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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): OCTOBER 30, 1998
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JDN REALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 1-12844 58-1468053
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification
Incorporation) Number)
359 EAST PACES FERRY ROAD
SUITE 400
ATLANTA, GEORGIA 30305
(Address of Principal Executive Offices) (Zip Code)
(404) 262-3252
(Registrant's Telephone Number, including Area Code)
NOT APPLICABLE
(Former Name)
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ITEM 5. OTHER EVENTS.
Risk Factors/Cautionary Statements for Purposes of the Private
Securities Litigation Reform Act of 1995. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
is hereby filing cautionary statements identifying important factors that could
cause the Company's actual consolidated results of operations to differ
materially from those projected in forward-looking statements of the Company
made by or on behalf of the Company. Certain of these statements are also
intended to inform investors of the most significant risk factors that should be
considered in making an investment in the Company's securities. These cautionary
statements revise and update those previously filed with the Securities and
Exchange Commission by the Company.
Federal Income Tax and ERISA Considerations. The Company is also filing
certain information regarding the Internal Revenue Code of 1986, as amended,
and the Employment Retirement Income Security Act of 1974, as amended.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) EXHIBITS.
Exhibit No. Description
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99.1 Risk Factors/Cautionary Statements for Purposes of
the Private Securities Litigation Reform Act of 1995
99.2 Federal Income Tax and ERISA Considerations
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
JDN REALTY CORPORATION
By: /s/ William J. Kerley
--------------------------------
William J. Kerley
Chief Financial Officer
Date: October 29, 1998
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INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
99.1 Risk Factors/Cautionary Statements for Purposes of
the Private Securities Litigation Reform Act of 1995
99.2 Federal Income Tax and ERISA Considerations
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EXHIBIT 99.1
RISK FACTORS/CAUTIONARY STATEMENTS FOR PURPOSES OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Management of JDN Realty Corporation may from time to time make certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. When making statements which are not historical in nature,
including the words "anticipate," "estimate," "should," "expect," "believe,"
"intend" and similar expressions, we intend to identify forward-looking
statements. Such statements are, by their nature, subject to certain risks and
uncertainties.
Among the factors that could cause actual consolidated results from
operations to differ materially from those that the Company projects in
forward-looking statements are the following:
SIGNIFICANT RELIANCE ON MAJOR TENANTS; RISK OF TENANT BANKRUPTCY
Major Tenants. As of September 30, 1998, each of Wal-Mart and Lowe's
leased more than 10% of the gross leaseable area that the Company owned
directly. Wal-Mart and Lowe's also each accounted for more than 10% of the
Company's total minimum rent. No other single tenant accounts for more than 10%
of the Company's gross leaseable area or more than 10% total minimum rent in
1998.
If the financial condition or corporate strategy of any of the
Company's major tenants changes, these changes could have an adverse impact on
the Company, such as reducing distributions. The following is a list of examples
of changes that could have a material adverse effect on income and funds from
operations and, consequently, could reduce distributions:
- Wal-Mart or Lowe's could become unable to complete and lease
existing development and redevelopment projects on schedule and
within budget;
- Wal-Mart or Lowe's could become unable to pay rent as it becomes
due;
- Wal-Mart or Lowe's could fail to renew leases as they expire; and
- Wal-Mart or Lowe's could discontinue providing or provide
significantly fewer assignments of development projects to the
Company, and the Company could be unable to replace the income
from these assignments with economically advantageous assignments
from other value-oriented retail anchor tenants.
Other Tenants. The bankruptcy or insolvency of a major tenant or a
number of smaller tenants may have an adverse impact on the properties affected
and on the income that those properties produce.
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DEPENDENCE ON AND INFLUENCE OF EXECUTIVE OFFICERS AND DIRECTORS
The Company depends on the efforts of its executive officers, and
particularly J. Donald Nichols and Elizabeth L. Nichols. The loss of their
services could have an adverse effect on the operations of the Company.
J. Donald Nichols, Elizabeth L. Nichols and the other directors and
executive officers of the Company have substantial influence on the affairs of
the Company. For example, the directors may amend the investment and financing
policies of the Company without a vote of the holders of the Common Stock.
Any such amendments could result in decisions that are detrimental to the value
of the Company.
RISK OF DEBT FINANCING
The Company is subject to a variety of risks associated with debt
financing. Examples of these risks include the following:
- the Company's cash provided by operating activities may be
insufficient to meet required payments of principal and interest;
- the Company may be unable to pay or refinance indebtedness on its
properties;
- if prevailing interest rates or other factors at the time of
refinancing result in higher interest rates on refinancing, then
the Company's interest costs would increase, which may adversely
affect the Company's costs and related returns on its development
and redevelopment activities, cash provided by operating
activities and the ability to make distributions or payments to
holders of the Company's securities;
- if the Company is unable to secure refinancing of indebtedness on
acceptable terms, the Company may be forced to dispose of
properties upon disadvantageous terms, which may result in losses
to the Company and may adversely affect the Company's funds from
operations; and
- if a property or properties are mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments,
the mortgagee may foreclose upon the property or otherwise compel
the Company to transfer the property to the mortgagee, resulting
in a loss of income and asset value to the Company.
In addition, in June 1998 the Division of Banking Supervision and
Regulation of the Board of Governors of the Federal Reserve System issued a
supervisory letter which addressed the subject of lending standards for business
loans. The supervisory letter noted, among other things, a significant increase
in bank lending to REITs and concluded that bank examiners should increase their
understanding of REITs and related lending and credit risks associated with
lending to REITs. Management is uncertain of the future effects of the
supervisory letter on the Company. Any changes in bank lending practices as a
result of the supervisory letter may affect the Company's ability to
successfully negotiate new credit facilities.
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Company policy currently prohibits the Company from incurring debt
(secured or unsecured) in excess of 60% of total market capitalization. The
Board of Directors can change this limitation without approval of the holders of
the Company's common stock. The Charter and Bylaws of the Company do not limit
the amount of borrowings the Company can incur.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees
of risk. Among the factors that may affect real estate values and the income
generated from real estate investments are the following:
- changes in the general economic climate;
- local conditions (such as an oversupply of or a reduction in
demand for shopping center space in an area);
- the quality and philosophy of management;
- competition from other available space;
- the ability of the owner to provide adequate maintenance and
insurance;
- variable operating costs (including real estate taxes);
- costs associated with federal, state and local government laws
and regulations (including, for example, environmental, zoning
and other land use laws and regulations);
- changes in business conditions and the general economy as they
affect interest rate levels;
- the availability of financing; and
- potential liability under and changes in environmental and other
laws.
Dependence on rental income from real property. Because rental income
from real property represents substantially all of the Company's income and
funds from operations, the inability of a significant number of the Company's
tenants to meet their obligations to the Company, or the inability of the
Company to lease on economically favorable terms a significant amount of space
in its properties could adversely affect the Company.
In the event of default by a tenant, the Company may experience delays
in enforcing, and incur substantial costs to enforce, its rights as landlord. In
addition, although circumstances may cause a reduction in income from the
investment, there is generally no reduction in certain significant expenditures
associated with ownership of real estate (such as mortgage payments, real estate
taxes and maintenance costs).
Operating Risks. The Company's shopping center properties are subject
to all operating risks common to shopping center developments and are
particularly subject to
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the risks of changing economic conditions that affect value-oriented retailers
and the retail industry as a whole. Such risks include the following:
- competition from other shopping center developments and
developers;
- excessive building of comparable properties or increases in
unemployment in the areas in which the Company's properties are
located (either of which might adversely affect occupancy or
rental rates);
- increases in operating costs due to inflation and other factors
(which increases may not necessarily be offset by increased
rents);
- inability or unwillingness of lessees to pay rent increases;
- changes in general economic conditions or consumer preferences
that affect the demand for value-oriented retailers or that
result in the merger of or closings by such retailers;
- the availability of debt and equity capital with favorable terms
and conditions;
- future enactment of laws regulating public places (including
present and possible future laws relating to access by disabled
persons); and
- limitation by local rental markets of the extent to which rents
may be increased to meet increased expenses without decreasing
occupancy rates.
Any of the above may adversely affect the Company's ability to make
distributions or payments to holders of its securities.
Illiquidity of Real Estate. Equity real estate investments are
relatively difficult to convert to cash and therefore may tend to limit the
ability of the Company to react promptly in response to changes in economic or
other conditions. Further, restrictions applicable to REITS may affect the
Company's ability to sell properties without adversely affecting returns to
holders of the Company's securities.
Inability to Rent Unleased Space. Many factors, including certain
covenants found in some leases with existing tenants that restrict the use of
other space at a property, may affect the ability of the Company to rent
unleased space. There can be no assurance that any tenant whose lease expires in
the future will renew such lease or that the Company will be able to re-lease
space on economically advantageous terms. In addition, the Company may incur
costs in making improvements or repairs to a property that are required by a new
tenant.
Effect of Uninsured Loss on Performance. The Company carries
comprehensive liability, fire, flood, extended coverage and rental loss
insurance with policy specifications and insured limits that are customary for
similar properties. Certain types of losses (such as from wars or earthquakes),
however, are either uninsurable or insurable only at costs which are not
economically justifiable. If an uninsured loss occurs, although the Company
would continue to be obligated to repay any recourse mortgage indebtedness on
the
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property, the Company may lose both its invested capital in, and anticipated
profits from, the property.
Competition. Numerous commercial developers, real estate companies and
other owners of real estate (including those that operate in the region in which
the Company's properties are located) compete with the Company in seeking land
for development, properties for acquisition and tenants for properties.
Certain of these competitors may have greater capital and other resources than
the Company.
Potential Environmental Liability and Cost of Remediation. As an owner
of real property, the Company may become liable for the costs of removal or
remediation of certain hazardous or toxic substances at, under or disposed of in
connection with such property. Also, the Company may become liable for certain
other potential costs relating to hazardous or toxic substances (including
government fines and injuries to persons and adjacent property). Various
federal, state and local environmental laws may impose liability without regard
to whether the owner knew of, or was responsible for, the presence or disposal
of such substances and may impose liability on the owner in connection with the
activities of an operator of the property.
The cost of any required remediation, removal, fines or personal or
property damages and the owner's liability therefor could exceed the value of
the property. In addition, the presence of such substances, or the failure to
properly dispose of or remediate such substances, may adversely affect the
owner's ability to sell or rent such property or to borrow using such property
as collateral which, in turn, would reduce the owner's revenues.
Americans with Disabilities Act. The Company's properties and any
additional developments or acquisitions must comply with Title III of the
Americans with Disabilities Act. Compliance with the ADA's requirements may
require removal of structural, architectural or communication barriers to
handicapped access and utilization in certain public areas of the Company's
properties. Noncompliance could result in injunctive relief, imposition of fines
or an award of damages to private litigants. If the Company must make changes to
bring any of the properties into compliance with the ADA, expenses associated
with such changes could adversely affect the Company's ability to make expected
distributions. The Company believes that its competitors face similar costs to
comply with the requirements of the ADA.
RISKS INHERENT IN DEVELOPMENT AND ACQUISITION ACTIVITIES
Developing or expanding existing shopping centers is an integral part
of the Company's strategy for maintaining and enhancing the value of its
shopping center portfolio. While the Company's policies with respect to its
activities are intended to limit some of the risks otherwise associated with
those activities (including not commencing construction on a project prior to
obtaining a commitment from an anchor tenant), the Company nevertheless will
incur certain risks, including risks related to delays in construction and
lease-up, costs of materials, financing availability, volatility in interest
rates, labor availability and the failure of properties to perform as expected.
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LIMITATIONS ON POTENTIAL CHANGES IN CONTROL
Certain provisions of the Company's Charter and Bylaws and Maryland law
may make a change in the control of the Company more difficult, even if a change
of control were in the shareholders' interest. These provisions include the
following:
- the limitation on ownership of the Company's capital stock by any
single holder (other than the Nichols, their immediate family and
certain affiliates) to (a) 8% of either the number or the value
of the outstanding shares of common stock and (b) 8% of either
the number or the value of the outstanding shares of preferred
stock;
- the staggered terms of the Company's Board of Directors;
- super-majority voting in certain situations;
- business combination provisions under Maryland law; and
- the ability of the Company's Board of Directors to issue
preferred stock without shareholder approval.
ADVERSE TAX CONSEQUENCES
Tax Liabilities of Failure to Qualify as a REIT. The Company has
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code") for federal income tax purposes. We can provide no
assurance, however, that the Company will continue to operate in a manner
enabling it to remain so qualified. Qualification as a REIT involves the
application of highly technical and complex Code provisions which have only a
limited number of judicial or administrative interpretations. Also, the
determination of various factual matters and circumstances not entirely within
the Company's control may impact its ability to qualify as a REIT. In addition,
new legislation, regulations, administrative interpretations or court decisions
may significantly change the tax laws with respect to the qualification as a
REIT or the federal income tax consequences of such qualification.
If in any taxable year the Company does not qualify as a REIT, it would
be taxed as a corporation and, in computing its taxable income, the Company
would not be able to deduct distributions to the holders of the Company's
capital stock. In addition, unless entitled to relief under certain statutory
provisions, the Company could not elect REIT status for the four taxable years
following the year during which qualification was lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
or payment to holders of its securities because of the additional tax liability
to the Company for the year or years involved. In addition, the Company would no
longer be required by the Code to make any distributions.
Among the requirements to qualify as a REIT, the Company must
distribute at least 95% of its taxable income to its shareholders each year.
Possible timing differences between receipt of income and payment of expenses
and the inclusion and deduction of such amounts in determining taxable income,
could require the Company to reduce its dividends below the level
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necessary to maintain its qualification as a REIT, which would have material
adverse tax consequences.
Other REIT Taxes. Although qualified for REIT taxation, certain
transactions or other events could lead to the Company being taxed at rates
ranging from 4% to 100% on certain income or gains.
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We may amend or supplement from time to time in other filings with the
Securities and Exchange Commission these risks, uncertainties and factors that
could cause actual consolidated results from operations to differ materially
from projections in forward-looking statements made by or on behalf of the
Company.
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EXHIBIT 99.2
FEDERAL INCOME TAX AND ERISA CONSIDERATIONS
The following discussion addresses the material federal tax
considerations relevant to the taxation of the Company and summarizes the
material federal income tax consequences relevant to certain shareholders. This
discussion is for general information only, is not exhaustive of all possible
tax considerations and is not intended as and should not be construed as tax
advise. The actual tax consequences of holding particular securities being
issued by the Company may vary in light of a prospective holder's particular
facts and circumstances. Certain holders, such as tax-exempt entities, insurance
companies and financial institutions, are generally subject to special rules
which are not addressed fully herein. In addition, the following discussion does
not discuss issues under any foreign, state or local tax laws except as
expressly stated. The tax treatment of a holder of any of the securities offered
by the Company will vary depending upon the terms of the particular securities
acquired by such holder, as well as his particular situation, and this
discussion does not attempt to address aspects of federal income taxation
relating to holders of particular securities. Any additional federal income tax
considerations relevant to holders of particular securities will be provided in
the applicable Prospectus and/or Prospectus Supplement relating thereto.
The following general summary of the federal income tax rules governing
a REIT and its shareholders is based on the Code, Treasury Regulations,
generally available judicial decisions, rulings and other administrative
interpretations, all of which are subject to change, and possibly retroactively.
Because many provisions of the Code have been revised substantially by recent
legislation, including the Taxpayer Relief Act of 1997 (the "1997 Act"), very
few Treasury Regulations, judicial decisions, rulings or other administrative
pronouncements have been issued interpreting many of the revisions to the Code.
Waller Lansden Dortch & Davis, A Professional Limited Liability Company
("WLDD"), has acted as tax counsel to the Company and has reviewed this summary
and has rendered an opinion that the description of the law and the legal
conclusions contained herein are correct in all material respects, and that the
discussion hereunder fairly summarizes the federal income tax considerations
that are likely to be material to the Company and a holder of securities of the
Company. However, investors should be aware that Congress continues to consider
new tax bills. Accordingly, no assurance can be given that future legislation,
administrative regulations, rulings, or interpretations or court decisions will
not alter significantly the tax consequences described below or that such
changes or decisions will not be retroactive. The Company has not requested, nor
does it presently intend to request, a ruling from the Internal Revenue Service
(the "IRS") with respect to any of the matters discussed below. An opinion of
counsel is not binding on the IRS, and no assurance can be given that the IRS
will not challenge the Company's eligibility for taxation as a REIT. Because the
provisions governing REITs are highly technical and complex, no attempt is made
in the following discussion to discuss in detail all of the possible tax
consequences applicable to the Company or its shareholders.
ACCORDINGLY, THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT THE
APPLICABLE PROSPECTUS AND/OR
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PROSPECTUS SUPPLEMENT, AS WELL AS WITH HIS OWN TAX ADVISOR, REGARDING THE TAX
CONSEQUENCES TO HIM OF THE ACQUISITION, OWNERSHIP AND SALE OF THE COMPANY'S
SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
It is the opinion of WLDD that the Company is organized and is
operating in conformity with the requirements for qualification and taxation as
a REIT commencing with the Company's taxable year ending December 31, 1994, and
its method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters including, but not
limited to, those set forth below in this discussion and those concerning its
business and properties as set forth in any applicable Prospectus and/or
Prospectus Supplement. Moreover, such qualification and taxation as a REIT
depends upon the Company's ability to meet, through actual annual operating
results, the various income, asset, distribution, stock ownership and other
tests discussed below, the results of which will not be reviewed by WLDD.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any one taxable year will satisfy such requirements.
If the Company ceases to qualify as a REIT, and the relief provisions
do not apply, the Company's income that is distributed to shareholders would be
subject to the "double taxation" on earnings (once at the corporate level and
again at the shareholder level) that generally results from investment in a
corporation. Failure to maintain qualification as a REIT would force the Company
to reduce significantly its distributions and possibly incur substantial
indebtedness or liquidate substantial investments in order to pay the resulting
corporate taxes. In addition, the Company, once having obtained REIT status and
having lost such status, would not be eligible to elect REIT status for the four
subsequent taxable years, unless its failure to maintain its qualification was
due to reasonable cause and not willful neglect, and certain other requirements
were satisfied. In order to elect to again be taxed as a REIT, just as with the
original election, the Company would be required to distribute all of its
earnings and profits accumulated in any non-REIT taxable year.
The Company intends to conduct its affairs so that the assets of the
Company will not be deemed to be "plan assets" of any individual retirement
account, employee benefit plan subject to Title I of ERISA, or other qualified
retirement plan subject to Section 4975 of the Code which acquires its shares.
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT for federal income tax
purposes commencing with the taxable year ending December 31, 1994. The Company
has continued its REIT election since that time and intends to continue such
election. The Company believes that it was organized and has operated in a
manner so as to qualify for taxation as a REIT, and the Company intends to
continue to operate in such a manner. However, no assurance can be given that
the Company has operated in a manner so as to qualify for taxation as a REIT or
that it will continue to operate in such a manner.
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Generally, if the Company continues to qualify for taxation as a REIT,
it will not be subject to federal income tax on income or capital gains that it
distributes in a timely manner to shareholders. However, notwithstanding the
Company's qualification as a REIT, the Company will be subject to federal income
tax as follows: First, the Company will be taxed at regular corporate rates on
any undistributed "real estate investment trust taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference, if any. Third, if the Company has (i) net income from the sale or
other disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business, or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax on such income at the
highest corporate rate. Fourth, any net income that the Company has from
prohibited transactions (which are, in general, certain sales or other
dispositions of property other than foreclosure property held primarily for sale
to customers in the ordinary course of business) will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy either the 75% or 95% gross income
tests (as discussed below), and has nonetheless maintained its qualification as
a REIT because certain other requirements have been met, it will be subject to a
100% tax on the net income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income tests. Sixth, if the Company fails
to distribute during each year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) (subject to the Section 857(b) election) 95% of its
REIT capital gain net income for such year, and (iii) any undistributed taxable
income from preceding periods, then the Company will be subject to a 4% federal
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, to the extent that the Company recognizes gain from the
disposition of an asset with respect to which there existed "built-in gain" as
of January 1, 1994 and such disposition occurs within a 10-year recognition
period beginning January 1, 1994, the Company will be subject to federal income
tax at the highest regular corporate rate on the amount of its "net recognized
built-in gain." The Company estimates that on January 1, 1994, the aggregate
"built-in gain" was approximately $12.1 million. The Company may offset any net
recognized built-in gain by available net operating loss carryforwards. On
January 1, 1994, the Company had approximately $2.7 million in net operating
loss carryforwards which expire at various dates through 2007. Management of the
Company will consider this tax effect when determining whether it is in the best
interest of the Company to sell a specific piece of real property. Eighth, the
Company could be subject to tax in certain situations and on certain
transactions not presently contemplated.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify as a REIT for a taxable year under the Code, the Company
must have no earnings and profits accumulated in any non-REIT year. The Company
also must have in effect an election to be taxed as a REIT and must meet other
requirements, some of which are summarized below, including percentage tests
relating to the sources of its gross income, the nature of the Company's assets
and the distribution of its income to shareholders. Such election, if properly
made and assuming continuing compliance with the qualification tests described
herein, will continue in effect for subsequent years.
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ORGANIZATIONAL REQUIREMENTS AND SHARE OWNERSHIP TESTS
Section 856(a) of the Code defines a REIT as a corporation, trust or
association (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable,
but for Sections 856 through 859 of the Code, as a domestic corporation; (4)
which is neither a financial institution nor an insurance company, subject to
certain provisions of the Code; (5) the beneficial ownership of which is held by
100 or more persons, determined without reference to any rules of attribution
(the "share ownership test"); (6) that during the last half of each taxable year
not more than 50% in value of the outstanding stock of which is owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) (the "five or fewer test"); and (7) which meets certain other
tests, described below, regarding the nature of its income and assets. Section
856(b) of the Code provides that conditions (1) through (4), inclusive, must be
met during the entire taxable year, and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of fewer than 12 months. The five or fewer test and the share
ownership test do not apply to the first taxable year for which an election is
made to be treated as a REIT.
The Company has issued sufficient shares to a sufficient number of
people pursuant to its initial public offering to allow it to satisfy the share
ownership test and the five or fewer test. In addition, to assist in complying
with the five or fewer test on an ongoing basis, the Company's Charter contains
certain provisions restricting share transfers where the transferee (other than
the Nichols, members of their families and certain affiliates, and certain
exceptions specified in the Charter) would, after such transfer, own (a) more
than 8% either in number or value of the outstanding Common Stock of the Company
or (b) more than 8% either in number or value of the outstanding Preferred Stock
of the Company. Pension plans and certain other tax exempt entities will have
different restrictions on ownership. If, despite this prohibition, stock is
acquired increasing a transferee's ownership to over 8% in value of either the
outstanding Common Stock of the Company or Preferred Stock of the Company, the
stock in excess of the 8% is deemed to be held in trust for transfer at a price
which does not exceed what the purported transferee paid for the stock and,
while held in trust, the stock is not entitled to receive dividends or to vote.
In addition, under these circumstances, the Company also has the right to redeem
such stock. For purposes of determining whether the five or fewer test (but not
the share ownership test) is met, any stock held by a qualified trust (generally
pension plans, profit-sharing plans and other employee retirement trusts)
generally is treated as held directly by the trust's beneficiaries in proportion
to their actuarial interests in the trust, and not held by the trust.
The Company is required to maintain records of the actual and
constructive beneficial ownership of its shares. The 1997 Act added certain
provisions to the Code that provide that if the Company timely mails demand
letters to certain shareholders requesting stock ownership information be
provided to the Company or the IRS, unless the Company does not know, or
exercising reasonable due diligence would not have known, that the five or fewer
test has in fact not been satisfied, the Company shall be deemed to have
satisfied the five or fewer test. Pursuant to the 1997 Act, if the Company fails
to comply with the Treasury Regulations to ascertain its ownership it will be
subject to a
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penalty for failing to do so and will void the possible application of the
deemed satisfaction of the five or fewer test of ownership. The penalty is
$25,000 ($50,000 for intentional violations) for any year in which the Company
does not comply with the ownership Treasury Regulations. The Company will also
be required, when requested by the IRS, to send curative demand letters. In
accordance with the Treasury Regulations, the Company must and will demand from
certain shareholders written statements concerning the actual and constructive
beneficial ownership of shares. The Company's Bylaws require such record holders
to respond to such requests for information. Any shareholder who does not
provide the Company with requested information concerning share ownership will
be required to include certain information relating thereto with his income tax
return. A list of shareholders failing to fully comply with the demand for the
written statements shall be maintained as part of the Company's records required
under the Code.
INCOME TESTS
In order to maintain qualification as a REIT, two gross income
requirements must be satisfied annually by the Company. First, at least 75% of
the Company's gross income (other than from certain "prohibited transactions")
in each taxable year must consist of certain types of income identified in the
Code, including qualifying "rents from real property"; qualifying interest on
obligations secured by mortgages on real property or interests in real property;
gain from the sale or other disposition of real property (including interests in
real property and mortgages on real property) held for investment and not
primarily for sale to customers in the ordinary course of business; income and
gain from certain properties acquired by the Company through foreclosure; and
income earned from certain types of qualifying temporary investments. When the
Company receives new capital in exchange for its shares (other than dividend
reinvestment amounts) or in a public offering of debt instruments with
maturities of five years or longer, income attributable to the temporary
investment of such new capital, if received or accrued within one year of the
Company's receipt of the new capital, is qualified temporary investment income
under the 75% gross income test.
Second, at least 95% of the Company's gross income (other than from
certain "prohibited transactions") in each taxable year must consist of income
which qualifies under the 75% gross income test as well as dividends and
interest from any other source, gain from the sale or other disposition of
shares and other securities which are not dealer property, any payment to the
Company under an interest rate swap or cap agreement entered into as a hedge
against variable rate indebtedness incurred to acquire or carry real estate
assets, and any gain from the disposition of such an agreement.
In order to qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above, several conditions must be
met related to the identity of the tenant, the computation of the rent payable,
and the nature of the property leased. The Company does not anticipate receiving
rents that fail to meet these conditions. In addition, the Company must not
manage its properties or furnish or render services to the tenants of its
properties, except through an independent contractor from whom the Company
derives no income. There is an exception to this rule permitting a REIT to
perform directly certain "usually or customarily rendered" tenant services of
the sort which a tax-exempt organization could perform without being considered
in receipt of "unrelated
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business taxable income." The Company self-manages the properties, but does not
provide services to tenants which it believes are outside the exception. The
1997 Act added certain provisions to the Code that permit the Company to render
a de minimis amount (1% of rents) of nonqualifying services to tenants, or in
connection with the management of the property, and still treat other amounts
received as "rents from real property." For these purposes, the value of
nonqualifying services shall not be less than 150% of the Company's direct cost
of providing the services.
If rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as rents from real property. Generally, this 15% test is applied
separately to each lease. The portion of rental income treated as attributable
to personal property is determined according to the ratio of the tax basis of
the personal property to the total tax basis of the property which is rented.
The determination of what fixtures and other property constitute personal
property for federal tax purposes is difficult and imprecise. Based upon
allocations of value as found in the purchase agreements and/or upon review by
employees of the Company, the Company believes that it currently does not have
and does not believe that is likely in the future to have 15% in value of any
significant portion of its real properties classified as personalty. WLDD, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on the conclusions of the Company and its senior management as to the
proportionate value of the personalty. If, however, rent payments do not
qualify, for reasons discussed above, as rents from real property for purposes
of Section 856 of the Code, it will be more difficult for the Company to meet
the 95% or 75% gross income tests and continue to qualify as a REIT.
In order to qualify as "interest on obligations secured by mortgages on
real property," the amount of interest received generally must not be based on
the income or profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
The Company may temporarily invest its working capital in short-term
investments, including shares in other REITs or interests in REMICs. Although
the Company will use its best efforts to ensure that its income generated by
these investments will be of a type which satisfies the 75% and 95% gross income
tests, there can be no assurance in this regard. The Company has analyzed its
gross income through December 31, 1997 and has determined that it has met and
expects in the future to meet the 75% and 95% gross income tests, and for 1997
and prior years has met the 30% gross income test, which has been repealed for
1998 and subsequent years.
The Company is and expects to continue performing third-party
management services. Such income does not qualify for the 95% or 75% gross
income test and the Company will continue to monitor the volume of such income
to avoid violating the 95% and 75% gross income tests. The Company may, if
necessary, provide such services through a non-controlled affiliated entity to
avoid failing to satisfy either the 95% or 75% gross income test. The Company
presently has a non-controlled affiliated entity which is engaged in development
activities.
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If the Company fails to meet the requirements of either or both the 75%
or 95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to know whether the Company
would be entitled to the benefit of these relief provisions as the application
of the relief provisions is dependent on future facts and circumstances. If
these relief provisions apply, a special tax generally equal to 100% is imposed
upon the net income attributable to the greater of the amount by which the
Company failed the 75% or 95% gross income tests.
ASSET TESTS
At the close of each quarter of the Company's taxable year, it must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must consist of "real estate
assets" (including interests in real property, interests in mortgages on real
property, shares in other qualified REITs, and certain temporary investments),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented, in whole or in part, by securities
other than those includable in the 75% asset class. Finally, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by the Company may not exceed 5% of the value of the Company's total assets, and
the Company may not own more than 10% of any one issuer's outstanding voting
securities.
If the Company meets the above requirements at the close of any
quarter, it will not lose its status as a REIT because of the change in value of
its assets during a subsequent quarter unless the discrepancy exists immediately
after the acquisition of any security or other property which is wholly or
partly the result of such acquisition. Where a failure to satisfy the above
requirements results from an acquisition of securities or other property during
a quarter, the failure can be cured by disposition of sufficient nonqualifying
assets within 30 days after the close of such quarter. While the Company intends
to meet the requirements of the asset tests described above, no assurance can be
given that the Company will be able to do so.
The Company may own 100% of the stock of a corporation if such
corporation is a "qualified REIT subsidiary." For federal tax purposes, a
qualified REIT subsidiary is ignored and the assets, income, gain, loss and
other attributes are treated as being owned or generated directly by the
Company. The Company currently has four wholly owned qualified REIT
subsidiaries. If the Company acquires 100% of an existing corporation, the
acquired corporation will be deemed to liquidate and all of its built-in gain
will be taxable. In addition, the Company would have to make distributions
sufficient to eliminate any "C" corporation earnings and profits as well as
sufficient distributions to meet the distribution requirements described below.
DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
equal to or greater
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than the excess of (A) the sum of (i) 95% of the Company's "real estate
investment trust taxable income," computed without regard to the dividends paid
deduction and the Company's net capital gain ("net investment income") and (ii)
95% of the net income, if any, (after tax) from foreclosure property, over (B)
the sum of certain non-cash income (from certain imputed rental income and
income from transactions inadvertently failing to qualify as like-kind
exchanges). These requirements may be waived by the IRS if the REIT establishes
that it failed to meet them by reason of distributions previously made to meet
the requirements of the 4% federal excise tax described below.
Unlike net investment income, the Company's net capital gain need not
be distributed in order for the Company to maintain its status under the Code as
a REIT; however, the Company will be taxed on any net capital gain and net
investment income which it fails to distribute in a timely manner. A REIT may
elect to retain and pay income tax on net long-term capital gains that it
receives during a taxable year. If the Company makes this election, shareholders
are required to include in their income as long-term capital gain their
proportionate share of the undistributed long-term capital gains so designated
by the Company. A shareholder will be treated as having paid his or her share of
the tax paid by the Company in respect of long-term capital gains so designated
by the Company, for which the shareholder will be entitled to a credit or
refund. In addition, the shareholder's basis in his or her Company shares will
be increased by the amount of the Company's designated undistributed long-term
capital gains that are included in the shareholder's long-term capital gains,
reduced by the shareholder's proportionate share of tax paid by the Company on
those gains that the shareholder is treated as having paid. The earnings and
profits of the Company will be reduced, and the earnings and profits of any
corporate shareholder of the Company will be increased, to take into account
amounts designated by the Company pursuant to this rule. The Company must pay
its tax on its designated long-term capital gains within 30 days of the close of
any taxable year in which it designates long-term capital gains pursuant to this
rule, and it must mail a written notice of its designation to its shareholders
within 60 days of the close of the taxable year.
Should the Company distribute a capital gain dividend while Preferred
Shares are outstanding, it will be required to designate a portion of dividends
entitled to be received by holders of the Preferred Shares as capital gain
dividends, thereby reducing the portion of total distributions paid to holders
of the Company's Common Shares which would otherwise be characterized as capital
gains dividends.
The Company will be subject to a nondeductible 4% federal excise tax to
the extent it fails within a calendar year to make "required distributions" to
its shareholders of 85% of its ordinary income and, unless the 1997 Act election
is made, 95% of its capital gain net income plus the excess, if any, of the
"grossed up required distribution" for the preceding calendar year over the
amount treated as distributed for such preceding calendar year. For this
purpose, the term "grossed up required distribution" for any calendar year is
the sum of the taxable income of the Company for the taxable year (without
regard to the deduction for dividends paid) and all amounts from earlier years
that are not treated as having been distributed under the provision. Dividends
declared in the last quarter of the year and paid during the following January
will be treated as having been paid and received on December 31. The Company
intends to make distributions to shareholders so that it will
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not incur this tax but, as noted below, various situations could make it
impractical to meet the prescribed distribution schedule.
It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirements
due to timing differences between actual receipt of income and actual payment of
deductible expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at "real estate
investment trust taxable income" of the Company on the other hand. The 1997 Act
eliminated certain items of phantom income from the 95% distribution
requirement. The problem of inadequate cash to make required distributions could
also occur as a result of the repayment in cash of principal amounts due on the
Company's outstanding debt, particularly in the case of "balloon" repayments or
as a result of capital losses on short-term investments of working capital.
Therefore, the Company might find it necessary to arrange for short-term, or
possibly long-term borrowing, or new equity financing. If the Company were
unable to arrange such borrowing or financing as might be necessary to provide
funds for required distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company may in certain circumstances remain liable for the 4%
federal excise tax described above.
COMPANY'S OWNERSHIP OF PARTNERSHIP INTERESTS
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the partnership's assets and to earn its proportionate share of the
partnership's income. In addition, the assets and gross income of the
partnership retain the same character in the hands of the REIT for purposes of
the gross income and asset tests applicable to REITs as described above. Thus,
the Company's proportionate share of the assets, liabilities and items of income
of the partnerships and limited liability companies in which it has ownership
interests will be treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT requirements described herein.
FEDERAL INCOME TAX TREATMENT OF LEASES
The availability to the Company of, among other things, depreciation
deductions with respect to the facilities owned and leased by the Company
depends upon the treatment of the Company as the owner of the facilities and the
classification of the leases of the facilities as true leases, rather than as
sales or financing arrangements, for federal income tax purposes. The Company
has not requested nor received an opinion that it will be treated as the owner
of the portion of the facilities constituting real property and the leases will
be treated as true leases of such real property for federal income tax purposes.
Based on the conclusions of the Company and its senior management as to the
values of personalty, the Company has met and plans to meet in the future its
compliance with the 95% distribution requirement (and the required distribution
requirement) by making
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distributions on the assumption that it is not entitled to depreciation
deductions for that portion of the leased facilities which it believes
constitutes personal property, but to report the amount of income taxable to its
shareholders by taking into account such depreciation. The value of real and
personal property and whether certain fixtures are real or personal property are
factual evaluations that cannot be determined with absolute certainty under
current IRS regulations and therefore are somewhat uncertain.
INCOME FROM PROHIBITED TRANSACTIONS
A REIT is subject to a 100% tax on the net income derived from
"prohibited transactions." A prohibited transaction is the sale or other
disposition of property "held primarily for sale to customers in the ordinary
course of business" which is not foreclosure property. The Company intends to
hold its properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning and operating its
properties and to make occasional sales of its properties as are consistent with
the Company's investment objectives. Whether property is held primarily for sale
to customers in the ordinary course of business is a question of fact that
depends on all the facts and circumstances with respect to the particular
transaction.
A safe harbor exception is provided for which certain sales of "real
estate assets" will be deemed not to constitute a prohibited transaction.
Generally, the following requirements must be met for the sale to fall within
this safe harbor:
- the REIT must have held the property for at least four
years;
- the total expenditures made by the REIT during the four-year
period preceding the date of sale which are includible in the basis of
the property must not exceed 30% of the net selling price of the
property;
- during the taxable year, (i) the REIT does not make more
than seven sales of property (other than sales of foreclosure property
or property that was involuntarily converted), or (ii) the total
adjusted bases of property (other than sales of foreclosure property or
property that was involuntarily converted) sold must not exceed 10% of
the total bases of all of the assets of the REIT as of the beginning of
the taxable year;
- if the REIT makes more than seven sales of property (other
than sales of foreclosure property or property that was involuntarily
converted) during the taxable year, substantially all of the marketing
and development expenditures with respect to the property must be made
through an "independent contractor" from whom the REIT itself does not
derive or receive any income; and
- if the property consists of land or improvements, not
acquired through foreclosure (or deed in lieu of foreclosure), or lease
termination, the REIT must have held the property for at least four
years for production of rental income.
The Company may from time to time sell or exchange some of its
properties for various reasons. If the above safe harbor is not met, the Company
will consider all of the facts and circumstances of the particular transaction
and the possible applicability of the
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100% tax. The simultaneous exercise of options to acquire leased property that
may be granted to certain lessees or other events could result in sales of
properties by the Company that exceed the safe harbor. However, the Company
believes that in such event, based on all of the facts and circumstances, it
will not have held such properties primarily for sale to customers in the
ordinary course of business.
OTHER ISSUES
With respect to property acquired from and leased back to the same or
an affiliated party, the IRS could assert that the Company realized prepaid
rental income in the year of purchase to the extent that the value of the leased
property exceeds the purchase price paid by the Company for that property. In
litigated cases involving sale-leasebacks which have considered this issue,
courts have concluded that buyers have realized prepaid rent where both parties
acknowledged that the purported purchase price for the property was
substantially less than fair market value and the purported rents were
substantially less than the fair market rentals. Because of the lack of clear
precedent and the inherently factual nature of the inquiry, complete assurance
cannot be given that the IRS could not successfully assert the existence of
prepaid rental income in such circumstances. The value of property and the fair
market rent for properties involved in sale-leasebacks are inherently factual
matters and always subject to challenge.
Additionally, it should be noted that Section 467 of the Code
(concerning leases with increasing rents) may apply to those leases of the
Company which provide for rents that increase from one period to the next.
Section 467 provides that in the case of a so-called "disqualified leaseback
agreement," rental income must be accrued at a constant rate. If such constant
rent accrual is required, the Company would recognize rental income in excess of
cash rents and as a result, may fail to meet the 95% dividend distribution
requirement. "Disqualified leaseback agreements" include leaseback transactions
where a principal purpose of providing increasing rent under the agreement is
the avoidance of federal income tax. The IRS has issued proposed regulations
under Section 467 relating to the treatment of rent and interest provided for in
certain leases. The proposed regulations apply to rental agreements that provide
for increasing or decreasing rent. A rental agreement has increasing or
decreasing rent if it requires the payment of contingent rent, other than rent
that is contingent due to (1) a provision computing rent based on a percentage
of the lessee's gross or net receipts; (2) adjustments based on a reasonable
price index; or (3) a provision requiring the lessee to pay third-party costs.
Therefore, additional rent provisions of leases containing such clauses should
not be "disqualified leaseback agreements." The proposed regulations also
provide that if the rent allocated to each calendar year does not vary from the
average rent allocated to all calendar years by more than 10%, the lease will be
deemed not motivated by tax avoidance and thus should not be a "disqualified
leaseback agreement." It should be noted, however, that leases involved in
sale-leaseback transactions are subject to special scrutiny under this Section.
The Company, based on its evaluation of the value of the property and the terms
of the leases, does not believe it has or will have in the future rent subject
to the provisions of Section 467.
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DEPRECIATION OF PROPERTIES
For tax purposes, the Company's real property acquired subsequent to
its initial public offering is being depreciated over 39 years utilizing the
straight-line method of depreciation and personal property is being depreciated
over 5 to 15 years in accordance with applicable laws and regulations relating
to different classifications of personal property.
FAILURE TO QUALIFY AS A REIT
If the Company fails to qualify for federal income tax purposes as a
REIT in any taxable year, and the relief provisions do not apply, the Company
will be subject to tax on its taxable income at regular corporate rates (plus
any applicable alternative minimum tax). Distributions to shareholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the following four taxable
years. It is not possible to state whether in all circumstances the Company
would be entitled to statutory relief from such disqualification. Failure to
qualify for even one year could result in the Company's incurring substantial
indebtedness (to the extent borrowings are feasible) or liquidating substantial
investments in order to pay the resulting taxes.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held his or her
stock. However, corporate stockholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares in respect of which the distributions
were made, but rather will reduce the adjusted basis of such shares. To the
extent that such distributions exceed the adjusted basis of a shareholder's
shares in respect of which the distributions were made, they will be included in
income as capital gain provided that the shares are a capital asset in the hands
of the shareholder.
In general, under the recently enacted Internal Revenue Service
Restructuring and Reform Act of 1988, capital gains recognized by individuals
and other non-corporate shareholders upon the sale or disposition of shares of
the Company will be subject to a
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maximum federal income tax rate of 20% if the shares are held for more than 12
months and will be taxed at ordinary income rates if the shares are held for 12
months or less. Capital losses recognized by a shareholder upon the disposition
of shares of the Company held for more than one year at the time of disposition
will be a long-term capital loss. In addition, any loss upon a sale or exchange
of shares of the Company by a shareholder who has held such shares for six
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent of distributions from the Company
required to be treated by such shareholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of
shares of the Company may be disallowed if other shares of the Company are
purchased (under a dividend reinvestment plan or otherwise) within 30 days
before or after the disposition.
A redemption of Preferred Shares of the Company will be treated under
Section 302 of the Code as a dividend subject to tax at ordinary income tax
rates (to the extent of the Company's current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale or exchange
of the Preferred Shares. The redemption will satisfy such test if it (i) is
"substantially disproportionate" with respect to the holder, (ii) results in a
"complete termination" of the holder's stock interest in the Company, or (iii)
is "not essentially equivalent to a dividend" with respect to the holder, all
within the meaning of Section 302(b) of the Code. In determining whether any of
these tests have been met, shares considered to be owned by the holder by reason
of certain constructive ownership rules set forth in the Code, as well as shares
actually owned, must generally be taken into account. Because the determination
as to whether any of the alternative tests of Section 302(b) of the Code is
satisfied with respect to any particular holder of the Preferred Shares will
depend upon the facts and circumstances as of the time the determination is
made, prospective investors are advised to consult their own tax advisors to
determine such tax treatment. If a redemption of the Preferred Shares is treated
as a distribution that is taxable as a dividend, the amount of the distribution
would be measured by the amount of cash and the fair market value of any
property received by the stockholders. The stockholder's adjusted tax basis in
such redeemed Preferred Shares would be transferred to the holder's remaining
stockholdings in the Company. If, however, the stockholder has no remaining
stockholdings in the Company, such basis may, under certain circumstances, be
transferred to a related person or it may be lost entirely.
The Company may be required to withhold and remit to the IRS 31% of the
dividends paid to any shareholder who (a) fails to furnish the Company with a
properly certified taxpayer identification number, (b) has under reported
dividend or interest income to the IRS or (c) fails to certify to the Company
that he or she is not subject to backup withholding. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
The Company will report to its shareholders and the IRS the amount of dividends
paid during each calendar year and the amount of any tax withheld.
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TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the IRS has ruled that dividend
distributions from a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on that
ruling, amounts distributed by the Company to Exempt Organizations should
generally not constitute UBTI. However, if an Exempt Organization finances its
acquisition of its shares with debt, a portion of its income from the Company
will constitute UBTI pursuant to the "debt-financed property" rules. In
addition, in certain circumstances, a pension trust that owns more than 10% of
the Company's stock is required to treat a percentage of the dividends from the
Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income
derived by the Company from an unrelated trade or business (determined as if the
Company were a pension trust) divided by the gross income of the Company for the
year in which the dividends are paid. The UBTI rule applies to a pension trust
holding more than 10% of the Company's stock only if (1) the UBTI Percentage is
at least 5%, (2) the Company qualifies as a REIT only because the pension trust
is not treated as a single issuer for purposes of the five or fewer rule, and
(3) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts each individually holding more
than 10% of the value of the Company's stock collectively owns more that 50% of
the value of the Company's stock. The Company currently does not expect that
this rule will apply.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "non-U.S. shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
Non-U.S. shareholders should consult with their own tax advisers to determine
the impact of federal, state and local income tax laws with regard to an
investment in shares of the Company, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of "United States Real Property Interests" and not designated by
the Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Generally, such distributions will be subject to a
U.S. withholding tax equal to 30% of the gross amount of the distribution unless
an applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the shares of the Company is treated as effectively connected
with the non-U.S. shareholder's conduct of a United States trade or business,
the non-U.S. shareholder generally will be subject to a tax at graduated rates,
in the same manner as U.S. shareholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax in the case of a
shareholder that is a foreign
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corporation). Any distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a non-U.S. shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a non-U.S. shareholder's shares
in the Company, they will give rise to tax liability if the non-U.S. shareholder
would otherwise be subject to tax on any gain from the sale or disposition of
his or her shares, as described below. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distributions will be subject
to withholding at the same rate as dividends. However, amounts thus withheld are
refundable if it subsequently is determined that such distribution was, in fact,
in excess of current and accumulated earnings and profits of the Company.
Under currently applicable Treasury Regulations, withholding agents are
required to determine the applicable withholding rate pursuant to the
appropriate tax treaty, and withhold the appropriate amount. New Treasury
Regulations, however, have been adopted that revise in certain respects the
rules applicable to non-U.S. shareholders (the "New Treasury Regulations"). The
IRS has recently announced that the New Treasury Regulations are effective
generally for payments made after December 31, 1999, subject to certain
transition rules.
Currently, dividends paid to an address in a foreign country are
presumed to be paid to a resident of that country (unless the payor has
knowledge to the contrary) for purposes of the 30% U.S. withholding tax
applicable to certain non-U.S. shareholders and for purposes of determining the
applicability of a tax treaty rate. Under the New Treasury Regulations, however,
a non-U.S. shareholder who wishes to claim the benefit of an applicable treaty
rate will be required to provide Form W-8 which satisfies applicable
certification and other requirements, including a representation as to the
holder's foreign status, the holder's name and permanent residence address, and
the relevant tax treaty. Such information is subject to being reported to the
IRS. A permanent residence address for this purpose generally is the address in
the country where the person claims to be a resident for purposes of the
country's income tax. If the beneficial holder is a corporation, then the
address is where the corporation maintains its principal office in its country
of incorporation. The New Treasury Regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax treaty
and for purposes of the 30% withholding tax described above, dividends paid to a
non-U.S. shareholder that is an entity should be treated as paid to the entity
or those holding an interest in that entity. In particular, in the case of a
foreign partnership, the certification requirement will generally be applied to
the partners of the partnership. In addition, the New Treasury Regulations will
also require the partnership to provide certain information, including a United
States taxpayer identification number, and will provide look-through rules for
tiered partnerships. A non-U.S. shareholder that is eligible for a reduced rate
of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amount withheld by filing an appropriate claim for refund with the
IRS. The New Treasury Regulations contain detailed rules governing tax
certifications during the transition period prior to and immediately following
the effectiveness of the New Treasury Regulations.
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For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of "United
States Real Property Interests" will be taxed to a non-U.S. shareholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a non-U.S.
shareholder as if such gain were effectively connected with a United States
trade or business. Non-U.S. shareholders would be subject to U.S. income tax at
the rates applicable to U.S. individuals or corporations, without regard to
whether such distribution is designated as a capital gain dividend. Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required to withhold 35% of any distribution that could be
designated by the Company as a capital gain dividend to the extent that such
capital gain dividends are attributable to the sale or exchange by the Company
of "United States Real Property Interests." This amount is creditable against
the non-U.S. shareholder's federal tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains would be treated with respect to non-U.S. shareholders in the
manner outlined in the preceding paragraph for actual distributions by the
Company of capital gain dividends. Under that approach, the non-U.S.
shareholders would be able to offset as a credit against their U.S. federal
income tax liability resulting therefrom their proportionate share of the tax
paid by the Company on such undistributed capital gains (and to receive from the
IRS a refund to the extent their proportionate share of such tax paid by the
Company were to exceed their actual U.S. federal income tax liability).
Gain recognized by a non-U.S. shareholder upon a sale of Company shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which, at all times during a
specified testing period, less than 50% in value of the shares were held
directly or indirectly by non-U.S. persons. The Company believes that it is, and
it expects to continue to be, a domestically controlled REIT and, therefore, the
sale of Company shares should not be subject to taxation under FIRPTA. Because
the Company's stock is publicly traded, however, no assurance can be given that
the Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
non-U.S. shareholder's sale of Company shares generally will still not be
subject to tax under FIRPTA as a sale of U.S. Real Property Interests provided
that (i) the stock is "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market and (ii) the selling non-U.S.
shareholder held 5% or less of the Company's outstanding stock at all times
during a specified testing period.
If gain on the sale of shares of the Company were subject to taxation
under FIRPTA, the non-U.S. shareholder would be subject to the same treatment as
a U.S. shareholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the stock could be required to withhold
10% of the purchase price and remit such amount to the IRS.
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Gain from the sale of Company shares that would not otherwise be
subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S.
shareholder in two cases: (i) if the non-U.S. shareholder's investment in the
Company's stock is effectively connected with a U.S. trade or business conducted
by such non-U.S. shareholder, the non-U.S. shareholder will be subject to the
same treatment as a U.S. stockholder with respect to such gain, or (ii) if the
non-U.S. shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, the nonresident alien individual will be subject to a 30%
tax on the individual's capital gain.
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