<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1997
REGISTRATION NO. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AGREE REALTY CORPORATION
(Exact name of registrant as specified in its governing instruments)
31850 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334
(810) 737-4190
(Address of principal executive offices)
RICHARD AGREE
31850 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334
(810) 737-4190
(Name and address of agent for service)
COPIES TO:
David P. Levin, Esq. Michelle P. Goolsby, Esq.
Kramer, Levin, Naftalis & Frankel Winstead Sechrest & Minick P.C.
919 Third Avenue 1201 Elm Street
New York, New York 10022 5400 Renaissance Tower
Dallas, Texas 75270
Approximate date of commencement of the proposed sale of the
securities to the public: as soon as practicable after this Registration
Statement becomes effective.
-------------
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, please check the following box. [ ]
-------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 1,725,000 $19 1/8 $32,990,625 $9,998
$.0001 per share
================================================================================================================================
</TABLE>
(1) Includes 1,500,000 shares of Common Stock to be offered to the public
and 225,000 shares of Common Stock issuable upon exercise of an over-
allotment option to be granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended,
based on the average of the high and low sales prices for the Common
Stock reported on the New York Stock Exchange on April 10, 1997.
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 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 16, 1997
PROSPECTUS
1,500,000 SHARES
AGREE REALTY CORPORATION
COMMON STOCK
Agree Realty Corporation (the "Company") is a self-administered,
self-managed real estate investment trust ("REIT") which develops, acquires,
owns and operates properties which are primarily leased to national and
regional retail companies under net leases. The Company owns, either directly
or through interests in joint ventures, a portfolio of 32 properties
(collectively, the "Properties" or the "Portfolio") located in 12 states and
containing an aggregate of approximately 3.1 million square feet in gross
leasable area. As of December 31, 1996, the Portfolio was 98% leased and the
average age of the Properties was approximately six years.
All of the shares of common stock, $.0001 par value per share
("Common Stock"), offered hereby (the "Offering") are being sold by the
Company. Upon the closing of the Offering, approximately 15.2% of the
outstanding Common Stock (including OP Units (defined below) convertible into
Common Stock) will be beneficially owned by executive officers and directors
of the Company. The Company has restricted the ownership of more than 9.8% of
its capital stock by most holders in order to maintain its qualification as a
REIT. See "Description of Capital Stock -- Restrictions on Transfer."
The Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "ADC." On April 15, 1997, the last reported sale price of the
Common Stock on the NYSE was $19 7/8 per share. See "Price Range of Common
Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR CERTAIN FACTORS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------
<TABLE>
<CAPTION>
===========================================================================================================================
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS (1) PROCEEDS TO COMPANY (2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE........................... $_______ $________ $________
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL (3)........................... $_______ $________ $________
===========================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting estimated expenses of approximately $______ payable
by the Company.
(3) The Company has granted the Underwriters a 30 day option to purchase
up to 225,000 additional shares of Common Stock on the same terms
and conditions as the securities offered hereby solely to cover
over-allotments, if any. If the option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $________, $_______ and $_______,
respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to certain other conditions, including the right of the
Underwriters to withdraw, cancel, modify or reject any order in whole or in
part. It is expected that delivery of the Common Stock will be made in New
York City on or about ____________ 1997.
Raymond James & Associates, Inc.
McDonald & Company Securities, Inc.
Roney & Co.
Sutro & Co. Incorporated
The date of this Prospectus is ____________, 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH JURISDICTION.
<PAGE>
[ARTWORK - MAP OF THE U.S. WITH LOCATIONS OF THE COMPANY'S
PROPERTIES INDICATED AND PHOTOGRAPHS OF SAMPLE PROPERTIES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF
THE SHARES OF COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING
THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
- 2 -
<PAGE>
TABLE OF CONTENTS
Page
No.
----
PROSPECTUS SUMMARY 6
The Company 6
Risk Factors 7
Objectives and Strategies 9
The Portfolio 10
Tax Status 12
The Offering 12
Summary Selected Consolidated and Combined Financial Data 13
RISK FACTORS 14
Reliance Upon Major Tenants 14
Dependence on Key Personnel 14
Risks Associated with Borrowing, Including Loss of Properties in
the Event of a Foreclosure 14
Adverse Effect of Increase in Market Interest Rate on Financial
Position and Common Stock Price 14
Investments in Joint Ventures 15
Development and Acquisition Risks 16
No Limitation in Organizational Documents on the Incurrence of Debt 16
Changes in Investment and Financing Policies 17
Limited Geographic Diversification of the Portfolio 17
Consequences of the Failure to Qualify as a REIT 17
Real Estate Investment Considerations 17
Environmental Matters 19
Ownership Limit; Anti-Takeover Effect 19
Limitations on Acquisition and Change in Control 20
Uninsured Loss and Condemnation 20
Shares Available for Future Sale 21
Control by Directors and Executive Officers 21
Competition 21
Financing of Future Developments or Acquisitions 21
USE OF PROCEEDS 22
PRICE RANGE OF COMMON STOCK AND DIVIDENDS 23
CAPITALIZATION 24
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 26
Overview 26
Results of Operations 26
Funds from Operations 28
Liquidity and Capital Resources 29
Inflation 30
BUSINESS AND PROPERTIES 31
Objectives and Strategies 31
Objectives 31
- 3 -
<PAGE>
Growth and Operating Strategies 31
Financing Strategy 32
Property Management 32
Properties 33
Community Shopping Centers 35
Free-Standing Properties 36
Joint Venture Properties 37
Major Tenants 38
Lease Expirations 39
Undeveloped Land 39
Sublet Space and Leased but Vacant Space 39
Employees 40
Potential Environmental Risks 40
Legal Proceedings 40
Competition 40
Insurance 41
MORTGAGE INDEBTEDNESS 41
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES 43
Investment Policies 43
Sale of Properties 43
Financing Policies 44
Conflicts of Interest Policies 44
Policies with Respect to Other Activities 45
MANAGEMENT 46
Directors and Executive Officers 46
Committees of the Board of Directors 47
Compensation of Directors 48
Executive Compensation 48
Employment Agreements and Covenants Not to Compete 49
Indemnification 49
Stock Incentive Plan 50
Profit Sharing Plan 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52
PRINCIPAL STOCKHOLDERS 53
DESCRIPTION OF CAPITAL STOCK 54
Common Stock 54
Transfer Agent and Registrar 54
Restrictions on Transfer 54
SHARES ELIGIBLE FOR FUTURE SALE 56
PARTNERSHIP AGREEMENT 57
Management 57
Transferability of Interests 57
Capital Contributions 57
Awards Under Stock Incentive Plan 58
Allocations and Distributions 58
- 4 -
<PAGE>
Conversion Rights 58
Tax Matters 59
Operations 59
Duties and Conflicts 59
Indemnification 59
Term 59
FEDERAL INCOME TAX CONSIDERATIONS 60
Taxation of the Company 60
Failure to Qualify 66
Taxation of Taxable Domestic Stockholders 66
Taxation of Tax-Exempt Stockholders 67
Special Tax Considerations for Foreign Stockholders 68
Tax Aspects of the Operating Partnership 70
Information Reporting Requirements and Backup Withholding Tax 73
State and Local Taxes 74
EMPLOYEE BENEFIT PLANS 74
ERISA CONSIDERATIONS 74
CERTAIN ANTI-TAKEOVER PROVISIONS 75
Staggered Board of Directors 76
Number of Directors; Removal; Filling Vacancies 76
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals 76
Relevant Factors to be Considered by the Board of Directors 77
Additional Classes and Series of Stock 77
Rights to Purchase Securities and Other Property 78
Business Combinations 78
Control Share Acquisitions 78
UNDERWRITING 80
EXPERTS 81
LEGAL MATTERS 81
ADDITIONAL INFORMATION 82
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS F-1
- 5 -
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and related notes appearing
elsewhere in this Prospectus. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements
that may be contained herein. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors." Unless
otherwise indicated, the information contained in this Prospectus assumes that
the Underwriters' over-allotment option is not exercised. Unless the context
requires otherwise, as used herein the term "Company" includes Agree Realty
Corporation and Agree Limited Partnership (the "Operating Partnership"), of
which Agree Realty Corporation is the sole general partner.
THE COMPANY
The Company is a self-administered, self-managed real estate
investment trust which develops, acquires, owns and operates Properties which
are primarily leased to major national and regional retail companies under net
leases. As of December 31, 1996, the Company owned, either directly or through
interests in joint ventures, 32 Properties located in 12 states and containing
an aggregate of approximately 3.1 million square feet of gross leasable area
("GLA"). The Properties consist of 13 neighborhood and community shopping
centers and 19 free-standing Properties. As of December 31, 1996, 98% of GLA
in the Portfolio was leased and approximately 92% of the Company's annualized
base rent was attributable to national and regional retailers. As of December
31, 1996, the Company derived approximately 70% of its annualized base rent
from four major tenants, Kmart Corporation ("Kmart"), Borders, Inc., Roundy's
Inc. ("Roundy's") and Fashion Bug (Charming Shoppes, Inc.). The Company was
the developer of all 13 of the shopping centers and 14 of the 19 free-standing
Properties. As of December 31, 1996, the average age of the Properties was
approximately six years.
The Company was formed in December 1993 to continue and expand the
retail property business founded in 1971 by its current Chairman of the Board
of Directors and President, Richard Agree. Since 1971, the Company and its
predecessors (the "Agree Predecessors") have specialized in building
properties to suit for national and regional retailers who have signed
long-term net leases prior to commencement of construction. The Company
believes that this strategy provides it with a predictable source of income
from primarily national and regional retail tenants in its existing Properties
and also provides opportunities for development of additional properties at
attractive returns on investment, without the lease-up risks inherent in
speculative development.
Upon completion of its initial public offering (the "IPO") in April
1994, the Company succeeded to the ownership of 17 Properties which contain an
aggregate of 2,376,000 square feet. Since the IPO, the Company has:
i) Completed, either directly or through interests in joint
ventures, the development or acquisition of 14 Properties
leased to Borders, Inc. and other subsidiaries
(collectively, "Borders") of Borders Group, Inc. ("BGI")
which contain in the aggregate over 650,000 square feet.
These Properties include Borders' corporate headquarters and
central administrative buildings in Ann Arbor, Michigan.
Seven of these 14 Properties are owned directly by the
Company and the remaining seven (the "Joint Venture
Properties") are owned by entities wherein the Company's
economic interest ranges from 8% to 20% (the "Joint
Ventures"). See "Business and Properties -- Free-Standing
Properties -- Joint Venture Properties."
- 6 -
<PAGE>
ii) Developed a Circuit City store in Boynton Beach, Florida,
consisting of approximately 32,500 square feet, pursuant to
a 20 year net lease.
iii) Continued to operate both its initial portfolio and its new
Properties at leased rates of over 95% and without any
tenant defaults. Kmart, the Company's largest tenant,
reported to the Company that the aggregate same-store sales
at the stores leased from the Company increased over 6% from
1995 to 1996. Since the IPO, the only anchor tenant to
vacate any of the Company's Properties was J. Byrons, which
vacated its 51,868 square-foot location in Lakeland, Florida
in September 1996. This space was re-leased to Best Buy
Company, Inc., at an increased rental rate, for a term
expiring in January 2013, with a 15 year renewal option.
iv) Announced results for the fourth quarter and year ended
December 31, 1996, which included Funds from Operations (as
hereinafter defined) of $1,951,000 and $7,076,000 for the
quarter and the year, respectively, or an increase of 19%
and 11%, respectively, from the same periods in 1995; and
net income for the quarter and the year of $1,382,000 and
$3,734,000, respectively, or an increase of 65% and 15%,
respectively, over the same periods in 1995.
The Company is operated under the direction of Richard Agree,
Chairman of the Board and President, and Kenneth Howe, Vice President -
Finance. Messrs. Agree and Howe have a combined 35 years experience in the
construction, management, leasing and disposition of retail properties. Upon
the completion of the Offering, executive officers and directors of the
Company will own 733,701 shares (including 569,825 OP Units convertible into
Common Stock) or approximately 15.2% of the total number of shares of Common
Stock then outstanding (including OP Units convertible into Common Stock).
The Company's executive offices are located at 31850 Northwestern
Highway, Farmington Hills, Michigan 48334. The telephone number is (810)
737-4190.
RISK FACTORS
Prospective investors should carefully consider the matters discussed
under "Risk Factors" prior to any investment in the Company. Some of the
significant considerations include:
o Limited diversification of tenants of the Properties,
including the fact that certain of the major tenants have
incurred operating losses or implemented financial or
corporate restructurings during recent periods. In addition,
Kmart is the anchor tenant in 11 of the 13 community
shopping centers and certain tenants' leases provide that if
Kmart abandons a Property, such tenants have the right to
terminate their leases.
o The dependence of the Company on the efforts of its
executive officers and directors, particularly Richard
Agree. The loss of Mr. Agree's services would likely have a
material adverse effect on the future acquisition or
development activities of the Company, which could adversely
affect the market price of the Common Stock.
o The uncertainty that the Company will be able to refinance
its mortgage indebtedness (including construction and
acquisition financing) when due, which could result in loss
of the Properties securing such debt upon a default, and the
risk of higher interest rates on debt incurred in any such
refinancing or on debt bearing variable interest rates or
rates
- 7 -
<PAGE>
which are to be reset, which could adversely affect the
Company's operating cash flow and its ability to make
distributions to stockholders.
o The adverse effect of increases in market interest rates,
including the higher annual yield (and thus lower Common
Stock price) which might be demanded by purchasers of Common
Stock and increased interest expense with respect to any
variable rate indebtedness and new indebtedness.
o The ownership by the Company of seven of the Properties
through its minority interest in the Joint Ventures,
pursuant to which Borders has the right, under certain
circumstances, to purchase the Properties from the Joint
Ventures at varying percentages of total project costs. If
Borders were to purchase Property from one or more Joint
Ventures prior to the time the Company had held its interest
in such Joint Ventures for a four-year period, and if the
Company's gain from such sales were to equal or exceed 30%
of the Company's gross income for the applicable taxable
year, the Company's status as a REIT would be adversely
impacted. Furthermore, if Borders were to exercise such
purchase option with respect to any of the Joint Venture
Properties at any time, the Company may not be able to
reinvest its portion of any proceeds from the sale in
additional properties or other investments with returns
comparable to those from the Joint Venture properties or may
not be able to reinvest such proceeds in a timely manner.
Any such event could be dilutive to the Company's per share
net income, Funds from Operations and cash available for
distribution.
o The risks associated with the development or acquisition of
properties, including construction, leasing and financing
risks and the risk that newly developed or acquired
properties will fail to perform as expected.
o No limitation in the Company's organizational documents on
the incurrence of debt, which could permit the Company to
become more highly leveraged.
o The ability of the Board of Directors to amend or revise the
investment and financial policies of the Company, including
the Company's policy with respect to incurring debt, without
a vote of the stockholders.
o The limited diversification in the location of the
Properties, which raises the risk that the Company might be
materially and adversely affected if certain regions of the
United States were to experience an economic downturn.
o Taxation of the Company as a regular corporation if it fails
to qualify as a REIT, which may affect the value of the
Common Stock and the Company's ability to make expected
distributions.
o Real estate investment considerations, such as the effect of
local economic and other conditions on real estate values,
the ability of tenants to make lease payments and the
ability of a property to generate income sufficient to meet
operating expenses, including future debt service, the risk
that the Company may be unable to renew leases or relet
space upon expiration of leases on equal or more favorable
terms than those currently in effect, and factors (such as
the relative illiquidity of equity real estate investments)
which may limit the flexibility of the Company to vary its
investments or may adversely affect the values of its
properties.
- 8 -
<PAGE>
o The potential liability of the Company for unknown or future
environmental liabilities on its past and present
properties, which could have an adverse effect on the
Company.
o The effects of limiting ownership by any person to 9.8% of
the outstanding Common Stock, which could have the effect of
discouraging a takeover or other transaction in which
holders of some, or a majority, of the Common Stock might
receive a premium for their shares over the then-prevailing
market price or which such holders might believe to be
otherwise in their best interest.
o Potential losses in the event of a casualty or condemnation
that are not insurable or not economically insurable, which
could have an adverse effect on the Company.
o The availability for future sale of shares of Common Stock,
which could adversely affect the market price of the Common
Stock.
OBJECTIVES AND STRATEGIES
OBJECTIVES
The Company's primary objectives are (i) to realize steady and
predictable cash flows through the ownership of high quality properties leased
primarily to national and regional retailers and (ii) to increase Funds from
Operations per share through the development or acquisition of additional
properties. The Company presently intends to achieve these objectives by
implementing the growth, operating and financing strategies outlined below.
GROWTH AND OPERATING STRATEGIES
In seeking to attain these objectives, the Company has applied and
intends to continue to apply the same strategies that have guided its
principals during the past 26 years. These strategies include the following:
o Developing or acquiring each property with the objective of
holding it for long-term investment value.
o Developing or acquiring properties in what the Company
considers to be attractive long-term locations. Such
locations typically have (i) convenient access to
transportation arteries with a traffic count that is higher
than average for the local market, (ii) concentrations of
other retail properties and (iii) demographic
characteristics which are attractive to the retail tenant
which will lease the property upon completion.
o Generally, purchasing land and beginning development of a
property only upon the execution of a lease with a national
or regional retailer on terms which provide a return on
estimated cost that is attractive relative to the Company's
cost of capital.
o Directing all aspects of development, including
construction, design, leasing and management. Property
management and the majority of its leasing activities are
handled directly by Company personnel. The Company believes
that this approach to development and management enables it
to operate efficiently and enhances the ability of the
Company to develop and maintain assets of high construction
quality which are designed, leased and maintained to
maximize long-term value.
- 9 -
<PAGE>
The Company believes that the relationships established by its
principals with national and regional retailers as well as the financing
relationships its principals have developed with lenders provide it with an
advantage in achieving its objectives.
FINANCING STRATEGY
As of December 31, 1996, the Company's ratio of total indebtedness to
Total Market Capitalization (as defined below) was 56% and on an as adjusted
basis to reflect the Offering such ratio was 37%. The Company intends to
maintain a ratio of total indebtedness (including construction and acquisition
financing) to Total Market Capitalization of 65% or less. The Company plans to
begin construction of additional pre-leased developments and may acquire
additional properties which will initially be financed by its Credit Facility
and Line of Credit (each as hereinafter defined). Management intends to
periodically refinance short term construction and acquisition financing with
long-term debt and equity. Upon the completion of such refinancings, the
Company intends to lower its ratio of total indebtedness to Total Market
Capitalization to 50% or less. Nevertheless, the Company may operate with debt
levels which are in excess of 50% of Total Market Capitalization for extended
periods of time prior to such refinancings. "Total Market Capitalization"
means the aggregate of (i) the total number of outstanding shares of Common
Stock and the total number of OP Units outstanding multiplied by the market
value per share of the Common Stock, and (ii) the total indebtedness of the
Company.
The Company may from time to time re-evaluate its borrowing policies
in light of then current economic conditions, relative costs of debt and
equity capital, market value of properties, growth and acquisition
opportunities and other factors. However, there are no limitations in the
Company's organizational documents on its ratio of total indebtedness to Total
Market Capitalization and, accordingly, the Company may modify its borrowing
policy and may increase or decrease its ratio of total indebtedness to Total
Market Capitalization.
THE PORTFOLIO
As of December 31, 1996, the Company owned, either directly or
through interests in Joint Ventures, 32 Properties located in 12 states and
containing an aggregate of approximately 3.1 million square feet of GLA. The
Properties consist of 13 neighborhood and community shopping centers and 19
free-standing properties. As of December 31, 1996, 98% of GLA in the Portfolio
was leased and approximately 92% of the Company's annualized base rent was
attributable to national and regional retailers. As of December 31, 1996, the
Company derived approximately 70% of its annualized base rent from four major
tenants, Kmart, Borders, Roundy's and Fashion Bug (Charming Shoppes, Inc.).
The Company was the developer of all 13 of the shopping centers and 14 of the
19 free-standing properties. As of December 31, 1996, the average age of the
Properties was approximately six years.
- 10 -
<PAGE>
LOCATION OF PROPERTIES IN THE PORTFOLIO
Total Gross Percent of
Number of Leasable Area GLA Leased on
State Properties (sq. feet) December 31, 1996
- ----- ---------- ---------- -----------------
California................ 1 38,015 100%
Florida................... 5(1) 487,269 96
Indiana................... 1(1) 15,844 100
Illinois.................. 1 20,000 85
Kansas.................... 1 25,000 100
Kentucky.................. 1 135,009 100
Michigan.................. 11(1) 1,549,758 99
Nebraska.................. 2(1) 55,000 100
Ohio...................... 2 108,543 100
Oklahoma.................. 3(1) 74,282 100
Pennsylvania.............. 1 37,004 100
Wisconsin................. 3 523,036 97
-- --------- ------
Total/Average.... 32 3,068,760 98%
== ========= ======
- ----------
(1) Includes Joint Venture Properties.
ANNUALIZED BASE RENT OF THE COMPANY'S PROPERTIES
The following is a breakdown of annualized base rent as of December
31, 1996 for each Property by type of tenant:
Annualized Percent of Total
Base Rent as of Annualized Base Rent as of
Type of Tenant December 31, 1996(1) December 31, 1996
- -------------- ----------------- -----------------
National.................. $13,520,102(2) 81%
Regional.................. 1,879,663 11
Local..................... 1,328,816 8
----------- ---
Total............ $16,728,581 100%
=========== ====
- ----------
(1) "Annualized base rent" of the Company as of December 31,
1996 is determined by multiplying the monthly rent as of
that date by 12, excluding (i) percentage rents, (ii)
additional rent payable by tenants such as common area
maintenance, real estate taxes and other expense
reimbursements and (iii) future contractual rent increases.
(2) Includes the Company's share of annualized base rent as of December
31, 1996 from each of the Joint Venture Properties. See "Business and
Properties -- Free-Standing Properties -- Joint Venture Properties."
- 11 -
<PAGE>
MAJOR TENANTS
The following sets forth certain information with respect to the
Company's major tenants:
<TABLE>
<CAPTION>
Percent of Total
Annualized Base Annualized
Number Rent as of Base Rent as of
Tenant of Leases December 31, 1996 December 31, 1996
- ------ --------- ----------------- -----------------
<S> <C> <C> <C>
Kmart....................................... 15 $5,305,601 32%
Borders..................................... 14 4,249,278(1) 25
Roundy's.................................... 7 1,730,063 10
Fashion Bug (Charming Shoppes, Inc.)........ 10 573,200 3
-- ------------ ---
Total/Average...................... 46 $11,858,142 70%
== =========== ===
</TABLE>
- ----------
(1) Includes the Company's share of annualized base rent as of December 31,
1996 from each of the Joint Venture Properties. See "Business and
Properties -- Free-Standing Properties -- Joint Venture Properties."
TAX STATUS
The Company has elected to be treated as a REIT under sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), for
each taxable year commencing with the year ended December 31, 1994. As a REIT,
the Company generally is not subject to Federal income tax provided it makes
certain distributions to its stockholders and meets certain organizational and
other requirements. Under the Code, REITs are subject to numerous
organizational and operational requirements. Should the Company fail to
qualify as a REIT in any taxable year, it will be subject to Federal income
tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. See "Risk Factors -- Consequences of the Failure
to Qualify as a REIT" and "Federal Income Tax Considerations." Even if the
Company qualifies as a REIT, it will be subject to certain Federal, state and
local taxes. See "Federal Income Tax Considerations."
THE OFFERING
Shares Offered 1,500,000(1)
Shares to be Outstanding After the Offering 4,816,389(1)(2)
Use of Proceeds To repay certain indebtedness
outstanding under the Credit
Facility and for general
working capital purposes. See
"Use of Proceeds"
NYSE Symbol ADC
- ----------
(1) Does not include 225,000 shares that may be issued upon the exercise
of the Underwriters' over-allotment option. See "Underwriting."
(2) Includes 637,959 shares of Common Stock reserved for issuance upon the
conversion of OP Units.
- 12 -
<PAGE>
SUMMARY SELECTED CONSOLIDATED AND
COMBINED FINANCIAL DATA
The following table sets forth certain financial information for the
Company and the Agree Predecessors (as defined in Note 1 to the Consolidated
and Combined Financial Statements) and should be read in conjunction with the
Pro Forma Condensed Consolidated Financial Statements and the Consolidated
Financial Statements of the Company and the Combined Historical Financial
Statements of the Agree Predecessors and the Notes thereto contained elsewhere
in this Prospectus. The balance sheet data for each of the five years ended
December 31, 1996 were derived from audited financial statements of the
Company and the Agree Predecessors.
Pro forma operating information is presented as if the Offering had
occurred as of January 1, 1996, and therefore incorporates certain assumptions
that are described in the Notes to the Pro Forma Consolidated Statement of
Operations included elsewhere in this Prospectus. The Pro Forma Balance Sheet
data is presented as if the Offering had occurred on December 31, 1996.
The pro forma information does not purport to represent what the
Company's financial position or results of operations actually would have been
if these transactions had, in fact, occurred on the date or at the beginning
of the period indicated, or to project the financial position or results of
operations at any future date or for any future period.
<TABLE>
<CAPTION>
(In thousands, except per share information)
Agree Realty Corporation Agree Predecessors
----------------------------------------------------- -----------------------------------------
Year Year April 22, January 1, Year Year
Pro Ended Ended Through through Ended Ended
Forma Dec 31, Dec 31, Dec 31, April 21, Dec 31, Dec 31,
Operating Data 1996 1996 1995 1994 1994 1993 1992
- -------------- ----------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues: $ 16,521 $ 16,291 $ 13,699 $ 9,280 $ 4,080 $ 13,156 $ 12,606
----------------------------------------------------- -----------------------------------------
Expenses:
Property expense (1) 2,594 2,485 2,049 1,245 681 1,872 1,856
General and administrative 1,105 1,105 966 668 159 660 639
Interest 4,841 6,101 4,335 2,972 2,584 8,803 9,167
Depreciation and
amortization 2,640 2,620 2,317 1,627 680 2,292 2,260
----------------------------------------------------- -----------------------------------------
Total expenses 11,180 12,311 9,667 6,512 4,104 13,627 13,922
----------------------------------------------------- -----------------------------------------
Other income (expense) (2) 653 653 -- (375) 85 448 680
----------------------------------------------------- -----------------------------------------
Income (loss) before
extraordinary item and
minority interest 5,994 4,633 4,032 2,393 61 (23) (636)
Extraordinary item - early
extinguishment of debt -- -- -- (2,139) -- -- --
----------------------------------------------------- -----------------------------------------
Income (loss) before minority
interest 5,994 4,633 4,032 254 61 (23) (636)
Minority interest 799 899 785 49 -- -- --
----------------------------------------------------- -----------------------------------------
Net income (loss) $ 5,195 $ 3,734 $ 3,247 $ 205 $ 61 $ (23) $ (636)
===================================================== =========================================
Funds from operations $ 8,457 $ 7,076 $ 6,389 $ 4,544
=====================================================
Number of Properties 32 32 20 17 17 17 17
===================================================== =========================================
Number of square feet 3,068 3,068 2,470 2,377 2,377 2,377 2,377
===================================================== =========================================
Per Share Data (3)
Net income $ 1.25 $ 1.41 $ 1.23 $ 0.08 -- -- --
===================================================== =========================================
Cash dividends $ 1.80 $ 1.80 $ 1.80 $ 1.25 -- -- --
===================================================== =========================================
Weighted average of common
shares outstanding 4,149 2,649 2,638 2,638 -- -- --
===================================================== =========================================
Balance Sheet Data
Real estate (before
accumulated depreciation) $ 132,474 $ 132,474 $ 118,360 $96,852 $ 96,548 $ 95,870
Total assets $ 121,382 $ 121,382 $ 108,928 $89,653 $ 89,835 $ 91,859
Total debt, including accrued
interest $ 60,502 $ 88,252 $ 73,741 $54,431 $ 94,334 $ 95,939
</TABLE>
<PAGE>
- ----------
(1) Property expense includes real estate taxes, property maintenance,
insurance, utilities and land lease expenses.
(2) Other income (expense) is comprised of development fee income, gain on
land sales, equity in net income of unconsolidated entities and
reorganization costs.
(3) Does not include 28,955 shares of restricted stock granted in January
1997 or 637,959 shares of Common Stock issuable upon the conversion of
OP Units. A total of 4,178,430 shares of Common Stock (including
restricted stock granted in January 1997, but excluding Common Stock
issuable upon the conversion of OP Units) will be issued and
outstanding upon completion of the Offering.
- 13 -
<PAGE>
RISK FACTORS
An investment in the Common Stock involves various risks. In addition
to general investment risks and those factors set forth elsewhere in this
Prospectus, prospective investors should consider, among other things, the
following factors:
RELIANCE UPON MAJOR TENANTS
As of December 31, 1996, the Company derived approximately 70% of its
annualized base rent from four major tenants, Kmart, Borders, Roundy's and
Fashion Bug (Charming Shoppes, Inc.). In the event of a default by any of
these tenants under their leases with the Company, the Company may experience
delays in enforcing its rights as lessor and may incur substantial costs in
protecting its investment. The bankruptcy or insolvency of any of the major
tenants would be likely to have a material adverse effect on the Properties
affected and the income produced by such Properties and correspondingly the
ability of the Company to make its distributions. Certain of the Company's
major tenants have incurred operating losses or have implemented financial or
corporate restructurings during recent periods. For example, Kmart and
Charming Shoppes, Inc. have undergone major corporate and financial
restructurings during recent periods which resulted in the closure of a
substantial number of stores nationwide; and in January 1996, Kmart's credit
rating was downgraded. Any future restructuring or financial difficulties
experienced by any of the Company's major tenants could have an adverse effect
upon the Company's rental income, as well as its ability to finance future
acquisition and development activities, and to make distributions to its
stockholders.
In the event that certain tenants cease to occupy a Property,
although under most circumstances such a tenant would remain liable for its
lease payments, such an action may result in certain other tenants having the
right to terminate their leases at the affected Property, which could
adversely affect the future income from such Property. As of December 31,
1996, 11 of the Properties had tenants with such provisions in their leases.
The aggregate base rental income and operating cost reimbursements
attributable to such tenants was approximately $1,600,000 for the year ended
December 31, 1996. The Property with the largest exposure to such loss, which
is anchored by Kmart, would have had approximately $248,000 in base rental
income for the year ended December 31, 1996 and operating cost reimbursements
attributable to such tenants.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers and
directors, particularly Richard Agree. The loss of Mr. Agree's services would
likely have a material adverse effect on the future development or acquisition
operations of the Company, which could adversely affect the market price of
the Common Stock. Mr. Agree has entered into an employment agreement with the
Company to serve as its Chairman of the Board of Directors and President until
April 24, 1999. However, Mr. Agree is permitted, at his discretion, to
terminate his employment with the Company upon 30 days' written notice. The
Company does not presently have key-man life insurance for any of its
employees, including Mr. Agree.
RISKS ASSOCIATED WITH BORROWING, INCLUDING LOSS OF PROPERTIES IN THE EVENT OF
A FORECLOSURE
At December 31, 1996, the Company's ratio of total indebtedness to
Total Market Capitalization was approximately 56%. Certain of the Properties
may have a ratio of long-term debt to tangible asset value exceeding 50%.
Although the use of leverage may increase the Company's rate of return on its
- 14 -
<PAGE>
equity investments and allow the Company to make more investments than it
otherwise would, the use of leverage also presents an additional element of
risk in the event that (i) the cash flow from lease payments on the Properties
is insufficient to meet debt obligations, (ii) the Company is unable to
refinance its debt obligations as necessary or on as favorable terms or (iii)
there is an increase in interest rates. If a property is mortgaged to secure
payment of indebtedness and the Company is unable to meet mortgage payments,
the property could be foreclosed upon with a consequent loss of income and
asset value to the Company. Under the "cross-default" provisions contained in
certain mortgages encumbering certain Properties, a default by the Company
under its mortgage with a lender would entitle that lender to declare a
default and exercise its remedies (including foreclosure) under mortgages held
by such lender on certain other Properties.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATE ON FINANCIAL POSITION AND
COMMON STOCK PRICE
One of the factors that may influence the price of the Company's
shares in public markets will be the annual distribution rate on the Common
Stock. Thus, an increase in market interest rates may lead purchasers of
Common Stock to demand a higher annual distribution rate, which could
adversely affect the market price of the Common Stock. In addition, an
increase in the market rate of interest may increase interest expenses under
any variable rate indebtedness of the Company. The Company has established a
$50,000,000 line of credit facility with certain lenders led by Michigan
National Bank (the "Credit Facility"). Amounts outstanding under the Credit
Facility bear interest at a variable rate within a range of one-month to
six-month LIBOR plus 200 basis points to 263 basis points or Michigan National
Bank's prime rate plus 37 basis points to 75 basis points, at the option of
the Company. The Company has also established a $5,000,000 line of credit with
Michigan National Bank (the "Line of Credit"), the outstanding borrowings
under which bear a variable interest rate based on the prime rate established
by Michigan National Bank (8.25% as of March 15, 1997) or 225 basis points in
excess of the one-month LIBOR rate at the option of the Company. The Company
is therefore subject to the risk of interest rate fluctuations.
INVESTMENTS IN JOINT VENTURES
Since the Company's IPO, a substantial portion of the Company's
acquisition and development activity has included the acquisition and
development, either directly or through interests in the Joint Ventures, of a
total of 14 properties which are leased to Borders. Seven of the 14 Properties
acquired or developed and leased to Borders are owned by the Joint Ventures in
which the Company owns minority interests ranging from 8% to 20%. Pursuant to
the lease and ancillary agreements entered into among the Joint Ventures,
Borders and the Company, Borders has the right, at any time, to refinance the
Properties or to purchase the Properties from the Joint Ventures at various
percentages of total project costs. Prior to any such financing or purchase,
the Company has the right to obtain alternative financing for the Properties
or to purchase the Properties (and to purchase the interest of the third
parties in the Joint Ventures). In the event the Company is unable to obtain
the requisite financing or defaults in its development obligations to the
Joint Ventures, Borders may, nonetheless, purchase the Properties. If Borders
were to purchase Property from one or more Joint Ventures prior to the time
the Company had held its interest in such Joint Ventures for a four-year
period, and if the Company's gain from such sales were to equal or exceed 30%
of the Company's gross income for the taxable year, the Company's status as a
REIT would be adversely impacted. See "Federal Income Tax Considerations."
Furthermore, if Borders purchases any of the Joint Venture Properties at any
time, the Company may not be able to reinvest its portion of any proceeds from
the sale in additional properties or other investments with returns comparable
to those from the Joint Venture properties or may not be able to reinvest such
- 15 -
<PAGE>
proceeds in a timely manner. In such event, the Company's per share net
income, Funds from Operations and cash available for distribution to the
holders of its Common Stock could be adversely impacted. See "Business
Properties -- Free-standing Properties -- Joint Venture Properties."
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue development of new properties and to
consider possible acquisitions of existing properties. New project development
is subject to a number of risks, including risks of construction delays or
cost overruns that may increase project costs, risks that the properties will
not achieve anticipated occupancy levels or sustain anticipated rent levels,
and new project commencement risks such as receipt of zoning, occupancy and
other required governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not pursued to
completion. In addition, the Company anticipates that its new development will
be financed under lines of credit or other forms of construction financing
that will result in a risk that permanent financing on newly developed
projects might not be available or would be available only on disadvantageous
terms. In addition, the fact that the Company must distribute 95% of its
taxable income in order to maintain its qualification as a REIT will limit the
ability of the Company to rely upon income from operations or cash flow from
operations to finance new development or acquisitions. As a result, if
permanent debt or equity financing was not available on acceptable terms to
refinance new development or acquisitions undertaken without permanent
financing, further development activities or acquisitions might be curtailed
or cash available for distribution might be adversely affected. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that judgments with respect to the costs of improvements to
bring an acquired property up to standards established for the market position
intended for that property will prove inaccurate, as well as general
investment risks associated with any new real estate investment.
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON THE INCURRENCE OF DEBT
The Company intends to maintain a ratio of total indebtedness
(including construction or acquisition financing) to Total Market
Capitalization of 65% or less. Management intends to periodically refinance
construction and acquisition financing with long-term debt and equity. Upon
completion of refinancings, the Company intends to lower the ratio of total
indebtedness to Total Market Capitalization to 50% or less. Nevertheless, the
Company may operate with debt levels which are in excess of 50% of Total
Market Capitalization for extended periods of time prior to such refinancings.
The organizational documents of the Company contain no limitation on the
amount or percentage of indebtedness which the Company may incur. Therefore,
the Board of Directors, without a vote of the stockholders, could alter the
general policy on borrowings at any time. If the Company's debt capitalization
policy were changed, the Company could become more highly leveraged, resulting
in an increase in debt service that could adversely affect the Company's
operating cash flow and its ability to make expected distributions to
stockholders, and could result in an increased risk of default on its
obligations.
Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of properties to be acquired with debt financing, the
estimated market value of properties upon refinancing, and the ability of
particular properties and the Company, as a whole, to generate cash flow to
cover expected debt service), there can be no assurance that the ratio of
total indebtedness to Total Market Capitalization will be consistent with the
maintenance of the expected level of distributions to stockholders.
- 16 -
<PAGE>
CHANGES IN INVESTMENT AND FINANCING POLICIES
The investment and financing policies of the Company, and its
policies with respect to certain other activities, including its growth, debt
capitalization, distributions, REIT status and investment and operating
policies, are determined by the Board of Directors. Although it has no present
intention to do so, these policies may be amended or revised from time to time
at the discretion of the Board of Directors without a vote of the stockholders
of the Company.
LIMITED GEOGRAPHIC DIVERSIFICATION OF THE PORTFOLIO
The Company's Properties are located primarily in the midwestern
United States and Florida. The concentration of the Portfolio in a limited
number of geographic regions creates the risk that, should these regions
experience an economic downturn, the Company's operations may be adversely
affected. See "Business and Properties -- Location of Properties in the
Portfolio."
CONSEQUENCES OF THE FAILURE TO QUALIFY AS A REIT
The Company intends to continue to operate so as to qualify as a REIT
under the Code. Although management of the Company believes that the Company
will continue to operate in such a manner, no assurance can be given that the
Company will be able to continue to do so. Qualification as a REIT involves
the application of highly technical and complex Code provisions for which
there are only limited judicial or administrative interpretations, and the
determination of various factual matters and circumstances not entirely within
the Company's control may impact its ability to qualify as a REIT. It is
possible that future economic, market, legal, tax or other considerations may
cause the Company to fail to qualify as a REIT or may cause the Company's
Board of Directors to revoke the REIT election. In addition, no assurance can
be given that new legislation, regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to the
Company's qualification as a REIT or the Federal income tax consequences of
such qualification. The Company, however, is not aware of any proposal to
amend the tax laws that would significantly and adversely affect the Company's
ability to qualify as a REIT.
If in any taxable year the Company were to fail to qualify as a REIT,
the Company would not be allowed a deduction for distributions to stockholders
in computing its taxable income and would be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. This treatment would reduce the net earnings of the
Company available for investment or distribution to stockholders because of
the additional tax liability of the Company for the year or years involved,
and distributions would no longer be required to be made. In addition, unless
entitled to relief under certain statutory provisions, the Company would be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification is lost. See "Federal Income Tax
Considerations."
REAL ESTATE INVESTMENT CONSIDERATIONS
Economic Performance and Value of Properties Dependent on Many
Factors. Real property investments are subject to varying degrees of risk. The
yields available from equity investments in real estate depend on the amount
of income generated and expenses incurred. If the Company's properties do not
generate income sufficient to meet operating expenses, including debt service,
the Company's income and ability to make distributions to its stockholders
will be adversely affected.
- 17 -
<PAGE>
The income from and market value of a leased property may be
adversely affected by such factors as changes in the general economic climate,
local conditions such as an oversupply of space or a reduction in demand for
real estate in the area, the attractiveness of the properties to tenants and
competition from other available space. Real estate values and income are also
affected by such factors as government regulations and changes in real estate,
zoning or tax laws, interest rate levels, the availability of financing, and
potential liability under environmental and other laws.
Adverse economic conditions could adversely affect the ability of a
tenant to make its lease payments to the Company, resulting in a reduction in
the cash flow of the Company and a decrease in the value of the property
leased to such tenant in the event the lease is terminated and the Company is
unable to lease the property to another tenant on similar or better terms, or
at all. In addition, the Company may experience delays in enforcing its rights
as lessor and may incur substantial costs in protecting its investment.
Dependence on Rental Income from Real Property to Meet Debt
Obligations and Make Distributions. As substantially all of the Company's
income is derived from rental income from real property, the Company's income
and Funds from Operations would be adversely affected if a single major tenant
was, or a number of smaller tenants were, unable to meet their obligations to
the Company or if the Company was unable to lease on economically favorable
terms a significant amount of space in its properties. In addition, the
Company's tenants may have the right to terminate their leases upon the
occurrence of certain customary events of default, or, in some cases, if the
lease held by an anchor tenant or other principal tenant of the property
expires, is terminated or the property subject to the lease is vacated, even
if rent continues to be paid under the lease. No assurance can be given that
leases that expire can be renewed, or that the square footage covered by
leases that expire or are terminated can be leased to comparable tenants or on
comparable terms, or at all.
Risk of Bankruptcy of Major 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 produced by such properties. Under
bankruptcy law, a tenant has the option of assuming (continuing) or rejecting
(terminating) any unexpired lease. If the tenant assumes its lease with the
Company, the tenant must cure all defaults under the lease and provide the
Company with adequate assurance of its future performance under the lease. If
the tenant rejects the lease, the Company's claim for breach of the lease
would (absent collateral securing the claim) be treated as a general unsecured
claim. General unsecured claims are the last claims to be paid in a bankruptcy
and therefore funds may not be available to pay such claims. The amount of the
claim would be capped at the amount owed for unpaid pre-petition lease
payments unrelated to the rejection, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but
not to exceed the amount of three years' lease payments). As of December 31,
1996, none of the Company's major tenants had become subject to bankruptcy
proceedings or defaulted on a lease.
Illiquidity of Real Estate Investments. Equity real estate
investments are relatively illiquid and therefore tend to limit the ability of
the Company to vary its portfolio promptly in response to changes in economic
or other conditions. In addition, mortgage payments and, to the extent the
properties are not subject to triple net leases, certain significant
expenditures such as real estate taxes and maintenance costs generally are not
reduced when circumstances cause a reduction in income from the investment,
and, should such events occur, the Company's income and funds for distribution
would be adversely affected. A portion of the Company's Properties are
mortgaged to secure payment of indebtedness, and if the Company were unable to
meet its mortgage payments, a loss could be sustained as a result of
- 18 -
<PAGE>
foreclosure on such properties by the mortgagee. See "-- Risks Associated with
Borrowing, Including Loss of Properties in the Event of a Foreclosure."
Changes in Laws. Costs resulting from changes in real estate taxes
not exceeding specified maximum increases generally may be passed through to
tenants and, to such extent, will not affect the Company. Increases in income,
service or transfer taxes, however, generally are not passed through to
tenants under the Properties' leases and may adversely affect the Company's
operating cash flow and its ability to make distributions to stockholders.
Similarly, changes in laws increasing the potential liability for
environmental conditions existing on properties or increasing the restrictions
on discharges or other conditions may result in significant unanticipated
expenditures, which would adversely affect the Company's operating cash flow
and its ability to make distributions to stockholders.
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and
regulations, an owner of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner knew
of, or was responsible for, the presence of such hazardous or toxic
substances. The costs of any required remediation or removal of such
substances may be substantial and the owner's liability therefor as to any
property is generally not limited under such laws, ordinances and regulations
and could exceed the value of the property. The presence of such substances,
or the failure to properly remediate such substances, may adversely affect the
owner's ability to sell the property or to borrow using such real estate as
collateral. All of the Properties have been subject to Phase I environmental
audits (which involves inspection without soil sampling or ground water
analysis) by independent environmental consultants. The Phase I audit reports
have not revealed any environmental liability, nor is the Company aware of any
environmental liability that the Company's management believes would have a
material adverse effect on the Company's business, assets or results of
operations, taken as a whole. No assurance, however, can be given that these
reports reveal all environmental liabilities or that no prior owner created
any material environmental condition not known to the Company.
The Company believes that it is in compliance in all material
respects with all Federal, state and local ordinances and regulations
regarding hazardous or toxic substances, and the Company has not been notified
by any governmental authority of any noncompliance, liability or other claim
in connection with any of its present or former properties.
OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of the outstanding Common Stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). To ensure that the Company will not fail to qualify as a
REIT under this test, the Charter authorizes the directors of the Company to
take such action as may be required to preserve its qualification as a REIT
and to limit any person, other than Messrs. Agree and Rosenberg, to direct or
indirect ownership of no more than 9.8% of the outstanding Common Stock. The
ownership limits set forth in the Charter may discourage a change of control
of the Company and may also (i) deter tender offers for the Common Stock,
which offers may be attractive to the stockholders, or (ii) limit the
opportunity for stockholders to receive a premium for their Common Stock that
might otherwise exist if a third party were attempting to acquire Common Stock
in excess of 9.8% of the outstanding Common Stock or otherwise effect a change
of control of the Company. See "Description of Capital Stock -- Restrictions
on Transfer."
- 19 -
<PAGE>
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
The Articles of Incorporation (the "Charter") and Bylaws of the
Company contain a number of provisions, and the Board of Directors has taken
certain actions, that could impede a change of control in the Company. See
"Certain Anti-Takeover Provisions." These provisions include the following:
Staggered Board. The Board of Directors of the Company has three
classes of directors. The staggered terms for directors may adversely affect
the stockholders' ability to change control of the Company, even if a change
in control were in the interest of some, or a majority, of stockholders.
Capital Stock. The Charter authorizes the Board of Directors to
create new classes and series of securities and to establish the preferences
and rights of any such classes and series. See "Description of Capital Stock."
The issuance of securities by the Board of Directors pursuant to this Charter
provision could have the effect of delaying or preventing a change of control
of the Company, even if a change of control were in the interest of some, or a
majority, of stockholders.
Statutory Provisions. Under the Maryland General Corporation Law (the
"MGCL"), unless exempted by action of the Board of Directors, certain
"business combinations" between a Maryland corporation and a stockholder
holding 10% or more of the corporation's voting securities (an "Interested
Stockholder") are subject to certain conditions, including approval by a
supermajority vote of all voting stock excluding those held by the Interested
Stockholder or affiliate thereof, and may not occur for a period of five years
after the stockholder becomes an Interested Stockholder. The Board of
Directors has exempted from these statutory provisions any business
combination with Messrs. Richard Agree and Edward Rosenberg or any person
acting in concert therewith. Therefore, a business combination with any person
or group other than Messrs. Agree and Rosenberg or a group including such a
member may be impeded or prohibited, even if such a combination may be in the
interest of some, or a majority, of the Company's stockholders.
The MGCL also provides that "control shares" may be voted only upon
approval of two-thirds of the outstanding stock of the corporation excluding
the control shares and shares held by affiliates of the corporation. Under
certain circumstances, the corporation also may redeem the control shares for
cash and, in the event that control shares are permitted to vote, the other
stockholders of the corporation are entitled to appraisal rights. The Bylaws
exempt from these control share provisions acquisitions involving Messrs.
Agree and Rosenberg, affiliates thereof, officers and employees of the Company
and any person approved by the Board of Directors, in its discretion.
Therefore, a control share acquisition by any person not exempted by the Board
of Directors could be impeded, and the attempt of any such transaction could
be discouraged, even if it were in the best interest of some, or a majority,
of the Company's stockholders. See "Certain Anti-Takeover Provisions --
Business Combinations" and "-- Control Share Acquisitions."
UNINSURED LOSS AND CONDEMNATION
The Company or, in the case of the Joint Venture Properties, Borders
carries comprehensive liability, fire, flood, extended coverage and rental
loss insurance with respect to the Properties, with policy specifications and
insured limits customarily carried for similar properties. There are, however,
certain types of losses (such as from wars or earthquakes) which may be either
uninsurable or not economically insurable. Should an uninsured loss occur, the
Company could lose both its invested capital in and anticipated profits from
the property, and would continue to be obligated to repay any of its mortgage
indebtedness on the property, other than non-recourse mortgage indebtedness.
- 20 -
<PAGE>
The leases of the Company's properties may permit the tenant to
terminate its lease in the event of a substantial casualty or a taking by
eminent domain of a substantial portion of the property. Should these events
occur, the Company generally will be compensated by insurance proceeds or a
condemnation award. There can be no assurance, however, that insurance
proceeds, if available, or a condemnation award, if given, will equal the
value of the property or the Company's investment in the property.
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of stock options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. Messrs. Agree
and Rosenberg have agreed not to transfer, sell, offer to sell or otherwise
convey to any unaffiliated party any shares of Common Stock now held
or received upon the conversion of their OP Units or the exercise of their
options without the prior written consent of Raymond James & Associates, Inc.
for a period of 120 days after the date of this Prospectus. The Company has
also agreed not to transfer, sell, offer to sell or otherwise convey to any
unaffiliated party any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, other than options and
restricted stock issued under the Company's 1994 Stock Incentive Plan (the
"Plan"), without the prior written consent of Raymond James & Associates, Inc.
for a period of 120 days after the date of this Prospectus.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Under the Partnership Agreement of the Operating Partnership
("Partnership Agreement"), the Company, as the sole general partner of the
Operating Partnership, is responsible for the management of the Operating
Partnership's business and affairs and, except as otherwise expressly provided
in the Partnership Agreement, has full and complete power to take action for
and on behalf of the Operating Partnership. However, the consent of Messrs.
Agree and Rosenberg, as holders of a majority in interest of the OP Units, is
required for any amendment of the Partnership Agreement and for certain
actions.
Directors and executive officers of the Company are not selling any
shares of Common Stock in the Offering and will beneficially own approximately
15.2% of the Common Stock (including OP Units convertible into Common Stock)
after giving effect to the Offering.
COMPETITION
There are numerous commercial developers and real estate companies,
many of which may have greater financial and other resources than the Company,
that compete with the Company in seeking properties for development and
acquisition and tenants who will lease space in these properties. There can be
no assurance that the Company will be able to continue to successfully compete
with such entities in its development, acquisition and leasing activities.
FINANCING OF FUTURE DEVELOPMENTS OR ACQUISITIONS
The Company expects to develop or possibly acquire additional
shopping center properties. As the Company must distribute 95% of its REIT
taxable income to qualify as a REIT, there may not be sufficient available
cash in excess of distributions to fund such future developments or
acquisitions. Thus, the necessary funds for future developments, acquisitions
or required tenant improvements will be
- 21 -
<PAGE>
obtained, to the extent available, primarily from cash flow in excess of that
required to be distributed, net proceeds from the issuance of equity
securities, and, within certain debt limitations, bank borrowings and the
issuance of debt securities or the sale of existing investments. There can be
no assurance that financing for future projects will be available to the
Company on satisfactory terms at the times required. See "-- Adverse Effect of
Increase in Market Interest Rate on Financial Position and Common Stock Price"
and "Use of Proceeds."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be approximately $__________ ($__________ if
the Underwriters' over-allotment option is exercised in full). The Company
expects to use the net proceeds from the sale of the Common Stock to repay
amounts outstanding under the Credit Facility. As of March 15, 1997,
approximately $33,485,835 was outstanding under the Credit Facility, which
borrowings were used for the acquisition, construction and development of
additional properties. As of March 15, 1997, the weighted average interest
rate on such funds was 7.64%. Subject to certain exceptions, the then
outstanding principal balance of the borrowings under the Credit Facility,
together with the accrued interest thereon, will become payable on the
maturity date, November 14, 2001. The borrowings under the Credit Facility
bear a variable interest rate within a range of one-month to six-month LIBOR
plus 200 basis points to 263 basis points or Michigan National Bank's prime
rate plus 37 basis points to 75 basis points.
The Company intends to use any remaining net proceeds from the sale
of the Common Stock for general corporate purposes, which may include
acquiring additional retail income-producing properties or interests in
entities owning or developing such properties as suitable opportunities arise,
making improvements to properties, repaying certain then-outstanding secured
or unsecured indebtedness and for working capital. Pending use for the
foregoing purposes, such proceeds may be invested in short-term,
interest-bearing time or demand deposits with financial institutions, cash
items or qualified government securities.
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<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock has been listed and traded on the NYSE under the
symbol "ADC" since the IPO. The following table sets forth the quarterly high
and low sales prices per share as reported on the NYSE, as well as the
quarterly dividends declared per share, with respect to the periods indicated:
DIVIDENDS
HIGH LOW PER SHARE(1)
---- --- ------------
Year Ended December 31, 1995:
1st Quarter............................... $16.250 $15.375 $0.450
2nd Quarter............................... 17.000 14.500 0.450
3rd Quarter............................... 17.375 15.500 0.450
4th Quarter............................... 17.000 13.500 0.450
Year Ended December 31, 1996:
1st Quarter............................... 18.250 14.500 0.450
2nd Quarter............................... 18.875 16.500 0.450
3rd Quarter............................... 19.750 17.500 0.450
4th Quarter............................... 21.500 18.750 0.450
Year Ending December 31, 1997:
1st Quarter............................... 22.375 19.375 0.450
2nd Quarter (through April 15, 1997)...... 20.000 18.750 --
- ----------
(1) Dividends are shown for the periods during which they were declared.
These dividends were or will be paid in the immediately subsequent
period.
On April 15, 1997, the closing sale price of the Common Stock as
reported on the NYSE was $19.875 per share. As of April 15, 1997, there were
2,678,430 shares of Common Stock outstanding which were held by
approximately 215 record holders. The record holders do not reflect the
persons or entities who held their shares in nominee or "street" name.
The Company intends to continue to declare quarterly dividends to its
stockholders. However, distributions by the Company are determined by the
Board of Directors and will depend on a number of factors, including the
amount of Funds from Operations, the financial and other condition of its
properties, its capital requirements, the annual distribution requirements
under the provisions of the Code applicable to REITs and such other factors as
the Board of Directors deems relevant.
- 23 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of December 31, 1996, and as adjusted to give effect to the sale of shares of
Common Stock offered hereby and the use of the net proceeds therefrom as
described under the caption "Use of Proceeds."
DECEMBER 31, 1996
------------------------
OUTSTANDING AS ADJUSTED
----------- -----------
(IN THOUSANDS)
Debt(1):
Notes Payable ................................... $ 23,616 $ 5,055
Mortgage Loans .................................. 53,664 53,664
Construction Loans .............................. 10,617 1,569
--------- ---------
Total Debt ................................... 87,897 60,288
--------- ---------
Minority Interest .................................. 5,869 5,869
--------- ---------
Stockholders' equity (deficit):
Common Stock $.0001 par value, 20,000,000
shares authorized, 2,649,475 shares issued
and outstanding, actual, and 4,149,475
outstanding, as adjusted(2) .................. * *
Paid-in capital ................................. 30,061 57,811
Accumulated deficit ............................. (5,619) (5,619)
--------- ---------
Total Stockholders' Equity ................... 24,442 52,192
--------- ---------
Total Capitalization ......................... $ 118,208 $ 118,349
========= =========
- ----------
* Less than $1,000
(1) See Note 3 of the Notes to Historical Consolidated Financial
Statements for information pertaining to the notes and mortgages.
(2) Does not include 637,959 shares of Common Stock reserved for issuance
upon the conversion of OP Units.
- 24 -
<PAGE>
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA
The following table sets forth financial information for the Company
and the Agree Predecessors on a historical and pro forma basis and should be
read in conjunction with all of the financial statements and notes thereto
included elsewhere in this Prospectus. The pro forma consolidated operating
results of the Company may not be comparable to future consolidated results.
The balance sheet data for December 31, 1992 through December 31, 1996 and
operating data for each of the periods presented were derived from audited
financial statements of the Company and the Agree Predecessors.
The pro forma information does not purport to represent what the Company's
financial position or results of operations would actually have been if these
transactions had, in fact, occurred on the date, or at the beginning of the
period, indicated, or to project the Company's financial position or results
of operations at any future date or for any future period.
<TABLE>
<CAPTION>
(In thousands, except per share information)
Agree Realty Corporation Agree Predecessors
------------------------------------------------- -------------------------------------
Year Year April 22, January 1, Year Year
Pro Ended Ended Through through Ended Ended
Forma Dec 31, Dec 31, Dec 31, April 21, Dec 31, Dec 31,
Operating Data 1996 1996 1995 1994 1994 1993 1992
- -------------- ------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income $ 14,680 $ 14,450 $ 11,936 $ 8,140 $ 3,575 $ 11,557 $ 11,081
Operating cost reimbursement 1,761 1,761 1,671 1,093 495 1,577 1,519
Management fees and other 80 80 92 47 10 22 6
------------------------------------------------- -------------------------------------
Total revenues 16,521 16,291 13,699 9,280 4,080 13,156 12,606
------------------------------------------------- -------------------------------------
Expenses:
Property expense (1) 2,594 2,485 2,049 1,245 681 1,872 1,856
General and administrative 1,105 1,105 966 668 159 660 639
Interest 4,841 6,101 4,335 2,972 2,584 8,803 9,167
Depreciation and
amortization 2,640 2,620 2,317 1,627 680 2,292 2,260
------------------------------------------------- -------------------------------------
Total expenses 11,180 12,311 9,667 6,512 4,104 13,627 13,922
------------------------------------------------- -------------------------------------
Other income (expense)(2) 653 653 -- (375) 85 448 680
------------------------------------------------- -------------------------------------
Income (loss) before
extraordinary item and
minority interest 5,994 4,633 4,032 2,393 61 (23) (636)
Extraordinary item -
Early extinguishment of debt -- -- -- (2,139) -- -- --
------------------------------------------------- -------------------------------------
Income (loss) before minority
interest 5,994 4,633 4,032 254 61 (23) (636)
Minority interest 799 899 785 49 -- -- --
------------------------------------------------- -------------------------------------
Net income (loss) $ 5,195 $ 3,734 $ 3,247 $ 8,205 $ 61 $ (23) $ (636)
================================================= =====================================
Funds from operations $ 8,457 $ 7,076 $ 6,389 $ 4,544 -- -- --
================================================= =====================================
Number of properties 32 32 20 17 17 17 17
================================================= =====================================
Number of square feet 3,068 3,068 2,470 2,377 2,377 2,377 2,377
================================================= =====================================
Per Share Data(3)
Net income $ 1.25 $ 1.41 $ 1.23 $ 0.08 -- -- --
================================================= =====================================
Cash dividends $ 1.80 $ 1.80 $ 1.80 $ 1.25 -- -- --
================================================= =====================================
Weighted average of common
shares outstanding 4,149 2,649 2,638 2,638 -- -- --
================================================= =====================================
Balance Sheet Data
Real estate
(before accumulated depreciation) $ 132,474 $132,474 $ 118,360 $96,852 $96,548 $95,870
Total assets $ 121,382 $121,382 $ 108,928 $89,653 $89,835 $91,859
Total debt, including
accrued interest $ 60,502 $ 88,252 $ 73,741 $54,431 $94,334 $95,939
</TABLE>
<PAGE>
- ----------
(1) Property expense includes real estate taxes, property maintenance,
insurance, utilities and land lease expenses.
(2) Other income (expense) is comprised of development fee income, gain on
land sales, equity in net income of unconsolidated entities and
reorganization costs.
(3) Does not include 28,955 shares of restricted stock granted in January
1997 or 637,959 shares of Common Stock issuable upon the conversion of
OP Units. A total of 4,178,430 shares of Common Stock (including
restricted stock granted in January 1997, but excluding Common Stock
issuable upon the conversion of OP Units) will be issued and
outstanding upon completion of the Offering.
- 25 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in such forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
The Company was established to continue to operate and expand the
retail property business of the Agree Predecessors. The Company commenced its
operations on April 22, 1994 with the sale of 2,500,000 shares of Common
Stock. The net cash proceeds to the Company from the completion of the IPO
were approximately $45.4 million which were used primarily to reduce
outstanding indebtedness, pay stock issuance costs and establish a working
capital reserve.
The assets of the Company are held by, and all operations are
conducted through, the Operating Partnership, in which the Company held an
80.59% interest as of December 31, 1996 as the sole general partner. The
Company is operating so as to qualify as a REIT for federal income tax
purposes.
The following should be read in conjunction with the Consolidated
Financial Statements of Agree Realty Corporation and the Combined Financial
Statements of the Agree Predecessors, including the respective notes thereto,
which are included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Rental income increased $2,514,000, or 21%, to $14,450,000 in 1996,
compared to $11,936,000 in 1995. The increase was the result of the
development and acquisition of five Properties in 1996 and the development of
three Properties in the fourth quarter of 1995.
Operating cost reimbursements, which represent additional rent
required by substantially all of the Company's leases to cover the tenants'
proportionate share of property operating expenses, increased $90,000, or 5%,
to $1,761,000 in 1996, compared to $1,671,000 in 1995. Operating cost
reimbursements increased due to the increase in real estate taxes and property
operating expenses from 1995 to 1996 as explained below.
Management fees and other income remained relatively constant at
$80,000 in 1996 versus $92,000 in 1995.
Real estate taxes increased $49,000, or 4%, to $1,169,000 in 1996
versus $1,120,000 in 1995. The increase is the result of general assessment
increases relating to the shopping center Properties and the addition of new
Properties.
Property operating expense (shopping center maintenance, insurance
and utilities) increased $109,000, or 12%, to $980,000 in 1996 versus $871,000
in 1995. The increase was the result of increased snow removal costs of
$26,000; an increase in shopping center maintenance costs of $95,000; an
increase in utility costs of $8,000 and a decrease in insurance costs of
$20,000 in 1996 versus 1995.
- 26 -
<PAGE>
Land lease payments increased $280,000 to $336,000 in 1996 versus
$56,000 in 1995 as a result of the acquisition of a ground lease of a single
tenant property in Aventura, Florida.
General and administrative expenses increased by $139,000, or 14%, to
$1,105,000 in 1996 versus $966,000 in 1995. This increase was primarily the
result of increases in compensation related expenses of $24,000; increases in
state franchise and income taxes of $40,000; additional administrative
expenses in connection with its secured line of credit of $25,000 and
increased expenses in connection with the management of the Company's
Properties of $50,000. General and administrative expenses as a percentage of
rental income decreased from 8.1% for 1995 to 7.6% for 1996.
Depreciation and amortization increased $303,000, or 13%, to
$2,620,000 in 1996 versus $2,317,000 in 1995. The increase was the result of
the completion of eight new Properties in late 1995 and 1996.
Interest expense increased $1,766,000, or 41%, to $6,101,000 in 1996,
from $4,335,000 in 1995. The increase in interest expense was the result of
the Company financing the development and acquisition of eight new Properties
in late 1995 and 1996.
The Company received $510,000 of development fee income in 1996 in
connection with the development of four Joint Venture Properties. There was no
development fee income in 1995. The above amount was not included in the
Company's calculation of Funds from Operations, due to the non-recurring
nature of this type of income.
The Company recognized income of $85,000 on the sale of a parcel of
land in 1996. There was no land sale gains in 1995.
Equity in net income of unconsolidated entities represents the
Company's share of the net income of $59,000 of the seven Joint Ventures
formed for the purpose of acquiring and developing the single tenant
properties for Borders. These entities were not in existence during the year
ended December 31, 1995.
The Company's income before minority interest increased $601,000 as a
result of the foregoing factors.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Rental income increased $221,000, or 2%, to $11,936,000 in 1995,
compared to $11,715,000 in 1994. The increase was the result of $237,000 from
the addition of three new Properties in 1995, $49,000 from periodic rental
increases that came into effect during 1995 and a decrease of $65,000 due
primarily to the releasing of tenant space in one of the Company's Florida
shopping centers.
Operating cost reimbursements increased $83,000, or 5%, to $1,671,000
in 1995, compared to $1,588,000 in 1994. The increase in operating cost
reimbursements resulted from the increase in real estate taxes and property
operating expenses from 1994 to 1995 as explained below.
Management fees and other income increased $35,000 to $91,000 in 1995
versus $56,000 in 1994.
- 27 -
<PAGE>
Real estate taxes increased $15,000, or 1%, to $1,121,000 in 1995
versus $1,106,000 in 1995. The increase is the result of general assessment
increases.
Property operating expense increased $107,000, or 14%, to $871,000 in
1995 versus $764,000 in 1994. The increase was the result of an increase in
snow removal costs of $96,000 as a result of heavy snowfalls in Michigan and
Wisconsin during the fourth quarter of 1995; an increase in property repairs
of $13,000; an increase in utility costs of $3,000 and a decrease in insurance
expense of $5,000.
Land lease payments remained the same at $56,000 for 1995 and 1994.
General and administrative expenses increased $139,000, or 17%, to
$966,000 in 1995 versus $827,000 in 1994. This increase is primarily the
result of costs associated with being a public company for a full year.
General and administrative expenses as a percentage of rental income increased
from 7.1% in 1994 to 8.1% in 1995.
Depreciation and amortization increased $10,000, to $2,317,000 in
1995 from $2,307,000 in 1994. The increase reflects depreciation and
amortization on properties developed in 1995.
Interest expense decreased $1,221,000, or 22%, to $4,335,000 in 1995,
from $5,556,000 in 1994. The decrease in interest expense results primarily
from the prepayment and refinancing of the Company's debt in connection with
the IPO.
Other income (excluding reorganization costs) decreased $205,000 as a
result of a decrease in development fee income of $85,000 and a decrease in
gain on land sale of $120,000.
Reorganization costs of $494,000 were incurred during 1994 in
connection with certain property and related mortgage transfers. These costs
were associated with the transfer of the Properties from the Agree
Predecessors to the Company in connection with the IPO. There were no
reorganization costs in 1995.
There was an extraordinary item in 1994 of $2,139,000 attributable to
prepayment penalties and the write-off of deferred finance charges on the
indebtedness which was repaid with the proceeds of the IPO. There were no
extraordinary items in 1995.
The Company's income before minority interest increased $3,717,000 as
a result of the foregoing factors.
FUNDS FROM OPERATIONS
Management considers funds from operations ("Funds from Operations"
or "FFO") to be a supplemental measure of the Company's operating performance.
FFO is defined by the National Association of Real Estate Investment Trusts,
Inc. ("NAREIT") to mean income (loss) before minority interest, computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not represent cash generated from operating activities in
accordance with GAAP and is not necessarily indicative of cash available to
fund cash needs. FFO should not be considered as an alternative to net income
as the primary indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
- 28 -
<PAGE>
The following table illustrates the calculation of FFO for the years
ended December 31, 1996 and 1995:
Year Ended December 31,
--------------------------------
1996 1995
---- ----
Net income before minority interest $4,633,295 $4,032,381
Depreciation of real estate assets 2,556,603 2,248,720
Amortization of leasing costs 52,033 58,867
Amortization of stock awards 82,873 48,750
Depreciation of real estate assets
held in unconsolidated entities 345,972 --
Gain on sale of assets (84,688) --
Development fee income (509,673) --
--------------------------------
Funds from Operations $7,076,415 $6,388,718
================================
Funds from Operations per share $2.15 $1.95
================================
Weighted average shares and
OP Units outstanding 3,287,434 3,276,144
================================
FFO increased $688,000, or 11%, for the year ended December 31, 1996, to
$7,076,000. The increase in FFO is primarily the result of the development and
acquisition of five Properties in 1996 and the development of three properties
in the fourth quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are distributions to
its stockholders, debt repayment, development of new properties and future
property acquisitions.
During the quarter ended December 31, 1996, the Company declared a
quarterly dividend of $.45 per share. The dividend was paid on January 6, 1997
to stockholders of record on December 23, 1996.
As of December 31, 1996, the Company had total mortgage
indebtedness of $53,663,999 with a weighted average interest rate of 7.61%.
Future scheduled annual maturities of mortgages payable for the years ending
December 31 are as follows: 1997 - $357,946; 1998 - $421,123; 1999 -
$10,679,397; 2000 - $969,964; 2001 - $1,046,875. This mortgage debt is all
fixed rate debt with the exception of $2,375,000 which bears interest at one
half percent over the prime rate.
In addition, the Operating Partnership has in place a $50 million
Credit Facility with a bank group headed by Michigan National Bank which is
guaranteed by the Company. The loan is for a three year period ending on
November 14, 1998 and can be extended by the Company for an additional three
years. Advances under the Credit Facility bear interest within a range of
LIBOR plus 200 basis points to 263 basis points or the Bank's prime rate plus
37 basis points to 75 basis points, at the option of the Company, based on
certain factors such as debt to property value and debt service coverage. The
Credit Facility is used to fund property acquisitions and development
activities and is secured by all of the Company's existing Properties which
are not otherwise encumbered and properties to be acquired or developed. As of
December 31, 1996, $20,746,937 was outstanding under the Credit Facility.
- 29 -
<PAGE>
The Company also has in place a $5 million Line of Credit which
matures in September 1997, and which the Company expects to renew for an
additional 12-month period. The line bears interest at the bank's prime rate
or 225 basis points in excess of the one-month LIBOR rate at the option of the
Company. The purpose of the line is to provide working capital to the Company
and fund land options and start-up costs associated with new projects. As of
December 31, 1996, $2,869,445 was outstanding under the Line of Credit.
The Company has received funding from an unaffiliated entity for
the construction of certain of its Properties. Advances under this arrangement
bear no interest and are required to be repaid within 60 days after the date
construction has been completed. The advances are secured by the specific land
and buildings being developed. As of December 31, 1996, $10,616,936 was
outstanding under this arrangement.
The Company intends to meet its short-term liquidity requirements,
including capital expenditures related to the leasing and improvement of the
Properties, through its cash flow provided by operations and the Line of
Credit. Management believes that adequate cash flow will be available to fund
the Company's operations and pay dividends in accordance with REIT
requirements. The Company intends to maintain a ratio of total indebtedness
(including construction and acquisition financing) to Total Market
Capitalization of 65% or less. The Company plans to begin construction of
additional pre-leased developments and may acquire additional properties which
will initially be financed by the Line of Credit and the Credit Facility.
Management intends to periodically refinance short term construction and
acquisition financing with long-term debt and equity. Upon the completion of
such refinancings, the Company intends to lower its ratio of total
indebtedness to Total Market Capitalization to 50% or less. Nevertheless, the
Company may operate with debt levels which are in excess of 50% for extended
periods of time prior to such refinancings.
INFLATION
The Company's leases generally contain provisions designed to
mitigate the adverse impact of inflation on net income. These provisions
include clauses enabling the Company to pass through to tenants certain
operating costs, including real estate taxes, common area maintenance,
utilities and insurance, thereby reducing the Company's exposure to increases
in costs and operating expenses resulting from inflation. Certain of the
Company's leases contain clauses enabling the Company to receive percentage
rents based on tenants' gross sales, which generally increase as prices rise,
and, in certain cases, escalation clauses, which generally increase rental
rates during the terms of the leases. In addition, expiring tenant leases
permit the Company to seek increased rents upon re-lease at market rates if
rents are below the then existing market rates.
- 30 -
<PAGE>
BUSINESS AND PROPERTIES
The Company is a self-administered, self-managed REIT which
develops, acquires, owns and operates Properties which are primarily leased to
major national and regional retail companies under net leases. As of December
31, 1996 the Company owned, either directly or through interests in Joint
Ventures, 32 Properties located in 12 states and containing an aggregate of
approximately 3.1 million square feet of GLA. The Properties consist of 13
neighborhood and community shopping centers and 19 free-standing Properties.
As of December 31, 1996, 98% of GLA in the Portfolio was leased and
approximately 92% of the Company's annualized base rent was attributable to
national and regional retailers. As of December 31, 1996, the Company derived
approximately 70% of its annualized base rent from four major tenants, Kmart,
Borders, Roundy's and Fashion Bug (Charming Shoppes, Inc.). The Company was
the developer of all 13 of the shopping centers and 14 of the 19 free-standing
Properties. As of December 31, 1996, the average age of the Properties was
approximately six years.
The Company was formed in December 1993, to continue and expand the
retail property business founded in 1971 by its current Chairman of the Board
and President, Richard Agree. Since 1971, the Company and the Agree
Predecessors have specialized in building properties to suit for national and
regional retailers who have signed long-term net leases prior to commencement
of construction. The Company believes that this strategy provides it with a
predictable source of income from creditworthy tenants in its existing
Properties and also provides opportunities for development of additional
properties at attractive returns on investment, without the lease-up risks
inherent in speculative development.
OBJECTIVES AND STRATEGIES
OBJECTIVES
The Company's primary objectives are (i) to realize steady and
predictable cash flows through the ownership of high quality properties leased
primarily to national and regional retailers, and (ii) to increase Funds from
Operations per share through the development or acquisition of additional
properties. The Company presently intends to achieve these objectives by
implementing the growth, operating and financing strategies outlined below.
GROWTH AND OPERATING STRATEGIES
In seeking to attain these objectives, the Company has applied and
intends to continue to apply the same strategies that have guided its
principals during the past 26 years. These strategies include the following:
o Developing or acquiring each property with the objective of
holding it for long-term investment value.
o Developing or acquiring properties in what the Company
considers to be attractive long term locations. Such
locations typically have (i) convenient access to
transportation arteries with a traffic count that is higher
than average for the local market, (ii) concentrations of
other retail properties and (iii) demographic
characteristics which are attractive to the retail tenant
which will lease the property upon completion.
- 31 -
<PAGE>
o Generally, purchasing land and beginning development of a
property only upon the execution of a lease with a national
or regional retailer on terms which provide a return on
estimated cost that is attractive relative to the Company's
cost of capital.
o Directing all aspects of development, including
construction, design, leasing and management. Property
management and the majority of its leasing activities are
handled directly by Company personnel. The Company believes
that this approach to development and management enables it
to operate efficiently and enhances the ability of the
Company to develop and maintain assets of high construction
quality which are designed, leased and maintained to
maximize long-term value.
The Company believes that the relationships established by its
principals with national and regional retailers as well as the financing
relationships its principals have developed with lenders provide it with an
advantage in achieving its objectives.
FINANCING STRATEGY
As of December 31, 1996, the ratio of total indebtedness to Total
Market Capitalization was 56% and on an as adjusted basis to reflect the
Offering such ratio was 37%. The Company intends to maintain a ratio of total
indebtedness (including construction and acquisition financing) to Total
Market Capitalization of 65% or less. The Company plans to begin construction
of additional pre-leased developments and may acquire additional properties
which will initially be financed by the Line of Credit and the Credit
Facility. Management intends to periodically refinance short term construction
and acquisition financing with long-term debt and equity. Upon the completion
of such refinancings, the Company intends to lower its ratio of total
indebtedness to Total Market Capitalization to 50% or less. Nevertheless, the
Company may operate with debt levels which are in excess of 50% of Total
Market Capitalization for extended periods of time prior to such refinancings.
The Company may from time to time re-evaluate its borrowing
policies in light of then current economic conditions, relative costs of debt
and equity capital, market value of properties, growth and acquisition
opportunities and other factors. However, there are no limitations in the
Company's organizational documents on its ratio of total indebtedness to Total
Market Capitalization, and, accordingly, the Company may modify its borrowing
policy and may increase or decrease its ratio of total indebtedness to Total
Market Capitalization.
PROPERTY MANAGEMENT
The Company maintains an active leasing and capital improvement
program that, combined with the quality and locations of the Properties, has
made the Properties attractive to tenants. The Company intends to continue to
hold the Properties for long-term investment and, accordingly, places a strong
emphasis on quality construction and an on-going program of regular
maintenance. The Properties are designed to require minimal capital
improvements other than renovations or expansions paid for by tenants. Nearly
all operating and administrative functions, including leasing, legal,
construction, data processing, maintenance, finance and accounting, are
administered by the Company. On-site functions such as maintenance,
landscaping, snow removal, sweeping, plumbing and electrical are subcontracted
out at each location and, to the extent permitted by their respective leases,
the cost of these functions is passed on to the tenants. Personnel from the
Company's corporate headquarters conduct regular inspections of each Property
and maintain frequent contact with major tenants.
- 32 -
<PAGE>
The Company has a management information system designed to provide
management with the operating data necessary to make informed business
decisions on a timely basis. This computer system allows instant access to
store availability, lease data, tenants' sales history, cash flow budgets and
forecasts, and enables the Company to maximize cash flow from operations and
closely monitor corporate expenses.
PROPERTIES
The Properties consist of 13 neighborhood and community shopping
centers and 19 free-standing Properties. As of December 31, 1996, 98% of GLA
in the Portfolio was leased and approximately 92% of the Company's annualized
base rent was attributable to national and regional retailers. As of December
31, 1996, the Company derived approximately 70% of its annualized base rent
from four major tenants, Kmart, Borders, Roundy's and Fashion Bug (Charming
Shoppes, Inc.).
A substantial portion of the Company's income consists of rent
received under net leases. Most of the leases provide for the payment of fixed
base rentals monthly in advance and for the payment by tenants of a pro rata
share of the real estate taxes, insurance, utilities and common area
maintenance of the Properties as well as payment to the Company of a
percentage of such tenant's sales. However, the payments of percentage rents
to the Company historically have not been material and the Company does not
anticipate that they will become material in the future. Although a majority
of the leases require the Company to make roof and structural repairs as
needed, a number of leases place that responsibility on the tenant. The
Company's management places a strong emphasis on sound construction and
maintenance at its Properties.
LOCATION OF PROPERTIES IN THE PORTFOLIO
TOTAL GROSS PERCENT OF
NUMBER OF LEASABLE AREA GLA LEASED ON
STATE PROPERTIES (SQ. FEET) DECEMBER 31, 1996
- ----- ---------- ---------- -----------------
California................... 1 38,015 100%
Florida...................... 5(1) 487,269 96
Indiana...................... 1(1) 15,844 100
Illinois..................... 1 20,000 85
Kansas....................... 1 25,000 100
Kentucky..................... 1 135,009 100
Michigan..................... 11(1) 1,549,758 99
Nebraska..................... 2(1) 55,000 100
Ohio......................... 2 108,543 100
Oklahoma..................... 3(1) 74,282 100
Pennsylvania................. 1 37,004 100
Wisconsin.................... 3 523,036 97
---- --------- -----
Total/Average.............. 32 3,068,760 98%
==== ========= ======
- ----------
(1) Includes Joint Venture Properties.
- 33 -
<PAGE>
ANNUALIZED BASE RENT OF THE COMPANY'S PROPERTIES
The following is a breakdown of annualized base rent as of December
31, 1996 for each Property by type of tenant:
Annualized Percent of Total
Base Rent as of Annualized Base Rent as
Type of Tenants December 31, 1996 of December 31, 1996
--------------- ----------------- --------------------
National(1)..................... $13,520,102(2) 81%
Regional(3)..................... 1,879,663 11
Local........................... 1,328,816 8
------------ ----
Total................ $16,728,581 100%
=========== ====
- ----------
(1) Includes the following national tenants: Kmart, Borders, Fashion Bug,
Winn Dixie, Rite Aid, J.C. Penney, Avco Financial, GNC Group, Radio
Shack, On Cue, Super Value, Maurices, Petrie Stores, Walgreens,
Payless Shoes, Food Lion, Blockbuster Video, Sears, A&P, TGI Fridays
and Circuit City.
(2) Includes the Company's share of annualized base rent as of December 31,
1996 from each of the Joint Venture Properties. See "-- Free-Standing
Properties -- Joint Venture Properties."
(3) Includes the following regional tenants: Roundy's, Dunhams Sports,
Braun's Fashion and Hollywood Video.
- 34 -
<PAGE>
COMMUNITY SHOPPING CENTERS
Thirteen of the Company's properties are community shopping centers
ranging in size from 20,000 to 228,476 square feet of GLA. The centers are
located in five states as follows: Florida (2), Illinois (1), Kentucky(1),
Michigan (6) and Wisconsin (3). The location, general character and primary
occupancy information with respect to the community shopping centers at
December 31, 1996 are set forth below:
<TABLE>
<CAPTION>
COMMUNITY SHOPPING CENTERS
Anchor Anchor
(2) (3) Percent Tenants Tenants
Total (1) Average Percent Occupied (lease Percent-
Year Land Leasable Annualized Base Leased at at expiration/ age
Property Completed/ Area Area Base Rent per Dec. 31, Dec. 31, options of Base
and Location Expanded (acres) (sq. ft.) Rent sq. ft. 1996 1996 expiration) Rents
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Plaza(4)......1978/1991 11.58 135,009$ 405,268 $ 3.00 100% 100% Kmart (2003/2053) 88%
Frankfort, KY Winn Dixie (2010/2035)
Fashion Bug (2004/2024)
Charlevoix Commons.........1991 14.79 137,375 633,395 4.78 96 70 Kmart (2015/2065) 94
Charlevoix, MI Roundy's Inc. (2011/2031)
Chippewa Commons...........1990 16.37 168,311 846,583 5.25 96 96 Kmart (2014/2064) 83
Chippewa Falls, WI Roundy's Inc. (2011/2031)
Fashion Bug (2001/2021)
Iron Mountain Plaza........1991 21.20 176,352 834,513 4.88 97 77 Kmart (2015/2065) 75
Iron Mountain, MI Roundy's Inc. (2011/2031)
Fashion Bug (2002/2022)
Ironwood Commons...........1991 23.92 185,535 938,754 5.06 100 100 Kmart (2015/2065) 79
Ironwood, MI Super Value (2011/2036)
J.C. Penney (2006/2026)
Fashion Bug (2002/2022)
Marshall Plaza.............1990 10.74 119,279 634,655 5.32 100 100 Kmart (2015/2065) 65
Phase Two Fashion Bug (2002/2022)
Marshall, MI
North Lakeland Plaza.......1987 16.67 171,334 1,272,263 7.43 100 100 Kmart (2011/2061) 72
Lakeland, FL Best Buy (2013/2028)
Petoskey Town Center.......1990 22.08 174,870 930,728 5.66 94 94 Kmart (2015/2065) 76
Petoskey, MI Roundy's Inc. (2010/2030)
Fashion Bug (2002/2022)
Plymouth Commons...........1990 16.30 162,031 804,469 5.25 95 95 Kmart (2015/2065) 81
Plymouth, WI Roundy's Inc. (2010/2030)
Fashion Bug (2001/2021)
Rapids Associates..........1990 16.84 173,557 977,257 5.63 100 100 Kmart (2015/2065) 72
Big Rapids, MI Roundy's Inc. (2010/2030)
Fashion Bug (2001/2021)
Shawano Plaza..............1990 17.91 192,694 981,954 5.10 100 100 Kmart (2014/2064) 79
Shawano, WI Roundy's Inc. (2010/2030)
J.C. Penney (2005/2025)
Fashion Bug (2001/2021)
West Frankfort Plaza.......1982 1.45 20,000 89,250 5.25 85 85 Fashion Bug (2002/2007) 58
West Frankfort, IL
Winter Garden Plaza........1988 22.34 228,476 1,221,348 5.86 91 69 Kmart (2013/2063) 71
Winter Garden, FL Food Lion (2009/2029)
Sears, Roebuck & Co. (2000/2010)
------ --------- ----------- ------ --- --- ---
Total/Average............. 212.19 2,044,823 $10,570,437 $ 5.33 97% 91% 77%
====== ========= =========== ====== === === ===
</TABLE>
- ----------
(1) "Annualized base rent" of the Company as of December 31, 1996 is
determined by multiplying the monthly rent as of that date by 12,
excluding (i) percentage rents, (ii) additional rent payable by
tenants such as common area maintenance, real estate taxes and other
expense reimbursements and (iii) future contractual rent increases.
(2) Calculated as total annualized base rents, divided by GLA leased as of
December 31, 1996.
(3) Roundy's Inc. does not currently occupy the space it leases at the
Iron Mountain Plaza (35,285 square feet, rented at a rate of $5.87
per square foot) and the Charlevoix Commons Properties (35,896 square
feet, rented at a rate of $5.97 per square foot). Both of these
leases expire in 2011 (assuming they are not extended by Roundy's
Inc.). Sears,
- 35 -
<PAGE>
Roebuck & Co. leases, but does not currently occupy, the 50,000
square feet it leases at the Winter Garden Plaza Property. This lease
expires in 2000 (assuming that it is not extended by Sears, Roebuck &
Co.) and is rented at a rate of $5.00 per square foot.
(4) All community shopping centers except Capital Plaza (which is subject
to a long-term ground lease expiring in 2053 from a third party) are
wholly owned by the Company.
FREE-STANDING PROPERTIES
Nineteen of the Properties are free-standing Properties net leased to
either A&P (1), Borders (14), Circuit City (1) or Kmart (3), which in the
aggregate comprise approximately 1,000,000 square feet. The free-standing
Properties range in size from 15,844 to 226,000 square feet of GLA and are
located in the following states: California (1), Florida (3), Indiana (1),
Kansas (1), Michigan (5), Nebraska (2), Ohio (2), Oklahoma (3) and
Pennsylvania (1). Included in the Company's 19 free-standing retail Properties
are 12 wholly owned Properties and seven Joint Venture Properties in which the
Company owns interests ranging from 8% to 20%. As of December 31, 1996, the
Company's 12 wholly owned free-standing Properties provided $5,481,227 of
annualized base rent at an average base rent per square foot of $9.57. The
location, general character and primary occupancy information with respect to
the wholly owned free-standing Properties are set forth in the following
table:
WHOLLY OWNED FREE-STANDING PROPERTIES
Year Lease expiration/
Tenant/Location Completed Total GLA (Option expiration)
- --------------- --------- --------- -------------------
A&P, Roseville, MI........... 1977 104,000 May 31, 2002 (2022)
Borders, Aventura, FL (1).... 1996 30,000 January 31, 2016 (2036)
Borders, Columbus, OH........ 1996 21,000 January 31, 2016 (2036)
Borders, Monroeville, PA..... 1996 37,004 November 8, 2016 (2036)
Borders, Norman, OK.......... 1996 24,641 September 20, 2016 (2036)
Borders, Omaha, NE........... 1995 30,000 November 3, 2015 (2035)
Borders, Santa Barbara, CA... 1995 38,015 November 17, 2015 (2035)
Borders, Wichita, KS......... 1995 25,000 November 10, 2015 (2035)
Circuit City,
Boynton Beach, FL.......... 1996 32,459 January 31, 2017 (2037)
Kmart, Grayling, MI.......... 1984 52,320 September 30, 2009 (2059)
Kmart, Oscoda, MI............ 1984 90,470 September 30, 2009 (2059)
Kmart, Perrysburg, OH (1).... 1983 87,543 October 31, 2008 (2058)
-------
572,452
=======
- -----------
(1) These Properties are subject to long-term ground leases where a third
party owns the underlying land and has leased the land to the Company
to construct or operate two free-standing properties. The Company
pays rent for the use of the land and generally is responsible for
all costs and expenses associated with the building and improvements.
At the end of the lease terms, as extended (2035 and 2027), the land
together with all improvements revert to the land owner. The Company
has an option to purchase the Perrysburg property during its lease
term.
- 36 -
<PAGE>
JOINT VENTURE PROPERTIES
During 1996, the Company, through interests in the Joint Ventures,
developed or acquired seven free-standing Properties which are leased to
Borders, including Borders' corporate headquarters, its central administrative
building and Properties operated as Borders Books and Music. Each of these
Properties is owned by a separate limited liability company or limited
partnership which is owned jointly by the Company and a third party. The
Company's economic interest in the Joint Ventures ranges from 8% to 20%. The
financing for the development of the Joint Venture Properties was provided
through a financing facility established by Borders and its affiliates (the
"Borders Financing Facility").
The lease between Borders and each of the Joint Ventures has a term
expiring November 21, 2000, unless the Borders Financing Facility is extended
or earlier terminated. At any time during the term of the lease, Borders has
the right to refinance the Property or to purchase the Property for various
percentages of total project costs, provided that, prior to such refinancing
or purchase, the Company may elect to provide alternative financing for the
Property or purchase the Property and purchase the interest of the third party
in the Joint Venture. In the event the Company elects to provide financing or
to purchase the Property, and is subsequently unable to obtain the requisite
financing, or in the event that the Company defaults in its development
obligations to the Joint Venture, Borders may purchase the Property. If the
Company provides refinancing or purchases the Property, the Company will be
required to acquire the interest of the third party in the Joint Venture, and
Borders and the Joint Venture will enter into a new lease providing for a term
of 10 to 20 years, with four five-year extension options.
Under certain circumstances, the Company may elect to allow Borders
to place long-term financing on such Properties, in which case the Company
will become the sole equity member of the entity which owns such Property. In
such a circumstance, the Company will own such Property subject to a first
mortgage loan which could exceed 90% of such Property's estimated value, and
lease payments received by the Company would be adjusted to reflect Borders'
financing.
Prior to the occurrence of any of the financing transactions
discussed above, the Company's investment in the seven Joint Venture
Properties is expected to provide in excess of $600,000 in annualized base
rent. Of this amount, the Company estimates that approximately $116,000 is
adjustable based on short-term financing rates. Under certain circumstances
relating to refinancing of such assets, the rents paid pursuant to such leases
are subject to adjustment and could, in certain circumstances, be reduced. See
"Risk Factors -- Investments in Joint Ventures."
The following table provides additional information on the Joint
Venture Properties:
JOINT VENTURE FREE-STANDING PROPERTIES
THE COMPANY'S YEAR
LOCATION INTEREST COMPLETED TOTAL GLA LEASE EXPIRATIONS
- -------- -------- --------- --------- -----------------
Ann Arbor, MI(1)..... 11% 1995 110,000 November 21, 2000
Ann Arbor, MI(2)..... 8% 1995 226,000 November 21, 2000
Boynton Beach, FL.... 12% 1996 25,000 November 21, 2000
Indianapolis, IN..... 8% 1987 15,844 November 21, 2000
Oklahoma City, OK.... 20% 1996 24,641 November 21, 2000
Omaha, NE............ 18% 1996 25,000 November 21, 2000
Tulsa, OK............ 15% 1996 25,000 November 21, 2000
--------
451,485
========
- ----------
(1) Includes Borders' corporate headquarters and approximately 40,000 square
feet of retail space. This Property was substantially renovated and
rehabilitated in 1995.
(2) Borders' central administrative building. This Property was substantially
renovated and rehabilitated in 1995.
- 37 -
<PAGE>
MAJOR TENANTS
The following table sets forth certain information with respect to the
Company's major tenants:
<TABLE>
<CAPTION>
MAJOR TENANTS
PERCENT OF TOTAL
ANNUALIZED BASE ANNUALIZED BASE
NUMBER RENT AS OF RENT AS OF
TENANT OF LEASES DECEMBER 31, 1996 DECEMBER 31, 1996
- ------ --------- ----------------- -----------------
<S> <C> <C> <C>
Kmart.................................. 15 $5,305,601 32%
Borders................................ 14 4,249,278(1) 25
Roundy's............................... 7 1,730,063 10
Fashion Bug (Charming Shoppes, Inc.)... 10 573,200 3
-- ------------ -----
Total/Average........................ 46 $11,858,142 70%
== =========== =====
</TABLE>
- ----------
(1) Includes the Company's share of annualized base rent as of December 31,
1996 from each of the Joint Venture Properties. See "-- Free-Standing
Properties -- Joint Venture Properties."
Fifteen of the Properties are anchored by Kmart, a publicly traded
international retailer with over 2,100 stores. Kmart's principal business is
general merchandise retailing through a chain of department stores. The
Company receives approximately 32% of its annualized base rent as of December
31, 1996 from, and approximately 39% of the Company's future minimum rentals
are attributable to, Kmart.
Borders Group, Inc., a publicly-traded company, is one of the country's
largest retailers of books, music and other informational, educational and
entertainment products. Two of BGI's subsidiaries, Borders, Inc. and Walden
Books Co., Inc., together operate in over 1,000 locations, serving all 50
states. The Company receives approximately 25% of its annualized base rent as
of December 31, 1996 from, and approximately 31% of the Company's future
minimum rentals are attributable to, Borders.
Roundy's and its subsidiaries are engaged principally in the wholesale
distribution of food and non-food products to supermarkets and warehouse food
stores. Roundy's owns and operates retail warehouse food stores and services,
retail grocery stores and convenience stores nationwide. The Company receives
approximately 10% of its annualized base rent as of December 31, 1996 from,
and approximately 11% of the Company's future minimum rentals are attributable
to, Roundy's.
Charming Shoppes, Inc. operates, through its subsidiaries, a chain of
women's specialty clothing stores in over 40 states. Its retail properties
operate under the names Fashion Bug and Fashion Bug Plus. The Company receives
approximately 3% of its annualized base rent as of December 31, 1996 from, and
approximately 1% of the Company's future minimum rentals are attributable to,
Charming Shoppes, Inc.
- 38 -
<PAGE>
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for the
Company's community shopping centers and wholly owned free-standing
Properties, assuming that none of the tenants exercise renewal options:
LEASE EXPIRATIONS - COMMUNITY SHOPPING CENTERS
AND WHOLLY OWNED FREE-STANDING PROPERTIES
<TABLE>
<CAPTION>
GROSS LEASABLE AREA(1) ANNUALIZED BASE RENT(1)
---------------------- -----------------------
NUMBER
EXPIRATION OF LEASES APPROXIMATE PERCENT OF PERCENT OF
YEAR EXPIRING SQ. FEET TOTAL AMOUNT TOTAL
---- -------- -------- ----- ------ -----
<C> <C> <C> <C> <C> <C>
1997..................... 9 35,240 1.3% $ 290,432 1.8%
1998..................... 22 79,410 3.0 564,642 3.5
1999..................... 4 19,800 0.8 121,300 0.8
2000..................... 13 114,050 4.4 744,417 4.6
2001..................... 26 105,434 4.0 861,908 5.4
2002..................... 10 166,570 6.4 803,330 5.0
2003..................... 7 113,992 4.3 494,300 3.1
2004..................... - -- -- -- --
2005..................... 2 34,204 1.3 131,714 0.8
2006..................... 2 31,204 1.2 155,265 1.0
--- ---------- ------ --------- -----
Total/Average.......... 95 699,904 26.7% $4,167,308 26.0%
=== ========= ===== ========== =====
</TABLE>
- ----------
(1) As of December 31, 1996.
Leases on the seven Joint Venture Properties, which are not included
in the table above, are typically for an initial term through November 2000.
In the event a refinancing is consummated, Borders is required to enter into a
10 to 20 year net lease with a fixed lease rate. See " -- Joint Venture
Properties."
UNDEVELOPED LAND
The Company owns seven parcels of land which are adjacent to the
Properties. At times when circumstances warrant, the Company may sell or
ground lease such parcels for use as restaurants, banks, auto centers or other
facilities.
SUBLET SPACE AND LEASED BUT VACANT SPACE
Roundy's Inc. does not currently occupy the space it leases at the Iron
Mountain Plaza (35,285 square feet, rented at a rate of $5.87 per square foot)
and the Charlevoix Commons Properties
- 39 -
<PAGE>
(35,896 square feet, rented at a rate of $5.97 per square foot). Both of these
leases expire in 2011 (assuming they are not extended by Roundy's Inc.).
Sears, Roebuck & Co. leases, but does not currently occupy, the 50,000 square
feet it leases at the Winter Garden Plaza Property. This lease expires in 2000
(assuming it is not extended by Sears, Roebuck & Co.) and is rented at a rate
of $5.00 per square foot. A&P has sublet approximately 50,000 square feet of
its space in Roseville, Michigan. This lease expires in 2002 and is rented at
a rate of $3.76 per square foot. In all of the above cases, rent is being paid
on the space.
EMPLOYEES
The Company employs eight persons who are located at the Company's
corporate headquarters in Farmington Hills, Michigan. Employee
responsibilities include accounting, construction, leasing, property
coordination and administrative functions for the Properties. The Company's
employees are not covered by a collective bargaining agreement and the Company
considers its employee relations to be satisfactory.
POTENTIAL ENVIRONMENTAL RISKS
Investments in real property create a potential for environmental
liability on the part of the owner or operator of such real property. If
hazardous substances are discovered on or emanating from any of the
properties, the owner or operator of the property (including the Company) may
be held strictly liable for all costs and liabilities relating to such
hazardous substances. The Company has had a Phase I environmental study (which
involves inspection without soil sampling or ground water analysis) conducted
on each Property by independent environmental consultants. Furthermore, the
Company has adopted a policy of conducting a Phase I environmental study on
each property it acquires.
The Phase I environmental studies conducted by the Company have not
revealed the existence of any hazardous substance or environmental liability
on the Properties which has not been remediated. In addition, the management of
the Company has no reason to believe that any hazardous substances exist on the
Properties in violation of any applicable laws; however, no assurance can be
given that such substances are not located on any of the Properties. The
Company presently carries no insurance coverage for the types of environmental
risks described above.
The Company believes that it is in compliance in all material respects
with all Federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company has not been notified by any
governmental authority of any noncompliance, liability or other claim in
connection with any of the Properties.
LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor, to
the Company's knowledge, is any material litigation threatened against the
Company or any of the Properties, other than routine litigation arising in the
ordinary course of business and which is expected to be covered by the
Company's liability insurance.
COMPETITION
The Company faces competition in seeking properties for acquisition and
tenants who will lease space in these properties from insurance companies,
credit companies, pension funds, private individuals,
- 40 -
<PAGE>
investment companies and other REITs, many of which have greater financial and
other resources than the Company. There can be no assurance that the Company
will be able to successfully compete with such entities in its development,
acquisition and leasing activities in the future.
INSURANCE
Under their leases, the Company's tenants are generally responsible for
providing adequate insurance on the properties they lease. The Company
believes the Properties are covered by adequate fire, flood and property
insurance provided by reputable companies. However, some of the Properties are
not covered by disaster insurance with respect to certain hazards (such as
earthquakes) for which coverage is not available or available only at rates
which, in the opinion of the Company, are prohibitive. The Company has
obtained title insurance insuring title to the Portfolio in an aggregate
amount which the Company believes to be adequate.
MORTGAGE INDEBTEDNESS
The following summarizes the Company's mortgage indebtedness as of March
15, 1997:
<TABLE>
<CAPTION>
ANNUAL DEBT
PRINCIPAL AMORTIZATION INTEREST MATURITY SERVICE
BALANCE SCHEDULE RATE DATE AMOUNT
------- -------- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Nationwide(1) $ 33,600,000 None 6.88% November 15, 2005 $ 2,310,000
Winter Garden
Plaza(2) 9,651,135 25 9.75% July 1, 2010 1,131,797
North Lakeland
Plaza(3) 7,968,307 25 7.75% April 1, 1999 754,573
Perrysburg(4) 2,375,000 20 prime+1/2% March 8, 1999 208,000
------------- ---------- -----------
Total/Average $ 53,594,442 7.61% $ 4,404,370
============ ===== ===========
</TABLE>
- ----------
(1) Nationwide holds two promissory notes which are secured by mortgages
which are cross-collateralized and contain cross-default provisions
on the following Properties: Rapids Associates, Petoskey Town Center,
Shawano Plaza, Charlevoix Commons, Marshall Plaza, Chippewa Commons
and Plymouth Commons. These promissory notes require interest only
payments through April 1999. Payments over the remaining years will
be based on a 22 year amortization schedule. On April 22, 1999, the
interest rate will be reset to Nationwide's then current and
prevailing interest rate for loans with a term of seven years. The
promissory notes contain prepayment penalties based on a yield
maintenance calculation.
(2) There is no prepayment allowed under this indebtedness prior to July
1, 2005, after which the indebtedness may be prepaid by paying a
premium of five percent of the outstanding principal balance, which
reduces by one percent per year until maturity.
(3) The indebtedness contains a prepayment penalty throughout the term
based on a yield maintenance calculation.
(4) The interest rate is set at 1/2% over the prime rate established by
Michigan National Bank (the prime rate was 8.25% as of March 15,
1997). The payments were interest only for the first three years.
Payments over the remaining years will be based on a 20 year
amortization schedule. The loan may be prepaid at any time without
penalty. Messrs. Agree and Rosenberg guaranteed this loan.
- 41 -
<PAGE>
The loan agreements evidencing each of the mortgages contain
customary representations, warranties and events of default. Each mortgage
also requires the Company to comply with certain affirmative and negative
covenants, including covenants restricting additional indebtedness. None of
the documents evidencing the mortgages contain any provision directly or
indirectly limiting the distributions that may be made to the stockholders by
the Company in any way that would cause the Company to fail to qualify as a
REIT.
As of March 15, 1997, the Company had $33,485,835 of indebtedness
outstanding with a variable interest rate within a range of one-month to
six-month LIBOR plus 200 basis points to 263 basis points or Michigan National
Bank's prime rate plus 37 basis points to 75 basis points, at the option of
the Company, under the Credit Facility. The Credit Facility is secured by all
of the Company's existing properties which are not otherwise encumbered and
properties to be acquired or developed. In addition, the Company has obtained
construction financing on a project-by-project basis pursuant to a funding
arrangement. Advances under such funding arrangement are secured by the
specific land and buildings being developed under such arrangement. As of
March 15, 1997, $1,569,000 was outstanding under this arrangement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
- 42 -
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's investment policies,
financing policies and policies with respect to certain other activities. The
Company's policies with respect to these activities have been determined by
the Board of Directors of the Company and may be amended or revised from time
to time at the discretion of the Board of Directors without a vote of the
stockholders of the Company.
INVESTMENT POLICIES
The Company's investment objective is to preserve the value of its
existing Properties through regular maintenance and attention to tenant
services, and to seek continued growth through the construction of additional
community shopping centers and single-tenant properties in cooperation with
national and regional retailers who will enter long-term leases before
construction commences. Future developments are not limited (as to percentage
of assets or otherwise) to any geographic area or any specific type of
property. Moreover, the Company has acquired, and may continue to acquire in
the future, properties which are already developed and leased predominantly to
national or regional retailers in the event that the Board of Directors
determines that acquisition of a particular property or properties is in the
best interests of the Company.
The Company may pursue its acquisition and development activities
directly through the Operating Partnership or indirectly through other
entities in which it owns various percentages of interest, such as the Joint
Ventures.
Subject to the percentage of ownership limitations and gross income
tests necessary for REIT qualification, the Company also may invest in
securities of or interests in entities engaged in real estate activities or
securities of other issuers, including for the purpose of exercising control
over such entities. See "Federal Income Tax Considerations -- Taxation of the
Company." The Company may acquire all or substantially all of the securities
or assets of other REITs or similar entities when such investments would be
consistent with the Company's investment policies, but the Company does not
have any present intention to do so and it has not made such investments in
the past. The Company does not intend that its investments in securities will
require it to register as an "investment company" under the Investment Company
Act of 1940, as amended, and the Company intends to divest securities if any
such registration would otherwise be required.
Pending disbursement for investment as described herein, the Company
may invest funds, including the proceeds of the Offering, in deposits at
commercial banks, money market accounts, certificates of deposit, U.S.
government securities or other liquid investments (including, GNMA, FNMA, and
FHLMC mortgage-backed securities) as the Board of Directors deems appropriate.
SALE OF PROPERTIES
The Company has, in the past, from time to time sold certain of its
properties. While the Company presently has no intention of doing so with
respect to its existing Properties, it may sell certain of the Properties in
the future if the Board of Directors determines that such action is in the
best interests of the Company.
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<PAGE>
FINANCING POLICIES
The Company may from time to time re-evaluate its borrowing policies
in light of then current economic conditions, relative costs of debt and
equity capital, market value of properties, growth and acquisition
opportunities and other factors. However, there is no contractual limit on the
Company's ratio of total indebtedness to Total Market Capitalization and,
accordingly, the Company may modify its borrowing policy and may increase or
decrease its ratio of total indebtedness to Total Market Capitalization. See
"Business and Properties -- Financing Strategy."
The Company has established its debt policy relative to the Total
Market Capitalization of the Company rather than to the book value of its
assets, a ratio that is frequently employed, because it believes that the book
value of its assets (which to a large extent is the depreciated value of real
property, the Company's primary tangible asset) does not accurately reflect
its ability to borrow and to meet debt service requirements. The Company may
from time to time re-evaluate its borrowing policies in light of then current
economic conditions, relative costs of debt and equity capital, market value
of properties, growth and acquisition opportunities and other factors. There
are no limitations in the Company's organizational documents on its ratio of
total indebtedness to Total Market Capitalization, and, accordingly, the
Company may modify its borrowing policy and may increase or decrease its ratio
of total indebtedness to Total Market Capitalization. To the extent that the
Board of Directors determines to obtain additional capital, the Company may
raise such capital through additional equity offerings, debt financing,
retention of cash flow subject to provisions in the Code concerning
distribution of REIT income, or a combination of these methods.
To the extent that the Board of Directors determines to obtain
additional debt financing, the Company intends to do so generally through
mortgage loans on its properties in a manner consistent with its debt policy.
The Company does not have a policy limiting the number or amounts of mortgages
that may be placed on any particular property, but mortgage financing
instruments usually limit additional indebtedness on such properties.
The Company also may incur indebtedness for purposes other than the
construction or acquisition of additional properties when, in the opinion of
the Board of Directors, it is advisable to do so. For example, the Company may
borrow to meet the taxable income distribution requirements under the Code if
the Company has taxable income without receipt of cash sufficient to enable
the Company to meet such distribution requirements. See "Risk Factors --
Financing of Future Developments or Acquisitions." For short-term purposes the
Company may, from time to time, borrow under its lines of credit, or arrange
for other short-term borrowing from banks or otherwise. The Company may
arrange for long-term borrowing from institutional lenders or through public
offerings or other means. The Company has no commitments with respect to any
such long-term borrowing and there is no assurance that any such long-term
borrowing will be available.
The Company may seek to extend, expand, reduce or renew its present
line of credit, or to obtain new lines of credit for the purpose of making
capital improvements, or to provide general working capital, subject to its
debt policy. The Company also may determine to issue its own debt securities
(which may be convertible into capital stock or be accompanied by warrants to
purchase capital stock).
CONFLICTS OF INTEREST POLICIES
In general, the Company will not engage in any transaction with any
director, officer or affiliate thereof involving the sale or disposition of an
equity interest of more than 1% in Company property to
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<PAGE>
such person, and most other transactions between the Company and any director
or officer, or affiliate thereof, must be approved by a majority vote of the
Board of Directors as being fair, competitive, and commercially reasonable and
no less favorable to the Company than similar transactions between
unaffiliated parties under the same circumstances. Such restrictions do not
apply where such director, officer or affiliate has acquired the property for
the sole purpose of facilitating its acquisition by the Company, and the total
consideration paid by the Company does not exceed the cost of the property to
such person (where the cost is increased by the person's holding costs and
decreased by any income received by the person from the property) and no
special benefit results to such person.
In addition, it is in the interest of Messrs. Agree and Rosenberg
that the Company retain the Properties and the Company's debt for purposes of
deferring taxable gain, although under certain circumstances it may be in the
interest of some, or a majority, of the stockholders to sell one or more of
the Properties or to reduce the Company's debt. In order to minimize this
potential conflict, decisions as to sales of the Properties and any
refinancing or repayment with respect to the Company's debt will be made by a
majority of the Independent Directors (as hereinafter defined) of the Company.
See "Management -- Directors and Executive Officers."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company may, but does not presently intend to, make investments
other than as previously described. The Company has authority to offer shares
of its capital stock or other senior securities in exchange for property and
to repurchase or otherwise reacquire its Common Stock or any other securities
and may engage in such activities in the future. The Company has not issued
Common Stock or any other securities in exchange for property, nor has it
reacquired any of its Common Stock or any other securities. Except with
respect to loans to employees which have been repaid, neither the Company nor
the Agree Predecessors have made loans to other entities or persons, including
its officers and directors. Neither the Company nor the Agree Predecessors
have engaged in trading, underwriting or agency distribution or sale of
securities of other issuers and the Company does not intend to do so. At all
times, the Company intends to make investments in such a manner as to be
consistent with the requirements of the Code to qualify as a REIT unless,
because of circumstances or changes in the Code (or in the Treasury
Regulations), the Board of Directors determines that it is no longer in the
best interests of the Company to qualify as a REIT. The Company's policies,
including the Company's REIT status election, with respect to such activities
may be reviewed and modified from time to time by the Company's Board of
Directors without the vote of the stockholders.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
the directors and executive officers of the Company. The Board of Directors of
the Company consists of six members divided into three classes serving
staggered three-year terms. Executive officers of the Company serve at the
pleasure of the Board of Directors.
NAME AGE* POSITION
Richard Agree (3)(5) 53 Chairman of the Board and President
Edward Rosenberg (2)(5) 77 Director and Senior Vice President
Ellis G. Wachs (2)(4)(5)(6) 67 Director
Farris G. Kalil (1)(4)(6) 58 Director
Gene Silverman (1)(6) 63 Director
Michael Rotchford (3)(5) 38 Director
Kenneth Howe 48 Vice President-Finance and Secretary
- ----------
* As of April 1, 1997
(1) Term as a Director will expire at the Company's 1997 Annual Meeting of
the Stockholders. The Board of Directors of the Company has nominated
Messrs. Kalil and Silverman for re-election.
(2) Term as a Director will expire in 1998.
(3) Term as a Director will expire in 1999.
(4) Member of the Audit Committee.
(5) Member of the Executive Committee.
(6) Member of the Executive Compensation Committee.
Richard Agree has been President and Chairman of the Board of the
Company since December 1993. Prior thereto, he worked as managing partner of
the general partnerships which held certain of the Properties prior to the
Company's formation and IPO and was President of the predecessors of the
Company since 1971. Mr. Agree has managed and overseen the development of over
4,000,000 square feet of anchored shopping center space during the past 23
years. Mr. Agree is a son-in-law of Mr. Rosenberg.
Edward Rosenberg has been Director and Senior Vice President of the
Company since December 1993. Prior thereto, he has worked on behalf of and as
a general partner of the Company's predecessor entities for the past 23 years.
Mr. Rosenberg has been involved in commercial development of community
shopping centers for over 30 years. During this period, he has overseen the
expansion and management of existing properties totalling over 4,000,000
square feet. Mr. Rosenberg is the father-in-law of Mr. Agree. As of April 22,
1997, the date on which Mr. Rosenberg's employment agreement with the Company
expires, he will no longer serve as Senior Vice President, or hold any other
office, of the Company but will continue to serve in his capacity as a
Director of the Company.
Ellis G. Wachs has been a director of the Company since December
1993. Mr. Wachs is one of the four founders of Charming Shoppes, Inc., where,
for a forty year period ended in 1991, he held various positions, including
Executive Vice President, with various responsibilities including merchandise
acquisition, real estate leasing and site location. From 1991 until recently,
he served as a consultant to
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<PAGE>
Charming Shoppes, Inc. and he is currently a real estate investor. He is a
graduate of the University of Illinois and a board member of the Philadelphia
Free Library.
Farris G. Kalil has been a director of the Company since December
1993. Mr. Kalil is Director of Business Development for the Commercial Lending
Division of Michigan National Bank, a national banking institution. From May
1994 to November 1996, Mr. Kalil served as a Senior Vice President for
Commercial Lending at First of America Bank - Southeast Michigan, N.A. Prior
thereto, Mr. Kalil served as a Senior Vice President of Michigan National Bank
where he headed the Commercial Real Estate Division, Corporate Special Loans,
Real Estate Asset Management/Real Estate Owned Group, and the Government
Insured Multi-Family Department. He had been with Michigan National
Corporation since 1960. Mr. Kalil received his B.S. from Wayne State
University and continued his education at the Northwestern University School
of Mortgage Banking.
Gene Silverman has been a director of the Company since April 1994.
Mr. Silverman is currently a consultant to the entertainment industry. From
July 1993 until his retirement in December 1995, Mr. Silverman served as the
President and Chief Executive Officer of Polygram Video, USA, a division of
Polygram N.V., a New York Stock Exchange listed company. Prior thereto, he was
Senior Vice President of Sales at Orion Home Video from 1987 through 1992. In
1979, Mr. Silverman founded the Detroit-based distribution company named Video
Trend, Inc. In addition, he owned and operated Music Trend, Inc. and Merit
Music Distribution, Inc. in Detroit.
Michael Rotchford has been a director of the Company since December
1993. He is a Managing Director of The Saratoga Group, an investment banking
organization which specializes in tax and asset-based financing. He currently
is a member of the Board of Directors of American Real Estate Investment
Corporation, a public company. Mr. Rotchford has been with The Saratoga Group
since 1991. Prior to 1991, Mr. Rotchford was a Director in the investment
banking division of Merrill Lynch & Co. where he managed the commercial
mortgage placement group. Mr. Rotchford holds a bachelor's degree, with high
honors, from the State University of New York at Albany. He is also a licensed
real estate broker, a registered representative and a Securities Principal.
Kenneth Howe has been Vice President-Finance of the Company since
June 1994 and Secretary of the Company since November 1993. Prior to being
appointed as Vice President-Finance, Mr. Howe served as Chief Financial
Officer of the Company since November 1993. From 1989 to April 1994, he had
been Controller of the Agree Predecessors. From 1984 to 1989, he was a partner
in Straka, Jarackas and Company, a public accounting firm with whom he was
employed since 1974. He is a graduate of Western Michigan University and a
certified public accountant.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Board of Directors has established an Audit
Committee which consists of two members of the Board of Directors who are not
affiliated with Messrs. Agree and Rosenberg ("Independent Directors"). The
Audit Committee was established to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls. The Audit Committee consists of Messrs. Wachs and Kalil.
The Audit Committee met twice during 1996.
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<PAGE>
Executive Committee. The Executive Committee has the authority to
acquire and dispose of real property and the power to authorize, on behalf of
the full Board of Directors, the execution of certain contracts and
agreements, including those related to the borrowing of money by the Company,
and generally to exercise all other powers of the Board of Directors except
for those which require action by a majority of the Independent Directors or
the entire Board of Directors under the Charter, Bylaws or applicable law. The
Executive Committee consists of Messrs. Agree, Rosenberg, Rotchford and Wachs.
The Executive Committee met once during 1996.
Executive Compensation Committee. The Board of Directors has
established an Executive Compensation Committee to determine compensation for
the Company's executive officers, in addition to administering the Company's
stock option and other employee benefit plans. The Executive Compensation
Committee consists of three Independent Directors, Messrs. Kalil, Silverman
and Wachs. The Executive Compensation Committee met once in 1996.
COMPENSATION OF DIRECTORS
The Company currently pays an annual fee of $7,000 to its directors
who are not employees of the Company. Employees of the Company who are also
directors are not paid any director fees.
EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table below sets forth the compensation for
the years ended December 31, 1994, 1995 and 1996 for the President and the two
other executive officers of the Company (together, the "Named Executive
Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------- -------------------------------------------
COMMON STOCK
UNDERLYING
RESTRICTED STOCK OPTION
STOCK AWARDS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS ($) (NO. OF SHARES)
--------------------------- ---- ------ ----- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Richard Agree....................... 1996 $100,000 -- -- --
President and Chairman of the 1995 100,000 -- -- --
Board 1994 69,231(1) -- -- 18,375
Edward Rosenberg.................... 1996 $ 75,000 -- -- --
Director and Senior Vice 1995 75,000 -- -- --
President 1994 51,923(1) -- -- 6,125
Kenneth R. Howe..................... 1996 $75,000 $4,327 $22,700(2) --
Vice President -- Finance 1995 75,000 4,327 19,500(2) --
and Secretary 1994 51,923(1) 4,327 13,812(2) 4,900
</TABLE>
- ----------
(1) Amounts paid by the Company during the period April 22, 1994 through
December 31, 1994. Annualized salary for Messrs. Agree, Rosenberg and
Howe was $100,000, $75,000 and $75,000, respectively.
(2) The dollar value (net of any consideration paid) of the award of
restricted stock, calculated by multiplying the closing sale price of
the Company's Common Stock as reported on the NYSE on the last
trading day of each fiscal year
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<PAGE>
presented by the number of shares awarded during each such period.
Mr. Howe was awarded 5,000 and 1,000 shares of restricted stock on
May 12, 1994 and January 1, 1996, respectively, pursuant to the Plan.
Such grants (i) vest in equal annual installments over a five-year
period from the date of the grant and (ii) are entitled to dividends
from the date of the grant. At December 31, 1996, the market value,
based upon the closing sale price of the Company's Common Stock as
reported on the NYSE on such date, of Mr. Howe's restricted stock was
$126,750.
Option Grants
During the year ended December 31, 1996, the Company did not grant
any stock options to purchase shares of Common Stock.
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information with respect to
unexercised stock options held by the Named Executive Officers at December 31,
1996. During the year ended December 31, 1996, none of the Named Executive
Officers exercised any stock options.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1996 at December 31, 1996(1)
-----------------------------------------------------------------------------------
Name and Principal Position Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard Agree............................... 9,187 9,188 $16,077 $16,079
Chairman of the Board
and President
Edward Rosenbeg............................. 3,062 3,063 $ 5,359 $ 5,360
Director and Senior
Vice President
Kenneth Howe................................ 2,450 2,450 $ 4,288 $ 4,288
Vice President, Finance
and Secretary
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Market value of the underlying shares of Common Stock based on the
average of the high and low sales prices of the Company's Common
Stock as reported on the NYSE on December 31, 1996, minus the
aggregate exercise price.
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
In connection with the IPO, Messrs. Agree and Rosenberg entered into
employment agreements with the Company providing for terms expiring on April
22, 1999 and on April 22, 1997, respectively, pursuant to which Messrs. Agree
and Rosenberg are paid annual salaries of $100,000 and $75,000, respectively.
Subject to certain terms and conditions, Messrs. Agree and Rosenberg have
agreed that, during the term of their employment agreements, they will not
compete with the Company's business, including real estate development. Mr.
Agree and Mr. Rosenberg are required to devote substantially all of their
business time to the affairs of the Company while they are employees of the
Company.
INDEMNIFICATION
As permitted by the MGCL, the Charter obligates the Company to
indemnify its present and former directors and officers and to pay or
reimburse reasonable expenses for such individuals in advance of the final
disposition of a proceeding to the maximum extent permitted from time to time
by Maryland
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<PAGE>
law. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities, unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to such proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services,
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. The Bylaws
implement the provisions relating to indemnification contained in the Charter.
Maryland law permits the charter of a Maryland corporation to include
a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except to the extent that
(i) the person actually received an improper benefit or profit in money,
property or services, or (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. The Charter
contains a provision providing for elimination of the liability of its
directors or officers to the Company or its stockholders for money damages to
the maximum extent permitted by Maryland law from time to time.
In addition, the officers, directors and controlling persons of the
Company are indemnified against certain liabilities by the Underwriters and
the Underwriters are indemnified against certain liabilities by the Company
under the Underwriting Agreement relating to the Offering. See "Underwriting."
The Company maintains for the benefit of its officers and directors,
officers' and directors' insurance.
STOCK INCENTIVE PLAN
The Company has established the Plan for the purpose of attracting
and retaining directors, executive officers and other employees. The Plan is
administered by the Executive Compensation Committee of the Board of Directors
(the "Committee"). A maximum of 200,000 shares of Common Stock have been
reserved for issuance under the Plan, and as of March 31, 1997, 52,745 shares
of restricted stock had been granted under the Plan and options to purchase
29,400 shares of Common Stock were outstanding under the Plan. In its
discretion, the Board of Directors may increase the number of shares of Common
Stock reserved for issuance under the Plan each January 1 by up to 1% of the
number of shares of Common Stock outstanding at each such date. Any amount of
permitted increase not implemented in one year may, in the Board of Directors'
discretion, be implemented in a subsequent year. In the event of a stock
dividend, stock split, recapitalization or the like, the Committee will
equitably adjust the aggregate number of shares available for issuance under
the Plan, the number of shares subject to each outstanding award, and the
exercise prices of outstanding options.
Awards under the Plan may be made in the form of (i) incentive stock
options that qualify for certain tax benefits to the optionees, (ii)
non-qualified stock options (incentive and non-qualified stock options are
collectively referred to as "options"), (iii) stock appreciation rights, (iv)
dividend equivalent rights, (v) restricted stock, (vi) unrestricted stock and
(vii) performance shares. Awards may be made under the Plan to such officers
and executive, managerial, professional or administrative employees of the
Company and its subsidiaries (including employees who are Directors), and to
such consultants to the Company and employees of joint ventures in which the
Company participates, as the Committee shall in
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<PAGE>
its discretion select. No award or right granted under the Plan may be
assigned or transferred other than upon the grantee's death.
Unless sooner terminated by the Board of Directors, the provisions of
the Plan respecting the grant of incentive stock options shall terminate on
the tenth anniversary of the adoption of the Plan by the Board. All awards
made under the Plan prior to its termination shall remain in effect until such
awards have been satisfied or terminated. The Board of Directors may, without
stockholder approval, suspend, discontinue, revise or amend the Plan at any
time or from time to time.
PROFIT SHARING PLAN
The Company maintains a tax-qualified profit sharing plan (the
"Profit Sharing Plan"). The participants in the Profit Sharing Plan consists
of all employees who are at least 21 years old and have completed one year of
service. Participants do not share in contributions or forfeitures for a year
unless they are employed at the end of such year or have died, become totally
disabled or retired after age 65 during such year. The Profit Sharing Plan is
intended to qualify under section 401(a) of the Code.
The Company's Board of Directors has the discretion to determine
whether to make a contribution to the Profit Sharing Plan for a given year and
the amount thereof. The contribution for any participant's account generally
will not exceed 15% of participant compensation, up to a maximum calculated
pursuant to applicable regulations under the Code.
Under the Profit Sharing Plan, 20% of a participant's benefits will
become vested after the participant's second year of credited service and an
additional 20% after each of the following four years. Vested benefits will
normally be paid in a lump sum within 60 days after the end of the fiscal year
in which the participant's employment terminates.
The participants in the Profit Sharing Plan cannot make any
contributions thereto, and no contributions have been made to the Profit
Sharing Plan by the Company since the IPO.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company rents its executive offices, located at 31850
Northwestern Highway, Farmington Hills, Michigan, from A&M Investment, a
Michigan general partnership, the general partners of which are the daughters
of Mr. Rosenberg and in the case of one of the partners, the spouse of Mr.
Agree, for annual rental payments of $60,000 ($10.00 per square foot) and a
lease term ending April 30, 1999. Management believes that the lease terms are
comparable to leases for similar properties in this location.
The Company and three co-partnerships, of which Messrs. Agree and
Rosenberg are general partners (the "Co-Partnerships"), have entered into a
management agreement (the "Management Agreement") expiring on April 22, 1999
whereby the Company manages three properties for the Co-Partnerships that are
not part of the Portfolio for a fee equal to 3 1/2% of the gross rental income
of the three properties. During the year ended December 31, 1996, the Company
received approximately $77,000 pursuant to the Management Agreement. In
addition, the Company has been granted a right of first refusal to purchase
all or any one of the three properties on the same terms and conditions as any
arm's-length, bona fide, written offer received from an unaffiliated third
party pursuant to the Management Agreement. In the event that the Company
decides to acquire any of the three properties, such acquisition will be
contingent upon the receipt of a fairness opinion from Raymond James &
Associates, Inc. and approval by a majority of the Independent Directors.
Mr. Kalil, a director of the Company, is a Director of Business
Development for the Commercial Lending Division of Michigan National Bank.
Michigan National Bank is one of the lending banks under the Credit Facility
and is the lender of the Line of Credit, and it provides other on-going
banking services to the Company and receives usual and customary banking fees
for such services. As of March 15, 1997, $33,485,835 was outstanding under the
Credit Facility and there was no outstanding indebtedness under the Line of
Credit.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The beneficial ownership, as of February 28, 1997, of the Common
Stock with respect to each director of the Company, each Named Executive, each
person known by the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock, and of all directors and executive
officers as a group is set forth on the table below. None of such stockholders
is selling any shares of Common Stock in the Offering.
<TABLE>
<CAPTION>
Amount and Percent of Percent of
Name and Business Address Nature of Class Prior to Class After
of Beneficial Owners(1) Beneficial Ownership(2) the Offering(2) the Offering(2)
- ----------------------- ----------------------- --------------- ---------------
<S> <C> <C> <C>
Richard Agree 416,797 13.8% 9.2%
Edward Rosenberg 307,436 10.5% 7.0%
Michael Rotchford 1,000 * *
Farris G. Kalil 4,850 * *
Ellis G. Wachs 1,000 * *
Gene Silverman 11,893 * *
Kenneth Howe 12,775 * *
All directors and executive
officers as a group (7 persons) 755,751 23.1% 15.8%
</TABLE>
- ----------
* Less than 1%
(1) The address of each person is c/o the Company at 31850 Northwestern
Highway, Farmington Hills, Michigan 48334.
(2) Includes shares of Common Stock issuable upon conversion of OP Units
to Messrs. Agree and Rosenberg of 329,825 and 240,000, respectively,
and options exercisable within 60 days held by Messrs. Agree,
Rosenberg and Howe to purchase 13,781, 4,594 and 3,675 shares of
Common Stock, respectively. Also includes shares of restricted stock
granted in the amounts of 5,000, 1,000 and 2,500 shares to Mr. Howe
on May 12, 1994, January 1, 1996 and January 1, 1997, respectively,
and of 4,000 shares to Mr. Agree on January 1, 1997. Such grants (i)
vest in equal annual increments over a five year period from the date
of the award and (ii) are entitled to dividends from the date of the
award.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Charter and Bylaws. This summary does not purport to be complete and
is qualified by reference to the Charter and Bylaws. See also "Certain
Anti-takeover Provisions."
Under the Company's Charter and Bylaws, the total number of shares of
all classes of capital stock that the Company has authority to issue is
20,000,000 shares, par value $0.0001 per share, initially consisting of
5,000,000 shares of Common Stock.
The Board of Directors is authorized to classify or reclassify any
unissued portion of the authorized shares of capital stock to provide for the
issuance of shares in other classes or series, including Preferred Stock in
one or more series. The Company has no current intention to issue shares of
any class or series other than Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Holders
of Common Stock do not have cumulative voting rights in the election of
directors, which means that holders of more than 50% of the shares of Common
Stock voting for the election of directors can elect all of the directors if
they choose to do so and the holders of the remaining shares cannot elect any
directors. Subject to preferential rights with respect to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. The shares of Common Stock are not convertible into any
other class or series except into Excess Stock under limited circumstances.
See "-- Restrictions on Transfer." Holders of Common Stock do not have
preemptive rights, which means they have no right to acquire any additional
shares of Common Stock that may be issued by the Company at a subsequent date.
The outstanding shares of Common Stock are, and the Common Stock to be
outstanding upon completion of the Offering will be, fully paid and
nonassessable. The Common Stock has been listed for trading on the NYSE since
April 15, 1994. See "Price Range of Common Stock and Dividends."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First
National Bank of Boston.
RESTRICTIONS ON TRANSFER
Among other requirements that must be met, for the Company to qualify
as a REIT under the Code, not more than 50% in value of its outstanding Common
Stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, and the Common Stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (see "Federal Income Tax
Considerations -- Taxation of the Company -- Income Tests"). The Charter
contains restrictions on the acquisition of shares of Common Stock to enable
the Company to qualify as a REIT.
Subject to certain exceptions specified in the Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% of the Company's Common Stock,
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except that the Agree-Rosenberg Group (as defined in the Charter) may own up
to 24%. The Board of Directors may waive the Ownership Limit if evidence
satisfactory to the Board of Directors and the Company's tax counsel is
presented that such ownership will not then or in the future jeopardize the
Company's status as a REIT. As a condition of such waiver, the Board of
Directors may require opinions of counsel satisfactory to it and/or an
undertaking from the applicant with respect to preserving the REIT status of
the Company. The foregoing restrictions on transferability and ownership will
not apply if the Board of Directors determines that it is no longer in the
best interests of the Company to continue to qualify as a REIT. If shares of
Common Stock in excess of the Ownership Limit, or shares which would cause the
REIT to be beneficially owned by less than 100 persons, are issued or
transferred to any person, such issuance or transfer shall be null and void to
the intended transferee, and the intended transferee would acquire no rights
to the stock. Shares transferred in excess of the Ownership Limit will be
automatically converted into shares of Excess Stock that will be deemed
transferred by operation of law to the Company as trustee for the exclusive
benefit of the person or persons to whom the shares are ultimately
transferred, until the intended transferee retransfers the shares. While these
shares are held in trust, they will not be entitled to vote or to share in any
dividends or other distributions. The shares may be retransferred by the
intended transferee to any person who may hold such shares at a price not to
exceed the price paid by the intended transferee, at which point the shares
will automatically be converted into ordinary Common Stock. In addition, such
shares of Excess Stock held in trust are purchasable by the Company for a
90-day period at a price equal to the lesser of the price paid for the stock
by the intended transferee and the market price for the stock on the date the
Company determines to purchase the stock. This period commences on the date of
the violative transfer if the intended transferee gives notice to the Company
of the transfer, or the date the Board of Directors determines that a
violative transfer has occurred if no notice has been provided.
All certificates representing shares of Common Stock will bear a
legend referring to the restrictions described above.
In order for the Company to comply with its record keeping
requirements, the Charter requires that each beneficial or constructive owner
of Common Stock, and each person (including stockholders of record) who holds
stock for a beneficial or constructive owner, shall provide to the Company
such information as the Company may request in order to determine the
Company's status as a REIT and to ensure compliance with limitations on the
ownership of Common Stock. The Charter also requires each beneficial or
constructive owner of a specified percentage of Common Stock to provide, no
later than January 31 of each year, written notice to the Company stating the
name and address of such owner, the number of shares of Common Stock
beneficially or constructively owned, and a description of how such shares are
held. In addition, each such stockholder must provide such additional
information as the Company may request in order to determine the effect of
such stockholder's ownership of Common Stock on the Company's status as a REIT
and to ensure compliance with the limitations on the ownership of Common
Stock.
This ownership limitation may have the effect of precluding
acquisition of control of the Company by a third party unless the Board of
Directors determines that maintenance of REIT status is no longer in the best
interests of the Company. No restrictions on transfer will preclude the
settlement of transactions entered into through the facilities of the NYSE;
provided that certain transactions may be settled by the delivery of Excess
Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices. Upon completion of the
Offering, there will be 4,178,430 shares of Common Stock outstanding (assuming
no exercise of the Underwriters' over-allotment option).
Messrs. Agree and Rosenberg have agreed not to transfer, sell, offer
to sell or otherwise convey to any unaffiliated party any shares of Common
Stock now held or received upon the conversion of their OP Units or the
exercise of their options without the prior written consent of Raymond James &
Associates, Inc. for a period of 120 days after the date of this Prospectus.
The Company has also agreed not to transfer, sell, offer to sell or otherwise
convey to any unaffiliated party any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, other than
options and restricted stock issued under the Plan, without the prior written
consent of Raymond James & Associates, Inc. for a period of 120 days after
the date of this Prospectus. The 733,701 shares of Common Stock (including
569,825 OP Units convertible into Common Stock) held by directors and
officers of the Company are restricted securities ("Restricted Shares") under
the meaning of Rule 144 under the Act and may not be sold in the absence of
registration under the Act unless an exemption from registration, including
exemptions contained in Rule 144, is available.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one
year, including an "affiliate", as that term is defined below, is entitled to
sell, within any three-month period, that number of shares that does not
exceed the greater of 1% of the then outstanding shares or the average weekly
trading volume of the shares during the four calendar weeks preceding each
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company, and who has
beneficially owned shares for at least two years, is entitled to sell such
shares under Rule 144 without regard to the volume limitations, manner of sale
provisions or public information requirements referred to above. The foregoing
discussion reflects a recent amendment to the holding periods under Rule 144
which will go into effect on April 29, 1997. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through the
use of one or more intermediaries, controls, or is controlled by, or is under
the common control with, such issuer.
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement which has
been incorporated by reference as an exhibit to the Registration Statement of
which this Prospectus is a part.
MANAGEMENT
Pursuant to the Partnership Agreement, the Company, as the sole
general partner of the Operating Partnership, generally has full, exclusive
and complete responsibility and discretion in the management and control of
the Operating Partnership, and the limited partners of the Operating
Partnership (the "Limited Partners") will have no authority to transact
business for, or participate in the management activities or decisions of, the
Operating Partnership. However, any decision to (i) amend or terminate the
Partnership Agreement; (ii) make a general assignment for the benefit of
creditors; (iii) sell, exchange, transfer or otherwise dispose of all or
substantially all of the Operating Partnership's assets in a single
transaction, or in a series of related transactions; (iv) institute any
bankruptcy proceeding on behalf of, or dissolve, the Operating Partnership; or
(v) admit a Person as a Partner, except as otherwise provided in the
Partnership Agreement would require the consent of a majority in interest of
the Limited Partners, so long as the aggregate ownership interest of the
Limited Partners in the Operating Partnership is at least 10%.
TRANSFERABILITY OF INTERESTS
The Partnership Agreement provides that the Company may not
voluntarily withdraw from the Operating Partnership or transfer, pledge, or
otherwise dispose of any portion of its interest in the Operating Partnership
without the consent of a majority in interest of the Limited Partners. The
Partnership Agreement also provides that the Company may not recapitalize or
merge or otherwise combine with any other entity unless the Limited Partners
have the right to elect either to be treated in a merger or other combination
of the Company on a substantially equivalent basis with the Company's
stockholders or to have the Partnership continue as a separate entity in which
the Limited Partners retain rights substantially similar to the Conversion
Rights. No Limited Partner may transfer, pledge, or otherwise dispose of all
or any portion of its interest in the Operating Partnership without the
consent of the General Partner, except that a Limited Partner may (i) exercise
Conversion Rights; (ii) transfer its interests to an "affiliate" (as defined
in the Partnership Agreement); or (iii) pledge its interest to secure its
obligations, which pledgee may acquire the interest upon a default. Any
pledgee which acquires an interest in the Operating Partnership upon default
may, for a period of one year, elect to exchange the OP Units represented by
such interest for shares of Common Stock on a one-for-one basis or, at the
option of the Company, for cash. In general, at the end of the one year
period, any OP Units not previously exchanged will be automatically exchanged
for Common Stock.
CAPITAL CONTRIBUTIONS
If the Company issues additional shares of Common Stock to other than
all holders of Common Stock, it is required to contribute the proceeds from
such issuance to the Operating Partnership in exchange for an additional
general partnership interest in the Operating Partnership. If the Company
issues preferred stock, rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock ("New Securities") to other than all holders of Common
Stock, it is required to contribute the proceeds from the issuance of the New
Securities to
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the Operating Partnership in exchange for a partnership interest having
economic rights substantially similar to those of the New Securities. If the
New Securities subsequently are converted into shares of Common Stock, such
partnership interest of the Company will be converted into an additional
general partnership interest in the Operating Partnership, based on the value
of the shares of Common Stock into which the New Securities are converted and
the value of the Operating Partnership at the time of conversion of the New
Securities. Any issuance of an increased general partnership interest to the
Company will proportionately decrease the partnership interests of the Limited
Partners.
The General Partner has the authority to admit additional limited
partners to the Operating Partnership if it determines that such admission is
in the best interest of the Operating Partnership. The additional partners may
contribute cash or other assets in exchange for their limited partnership
interest. If additional partners are admitted to the Operating Partnership,
the partnership interests of all existing partners of the Operating
Partnership, including the Company, will be decreased proportionately, based
upon the amount of additional capital contributions made by the additional
partners and the value of the Operating Partnership at the time of such
contributions.
AWARDS UNDER STOCK INCENTIVE PLAN
Upon exercise of any options granted pursuant to the Plan, the
Partnership Agreement provides that the Company must contribute to the
Operating Partnership, as an additional capital contribution, the exercise
price of such options. Although the Company will contribute to the Operating
Partnership the amount of the exercise price actually received, the Company
will be deemed to have made a contribution equal to the then-current fair
market value of the shares of Common Stock issued upon exercise of the option.
This will have the effect of increasing the partnership interest of the
Company and decreasing the interests of the Limited Partners.
ALLOCATIONS AND DISTRIBUTIONS
The net income or net loss of the Operating Partnership for tax
purposes will generally be allocated to the Company and the Limited Partners
in accordance with their percentage interests, subject to compliance with the
provisions of sections 704(b) and 704(c) of the Code and the regulations
promulgated thereunder.
CONVERSION RIGHTS
Pursuant to the Partnership Agreement, the holders of OP Units
received certain conversion rights, which, among other things, will enable
them to convert their OP Units at any time, at the option of the Company, into
cash or shares of Common Stock, on a one-for-one basis. In addition, any
pledgee which acquires OP Units will have certain rights to exchange such OP
Units, at the option of the Company, for cash or for shares of Common Stock,
as described above at "-- Transferability of Interests."
The one-for-one conversion ratio of OP Units for Common Stock will be
adjusted from time to time to reflect stock dividends, stock splits or reverse
stock splits. In addition, if the Company issues to all of its stockholders
any New Securities, the conversion rights will include the right to receive
such New Securities that a holder of a share of Common Stock would be entitled
to receive.
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TAX MATTERS
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Operating Partnership and has authority to make tax elections
under the Code on behalf of the Operating Partnership.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for qualification as a REIT, such that it will not generally be subject to
Federal income tax liability.
Pursuant to the Partnership Agreement, the Operating Partnership will
reimburse the Company for all costs and expenses relating to the ownership and
operation of, or for the benefit of, the Operating Partnership, including,
without limitation, (i) all expenses incurred by the Company in managing the
business of the Operating Partnership, including all executive compensation;
and (ii) all general and administrative expenses of the Company.
DUTIES AND CONFLICTS
The Partnership Agreement provides that all business activities of
the Company must be conducted through the Operating Partnership. The Operating
Partnership is authorized to enter into transactions with partners or their
affiliates, as long as the terms of such transactions are no less favorable to
the Operating Partnership than would be obtained from an unaffiliated third
party. All such transactions with Messrs. Agree and Rosenberg, or with an
"affiliate" of either of them, are subject to review and approval by a
majority of the Independent Directors.
Except as otherwise set forth in "Policies with Respect to Certain
Activities -- Conflicts of Interest Policies" and "Management -- Employment
Agreement and Covenant Not to Compete," any Limited Partner may engage in
other business activities outside the Operating Partnership, including
business activities which directly compete with the Operating Partnership.
INDEMNIFICATION
The Partnership Agreement contains indemnification provisions
comparable to those contained in the Charter. See "Management --
Indemnification."
TERM
The Operating Partnership will continue in full force and effect
until December 31, 2094, or until sooner dissolved upon (i) the dissolution,
termination or bankruptcy of the Company (unless a majority in interest of the
Limited Partners elects to continue the Operating Partnership); (ii) the
election of the Company and a majority in interest of the Limited Partners
(provided that the consent of the Limited Partners is not required if their
aggregate ownership interest in the Operating Partnership is less than 3%); or
(iii) the sale or other disposition of all, or substantially all, of the
assets of the Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material Federal income tax considerations
regarding an investment in the Offered Securities is based on current law, is
for general information only and is not tax advice. For purposes of this
discussion, the "Company" refers only to Agree Realty Corporation. Kramer,
Levin, Naftalis & Frankel ("Kramer Levin"), counsel to the Company, has
reviewed the following discussion and is of the opinion that it fairly
summarizes all Federal income tax considerations that are likely to be
material to Company stockholders. However, this discussion does not purport to
deal with all aspects of taxation that may be relevant to particular
stockholders in light of their particular investment or tax circumstances, or
to certain types of stockholders subject to special treatment under the
Federal income tax laws (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations
and individuals who are not citizens or residents of the United States). The
discussion in this section is based on existing provisions of the Code,
existing and proposed Treasury Regulations, existing court decisions and
existing rulings and other administrative interpretations. There can be no
assurance that future Code provisions or other legal authorities will not
alter significantly the tax consequences described below. No rulings have been
obtained from the IRS concerning any of the matters discussed in this section.
Because the following represents only a summary, it is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of
which are subject to change, which change may apply retroactively.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General
The Company has elected to be taxed as a REIT commencing with the
taxable year ending December 31, 1994. The Company believes that, commencing
with such taxable year, it has been organized and has operated in such a
manner as to qualify for taxation as a REIT under the Code and the Company
intends to continue to operate in such a manner, but no assurance can be given
that it will qualify as a REIT in any particular year.
The REIT requirements, relating to the Federal income tax treatment
of REITs and their stockholders, are highly technical and complex. The
following discussion sets forth only the material aspects of the Code sections
that govern the Federal income tax treatment of a REIT and its stockholders.
Opinion of Counsel
In the opinion of Kramer Levin, the Company will be treated as having
met the requirements for qualification and taxation as a REIT for its taxable
years ending December 31, 1994, 1995 and 1996 and, assuming that the actions
described in this discussion of "Federal Income Tax Considerations" are
completed in a timely fashion, its proposed method of operation and the
proposed method of operation of the Operating Partnership will enable it to
continue to meet the requirements for qualification and
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taxation as a REIT under the Code. It must be emphasized that the opinion is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters. Certain of such factual assumptions
and representations are set forth below in this discussion of "Federal Income
Tax Considerations." In addition, the opinion is based upon the factual
representations of the Company concerning its business and properties, and the
business and properties held by or through the Operating Partnership, as set
forth in this Prospectus. The opinion is expressed as of its date, and Kramer
Levin has no obligation to advise stockholders of the Company of any subsequent
change in the matters stated, represented or assumed, or any subsequent change
in applicable law. Moreover, such qualification and taxation as a REIT depends
upon the Company's ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code as discussed below, the results of which will not
be reviewed by Kramer Levin. Accordingly, no assurance can be given that the
actual results of the Company's operation for any one taxable year will satisfy
such requirements. See "-- Failure to Qualify." 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 qualification as a REIT or that such challenge would
not be upheld by a court.
Taxation of the Company
If the Company qualifies for taxation as a REIT, it generally will
not be subject to Federal corporate income tax on its net income that is
7urrently distributed to stockholders because the REIT provisions of the Code
generally allow a REIT to deduct dividends paid to stockholders. This
deduction for dividends paid to stockholders substantially eliminates the
Federal "double taxation" (once at the corporate level and once again at the
stockholder level) that generally results from investment in a corporation.
However, the Company will be subject to Federal income tax as
follows: First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" (generally, property acquired by reason of a default in a lease or
an indebtedness held by a REIT) which is held primarily for sale to customers
in the ordinary course of business or (ii) other nonqualifying net income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business other than foreclosure property), such income will be subject to a
100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the gross income attributable to
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a four
percent excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from
a C corporation (i.e., a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other property)
in the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Company (the "Recognition Period"), then
pursuant to guidelines issued by the IRS in IRS Notice 88-19
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(the "Built-in Gain Rules"), such gain, to the extent of the excess of (a) the
fair market value of such asset as of the beginning of such Recognition Period
over (b) the Company's adjusted basis in such assets as of the beginning of
such Recognition Period (the "Built-in Gain"), will be subject to tax at the
highest regular corporate rate. The results described above with respect to
the recognition of Built-in Gain assume that the Company will make an election
pursuant to the Built-in Gain Rules or applicable future administrative rules
or Treasury Regulations. The Company has not acquired, and does not expect to
acquire, an interest in any asset subject to the Built-in Gain Rules.
Requirements for Qualification
To qualify as a REIT, the Company must elect to be a REIT and
must meet the requirements, certain of which are discussed below, relating to
the Company's organization, sources of income, nature of assets and
distributions of income to stockholders. The Company has made the necessary
election to be a REIT.
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 as a domestic
corporation, but for sections 856 through 859 of the Code; (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; (6) not more than 50% in value of the outstanding stock of
which is, at any time during the last half of each taxable year, owned,
directly or indirectly through the application of certain attribution rules,
by five or fewer individuals (as defined in the Code to include certain
entities); and (7) which meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (1) to
(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 less than 12 months.
Conditions (5) and (6) do not apply to the first taxable year for which an
election is made to be taxed as a REIT. The Company has satisfied and
anticipates that it will continue to satisfy the requirements set forth in (1)
through (7) above. In addition, the Charter currently includes certain
restrictions regarding transfer of the Equity Stock that are intended to
assist the Company in continuing to satisfy the share ownership requirements
described in (5) and (6) above. See "Description of Capital Stock --
Restrictions on Transfer."
To monitor the Company's compliance with the share ownership
requirements, the Company is required to maintain records regarding the actual
ownership of its shares. To do so, the Company must demand written statements
each year from the record holders of certain percentages of its stock in which
the record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A list of
those persons failing or refusing to comply with this demand must be
maintained as part of the Company's records. A stockholder who fails or
refuses to comply with the demand must submit a statement with its tax return
disclosing the actual ownership of the shares and certain other information.
In addition, a corporation may not elect to be taxed as a REIT unless
its taxable year is the calendar year. The Company has a calendar year taxable
year.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership shall retain the
same character in the hands of the REIT for purposes of section 856 of the
Code, including satisfying the gross income tests and the asset tests
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described below. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership (and any other
partnership in which the Company invests) will be treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements described herein, provided that the Operating Partnership (and
any such other partnership) is treated as a partnership for Federal income tax
purposes. See "-- Tax Aspects of the Operating Partnership -- Classification
as a Partnership."
Income Tests
In order to maintain qualification as a REIT, there are three gross
income requirements that must be satisfied annually. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances, interest)
or from "qualified temporary investment income" (described below). Second, at
least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, and from dividends, interest and gain from the sale or
disposition of stock or securities or from any combination of the foregoing.
Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent must not
be based in whole or in part on the income or profits of any person. However,
an amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an owner of 10% or more of
the REIT, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent for the taxable year attributable to
personal property leased in connection with a lease of real property is
greater than 15% of the total rent for the taxable year received under the
lease, then the portion of rent attributable to such personal property will
not qualify as "rents from real property." Finally, for rents received to
qualify as "rents from real property," the REIT generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an independent contractor who is adequately
compensated and from whom the REIT does not derive any income; provided,
however, that the Company may directly perform certain customary services in
connection with the rental of property (e.g., furnishing water, heat, light
and air conditioning, and cleaning windows, public entrances and lobbies)
other than services which are considered rendered to the occupant of the
property (e.g., renting parking spaces on a reserved basis to tenants). The
Company does not and will not charge rent for any property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage or percentages of receipts or sales, as described
above) and the Company does not and will not rent any property to a Related
Party Tenant. The Company, directly and through independent contractors,
performs services under certain of its leases, all of which the Company
believes are customary services. The Company will hire independent contractors
from whom it derives no revenue to perform any non-customary services.
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The Company expects that substantially all of its gross income will
qualify as "rents from real property." The Company provides management and
development services to certain properties outside the Portfolio for which it
receives a fee and may also realize gains from the sale of parcels of land
adjacent to the Properties; however, such fees and gains, together with any
other income that does not qualify for the 95% gross income test, have
constituted, and the Company anticipates that they will continue to constitute,
less than 5% of the Company's gross income.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. The Company does not, and does not intend to, charge
interest that will depend, in whole or in part, on the income or profits of
any person.
To the extent the Operating Partnership does not immediately use the
proceeds from the sale of the Offered Securities, these funds will be invested
in interest-bearing accounts and short-term, interest-bearing securities. The
interest income earned on these funds is expected to be includible under the
75% test as "qualified temporary investment income" (which includes income
earned on stock or debt instruments acquired with the proceeds of a stock
offering, not including amounts received under a dividend reinvestment plan).
Qualified temporary investment income treatment only applies during the
one-year period beginning on the date the Company receives the new capital.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure
to meet such tests was due to reasonable cause and not due to willful neglect,
the Company attaches a schedule of the nature and amount of its gross 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 state whether
in all circumstances the Company would be entitled to the benefit of these
relief provisions. As discussed above in "-- Taxation of the Company," even if
these relief provisions apply, a tax would be imposed with respect to the
excess net income. No similar mitigation provision applies to provide relief
if the 30% income test is failed, and in such case, the Company would cease to
qualify as a REIT. See "-- Failure to Qualify."
Asset Tests
The Company, at the close of each quarter of its taxable year, 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 be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest or held by "qualified REIT
subsidiaries" of the Company and (ii) stock or debt instruments held for not
more than one year purchased with the proceeds of a stock offering or
long-term (at least five years) debt offering of the Company), cash, cash
items and government securities. Second, not more than 25% of the value of the
Company's total assets may be represented by securities other than those
includible in the 75% asset class. Third, 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
(excluding securities of a qualified REIT subsidiary or another REIT).
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The Company believes that it has complied and anticipates that it
will continue to comply with these asset tests. The Company is deemed to hold
directly its proportionate share of all real estate and other assets of the
Operating Partnership (and other partnerships in which the Company holds an
interest). As a result, the Company believes that more than 75% of its assets
are and will continue to be real estate assets. In addition, the Company does
not, and does not plan to, hold any securities representing more than 10% of
any one issuer's voting securities (other than securities of a qualified REIT
subsidiary or another REIT), or securities of any one issuer exceeding 5% of
the value of the Company's gross assets (determined in accordance with
generally accepted accounting principles). As previously discussed, the
Company is deemed to own its proportionate share of the assets of a
partnership in which it is a partner so that the Company's partnership
interest in the Operating Partnership itself (or in other partnerships in
which the Company holds an interest) is not a security for purposes of the
asset test.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests 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 that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and to take such
other action within 30 days after the close of any quarter as may be required
to cure any noncompliance. However, there can be no assurance that such other
action will always be successful.
Annual Distribution Requirements
The Company, in order to be treated as a REIT, is required to
distribute dividends (other than capital gain dividends) to its stockholders
in an amount at least equal to (A) the sum of (i) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and
the Company's net capital gain) and (ii) 95% of the net income, if any, from
foreclosure property in excess of the special tax on income from foreclosure
property, minus (B) the sum of certain items of noncash income. In addition,
during the Company's Recognition Period, if the Company disposes of any asset
subject to the Built-in Gain Rules, the Company will be required, pursuant to
guidelines issued by the IRS, to distribute at least 95% of the after-tax
Built-in Gain realized during the Recognition Period. Such distributions must
be made in the taxable year to which they relate, or in the following taxable
year if declared before the Company timely files its tax return for such year
and if paid on or before the first regular dividend payment after such
declaration. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95% (but less than 100%) of its "REIT
taxable income," as adjusted, it will be subject to tax on the undistributed
portion at regular ordinary and capital gains corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a four percent excise tax on the excess of such required distribution over
the amounts actually distributed. The Company believes that it has made, and
intends to make, timely distributions sufficient to satisfy these annual
distribution requirements.
The Company's REIT taxable income has been, and is expected to
continue for five to seven years to be, less than its cash flow, due to the
allowance of depreciation and other noncash charges in computing taxable
income. Accordingly, the Company anticipates that during this period it will
generally have sufficient cash or liquid assets to enable it to satisfy the
95% distribution requirement. It is possible that the Company, from time to
time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement due to timing differences between the actual receipt
of income and actual
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payment of deductible expenses and the inclusion of such income and deduction
of such expenses in arriving at taxable income of the Company, or if the
amount of nondeductible expenses such as principal amortization or capital
expenditures exceeds the amount of noncash deductions. In the event that such
situation occurs, in order to meet the 95% distribution requirement, the
Company may find it necessary to arrange for short-term, or possibly
long-term, borrowing or to pay dividends in the form of taxable stock
dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." If the amount
of nondeductible expenses exceeds noncash deductions, the Company may
refinance its indebtedness to reduce principal payments and borrow funds for
capital expenditures.
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 stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to stockholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary dividend income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification is lost. It is not
possible to state whether in all circumstances the Company would be entitled
to the statutory relief described above.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As used herein, the term "Domestic Stockholder" means a holder of
shares of Stock that (for United States Federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, a partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof or (iii) is an estate or trust the
income of which is subject to United States Federal income taxation regardless
of its source. For any taxable year for which the Company qualifies for
taxation as a REIT, amounts distributed to taxable Domestic Stockholders will
be taxed as follows.
Distributions Generally
Distributions to Domestic Stockholders, other than capital gain
dividends discussed below, will be taxable as ordinary dividend income to such
holders up to the amount of the Company's current or accumulated earnings and
profits. Such distributions are not eligible for the dividends received
deduction for corporations. To the extent that the Company makes distributions
in excess of its current or accumulated earnings and profits, such
distributions will first be treated as a tax-free return of capital, reducing
the tax basis in a Domestic Stockholder's shares of Stock, and the amount in
excess of such Stockholder's tax basis in its shares of Stock will be taxable
as gain realized from the sale of such shares. Such gain will constitute
capital gain if such shares were held as a capital asset, and will constitute
long-
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term capital gain if such shares were held for more than one year. See
"--Dispositions of Shares of Stock." Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record
on a specified date in any such month will be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include on their own income tax
returns any tax losses of the Company. Future regulations may require
stockholders to take into account, for purposes of computing their individual
alternative minimum tax liability, certain tax preference items of the
Company.
As a result of certain rules relating to the determination of the
Company's earnings and profits, stockholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends. Moreover, any "deficiency dividend" will be treated as a
"dividend" (an ordinary dividend or a capital gain dividend, as the case may
be), regardless of the Company's earnings and profits.
Capital Gain Dividends
Dividends to Domestic Stockholders that are properly designated by
the Company as capital gain dividends will be treated as long-term capital
gain (to the extent they do not exceed the Company's actual net capital gain)
for the taxable year without regard to the period for which the stockholder
has held its stock. Corporate stockholders, however, may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Capital gain
dividends are not eligible for the dividends received deduction for
corporations.
Passive Activity Losses; Investment Interest Limitations
Distributions from the Company and gain from the disposition of the
shares of Stock will not ordinarily be treated as passive activity income,
and, therefore, Domestic Stockholders generally will not be able to apply any
"passive activity losses" against such income. Dividends from the Company (to
the extent they do not constitute a return of capital) and gain from the
disposition of shares of Stock generally will be treated as investment income
for purposes of the investment interest limitation.
Dispositions of Shares of Stock
A Domestic Stockholder will recognize gain or loss on the sale or
exchange of shares of Stock to the extent of the difference between the amount
realized on such sale or exchange and the holder's tax basis in such shares.
Such gain or loss generally will constitute capital gain or loss if the holder
has held such shares as a capital asset and will generally constitute
long-term capital gain or loss if such holder has held the shares for more
than one year. Losses incurred on the sale or exchange of shares of Stock held
for six months or less (after applying certain holding period rules), however,
will generally be deemed long-term capital loss to the extent of any capital
gain dividends received by the Domestic Stockholder with respect to such
shares and treated as long-term capital gain.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
In general, a tax-exempt entity that is a stockholder of the Company
will not be subject to tax on distributions from the Company or gain realized
on the sale of Stock. The IRS has ruled that amounts distributed by a REIT to
a tax-exempt employees' pension trust do not constitute unrelated business
taxable income ("UBTI"). Although rulings are merely interpretations of law by
the IRS and may be
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revoked or modified, based on this analysis, indebtedness incurred by the
Company in connection with the acquisition of an investment should not cause
any income derived from the investment to be treated as UBTI to a tax-exempt
entity, provided that the tax-exempt entity has not financed the acquisition
of its shares with "acquisition indebtedness" within the meaning of the Code
and the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. A tax-exempt entity that incurs indebtedness to finance its
purchase of shares, however, will be subject to UBTI by virtue of the
acquisition indebtedness rules.
In certain circumstances, qualified trusts that hold more than 10%
(by value) of the interests in a REIT meeting certain requirements are
required to treat a percentage of REIT dividends as UBTI. The rule applies
only if (i) the qualification of the REIT depends upon the application of a
"look-through" exception to the restriction on REIT stockholdings by five or
fewer individuals, including qualified trusts (see "Description of Capital
Stock -- Restrictions on Transfer"), and (ii) the REIT is "predominantly held"
by qualified trusts. A REIT is predominantly held by qualified trusts if one
qualified trust owns more than 25% of the value of the REIT or a group of
qualified trusts each owning more than 10% of the value of the REIT
collectively own more than 50% of the value of the REIT. The qualification of
the Company as a REIT has not depended and it is not anticipated that it will
depend on the application of the "look-through" exception. The Company has not
been and does not expect to be "predominantly held" by qualified trusts.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States Federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
foreign trusts and estates (collectively, "Non-U.S. Stockholders") are
complex, and the following discussion is intended only as a summary of such
rules. Prospective Non-U.S. Stockholders should consult with their own tax
advisors to determine the impact of Federal, state and local income tax laws
on an investment in the Company, including any reporting requirements, as well
as the tax treatment of such an investment under the laws of any foreign
jurisdiction.
In general, Non-U.S. Stockholders will be subject to regular United
States Federal income tax with respect to their investment in the Company if
such investment is "effectively connected" with the Non-U.S. Stockholder's
conduct of a trade or business in the United States. A corporate Non-U.S.
Stockholder that receives income that is (or is treated as) effectively
connected with a United States trade or business may also be subject to a
branch profits tax at a 30% rate, unless reduced or eliminated by an
applicable income tax treaty, which is payable in addition to regular United
States corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in the Company is not so effectively connected.
The Company expects to withhold United States income tax, as described below,
on the gross amount of any distributions paid to a Non-U.S. Stockholder unless
the Non-U.S. Stockholder files the appropriate IRS form, claiming that a lower
income tax treaty rate applies or that the distribution is effectively
connected income.
A distribution by the Company that is not attributable to gain from
the sale or exchange by the Company of a United States real property interest
and that is not designated by the Company as a capital gain dividend will be
treated as an ordinary income dividend to the extent made out of current or
accumulated earnings and profits, and subject to withholding as discussed
below. A distribution of cash in excess of the Company's earnings and profits
will be treated first as a return of capital that will reduce a Non-U.S.
Stockholder's basis in its shares of Stock (but not below zero) and then as
gain from the disposition of such shares, the tax treatment of which is
described under the rules discussed below with respect to dispositions of
shares.
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Distributions by the Company that are attributable to gain from the
sale or exchange of a United States real property interest will be taxed to a
Non-U.S. Stockholder under provisions of the Code enacted by the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under the FIRPTA
provisions, such distributions are taxed to a Non-U.S. Stockholder as if such
distributions were gains effectively connected with a United States trade or
business. Accordingly, a Non-U.S. Stockholder will be taxed at the normal
capital gain rates applicable to a Domestic Stockholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in
the case of non-resident alien individuals). Distributions subject to the
FIRPTA provisions may also be subject to a 30% branch profits tax in the hands
of a corporate Non-U.S. Stockholder that is not entitled to treaty exemption.
The Company will be required to withhold and remit to the IRS 35% of
designated capital gain dividends payable to Non-U.S. Stockholders (or, if
greater, 35% of the amount of any distributions that could be designated as
capital gain dividends). In addition, if the Company designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. The Company will also be required to withhold and
remit to the IRS 30% of the gross amount of distributions not attributable to
gain from the sale or exchange of a United States real property interest and
not designated as a capital gain dividend. If recently issued proposed
Treasury Regulations are promulgated in their current form, the Company would
have the option, effective for distributions made after December 31, 1997,
either to treat the entire distribution as a dividend subject to withholding
(as under current law) or to treat only a portion of the distribution as a
dividend if it makes a reasonable estimate of the portion of the distribution
that is not a dividend based on expected earnings and profits. Tax treaties may
reduce the Company's withholding obligations. If the amount withheld by the
Company with respect to a distribution to a Non-U.S. Stockholder exceeds the
stockholder's United States tax liability with respect to such distribution (as
determined under the rules described in the two preceding paragraphs), the
Non-U.S. Stockholder may file for a refund of such excess from the IRS. It
should be noted that the 35% withholding tax rate on capital gain dividends
currently corresponds to the maximum income tax rate applicable to
corporations, but is higher than the 28% maximum rate on capital gains of
individuals.
Unless the shares of Stock constitute a "United States real property
interest" within the meaning of the FIRPTA provisions, a sale of such shares
by a Non-U.S. Stockholder generally will not be subject to United States
taxation. The shares of Stock of the Company will not constitute a United
States real property interest if the Company is a "domestically controlled
REIT." A domestically controlled REIT is a REIT in which at all times during a
specified testing period less than 50% in value of its shares is held directly
or indirectly by Non-U.S. Stockholders. The Company believes that it is, and
expects to continue to be, a domestically controlled REIT, and therefore that
the sale of shares in the Company by Non-U.S. Stockholders will not be subject
to U.S. income tax taxation. However, because the shares of Stock will be
publicly traded, no assurance can be given that the Company will continue to
be a domestically controlled REIT. Notwithstanding the foregoing, capital gain
not subject to the FIRPTA provisions will be taxable to a Non-U.S. Stockholder
if the Non-U.S. Stockholder is a nonresident alien individual who is present
in the United States for 183 days or more during the taxable year and certain
other conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on such individual's capital gains. If the Company was
not a domestically controlled REIT, whether a Non-U.S. Stockholder's sale of
shares of Stock would be subject to tax under the FIRPTA provisions as a sale
of a United States real property interest would depend on whether the shares
were "regularly traded" (as defined by applicable Treasury Regulations) on an
established securities market (e.g., the NYSE on which the shares of Stock are
listed) and on whether such Non-U.S. Stockholder held more than 5% of such
shares during a specified testing period. If the gain on the sale of the
Company's shares were subject to taxation under the provisions, the Non-U.S.
Stockholder would be subject to the same
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treatment as a Domestic Stockholder with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresidential alien individuals). In any event, a purchaser of
shares of Stock from a Non-U.S. Stockholder will not be required under the
FIRPTA provisions to withhold on the purchase price if the purchased shares of
Stock are "regularly traded" on an established securities market or if the
Company is a domestically controlled REIT. Otherwise, under the FIRPTA
provisions the purchaser of shares of Stock may be required to withhold 10% of
the purchase price and remit such amount to the IRS.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain Federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
Federal tax laws other than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its
distributive share of the Operating Partnership's income and to deduct its
distributive share of the Operating Partnership's losses only if the Operating
Partnership is classified, for Federal income tax purposes, (i) as a
partnership rather than as an association taxable as a corporation and (ii)
not as a "publicly traded partnership." Under recently finalized Treasury
Regulations, an entity such as the Company that has more than one owner and
was in existence and claimed partnership classification prior to January 1,
1997 (the "Effective Date"), will be classified as a partnership rather than
as an association taxable as a corporation for periods beginning on the
Effective Date, provided it does not elect to change its classification. In
general, the entity's claimed partnership classification will be respected for
all periods prior to the Effective Date if it had a reasonable basis for its
claimed classification.
The Operating Partnership has not requested, and does not intend to
request, a ruling from the IRS that it will be treated as a partnership for
Federal income tax purposes. In the opinion of Kramer Levin, based on the
provisions of the Partnership Agreement, certain factual assumptions and
certain representations described in the opinion, the Operating Partnership
will, for all taxable years since its inception, be treated as a partnership
and not as a corporation or an association taxable as a corporation for
Federal income tax purposes and not as a "publicly traded partnership." Unlike
a tax ruling, an opinion of counsel is not binding on the IRS or the courts.
If for any reason the Operating Partnership was taxable as a
corporation rather than as a partnership for Federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for
status as a REIT. See "-- Taxation of the Company -- Income Tests," and "--
Taxation of the Company -- Asset Tests," above. In addition, any change in the
Operating Partnership's status for tax purposes might be treated as a taxable
event, in which case the Company might incur a tax liability without any
related cash distribution. See "-- Taxation of the Company -- Annual
Distribution Requirements," above. Further, items of income and deduction of
the Operating Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. The Operating
Partnership would be required to pay Federal income tax at regular corporate
tax rates on its net income and distributions to partners would constitute
dividends (to the extent of the Operating Partnership's current and
accumulated earnings and profits) that would not be deductible in computing
the Operating Partnership's taxable income.
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Partners, Not the Operating Partnership, Subject to Tax
A partnership is not a taxable entity for Federal income tax
purposes. Rather, the Company will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses,
deductions and credits for the taxable year of the Operating Partnership
ending within or with the taxable year of the Company without regard to
whether the Company has received or will receive any cash distributions from
the Operating Partnership.
Operating Partnership Allocations
The allocation of income, gains, losses, deductions and credits among
partners will generally be determined in accordance with the provisions of the
Partnership Agreement. However, the allocations provided in the Partnership
Agreement will be disregarded for Federal income tax purposes 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. The Operating
Partnership's allocations of income, gains, losses, deductions and credits 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 Pre-Contribution Gain
Pursuant to section 704(c) of the Code, items of income, gain, loss,
deduction and credit attributable to appreciated or depreciated property that
is contributed to a partnership in exchange for an interest in the partnership
must be allocated for Federal income tax purposes in a manner such that the
contributor is charged with, or benefits from, 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 and the adjusted tax basis of the
contributed property at the time of contribution (the "Book-Tax Difference").
In general, the fair market value of the Properties contributed to the
Operating Partnership was in excess of their adjusted tax bases. The
Partnership Agreement requires allocations of income, gains, losses,
deductions and credits attributable to each item of contributed property be
made in a manner that is consistent with section 704(c) of the Code. As a
result, the tax depreciation available with respect to such property will be
allocated first to the partners other than the partner that contributed the
property, to the extent of, and in proportion to, such other partners' share
of book depreciation, and then, if any tax depreciation remains, to the
partner that contributed the property. Accordingly, the depreciation
deductions allocable to the parties for tax purposes will not correspond to
the percentage interests of the partners. While the Company will generally be
allocated tax depreciation deductions with respect to the Properties in excess
of its percentage interest in the Operating Partnership, its share of tax
depreciation may be less than the depreciation deductions that would have been
allocated to the Company had the basis of the Properties been equal to their
fair market value. Upon the disposition of any item of contributed property,
any gain attributable to the excess, if any, at such time of basis for book
purposes over basis for tax purposes would be allocated for tax purposes to
the contributing partner.
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Basis in Partnership Interests
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership generally will be (i) equal to the amount of cash and
the basis of any other property contributed to the Operating Partnership by
the Company; (ii) increased by (a) its allocable share of the Operating
Partnership's income and (b) its allocable share of indebtedness of the
Operating Partnership; and (iii) reduced, but not below zero, by the Company's
allocable share of (a) the Operating Partnership's loss and (b) the amount of
cash distributed to the Company, the basis of property distributed to the
Company and by constructive distributions resulting from a reduction in the
Company's share of the indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the
Operating Partnership's loss would reduce the adjusted tax basis of the
Company's partnership interest in the Operating Partnership below zero, the
recognition of such loss will be deferred until such time as the recognition
of such loss would not reduce the Company's adjusted tax basis below zero. To
the extent that the Operating Partnership's distributions or any decrease in
the Company's share of the indebtedness of the Operating Partnership (each
such decrease being considered a constructive cash distribution to the
partners) would reduce the Company's adjusted tax basis in the Operating
Partnership below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally will be characterized as
a capital gain, and if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), such distributions and constructive distributions
will constitute long-term capital gain.
Depreciation Deductions Available to the Partnerships
The Operating Partnership's assets other than cash consist largely of
appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction carry over their depreciation schedules.
Accordingly, the Operating Partnership's depreciation deductions for its real
property are based largely on the historic depreciation schedules for the
Properties. The real property is being depreciated over a range of 15 to 39
years using various methods of depreciation which were determined at the time
that each item of depreciable property was placed in service. Any real
property purchased or developed by the Operating Partnership will be
depreciated over at least 39 years.
Sale of Partnership Property
Generally, any gain realized by the Operating Partnership on the sale
of property held by it, if the property is held 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. However, under the REIT
requirements, the Company's share as a partner of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "-- Taxation of the Company," above. Such
prohibited transaction income will also have an adverse effect upon the
Company's ability to satisfy the income tests for status as a REIT. Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business is a question of fact that depends on all the facts and circumstances
with respect to the particular transaction. A safe harbor to avoid
classification as a prohibited transaction exists as to real estate assets
held for the production of rental income by a REIT for at least four years
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where in any taxable year the REIT has made no more than seven sales of
property or, in the alternative, the aggregate of the adjusted bases of all
the properties sold does not exceed 10% of the adjusted bases of all of the
REIT's properties during the year and the expenditures includible in a
property's basis made during the four-year period prior to disposition do not
exceed 30% of the property's net sales price. The Operating Partnership has
held and intends to continue to hold the Properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating and leasing the Properties and to make such occasional
sales of the Properties, including peripheral land, as are consistent with the
Company's and the Operating Partnership's investment objectives. No assurance
can be given, however, that every property sale by the Operating Partnership
will constitute a sale of property held for investment.
Conversion Rights
In the event that the Company acquires limited partnership units in
the Operating Partnership ("OP Units") from the holders thereof by reason of
the exercise of conversion rights, the Company will have a basis in the OP
Units so acquired equal to the fair market value of the stock it issues, or
the amount of cash it pays, in exchange for such OP Units. If the Operating
Partnership makes an election under section 754, the portion of the Operating
Partnership's basis in its assets with respect to the Company will be adjusted
to reflect the price paid for the OP Units. If the Company acquires all the OP
Units, the Operating Partnership will terminate and the Company will, as a
result, directly own all the Properties directly held by the Operating
Partnership, and the basis of those Properties in the hands of the Company
would be determined by reference to the Company's basis in its partnership
interest in the Operating Partnership.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its Domestic Stockholders and the IRS the
amount of distributions paid during each calendar year and the amount of tax
withheld, if any. Under certain circumstances, Domestic Stockholders may be
subject to backup withholding at a rate of 31% with respect to distributions
paid. Backup withholding will apply only if the holder (i) fails to furnish
its taxpayer identification number ("TIN") (which, for an individual, would be
his Social Security number), (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. Domestic Stockholders should consult their own
tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption. Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a Domestic Stockholder will be
allowed as a credit against such Domestic Stockholder's United States Federal
income tax liability and may entitle such Domestic Stockholder to a refund,
provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and
backup withholding with respect to Non-U.S. Stockholders. For example, the
Company may be required to withhold a portion of capital gain distributions to
any stockholders who fail to certify their foreign status to the Company. See
"-- Special Tax Considerations for Foreign Stockholders." Non-U.S.
Stockholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements.
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STATE AND LOCAL TAXES
The Company will, and its stockholders may, be subject to state or
local taxation in various state or local jurisdictions, including those in
which the Company, its stockholders, or the Operating Partnership transact
business or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the Federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Company.
EMPLOYEE BENEFIT PLANS
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN OF ANY SORT, WHETHER
OR NOT SUBJECT TO ERISA, IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE
COMMON STOCK BY SUCH PLAN.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under
ERISA and the prohibited transaction provisions of Section 4975 of the Code
that may be relevant to prospective investors. This discussion does not
purport to deal with all aspects of ERISA or the Code that may be relevant to
particular investors in light of their particular circumstances.
A fiduciary of a pension, profit-sharing, retirement or other
employee benefit plan subject to ERISA (a "Plan"), should consider the
fiduciary standards under ERISA in the context of the Plan's particular
circumstances before authorizing an investment of a portion of such Plan's
assets in the shares of Common Stock offered hereby (the "Offered
Securities"). In particular, such fiduciary should consider (i) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(c)
of ERISA, (ii) whether the investment is in accordance with the documents and
instruments governing the Plan as required by Section 404(a)(1)(D) of ERISA
(including the Plan's funding policy), (iii) whether the investment is for the
exclusive purpose of providing benefits to participants in the Plan and their
beneficiaries or defraying reasonable administrative expenses of the Plan, and
(iv) whether the investment is prudent under ERISA. In addition to the
imposition of general fiduciary standards of investment prudence and
diversification, ERISA, and the corresponding provisions of the Code, prohibit
a wide range of transactions involving the assets of a Plan or an individual
retirement account ("IRA") and persons who have certain specified
relationships to the Plan or an IRA ("parties in interest" within the meaning
of ERISA, "disqualified persons" within the meaning of the Code). Thus, a
fiduciary of a Plan or an IRA considering an investment in the Offered
Securities also should consider whether the acquisition or the continued
holding of the Offered Securities might constitute or give rise to a direct or
indirect prohibited transaction.
The United States Department of Labor (the "DOL") has issued final
regulations (the "Regulations") setting out the standards it will apply in
determining what constitutes assets of an employee benefit plan under ERISA.
Under the Regulations, if a Plan or an employer sponsored IRA that is an ERISA
plan ("Employer IRA") acquires an equity interest in an entity, which interest
is neither
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a "publicly offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, as amended, the Plan's
and the Employer IRA's assets would include, for purposes of the fiduciary
responsibility provisions of ERISA or the Code, both the equity interest and
an undivided interest in each of the entity's underlying assets unless certain
specified exceptions apply. The Regulations define a publicly-offered security
as security that is "widely held," "freely transferable," and either a part of
a class of securities registered under the Exchange Act, or sold pursuant to
an effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The
Shares are being sold in an offering registered under the Securities Act and
are a part of a class of securities registered under the Exchange Act.
The Regulations provide that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control.
The Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Regulations further provide that when a
security is part of an offering in which the minimum investment is $10,000 or
less certain restrictions ordinarily will not, alone or in combination, affect
the finding that such securities are freely transferable. The Company believes
that the restrictions imposed under the Articles on the transfer of the
capital stock are limited to the restrictions on transfer generally permitted
under the Regulations and are not likely to result in the failure of the
capital stock to be "freely transferable." The Company also believes that
certain restrictions that apply to the capital stock held by the Company or
which may be derived from contractual arrangements requested by the
Underwriters in connection with the Offering pursuant to the Underwriting
Agreement (as hereinafter defined) are unlikely to result in the failure of
the capital stock to be "freely transferable." The Regulations only establish
a presumption in favor of the finding of free transferability, and, therefore,
no assurance can be given that the DOL or a court of competent jurisdiction
would not reach a contrary conclusion.
Assuming that the Offered Securities will be "widely held," the
Company believes that the Offered Securities will be publicly offered
securities for purposes of the Regulations and that the assets of the Company
will not be deemed to be "plan assets" of any Plan or IRA that invests in the
Offered Securities.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Charter and the Bylaws of the Company contain certain provisions
that could discourage, impede or impair acquisition of control of the Company
by means of a tender offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control
of the Company to negotiate first with the Board of Directors. The Company
believes that these provisions increase the likelihood that proposals
initially will be on more attractive terms than would be the case in their
absence and increasing the likelihood of negotiations, which might outweigh
the potential disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals might result in improvement of
terms. The description set forth below is a summary only, and is qualified in
its entirety by reference to the Charter and the Bylaws which have been filed
as exhibits to the Registration Statement of which
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this Prospectus is a part. See also "Description of Capital Stock --
Restrictions on Transfer" and "Risk Factors -- Limitations on Acquisition and
Change in Control."
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws divide the Board of Directors into three
classes of directors, each class constituting approximately one-third of the
total numbers of directors, with the classes serving staggered three-year
terms. The classification of the Board of Directors will make it more
difficult for stockholders to change the composition of the Board of Directors
because only a minority of the directors can be elected at once. The Company
believes, however, that the staggered Board of Directors will help to ensure
continuity and stability of the Company's management and policies.
The classification provisions could also discourage a third party
from accumulating the Company's stock or attempting to obtain control of the
Company, even though this attempt might be beneficial to the Company and some,
or a majority, of its stockholders. Accordingly, under certain circumstances
stockholders could be deprived of opportunities to sell their shares of Common
Stock at a higher price than might otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Charter and Bylaws provide that, subject to any rights of holders
of Preferred Stock to elect additional directors under specified circumstances
("Preferred Holders Rights"), the number of directors will be six and may be
changed by a majority of the entire Board of Directors. In addition, the
Charter provides that, subject to any Preferred Holders Rights, and unless the
Board of Directors otherwise determines, any vacancies may be filled by a vote
of the stockholders or a majority of the remaining directors, though less than
a quorum, except vacancies created by the increase in the number of directors,
which only may be filled by a vote of the stockholders or a majority of the
entire Board of Directors. Accordingly, the Board of Directors could
temporarily prevent any stockholder from enlarging the Board of Directors and
filling the new directorship with such stockholder's own nominees.
The Charter and the Bylaws provide that, subject to the rights of any
class or series to elect directors, directors may be removed only for cause
upon the affirmative vote of 80% of holders of all the then-outstanding shares
of stock entitled to vote generally in the election of directors, voting
together as a single class.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Charter and the Bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for director or bring other
business before an annual meeting of stockholders of the Company (the
"Stockholder Notice Procedure").
The Bylaws provide that (i) only persons who are nominated by, or at
the direction of, the Board of Directors, or by a stockholder who has given
timely written notice containing specified information to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company and (ii) at an annual
meeting, only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Chairman or the Board of Directors or
by a stockholder who has given timely written notice to the Secretary of the
Company of such stockholder's intention to bring such business before such
meeting. In general, for notice of stockholder nominations or proposed
business (other than business to be included in the Company's Proxy
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Statement under the Securities and Exchange Commission's Rule 14a-8) to be
conducted at an annual meeting to be timely, such notice must be received by
the Company not less than 60 days nor more than 90 days prior to the first
anniversary of the previous year's annual meeting.
The purpose of requiring stockholders to give the Company advance
notice of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders and
make recommendations about such nominees or business, as well as to ensure an
orderly procedure for conducting meetings of stockholders. Although the
Charter and the Bylaws do not give the Board of Directors power to block
stockholder nominations for the election of directors or proposals for action,
they may have the effect of discouraging a stockholder from proposing nominees
or business, precluding a contest for the election of directors or the
consideration of stockholder proposals if procedural requirements are not met
and deterring third parties from soliciting proxies for a non-management slate
of directors or proposals, without regard to the merits of such slate or
proposals.
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF DIRECTORS
The Charter provides that, in determining what is in the best
interest of the Company in a business combination or certain change of control
events, a director of the Company shall consider the interests of the
stockholders of the Company and, in his or her discretion, also may consider
(i) the interests of the Company's employees, suppliers, creditors and
tenants; and (ii) both the long-term and short-term interests of the Company
and its stockholders, including the possibility that these interests may be
best served by the continued independence of the Company. Pursuant to this
provision, the Board of Directors may consider subjective factors affecting a
proposal, including certain nonfinancial matters, and on the basis of these
considerations may oppose a business combination or other transaction which,
evaluated only in terms of its financial merits, might be attractive to some,
or a majority, of the Company's stockholders.
ADDITIONAL CLASSES AND SERIES OF STOCK
The Board of Directors is authorized to establish one or more classes
and series of stock, including series of Preferred Stock, from time to time,
and to establish the number of shares in each class or series and to fix the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of such class or series, without any further vote or action by the
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded.
The issuance of additional classes or series of capital stock may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action of the stockholders. The issuance of
additional classes or series of capital stock with voting and conversion
rights may adversely affect the voting power of the holders of capital stock
of the Company, including the loss of voting control to others. The ability of
the Board of Directors to issue additional classes or series of capital stock,
while providing flexibility in connection with possible acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company, even where such an
acquisition may be beneficial to the Company or its stockholders. The Company
has no current plans to issue any additional classes or series of stock.
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RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Board of Directors may create and authorize the Company to issue
rights entitling the holders thereof to purchase from the Company shares of
capital stock or other securities or property. The times at which and terms
upon which such rights are to be issued are within the discretion of the Board
of Directors. This provision is intended to confirm the Board of Directors'
authority to issue share purchase rights which could have terms that would
impede a merger, tender offer or other takeover attempt, or other rights to
purchase securities of the Company or any other entity.
BUSINESS COMBINATIONS
The MGCL prohibits certain "business combinations" (including certain
mergers, consolidations, share exchanges, asset transfers, sales, leases,
issuance or reclassification of equity securities and benefits) involving a
Maryland corporation and an "Interested Stockholder." Interested Stockholders
are all persons (i) who beneficially own 10% or more of the voting power of
the corporation's stock or (ii) an affiliate or associate of the corporation
who, at any time within the two-year period prior to the date in question, was
an Interested Stockholder or an affiliate or an associate thereof. Such
business combinations are prohibited for five years after the most recent date
on which the Interested Stockholder become an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by all holders of voting shares of
the corporation, and (b) 66 2/3% of the votes entitled to be cast by all
holders of voting shares of the corporation other than voting shares held by
the Interested Stockholder or an affiliate or associate of the Interested
Stockholder, with whom the business combination is to be effected, unless,
among other things, the corporation's stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes
an Interested Stockholder. A Maryland corporation may adopt an amendment to
its charter electing not to be subject to the special voting requirements of
the foregoing legislation. Any such amendment would have to be approved by the
affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66 2/3% of the votes
entitled to be cast by holders of outstanding shares of voting stock who are
not Interested Stockholders. The Board of Directors has exempted from the
provisions of the MGCL any business combination with Messrs. Agree and
Rosenberg or any other person acting in concert or as a group with Messrs.
Agree and Rosenberg.
CONTROL SHARE ACQUISITIONS
The MGCL provides the "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares of stock owned by the acquiror or by the officers
or directors who are employees of the company. Control shares are voting
shares of stock which, if aggregated with all other shares of stock previously
acquired by such a person, would entitle the acquiror to exercise voting power
in electing directors within one of the following ranges of voting power: (i)
20% or more but less than 33 1/3%; (ii) 33 1/3% or more but less than a
majority; or (iii) a majority of all voting power. Control Shares do not
include shares of stock an acquiring person is entitled to vote as a result of
having previously obtained stockholder approval. A control share acquisition
means, subject to certain exceptions, the acquisition of, ownership of or the
power to direct the exercise of voting power with respect to, control shares.
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A person who has made or proposes to make a "control share
acquisition," upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors to call a
special meeting of stockholders to be held within 50 days of demand therefor
to consider the voting rights of the shares. If no request for a meeting is
made, the corporation may itself present the question at any stockholders'
meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without
regard to voting rights, as of the date of the last control share acquisition
or of any meeting of stockholders at which the voting rights of such shares
are considered and not approved. If voting rights for "control shares" are
approved at a stockholders' meeting and the acquiror becomes entitled to vote
a majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the stock as determined for purposes of
such appraisal rights may not be less than the highest price per share paid in
the control share acquisition, and certain limitations and restrictions
otherwise applicable to the exercise of dissenters' rights do not apply in the
context of a "control share acquisition."
The control share acquisition statute does not apply to stock
acquired in a merger, consolidation or stock exchange if the corporation is a
party to the transaction, or to acquisitions previously approved or exempted
by a provision in the charter or by-laws of the corporation. Pursuant to the
statute, the Company's Bylaws have exempted control share acquisitions
involving members of the Agree-Rosenberg Group, any other officers of the
Company, employees of the Company, any of the associates or affiliates of the
foregoing and any other person acting in concert or as a group with any of the
foregoing. Consequently, the prohibition on voting control shares will not
apply to Messrs. Agree and Rosenberg and such other persons.
The limitation on ownership of shares of Common Stock set forth in
the Charter, as well as the provisions of the MGCL, could have the effect of
discouraging offers to acquire the Company and of increasing the difficulty of
consummating any such offer. See "Description of Capital Stock -- Restrictions
on Transfer."
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement"), the Company has agreed to sell to
each of the Underwriters named below (the "Underwriters"), for whom Raymond
James & Associates, Inc., McDonald & Company Securities, Inc., Roney & Co. and
Sutro & Co. Incorporated are acting as representatives (the
"Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
below opposite their respective names. The Underwriters are committed to
purchase all of such shares of Common Stock if any are purchased.
NUMBER OF
UNDERWRITER SHARES
- ----------- --------
Raymond James & Associates, Inc.................................
McDonald & Company Securities, Inc..............................
Roney & Co......................................................
Sutro & Co. Incorporated........................................
Total...................................................... 1,500,000
=========
The Representatives have advised the Company that they propose
initially to offer such shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $_____ per share of
Common Stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $___ per share of Common Stock on sales to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase 225,000 additional shares
of Common Stock to cover over-allotments, if any, at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
If the Underwriters exercise this option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of such shares of Common Stock which the number of shares of
Common Stock to be purchased by it shown in the foregoing table bears to the
total number of shares of Common Stock initially offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Act.
Messrs. Agree and Rosenberg have agreed not to transfer, sell,
offer to sell or otherwise convey to any unaffiliated party any shares of
Common Stock now held or received upon the conversion of their OP Units or the
exercise of their options without the prior written consent of Raymond James &
Associates, Inc. for a period of 120 days after the date of this Prospectus.
The Company has also agreed not to transfer, sell, offer to sell or otherwise
convey to any unaffiliated party any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock,
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other than options and restricted stock issued under the Plan, without the
prior written consent of Raymond James & Associates, Inc. for a period of 120
days after the date of this Prospectus.
The Underwriters do not intend to confirm sales to any account over
which they exercise discretionary authority.
In connection with the Offering, the rules of the Securities and
Exchange Commission (the "Commission") permit the Representatives to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
EXPERTS
The financial statements and schedule included in this Prospectus
have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Piper & Marbury L.L.P., Baltimore, Maryland,
and certain legal matters will be passed upon for the Underwriters by Winstead
Sechrest & Minick P.C., Dallas, Texas. Winstead Sechrest & Minick P.C. will
rely as to certain matters of Maryland law on the opinion of Piper & Marbury
L.L.P. In addition,
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the description of Federal income tax consequences contained in this
Prospectus under the caption entitled "Federal Income Tax Considerations" is
based upon the opinion of Kramer, Levin, Naftalis & Frankel.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement
(of which this Prospectus is a part) on Form S-11 (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under
the Act, with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete,
and in each instance reference is made to the copy of the contract or other
document filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by that reference and the exhibits to the
Registration Statement. For further information regarding the Company and the
Common Stock offered hereby, reference is hereby made to the Registration
Statement and the exhibits to the Registration Statement which may be obtained
from the Commission at its principal office in Washington, D.C., upon payment
of fees prescribed by the Commission.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; and at its Regional Offices located at Citicorp Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661; and Suite 1300, Seven World
Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a site on the World Wide Web at http://www.sec.gov. that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Common Stock is
listed on the NYSE and such reports, proxy statements and other information
concerning the Company can be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
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AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
PAGE
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet as of December 31, 1996 F-2
Statement of Operations for the Year
Ended December 31, 1996 F-4
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-6
Consolidated Balance Sheets F-7
Consolidated Statements of Operations and
Combined Statement of Operations
of the Predecessors F-9
Consolidated Statements of Stockholders'
Equity and Combined Statement of
Partners' Deficit of the Predecessors F-10
Consolidated Statements of Cash Flows and Combined
Statement of Cash Flows of the Predecessors F-11
NOTES TO FINANCIAL STATEMENTS F-13
SCHEDULE III - Real Estate And Accumulated
Depreciation, December 31, 1996 F-22
F - 1
<PAGE>
AGREE REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
This unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the Offering had occurred on December 31, 1996. Such pro forma information
is based on the consolidated historical balance sheet of Agree Realty
Corporation and the application of the proceeds of the Offering as set forth
under the caption "Use of Proceeds." This pro forma information should be read
in conjunction with the Consolidated Historical Financial Statements and Notes
thereto included elsewhere herein. In management's opinion, all adjustments
necessary to reflect the effects of the Offering have been made.
The unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming the Offering had been completed at December 31, 1996, and does not
purport to represent the future financial position of the Company.
Pro Forma
Historical Adjustments Pro Forma
- -----------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Real estate, net $ 115,135 $ - $ 115,135
Cash 294 - (A) 294
Other assets 5,953 - 5,953
- -----------------------------------------------------------------------------
TOTAL $ 121,382 $ - $ 121,382
- -----------------------------------------------------------------------------
LIABILITIES
Mortgages payable $ 53,664 $ - $ 53,664
Construction loans 10,617 (9,048) (B) 1,569
Notes payable 23,616 (18,561) (C) 5,055
Other liabilities 3,174 (141) (D) 3,033
- -----------------------------------------------------------------------------
91,071 (27,750) 63,321
- -----------------------------------------------------------------------------
MINORITY INTEREST 5,869 - 5,869
- -----------------------------------------------------------------------------
STOCKHOLDER EQUITY
Common stock - - -
Additional paid-in capital 30,061 27,750 (E) 57,811
Deficit (5,619) - (5,619)
- -----------------------------------------------------------------------------
24,442 27,750 52,192
- -----------------------------------------------------------------------------
TOTAL $ 121,382 $ - $ 121,382
- -----------------------------------------------------------------------------
F - 2
<PAGE>
AGREE REALTY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
(A) Reflects summary cash transactions as follows:
Proceeds from Offering, net of estimated issuance and
related costs $ 27,750
Repayment of debt, including accrued interest (27,750)
- ------------------------------------------------------------------------------
$ -
- ------------------------------------------------------------------------------
(B) Reflects the payment of construction loans to an unaffiliated
third party
(C) Reflects payments on the Company's $50 million secured line
of credit.
(D) Reflects payment of accrued interest on the Company's $50
million secured line of credit.
(E) Represents the sale of 1,500,000 shares of Common Stock (par
value $.0001) made in connection with the Offering.
Additional paid-in capital is reflected net of estimated
Offering costs of $2,063
F - 3
<PAGE>
AGREE REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
This unaudited Pro Forma Condensed Consolidated Statement of Operations is
presented as if the Offering had occurred on January 1, 1996. Such pro forma
information is based on the consolidated historical Statement of Operations of
Agree Realty Corporation and the application of the proceeds of the Offering
as set forth under the caption "Use of Proceeds." This pro forma information
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included elsewhere herein. In management's opinion, all
adjustments necessary to reflect the effects of the Offering have been made.
This unaudited Pro Forma Condensed Consolidated Statement of Operations is not
necessarily indicative of what the actual results of operations would have
been assuming the Offering had been completed at January 1, 1996, and does not
purport to represent the results of operations for future periods.
Pro Forma
Historical Adjustments Pro Forma
- ------------------------------------------------------------------------------
(Dollars in thousands)
TOTAL REVENUES $16,291 $ 230 (A) $16,521
- ------------------------------------------------------------------------------
OPERATING EXPENSES
Property expenses 2,485 109 (B) 2,594
General and administrative 1,105 - 1,105
Depreciation and amortization 2,620 20 (C) 2,640
- ------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 6,210 129 6,339
- ------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net (6,101) 1,260 (D) (4,841)
Other income 653 - 653
- ------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (5,448) 1,260 (4,188)
- ------------------------------------------------------------------------------
Income before minority interest 4,633 1,361 5,994
Minority interest 899 (100)(E) 799
- ------------------------------------------------------------------------------
NET INCOME $ 3,734 $1,461 $ 5,195
- ------------------------------------------------------------------------------
NET INCOME PER SHARE $ 1.41 $(0.16)(F) $ 1.25
- ------------------------------------------------------------------------------
F - 4
<PAGE>
AGREE REALTY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
(A) Reflects additional rental income pertaining to the acquisition of the
Columbus, Ohio and Aventura, Florida properties as if they had occurred
on January 1, 1996
(B) Reflects additional property expenses pertaining to the acquisitions of
the Aventura, Florida and Columbus, Ohio properties as if they had
occurred on January 1, 1996
(C) Reflects additional depreciation pertaining to the acquisitions of the
Aventura, Florida and Columbus, Ohio properties as if they had occurred
on January 1, 1996
(D) Reflects the reduction in interest costs associated with the expected
debt paydown from the proceeds of the Offering
(E) Reflects the change in minority interest as a result of the Offering from
19.41% to 13.33% after the Offering
(F) Per share calculations are based on 2,649,475 shares of Common Stock
outstanding prior to the Offering and 4,149,475 shares of Common Stock
outstanding after an Offering of 1,500,000 Common Shares
F - 5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Owners of
Agree Realty Corporation
Farmington Hills, Michigan
We have audited the accompanying consolidated balance sheets of Agree Realty
Corporation (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1996 and 1995 and for the period from April 22,
1994 to December 31, 1994. We have also audited the accompanying combined
statements of operations, partners' deficit and cash flows for the period from
January 1, 1994 to April 21, 1994 of Agree Realty Group (the "Agree
Predecessors"). We have also audited the schedule listed in the accompanying
index. These financial statements and the schedule are the responsibility of
the Company's and Agree Predecessors' management. Our responsibility is to
express an opinion on these financial statements and the schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and the
schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Agree Realty
Corporation at December 31, 1996 and 1995 and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1995 and for the
period from April 22, 1994 to December 31, 1994, and the results of the Agree
Predecessors operations and its cash flows for the period from January 1, 1994
to April 21, 1994 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
February 14, 1997
F - 6
<PAGE>
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31, December 31,
1996 1995
- ------------------------------------------------------------------------------
ASSETS
REAL ESTATE INVESTMENTS (Note 3)
Land $ 25,183,667 $ 23,224,377
Buildings 107,204,583 94,955,086
Property under development 85,993 180,805
- ------------------------------------------------------------------------------
132,474,243 118,360,268
Less accumulated depreciation (17,339,353) (14,792,193)
- ------------------------------------------------------------------------------
NET REAL ESTATE INVESTMENTS 115,134,890 103,568,075
CASH AND CASH EQUIVALENTS 294,389 1,283,672
ACCOUNTS RECEIVABLE - TENANTS 638,735 626,280
RESTRICTED ASSET - CASH HELD IN ESCROW 266,771 259,204
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
ENTITIES 1,820,605 -
UNAMORTIZED DEFERRED EXPENSES
Financing costs 2,398,377 2,513,665
Leasing costs 141,757 140,026
OTHER ASSETS 686,346 537,487
- ------------------------------------------------------------------------------
$ 121,381,870 $108,928,409
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
F - 7
<PAGE>
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31, December 31,
1996 1995
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGES PAYABLE (Note 3) $ 53,663,999 $53,970,525
CONSTRUCTION LOANS (Note 3) 10,616,936 17,603,785
NOTE PAYABLE (Note 3) 23,616,382 1,977,808
DIVIDENDS AND DISTRIBUTIONS PAYABLE (Note 4) 1,479,345 1,474,265
ACCRUED INTEREST PAYABLE 354,988 189,256
ACCOUNTS PAYABLE
Operating 691,981 596,913
Capital expenditures 596,794 1,637,861
TENANT DEPOSITS 50,394 53,477
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 91,070,819 77,503,890
- ------------------------------------------------------------------------------
MINORITY INTEREST (Note 5) 5,869,014 6,118,017
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 4)
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,649,475 and 2,638,185
shares issued and outstanding 265 264
Additional paid-in capital 30,060,908 29,890,292
Deficit (5,619,136) (4,584,054)
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 24,442,037 25,306,502
- ------------------------------------------------------------------------------
$ 121,381,870 $108,928,409
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
F - 8
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY AND
COMBINED STATEMENTS OF OPERATIONS OF THE AGREE PREDECESSORS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Agree Realty Agree Realty Agree Realty Agree
Corporation Corporation Corporation Predecessors
January 1, to January 1, to April 22, to January 1, to
December 31, 1996 December 31, 1995 December 31, 1994 April 21, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental income $14,450,035 $11,935,523 $8,139,566 $ 3,575,128
Operating cost reimbursement 1,760,681 1,671,359 1,093,463 494,909
Management fees and other (Note 7) 80,752 91,714 46,487 9,858
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 16,291,468 13,698,596 9,279,516 4,079,895
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Real estate taxes 1,169,308 1,120,515 737,628 368,124
Property operating expenses 979,606 871,167 464,007 299,623
Land lease payments 336,083 56,000 43,400 12,600
General and administrative 1,104,861 966,464 667,800 159,393
Depreciation and amortization 2,620,274 2,316,862 1,626,604 680,458
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 6,210,132 5,331,008 3,539,439 1,520,198
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 10,081,336 8,367,588 5,740,077 2,559,697
- -------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net (6,101,106) (4,335,207) (2,972,237) (2,584,002)
Development fee income 509,673 - - 85,273
Gain on land sales 84,688 - 119,635 -
Equity in net income of unconsolidated entities 58,704 - - -
Reorganization costs (Note 6) - - (494,317) -
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (5,448,041) (4,335,207) (3,346,919) (2,498,729)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST 4,633,295 4,032,381 2,393,158 60,968
EXTRAORDINARY ITEM - LOSS ON EXTINGUISHMENT OF DEBT (Note 8) - - (2,139,114) -
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 4,633,295 4,032,381 254,044 60,968
MINORITY INTEREST 899,323 785,105 49,462 -
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,733,972 $ 3,247,276 $ 204,582 $ 60,968
- -------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Income before extraordinary item $ 1.41 $ 1.23 $ .73
Extraordinary item - - (.65)
- -------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 1.41 $ 1.23 $ .08
- -------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,649,475 2,638,185 2,638,185
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F - 9
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY OF THE COMPANY AND
COMBINED STATEMENTS OF PARTNERS' DEFICIT OF THE AGREE PREDECESSORS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Agree
Additional Predecessors
Common Stock Paid-In Partners'
Shares Amount Capital Deficit Deficit
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 - $ - $ - $ - $(5,436,893)
Contributions - - - - 3,000
Distributions - - - - (3,350,741)
Net income - - - - 60,968
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, April 21, 1994 - - - - (8,723,666)
Reclassification of Agree Predecessors partners'
deficit in connection with formation of the Company - - (8,723,666) 8,723,666
Proceeds from issuance of common stock,
net of underwriting fees 2,625,685 263 47,800,594 - -
Payment of stock issuance costs - - (2,203,712) - -
Issuance of shares under the Stock Incentive Plan 12,500 1 243,749 - -
Minority interest equity immediately following the
April 22, 1994 initial public offering - - (7,226,673) - -
Dividends declared for the period April 22, 1994
to December 31, 1994, $1.246 per share - - - (3,287,179) -
Net income for the period April 22, 1994
to December 31, 1994 - - - 204,582 -
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 2,638,185 264 29,890,292 (3,082,597) -
Dividends declared for the year ended
December 31, 1995, $1.80 per share - - - (4,748,733) -
Net income for the year ended December 31, 1995 - - - 3,247,276 -
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 2,638,185 264 29,890,292 (4,584,054) -
Issuance of shares under the Stock Incentive Plan 11,290 1 170,616 - -
Dividends declared for the year ended December 31, 1996,
$1.80 per share - - - (4,769,054) -
Net income for the year ended December 31, 1996 - - - 3,733,972 -
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 2,649,475 $ 265 $30,060,908 $(5,619,136) $ -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F - 10
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND COMBINED
STATEMENTS OF CASH FLOWS OF THE AGREE PREDECESSORS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Agree Realty Agree Realty Agree Realty Agree
Corporation Corporation Corporation Predecessors
January 1, to January 1, to April 22, to January 1, to
December 31, December 31, December 31, April 21,
1996 1995 1994 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,733,972 $ 3,247,276 $ 204,582 $ 60,968
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 2,523,621 2,252,642 1,551,570 636,561
Amortization 505,089 311,415 249,971 74,598
Equity in net income of unconsolidated entities (58,704) - - -
Write-off of deferred financing costs - - 189,231 -
Minority interests 899,323 785,105 49,462 -
Gain on land sales (84,688) - (119,635) -
Decrease (increase) in accounts receivable (12,455) (64,629) (561,651) 449,504
Increase in deferred costs (53,764) (27,524) (14,640) -
Decrease (increase) in other assets 677 (133,728) (112,531) 522,163
Increase (decrease) in accounts payable 95,068 197,406 327,885 (760,349)
Increase (decrease) in accrued interest 165,732 9,592 (967,640) (536,099)
Increase (decrease) in tenant deposits (3,083) (5,484) 58,961 (60,461)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,710,788 6,572,071 855,565 386,885
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments
(including capitalized interest of $78,703
in 1996 and $59,752 in 1995) (13,577,181) (19,870,270) (117,102) (228,810)
Investments in and advances to
unconsolidated entities (1,761,901) - - -
Proceeds from sale of land 144,688 - 161,635 -
Proceeds from sale of marketable securities - 300,188 - -
Purchase of marketable securities - - (300,188) -
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (15,194,394) (19,570,082) (255,655) (228,810)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F - 11
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND COMBINED
STATEMENTS OF CASH FLOWS OF THE AGREE PREDECESSORS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Agree Realty Agree Realty Agree Realty Agree
Corporation Corporation Corporation Predecessors
January 1, to January 1, to April 22, to January 1, to
December 31, December 31, December 31, April 21,
1996 1995 1994 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Line-of-credit proceeds 21,638,574 1,977,808 - 1,589,774
Payment of construction loans (11,861,006) - (11,407,600) -
Dividends and limited partners' distributions paid (5,912,300) (5,897,059) (2,607,811) -
Proceeds from construction loans 4,874,157 17,603,785 - -
Payments of payables for capital expenditures (1,637,861) - - (45,688)
Payments of mortgages payable (306,526) (280,522) (14,394,680) (1,388,265)
Payments for financing costs (293,148) (765,535) (961,339) (425,424)
Decrease (increase) in escrow and bond fund deposits (7,567) (16,200) 7,314 380,378
Net proceeds from the issuance of common stock - - 45,597,145 -
Payment of line-of-credit - - (7,003,977) -
Payments on related party notes - - (4,414,556) -
Payment of bonds - - (3,755,000) -
Partners' distributions - - - (3,350,741)
Mortgage proceeds - - - 2,375,000
Partners' contributions - - - 3,000
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,494,323 12,622,277 1,059,496 (861,966)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (989,283) (375,734) 1,659,406 (703,891)
CASH AND CASH EQUIVALENTS, beginning of period 1,283,672 1,659,406 - 703,891
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 294,389 $ 1,283,672 $ 1,659,406 $ -
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 5,630,000 $ 4,177,000 $ 2,677,000 $ 4,318,000
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Dividends and limited partners' distributions
declared and unpaid $ 1,479,345 $ 1,474,265 $ 1,474,265 $ -
Real estate investments financed with accounts
payable $ 596,794 $ 1,637,861 $ - $ -
Shares issued under Stock Incentive Plan $ 170,617 $ - $ 243,750 $ -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F - 12
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF ORGANIZATION AND BUSINESS
SIGNIFICANT
ACCOUNTING POLICIES Agree Realty Corporation (the "Company") was
formed as a Maryland real estate investment
trust in December 1993, and commenced operations
effective with the completion of its initial
public offering on April 22, 1994. The Company
is the successor to the operations of Agree
Realty Group (the "Agree Predecessors"), which
was comprised of seventeen real estate property
partnerships and a management and development
company. All of the Company's assets are held
by, and all of its operations are conducted
through, Agree Limited Partnership (the
"Operating Partnership"). The Company will, at
all times, be the sole general partner of the
Operating Partnership. Minority interest in the
Operating Partnership represents partnership
units of the Operating Partnership (OP Units).
The Company operates, manages, acquires and
develops retail properties. At December 31,
1996, the Company's properties are comprised of
thirteen shopping centers and twelve single
tenant retail facilities located in eleven
states. During the year ended December 31, 1996,
approximately 90% of the Company's base rental
revenues were received from national or regional
tenants under long-term leases, including
approximately 32% from Kmart Corporation and 23%
from Borders, Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Agree
Realty Corporation include the accounts of the
Company and its majority owned partnership, the
Operating Partnership. The Agree Predecessors'
financial statements were prepared on a combined
basis because of common ownership and
management. All significant intercompany
accounts and transactions have been eliminated
in the accompanying consolidated and combined
financial statements.
USE OF ESTIMATES
In preparing financial statements in conformity
with generally accepted accounting principles,
management is required to make estimates and
assumptions that affect (1) the reported amounts
of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date
of the financial statements, and (2) revenues
and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial
instruments, which consist of cash, cash
equivalents, receivables, notes payable,
accounts payable and long-term debt, approximate
their fair values.
F - 13
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS
Real estate assets are stated at cost less
accumulated depreciation. All costs related to
planning, development and construction of
buildings prior to the date they become
operational, including interest and real estate
taxes during the construction period, are
capitalized for financial reporting purposes.
Subsequent to completion of construction,
expenditures for property maintenance are
charged to operations as incurred, while
significant renovations are capitalized.
Depreciation of the buildings is recorded on the
straight-line method using an estimated useful
life of forty years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and
highly liquid tax anticipation notes with
original maturities of three months or less.
ACCOUNTS RECEIVABLE - TENANTS
Accounts receivable from tenants reflect
primarily reimbursement of specified common area
maintenance costs. No allowance for
uncollectible accounts has been provided based
on past collection results.
RESTRICTED ASSETS
These amounts represent funds on deposit
restricted by certain lenders pursuant to
agreements entered into by the Company. The
funds held in escrow are used to pay
capital-related costs and are released to the
Company upon inspection and leasing of related
property to tenants and are used to pay real
estate taxes for one shopping center in Florida.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company uses the equity method of accounting
for investments in non-majority owned entities
where the Company has the ability to exercise
significant influence over operating and
financial policies.
The Company's initial investment is recorded at
cost, and the carrying amount of the investment
is (a) increased by the Company's share of the
investees' earnings (as defined in the limited
liability company agreements), and (b) reduced
by distributions paid from the investees to the
Company.
F - 14
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
UNAMORTIZED DEFERRED EXPENSES
Deferred expenses are stated net of total
accumulated amortization. The nature and
treatment of these capitalized costs are as
follows: (1) financing costs, consisting of
expenditures incurred to obtain long-term
financing, are being amortized using the
interest method over the term of the related
loan, and (2) leasing costs, which are amortized
on a straight-line basis over the term of the
related lease.
ACCOUNTS PAYABLE - CAPITAL EXPENDITURES
Included in accounts payable are amounts related
to the construction of buildings. Due to the
nature of these expenditures, they are reflected
in the statements of cash flows as a financing
activity.
MINORITY INTEREST
This amount represents the limited partners'
interest of 19.41% and 19.47% in the Operating
Partnership as of December 31, 1996 and 1995,
respectively, which is convertible into 637,959
shares of the Company's common stock.
REVENUE RECOGNITION
Base rental income attributable to leases is
recorded when due from tenants. Certain leases
provide for additional rents based on tenants'
sales volume. These percentage rents are
reflected based on the tenants' fiscal year;
however, such amounts earned by the Company have
historically not been material. In addition,
leases for certain tenants contain rent
escalations and/or free rent during the first
several months of the lease term; however, such
amounts are not material.
The Company acts as the construction developer
on certain properties. Related development fee
income is recognized upon completion of
construction.
OPERATING COST REIMBURSEMENT
Substantially all of the Company's leases
contain provisions requiring tenants to pay as
additional rent a proportionate share of
operating expenses such as real estate taxes,
repairs and maintenance, insurance, etc. The
related revenue from tenant billings is
recognized in the same period the expense is
recorded.
F - 15
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
INCOME TAXES
The Company has elected to be taxed as a real
estate investment trust ("REIT") under Sections
856 through 860 of the Internal Revenue Code of
1986, as amended. A REIT will generally not be
subject to federal income taxation on that
portion of its income that qualifies as REIT
taxable income to the extent that it distributes
at least 95 percent of its taxable income to its
stockholders and complies with certain other
requirements. Accordingly, no provision has been
made for federal income taxes for the Company in
the accompanying consolidated financial
statements.
The aggregate federal income tax basis of Real
Estate Investments is approximately $10.5
million less than the financial statement basis.
PER SHARE DATA
Earnings per share has been computed by dividing
the income by the weighted average number of
common shares and dilutive common equivalent
shares outstanding.
RECLASSIFICATIONS
Certain insignificant amounts in the prior year
financial statements have been reclassified to
conform with the 1996 presentation.
2. FORMATION OF THE The Company was established to continue the
COMPANY, INITIAL business of the Agree Predecessors. The Company
PUBLIC OFFERING AND commenced its operations on April 22, 1994 with
BASIS OF the sale of 2,500,000 shares of common stock.
PRESENTATION The cash proceeds (net of underwriting fees) to
the Company from the completion of this initial
public offering were approximately $45.4
million, which were used primarily to reduce
outstanding indebtedness, pay stock issuance
costs and establish a working capital reserve.
Also in connection with the formation of the
Company, 125,685 shares of common stock were
purchased by two principals of the Agree
Predecessors in a private transaction at the
initial public offering price of $19.50 per
share.
The assets of the Company are held by and all
operations conducted through the Operating
Partnership. The Company controls, as the sole
general partner, 80.59% and 80.53% of the
Operating Partnership as of December 31, 1996
and 1995, respectively.
3. MORTGAGES, Mortgages payable consisted of the following:
CONSTRUCTION LOANS
AND NOTE PAYABLE
<TABLE>
<CAPTION>
December 31, 1996 1995
----------------------------------------------------------------------------
<S> <C> <C>
Note payable in monthly installments of interest
only at 6.875% per annum until May 1999, at
which time the Company can elect to either pay
the amount in full or accept the then
prevailing interest rate and
</TABLE>
F - 16
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
continue making principal and interest payments
based on a 22-year amortization schedule, with
the remaining unpaid principal and accrued
unpaid interest then due November 2005,
collateralized by related real estate and
tenants' leases $ 33,600,000 $33,600,000
Note payable in monthly installments of $98,477
including interest at 9.75% per annum,
collateralized by related real estate and
tenants' leases, final balloon installment due
July 2010 9,698,073 9,874,834
Note payable in monthly installments of $62,881
including interest at 7.75% per annum,
collateralized by related real estate and
tenants' leases, final balloon installment due
March 1999 7,990,926 8,120,691
Note payable in monthly installments of interest
only at the prime rate (which was 8.25% at
December 31, 1996) plus .5%, beginning April
1997, payable in monthly installments of
principal and interest based on a 20-year
amortization, collateralized by related real
estate and tenants' leases, final balloon
installment due March 1999 2,375,000 2,375,000
---------------------------------------------------------------------------
MORTGAGES PAYABLE $ 53,663,999 $53,970,525
---------------------------------------------------------------------------
</TABLE>
Future scheduled annual maturities of mortgages
payable for years ending December 31, are as
follows: 1997 - $357,946; 1998 - $421,123; 1999
- $10,679,397; 2000 - $969,964; 2001 -
$1,046,875 and $40,188,694 thereafter. (These
maturities assume that the $33,600,000 mortgage
will be extended beyond May 1999.)
In November 1995, the Operating Partnership
entered into a $50 million line-of-credit
agreement which is guaranteed by the Company.
The agreement has an initial term of three years
and can be extended, at the option of the
Company, for an additional three years. Advances
under this credit facility bear interest within
a range of LIBOR plus 200 basis points to 263
basis points, or the bank's prime rate plus 37
basis points to 75 basis points, at the option
of the Company, based on certain factors such as
debt to property value and debt service
coverage. The credit facility will be used to
fund property acquisitions and development
activities, and is secured by specific
properties. As of December 31, 1996, $20,746,937
was outstanding under this facility and there
were no amounts outstanding under this credit
facility as of December 31, 1995.
F - 17
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
In addition, the Company maintains a $5,000,000
line-of-credit agreement with a bank which
expires on September 21, 1997. Payments of
interest only, at the bank's prime rate, or 225
basis points in excess of the one month LIBOR
rate, at the option of the Company, are required
monthly. At December 31, 1996 and 1995,
$2,869,445 and $1,977,808 were outstanding under
this agreement, respectively.
The Company has received funding from an
unaffiliated third party for certain of its
single tenant retail properties. Borrowings
under this arrangement bear no interest and are
required to be repaid within sixty (60) days
after the date the construction has been
completed. The advances are secured by the
specific land and buildings being developed. As
of December 31, 1996 and 1995, $10,616,936 and
$17,603,785 was outstanding under this
agreement, respectively.
4. DIVIDENDS AND On December 9, 1996, the Company declared a
DISTRIBUTIONS dividend of $.45 per share for the quarter ended
PAYABLE December 31, 1996; approximately 30 percent of
the dividend represented a return of capital.
The holders of OP Units were entitled to an
equal distribution per OP Unit held as of
December 31, 1996. The dividends and
distributions payable are recorded as
liabilities in the Company's balance sheet at
December 31, 1996. The dividend has been
reflected as a reduction of stockholders' equity
and the distribution has been reflected as a
reduction of the limited partners' minority
interest. These amounts were paid on January 6,
1997.
5. MINORITY INTEREST The following summarizes the changes in the
limited partners' minority interest since
January 1, 1995:
<TABLE>
<S> <C>
Minority interest at January 1, 1995 $ 6,481,238
Minority interests' share of income for
the year ended December 31, 1995 785,105
Distributions for the year ended December 31, 1995 (1,148,326)
-------------------------------------------------------------------
MINORITY INTEREST AT DECEMBER 31, 1995 6,118,017
Minority interests' share of income for the year
ended December 31, 1996 899,323
Distributions for the year ended December 31, 1996 (1,148,326)
-------------------------------------------------------------------
MINORITY INTEREST AT DECEMBER 31, 1996 $ 5,869,014
-------------------------------------------------------------------
</TABLE>
6. REORGANIZATION Costs incurred by the Company related to title
COSTS insurance costs, revenue stamps and transfer
fees associated with the transfer of properties
and certain related mortgages from the Agree
Predecessors to the Company were charged to
operations and reflected as "Reorganization
Costs" in the 1994 consolidated statement of
operations.
F - 18
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
7. RELATED PARTY The Company currently manages certain additional
TRANSACTIONS properties which are owned by certain officers
and directors of the Company, but are not
included in these consolidated or combined
financial statements. Income related to these
activities are reflected as "Management fees and
other" in the accompanying consolidated
statements of operations.
8. EXTRAORDINARY ITEM As a result of the early extinguishment of
indebtedness with a portion of the net proceeds
from the issuance of its common stock, the
Company recognized an extraordinary loss in 1994
related to loan prepayment penalties and the
write-off of deferred financing costs on debt
that was retired.
9. STOCK INCENTIVE The Company has established a stock incentive
PLAN plan (the "Plan") under which 29,400 options
were granted in April 1994. The options, which
have an exercise price equal to the initial
public offering price ($19.50/share), can be
exercised in increments of 25% on each
anniversary of the date of the grant. A total of
14,700 and 7,350 of the options were exercisable
at December 31, 1996 and 1995, respectively. No
options were exercised during either 1996 or
1995.
The Company has adopted the disclosure-only
provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation." However, since no
compensation cost would have been recognized
pursuant to SFAS No. 123 under the Plan in
either 1996 or 1995, there is no effect on the
Company's net income or earnings per share for
these years.
10. RESTRICTED STOCK As part of the Company's stock incentive plan,
12,500 restricted common shares were granted to
certain employees in April 1994; an additional
11,290 shares were granted during the first
quarter of 1996. The restricted shares vest in
increments of 20% per year for five years. The
Company recorded related compensation expense of
$82,873, $48,750 and $34,530 in 1996, 1995 and
1994, respectively. Plan participants are
entitled to receive the quarterly dividends on
their respective restricted shares.
11. PROFIT-SHARING PLAN The Company has a discretionary profit-sharing
plan whereby it contributes to the plan such
amounts as the Board of Directors of the Company
determines. The participants in the plan cannot
make any contributions to the plan.
Contributions to the plan are allocated to the
employees based on their percentage of
compensation to the total compensation of all
employees for the plan year. Participants in the
plan become fully vested after six years of
service. No contributions were made to the plan
in 1996, 1995 or 1994.
12. RENTAL INCOME The Company leases premises in its properties to
tenants pursuant to lease agreements which
provide for terms ranging generally from 5 to 25
years. The majority of leases provide for
additional rents based on tenants' sales volume;
however, such amounts earned by Agree have
historically not been material.
F - 19
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
As of December 31, 1996, the future minimum
revenues for the next five years from rental
property under the terms of all noncancellable
tenant leases, assuming no new or renegotiated
leases are executed for such premises, are as
follows (in thousands):
1997 $ 16,078
1998 15,654
1999 15,350
2000 14,982
2001 13,950
Thereafter 149,949
-------------------------------------------------
TOTAL $225,963
-------------------------------------------------
Of the future minimum rentals, approximately 39%
of the above total is attributable to Kmart
Corporation and approximately 31% is
attributable to Borders, Inc. Kmart's principal
business is general merchandise retailing
through a chain of discount department stores,
and Borders is a major operator of book
superstores in the United States.
13. LEASE The Company has entered into certain land lease
COMMITMENTS agreements for three of its properties. As of
December 31, 1996, approximate future annual
lease commitments under these agreements are as
follows:
Year Ended December 31,
-------------------------------------------------
1997 $ 446,000
1998 446,000
1999 446,000
2000 482,000
2001 485,000
Thereafter 6,606,000
-------------------------------------------------
F - 20
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
14. INTERIM RESULTS The following summary represents the unaudited
(UNAUDITED) results of operations of the Company, expressed
in thousands except per share amounts, for the
periods from January 1, 1995 through December
31, 1996:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
1996 March 31, June 30, September 30, December 31,
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 3,866 $ 4,026 $ 4,017 $ 4,382
-------------------------------------------------------------------------------
Income before
minority interest $ 1,010 $ 1,064 $ 845 $ 1,714
Minority interest 196 207 164 332
-------------------------------------------------------------------------------
NET INCOME $ 814 $ 857 $ 681 $ 1,382
-------------------------------------------------------------------------------
NET INCOME PER
SHARE $ .31 $ .32 $ .26 $ .52
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
1995 March 31, June 30, September 30, December 31,
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 3,413 $ 3,337 $ 3,364 $ 3,614
-------------------------------------------------------------------------------
Income before
minority interest $ 987 $ 1,003 $ 1,004 $ 1,038
Minority interest 192 196 195 202
-------------------------------------------------------------------------------
NET INCOME $ 795 $ 807 $ 809 $ 836
-------------------------------------------------------------------------------
NET INCOME PER
SHARE $ .30 $ .30 $ .31 $ .32
-------------------------------------------------------------------------------
</TABLE>
F - 21
<PAGE>
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------- ------------- ------------------------ ------------- ----------------------------------------
Costs
Capitalized
Subsequent to Gross Amount at Which Carried
Initial Cost Acquisition at Close of Period
------------------------ ------------- ----------------------------------------
Building and Building Building and
Description Encumbrance Land Improvements Improvements Land Improvements TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPLETED RETAIL
FACILITIES
Borman Center, MI $ - $ 550,000 $ 562,404 $ 1,066,115 $ 550,000 $ 1,628,519 $ 2,178,519
Capital Plaza, KY - 7,379 2,240,607 514,580 7,379 2,755,187 2,762,566
Charlevoix Commons, MI 3,981,600 305,000 5,152,992 - 305,000 5,152,992 5,457,992
Chippewa Commons, WI 5,103,840 1,197,150 6,367,560 35,539 1,197,150 6,403,099 7,600,249
Grayling Plaza, MI - 200,000 1,778,657 - 200,000 1,778,657 1,978,657
Iron Mountain Plaza, MI - 677,820 7,014,996 372,627 677,820 7,387,623 8,065,443
Ironwood Commons, MI - 212,500 8,181,306 230,953 212,500 8,412,259 8,624,759
Marshall Plaza Two, MI 3,407,040 - 4,662,230 10,764 - 4,672,994 4,672,994
North Lakeland Plaza, FL 7,990,926 1,641,879 6,364,379 337,905 1,641,879 6,702,284 8,344,163
Oscoda Plaza, MI - 183,295 1,872,854 - 183,295 1,872,854 2,056,149
Perrysburg Plaza, OH 2,375,000 21,835 2,291,651 - 21,835 2,291,651 2,313,486
Petoskey Town Center, MI 5,577,600 875,000 8,895,289 5,985 875,000 8,901,274 9,776,274
Plymouth Commons, WI 4,811,520 535,460 5,667,504 138,260 535,460 5,805,764 6,341,224
Rapids Associates, MI 5,120,640 705,000 6,854,790 13,000 705,000 6,867,790 7,572,790
Shawano Plaza, WI 5,597,760 190,000 9,133,934 - 190,000 9,133,934 9,323,934
West Frankfort Plaza, IL - 8,002 784,077 - 8,002 784,077 792,079
Winter Garden Plaza, FL 9,698,073 1,631,448 8,459,024 - 1,631,448 8,459,024 10,090,472
Omaha Store, NE 3,596,937 1,705,619 2,053,615 2,152 1,705,619 2,055,767 3,761,386
Wichita Store, KS 2,910,064 1,039,195 1,690,644 24,666 1,039,195 1,715,310 2,754,505
Santa Barbara Store, CA 5,795,333 2,355,423 3,240,557 2,650 2,355,423 3,243,207 5,598,630
</TABLE>
(RESTUBBED TABLE FROM ABOVE)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Column A Column F Column G Column H
- -------- ---------- ----------- -----------
Life
on Which
Depreciation
in Latest
Income
Accumulated Date of Statement
Description Depreciation Construction is Computed
- ------------------------------------------------------------------------
<S> <C> <C> <C>
COMPLETED RETAIL
FACILITIES
Borman Center, MI $ 878,263 1977 40 Years
Capital Plaza, KY 1,065,945 1978 40 Years
Charlevoix Commons, MI 801,471 1991 40 Years
Chippewa Commons, WI 1,056,930 1990 40 Years
Grayling Plaza, MI 584,444 1984 40 Years
Iron Mountain Plaza, MI 981,711 1991 40 Years
Ironwood Commons, MI 1,156,330 1991 40 Years
Marshall Plaza Two, MI 677,963 1990 40 Years
North Lakeland Plaza, FL 1,674,282 1987 40 Years
Oscoda Plaza, MI 608,363 1984 40 Years
Perrysburg Plaza, OH 759,110 1983 40 Years
Petoskey Town Center, MI 1,327,675 1990 40 Years
Plymouth Commons, WI 897,413 1990 40 Years
Rapids Associates, MI 1,067,320 1990 40 Years
Shawano Plaza, WI 1,512,238 1990 40 Years
West Frankfort Plaza, IL 290,838 1982 40 Years
Winter Garden Plaza, FL 1,672,227 1988 40 Years
Omaha Store, NE 57,812 1995 40 Years
Wichita Store, KS 48,166 1995 40 years
Santa Barbara Store, CA 91,207 1995 40 years
</TABLE>
F - 22
<PAGE>
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------- ------------- ------------------------ ------------- ----------------------------------------
Costs
Capitalized
Subsequent to Gross Amount at Which Carried
Initial Cost Acquisition at Close of Period
------------------------ ------------- ----------------------------------------
Building and Building Building and
Description Encumbrance Land Improvements Improvements Land Improvements TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Monroeville, PA 6,773,314 6,332,158 2,168,892 - 6,332,158 2,168,892 8,501,050
Norman, OK 2,274,622 879,562 1,595,379 - 879,562 1,595,379 2,474,941
Columbus, OH 3,131,427 826,000 2,321,134 - 826,000 2,321,134 3,147,134
Aventura, FL 3,130,000 - 3,141,821 - - 3,141,821 3,141,821
Boyton Beach, FL 2,183,176 3,103,942 1,953,091 - 3,103,942 1,953,091 5,057,033
- ----------------------------------------------------------------------------------------------------------------------------------
SUB TOTAL 83,458,872 25,183,667 104,449,387 2,755,196 25,183,667 107,204,583 132,388,250
- ----------------------------------------------------------------------------------------------------------------------------------
RETAIL FACILITIES
UNDER DEVELOPMENT
Lawrence, KS - - 85,993 - - 85,993 85,993
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 83,458,872 $25,183,667 $104,535,380 $ 2,755,196 $25,183,667 $107,290,576 $ 132,474,243
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE FROM ABOVE)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Column A Column F Column G Column H
- -------- ---------- ----------- -----------
Life
on Which
Depreciation
in Latest
Income
Accumulated Date of Statement
Description Depreciation Construction is Computed
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Monroeville, PA 6,778 1996 40 years
Norman, OK 9,971 1996 40 years
Columbus, OH 53,191 1996 40 years
Aventura, FL 55,636 1996 40 years
Boyton Beach, FL 4,069 1996 40 years
- ------------------------------------------------------------------------
SUB TOTAL 17,339,353
- ------------------------------------------------------------------------
RETAIL FACILITIES
UNDER DEVELOPMENT
Lawrence, KS - N/A N/A
- ------------------------------------------------------------------------
TOTAL $17,339,353
- ------------------------------------------------------------------------
</TABLE>
F - 23
<PAGE>
AGREE REALTY CORPORATION
NOTES TO SCHEDULE III
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
1) RECONCILIATION OF REAL ESTATE PROPERTIES
The following table reconciles the Real Estate Properties from January
1, 1994 to December 31, 1996:
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at January 1 $118,360,268 $ 96,852,137 $96,548,225
Construction costs 14,173,975 21,508,131 345,912
Sales (60,000) - (42,000)
- ------------------------------------------------------------------------------
Balance at December 31 $132,474,243 $118,360,268 $96,852,137
- ------------------------------------------------------------------------------
2) RECONCILIATION OF ACCUMULATED DEPRECIATION
The following table reconciles the accumulated depreciation from January
1, 1994 to December 31, 1996:
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at January 1 $14,792,193 $12,548,826 $10,325,699
Current year depreciation expense 2,547,160 2,243,367 2,223,127
- ------------------------------------------------------------------------------
Balance at December 31 $17,339,353 $14,792,193 $12,548,826
- ------------------------------------------------------------------------------
3) TAX BASIS OF BUILDINGS AND IMPROVEMENTS
The aggregate cost of Building and Improvements for federal income tax
purposes is equal to the cost basis used for financial statement
purposes.
F - 24
<PAGE>
[ARTWORK - PHOTOGRAPHS OF SAMPLE PROPERTIES]
<PAGE>
=============================================================================
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
Prospectus Summary............................................ 6
Risk Factors.................................................. 14
Use of Proceeds............................................... 22
Price Range of Common Stock and
Dividends................................................... 23
Capitalization................................................ 24
Selected Consolidated and Combined
Financial Data.............................................. 25
Management's Discussion and Analysis
of Financial Conditions and Results of Operations........... 26
Business and Properties....................................... 31
Mortgage Indebtedness......................................... 41
Policies with Respect to Certain Activities................... 43
Management.................................................... 46
Certain Relationships and Related
Transactions................................................ 52
Principal Stockholders........................................ 53
Description of Capital Stock.................................. 54
Shares Eligible for Future Sale............................... 56
Partnership Agreement......................................... 57
Federal Income Tax Considerations............................. 60
Employee Benefit Plans........................................ 74
ERISA Considerations.......................................... 74
Certain Anti-Takeover Provisions.............................. 75
Underwriting.................................................. 80
Experts....................................................... 81
Legal Matters................................................. 81
Additional Information........................................ 82
Index to Consolidated and Combined Financial
Statements..................................................F-1
1,500,000 SHARES
AGREE REALTY
CORPORATION
COMMON STOCK
----------
PROSPECTUS
----------
RAYMOND JAMES & ASSOCIATES, INC.
MCDONALD & COMPANY SECURIITES, INC.
RONEY & CO
SUTRO & CO. INCORPORATED
, 1997
==============================================================================
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses payable by the Registrant in
connection with the Offering described in this Registration Statement will be
as follows:
SEC Registration Fee (actual)..................................... $9,998
NASD Fee (actual) ................................................ 3,299
NYSE Listing Fee.................................................. *
Printing and Engraving Expenses................................... *
Legal Fees and Expenses........................................... *
Accounting Fees and Expenses...................................... *
Miscellaneous..................................................... *
----------
Total........................................................ $ *
==========
- ----------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities by the Registrant
within the past three years, except for grants of restricted stock, pursuant
to the Registrant's 1994 Stock Incentive Plan, in the aggregate amount of
12,500 shares, 11,290 shares and 28,955 shares to certain employees of the
Company on May 12, 1994, January 1, 1996 and January 1, 1997, respectively.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is a Maryland corporation. The Operating Partnership,
of which the Registrant is the sole general partner, is a Delaware limited
partnership. The Registrant's officers and directors are and will be
indemnified under Maryland and Delaware law, the Charter of the Registrant and
the Partnership Agreement of the Operating Partnership against certain
liabilities. The Registrant's Charter requires it to indemnify its directors
and officers to the fullest extent permitted from time to time by the laws of
the State of Maryland. The Maryland General Corporation Law (the "MGCL")
permits a corporation to indemnify its directors and officers (i) against
judgments, penalties, fines, settlements, and reasonable expenses actually
incurred in connection with any proceeding to which they are made a party by
reason of their service in those capacities, unless it is established that the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (a) was committed in bad faith or (b) was the
result of active and deliberate dishonesty, (ii) the director or officer
actually received an improper personal benefit in money, property or services,
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
II - 1
<PAGE>
The MGCL permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions. The Registrant's Charter contains such a provision. The law does
not, however, permit the liability of directors and officers to the
corporation or its stockholders to be limited to the extent that (1) it is
proved that the person actually received an improper personal benefit or (2) a
judgment or other final adjudication is entered in a proceeding based on a
finding that the person's action, or failure to act was material to the cause
of action adjudicated in the proceeding; and was (a) committed in bad faith or
(b) the result of active and deliberate dishonesty.
The Partnership Agreement of the Operating Partnership also provides
for indemnification of the Registrant and its officers and directors to the
same extent as in the Registrant's Charter, and limits the liability of the
Registrant and its officers and directors to the Operating Partnership and its
partners to the same extent the Registrant's Charter limits liability of
officers and directors to Agree Realty Corporation and its stockholders.
The Registrant maintains liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Registrant.
In addition, the officers, directors and controlling persons of the
Registrant are indemnified against certain liabilities by the Underwriters
under the Underwriting Agreement relating to the Offering.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The "Index to Consolidated and Combined Financial
Statements" in the Prospectus is incorporated herein by this
reference.
Schedules other than Schedule III have been omitted as the
required information is inapplicable or is presented in the
combined financial statements or the notes thereto.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
* 1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11
(Registration No. 33-73858), as amended ("IPO S-11"))
II - 2
<PAGE>
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to IPO S-11)
* 5.1 Opinion of Piper & Marbury L.L.P. regarding the validity of the shares of Common
Stock being registered
* 8.1 Opinion of Kramer, Levin, Naftalis & Frankel regarding certain Federal income tax
matters
10.1 Loan Modification Agreement, dated April 22, 1994, by and among Shawano Plaza,
Plymouth Commons, Chippewa Commons and Nationwide Life Insurance Company
(incorporated by reference to the exhibit with the corresponding number filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the
"1996 10-K"))
10.2 Loan Modification Agreement, dated April 22, 1994, by and among Rapids Associates,
Marshall Plaza Phase Two, Petoskey Town Center, Charlevoix Commons and
Nationwide Life Insurance Company (incorporated by reference to the exhibit with the
corresponding number filed with the 1996 10-K)
10.3 Modification Agreement, dated as of March 28, 1994, by and between North Lakeland
Plaza and the Travelers Indemnity Company (incorporated by reference to Exhibit 4.2
to IPO S-11)
10.4 Loan Agreement, dated August 19, 1992, by and among Richard Agree, Edward
Rosenberg and Michigan National Bank (incorporated by reference to Exhibit 4.3 to IPO
S-11)
10.5 Loan Agreement, dated March 7, 1990, and Modification of Mortgage and Security
Agreement, dated July 10, 1990, by and between Winter Garden Plaza and American
United Life Insurance Company (incorporated by reference to Exhibit 4.4 to IPO S-11)
10.6 First Amended and Restated Agreement of Limited Partnership of Agree Limited
Partnership, dated as of April 22, 1994, by and among the Company, Richard Agree,
Edward Rosenberg and Joel Weiner (incorporated by reference to the Exhibit with the
corresponding number filed with the 1996 10-K)
10.7 Amended and Restated Registration Rights Agreement, dated July 8, 1994, by and among
the Company, Richard Agree, Edward Rosenberg and Joel Weiner (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 (the "1994 10-K"))
10.8 1994 Stock Incentive Plan of the Company (incorporated by reference to the exhibit with
the corresponding number filed with the 1996 10-K)
10.9 Management Agreement, dated April 22, 1994, by and among Mt. Pleasant Shopping
Center, Angola Plaza, Shiloh Plaza and the Company (incorporated by reference to the
exhibit with the corresponding number filed with the 1996 10-K)
10.10 Contribution Agreement, dated as of April 21, 1994, by and among the Company,
Richard Agree, Edward Rosenberg and the co-partnerships named therein (incorporated
by reference to the exhibit with the corresponding number filed with the 1996 10-K)
10.11 Employment Agreement, dated April 22, 1994, by and between the Company and
Richard Agree (incorporated by reference to the exhibit with the corresponding number
filed with the 1996 10-K)
10.12 Employment Agreement, dated April 22, 1994, by and between the Company and
Edward Rosenberg (incorporated by reference to the exhibit with the corresponding
number filed with the 1996 10-K)
II - 3
<PAGE>
10.13 Agree Realty Corporation Profit-Sharing Plan (incorporated by reference to the exhibit
with the corresponding number filed with the 1996 10-K)
10.14 Business Loan Agreement, by and between Agree Limited
Partnership and Michigan National Bank (incorporated by
reference to Exhibit 10.8 to the 1994 10-K)
10.15 Business Loan Agreement, dated as of September 21, 1995, by and between Agree
Limited Partnership and Michigan National Bank (incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 10-K"))
10.16 Line of Credit Agreement by and among Agree Limited Partnership, the Company, the
lenders parties thereto, and Michigan National Bank, as Agent (incorporated by reference
to Exhibit 10.10 to the 1995 10-K)
23.1 Consent of BDO Seidman, LLP
* 23.2 Consent of Piper & Marbury L.L.P. (including in their opinion filed as Exhibit 5.1)
* 23.3 Consent of Kramer, Levin, Naftalis & Frankel (included in their opinion filed as
Exhibit 8.1)
24.1 Powers of Attorney (included on the signature page on the Registration Statement)
</TABLE>
- ------------
* To be filed by amendment.
II - 4
<PAGE>
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in Item 34 above, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted 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 Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the 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 Act, 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 - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-11 and has duly
caused this registration statement or amendment to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Farmington Hills,
State of Michigan, on April 16, 1997.
AGREE REALTY CORPORATION
By: /s/ RICHARD AGREE
--------------------------------------
Name: Richard Agree
Title: President and Chairman of the
Board of Directors
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Richard Agree, Kenneth Howe and
Edward Rosenberg his true and lawful attorney-in-fact and agent, each acting
alone, with full powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all
amendments to this registration statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title(s) Date
--------- -------- ----
/s/ RICHARD AGREE President and Chairman of the Board April 16, 1997
- ----------------------- (Principal Executive Officer)
Richard Agree
/s/ KENNETH HOWE Vice President - Finance and April 16, 1997
- ----------------------- Secretary (Principal Financial and
Kenneth Howe Accounting Officer)
/s/ EDWARD ROSENBERG Director and Senior Vice President April 16, 1997
- -----------------------
Edward Rosenberg
/s/ FARRIS G. KALIL Director April 16, 1997
- -----------------------
Farris G. Kalil
/s/ MICHAEL ROTCHFORD Director April 16, 1997
- -----------------------
Michael Rotchford
II - 6
<PAGE>
/s/ ELLIS G. WACHS Director April 16, 1997
- -----------------------
Ellis G. Wachs
/s/ GENE SILVERMAN Director April 16, 1997
- -----------------------
Gene Silverman
II - 7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ----------- ----------- ------
<S> <C>
* 1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation and Articles of Amendment of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-11 (Registration
No. 33-73858), as amended ("IPO S-11"))
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to IPO S-11)
* 5.1 Opinion of Piper & Marbury L.L.P. regarding the validity of
the shares of Common Stock being registered
* 8.1 Opinion of Kramer, Levin, Naftalis & Frankel regarding
certain Federal income tax matters
10.1 Loan Modification Agreement, dated April 22, 1994, by and
among Shawano Plaza, Plymouth Commons, Chippewa Commons and
Nationwide Life Insurance Company (incorporated by reference
to the exhibit with the corresponding number filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 10-K"))
10.2 Loan Modification Agreement, dated April 22, 1994, by and
among Rapids Associates, Marshall Plaza Phase Two, Petoskey
Town Center, Charlevoix Commons and Nationwide Life
Insurance Company (incorporated by reference to the exhibit
with the corresponding number filed with the 1996 10-K)
10.3 Modification Agreement, dated as of March 28, 1994, by and
between North Lakeland Plaza and the Travelers Indemnity
Company (incorporated by reference to Exhibit 4.2 to IPO
S-11)
10.4 Loan Agreement, dated August 19, 1992, by and among Richard
Agree, Edward Rosenberg and Michigan National Bank
(incorporated by reference to Exhibit 4.3 to IPO S-11)
10.5 Loan Agreement, dated March 7, 1990, and Modification of
Mortgage and Security Agreement, dated July 10, 1990, by and
between Winter Garden Plaza and American United Life
Insurance Company (incorporated by reference to Exhibit 4.4
to IPO S-11)
10.6 First Amended and Restated Agreement of Limited Partnership
of Agree Limited Partnership, dated as of April 22, 1994, by
and among the Company, Richard Agree, Edward Rosenberg and
Joel Weiner (incorporated by reference to the exhibit with
the corresponding number filed with the 1996 10-K)
10.7 Amended and Restated Registration Rights Agreement, dated
July 8, 1994, by and among the Company, Richard Agree,
Edward Rosenberg and Joel Weiner (incorporated by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (the "1994 10-K"))
10.8 1994 Stock Incentive Plan of the Company (incorporated by
reference to the exhibit with the corresponding number filed
with the 1996 10-K)
10.9 Management Agreement, dated April 22, 1994, by and among Mt.
Pleasant Shopping Center, Angola Plaza, Shiloh Plaza and the
Company (incorporated by reference to the exhibit with the
corresponding number filed with the 1996 10-K)
10.10 Contribution Agreement, dated as of April 21, 1994, by and
among the Company, Richard Agree, Edward Rosenberg and the
co-partnerships named therein (incorporated by reference to
the exhibit with the corresponding number filed with the
1996 10-K)
10.11 Employment Agreement, dated April 22, 1994, by and between
the Company and Richard Agree (incorporated by reference to
the exhibit with the corresponding number filed with the
1996 10-K)
10.12 Employment Agreement, dated April 22, 1994, by and between
the Company and Edward Rosenberg (incorporated by reference
to the exhibit with the corresponding number filed with the
1996 10-K)
10.13 Agree Realty Corporation Profit-Sharing Plan (incorporated by
reference to the exhibit with the corresponding number filed
with the 1996 10-K)
II - 8
<PAGE>
10.14 Business Loan Agreement, by and between Agree Limited
Partnership and Michigan National Bank (incorporated by
reference to Exhibit 10.8 to the 1994 10-K)
10.15 Business Loan Agreement, dated as of September 21, 1995, by
and between Agree Limited Partnership and Michigan National
Bank (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K"))
10.16 Line of Credit Agreement by and among Agree Limited
Partnership, the Company, the lenders parties thereto, and
Michigan National Bank, as Agent (incorporated by reference
to Exhibit 10.10 to the 1995 10-K)
23.1 Consent of BDO Seidman, LLP
* 23.2 Consent of Piper & Marbury L.L.P. (including in their opinion
filed as Exhibit 5.1)
* 23.3 Consent of Kramer, Levin, Naftalis & Frankel (included in
their opinion filed as Exhibit 8.1)
24.1 Powers of Attorney (included on the signature page on the
Registration Statement)
</TABLE>
- ------------
*To be filed by amendment.
II - 9
<PAGE>
Consent of Independent
Certified Public Accountants
Agree Realty Corporation
Farmington Hills, Michigan
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 14, 1997, relating to the
financial statements and schedule of Agree Realty Corporation and the Agree
Predecessors which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Troy, Michigan
April 14, 1997
