<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
Form S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------
AGREE REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 38-3148187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31850 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
RICHARD AGREE
31850 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334
(810) 737-4190
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------------
COPIES TO:
DAVID P. LEVIN, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [ ]
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Title of Each Class of Securities to be Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Registered Offering Price Per Aggregate Offering Registration Fee
Share Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per (1) (2) (3) (1) (2) N/A
share.................................
- -----------------------------------------------------------------------------------------------------------------------
Preferred Stock, par value $.0001 per (1) (4) (3) (1) (4) N/A
share.................................
=======================================================================================================================
Total................................. $125,000,000 (3) $125,000,000 $37,879.00
=======================================================================================================================
</TABLE>
<PAGE>
(1) In no event will the aggregate maximum offering price of all securities
issued pursuant to this Registration Statement exceed $125,000,000. Any
securities registered hereunder may be sold separately or as units with
other securities registered hereunder.
(2) Subject to footnote (1) above, there is being registered hereunder an
indeterminate number of shares of Common Stock, par value $.0001 per
share, as may be sold, from time to time, by the Registrant.
(3) The proposed maximum offering price per share will be determined from
time to time by the Registrant in connection with the issuance by the
Registrant of the shares of its securities registered hereunder.
(4) Subject to footnote (1) above, there is being registered hereunder an
indeterminate number of shares of Preferred Stock, par value $.0001 per
share, as may be sold, from time to time, by the Registrant.
(5) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act of 1933, as
amended.
-----------------------
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, or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to Section 8(a), may determine.
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<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.
PROSPECTUS
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1997
AGREE REALTY CORPORATION
$125,000,000
COMMON STOCK
PREFERRED STOCK
Agree Realty Corporation (the "Company") may from time to time offer and
sell (i) shares of its common stock, par value $.0001 per share (the "Common
Stock") and (ii) shares of its preferred stock, par value $.0001 per share (the
"Preferred Stock" and, together with the Common Stock, the "Offered
Securities"), with an aggregate public offering price not to exceed
$125,000,000. The Offered Securities may be offered separately or together, in
separate series, in amounts and at prices and terms to be set forth in a
supplement to this Prospectus (the "Prospectus Supplement").
The terms of the Preferred Stock, including the specific designation and
stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, and all other specific terms of the Preferred Stock,
including the initial public offering price, will be set forth in the
applicable Prospectus Supplement. The specific number of shares of Common Stock
and issuance price per share thereof will be set forth in the applicable
Prospectus Supplement. In addition, the specific terms of the Prospectus
Supplement may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for Federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain Federal income tax considerations relating to, and
any listing on a securities exchange of, the Offered Securities covered by such
Prospectus Supplement.
The Offered Securities may be offered directly by the Company, through
agents designated from time to time by the Company or to or through
underwriters or dealers, or through a combination of the foregoing. If any
agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such Offered Securities.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
THE "RISK FACTORS" SET FORTH IN THE APPLICABLE PROSPECTUS SUPPLEMENT.
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<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------
The date of this Prospectus is ____________, 1997.
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<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (of which this Prospectus is a part) on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities 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 securities 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 New York
Stock Exchange, Inc. (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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to the Exchange Act (File No. 1-12928) are hereby incorporated by reference in
this Prospectus.
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 (the "Form 10-K").
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
- 5 -
<PAGE>
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(e) Description of the Offered Securities contained in the Company's
registration statement on Form 8-A filed March 18, 1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of the Registration Statement and
this Prospectus to the extent that a statement contained in the Registration
Statement, this Prospectus or any other subsequently filed document that is
also incorporated by reference herein modifies or supersedes that statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates by reference). Requests should be directed to Kenneth Howe, Vice
President -- Finance, Agree Realty Corporation, 31850 Northwestern Highway,
Farmington Hills, Michigan 48334; telephone number (810) 737-4190.
-------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER OR AGENT. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
- 6 -
<PAGE>
THE COMPANY
The Company is a self-administered, self-managed REIT which owns and
manages, through the Operating Partnership (as defined below), retail
income-producing properties primarily leased on a long-term basis to major
retail companies. The Company, a Maryland corporation with headquarters in
Farmington Hills, Michigan, was formed in December 1993 to continue to operate
and expand the community shopping center business conducted since 1971 by its
predecessor entities, Agree Realty Group and Agree Development Company. The
Company currently owns and operates 25 properties (the "Properties," and
sometimes collectively referred to as the "Portfolio") located in 11 states,
principally in the midwestern United States and Florida. The Properties consist
of 13 neighborhood and community shopping centers anchored by major retail
tenants and 12 single tenant properties leased to national retail tenants.
As of December 31, 1996, 98% of the Portfolio was leased and approximately
91% of the Company's base rental income was attributable to national and
regional retailers under long-term leases. Such retailers include Kmart
Corporation, Borders, Inc., Roundy's Inc., Fashion Bug (Charming Shoppes, Inc.)
and Circuit City Stores, Inc.
Upon completion of its initial public offering in April 1994, the Company
succeeded to the ownership of a portfolio of 17 properties, all of which were
developed by its predecessor entities. Since the consummation of its initial
public offering, the Company has developed six additional single tenant
properties and has acquired two single tenant properties, increasing the square
footage of gross leasable area in the Portfolio to 2,616,663 square feet as of
December 31, 1996. Management believes that the addition of these properties is
consistent with its strategy of developing high quality retail properties
leased to national and regional retailers.
In addition to the Portfolio, during 1996, the Company acquired interests,
ranging from 8% to 20%, in seven limited liability companies formed for the
purpose of acquiring, developing and operating seven single-tenant
income-producing properties leased by Borders, Inc. and located in Ann Arbor,
Michigan; Boynton Beach, Florida; Tulsa, Oklahoma; Oklahoma City, Oklahoma;
Omaha, Nebraska; and Indianapolis, Indiana.
The Company is operated under the direction of Richard Agree, President and
Chairman of the Board of the Company, and Kenneth Howe, the Vice President --
Finance of the Company, along with the other executive officers of the Company.
Messrs. Agree and Howe have a combined 35 years experience in the construction,
management, leasing and disposition of shopping center properties.
The Company's executive offices are located at 31850 Northwestern Highway,
Farmington Hills, Michigan 48334. The telephone number is (810) 737-4190. The
Company was incorporated in Maryland on December 15, 1993 and the duration of
its existence is perpetual. 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.
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<PAGE>
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company expects to use all or a portion of the net proceeds from the sale of
the Offered Securities, first, to discharge all or a portion of the then
outstanding principal amount under the $50,000,000 Line of Credit Agreement,
dated as of November 14, 1995, by and among the Operating Partnership, the
Company, Michigan National Bank, NBD Bank and LaSalle National Bank (the
"Credit Agreement"). As of February 5, 1997, approximately $25,000,000 was
outstanding under the Credit Agreement, which borrowings were used for the
acquisition, construction and development of additional properties. Subject to
certain exceptions, the then outstanding principal balance of the borrowings
under the Credit Agreement, together with the accrued interest thereon, becomes
payable on the maturity date, November 14, 2001. The borrowings under the
Credit Agreement bear an adjustable interest rate.
The Company intends, unless otherwise described in the applicable
Prospectus Supplement, to use the remaining net proceeds from the sale of the
Offered Securities 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.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the nine months ended September 30, 1996, the year ended
December 31, 1995 and the year ended December 31, 1994 (which includes results
of operations of the Company's predecessor entities for the period of January
1, 1994 through April 21, 1994) was 1.65x, 1.91x and 1.44x, respectively, and
for the years ending December 31, 1993, 1992 and 1991 (which are based on the
results of the Company's predecessor entities) was .99x, .93x and .84x,
respectively. For the years ending December 31, 1993, 1992 and 1991,
respectively, all of which were prior to the Company's initial public offering
in April of 1994, the Company's earnings were inadequate to cover fixed charges
by $22,654, $635,882 and $1,462,384. The Company had no preferred dividend
requirement in any of the foregoing years. Therefore, the ratio of earnings to
combined fixed charges and preferred stock dividends are the same as the ratio
of earnings to fixed charges for such years. Earnings were calculated by adding
certain fixed charges (consisting of interest on indebtedness and amortization
of finance costs) to the Company's income before extraordinary items.
DESCRIPTION OF SECURITIES
The summary of the terms of the Offered Securities set forth below does not
purport to be complete and is subject to, and qualified in its entirety by,
references to the Company's articles of incorporation, as they may be amended
from time to time (the "Charter"), and bylaws, as they may be amended from time
to time (the "Bylaws").
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 $.0001 per share, initially consisting of 5,000,000 shares of
Common Stock and 2,500,000 shares of excess stock (the "Excess Stock"). At
February 1, 1997, 2,678,430 shares of Common Stock were issued and outstanding,
all of which are fully paid and nonassessable.
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.
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<PAGE>
DESCRIPTION OF COMMON STOCK
GENERAL
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.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock, together with the holders of Excess Stock, are
entitled to share ratably in net assets remaining after payment of liabilities
and satisfaction of preferential rights with respect to any outstanding shares
of Preferred Stock. 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 is listed on the NYSE.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% of the value of its issued and
outstanding Equity Stock (as defined below) may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include,
except in limited circumstances, certain entities such as qualified private
pension plans) during the last half of a taxable year (other than the first
year for which an election is made to be taxed as a REIT). The Equity Stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election is made to be
taxed as a REIT), and certain percentages of the Company's gross income must be
from particular activities (see "Federal Income Tax Considerations -- Taxation
of the Company -- Income Tests"). The Charter contains restrictions on the
acquisition of shares of Equity Stock essentially for 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% (the "Ownership Limit") of the value of the Company's outstanding
Common Stock and Preferred Stock (collectively, the "Equity Stock" or the
"Stock") and 24% for the Agree-Rosenberg Group (as defined in the Charter). 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
- 9 -
<PAGE>
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 attempt to qualify, or to continue to qualify, as a
REIT. If shares of Equity 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 Equity 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 the Offered Securities 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 written statements of actual stock ownership be submitted
by certain stockholders to the Company, no later than January 31 of each year
as follows: (i) if the Company has 200 or fewer stockholders of record on any
dividend record date, it will demand written statements of actual stock
ownership from each record holder of 1/2 of 1% or more of the outstanding
Equity Stock; (ii) if the Company has between 201 and 1,999 stockholders of
record on any dividend record date, it will demand written statements of actual
stock ownership from each record holder of 1% or more of the outstanding Equity
Stock; (iii) if the Company has more than 1,999 stockholders of record on any
dividend record date, it will demand written statements of actual ownership
from each record holder of 5% or more of the outstanding Equity Stock. In
addition, each stockholder must upon demand disclose to the Company, in
writing, such information as the Company may request in order to determine the
effect of such stockholder's direct, indirect and constructive ownership of
Equity Stock on the Company's status as a REIT or to comply with the
requirements of any taxing authority or governmental agency.
This ownership limitation may have the effect of precluding acquisition of
control of the Company by a third party unless the Board of Directors
determines that maintenance of REIT status is no longer in the best interests
of the Company. No restrictions on transfer will preclude the settlement of
transactions entered into through the facilities of the NYSE, provided that
certain transactions may be settled by the delivery of Excess Stock.
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<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
DESCRIPTION OF PREFERRED STOCK
GENERAL
Subject to limitations prescribed by Maryland law and the Company's
Charter, the Board of Directors is authorized to issue, from the authorized but
unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish from
time to time the number of shares of Preferred Stock to be included in any such
class or series and to fix the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of any such
class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company.
As of the date hereof, none of the shares of capital stock has been
designated as Preferred Stock. The Preferred Stock will, when issued for lawful
consideration therefor, be fully paid and nonassessable and, unless otherwise
provided in the applicable Prospectus Supplement, will have no preemptive
rights.
TERMS
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. The
statements below describing the Preferred Stock are in all respects subject to
and qualified in their entirety by reference to the applicable provisions of
the Charter and the By-Laws and any articles supplementary to the Charter
designating terms of a series of Preferred Stock (the "Articles
Supplementary").
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including: (i) the title and stated
value of such Preferred Stock and the number of shares offered; (ii) the
liquidation preference per share; (iii) the initial public offering price at
which such Preferred Stock will be issued; (iv) the dividend rate, periods and
payment dates or methods of calculation thereof applicable to such Preferred
Stock and the date from which dividends on such Preferred Stock shall commence
to cumulate, if applicable; (v) the provision for a sinking fund, if any, for
such Preferred Stock; (vi) the provision for redemption, if applicable, of such
Preferred Stock; (vii) any listing of such Preferred Stock on any securities
exchange; (viii) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, including the conversion
price or rate (or manner of calculation thereof); (ix) any other specific
terms, preferences, rights, limitations or restrictions of such Preferred
Stock; (x) a discussion of Federal income tax considerations applicable to such
Preferred Stock; (xi) the relative ranking and preference of such Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs
- 11 -
<PAGE>
of the Company; (xii) any limitations on issuance of any series of Preferred
Stock ranking senior to or on a parity with such series of Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; (xiii) any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT; and (xiv) the voting rights, if
any, of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock and Excess Stock of the Company and to all
equity securities ranking junior to such Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company, the
terms of which specifically provide that such equity securities rank on a
parity with the Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
equity securities issued by the Company, the terms of which specifically
provide that such equity securities rank senior to the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding
up of the Company.
DIVIDENDS
Holders of each series of Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the
Company legally available for payment, cash dividends at such rates and on such
dates as will be set forth in the applicable Prospectus Supplement. Such rate
may be fixed or variable or both. Each such dividend shall be payable to
holders of record as they appear on the share transfer books of the Company on
such record date as shall be fixed by the Board of Directors, as specified in
the Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of the Preferred
Stock for which dividends are noncumulative, then the holders of such series of
the Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
So long as any series of Preferred Stock shall be outstanding, unless (i)
full dividends (including, if such dividends are cumulative, dividends for
prior dividend periods) shall have been paid or declared and set apart for
payment on all outstanding shares of Preferred Stock of such series and all
other classes and series of Preferred Stock (other than Junior Stock, as
hereinafter defined) and (ii) the mandatory repurchase or other mandatory
retirement of, or with respect to any sinking or other analogous fund for, any
shares of Preferred stock of such series
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or any other Preferred Stock of any class or series (other than Junior Stock)
shall have occurred or been provided for and sufficient funds shall have been
deposited in trust to effect such repurchase or retirement, the Company may not
declare any dividends on any Common Stock or any other equity securities of the
Company ranking as to dividends or distributions of assets junior to such
series of Preferred Stock (the Common Stock and any such other equity
securities being herein referred to as "Junior Stock"), or make any payment on
account of, or set apart money for, the purchase, redemption or other
retirement of, or for a sinking or other analogous fund, for, any Junior Stock
or make any distribution in respect thereof, whether in cash or property or in
obligations or equity securities of the Company, other than shares of Junior
Stock which are neither convertible into, nor exchangeable or exercisable for,
any securities of the Company other than shares of Junior Stock.
Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, a series of
Preferred Stock may be redeemable, in whole or from time to time in part, at
the option of the Company, and may be subject to mandatory redemption pursuant
to a sinking fund or otherwise, in each case upon the terms, at the times and
at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of shares of equity securities of the Company, the
terms of such series of Preferred Stock may provide that, if no such shares of
capital stock shall have been issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Stock shall automatically and mandatorily be converted into
the applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
So long as any dividends on shares of any series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets with such series of Preferred Stock are in
arrears, no shares of any such series of Preferred Stock or such other series
of Preferred Stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and
the Company will not purchase or otherwise acquire any such shares; provided,
however, that the foregoing will not prevent the purchase or acquisition of
such shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
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In the event that fewer than all of the outstanding shares of a series of
Preferred Stock are to be redeemed, the number of shares to be redeemed will be
determined by lot or pro rata (subject to rounding to avoid fractional shares)
as may be determined by the Company or by any other method as may be determined
by the Company in its sole discretion to be equitable. From and after the
redemption dates (unless default shall be made by the Company in providing for
the payment of the redemption price plus accumulated and unpaid dividends, if
any), dividends shall cease to accumulate on the shares of Preferred Stock
called for redemption and all rights of the holders thereof (except the right
to receive the redemption price plus accumulated and unpaid dividends, if any)
shall cease.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock, Excess Stock or any other class or
series of capital stock of the Company ranking junior to the Preferred Stock in
the distribution of assets upon any liquidation, dissolution or winding up of
the Company, the holders of each series of Preferred Stock shall be entitled to
receive out of assets of the Company legally available for distribution to
stockholders liquidating distributions in the amount of the liquidation
preference per share, if any, set forth in the applicable Prospectus
Supplement, plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid noncumulative
dividends for prior dividend periods). After payment of the full amount of the
liquidating distributions to which they are entitled, the holder of Preferred
Stock will have no right or claim to any of the remaining assets of the
Company. In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Company are insufficient
to pay the amount of the liquidating distributions on all outstanding shares of
Preferred Stock and the corresponding amounts payable on all shares of other
classes or series of capital stock of the Company ranking on a parity with the
Preferred Stock in the distribution of assets, then the holders of the
Preferred Stock and all other such classes or series of capital stock ranking
on parity with the Preferred Stock shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise by respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
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Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of at least a majority
of the shares of such series of Preferred Stock outstanding at the time, given
in person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital stock of the Company into such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares, or (ii) amend, alter or
repeal the provisions of the Charter or the Articles Supplementary for such
series of Preferred Stock, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Stock or the holders
thereof, provided, however, with respect to the occurrence of any Event set
forth in (ii) above, so long as the Preferred Stock remains outstanding with
the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event the Company may not be the surviving entity, the
occurrence of any such Event shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of
Preferred Stock, and provided further that (a) any increase in the amount of
the authorized Preferred Stock or the creation or issuance of any other series
of Preferred Stock or (b) any increase in the amount of authorized shares of
such series or any other series of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series with respect to
payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the shares of Preferred Stock are
convertible, the conversion price or rate (or manner of calculation thereof),
the conversion period, provisions as to whether conversion will be at the
option of the holders of the Preferred Stock of the Company, the events
requiring an adjustment of the conversion price and the provisions affecting
conversion in the event of the redemption of such series of Preferred Stock.
RESTRICTIONS ON TRANSFER AND OWNERSHIP
See "Description of Common Stock -- Restrictions on Transfer" for a
discussion of the restrictions on transfer of shares of capital stock necessary
for the Company to qualify as a REIT under the Code.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
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 personal investment or tax circumstances, or to certain types of
stockholders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) subject to special
treatment under the Federal income tax laws. The 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 Internal
Revenue Service (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.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE 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.
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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. This
summary 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 may apply
retroactively.
Opinion of Counsel
Kramer Levin will deliver its opinion that, commencing with the Company's
taxable year ending December 31, 1994, and assuming that the actions described
in this discussion of "Federal Income Tax Considerations" are completed in a
timely fashion, the Company will be treated as having met the requirements for
qualification and taxation as a REIT commencing with its taxable year ending
December 31, 1994, and 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 taxation as a REIT under the Code. It
must be emphasized that the opinion will be based on various assumptions and
will be conditioned upon certain representations made by the Company as to
factual matters. Such factual assumptions and representations are set forth
below in this discussion of "Federal Income Tax Considerations." In addition,
the opinion will be 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 will be 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.
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 currently
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"
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(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 (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 asset 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 so treated and must meet
the requirements, 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.
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 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
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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 satisfies the requirements set forth in (1) through (6) 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 Common 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 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
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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. In applying these tests, the Company will be treated as realizing
its share of the income and bearing its share of the loss of the Operating
Partnership (and any other partnership in which the Company invests), and the
character of such income or loss, as well as other partnership items, will be
determined at the partnership level.
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.
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, the Company anticipates that such fees and gains have
constituted and 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
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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 will be generally 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).
The Company believes 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
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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 payment of deductible expenses and
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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 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 was lost. It is not possible to state
whether in all circumstances the Company would be entitled to such statutory
relief.
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 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
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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 the Domestic Stockholders' shares of Stock, and distributions in excess of
the Domestic Stockholders' tax basis in their respective shares of Stock are
taxable as gain realized from the sale of such shares. 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 dividends" 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 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 and Loss; 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 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.
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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, in Revenue Ruling 66-106, 1966-1 C.B. 151,
that amounts distributed by a REIT to a tax-exempt employees' pension trust did
not constitute unrelated business taxable income ("UBTI"). Although rulings are
merely interpretations of law by the IRS and may be 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 non-resident
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 their home country laws.
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 the branch profits tax
under section 884 of the Code, 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
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Non-U.S. Stockholder unless the Non-U.S. Stockholder files the appropriate IRS
form, claiming that a lower 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. Generally, an ordinary income dividend will
be subject to a United States withholding tax equal to 30% of the gross amount
of the distribution unless such tax is reduced or eliminated by an applicable
tax treaty. 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.
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 the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, 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 FIRPTA 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 from distributions to Non-U.S.
Stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could be
designated as capital gain dividends) and (ii) 30% of ordinary dividends paid
out of earnings and profits. 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. A distribution in excess of the Company's earnings
and profits may be subject to 30% dividend withholding if at the time of the
distribution it cannot be determined whether the distribution will be in an
amount in excess of the Company's current or accumulated earnings and profits.
Under recently issued proposed Treasury Regulations, the Company would have the
option to either treat the entire distribution as a dividend or to determine
the amount of the distribution subject to withholding based on 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 FIRPTA, a sale of such shares by a Non-U.S.
Stockholder generally will not be
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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 will not be subject
to taxation under FIRPTA. 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 FIRPTA 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 did not
constitute a domestically controlled REIT, whether a Non-U.S. Stockholder's
sale of shares of Stock would be subject to tax under FIRPTA 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 the size of the selling stockholder's interest in the Company.
If the gain on the sale of the Company's shares were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same 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 FIRPTA 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 FIRPTA 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.
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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. Instead, Kramer Levin will deliver its opinion
that, 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 income tax at regular corporate tax rates on its net income and
distributions to partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income.
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 any 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 and deductions 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 tax purposes under section 704(b) of the Code if they do not
comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of income, gains, losses and deductions are intended to comply with
the requirements of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
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Tax Allocations With Respect to Pre-Contribution Gain
Pursuant to section 704(c) of the Code, items of income, gain, loss, and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership
must be allocated 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 and
deductions 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.
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
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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 31.5
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 the Operating Partnership, 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 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 Messrs. Agree, Rosenberg and Weiner by
reason of the exercise
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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 non-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.
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.
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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
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 IRA acquires an equity interest in an
entity, which interest is neither 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 IRA's assets would include, for purposes of
the fiduciary responsibility provisions of ERISA and 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
- 32 -
<PAGE>
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 Offered
Securities will be sold in an offering registered under the Securities Act and
are or will be 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 DOL 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
Offered Securities offered pursuant to an underwritten agreement 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 and the
U.S. Treasury Department will 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.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to
investors directly or through agents. Any such underwriter or agent involved in
the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of the Offered
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of the Offered Securities for whom they may
act as agent. Underwriters may sell the Offered Securities to or through
dealers, and such dealers may receive compensation in the
- 33 -
<PAGE>
form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received by
them and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be customers of, the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate amount of the Offered Securities sold
pursuant to Contracts shall be not less nor more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contracts shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject; and (ii) if the Offered Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total amount of the Offered
Securities less the amount thereof covered by the Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
The legality of the shares of Common Stock and Preferred Stock offered
hereby will be passed upon for the Company by Piper & Marbury L.L.P.,
Baltimore, Maryland. In addition, 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, New York, New York.
- 34 -
<PAGE>
EXPERTS
The financial statements and schedule for Agree Realty Corporation and its
predecessor entities included in the Form 10-K referred to and incorporated by
reference 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 incorporated herein by reference, and are incorporated herein in
reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
- 35 -
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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:
Total
--------
SEC registration fee (actual)....................................... $ 37,879
NYSE Filing Fee..................................................... *
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Blue Sky fees and expenses (including legal fees)................... *
Printing and engraving expenses..................................... *
Miscellaneous expenses.............................................. *
--------
Total............................................................. $ *
========
- ---------------------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a Maryland corporation. The Operating Partnership, of which
the Company is the sole general partner, is a Delaware limited partnership. The
Company's officers and directors are and will be indemnified under Maryland and
Delaware law, the Charter of the Company and the Partnership Agreement of the
Operating Partnership against certain liabilities. The Company'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 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.
The Maryland General Corporation 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, subject to
specified restrictions. The Company'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
II-1
<PAGE>
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 Company and its officers and directors to the same
extent as in the Company's Charter, and limits the liability of the Company and
its officers and directors to the Operating Partnership and its partners to the
same extent the Company's Charter limits liability of officers and directors to
the Company and its stockholders.
The Company 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 Company.
ITEM 16. EXHIBITS.
Exhibit No. Description
- ----------- -----------
1.1* Form of Underwriting Agreement
5.1** Opinion of Piper & Marbury L.L.P. regarding the legality of the
securities being offered hereby
8.1* Opinion of Kramer, Levin, Naftalis & Frankel regarding certain
federal income tax matters
12.1** Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
23.1** Consent of BDO Seidman, LLP
23.2** Consent of Piper & Marbury L.L.P. (contained in the opinion being
filed as Exhibit 5.1 hereto)
23.3* Consent of Kramer, Levin, Naftalis & Frankel (contained in the
opinion being filed as Exhibit 8.1 hereto)
24.1** Power of Attorney (included on the signature page to this
Registration Statement)
- -------------------
* To be filed by amendment or incorporated by reference prior to the
offering of the securities registered hereby, if applicable.
** Filed herewith.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 above, or otherwise, the
Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities 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 Common
Stock covered hereby, 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
II-2
<PAGE>
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Act; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement, provided, however, that
clauses (i) and (ii) do not apply if the information required to be
included in a post-effective amendment by such clauses is contained in
periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 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
February 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.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ RICHARD AGREE President and Chairman of the February 6, 1997
- ----------------------------- Board (Principal Executive
Richard Agree Officer)
/s/ KENNETH HOWE Vice President - Finance and February 6, 1997
- ----------------------------- Secretary (Principal Financial
Kenneth Howe and Accounting Officer)
/s/ EDWARD ROSENBERG Director and Senior Vice February 6, 1997
- ----------------------------- President
Edward Rosenberg
/s/ FARRIS G. KALIL Director February 6, 1997
- -----------------------------
Farris G. Kalil
/s/ MICHAEL ROTCHFORD Director February 6, 1997
- -----------------------------
Michael Rotchford
II-4
<PAGE>
/s/ ELLIS G. WACHS Director February 6, 1997
- -----------------------------
Ellis G. Wachs
/s/ GENE SILVERMAN Director February 6, 1997
- -----------------------------
Gene Silverman
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1* Form of Underwriting Agreement
5.1** Opinion of Piper & Marbury L.L.P. regarding the legality of the
securities being offered hereby
8.1* Opinion of Kramer, Levin, Naftalis & Frankel regarding certain
federal income tax matters
12.1** Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
23.1** Consent of BDO Seidman, LLP
23.2** Consent of Piper & Marbury L.L.P. (contained in the opinion being
filed as Exhibit 5.1 hereto)
23.3* Consent of Kramer, Levin, Naftalis & Frankel (contained in the
opinion being filed as Exhibit 8.1 hereto)
24.1** Power of Attorney (included on the signature page to this
Registration Statement)
- -------------------
* To be filed by amendment or incorporated by reference prior to the
offering of the securities registered hereby, if applicable.
** Filed herewith.
<PAGE>
Exhibit 5.1
[PIPER & MARBURY L.L.P. LETTERHEAD]
February 6, 1997
Agree Realty Corporation
31850 Northwestern Highway
Farmington Hills, Michigan 48334
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special Maryland counsel to Agree Realty Corporation,
a Maryland corporation (the "Company"), in connection with the registration
under the Securities Act of 1933, as amended (the "Act"), pursuant to a
Registration Statement on Form S-3 of the Company (the "Registration
Statement") filed with the Securities and Exchange Commission (the
"Commission") for offering by the Company from time to time of up to
$125,000,000 aggregate initial offering price of: (i) shares of common stock,
par value $0.0001 per share (the "Common Stock"); and (ii) shares of preferred
stock, par value $0.0001 per share (the "Preferred Stock"). The Common Stock
and the Preferred Stock are collectively referred to herein as the
"Securities." The Registration Statement provides that the Securities may be
offered separately or together, in separate series, in amounts, at prices, and
on terms to be set forth in one or more supplements (each a "Prospectus
Supplement") to the final Prospectus (the "Prospectus"). This opinion is being
provided at your request in connection with the filing of the Registration
Statement.
In this capacity, we have examined the Registration Statement, the
Prospectus, the Charter and By-Laws of the Company, the proceedings of the
Board of Directors of the Company or a committee thereof relating to the
authorization of the preparation and filing of the Registration Statement and
to the preparation of the Prospectus, a Certificate of the Secretary of the
Company dated February 6, 1997, and such other statutes, certificates,
instruments, and documents relating to the Company and matters of law as we
have deemed necessary to the issuance of this opinion. In such examination, we
have assumed, without independent investigation, the genuineness of all
signatures, the legal capacity of all individuals who have executed any of the
aforesaid documents, the authenticity of all documents submitted to us as
originals, the conformity with originals of all documents submitted to us as
copies (and the authenticity of the originals of such copies), and that all
public records reviewed are accurate and complete. As to factual matters, we
have relied on the Certificate of the Secretary of the Company and have not
independently verified the matters stated therein.
<PAGE>
Agree Realty Corporation
February 6, 1997
We assume that prior to the issuance of any shares of Common Stock or
Preferred Stock there will exist, under the Charter of the Company, the
requisite number of authorized but unissued shares of Common Stock or Preferred
Stock, as the case may be, and that all actions necessary to the creation of
any such Preferred Stock, whether by Charter amendment or by classification or
reclassification of existing capital stock and the filing of Articles
Supplementary, will have been taken. We further assume that appropriate
certificates representing shares of Common Stock or Preferred Stock will be
executed and delivered upon issuance and sale of any shares of Common Stock or
Preferred Stock, as the case may be, and will comply with all applicable
requirements of Maryland law. In addition, we assume that the underwriting
agreements for the offerings of the Common Stock and the Preferred Stock (each,
an "Underwriting Agreement") will be valid and legally binding agreements that
conform to the description thereof set forth in the applicable Prospectus
Supplement.
We assume that the issuance, sale, amount and terms of the Securities
to be offered from time to time will be authorized and determined by proper
action of the Board of Directors of the Company in accordance with the
parameters described in the Registration Statement (each, a "Board Action") and
in accordance with the Company's Charter and By-Laws and with applicable
Maryland law.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion and so advise you
that:
1. Upon due authorization by Board Action of an issuance of
Common Stock, and upon issuance and delivery of certificates for
shares of such Common Stock against payment therefor in accordance
with the terms and provisions of such Board Action, the Registration
Statement (as declared effective under the Act), the Prospectus or the
applicable Prospectus Supplement and, if applicable, an Underwriting
Agreement, the shares of Common Stock represented by such certificates
will be duly authorized, validly issued, fully paid and
non-assessable.
2. When a series of the Preferred Stock has been duly
authorized and established in accordance with the applicable Board
Action, the terms of the Company's Charter and applicable Maryland
law, upon due authorization by Board Action of an issuance of such
series of Preferred Stock, and, upon issuance and delivery of
certificates for shares of such series of Preferred Stock against
payment therefor in accordance with the terms and provisions of such
Board Action, the Registration Statement (as declared effective under
the Act), the Prospectus or the applicable Prospectus Supplement and,
if applicable, an Underwriting Agreement, the shares of Preferred
Stock represented by such certificates will be duly authorized,
validly issued, fully paid and non-assessable.
The opinion expressed herein is solely for the use of (i) the Company
in connection with the Registration Statement, and (ii) Kramer, Levin, Naftalis
& Frankel in giving their tax opinion to be filed as an exhibit to the
Registration Statement. This opinion may not be relied
<PAGE>
Agree Realty Corporation
February 6, 1997
on by any other person or in any other connection without our prior written
approval. This opinion is limited to the matters set forth herein, and no other
opinion should be inferred beyond the matters expressly stated.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
our consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Act of the rules and
regulations of the Commission thereunder.
Very truly yours,
PIPER & MARBURY L.L.P.
<PAGE>
Exhibit 12.1
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
(THE COMPANY) (PREDECESSOR ENTITIES)
-------------------------------------- -------------------------------------------------
APRIL 22, JANUARY 1,
NINE MONTHS YEAR ENDED 1994 TO 1994 TO YEAR ENDED YEAR ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31, APRIL 21, DECEMBER 31, DECEMBER 31, DECEMBER 31,
SEP 30, 1996 1995 1994 1994 1993 1992 1991
------------ ------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (Loss) before extraordinary item $2,918,552 $4,032,381 $2,393,158 $ 60,968 $ (22,654) $ (635,882) $(1,462,384)
Add:
Interest on indebtedness 4,205,030 4,186,492 2,856,661 2,559,695 8,623,084 9,058,829 8,982,207
Amortization of financing costs 305,626 247,195 179,374 31,395 189,232 125,760 197,917
------------ ------------ ------------ ---------- ------------ ------------ ------------
Earnings $7,429,208 $8,466,068 $5,429,193 $2,652,058 $ 8,789,662 $ 8,548,707 $ 7,717,740
============ ============ ============ ========== ============ ============ ============
Fixed charges and preferred stock
dividends:
Interest on indebtedness 4,205,030 4,186,492 2,856,661 2,559,695 8,623,084 9,058,829 8,982,207
Amortization and financing costs 305,626 247,195 179,374 31,395 189,232 125,760 197,917
------------ ------------ ------------ ---------- ------------ ------------ ------------
Fixed charges 4,510,656 4,433,687 3,036,035 2,591,090 8,812,316 9,184,589 9,180,124
Add:
Preferred stock dividends -- -- -- -- -- -- --
------------ ------------ ------------ ---------- ------------ ------------ ------------
Combined fixed charges and
preferred stock dividends $4,510,656 $4,433,687 $3,036,035 $2,591,090 $ 8,812,316 $ 9,184,589 $ 9,180,124
============ ============ ============ ========== ============ ============ ============
Earnings coverage deficiency N/A N/A N/A N/A $ 22,654 $ 635,882 $ 1,462,384
============ ============ ============ ========== ============ ============ ============
Ratio of earnings to fixed charges 1.65x 1.91x 1.79x 1.02x .99x .93X .84X
============ ============ ============ ========== ============ ============ ============
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Agree Realty Corporation
Farmington Hills, MI
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated February
8, 1996 relating to the financial statements and schedule of Agree Realty
Corporation (the "Company") appearing in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Troy, Michigan
February 5, 1997
