AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1997
REGISTRATION NO. 333-25313
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT No. 1
TO
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. [ ]
-------------
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 MAY 6, 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 May 5, 1997, the last reported sale price of
the Common Stock on the NYSE was $20 1/2 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.
Sutro & Co. Incorporated
The date of this Prospectus is ____________, 1997.
<PAGE>
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 Agreement and Covenant Not to Compete 49
Indemnification 49
Compensation Committee Interlocks and Insider Participation 50
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.
v) On April 30, 1997, announced its results of operations
for the quarter ended March 31, 1997, which included Funds
from Operations of $2,027,000 ($0.61 per share), compared to
$1,661,000 ($0.51 per share) for the comparable period in
1996; total revenues of $4,730,000, compared to $3,932,000
for the comparable period in 1996; and net income of
$919,000 ($0.34 per share), compared to $814,000 ($0.31 per
share) for the comparable period in 1996.
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>
<TABLE>
<CAPTION>
LOCATION OF PROPERTIES IN THE PORTFOLIO
Total Gross Percent of
Number of Leasable Area GLA Leased on
State Properties (sq. feet) December 31, 1996
- ----- ---------- ---------- -----------------
<S> <C> <C> <C>
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%
== ========= ======
<FN>
- ----------
(1) Includes Joint Venture Properties.
</TABLE>
ANNUALIZED BASE RENT OF THE COMPANY'S PROPERTIES
The following is a breakdown of annualized base rent as of December
31, 1996 for the Properties by type of tenant:
<TABLE>
<CAPTION>
Annualized Percent of Total
Base Rent as of Annualized Base Rent as of
Type of Tenant December 31, 1996(1) December 31, 1996
- -------------- ----------------- -----------------
<S> <C> <C>
National.................. $13,520,102(2) 81%
Regional.................. 1,879,663 11
Local..................... 1,328,816 8
----------- ---
Total............ $16,728,581 100%
=========== ====
<FN>
- ----------
(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."
</TABLE>
- 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 4,816 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 11,155 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 6,019 4,633 4,032 2,393 61 (23) (636)
Extraordinary item - early
extinguishment of debt -- -- -- (2,139) -- -- --
----------------------------------------------------- -----------------------------------------
Income (loss) before minority
interest 6,019 4,633 4,032 254 61 (23) (636)
Minority interest 802 899 785 49 -- -- --
----------------------------------------------------- -----------------------------------------
Net income (loss) $ 5,217 $ 3,734 $ 3,247 $ 205 $ 61 $ (23) $ (636)
===================================================== =========================================
Funds from operations $ 8,482 $ 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 $ 1.26 $ 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 $ 59,602 $ 88,252 $ 73,741 $54,431 $ 94,334 $ 95,939
</TABLE>
- ----------
(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 (8.5% as of April 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 which has not
been remediated, 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 April 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 April 15, 1997, the weighted average interest
rate on such funds was 7.75%. 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.
- 22 -
<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:
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW PER SHARE(1)
---- --- ------------
<S> <C> <C> <C>
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 May 5, 1997)......... 20.500 18.750 --
<FN>
- ----------
(1) Dividends are shown for the periods during which they were declared.
These dividends were or will be paid in the immediately subsequent
period.
</TABLE>
On May 5, 1997, the closing sale price of the Common Stock as
reported on the NYSE was $20 1/2 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."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
OUTSTANDING AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt(1):
Notes Payable ................................... $ 23,616 $ 4,155
Mortgage Loans .................................. 53,664 53,664
Construction Loans .............................. 10,617 1,569
--------- ---------
Total Debt ................................... 87,897 59,388
--------- ---------
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 58,711
Accumulated deficit ............................. (5,619) (5,619)
--------- ---------
Total Stockholders' Equity ................... 24,442 53,092
--------- ---------
Total Capitalization ......................... $ 118,208 $ 118,349
========= =========
<FN>
- ----------
* 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.
</TABLE>
- 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 4,816 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 11,155 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 6,019 4,633 4,032 2,393 61 (23) (636)
Extraordinary item -
Early extinguishment of debt -- -- -- (2,139) -- -- --
------------------------------------------------- -------------------------------------
Income (loss) before minority
interest 6,019 4,633 4,032 254 61 (23) (636)
Minority interest 802 899 785 49 -- -- --
------------------------------------------------- -------------------------------------
Net income (loss) $ 5,217 $ 3,734 $ 3,247 $ 205 $ 61 $ (23) $ (636)
================================================= =====================================
Funds from operations $ 8,482 $ 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 $ 1.26 $ 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 $ 59,602 $ 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:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
LOCATION OF PROPERTIES IN THE PORTFOLIO
TOTAL GROSS PERCENT OF
NUMBER OF LEASABLE AREA GLA LEASED ON
STATE PROPERTIES (SQ. FEET) DECEMBER 31, 1996
- ----- ---------- ---------- -----------------
<S> <C> <C> <C>
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%
==== ========= ======
<FN>
- ----------
(1) Includes Joint Venture Properties.
</TABLE>
- 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 the Properties by type of tenant:
<TABLE>
<CAPTION>
Annualized Percent of Total
Base Rent as of Annualized Base Rent as
Type of Tenants December 31, 1996 of December 31, 1996
--------------- ----------------- --------------------
<S> <C> <C>
National(1)..................... $13,520,102(2) 81%
Regional(3)..................... 1,879,663 11
Local........................... 1,328,816 8
------------ ----
Total................ $16,728,581 100%
=========== ====
<FN>
- ----------
(1) Includes, among others, the following national tenants: Kmart,
Borders, Fashion Bug, Winn Dixie, Rite Aid, J.C. Penney, Avco
Financial, GNC Group, Radio Shack, On Cue, Super Value, Maurices,
Petrie Stores, Walgreens, Payless Shoes, Food Lion, Blockbuster Video,
Sears, A&P, TGI Fridays and Circuit City.
(2) Includes the Company's share of annualized base rent as of December 31,
1996 from each of the Joint Venture Properties. See "-- Free-Standing
Properties -- Joint Venture Properties."
(3) Includes the following regional tenants: Roundy's, Dunhams Sports,
Braun's Fashion and Hollywood Video.
</TABLE>
- 34 -
<PAGE>
COMMUNITY SHOPPING CENTERS
Thirteen of the Company's properties are community shopping centers
ranging in size from 20,000 to 228,476 square feet of GLA. The centers are
located in five states as follows: Florida (2), Illinois (1), Kentucky(1),
Michigan (6) and Wisconsin (3). The location, general character and primary
occupancy information with respect to the community shopping centers at
December 31, 1996 are set forth below:
<TABLE>
<CAPTION>
COMMUNITY SHOPPING CENTERS
Anchor Anchor
(2) (3) Percent Tenants Tenants
Total (1) Average Percent Occupied (lease Percent-
Year Land Leasable Annualized Base Leased at at expiration/ age
Property Completed/ Area Area Base Rent per Dec. 31, Dec. 31, options of Base
and Location Expanded (acres) (sq. ft.) Rent sq. ft. 1996 1996 expiration) Rents
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Plaza(4)......1978/1991 11.58 135,009$ 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:
<TABLE>
<CAPTION>
WHOLLY OWNED FREE-STANDING PROPERTIES
Year Lease expiration/
Tenant/Location Completed Total GLA (Option expiration)
- --------------- --------- --------- -------------------
<S> <C> <C> <C>
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
=======
<FN>
- -----------
(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.
</TABLE>
- 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:
<TABLE>
<CAPTION>
JOINT VENTURE FREE-STANDING PROPERTIES
THE COMPANY'S YEAR
LOCATION INTEREST COMPLETED TOTAL GLA LEASE EXPIRATIONS
- -------- -------- --------- --------- -----------------
<S> <C> <C> <C> <C>
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
========
<FN>
- ----------
(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.
</TABLE>
- 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 Properties in an aggregate
amount which the Company believes to be adequate.
MORTGAGE INDEBTEDNESS
The following summarizes the Company's mortgage indebtedness as of
April 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) 9,635,234 25 9.75% July 1, 2010 1,131,797
North Lakeland
Plaza(3) 7,945,395 25 7.75% April 1, 1999 754,573
Perrysburg(4) 2,371,347 20 prime+1/2% March 8, 1999 252,000
------------- ---------- -----------
Total/Average $ 53,551,976 7.61% $ 4,448,370
============ ===== ===========
</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 8.5% as of April 15,
1997). The payments were interest only through April 1997.
Payments over the remaining years are 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 April 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 April 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.
- 43 -
<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
- 44 -
<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.
- 45 -
<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
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 26
years. Mr. Agree is a son-in-law of Mr. Rosenberg.
Edward Rosenberg has been a director of the Company since December
1993. From December 1993 until his retirement on April 22, 1997, Mr. Rosenberg
also served as Senior Vice President of the Company. Prior thereto, he
worked on behalf of and as a general partner of the Company's predecessor
entities for 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.
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
- 46 -
<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.
- 47 -
<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(2) 1994 51,923(1) -- -- 6,125
Kenneth R. Howe..................... 1996 $75,000 $4,327 $22,700(3) --
Vice President -- Finance 1995 75,000 4,327 19,500(3) --
and Secretary 1994 51,923(1) 4,327 13,812(3) 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) As of April 22, 1997, Mr. Rosenberg retired from his position as
Senior Vice President of the Company.
(3) 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
- 48 -
<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 Rosenberg............................ 3,062 3,063 $ 5,359 $ 5,360
Director and Senior
Vice President(2)
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.
(2) As of April 22, 1997, Mr. Rosenberg retired from his position
as Senior Vice President of the Company.
EMPLOYMENT AGREEMENT AND COVENANT NOT TO COMPETE
In connection with the IPO, Mr. Agree entered into an employment
agreement with the Company providing for a term expiring on April 22, 1999
pursuant to which Mr. Agree is paid an annual salary of $100,000. Subject
to certain terms and conditions, Mr. Agree has agreed that, during the term
of his employment agreement, he will not compete with the Company's business,
including real estate development. Mr. Agree is required to devote
substantially all of his business time to the affairs of the Company while
he is an employee 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
- 49 -
<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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Executive Compensation Committee consists of three
Independent Directors, Messrs. Kalil, Silverman and Wachs. The Executive
Compensation Committee determines compensation for the Company's executive
officers and administers the Company's stock option and other employee
benefit plans. See "Certain Relationships and Related Transactions."
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 April 15, 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
- 50 -
<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.
- 51 -
<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 April 15, 1997, $33,485,835 was outstanding under
the Credit Facility and there was no outstanding indebtedness under the Line
of Credit.
- 52 -
<PAGE>
PRINCIPAL STOCKHOLDERS
The beneficial ownership, as of March 15, 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(3) * *
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.
(3) Represents shares of Common Stock held by a trust for the benefit of
Catherine Rotchford, for which trust Mr. Rotchford and Catherine
Rotchford serve as co-trustees. Mr. Rotchford disclaims beneficial
ownership of the shares held by such trust.
- 53 -
<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,
- 54 -
<PAGE>
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.
- 55 -
<PAGE>
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. 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.
- 56 -
<PAGE>
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
- 57 -
<PAGE>
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.
- 58 -
<PAGE>
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.
- 59 -
<PAGE>
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
- 60 -
<PAGE>
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
- 61 -
<PAGE>
(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
- 62 -
<PAGE>
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.
- 63 -
<PAGE>
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).
- 64 -
<PAGE>
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
- 65 -
<PAGE>
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-
- 66 -
<PAGE>
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
- 67 -
<PAGE>
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.
- 68 -
<PAGE>
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
- 69 -
<PAGE>
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.
- 70 -
<PAGE>
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.
- 71 -
<PAGE>
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
- 72 -
<PAGE>
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.
- 73 -
<PAGE>
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
- 74 -
<PAGE>
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
- 75 -
<PAGE>
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
- 76 -
<PAGE>
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.
- 77 -
<PAGE>
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.
- 78 -
<PAGE>
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."
- 79 -
<PAGE>
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. 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.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- --------
<S> <C>
Raymond James & Associates, Inc.................................
McDonald & Company Securities, Inc..............................
Sutro & Co. Incorporated........................................
Total...................................................... 1,500,000
=========
</TABLE>
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,
- 80 -
<PAGE>
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,
- 81 -
<PAGE>
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.
- 82 -
<PAGE>
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 Agree Predecessors F-9
Consolidated Statements of Stockholders'
Equity and Combined Statement of
Partners' Deficit of the Agree Predecessors F-10
Consolidated Statements of Cash Flows and Combined
Statement of Cash Flows of the Agree 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.
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
- -----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Real estate, net $ 115,135 $ - $ 115,135
Cash 294 - (A) 294
Other assets 5,953 - 5,953
- -----------------------------------------------------------------------------
TOTAL ASSETS $ 121,382 $ - $ 121,382
- -----------------------------------------------------------------------------
LIABILITIES
Mortgages payable $ 53,664 $ - $ 53,664
Construction loans 10,617 (9,048) (B) 1,569
Notes payable 23,616 (19,461) (C) 4,155
Other liabilities 3,174 (141) (D) 3,033
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 91,071 (28,650) 62,421
- -----------------------------------------------------------------------------
MINORITY INTEREST 5,869 - 5,869
- -----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock - - -
Additional paid-in capital 30,061 28,650 (E) 58,711
Deficit (5,619) - (5,619)
- -----------------------------------------------------------------------------
24,442 28,650 53,092
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 121,382 $ - $ 121,382
- -----------------------------------------------------------------------------
</TABLE>
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 $ 28,650
Repayment of debt, including accrued interest (28,650)
- ------------------------------------------------------------------------------
$ -
- ------------------------------------------------------------------------------
(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 $2,100.
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.
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
- ------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
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) 1,285 (D) (4,816)
Other income 653 - 653
- ------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (5,448) 1,285 (4,163)
- ------------------------------------------------------------------------------
Income before minority interest 4,633 1,386 6,019
Minority interest 899 (97)(E) 802
- ------------------------------------------------------------------------------
NET INCOME $ 3,734 $1,483 $ 5,217
- ------------------------------------------------------------------------------
NET INCOME PER SHARE $ 1.41 $(0.15)(F) $ 1.26
- ------------------------------------------------------------------------------
</TABLE>
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>
<TABLE>
<CAPTION>
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31, December 31,
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 121,381,870 $108,928,409
- ------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</TABLE>
F - 7
<PAGE>
<TABLE>
<CAPTION>
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31, December 31,
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C.
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
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 121,381,870 $108,928,409
- ------------------------------------------------------------------------------
<FN>
See accompanying notes to financial statements.
</TABLE>
F - 8
<PAGE>
AGREE REALTY CORPORATION AND THE
AGREE PREDECESSORS
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY AND
COMBINED STATEMENT 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 STATEMENT 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
STATEMENT 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
STATEMENT 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):
<TABLE>
<S> <C>
1997 $ 16,078
1998 15,654
1999 15,350
2000 14,982
2001 13,950
Thereafter 149,949
-------------------------------------------------
TOTAL $225,963
-------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
<S> <C>
1997 $ 446,000
1998 446,000
1999 446,000
2000 482,000
2001 485,000
Thereafter 6,606,000
-------------------------------------------------
</TABLE>
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.
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) ................................................ 3,799
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 May 6, 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 May 6, 1997
- ----------------------- (Principal Executive Officer)
Richard Agree
/s/ KENNETH HOWE Vice President - Finance and May 6, 1997
- ----------------------- Secretary (Principal Financial and
Kenneth Howe Accounting Officer)
/s/ EDWARD ROSENBERG Director and Senior Vice President May 6, 1997
- -----------------------
Edward Rosenberg
/s/ FARRIS G. KALIL Director May 6, 1997
- -----------------------
Farris G. Kalil
/s/ MICHAEL ROTCHFORD Director May 6, 1997
- -----------------------
Michael Rotchford
II - 6
<PAGE>
/s/ ELLIS G. WACHS Director May 6, 1997
- -----------------------
Ellis G. Wachs
/s/ GENE SILVERMAN Director May 6, 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)
<PAGE>
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
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
May 5, 1997
