficial economic
interest therein). In addition, the Partnership owns 100% of the nonvoting stock
of each of Franchise and Construction, which represents 97.5% of the beneficial
economic interest in each of Franchise and Construction. 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 the
Nonqualified Subsidiaries held by the Partnership. The Company does not own more
than 10% of the voting securities of any Nonqualified Subsidiary. In addition,
based upon its analysis of the estimated value of the stock of each Nonqualified
Subsidiary owned by the Company relative to the estimated value of the other
assets owned by the Company, the Company believes that its pro rata share of the
stock of each Nonqualified Subsidiary owned by the Partnership does not exceed
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 rights to redeem their
Units). 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. See "Nonqualified Subsidiaries and Proposed Tax Legislation."
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of one or more
nonqualifying assets. If the condition described in clause (ii) of the preceding
sentence were not satisfied, the Company still could avoid disqualification by
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eliminating any discrepancy within 30 days after the close of the quarter in
which it arose.
Distribution Requirements
The Company, in order to avoid qualify as a REIT and to corporate
income taxation of the earnings that it distributes, is required to distribute
dividends (other than capital gain dividends and retained capital gain) to its
shareholders in an amount at least equal to (i) the sum of (A) 95% of its "REIT
taxable income" (computed without regard to the dividends paid deduction and its
net capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
date after such declaration. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less than 100%, of
its REIT taxable income, as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. To
the extent that the Company elects to retain and pay income tax on its net
long-term capital gains, such amount would be treated as having been distributed
by the Company for purposes of the 4% excise tax. The Company has made, and will
continue to make, distribution requirement.
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 Common 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
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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.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding stock.
The Company has complied, and will continue to comply, with such requirements.
Partnership Anti-Abuse Rule
A final regulation (the "Anti-Abuse Rule") under the partnership
provisions of the Code (the "Partnership Provisions") authorizes the Service, in
certain abusive transactions involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as the Service deems
appropriate. The Anti-Abuse Rule applies where a partnership is formed or
utilized in connection with a transaction (or series of related transactions)
with a principal purpose of substantially reducing the present value of the
partners' aggregate federal tax liability in a manner inconsistent with the
intent of the Partnership Provisions. The Anti-Abuse Rule states that the
Partnership Provisions are intended to permit taxpayers to conduct joint
business (including investment) activities through a flexible arrangement that
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring any entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all of
the facts and circumstances, including a comparison of the purported business
purpose for a transaction and the claimed tax benefits resulting from the
transaction. A reduction in the present value of the partners' aggregate federal
tax liability through the use of a partnership does not, by itself, establish
inconsistency with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be taxed as a REIT contributes substantially all of the proceeds from
a public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners have
the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of
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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 a Partnership for federal tax purposes or treating one or
more of the partners as nonpartners. Any such action 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.
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 or retained capital gains)
will be taken into account by such U.S. shareholders as ordinary income and will
not be eligible for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. shareholder" means a holder of
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is subject to U.S. federal income taxation regardless of its
connection with the conduct of a trade or business within the United States, or
(iv) a trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of the trust and (B)
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one or more U.S. persons have the authority to control all substantial decisions
of the trust.
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. The Company may elect to retain and pay income tax on all or a portion
of the net capital gain it receives in a taxable year. In that case, the
Company's shareholders would include in income their proportionate share of the
Company's undistributed net capital gain and would be deemed to have paid their
proportionate share of the tax paid by the Company, which would be credited or
refunded to the shareholders. Each shareholder's basis in his Common Stock would
be increased by the amount of the undistributed capital gain included in his
income, less the shareholder's share of the tax paid by the Company.
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
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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%.
The tax rate on net capital gains applicable to noncorporate taxpayers is 28%
for sales and exchanges of assets held for more than one year, but not more than
18 months, and 20% for sales and exchanges of assets held for more than 18
months. The maximum tax rate on gain from the sale or exchange of "section 1250
property" (i.e., depreciable real property) held for more than 18 months is 25%,
to the extent that such gain would have been recaptured and treated as ordinary
income if the section 1250 property were personal property. If the Company
designates a distribution as a capital gain dividend or is deemed to distribute
the capital gains it elects to retain, it may designate the distribution
(subject to certain limitations) as a 20%, 25%, or 28% rate gain distribution.
Thus, the tax rate differential between capital gain and ordinary income for
noncorporate taxpayers may be significant. In addition, the characterization of
income as capital or ordinary may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against an
individual's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
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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 has
issued final regulations regarding the backup withholding rules as applied to
Non-U.S. Shareholders (as defined herein). Those regulations alter the technical
requirements relating to backup withholding compliance and are effective fir
distributions made after December 31, 1999. 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
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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 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 or retained capital
gains 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 has issued final
regulations that modify the manner in which the Company complies with the
withholding requirements. Those regulations are effective for distributions made
after December 31, 1999.
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Distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding. However, amounts so
withheld are refundable to the extent it is determined subsequently that such
distribution was, in fact, in excess of the current and accumulated earnings and
profits of the Company.
The Company is required to withhold 10% of any distribution in excess
of the Company's current and accumulated earnings and profits. Although the
Company intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that the Company does not do so, any portion of a
distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Shareholders thus would be
taxed at the 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 could be 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. The Company believes that it is a
"domestically controlled REIT" and, therefore, the sale of the
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Common Stock will not be subject to taxation under FIRPTA. However, because the
Common Stock is publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT." The Company's Charter provides
for restrictions regarding transfer of the Common Stock that are intended to
assist the Company in continuing to be a "domestically controlled REIT."
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the Common Stock is effectively connected with
the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and certain other conditions apply, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital gains.
If the gain on the sale of the Common Stock were to be subject to taxation under
FIRPTA, the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of foreign corporations).
Other Tax Consequences
State and Local Taxes
The Company, the Trust, the Partnerships or the investors in the
Company 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. Such state and local tax treatment may not conform to the
federal income tax consequences discussed above. In addition, the Company, the
Trust or the Partnerships 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 INVESTORS 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 Partnerships
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investments in the
Partnership. 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
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distributive share of each Partnership's losses only if the Partnerships are
classified for federal income tax purposes as partnerships rather than as
corporations or associations taxable as corporations. An entity will be
classified as a partnership rather than as a corporation for federal income tax
purposes if the entity (i) is treated as a partnership under Treasury
regulations, effective January 1, 1997, relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership.
Pursuant to the Check-the-Box Regulations, an unincorporated entity with at
least two members may elect to be classified either as an association or as a
partnership. If such an entity fails to make an election, it generally will be
treated as a partnership for federal income tax purposes. The federal income tax
classification of an entity that was in existence prior to January 1, 1997, such
as the Partnerships, will be respected for all periods prior to January 1, 1997,
if (i) the entity had a reasonable basis for its claimed classification, (ii)
the entity and all members of the entity recognized the federal tax consequences
of any changes in the entity's classification within the 60 months prior to
January 1, 1997, and (iii) neither the entity nor any member of the entity was
notified in writing on or before May 8, 1996, that the classification of the
entity was under examination. The Company believes that each Partnership will be
treated as a partnership under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will not, however, be treated as a corporation for any taxable year
if 90% or more of the partnership's gross income for such year consists of
certain passive-type income, including (as may be relevant here) real property
rents, gains from the sale or other disposition of real property, interest and
dividends (the "90% Passive Income Exception").
The U.S. Department of the Treasury has issued regulations effective
for taxable years beginning after December 31, 1995 (the "PTP Regulations"),
that provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily tradable
on a secondary market or the substantial equivalent thereof if (i) all interests
in the partnership were issued in a transaction (or transactions) that was not
required to be registered under the Securities Act 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
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attributable to the flow-through entity's interest (direct or indirect) in the
partnership and (ii) a principal purpose of the use of the flow-through entity
is to permit the partnership to satisfy the 100-partner limitation. Each
Partnership qualifies for the Private Placement Exclusion.
If a Partnership is considered a publicly traded partnership under the
PTP Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive Income Exception. If, however, for any reason a Partnership
were taxable as a corporation, rather than as a partnership, for federal income
tax purposes, the Company would not be able to qualify as a REIT. See "Federal
Income Tax Considerations -- Requirements for Qualification -- Income Tests" and
"-- Requirements for Qualification -- Asset Tests." In addition, any change in a
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur tax liability without any related cash
distribution. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not the Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of each Partnership's income, gains,
losses, deductions and credits for any taxable year of such Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from such Partnership.
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.
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<PAGE>
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 the
contributed property at the time of contribution, and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). The
Treasury Department 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.
Under the partnership agreements governing the Partnerships,
depreciation or amortization deductions of the Partnership generally are
allocated among the partners in accordance with their respective interests in
the Partnership, except to the extent that Code section 704(c) requires
otherwise. In addition, gain on the sale of a contributed property will be
specially allocated to the contributing partner (including the Company) to the
extent of any "built-in" gain with respect to such property for federal income
tax purposes. The application of section 704(c) to the Partnerships 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 a 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 a
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
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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 certain 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 such
depreciable property for federal income tax purposes under the alternative
depreciation system of depreciation ("ADS"). Under ADS, the Partnerships
generally 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 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
such depreciable property for federal income tax purposes under ADS. Although
the law is not entirely clear, the Partnerships 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
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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.
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Nonqualified Subsidiaries and Proposed Tax Legislation
On February 2, 1998, the Clinton Administration released its budget
proposal for fiscal year 1999. One provision contained in the proposal
potentially could affect the Company if enacted in final form. That provision
would prohibit a REIT from owning, directly or indirectly, more than 10% of the
voting power or value of all classes of a C corporation's stock (other than the
stock of a qualified REIT subsidiary). Currently, a REIT may own no more than
10% of the voting stock of a C corporation (other than the stock of a qualified
REIT subsidiary), but its ownership of the nonvoting stock of a C corporation is
not limited (other than by the rule that the value of a REIT's combined equity
and debt interests in a C corporation may not exceed 5% of the value of the
REIT's total assets). That provision is proposed to be effective with respect to
stock in a C corporation acquired by a REIT on or after the date of "first
committee action" with respect to the provision. A REIT that owns stock in a C
corporation in excess of the new ownership limit prior to "first committee
action" would be "grandfathered," but only to the extent that the C corporation
does not engage in a new trade or business or acquire substantial new assets on
or after the effective date of the legislation.
The Partnership owns 94% of the nonvoting stock, and 5% of the voting
stock, of Management, representing in the aggregate a 97.5% economic interest
therein. In addition, the Partnership owns 100% of the nonvoting stock of each
of Franchise and Construction, representing a 97.5% economic interest therein.
By virtue of its ownership of the Partnership, the Company is considered to own
its pro rata share of the stock of the Nonqualified Subsidiaries held by the
Partnership.
Each Nonqualified Subsidiary is organized as a corporation and pays
federal, state and local income taxes on its taxable income at normal corporate
rates. Any such taxes reduce amounts available for distribution by such
Nonqualified Subsidiary, which in turn reduce amounts available for distribution
to the Company's shareholders.
If enacted as presently proposed, the proposed legislation described
above would prevent the Nonqualified Subsidiaries from expanding their current
operations and would significantly limit the Company's ability to use other
taxable subsidiaries to conduct businesses the income from which would be
nonqualifying income if received directly by the Company.
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 May 15, 1997 and May 30, 1997, respectively, 47,470 and 480,620
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.
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EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997
and 1996, and the consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997, the financial statement s chedule of the Company as of December 31, 1997,
the historical summaries of combined gross revenue and direct operating expenses
for certain self-storage facilities for the year ended December 31, 1996
included in the Company's Current Report on Form 8-K/A filed January 20, 1998,
the historical summaries of combined gross revenue and direct operating expenses
for certain self-storage facilities for the year ended December 31, 1996
included in the Company's Current Report on Form 8-K/A filed February 17, 1998,
and the historical summaries of combined gross revenue and direct operating
expenses for certain self-storage facilities for the year ended December 31,
1996 included in the Company's Current Report on Form 8-K/A filed March 25,
1998, all incorporated b y reference in this Registration Statement, have been
incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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.
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<TABLE>
<S> <C>
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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 STORAGE USA, INC.
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, 528,090 Shares
or to any person to whom, it is unlawful to make
any such offer or solicitation. Neither the
delivery of this Prospectus nor any offer or sale
made hereunder shall, under any circumstances,
create an implication that there has not been any Common Stock
change in the facts set forth in this Prospectus
or in the affairs of the Company since the date
hereof.
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TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION........................ 1
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE............................. 1 PROSPECTUS
THE COMPANY.................................. 2
--------------
DESCRIPTION OF CAPITAL STOCK................. 2
RESTRICTIONS ON TRANSFER OF CAPITAL STOCK.... 3
REDEMPTION OF UNITS.......................... 4
FEDERAL INCOME TAX CONSIDERATIONS............ 13
PLAN OF DISTRIBUTION......................... 28 May 29, 1998
EXPERTS...................................... 28
LEGAL MATTERS................................ 29
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</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The estimated expenses in connection with the offering are as follows:
Securities and Exchange Commission registration fee.........$5,869.00
Accounting fees and expenses................................ 500.00
Legal fees and expenses..................................... 1,000.00
---------
TOTAL..............................................$7,369.00
Item 15. Indemnification of Officers and Directors.
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 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 shall be paid out of the assets of the Company and shall
not be recoverable from the shareholders. To the extent that the foregoing
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, in the opinion of the Securities and
Exchange Commission such indemnification is contrary to public policy and,
therefore, unenforceable. The Company has purchased director and officer
liability insurance for the purpose of providing a source of funds to pay any
indemnification described above.
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.
The Second Amended and Restated Agreement of Limited Partnership of the
Partnership provides, generally, for the indemnification of an "indemnitee"
against losses, claims, damages, liabilities, judgments, fines, settlements and
other amounts (including reasonable expenses) that relate to the operations of
the Partnership unless it is established that (i) the act or omission of the
Indemnitee was material and either was committed in bad faith or pursuant to
active and deliberate dishonesty, (ii) the Indemnitee actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the Indemnitee had reasonable cause to believe that
the act or omission was unlawful. For this purpose, the term "Indemnitee"
includes any person made a party to a proceeding by reason of his status as a
director or officer of the Partnership, SUSA Management, Inc. or the Company,
and such other persons (including affiliates of the Company or the Partnership)
as the Company,
II-1
<PAGE>
may designate from time to time in its discretion. Any such indemnification will
be made only out of assets of the Partnership, and in no event may an Indemnitee
subject the limited partners of the Partnership to personal liability by reason
of the indemnification provisions in the Partnership Agreement. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted pursuant to the foregoing provisions or otherwise, the Partnership has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy and, therefore, unenforceable. The
Partnership has purchased liability insurance for the purpose of providing a
source of funds to pay the indemnification described above.
Item 16. Exhibits.
4.1* Specimen Common Stock Certificate.
4.2** Amended Charter of the Company.
4.3* Restated and Amended Bylaws of the Company.
5 Opinion of Hunton & Williams.
8 Tax Opinion of Hunton & Williams (to be filed by amendment).
23.1 Consent of Hunton & Williams (included in Exhibit 5).
23.2 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (located on the signature page of this
Registration Statement)
- -------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form
S-11, File No. 33-74072, as amended, and incorporated by reference
herein.
** Filed as an Exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-3, File No. 333-4556, and incorporated by reference
herein.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.); and (iii) to include any material information with respect to the
plan of distribution
II-2
<PAGE>
not previously disclosed in the registration statement or any material change to
such information in the registration statement; provided, however, that the
undertakings set forth in subparagraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby further undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that the in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted against
the registrant by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Columbia,
State of Maryland on this 29th day of May, 1998.
STORAGE USA, INC.
By: /s/ Christopher P. Marr
-------------------------------
Senior Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 29, 1998. Each of the undersigned officers and
directors of the registrant hereby constitutes Christopher P. Marr and Randall
S. Parks, any of whom may act, his true and lawful attorneys-in-fact with full
power to sign for him and in his name in the capacities indicated below and to
file any and all amendments to the registration statement filed herewith, making
such changes in the registration statement as the registrant deems appropriate,
and generally to do all such things in his name and behalf in his capacity as an
officer and director to enable the registrant to comply with the provisions of
the Securities Act of 1933 and all requirements of the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Signature Title & Capacity
--------- ----------------
<S> <C>
/s/ Dean Jernigan Chairman of the Board, Chief Executive
---------------------------------- Officer and Director
Dean Jernigan (Principal Executive Officer)
/s/ Dennis A. Reeve Chief Financial Officer
----------------------------------
Dennis A. Reeve
/s/ Sandy Impink Principal Accounting Officer
----------------------------------
Sandy Impink
/s/ C. Ronald Blankenship Director
----------------------------------
C. Ronald Blankenship
/s/ Howard P. Colhoun Director
----------------------------------
Howard P. Colhoun
/s/ Alan B. Graf Director
----------------------------------
Alan B. Graf
/s/ Mark Jorgensen Director
----------------------------------
Mark Jorgensen
/s/ John P. McCann Director
----------------------------------
John P. McCann
/s/ Caroline S. McBride Director
----------------------------------
Caroline S. McBride
/s/ J. Marshall Peck Director
----------------------------------
J. Marshall Peck
/s/ William D. Sanders Director
----------------------------------
William D. Sanders
/s/ Harry J. Thie Director
----------------------------------
Harry J. Thie
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
4.1* Specimen Common Stock Certificate
4.2** Amended Charter of the Company.
4.3* Restated and Amended Bylaws of the Company.
5 Opinion of Hunton & Williams.
8 Tax Opinion of Hunton & Williams (to be filed by amendment).
23.1 Consent of Hunton & Williams (included in Exhibit 5).
23.2 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (located on the signature page of this Registration
Statement)
- -------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form
S-11, File No. 33-74072, as amended, and incorporated by reference
herein.
** Filed as an Exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-3, File No. 333-4556, and incorporated by reference
herein.
HUNTON & WILLIAMS
Riverfront Plaza, East
951 East Byrd Street
Richmond, VA 23219
FILE NO.: 48010.1
May 29, 1998
Board of Directors
Storage USA, Inc.
10440 Little Patuxent Parkway, Suite 1100
Columbia, Maryland 21044
Registration Statement on Form S-3
Storage USA, Inc.
Ladies and Gentlemen:
We are acting as counsel for Storage USA, Inc. (the "Company") in
connection with its registration under the Securities Act of 1933 of 528,090
shares of its common stock, $.01 par value per share (the "Shares"), which are
proposed to be offered and sold as described in the Company's Registration
Statement on Form S-3 (the "Registration Statement") to be filed with the
Securities and Exchange Commission (the "Commission") on May 29, 1998.
In rendering this opinion, we have relied upon, among other things, our
examination of such records of the Company and certificates of its officers and
of public officials as we have deemed necessary.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly existing
under the laws of the State of Tennessee.
2. The Shares have been duly authorized and, when the Shares have been
offered and sold as described in the Registration Statement, will be legally
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement and the reference to our firm under the
heading "Legal Matters" in the Registration Statement.
Very truly yours,
HUNTON & WILLIAMS
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration
Statement of Storage USA, Inc. (the "Company") on Form S-3, of: (1) our report
dated January 30, 1998, except for Note 16, as to which the date is March 18,
1998, on our audits of the consolidated financial statements of the Company as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, which report is incorporated by reference in the
Company's 1997 Form 10-K; (2) our report dated January 30, 1998, on our audit of
the financial statement schedule of the Company as of December 31, 1997, which
report is included in the Company's 1997 Form 10-K; (3) our report dated January
20, 1998, on our audits of the Historical Summaries of Combined Gross Revenue
and Direct Operating Expenses for certain self-storage facilities for the year
ended December 31, 1996, which report is included in the Company's Form 8-K/A
filed January 20, 1998; (4) our report dated February 17, 1998, on our audits of
the Historical Summaries of Combined Gross Revenue and Direct Operating
Expenses for certain self-storage facilities for the year ended December 31,
1996, which report is included in the Company's Form 8-K/A filed February 17,
1998; and (5) our report dated March 25, 1998, on our audits of the Historical
Summaries of Combined Gross Revenue and Direct Operating Expenses for certain
self-storage facilities for the year ended December 31, 1996, which report is
included in the Company's Form 8-K/A filed March 25, 1998. We also consent to
the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 29, 1998
