As filed with the Securities and Exchange Commission on November 20, 1998
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------------
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 Number)
165 Madison Avenue
Suite 1300
Memphis, Tennessee 38103
(901) 252-2000
(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.
165 Madison Avenue,
Suite 1300
Memphis, Tennessee 38103
(901) 252-2000
(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 in light of market
conditions and other factors.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering:[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, please check the following box: [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Aggregate Amount Offering Price Per Aggregate Offering Amount of
Securities to be Registered to be Registered Unit(1) Price(1) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value, 125,135 $29.5625 $3,699,303 $1,028
per share
====================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the prices of the Common Shares on the New York Stock
Exchange on November 18, 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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER ___, 1998
Prospectus
125,135 Shares
Storage USA, Inc.
Common Stock
------------
Storage USA Common Stock trades on the New York Stock Exchange under
the symbol "SUS."
We may issue up to 125,135 shares of Common Stock to certain
individuals and entities (the "Unitholders") who sold self-storage facilities to
SUSA Partnership, L.P. on November 6, 1997. As partial consideration for their
properties, the Unitholders received a total of 125,135 units of limited
partnership interest in SUSA Partnership.
We will issue shares of Common Stock if:
1. the Unitholders choose to redeem their partnership units,
and
2. Storage USA elects to exchange the units for shares of
Common Stock.
The Unitholders will receive one share of Common Stock for each unit
exchanged. The Unitholders will not pay, and we will not receive, any cash for
the shares of Common Stock.
So that we can continue to qualify as a "real estate investment trust"
under the Internal Revenue Code, our Charter does not permit anyone to own more
than 9.8% of our outstanding Common Stock. This and other limits on who can own
Common Stock are described in this prospectus under "Restrictions on Ownership
and Transfer."
------------
Neither the Securities and Exchange Commission nor any State securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
The date of this Prospectus is November __, 1998.
<PAGE>
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION........................................3
A WARNING ABOUT FORWARD-LOOKING STATEMENTS.................................4
DESCRIPTION OF CAPITAL STOCK...............................................5
RESTRICTIONS ON OWNERSHIP AND TRANSFER.....................................6
REDEMPTION OF UNITS........................................................7
COMPARISON OF OWNERSHIP OF UNITS AND SHARES................................8
FEDERAL INCOME TAX CONSIDERATIONS.........................................17
PLAN OF DISTRIBUTION......................................................39
LEGAL OPINIONS............................................................39
EXPERTS...................................................................40
2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available on the SEC's
Website at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" information from other
documents that we file with them, which means that we can disclose important
information by referring to those documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 prior to the sale of all the shares covered
by this prospectus:
o Annual Report on Form 10-K for the year ended December 31, 1997;
o Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30, and September 30, 1998;
o Current Reports on Forms 8-K and 8-K/A filed with the SEC on January
20, 1998, January 26, 1998, February 17, 1998, March 6, 1998, March
25, 1998, October 13, 1998 and November 20, 1998;
o The description of the Class A Common Stock contained in our
Registration Statement on Form 8-A, filed with the SEC on March 15,
1994.
You may request a copy of these filings, at no cost, by writing or
telephoning:
Storage USA, Inc.
165 Madison Avenue
Suite 1300
Memphis, Tennessee 38101
Attention: Secretary
Telephone: 901/252-2000
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. We will not make an offer of
these shares in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any supplement is accurate as
of any date other than the date on the front of those documents.
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<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus, and the documents incorporated by reference, may
contain "forward-looking" statements as described in Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements usually include words like "believes,"
"anticipates" and "expects" and describe our expectations for the future. Of
course, these expectations may not be met in important ways for a variety of
reasons. We have described these reasons in our most recent Annual Report on
Form 10-K under the heading "Forward Looking Statements and Risk Factors" and
the other reports we file with the SEC, and you should review them before you
decide to buy our stock. We are not required to update any forward-looking
statements we make and we may not.
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STORAGE USA, INC.
Storage USA, Inc. ("Storage USA") is a self-managed, self-advised real
estate investment trust ("REIT"). We manage, acquire, develop and franchise
self-storage facilities. We do business through SUSA Partnership, L.P. ("SUSA
Partnership"), of which we are the sole general partner and in which we own an
approximate 88% partnership interest as of September 30, 1998. Our self-storage
facilities operate under the Storage USA name and offer low-cost, easily
accessible and enclosed storage space for personal and business use, primarily
on a month-to-month basis. All of our 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.
We are a Tennessee corporation. Our executive offices are located at
165 Madison Avenue, Suite 1300, Memphis, Tennessee 38103, and our telephone
number is (410) 730-9500.
DESCRIPTION OF CAPITAL STOCK
Storage USA 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, 650,000
shares of which have been designated as 8 7/8% Series A Cumulative Redeemable
Preferred Stock. As of September 30, 1998, there were 27,735,870 shares of
Common Stock outstanding. No shares of Preferred Stock were outstanding. The
following is only a summary of some of the rights of shareholders that might be
important to you. You should refer to our Charter and By-laws for a complete
statement of your rights as a shareholder. Both the Charter and the By-laws are
filed with the SEC as exhibits to the registration statement of which this
prospectus is a part.
Common Stock. As a holder of Common Stock you will have 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, only holders
of Common Stock have voting rights. The Charter does not provide for cumulative
voting in the election of directors or for preemptive rights to acquire new
shares issued by Storage USA. Common shareholders will receive dividends if the
Board declares them out of available funds.
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."
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<PAGE>
Preferred Stock. Under the Charter, the Board of Directors is
authorized, without further stockholder action, to issue up to 5,000,000 shares
of Preferred Stock. The Board may issue Preferred Stock in series, with
different preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions.
The Board has designated 650,000 shares of Preferred Stock as 8 7/8%
Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock").
Series A Preferred Stock is issuable in certain circumstances in exchange for
units of 8 7/8% Series A Cumulative Redeemable Preferred partnership interest in
SUSA Partnership, which have terms essentially identical to those of the Series
A Preferred Stock. If issued, the Series A Preferred Stock will be entitled to
receive cumulative preferential dividends at the rate of $8.78 per share per
year and will have a liquidation preference of $100 per share. Series A
Preferred Stock will be redeemable at the option of Storage USA beginning
November 1, 2003 at a redemption price of $100 per share, plus accrued but
unpaid dividends. The Series A Preferred Stock has voting rights only with
respect to certain matters that would adversely affect its rights.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Charter provides that, subject to certain exceptions, no
stockholder may own, or be deemed to own by virtue of the attribution provisions
of the Internal Revenue Code of 1986 as amended (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 (the "Ownership Limitation"). Pursuant to a Strategic
Alliance Agreement, dated as of March 19, 1996, as amended, among Storage USA,
Security Capital U.S. Realty and Security Capital Holdings S.A. (together with
Security Capital U.S. Realty, "Security Capital"), Security Capital and its
affiliates may beneficially own, in the aggregate, up to 42.5% of the Common
Stock outstanding (the "Special Stockholder Limit"). At September 14, 1998,
Security Capital held 11,765,654 shares, or approximately 42.4% 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
Storage USA's capital stock if, as a result of such acquisition, Storage USA
would fail to qualify as a domestically-controlled REIT (determined assuming
that Security Capital owns the maximum percentage of Storage USA's capital stock
that it is permitted to own under the Special Stockholder Limit).
The Charter provides that if any holder of capital stock of Storage USA
purports to transfer shares to a person or there is a change in the capital
structure of Storage USA, and either the purported transfer or the change in
capital structure would result in Storage USA 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 Storage USA that the shares have been transferred to a
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<PAGE>
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 Storage USA being "closely held" within
the meaning of Section 856(h) of the Code, and (B) such person provides to the
Board such representations and undertakings as the Board may require.
REDEMPTION OF UNITS
Under the Second Amended and Restated Agreement of Limited Partnership
for SUSA Partnership (the "Partnership Agreement"), the limited partners of SUSA
Partnership generally have the right to redeem their units of partnership
interest (the "Units"). Each limited partner may, subject to certain
limitations, require that SUSA Partnership redeem all or a portion of his Units
at any time after one year from the date he acquired the Units by delivering a
redemption notice to Storage USA. The form of the notice is an exhibit to The
Partnership Agreement.
A Limited Partner must request the redemption of at least 500 Units. If
the limited partner owns less than 500 Units, he must request the redemption of
all of his Units.
When a limited partner redeems his Units, SUSA Partnership can choose
to exchange the Units for either:
(1) a number of shares of Common Stock equal to the
number of Units redeemed (subject to certain
adjustments) or
(2) cash in an amount equal to the market value of the
number of shares of Common Stock he would have
received pursuant to clause (1) above.
To determine the amount of cash that SUSA Partnership will pay under
clause (2), SUSA Partnership will assume that the market value of the Common
Stock is equal to the average of the closing trading prices of the Common Stock
for the ten consecutive trading days before the day on which the redemption
notice was received by Storage USA.
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<PAGE>
The limited partner shall not receive Common Stock for his Units if the
issuance of Common Stock to him would:
o result in any person owning, directly or indirectly, Common
Stock in excess of the Ownership Limitation,
o result in Common Stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution),
o result in Storage USA being "closely held" within the
meaning of Section 856(h) of the Code,
o cause Storage USA to own, actually or constructively, 10% or
more of the ownership interests in a tenant of Storage USA's
or SUSA Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Code, or
o cause the acquisition of Common Stock by the redeeming
limited 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.
Instead of SUSA Partnership redeeming the Units, Storage USA may, in
its sole discretion, elect to purchase the Units directly from the limited
partner for either shares of Common Stock or cash, as described above. Storage
USA anticipates that it generally will elect exchange the Units for the shares
of Common Stock being offered by this prospectus. This transaction will be
treated as a sale of the Units to Storage USA for federal income tax purposes.
See "-- Tax Consequences of Redemption." After a limited partner redeems Units,
he will no longer have a right to receive distributions with respect to those
Units.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES
Generally, an investment in shares of Common Stock of Storage USA is
substantially equivalent economically to an investment in Units in SUSA
Partnership. Since SUSA Partnership makes distributions to its partners on a per
Unit basis and Storage USA 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. Shareholders and SUSA
Partnership's limited partners generally share in the risks and rewards of
ownership in the enterprise being conducted by Storage USA (through SUSA
Partnership). However, there are some differences between ownership of Units and
ownership of shares of Common Stock, some of which may be important to you.
The information below highlights a number of the significant
differences between SUSA Partnership and Storage USA and compares certain legal
rights associated with the ownership of Units and Common Stock, respectively.
These comparisons are intended to help SUSA Partnership's limited partners
understand how their investment will be changed if they redeem their Units for
Common Stock.
This discussion is summary in nature and does not constitute a complete
discussion of these matters. If you own Units, you should carefully review all
of this Prospectus and the registration statement of which this Prospectus is a
part for additional important information about Storage USA.
8
<PAGE>
Form of Organization and Assets Owned. SUSA Partnership is organized as
a Tennessee limited partnership, and Storage USA is its General Partner. Storage
USA is a Tennessee corporation. Storage USA 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. SUSA Partnership has a stated termination date of
December 31, 2054, although it may be terminated earlier under certain
circumstances. Storage USA has a perpetual term and intends to continue its
operations indefinitely.
Additional Equity. SUSA 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, Storage
USA in its sole discretion, may deem appropriate. In addition, if Storage USA
offers securities and contributes the proceeds from the sale of those securities
to SUSA Partnership, the General Partner may cause SUSA Partnership to issue
additional Units, or another class or series of partnership interest having
substantially similar rights as the new securities, to the General Partner.
Consideration for additional partnership interests may be cash or other property
or other assets permitted by Tennessee law.
Under the Charter, Storage USA has the authority to issue up to
150,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As
long as SUSA Partnership is in existence, the proceeds of all equity capital
raised by Storage USA will be contributed to SUSA Partnership in exchange for
Units or other interests in SUSA Partnership.
Management and Control. The General Partner of SUSA Partnership has the
exclusive power to manage and control all of SUSA Partnership's business. No
limited partner has any right to participate in or exercise management or
control over the SUSA Partnership's business. Upon the occurrence of an event of
bankruptcy or the dissolution of the General Partner, the General Partner will
be deemed to be removed automatically; otherwise, the limited partners may not
remove the General Partner with or without cause.
The Board of Directors has exclusive control over Storage USA'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 conflicts 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 Storage USA.
Fiduciary Duties. Under Tennessee law, the General Partner of SUSA
Partnership is accountable to SUSA Partnership as a fiduciary and, consequently,
must exercise good faith in all of its dealings with respect to partnership
affairs. However, under the Partnership Agreement, the General Partner is not
required to consider the tax consequences to any limited partner of any action
taken by it. So long as it acts in good faith, the General Partner is not liable
to a limited partner if the limited partner suffers damages or does not receive
certain benefits as a result of action or inaction of the General Partner.
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Under Tennessee law, Storage USA'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 Storage USA who act in such a
manner generally will not be liable to Storage USA or its shareholders for
monetary damages arising from their activities.
Management Limitation of Liability and Indemnification. The Partnership
Agreement generally provides that the General Partner will not be liable for
monetary damages to SUSA Partnership or any limited partner for losses sustained
or liabilities incurred as a result 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. Any action it takes or omits to take while relying on the opinion of
such persons, as to matters which the General Partner reasonably believes to be
within their professional or expert competence, are 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 liabilities (joint or several and including reasonable legal fees
and expenses) arising from claims that relate to the operations of SUSA
Partnership. However, SUSA Partnership may not indemnify any such person (1) for
an act or omission that was material to the matter giving rise to the claim and
either was committed in bad faith or was the result of active and deliberate
dishonesty, (2) if such person actually received an improper benefit in money,
property or services or (3) 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 the assets of SUSA Partnership.
Storage USA'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 (1) such persons
conducted themselves in good faith, (2) 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 (3) in the case of any criminal
proceeding, they had no reasonable cause to believe that their conduct was
unlawful. Any indemnification by Storage USA pursuant to the provisions of the
Charter described above will be paid out of the assets of Storage USA 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. However, a corporation cannot eliminate or limit the
liability of a director (1) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (2) for acts or omissions not in good faith
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or which involve intentional misconduct or a knowing violation of the law, or
(3) for unlawful distributions that exceed what could have been distributed
without violating the TBCA or the corporation's charter. Storage USA's Charter
contains a provision eliminating the personal liability of its directors or
officers to Storage USA 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, SUSA
Partnership's General Partner has exclusive management power over the
partnership's business and affairs. The limited partners may not remove the
General Partner 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 SUSA Partnership.
As described above under "Restrictions on Ownership and Transfer," the
Charter contains provisions restricting the acquisition of shares of Common
Stock.
In addition, Tennessee has adopted a series of statutes which 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 within seven days from the date the offer has become
effective following filing with the Commissioner and the offeree company a
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 of 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.
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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 (1) merger or
consolidation; (2) share exchange; (3) 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;
(4) issuance or transfer of shares from the corporation to the interested
shareholder; (5) plan of liquidation or dissolution proposed by the interested
shareholder; (6) transaction or recapitalization which increases the
proportionate share of any outstanding voting securities owned or controlled by
the interested shareholder; or (7) financing arrangement whereby any interested
shareholder receives, directly or indirectly, a benefit, except proportionately
as a shareholder.
"Interested shareholder" is defined as (1) 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 (2) 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 (A) is approved by the
holders of two-thirds of the voting stock not beneficially owned by the
interested shareholder, or (B) 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
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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: (A)
one-fifth (1/5) or more but less than one-third (1/3) of all voting power; (B)
one-third (1/3) or more but less than a majority of all voting power; or (C) 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 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.
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Storage USA's Bylaws contain a provision exempting from the Tennessee
Control Share Acquisition Act any and all such acquisitions by any person of
Storage USA'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, limited partners have
voting rights only as to the continuation of SUSA 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 SUSA Partnership are made by the General Partner. As of September
30, 1998, Storage USA held approximately 88% of the outstanding interests in
SUSA Partnership. As limited partners redeem their Units, Storage USA's
percentage ownership of SUSA Partnership will increase. If additional Units are
issued to third parties, Storage USA's percentage ownership of SUSA Partnership
will decrease.
Shareholders of Storage USA have the right to vote on, among other
things, a merger or sale of substantially all of the assets of Storage USA,
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, 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 (1) affect the redemption rights, (2) adversely affect the rights of
limited partners to receive distributions payable to them under The Partnership
Agreement, (3) alter SUSA Partnership's profit and loss allocations, or (4)
impose any obligation upon the limited partners to make additional capital
contributions to SUSA 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 by the written consent of such
majority if such a vote becomes permissible under Tennessee law). Storage USA'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 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 SUSA Partnership or Storage USA. At any time
prior to December 31, 2054 (upon which date SUSA Partnership will terminate),
the General Partner may elect to dissolve SUSA Partnership in its sole
discretion. Such dissolution shall also occur upon (1) the bankruptcy,
dissolution or withdrawal of the General Partner (unless the limited partners
unanimously elect to continue SUSA Partnership), (2) 90 days after the sale or
other disposition of all or substantially all the assets of SUSA Partnership or
(3) the redemption of all of the outstanding Units (other than those held by the
General Partner, if any).
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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 Storage USA.
Vote Required to Sell Assets or Merge. Under The Partnership Agreement,
the sale, exchange, transfer or other disposition of all or substantially all of
SUSA 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 Storage USA
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 Storage USA's assets other 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 Storage USA's assets in the usual and regular course of
business.
Compensation, Fees and Distributions. Storage USA does not receive any
compensation for its services as General Partner of SUSA Partnership. As a
partner in SUSA Partnership, however, the General Partner has the same right to
allocations and distributions as other partners. In addition, SUSA Partnership
will reimburse the General Partner for all of its expenses related to the
ongoing operation of SUSA Partnership and any offering of partnership interests
in SUSA Partnership or capital stock of Storage USA.
Liability of Investors. Under The Partnership Agreement and applicable
state law, the liability of the limited partners for SUSA 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 SUSA Partnership.
Under Tennessee law, Storage USA's shareholders are not personally
liable for the debts or obligations of the company.
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 SUSA Partnership. SUSA 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 Storage USA.
Storage USA is entitled to receive its pro rata share of distributions made by
SUSA Partnership with respect to the Units owned by Storage USA, 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, Storage USA
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.
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Potential Dilution of Rights. The General Partner of SUSA 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 purpose at any time on terms and
conditions established by the General Partner.
Storage USA's Board of Directors may issue, in its discretion,
additional shares of Common Stock and a variety of other equity securities 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 any of his Units without (1) obtaining the prior written consent of the
General Partner, which consent may be withheld in its sole and absolute
discretion, and (2) meeting certain other requirements set forth in the
Partnership Agreement. However, subject to certain restrictions, a limited
partner may transfer Units (A) as a gift to a member of a his immediate family
or a trust for the benefit of a member of a his immediate family or (B) if the
limited partner is a corporation or other business entity, to any of its
affiliates or subsidiaries or to any successor in interest.
Limited partners should expect to hold their Units until they redeem
them for cash or shares of Common Stock, or until SUSA Partnership terminates.
The right of a transferee to become a substituted limited partner also is
subject to the consent of the General Partner, and the General Partner may
withhold its consent 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
SUSA Partnership in connection with such transfer.
Federal Income Taxation. SUSA Partnership is not subject to federal
income taxes. Instead, each holder of an interest in SUSA Partnership takes into
account its allocable share of the partnership's taxable income or loss in
determining its federal income tax liability.
Income and loss from SUSA Partnership generally is subject to the
"passive activity" limitations. Under the "passive activity" rules, income and
loss from SUSA 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."
(However, if SUSA Partnership is considered a "publicly traded partnership,"
then income and loss from SUSA Partnership can only be offset against other
income and loss from SUSA 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 SUSA 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 SUSA 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 federal income tax returns.
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Holders of Units are required in some cases to file state income tax returns
and/or pay state income taxes in the states where SUSA Partnership owns
property, even if they are not residents of those states, and in some such
states SUSA Partnership is required to remit a withholding tax with respect to
distributions to such nonresidents.
Storage USA elected to be taxed as a REIT effective for its taxable
year ended December 31, 1994. So long as it qualifies as a REIT, Storage USA
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 Storage USA will be treated as "portfolio" income to
its shareholders and cannot be offset with losses from "passive activities."
Distributions made by Storage USA 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, Storage
USA shareholders (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 Storage USA's operations and
distributions. Storage USA may be required to pay state income and/or franchise
taxes in certain states.
FEDERAL INCOME TAX CONSIDERATIONS
The following sections summarize the federal income tax issues that
you, as a redeeming limited partner and shareholder, may consider relevant.
Because this section is a summary, it does not address all of the tax issues
that may be important to you. In addition, this section does not address the tax
issues that may be important to certain types of shareholders that are subject
to special treatment under the federal income tax laws, such as insurance
companies, tax-exempt organizations (except to the extent discussed in
"--Taxation of Tax-Exempt Shareholders" below), financial institutions or
broker-dealers, and non-U.S. individuals and foreign corporations (except to the
extent discussed in "--Taxation of Non-U.S. Shareholders" below).
In addition, the Charter restricts certain transfers of Common Stock to
persons who are not U.S. citizens, partnerships or corporations. Any transfer to
any of these non-U.S. persons is void if it would result in non-U.S. persons
holding 50% or more of the fair market value of Storage USA's capital stock.
Security Capital, which as of September 14, 1998 owned approximately 42.4% of
the outstanding Common Stock, is treated as a non-U.S. person for purposes of
this restriction.
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The statements in this section are based on the current federal income
tax laws governing our qualification as a REIT. We cannot assure you that new
laws, interpretations thereof, or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF REDEEMING YOUR UNITS FOR COMMON STOCK AND OF STORAGE
USA'S ELECTION TO BE TAXED AS A REIT. SPECIFICALLY, YOU SHOULD CONSULT YOUR OWN
TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH INVESTMENT AND ELECTION, AND REGARDING POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
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 Storage USA assumes the
redemption obligation and purchases Units from a redeeming limited partner, the
Partnership Agreement provides that the redemption will be treated by Storage
USA, SUSA Partnership, and the redeeming limited partner as a sale of Units by
the limited partner to Storage USA. The sale will be fully taxable to the
redeeming limited partner, and he will realize for tax purposes an amount equal
to the sum of the cash or the value of the Common Stock received in exchange for
the Units, plus the amount of any partnership liabilities allocable to the
redeemed Units at the time of the purchase.
If Storage USA does not elect to assume the obligation to redeem a
limited partner's Units, then SUSA Partnership may either (A) redeem the Units
for cash or shares of Common Stock that Storage USA contributes to SUSA
Partnership to effect the redemption, or (B) redeem the Units for cash that
Storage USA does not contribute to SUSA Partnership to effect the redemption. If
SUSA Partnership redeems the Units for cash or Common Stock contributed by
Storage USA, the redemption likely would be treated for tax purposes as a sale
of such Units in a fully taxable transaction. In that event, the redeeming
partner will realize 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 SUSA Partnership chooses to redeem Units for cash that is not
contributed by Storage USA to effect the redemption, the tax consequences would
be the same as described in the previous paragraph, except that if SUSA
Partnership redeems less than all of the Units owned by a limited partner, the
limited partner would not be permitted to recognize any loss occurring on the
transaction. The limited partner will recognize taxable gain only to the extent
that the sum of the cash and the amount of any partnership liabilities allocable
to the redeemed Units, exceeds his adjusted basis in all of his Units
immediately before the redemption.
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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 if 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 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., shares of Common
Stock) 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 sold, the limited partner will recognize gain. The amount of
gain recognized, or the tax liability resulting from such gain, could exceed the
amount of cash and the value of any other property received during the sale.
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 (A) the amount
realized upon the sale of a Unit that is attributable to a limited partner's
share of SUSA Partnership's "unrealized receivables" (as defined in Section 751
of the Code) exceeds (B) the basis attributable to those assets, the excess will
be treated as ordinary income. Unrealized receivables include, to the extent not
previously included in SUSA Partnership's 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 SUSA Partnership had
sold its assets at their fair market value at the time of the transfer of a
Unit.
Basis of Units. In general, if a limited partner was deemed to have
received his Units upon liquidation of a partnership, he will have an initial
tax basis in his Units ("Initial Basis") equal to his basis in his interest in
the liquidated partnership. Similarly, in general, if a limited partner received
his Units in exchange for a contribution of a partnership interest or other
property to SUSA Partnership, he will have an Initial Basis equal to his basis
in the contributed partnership interest or other property.
A limited partner's Initial Basis generally is increased by (1) his
share of SUSA Partnership's taxable income and (2) increases in his share of
SUSA Partnership's liabilities (including any increase in his share of
liabilities occurring in connection with the transactions resulting in the
issuance of the Units).
Generally, a limited partner's basis in his Units is decreased (but not
below zero) by (1) his share of SUSA Partnership's distributions, (2) decreases
in his share of SUSA Partnership's liabilities (including any decrease in his
share of liabilities occurring in connection with the transactions resulting in
the issuance of the Units), (3) his share of SUSA Partnership's losses and (4)
his share of SUSA Partnership's nondeductible expenditures 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 limited
partner's original transfer of property to the SUSA Partnership in exchange for
Units to be treated as a "disguised sale" of property.
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The Code and the Treasury Regulations thereunder (the "Disguised Sale
Regulations") generally provide that, unless an exception applies, if (A) a
partner contributes property to a partnership and (B) the partnership at the
same time or afterwards transfers money or other consideration (including the
assumption of or taking subject to a liability) to the partner, then the
transaction will be presumed to be a sale, in whole or in part, of the 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 contribution of property and the transfer of money or other
consideration from the partnership to a partner, 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 SUSA Partnership redeems a Unit, the Internal Revenue
Service could argue that the Disguised Sale Regulations apply, because the
redeeming limited partner will receive cash or shares of Common Stock after he
has contributed property to SUSA Partnership. If the Internal Revenue Service
were to make that argument successfully, the original issuance of the Units
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.
Taxation of Storage USA
Storage USA elected to be taxed as a REIT under the federal income tax
laws commencing with its taxable year ended December 31, 1994. Storage USA
believes that it has operated in a manner intended to qualify as a REIT since
its election to be a REIT and it intends to continue to so operate. This section
discusses the laws governing the federal income tax treatment of a REIT and its
shareholders. These laws are highly technical and complex.
Storage USA's qualification as a REIT depends on its ability to meet on
a continuing basis certain qualification tests set forth in the federal tax
laws. Those qualification tests involve the percentage of income that Storage
USA earns from specified sources, the percentage of its assets that fall within
certain categories, the diversity of its share ownership, and the percentage of
its earnings that it distributes. We describe the REIT qualification tests in
more detail below. For a discussion of the tax treatment of Storage USA and its
shareholders if Storage USA fails to qualify as a REIT, see "--Failure to
Qualify."
If Storage USA qualifies as a REIT, it generally will not be subject to
federal income tax on the taxable income that it distributes to its
shareholders. The benefit of that tax treatment is that it avoids the "double
taxation" (i.e., at both the corporate and stockholder levels) that generally
results from owning stock in a corporation. However, Storage USA will be subject
to federal tax in the following circumstances:
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o Storage USA will pay federal income tax on taxable income
(including net capital gain) that it does not distribute to
its shareholders during, or within a specified time period
after, the calendar year in which the income is earned.
o Storage USA may be subject to the "alternative minimum tax"
on any items of tax preference that it does not distribute
or allocate to its shareholders.
o Storage USA will pay income tax at the highest corporate
rate on (i) net income from the sale or other disposition of
property acquired through foreclosure ("foreclosure
property") that it holds primarily for sale to customers in
the ordinary course of business and (ii) other
non-qualifying income from foreclosure property.
o Storage USA will pay a 100% tax on net income from certain
sales or other dispositions of property (other than
foreclosure property) that it holds primarily for sale to
customers in the ordinary course of business ("prohibited
transactions").
o If Storage USA fails to satisfy the 75% gross income test or
the 95% gross income test (as described below under
"--Requirements for Qualification--Income Tests"), and
nonetheless continues to qualify as a REIT because it meets
certain other requirements, it will pay a 100% tax on (i)
the gross income attributable to the greater of the amounts
by which it fails the 75% and 95% gross income tests,
multiplied by (ii) a fraction intended to reflect its
profitability.
o If Storage USA fails to distribute during a 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, it will pay a 4% excise tax on the excess of
such required distribution over the amount it actually
distributed.
o Storage USA may elect to retain and pay income tax on its
net long-term capital gain.
o If Storage USA acquires any asset from a C corporation
(i.e., a corporation generally subject to full
corporate-level tax) in a merger or other transaction in
which it acquires a "carryover" basis in the asset (i.e.,
basis determined by reference to the C corporation's basis
in the asset (or another asset)), it will pay tax at the
highest regular corporate rate applicable if it recognizes
gain on the sale or disposition of such asset during the
10-year period after it acquires such asset. The amount of
gain on which it will pay tax is the lesser of (i) the
amount of gain that it recognizes at the time of the sale or
disposition and (ii) the amount of gain that it would have
recognized if it had sold the asset at the time it acquired
the asset. The rule described in this paragraph will apply
assuming that Storage USA makes an election under IRS Notice
88-19 upon its acquisition of an asset from a C corporation.
Requirements for REIT Qualification
A REIT is a corporation, trust, or association that meets the following
requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable
shares, or by transferable certificates of beneficial
interest;
3. it would be taxable as a domestic corporation, but for
sections 856 through 860 of the Code;
4. it is neither a financial institution nor an insurance
company subject to certain provisions of the Code;
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5. at least 100 persons are beneficial owners of its shares or
ownership certificates;
6. not more than 50% in value of its outstanding shares or
ownership certificates is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include
certain entities) during the last half of any taxable year
(the "5/50 Rule");
7. it elects 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 to elect and maintain REIT status;
8. it uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Code and
the Treasury regulations thereunder (the "Treasury
Regulations"); and
9. it meets certain other qualification tests, described below,
regarding the nature of its income and assets.
Storage USA must meet requirements 1 through 4 during its entire
taxable year and must meet requirement 5 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. If Storage USA complies with all the requirements for ascertaining
the ownership of its outstanding shares in a taxable year and has no reason to
know that it violated the 5/50 Rule, it will be deemed to have satisfied the
5/50 Rule for such taxable year. For purposes of determining share ownership
under the 5/50 Rule, an "individual" generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under Code section 401(a), and
beneficiaries of such a trust will be treated as holding shares of Storage USA
in proportion to their actuarial interests in the trust for purposes of the 5/50
Rule.
Storage USA believes it has issued sufficient Common Stock with
sufficient diversity of ownership to satisfy requirements 5 and 6 set forth
above. In addition, Storage USA's Charter restricts the ownership and transfer
of the Common Stock so that Storage USA should continue to satisfy requirements
5 and 6. The provisions of the Charter restricting the ownership and transfer of
the Common Stock are described in "Restrictions on Ownership and Transfer."
Storage USA currently has several direct corporate subsidiaries and may
have additional corporate subsidiaries in the future. A corporation that is a
"qualified REIT subsidiary" is not treated as a corporation separate from its
parent REIT. 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 owned by the REIT. Thus, in
applying the requirements described herein, any "qualified REIT subsidiary" of
Storage USA will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiary will be treated as assets, liabilities,
and items of income, deduction, and credit of Storage USA. Storage USA's direct
corporate subsidiaries are qualified REIT subsidiaries. Accordingly, they are
not subject to federal corporate income taxation, though they may be subject to
state and local taxation.
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In the case of a REIT that is a partner in a partnership, the REIT is
treated as owning its proportionate share of the assets of the partnership and
as earning its allocable share of the gross income of the partnership for
purposes of the applicable REIT qualification tests. Thus, Storage USA's
proportionate share of the assets, liabilities and items of income of SUSA
Partnership and of any other partnership in which Storage USA has acquired or
will acquire an interest, directly or indirectly (a "Subsidiary Partnership"),
are treated as assets and gross income of Storage USA for purposes of applying
the various REIT qualification requirements.
Income Tests
Storage USA must satisfy two gross income tests annually to maintain
its qualification as a REIT. First, at least 75% of its gross income (excluding
gross income from prohibited transactions) for each taxable year must consist of
defined types of income that it derives, directly or indirectly, from
investments relating to real property or mortgages on real property or temporary
investment income (the "75% gross income test"). Qualifying income for purposes
of the 75% gross income test includes "rents from real property," interest on
debt secured by mortgages on real property or on interests in real property, and
dividends or other distributions on and gain from the sale of shares in other
REITs. Second, at least 95% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of income that is
qualifying income for purposes of the 75% gross income test, dividends, other
types of interest, gain from the sale or disposition of stock or securities, or
any combination of the foregoing (the "95% gross income test"). The following
paragraphs discuss the specific application of these tests to Storage USA.
Rent that Storage USA receives from real property that it owns and
leases to tenants will qualify as "rents from real property" (which is
qualifying income for purposes of the 75% and 95% gross income tests) only if
several conditions are met. First, the rent must not be based, in whole or in
part, on the income or profits of any person. However, "rents from real
property" generally does not exclude an amount solely because it is based on a
fixed percentage or percentages of receipts or sales. Second, neither Storage
USA nor a direct or indirect owner of 10% or more of its stock may own, actually
or constructively, 10% or more of a tenant from whom it receives rent. Third,
all of the rent received under a lease of real property will not qualify as
"rents from real property" unless the rent attributable to the personal property
leased in connection with such lease is no more than 15% of the total rent
received under the lease. Finally, Storage USA generally must not operate or
manage its real property or furnish or render services to its tenants, other
than through an "independent contractor" who is adequately compensated and from
whom Storage USA does not derive revenue. However, Storage USA need not provide
services through an "independent contractor," but instead may provide services
directly, if the services are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant." In addition, Storage USA may render a de minimis
amount of "non-customary" services to the tenants of a property, other than
through an independent contractor, as long as its income from the services does
not exceed 1% of its income from the related property.
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Storage USA, through SUSA Partnership, derives most of its revenues
from rent from storage unit leases, additional first month rent and late charges
attributable to such rents (collectively, the "Primary Revenues"). Additional
revenues are derived from ancillary services such as moving truck rental
commissions, packing and shipping commissions, rent from leasing space utilized
for sales of locks and packing supplies to SUSA Management, Inc., a Tennessee
corporation ("Management") 5% of whose voting stock and 100% of whose nonvoting
stock (which together constitute 99% of the beneficial economic interest
therein) are owned by SUSA 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"). Storage
USA also receives dividends from Management and Storage USA Franchise Corp., a
Tennessee corporation ("Franchise"). SUSA Partnership owns 100% of the nonvoting
stock, which represents 97.5% of the beneficial economic interest therein, of
Franchise. We believe that, other than the late charges attributable to rent,
which are treated as interest that qualifies for the 95% gross income test, but
not the 75% gross income test, the Primary Revenues qualify as rents from real
property for purposes of both the 75% test and the 95% test and that dividends
from Management and Franchise qualify as dividends for purposes of the 95% test.
Furthermore, Storage USA believes that the Ancillary Revenues and other types of
potentially nonqualifying gross income earned by Storage USA in each taxable
year are equal to, and will continue to be equal to, less than 5% of Storage
USA's total gross income and, thus, that such items of income do not adversely
affect Storage USA's qualification as a REIT.
Other than with respect to its leasing arrangement with Management with
respect to the sale of lock and packing supplies (the revenue from which Storage
USA will treat as nonqualifying income for purposes of the 75% and 95% tests),
Storage USA 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, we
believe that any personal property rented in connection with our storage
facilities is well within the 15% restriction. However, in order for the Primary
Revenues to constitute "rents from real property," Storage USA must not provide
services (other than within the 1% de minimis exception described above) 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.
Storage USA, through SUSA Partnership (which is not an independent
contractor), provides certain services with respect to the facilities and will
provide certain services with respect to any newly acquired self-storage
facilities. Such services include (i) common area services, such as cleaning and
maintaining public entrances, exits, stairways, walkways, lobbies and 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 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, SUSA Partnership does not otherwise
assist tenants in the storage or removal of goods or belongings from the units),
(v) permitting tenants to use the fax machine at a facility for occasional local
faxes without additional charge and for occasional long-distance faxes for a
nominal charge, (vi) maintaining underground utilities and structural elements
of the facilities, (vii) paying real and personal property taxes or the cost of
replacing or refurbishing personal property with respect to real and personal
property owned by SUSA Partnership at a facility, (viii) for a fee, acting as an
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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 Storage USA or SUSA
Partnership to move their goods and belongings into and out of the units without
additional charge. Storage USA believes that the services provided by SUSA
Partnership are customarily furnished or rendered in connection with the rental
of space for occupancy only by self-storage facilities in the geographic areas
in which its facilities are located.
Storage USA's investment, through SUSA Partnership, in the facilities
in major part gives rise to rental income that is qualifying income for purposes
of the 75% and 95% gross income tests. Gains on sales of the facilities (other
than from prohibited transactions, as described below) or of Storage USA's
interest in SUSA Partnership generally will be qualifying income for purposes of
the 75% and 95% gross income tests. Storage USA anticipates that income on its
other investments, including its indirect investments in Management and
Franchise, will not result in Storage USA failing the 75% or 95% gross income
test for any year.
A REIT will incur a 100% tax on the net income derived from any
"prohibited transaction." A "prohibited transaction" generally is a sale or
other disposition of property (other than foreclosure property) that the REIT
holds primarily for sale to customers in the ordinary course of a trade or
business. We believe that none of Storage USA's or SUSA Partnership's assets is
held for sale to customers and that a sale of any such asset would not be in the
ordinary course of its business. Whether a REIT holds an asset "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 asset. Nevertheless, we will attempt to comply
with the terms of safe-harbor provisions in the Code prescribing when an asset
sale will not be characterized as a prohibited transaction. We cannot assure
you, however, that we can comply with such safe-harbor provisions or that
Storage USA or SUSA Partnership will avoid owning property that may be
characterized as property that it holds "primarily for sale to customers in the
ordinary course of a trade or business."
From time to time, Storage USA or SUSA Partnership may enter into
hedging transactions with respect to one or more of its assets or liabilities.
Its hedging activities may include entering into interest rate swaps, caps and
floors (or options to purchase such items), and futures and forward contracts.
To the extent that Storage USA or SUSA Partnership enters into an interest rate
swap or cap contract, option, futures contract, forward rate agreement or any
similar financial instrument to hedge its indebtedness incurred to acquire or
carry "real estate assets," any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. To the extent that Storage USA or SUSA
Partnership hedges with other types of financial instruments, or in other
situations, it is not entirely clear how the income from those transactions will
be treated for purposes of the gross income tests. We intend to structure any
hedging transactions in a manner that does not jeopardize Storage USA's status
as a REIT.
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If Storage USA fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT for
such year if it qualifies for relief under certain provisions of the Code. Those
relief provisions generally will be available if its failure to meet such tests
is due to reasonable cause and not due to willful neglect, we attach a schedule
of the sources of its income to its tax return, and any incorrect information on
the schedule was not due to fraud with intent to evade tax. We cannot predict,
however, whether in all circumstances Storage USA would qualify for the relief
provisions. In addition, as discussed above in "--Taxation of Storage USA," even
if the relief provisions apply, Storage USA would incur a 100% tax on the gross
income attributable to the greater of the amounts by which it fails the 75% and
95% gross income tests, multiplied by a fraction intended to reflect its
profitability.
Asset Tests
To maintain its qualification as a REIT, Storage USA also must satisfy
two asset tests at the close of each quarter of each taxable year. First, at
least 75% of the value of its total assets must consist of cash or cash items
(including certain receivables), government securities, "real estate assets," or
qualifying temporary investments (the "75% asset test"). The term "real estate
assets" includes interests in real property, interests in mortgages on real
property and stock in other REITs. For purposes of the 75% asset test, the term
"interest in real property" includes an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). Qualifying temporary investments are
investments in stock or debt instruments during the one-year period following
Storage USA's receipt of new capital that it raises through equity or long-term
(at least five-year) debt offerings.
The second asset test has two components. First, of Storage USA's
investments not included in the 75% asset class, the value of its interest in
any one issuer's securities (which does not include its stock in other REITs,
SUSA Partnership, or any qualified REIT subsidiary) may not exceed 5% of the
value of its total assets (the "5% asset test"). Second, Storage USA may not own
more than 10% of any one issuer's outstanding voting securities (which does not
include its stock in other REITs, SUSA Partnership, or any qualified REIT
subsidiary) (the "10% asset test").
SUSA Partnership owns 5% of the voting stock and 100% of the nonvoting
stock of Management (which together constitute 99% of the beneficial economic
interest therein). In addition, SUSA Partnership owns 100% of the nonvoting
stock of Franchise, which represents 97.5% of the beneficial economic interest
therein. By virtue of its partnership interest in SUSA Partnership, Storage USA
is deemed to own its pro rata share of the assets of SUSA Partnership, including
the stock of Management and Franchise held by SUSA Partnership.
SUSA Partnership does not own more than 10% of the voting securities of
either Management or Franchise. In addition, based upon its analysis of the
estimated value of the stock of Management and Franchise owned by SUSA
Partnership relative to the estimated value of the other assets owned by Storage
USA, Storage USA believes that neither its pro rata share of the stock of
Management nor its pro rata share of the stock of Franchise exceeds 5% of the
total value of Storage USA'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 Storage USA or SUSA Partnership increases its
interest in either Management or Franchise (including as a result of Storage USA
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increasing its interest in SUSA Partnership in connection with a stock offering
or as limited partners of SUSA Partnership exercise their redemption rights).
Although Storage USA 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 SUSA Partnership's overall interest in either Management
or Franchise. Storage USA does not expect to own securities of any other issuer
in excess of the restrictions set forth above.
If Storage USA should fail to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (i) it satisfied the
asset tests at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more non-qualifying assets. If
Storage USA did not satisfy the condition described in clause (ii) of the
preceding sentence, it still could avoid disqualification as a REIT by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which the discrepancy arose.
Distribution Requirements
Each taxable year, Storage USA must distribute dividends (other than
capital gain dividends and deemed distributions of retained capital gain) to its
shareholders in an aggregate 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 or loss) and (B) 95% of its net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. Storage USA must pay such distributions in the taxable year to
which they relate, or in the following taxable year if it declares the
distribution before it timely files its federal income tax return for such year
and pays the distribution on or before the first regular dividend payment date
after such declaration.
Storage USA will pay federal income tax on taxable income (including
net capital gain) that it does not distribute to shareholders. Furthermore, if
it fails to distribute during a calendar year (or, in the case of distributions
with declaration and record dates falling in the last three months of the
calendar year, by the end of January following such 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, it will incur a 4% nondeductible excise tax on the excess of
such required distribution over the amounts it actually distributed. Storage USA
may elect to retain and pay income tax on the net long-term capital gain it
receives in a taxable year. See "--Taxation of Taxable U.S. Shareholders." If it
so elects, it will be treated as having distributed any such retained amount for
purposes of the 4% excise tax described above. Storage USA has made, and Storage
USA intends to continue to make, timely distributions sufficient to satisfy the
annual distribution requirements.
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It is possible that, from time to time, Storage USA 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. For example, Storage USA
may not deduct recognized capital losses from its "REIT taxable income."
Further, it is possible that, from time to time, Storage USA 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. As a result of
the foregoing, Storage USA may have less cash than is necessary to distribute
all of its taxable income and thereby avoid corporate income tax and the excise
tax imposed on certain undistributed income. In such a situation, it may need to
borrow funds or issue Preferred Stock or additional Common Stock.
Under certain circumstances, Storage USA may be able to correct a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to its shareholders in a later year. Storage USA may include such
deficiency dividends in its deduction for dividends paid for the earlier year.
Although Storage USA may be able to avoid income tax on amounts distributed as
deficiency dividends, it will be required to pay interest to the Internal
Revenue Service based upon the amount of any deduction it takes for deficiency
dividends.
Recordkeeping Requirements
Storage USA must maintain certain records in order to qualify as a
REIT. In addition, to avoid a monetary penalty, it must request on an annual
basis certain information from its shareholders designed to disclose the actual
ownership of its outstanding stock. Storage USA has complied, and Storage USA
intends to continue to comply, with such requirements.
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Failure to Qualify
If Storage USA failed to qualify as a REIT in any taxable year, and no
relief provision applied, it would be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. In calculating its taxable income in a year in which it failed
to qualify as a REIT, Storage USA would not be able to deduct amounts paid out
to shareholders. In fact, Storage USA would not be required to distribute any
amounts to shareholders in such year. In such event, to the extent of its
current and accumulated earnings and profits, all distributions to shareholders
would be taxable as ordinary income. Subject to certain limitations of the Code,
corporate shareholders might be eligible for the dividends received deduction.
Unless Storage USA qualified for relief under specific statutory provisions, it
also would be disqualified from taxation as a REIT for the four taxable years
following the year during which it ceased to qualify as a REIT. We cannot
predict whether in all circumstances Storage USA would qualify for such
statutory relief.
Taxation of Taxable U.S. Shareholders
As long as Storage USA qualifies as a REIT, a taxable "U.S.
Stockholder" must take into account distributions out of Storage USA's current
or accumulated earnings and profits (and that it does not designate as capital
gain dividends or retained long-term capital gain) as ordinary income. A U.S.
Stockholder will not qualify for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. Stockholder" means a
holder of Common Stock that for U.S. federal income tax purposes is
o a citizen or resident of the United States,
o a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of an
political subdivision thereof,
o an estate whose income from sources outside the United
States is includible in gross income for U.S. federal income
tax purposes regardless of its connection with the conduct
of a trade or business within the United States, or
o any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons have the authority to
control all substantial decisions of the trust.
A U.S. Stockholder will recognize distributions that Storage USA
designates as capital gain dividends as long-term capital gain (to the extent
they do not exceed Storage USA's actual net capital gain for the taxable year)
without regard to the period for which the U.S. Stockholder has held its Common
Stock. Subject to certain limitations, Storage USA will designate its capital
gain dividends as either 20% or 25% rate distributions. A corporate U.S.
Stockholder, however, may be required to treat up to 20% of certain capital gain
dividends as ordinary income.
Storage USA may elect to retain and pay income tax on the net long-term
capital gain that it receives in a taxable year. In that case, a U.S.
Stockholder would be taxed on its proportionate share of Storage USA's
undistributed long-term capital gain. The U.S. Stockholder would receive a
credit or refund for its proportionate share of the tax Storage USA paid. The
U.S. Stockholder would increase the basis in its stock by the amount of its
proportionate share of Storage USA's undistributed long-term capital gain, minus
its share of the tax Storage USA paid.
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A U.S. Stockholder will not incur tax on a distribution in excess of
Storage USA's current and accumulated earnings and profits if such distribution
does not exceed the adjusted basis of the U.S. Stockholder's Common Stock.
Instead, such distribution will reduce the adjusted basis of such Common Stock.
A U.S. Stockholder will recognize a distribution in excess of both Storage USA's
current and accumulated earnings and profits and the U.S. Stockholder's adjusted
basis in its Common Stock 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 U.S. Stockholder. In addition, if
Storage USA declares a distribution in October, November, or December of any
year that is payable to a U.S. Stockholder of record on a specified date in any
such month, such distribution shall be treated as both paid by Storage USA and
received by the U.S. Stockholder on December 31 of such year, provided that
Storage USA actually pays the distribution during January of the following
calendar year. We will notify U.S. Shareholders after the close of Storage USA's
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income or capital gain dividends.
Taxation of U.S. Shareholders on the Disposition of the Common Stock
In general, a U.S. Stockholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the Common Stock
as long-term capital gain or loss if the U.S. Stockholder has held the Common
Stock for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. Stockholder must treat any loss upon a sale or exchange of
Common Stock held by such shareholder for six months or less (after applying
certain holding period rules) as a long-term capital loss to the extent of
capital gain dividends and other distributions from Storage USA that such U.S.
Stockholder treats as long-term capital gain. All or a portion of any loss a
U.S. Stockholder realizes upon a taxable disposition of the Common Stock may be
disallowed if the U.S. Stockholder purchases other shares of Common Stock within
30 days before or after the disposition.
Capital Gains and Losses
A taxpayer generally must hold a capital asset for more than one year
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 maximum tax rate on long-term capital gain applicable to non-corporate
taxpayers is 20% for sales and exchanges of assets held for more than one year.
The maximum tax rate on long-term capital gain from the sale or exchange of
"section 1250 property" (i.e., depreciable real property) is 25% to the extent
that such gain would have been treated as ordinary income if the property were
"section 1245 property." With respect to distributions that Storage USA
designates as capital gain dividends and any retained capital gain that it is
deemed to distribute, Storage USA may designate (subject to certain limits)
whether such a distribution is taxable to its non-corporate shareholders at a
20% or 25% rate. Thus, the tax rate differential between capital gain and
ordinary income for non-corporate taxpayers may be significant. In addition, the
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characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income only up to a
maximum annual amount of $3,000. A non-corporate taxpayer may carry forward
unused capital losses indefinitely. A corporate taxpayer must pay tax on its net
capital gain at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding
Storage USA will report to its shareholders and to the Internal Revenue
Service the amount of distributions it pays during each calendar year, and the
amount of tax it withholds, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions 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 Storage USA
with its correct taxpayer identification number also may be subject to penalties
imposed by the Internal Revenue Service. Any amount paid as backup withholding
will be creditable against the shareholder's income tax liability. In addition,
Storage USA may be required to withhold a portion of capital gain distributions
to any shareholders who fail to certify their non-foreign status to Storage USA.
The Treasury Department has issued final regulations regarding the backup
withholding rules as applied to Non-U.S. Shareholders. Those regulations alter
the current system of backup withholding compliance and are effective for
distributions made after December 31, 1999. See "--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 and annuities ("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 Internal
Revenue Service has issued a published ruling that dividend distributions from a
REIT to an exempt employee pension trust do not constitute UBTI, provided that
the exempt employee pension trust does not otherwise use the shares of the REIT
in an unrelated trade or business of the pension trust. Based on that ruling,
amounts that Storage USA distributes to Exempt Organizations generally should
not constitute UBTI. However, if an Exempt Organization were to finance its
acquisition of the Common Stock with debt, a portion of the income that they
receive from Storage USA would 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 that they
receive from Storage USA as UBTI. Finally, in certain circumstances, a qualified
employee pension or profit sharing trust that owns more than 10% of Storage
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USA's stock is required to treat a percentage of the dividends that it receives
from Storage USA as UBTI (the "UBTI Percentage"). The UBTI Percentage is equal
to the gross income Storage USA derives from an unrelated trade or business
(determined as if it were a pension trust) divided by its total gross income for
the year in which it pays the dividends. The UBTI rule applies to a pension
trust holding more than 10% of Storage USA's stock only if:
o the UBTI Percentage is at least 5%;
o Storage USA 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 Storage USA's
stock in proportion to their actuarial interests in the
pension trust; and
o Storage USA is a "pension-held REIT" (i.e., either (i) one
pension trust owns more than 25% of the value of its stock
or (ii) a group of pension trusts individually holding more
than 10% of the value of its stock collectively owns more
than 50% of the value of its stock).
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. This section
is only a summary of such rules. We urge Non-U.S. Shareholders to consult their
own tax advisors to determine the impact of federal, state, and local income tax
laws on ownership of the Common Stock, including any reporting requirements.
A Non-U.S. Stockholder that receives a distribution that is not
attributable to gain from Storage USA's sale or exchange of U.S. real property
interests (as defined below) and that Storage USA does not designate as a
capital gain dividend or retained capital gain will recognize ordinary income to
the extent that Storage USA pays such distribution out of its current or
accumulated earnings and profits. A withholding tax equal to 30% of the gross
amount of the distribution ordinarily will apply to such distribution unless an
applicable tax treaty reduces or eliminates the tax. However, if a distribution
is treated as effectively connected with the Non-U.S. Stockholder's conduct of a
U.S. trade or business, the Non-U.S. Stockholder generally will be subject to
federal income tax on the distribution 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. Stockholder that
is a non-U.S. corporation). Storage USA plans to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distribution paid to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies and the Non-U.S. Stockholder
files the required form evidencing eligibility for that reduced rate with
Storage USA or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with Storage
USA claiming that the distribution is effectively connected income. The U.S.
Treasury Department has issued final regulations that modify the manner in which
Storage USA will comply with the withholding requirements. Those regulations are
effective for distributions made after December 31, 1999.
A Non-U.S. Stockholder will not incur tax on a distribution in excess
of Storage USA's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of its Common Stock. Instead,
such a distribution will reduce the adjusted basis of such Common Stock. A
Non-U.S. Stockholder will be subject to tax on a distribution that exceeds both
Storage USA's current and accumulated earnings and profits and the adjusted
basis of its Common Stock, if the Non-U.S. Stockholder otherwise would be
subject to tax on gain from the sale or disposition of its Common Stock, as
described below. Because Storage USA generally cannot determine at the time it
makes a distribution whether or not the distribution will exceed its current and
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accumulated earnings and profits, it normally will withhold tax on the entire
amount of any distribution at the same rate as it would withhold on a dividend.
However, a Non-U.S. Stockholder may obtain a refund of amounts that Storage USA
withholds if it later determines that a distribution in fact exceeded its
current and accumulated earnings and profits.
Storage USA must withhold 10% of any distribution that exceeds its
current and accumulated earnings and profits. Consequently, although it intends
to withhold at a rate of 30% on the entire amount of any distribution, to the
extent that it does not do so, it will withhold at a rate of 10% on any portion
of a distribution not subject to withholding at a rate of 30%.
For any year in which Storage USA qualifies as a REIT, a Non-U.S.
Stockholder will incur tax on distributions that are attributable to gain from
its sale or exchange of "U.S. real property interests" under the provisions of
the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). The term
"U.S. real property interests" includes certain interests in real property and
stock in corporations at least 50% of whose assets consists of interests in real
property, but excludes mortgage loans and mortgage-backed securities. Under
FIRPTA, a Non-U.S. Stockholder is taxed on distributions attributable to gain
from sales of U.S. real property interests as if such gain were effectively
connected with a U.S. business of the Non-U.S. Stockholder. A Non-U.S.
Stockholder thus would be taxed on such a distribution 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 a nonresident
alien individual). A non-U.S. corporate shareholder not entitled to treaty
relief or exemption also may be subject to the 30% branch profits tax on
distributions subject to FIRPTA. Storage USA must withhold 35% of any
distribution that it could designate as a capital gain dividend. A Non-U.S.
Stockholder may receive a credit against its FIRPTA tax liability for the amount
Storage USA withholds.
A Non-U.S. Stockholder generally will not incur tax under FIRPTA on
gain from the sale of its Common Stock as long as Storage USA is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period non-U.S. persons held, directly or
indirectly, less than 50% in value of the stock. Storage USA's Charter prohibits
any person (other than Security Capital) from acquiring Common Stock if such
acquisition would cause Storage USA to fail to be a "domestically controlled
REIT." However, a Non-U.S. Stockholder will incur tax on gain not subject to
FIRPTA if (i) the gain is effectively connected with the Non-U.S. Stockholder's
U.S. trade or business, in which case the Non-U.S. Stockholder will be subject
to the same treatment as U.S. Shareholders with respect to such gain, or (ii)
the Non-U.S. Stockholder is a nonresident alien individual who was present in
the U.S. for 183 days or more during the taxable year and has a "tax home" in
the United States, in which case the Non-U.S. Stockholder will incur a 30% tax
on his capital gains. However, a Non-U.S. Stockholder that owned, actually or
constructively, 5% or less of the Common Stock at all times during a specified
testing period will not incur tax under FIRPTA if the Common Stock is "regularly
traded" on an established securities market. If the gain on the sale of the
Common Stock were taxed under FIRPTA, a Non-U.S. Stockholder would be taxed in
the same manner 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 non-U.S. corporations).
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Other Tax Consequences
State and Local Taxes
Storage USA and/or you may be subject to state and local tax in various
states and localities, including those states and localities in which Storage
USA or you transact business, own property or reside. The state and local tax
treatment in such jurisdictions may differ from the federal income tax treatment
described above. Consequently, you should consult your own tax advisor regarding
the effect of state and local tax laws upon an investment in the Common Stock.
Tax Aspects of Storage USA's Investments in SUSA Partnership and Subsidiary
Partnerships
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments in SUSA
Partnership and the Subsidiary Partnerships (each individually a "Partnership"
and, collectively, the "Partnerships"). The discussion does not cover state or
local tax laws or any federal tax laws other than income tax laws.
Classification as Partnerships
Storage USA is entitled to include in its income its distributive share
of each Partnership's income and to deduct its distributive share of each
Partnership's losses only if the Partnerships are classified for federal income
tax purposes as partnerships rather than as corporations or associations taxable
as corporations. An organization will be classified as a partnership, rather
than as a corporation, for federal income tax purposes if it (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.
Under the Check-the-Box Regulations, an unincorporated entity with at
least two members may elect to be classified either as an association taxable as
a corporation 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 by a taxing authority on or
before May 8, 1996 that the classification of the entity was under examination.
Each Partnership reasonably claimed partnership classification under the
Treasury Regulations relating to entity classification in effect prior to
January 1, 1997. In addition, the Partnerships intend to continue to be
classified as partnerships for federal income tax purposes and no Partnership
will elect to be treated as an association taxable as a corporation under the
Check-the-Box Regulations.
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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 (the "PTP
Regulations") that provide limited safe harbors from the definition of a
publicly traded partnership. Pursuant to one of those safe harbors (the "Private
Placement Exclusion"), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (i) all
interests in the partnership were issued in a transaction (or transactions) that
was not required to be registered under the Securities Act of 1933, as amended,
and (ii) the partnership does not have more than 100 partners at any time during
the partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (i)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (ii) a principal purpose of the use of the
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, Storage USA would not be able to qualify as a REIT. See "--
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 Storage USA
might incur tax liability without any related cash distribution. See "--
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.
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Income Taxation of SUSA Partnerships and their Partners
Partners, Not the Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, Storage USA 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 Storage USA, without regard to whether
Storage USA has received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under section 704(b) of the
Code if they do not comply with the provisions of section 704(b) of the Code and
the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Partnership's allocations of taxable income, gain and
loss are intended to comply with the requirements of section 704(b) of the Code
and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the unrealized gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (a "Book-Tax Difference"). Such allocations are
solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. SUSA
Partnership was formed by way of contributions of appreciated property and has
received contributions of appreciated property since Storage USA's initial
public offering. Consequently, the Partnership Agreement requires such
allocations to be made in a manner consistent with section 704(c) of the Code.
In general, the carryover basis of the facilities contributed by
Storage USA to SUSA Partnership will cause Storage USA to be allocated lower
depreciation and other deductions, and possibly amounts of taxable income, in
the event of a sale of such a facility, in excess of the economic or book income
allocated to it as a result of such sale. While this will tend to eliminate the
Book-Tax Differences over the life of SUSA Partnership, the special allocation
rules of section 704(c) do not always entirely rectify the Book-Tax Difference
on an annual basis or with respect to a specific taxable transaction such as a
sale. Therefore, elimination of Book-Tax Differences with respect to the
facilities contributed by Storage USA may cause Storage USA to recognize taxable
income in excess of its proportionate share of the cash proceeds, which might
adversely affect Storage USA's ability to comply with the REIT distribution
requirements. See "-- Requirements for Qualification -- Distribution
Requirements."
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The U.S. Department of the Treasury has 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.
SUSA Partnership generally has elected to use the "traditional method" for
allocating Code section 704(c) items with respect to the properties that it
acquires in exchange for Units. Under the Partnership Agreement, depreciation or
amortization deductions of SUSA Partnership generally will be allocated among
the partners in accordance with their respective interests in SUSA Partnership,
except to the extent that SUSA Partnership is required under Code section 704(c)
to use a method for allocating tax depreciation deductions attributable to
contributed properties that results in Storage USA receiving a disproportionate
share of such deductions. In addition, gain on sale of a facility that has been
contributed (in whole or in part) to SUSA Partnership will be specially
allocated to the contributing partners to the extent of any "built-in" gain with
respect to such facility for federal income tax purposes. The application of
section 704(c) to SUSA Partnership is not entirely clear, however, and may be
affected by Treasury Regulations promulgated in the future.
Basis in Partnership Interest. Storage USA's adjusted tax basis in its
partnership interest in SUSA Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to SUSA Partnership by
Storage USA, (ii) increased by (A) its allocable share of SUSA Partnership's
income and (B) its allocable share of indebtedness of SUSA Partnership, and
(iii) reduced, but not below zero, by (A) Storage USA's allocable share of SUSA
Partnership's loss, and (B) the amount of cash distributed to Storage USA, and
(C) constructive distributions resulting from a reduction in Storage USA's share
of indebtedness of SUSA Partnership.
If the allocation of Storage USA's distributive share of SUSA
Partnership's loss would reduce the adjusted tax basis of Storage USA's
partnership interest in SUSA Partnership below zero, the recognition of such
loss will be deferred until such time as the recognition of such loss would not
reduce Storage USA's adjusted tax basis below zero. To the extent that SUSA
Partnership's distributions, or any decrease in Storage USA's share of the
indebtedness of SUSA Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce Storage USA's adjusted tax
basis below zero, such distributions (including such constructive distributions)
constitute taxable income to Storage USA. Such distributions and constructive
distributions normally will be characterized as capital gain, and, if Storage
USA's partnership interest in SUSA Partnership has been held for longer than the
long-term capital gain holding period (currently one year), the distributions
and constructive distributions will constitute long-term capital gain.
Depreciation Deductions Available to the Partnerships. The Partnerships
have acquired equity interests in facilities, and expect to acquire additional
facilities in the future, for cash. To that extent, a Partnership's initial
basis in such a facility for federal income tax purpose generally equals the
purchase price paid by the Partnership. The Partnerships depreciate or will
depreciate such depreciable property for federal income tax purposes under the
alternative depreciation system ("ADS"). Under ADS, the Partnerships generally
depreciate or will depreciate furnishings and equipment over a 10-year recovery
period using a straight line method and a half-year convention. If, however, a
Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. Under ADS, the Partnerships generally depreciate or will
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depreciate buildings and improvements over a 40-year recovery period using a
straight line method and a mid-month convention. However, to the extent that a
Partnership has acquired or will acquire equity interests in facilities in
exchange for partnership interests in the Partnership, the Partnership's initial
basis in each such facility for federal income tax purposes should be the same
as the transferor's basis in that facility on the date of acquisition. The
Partnerships depreciate or will depreciate such depreciable property for federal
income tax purposes under ADS. Although the law is not entirely clear, the
Partnerships depreciate or will depreciate such depreciable property for federal
income tax purposes over the same remaining useful lives and under the same
methods used by the transferors. A Partnership's tax depreciation deductions
will be allocated among the partners in accordance with their respective
interests in the Partnership (except to the extent that the Partnership is
required under Code section 704(c) to use a method of allocating depreciation
deductions attributable to the contributed properties that results in Storage
USA 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 SUSA Partnership for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners of the
Partnership under section 704(c) of the Code to the extent of their "built-in
gain" on those properties for federal income tax purposes. The partners'
"built-in gain" on the contributed properties sold will equal the excess of the
partners' proportionate share of the book value of those properties over the
partners' tax basis allocable to those properties at the time of the sale. Any
remaining gain recognized by the Partnership on the disposition of the
contributed properties, and any gain recognized by the Partnership or the
disposition of the other properties, will be allocated among the partners in
accordance with their respective percentage interests in the Partnership.
Storage USA'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 Storage USA's ability to satisfy the income tests
for REIT status. See "-- Requirements for Qualification -- Income Tests."
Storage USA, 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 Storage USA's or such
Partnership's trade or business.
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Management and Franchise
SUSA Partnership owns 100% of the nonvoting stock, and 5% of the voting
stock, of Management, representing in the aggregate a 99% economic interest
therein. In addition, SUSA Partnership owns 100% of the nonvoting stock of
Franchise which represents a 97.5% economic interest therein. By virtue of its
ownership of SUSA Partnership, Storage USA is considered to own its pro rata
share of the stock of Management and Franchise held by SUSA Partnership.
As noted above, for Storage USA to qualify as a REIT, Storage USA's
proportionate share of the value of the securities of each of Management and
Franchise held by SUSA Partnership may not exceed 5% of the total value of
Storage USA's assets. In addition, Storage USA's proportionate share of each of
Management and Franchise's equity securities may not constitute more than 10% of
the voting securities of such entity. SUSA Partnership owns 5% of the voting
securities of Management, but does not own any of the voting securities of
Franchise. Storage USA believes that neither its proportionate share of the
value of the securities of Management held by SUSA Partnership nor its
proportionate share of the value of the securities of Franchise held by SUSA
Partnership exceeds 5% of the total value of Storage USA's assets. If the
Internal Revenue Service were to challenge successfully those determinations,
however, Storage USA likely would fail to qualify as a REIT.
Each of Management and Franchise 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 Management
and Franchise, which in turn reduces amounts available for distribution to
Storage USA's stockholders.
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by Storage USA of the
shares of Common Stock if, and to the extent that, the Unitholders tender their
Units for redemption and Storage USA elects to purchase the Units for shares of
Common Stock. On November 6, 1997, SUSA Partnership issued 125,135 Units to the
Unitholders. Storage USA is registering the issuance of 125,135 shares of Common
Stock so that the Unitholders will have freely tradeable securities upon
redemption of their Units. However, registration of these shares does not
necessarily mean that any of such shares will be issued by Storage USA or
offered or sold by any Unitholder.
Storage USA may from time to time issue shares of Common Stock upon
redemption of Units. Storage USA will exchange the redeeming partner's Units for
shares of Common Stock. Consequently, with each such redemption, Storage USA's
interest in SUSA Partnership will increase.
LEGAL OPINIONS
Hunton & Williams, Richmond, Virginia, has delivered to Storage USA a
legal opinion as to the validity of the Common Stock covered by this prospectus.
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EXPERTS
The consolidated balance sheets of Storage USA 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 schedule of Storage USA 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 Storage USA'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 Storage USA's Current Report on Form 8-K/A filed March 25,
1998, all incorporated by reference in this Registration Statement, have been
incorporated herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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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....... $1,028.00
Accounting fees and expenses.............................. $2,000.00
Legal fees and expenses................................... $3,500.00
Miscellaneous............................................. $ 0.00
TOTAL............................................ $6,528.00
Item 15. Indemnification of Officers and Directors.
Storage USA'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 Storage USA pursuant to the provisions of the
Charter described above shall be paid out of the assets of Storage USA 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. Storage USA 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. Storage USA's Charter
contains a provision eliminating the personal liability of its directors or
officers to Storage USA or its shareholders for money damages to the maximum
extent permitted by Tennessee law from time to time.
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The Second Amended and Restated Agreement of Limited Partnership of
SUSA 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
SUSA 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 SUSA Partnership, SUSA Management, Inc. or Storage USA,
and such other persons (including affiliates of Storage USA or SUSA Partnership)
as Storage USA, may designate from time to time in its discretion. Any such
indemnification will be made only out of assets of SUSA Partnership, and in no
event may an Indemnitee subject the limited partners of SUSA 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, SUSA Partnership has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy and, therefore, unenforceable. SUSA Partnership has purchased liability
insurance for the purpose of providing a source of funds to pay the
indemnification described above.
Item 16. Exhibits.
1.1* Private Placement Purchase Agreement, dated November 12, 1998, by and
between SUSA Partnership, L.P. and Greene Street 1998 Exchange Fund,
L.P., relating to the sale of 650,000 8 7/8% Series A Cumulative
Redeemable Preferred Units of SUSA Partnership, L.P.
3.1* Articles of Amendment to the Amended Charter of Storage USA, Inc.,
designating and fixing the rights and preferences of the 8 7/8% Series
A Cumulative Redeemable Preferred Stock, as filed with the Secretary of
State of the State of Tennessee on November 12, 1998.
4.1** Form of Common Stock Certificate
4.2*** Form of Amended Charter of Storage USA
4.3** Restated and Amended Bylaws of Storage USA
5 Opinion of Hunton & Williams
8 Tax Opinion of Hunton & Williams (to be filed by amendment)
10.1* Fourth Amendment to the Second Amended and Restated Agreement of
Limited Partnership of SUSA Partnership, L.P., dated November 12, 1998,
establishing the 8 7/8% Series A Cumulative Redeemable Preferred Units
of Partnership Interest and fixing distribution and other preferences
and rights of such units.
10.2* Registration Rights Agreement, dated as of November 12, 1998, by and
between Storage USA, Inc. and Greene Street 1998 Exchange Fund, L.P.
23.1 Consent of Hunton & Williams (included in Exhibit 5)
23.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (located on the signature page of
this Registration Statement)
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* Filed as an Exhibit to Storage USA's current report on Formm 8-K,
filed with the Commission on November 20, 1998, and incorporated by
reference herein.
** Filed as an Exhibit to Storage USA's Registration Statement on Form
S-11, File No. 33-74072, as amended, and incorporated by reference
herein.
*** Filed as an Exhibit to Storage USA's Amendment No. 1 to Registration
Statement on Form S-3, File No. 333-4556, and incorporated by
reference herein.
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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 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
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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-4
<PAGE>
<TABLE>
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 Memphis,
State of Tennessee on this 20th day of November, 1998.
By: /s/ Christopher P. Marr
---------------------------
Christopher P. Marr
Chief Financial Officer
(Principal Financial and Accounting Officer)
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 November 20, 1998. Each of the undersigned officers and
directors of the registrant hereby constitutes Christopher P. Marr, John W.
McConomy 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.
<CAPTION>
Signature Title & Capacity
--------- ----------------
<S> <C>
/s/ Dean Jernigan Chairman of the Board, Chief Executive
- --------------------------------- Officer and Director
Dean Jernigan (Principal Executive Officer)
/s/ Christopher P. Marr Chief Financial Officer
- --------------------------------- (Principal Financial and Accounting Officer)
Christopher P. Marr
/s/ C. Ronald Blankenship Director
- ---------------------------------
C. Ronald Blankenship
/s/ Howard P. Colhoun Director
- ---------------------------------
Howard P. Colhoun
/s/ Alan B. Graf, Jr. Director
- ---------------------------------
Alan B. Graf, Jr.
/s/ Mark Jorgensen Director
- ---------------------------------
Mark Jorgensen
II-5
<PAGE>
/s/ John P. McCann Director
- ---------------------------------
John P. McCann
/s/ Caroline S. McBride Director
- ---------------------------------
Caroline S. McBride
/s/ William D. Sanders Director
- ---------------------------------
William D. Sanders
/s/ Harry J. Thie Director
- ---------------------------------
Harry J. Thie
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
1.1* Private Placement Purchase Agreement, dated November 12, 1998, by and
between SUSA Partnership, L.P. and Greene Street 1998 Exchange Fund,
L.P., relating to the sale of 650,000 8 7/8% Series A Cumulative
Redeemable Preferred Units of SUSA Partnership, L.P.
3.1* Articles of Amendment to the Amended Charter of Storage USA, Inc.,
designating and fixing the rights and preferences of the 8 7/8% Series
A Cumulative Redeemable Preferred Stock, as filed with the Secretary of
State of the State of Tennessee on November 12, 1998.
4.1** Form of Common Stock Certificate
4.2*** Form of Amended Charter of Storage USA
4.3** Restated and Amended Bylaws of Storage USA
5 Opinion of Hunton & Williams
8 Tax Opinion of Hunton & Williams (to be filed by amendment)
10.1* Fourth Amendment to the Second Amended and Restated Agreement of
Limited Partnership of SUSA Partnership, L.P., dated November 12, 1998,
establishing the 8 7/8% Series A Cumulative Redeemable Preferred Units
of Partnership Interest and fixing distribution and other preferences
and rights of such units.
10.2* Registration Rights Agreement, dated as of November 12, 1998, by and
between Storage USA, Inc. and Greene Street 1998 Exchange Fund, L.P.
23.1 Consent of Hunton & Williams (included in Exhibit 5)
23.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (located on the signature page of
this Registration Statement)
- -------------------------
* Filed as an Exhibit to Storage USA's current report on Formm 8-K,
filed with the Commission on November 20, 1998, and incorporated by
reference herein.
** Filed as an Exhibit to Storage USA's Registration Statement on Form
S-11, File No. 33-74072, as amended, and incorporated by reference
herein.
*** Filed as an Exhibit to Storage USA's Amendment No. 1 to Registration
Statement on Form S-3, File No.333-4556, and incorporated by reference
herein.
Exhibit 5
HUNTON & WILLIAMS
951 East Byrd Street
Riverfront Tower, East
Richmond, VA 23219
November 19, 1998
Board of Directors
Storage USA, Inc.
165 Madison Avenue, Suite 1300
Memphis, Tennessee 38103
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 125,135
shares of its common stock (the "Shares") which are proposed to be offered and
sold as described in Storage USA's Registration Statement on Form S-3 (the
"Registration Statement") to be filed today with the Securities and Exchange
Commission (the "Commission").
In rendering this opinion, we have relied upon, among other things, our
examination of such records of Storage USA 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. Storage USA is a corporation duly incorporated, validly existing and
in good standing 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 reference to our firm under the
heading "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Hunton & Williams
07667
Exhibit 23.2
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
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 (4) 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".
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
November 19, 1998