AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1998.
REGISTRATION NO. 333-21293
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
Form S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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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
(248) 737-4190
(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
(248) 737-4190
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
SHARI KROUNER, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
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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: [ ]
<PAGE>
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"), other than
securities offered only in connection with a dividend or interest
reinvestment plan, 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: [ ]
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.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH JURISDICTION.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 22, 1998
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.
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.
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The date of this Prospectus is April __, 1998.
<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, 1997 (the "Form 10-K").
(b) The Company's Registration Statement on Form S-11, dated May 15,
1997 (Registration Statement No. 333-25313).
(c) 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
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<PAGE>
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 (248) 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.
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<PAGE>
THE COMPANY
The Company is a self-administered, self-managed real estate
investment trust ("REIT") which develops, acquires, owns and operates
Properties (as defined below) which are primarily leased to major national
and regional retail companies under net leases. As of December 31, 1997, the
Company owned, either directly or through interests in joint ventures, 34
Properties (the "Properties", and sometimes collectively referred to as the
"Portfolio") located in 12 states and containing an aggregate of
approximately 3.1 million square feet of gross leasable area ("GLA"). The
Properties consist of 13 neighborhood and community shopping centers and 21
free-standing Properties. As of December 31, 1997, 98% of GLA in the
Portfolio was leased and approximately 93% of the Company's annualized base
rent was attributable to national and regional retailers. As of December 31,
1997, the Company derived approximately 73% of its annualized base rent from
five major tenants, Kmart Corporation ("Kmart"), Borders, Inc., Roundy's Inc
("Roundy's), Walgreen Co. ("Walgreen") and Fashion Bug (Charming Shoppes,
Inc.). The Company was the developer of all 13 of the shopping centers and 16
of the 21 free-standing Properties. As of December 31, 1997, the average age
of the Properties was approximately seven years.
Upon completion of its initial public offering (the "IPO") in April
1994, the Company succeeded to the ownership of 17 Properties which contain
an aggregate of 2,376,000 square feet. Since the IPO, the Company has:
i) Completed, either directly or through interests in joint
ventures, the development or acquisition of 15 Properties
leased to Borders, Inc. and other subsidiaries (collectively,
"Borders") of Borders Group, Inc. ("BGI") which contain in the
aggregate over 675,000 square feet. These Properties include
Borders' corporate headquarters and central administrative
buildings in Ann Arbor, Michigan. Eight of these 15 Properties
are owned directly by the Company and the remaining seven (the
"Joint Venture Properties") are owned by entities wherein the
Company's economic interest ranges from 8% to 20% (the "Joint
Ventures").
ii) Developed a Circuit City store in Boynton Beach, Florida,
consisting of approximately 32,500 square feet, pursuant to a
20 year net lease.
iii) Developed a free standing Walgreen Drug Store located in
Waterford, Michigan consisting of approximately 14,000
square feet, pursuant to a 20 year net lease.
iv) Continued to operate both its initial portfolio and its new
Properties at leased rates of over 95% and without any tenant
defaults. Kmart, the Company's largest tenant, reported to the
Company that the aggregate same-store sales at the stores
leased from the Company increased over 6% from 1996 to 1997.
Since the IPO, the only anchor tenant to vacate any of the
Company's Properties was J. Byrons, which vacated its 51,868
square-foot location in Lakeland, Florida in September 1996.
This space was re-leased to Best Buy Company, Inc., at an
increased rental rate, for a term expiring in January 2013,
with a 15 year renewal option.
The Company is operated under the direction of Richard Agree,
Chairman of the Board and President, and Kenneth Howe, Vice
President-Finance. Messrs. Agree and Howe have a combined 35 years experience
in the construction, management, leasing and disposition of retail
properties.
The Company's executive offices are located at 31850 Northwestern
Highway, Farmington Hills, Michigan 48334. The telephone number is (248)
737-4190. The Company was incorporated in Maryland on December 15, 1993 and
the duration of its existence is perpetual. Unless the context otherwise
requires, the term "Company," as used herein, includes Agree Realty
Corporation and Agree Limited Partnership (the "Operating Partnership"), of
which Agree Realty Corporation is the sole general partner.
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,
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<PAGE>
and amended on August 7, 1997 and November 17, 1997, by and among the
Operating Partnership, the Company, Michigan National Bank, NBD Bank and
LaSalle National Bank (the "Credit Agreement"). As of March 31, 1998,
approximately $11,674,000 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, August 7,
2003. 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.
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<PAGE>
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 year ended December 31, 1997, the year
ended December 31, 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 2.1x, 1.7x, 1.9x and 1.4x, respectively, and for the years ending
December 31, 1993 and 1992 (which are based on the results of the
Company's predecessor entities) was .99x and .93x, respectively. For
the years ending December 31, 1993 and 1992, 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
and $635,882. 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 March 31, 1998, 4,346,313 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.
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 (as described below), 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 under the symbol "ADC."
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<PAGE>
RESTRICTIONS ON TRANSFER
Among other requirements that must be met 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, and 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. In addition, 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 to enable the Company to qualify
as a REIT.
Subject to certain exceptions specified in the Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% (the "Ownership Limit") of the value of the Company's
outstanding Common Stock and Preferred Stock (collectively, the "Equity
Stock" or the "Stock") except that the Agree-Rosenberg Group (as defined in
the Charter) may own up to 24%. The Board of Directors may waive the
Ownership Limit if evidence satisfactory to the Board of Directors and the
Company's tax counsel is presented that such ownership will not then or in
the future jeopardize the Company's status as a REIT. As a condition of such
waiver, the Board of Directors may require opinions of counsel satisfactory
to it and/or an undertaking from the applicant with respect to preserving the
REIT status of the Company. The foregoing restrictions on transferability and
ownership will not apply if the Board of Directors determines that it is no
longer in the best interests of the Company to continue to qualify as a REIT.
If shares of 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 that each beneficial or constructive owner
of Equity Stock and each person (including stockholders of record) who holds
stock for a beneficial or constructive owner, shall provide to the Company
such information as the Company may request in order to determine the
Company's status as a REIT and to ensure compliance with limitations on the
ownership of Equity Stock. The Charter also requires each beneficial or
constructive owner of a specified percentage of Equity Stock to provide, no
later than January 31 of each year, written notice to the Company stating the
name and address of such owner, the number of shares of Equity Stock
beneficially or constructively owned, and a description of how such shares
are held. In addition, each such stockholder must provide such additional
information as the Company may request in order to determine the effect of
such stockholder's ownership of Equity Stock on the Company's status as a
REIT and to ensure compliance with the limitations on the ownership of Equity
Stock.
This ownership limitation may have the effect of precluding
acquisition of control of the Company by a third party unless the Board of
Directors determines that maintenance of REIT status is no longer in the best
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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.
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 the applicable
Prospectus Supplement. 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 accumulate, 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
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 issued by the
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Company, the terms of which specifically provide that such equity securities
rank junior to the 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 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 junior as to dividends or distributions of assets 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
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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.
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 be 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.
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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.
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 or 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Preferred Stock will be set
forth in the applicable Prospectus Supplement.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material Federal income tax considerations
regarding an investment in the Offered Securities is based on current law, is
for general information only and is not tax advice. For purposes of this
discussion, the "Company" refers only to Agree Realty Corporation. Kramer,
Levin, Naftalis & Frankel ("Kramer Levin"), counsel to the Company, has
reviewed the following discussion and is of the opinion that it fairly
summarizes all Federal income tax considerations that are likely to be
material to Company stockholders. However, this discussion does not purport
to deal with all aspects of taxation that may be relevant to particular
stockholders in light of their personal investment or tax circumstances, or
to certain types of stockholders subject to special treatment under the
Federal income tax laws (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations
and individuals who are not citizens or residents of the United States). The
discussion in this section is based on existing provisions of the Code,
existing and proposed Treasury Regulations, existing court decisions and
existing rulings and other administrative interpretations. There can be no
assurance that future Code provisions or other legal authorities will not
alter significantly the tax consequences described below. No rulings have
been obtained from the 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, all of which are subject to change and all of which
may be applied retroactively.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND
OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General
The Company has elected to be taxed as a REIT commencing with the
taxable year ending December 31, 1994. The Company believes that, commencing
with such taxable year, it has been organized and has operated in such a
manner as to qualify for taxation as a REIT under the Code and the Company
intends to continue to operate in such a manner, but no assurance can be
given that it will qualify as a REIT in any particular year.
The REIT requirements and the Federal income tax treatment of REITs
and their stockholders are highly technical and complex. The following
discussion sets forth only the material aspects of the Code sections that
govern the Federal income tax treatment of a REIT and its stockholders.
Opinion of Counsel
Kramer Levin is of the opinion that the Company is organized in
conformity with the requirements for qualification and taxation as a REIT,
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 is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters. Certain of such factual assumptions and representations are set
forth below in this discussion of "Federal Income Tax Considerations." In
addition, the opinion is based upon the factual representations of the
Company concerning its business and properties, and the business and
properties held by or through the Operating Partnership, as set forth in this
Prospectus. The opinion is expressed as of its date, and Kramer Levin has no
obligation to advise stockholders of the Company of any subsequent change in
the matters stated, represented or assumed, or any subsequent change in
applicable law. Moreover, the Company's qualification and taxation as a REIT
depends upon its 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
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assurance can be given that the actual results of the Company's operation for
any one taxable year will satisfy such requirements. See "-- Failure to
Qualify." An opinion of counsel is not binding on the IRS, and no assurance
can be given that the IRS will not challenge the Company's qualification as a
REIT or that such challenge would not be upheld by a court.
Taxation of the Company
If the Company qualifies for taxation as a REIT, it generally will
not be subject to Federal corporate income tax on its net income that is
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" (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 (other than foreclosure property) held primarily for sale to
customers in the ordinary course of business), 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 any
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, certain of which are discussed below, relating to
the Company's organization, sources of income, nature of assets and
distributions of income to stockholders. The Company has made the necessary
election to be a REIT.
The Code defines a REIT as a corporation, trust or association (1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation, but for sections 856 through 859 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) which is not closely held, i.e.
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not more than 50% in value of its outstanding stock is, at any time during
the last half of the taxable year, owned, directly or indirectly through the
application of certain attribution rules, by or for five or fewer individuals
(as defined in the Code to include certain entities); and (7) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (1) to (4), inclusive, must be met
during the entire taxable year and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. Conditions (5) and (6) do not apply
to the first taxable year for which an election is made to be taxed as a
REIT. The Company has satisfied and anticipates that it will continue to
satisfy the requirements set forth in (1) through (7) above. In addition, the
Charter currently includes certain restrictions regarding transfer of the
Equity Stock that are intended to assist the Company in continuing to satisfy
the share ownership requirements described in (5) and (6) above. See
"Description of 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. Beginning in 1998, the Company will not be treated as closely
held during a taxable year if it demands the required information statements
from its record holders with respect to such year, provided that the Company
did not know, or have reason to know, that it was closely held.
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.
Treasury Regulations provide that a REIT which is a partner in a
partnership 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 for the Company to maintain its qualification as a REIT, it
must satify certain gross income requirements 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 other disposition of stock or securities or from any combination of
the foregoing. Third, prior to 1998, gain from the sale or other disposition
of stock or securities held for less than one year, gain from prohibited
transactions and gain from 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. This 30% gross income test will cease to apply in taxable years
beginning in 1998.
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For purposes of the 75% and 95% gross income tests described above,
"rents from real property" generally include rents from interests in real
property, charges for services customarily furnished or rendered in
connection with the rental of real property, and rent attributable to
personal property which is leased under, or in connection with, a lease of
real property, but only if the rent attributable to such personal property
for the taxable year does not exceed 15% of the total rent for the taxable
year under such lease. However, "rents from real property" do not include any
amount received or accrued with respect to any real or personal property if
the determination of such amount depends in whole or in part on the income or
profits derived by any person from such property. 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. In addition, the Code provides that rents
received or accrued 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"). Finally, "rents from real property" do not
include any amount received or accrued with respect to any real or personal
property if the REIT operates or manages the property or furnishes or renders
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). For taxable years beginning after August 5, 1997,
if the amount a REIT receives or accrues for furnishing or rendering such
impermissible services to the tenants of a property or for the management or
operation of property does not exceed 1% of all amounts received or accrued
by the REIT with respect to such property during the year, only the amount
received or accrued for such services, management or operation (rather than
all amounts received or accrued with respect to such property) will be
excluded from "rents from real property." The amount treated as received for
such impermissible services, management or operation will be at least equal
to 150% of the REIT's direct cost in furnishing such services or providing
the management or operation. 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
continue to qualify as "rents from real property." The Company provides
management and/or development services to certain properties for which it
receives a fee and may also realize gains from the sale of parcels of land
adjacent to the Properties; however, such fees and gains have constituted,
and the Company anticipates that they will continue to constitute, less than
5% of the Company's gross income.
For purposes of the gross income tests described above, the term
"interest" generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. The Company does not, and does not intend to, charge
interest that will depend, in whole or in part, on the income or profits of
any person.
To the extent the Operating Partnership does not immediately use the
proceeds from the sale of the Offered Securities, these funds will be
invested in interest-bearing accounts and short-term, interest-bearing
securities. The interest income earned on these funds is expected to be
includible under the 75% test as "qualified temporary investment income"
(which includes income attributable to stock or debt instruments and
attributable to the temporary investment of new capital received in a stock
offering, not including amounts received under a dividend reinvestment plan).
Qualified temporary investment income treatment only applies to income
received or accrued during the one-year period beginning on the date the
Company receives the new capital.
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If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure
to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the nature and amount of its
gross income to its return and any incorrect information on the schedule was
not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the
benefit of these relief provisions. As discussed above in "-- Taxation of the
Company," even if these relief provisions apply, a tax would be imposed with
respect to the excess net income. No similar mitigation provision applies to
provide relief if the 30% income test (for taxable years prior to 1998) is
not satisfied 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 two 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
attributable to the temporary investment of new capital received in exchange
for Company stock (other than amounts received pursuant to a dividend
reinvestment plan) or in a public offering of Company debt obligations which
have maturities of at least five years, but only during the one-year period
beginning on the date the Company receives such new capital), cash, cash
items and government securities. Second, with respect to investments in
securities other than those includible in the 75% 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 nor more than 10% of the outstanding
voting securities of such issuer (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 at least 75% of its assets
are and will continue to be real estate assets. In addition, the Company does
not, and does not plan to, hold any securities representing more than 10% of
any one issuer's voting securities (other than securities of a qualified REIT
subsidiary or another REIT), or securities of any one issuer exceeding 5% of
the value of the Company's gross assets (determined in accordance with
generally accepted accounting principles). As previously discussed, the
Company is deemed to own its proportionate share of the assets of a
partnership in which it is a partner so that the Company's partnership
interest in the Operating Partnership itself (or in other partnerships in
which the Company holds an interest) is not a security for purposes of the
asset tests.
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
during each taxable year in an amount at least equal to (A) the sum of (i)
95% of the Company's "REIT taxable income" for the taxable year (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
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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 corporate ordinary and capital gains tax rates. Furthermore, if the
Company should fail to distribute during any 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, possibly as a result of timing differences between
the actual receipt of income and actual payment of deductible expenses and
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company, or as a result of nondeductible expenses such
as principal amortization or capital expenditures exceeding 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. If the amount of nondeductible
expenses exceeds noncash deductions, the Company may refinance its
indebtedness to reduce principal payments and borrow funds for capital
expenditures.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary dividend income and, subject to certain limitations of
the Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification is lost. It is
not possible to state whether in all circumstances the Company would be
entitled to the statutory relief discussed above.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As used herein, the term "Domestic Stockholder" means a holder of
shares of Stock that (for United States Federal income tax purposes) is (i) a
citizen or resident of the United States, (ii) 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) an estate or trust
the income of which is subject to United States Federal income taxation
regardless of its source. A trust will generally be treated as a Domestic
Stockholder for its taxable years beginning after December 31, 1996, if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust. 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.
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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 excess of its current or accumulated earnings and profits,
such distributions will first be treated as a tax-free return of capital,
reducing the tax basis in a Domestic Stockholder's shares of Stock, and the
amount in excess of such Stockholder's tax basis in its shares of Stock will
be taxable as gain realized from the sale of such shares. Such gain will
constitute capital gain if such shares were held as a capital asset, and will
constitute long-term capital gain if held for more than one year. Long term
capital gain recognized by an individual Stockholder will be taxed at
the lowest rate applicable to capital gains if the Stockholder has held
the shares for more than 18 months. See "--Dispositions of Shares of
Stock." Dividends declared by the Company in October, November, or
December of any year payable to a stockholder of record on a specified
date in any such month will be treated as both paid by the Company and
received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not include on their own income tax returns
any tax losses of the Company. Future regulations may require stockholders to
take into account, for purposes of computing their individual alternative
minimum tax liability, certain tax preference items of the Company.
As a result of certain rules relating to the determination of the
Company's earnings and profits, stockholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends. Moreover, any "deficiency dividend" will be treated as a
"dividend" (an ordinary dividend or a capital gain dividend, as the case may
be), regardless of the Company's earnings and profits.
Capital Gain Dividends
Dividends to Domestic Stockholders that are properly designated by
the Company as capital gain dividends will be treated (to the extent they do
not exceed the Company's actual net capital gain) as gain from the sale or
exchange of a capital asset held for more than one year, or to the extent
designated by the Company, for more than 18 months 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. For taxable years beginning after 1997,
Domestic Stockholders may be treated as receiving a capital gain dividend
with respect to undistributed net capital gains of the Company, to the extent
designated by the Company in a written notice to the shareholders. In that
event, Domestic Stockholders will receive a credit or refund in the amount of
tax paid by the Company with respect to such deemed dividends and will
increase the basis in their shares by the amount of such deemed dividends.
Passive Activity Losses; Investment Interest Limitations
Distributions from the Company and gain from the disposition of the
shares of Stock will not ordinarily be treated as passive activity income,
and, therefore, Domestic Stockholders generally will not be able to apply any
"passive activity losses" against such income. Dividends from the Company (to
the extent they do not constitute a return of capital) and gain from the
disposition of shares of Stock generally will be treated as investment income
for purposes of the investment interest limitation.
Dispositions of Shares of Stock
A Domestic Stockholder will recognize gain or loss on the sale or
exchange of shares of Stock to the extent of the difference between the
amount realized on such sale or exchange and the holder's tax basis in such
shares. Such gain or loss generally will constitute capital gain or loss if
the holder has held such shares as a capital asset and will generally
constitute long-term capital gain if held for more than one year and taxable
at the lowest applicable rates for capital gains if held for more than
18 months. Losses incurred on the sale or exchange of shares of Stock held
for six months or less (after applying certain holding
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period rules), however, will generally be deemed long-term capital loss to
the extent of any capital gain dividends received by the Domestic Stockholder
with respect to such shares and treated as long-term capital gain.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
In general, a tax-exempt entity that is a stockholder of the Company
will not be subject to tax on distributions from the Company or gain realized
on the sale of Stock. The IRS has ruled that amounts distributed by a REIT to
a tax-exempt employees' pension trust do not constitute unrelated business
taxable income ("UBTI"). Although rulings are merely interpretations of law
by the IRS and may be 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 Common
Stock -- Restrictions on Transfer"), and (ii) the REIT is "predominantly
held" by qualified trusts. A REIT is predominantly held by qualified trusts
if one qualified trust owns more than 25% of the value of the REIT or a group
of qualified trusts each owning more than 10% of the value of the REIT
collectively own more than 50% of the value of the REIT. The qualification of
the Company as a REIT has not depended and it is not anticipated that it will
depend on the application of the "look-through" exception. The Company has
not been and does not expect to be "predominantly held" by qualified trusts.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States Federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
foreign trusts and estates (collectively, "Non-U.S. Stockholders") are
complex, and the following discussion is intended only as a summary of such
rules. Prospective Non-U.S. Stockholders should consult with their own tax
advisors to determine the impact of Federal, state and local income tax laws
on an investment in the Company, including any reporting requirements, as
well as the tax treatment of such an investment under 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 a
branch profits tax at a 30% rate, unless reduced or eliminated by an
applicable income tax treaty, which is payable in addition to regular United
States corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in the Company is not so effectively connected.
The Company expects to withhold United States income tax, as described below,
on the gross amount of any distributions paid to a Non-U.S. Stockholder
unless the Non-U.S. Stockholder files the appropriate IRS form, claiming that
a lower treaty income tax rate applies or that the distribution is
effectively connected income.
A distribution by the Company that is not attributable to gain from
the sale or exchange by the Company of a United States real property interest
and that is not designated by the Company as a capital gain dividend will be
treated as an ordinary income dividend to the extent made out of current or
accumulated earnings and profits, and subject to withholding as discussed
below. A distribution of cash in excess of the Company's earnings and profits
will be treated first as a return of capital that will reduce a Non-U.S.
Stockholder's basis in its shares of Stock (but not below zero) and then as
gain from the disposition of such shares, the tax treatment of which is
described under the rules discussed below with respect to dispositions of
shares.
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Distributions by the Company that are attributable to gain from the
sale or exchange of a United States real property interest will be taxed to a
Non-U.S. Stockholder under provisions of the Code enacted by the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under the FIRPTA
provisions, such distributions are taxed to a Non-U.S. Stockholder as if such
distributions were gains effectively connected with a United States trade or
business. Accordingly, a Non-U.S. Stockholder will be taxed at the normal
capital gain rates applicable to a Domestic Stockholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in
the case of non-resident alien individuals). Distributions subject to the
FIRPTA provisions may also be subject to a 30% branch profits tax in the
hands of a corporate Non-U.S. Stockholder that is not entitled to treaty
exemption.
The Company will be required to withhold and remit to the IRS 35% of
designated capital gain dividends payable to Non-U.S. Stockholders (or, if
greater, 35% of the amount of any distributions that could be designated as
capital gain dividends). In addition, if the Company designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. The Company will also be required to withhold
and remit to the IRS 30% of the gross amount of distributions not
attributable to gain from the sale or exchange of a United States real
property interest and not designated as a capital gain dividend. If recently
issued proposed Treasury Regulations are promulgated in their current form,
the Company would have the option, effective for distributions made after
December 31, 1997, either to treat the entire distribution as a dividend
subject to withholding (as under current law) or to treat only a portion of
the distribution as a dividend if it makes a reasonable estimate of the
portion of the distribution that is not a dividend based on expected earnings
and profits. Tax treaties may reduce the Company's withholding obligations.
If the amount withheld by the Company with respect to a distribution to a
Non-U.S. Stockholder exceeds the stockholder's United States tax liability
with respect to such distribution (as determined under the rules described in
the two preceding paragraphs), the Non-U.S. Stockholder may file for a refund
of such excess from the IRS. It should be noted that the 35% withholding tax
rate on capital gain dividends currently corresponds to the maximum income
tax rate applicable to corporations, but is higher than the 20% maximum rate
on capital gains of individuals.
Unless the shares of Stock constitute a "United States real property
interest" within the meaning of the FIRPTA provisions, a sale of such shares
by a Non-U.S. Stockholder generally will not be subject to United States
taxation. The shares of 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 less than 50% in value of the shares
of which are held directly or indirectly by Non-U.S Stockholders at all times
during a specified testing period. The Company believes that it is, and
expects to continue to be, a domestically controlled REIT, and therefore that
the sale of shares in the Company by Non-U.S. Stockholders will not be
subject to U.S. income taxation. However, because the shares of Stock will be
publicly traded, no assurance can be given that the Company will continue to
be a domestically controlled REIT. Notwithstanding the foregoing, capital
gain not subject to the FIRPTA provisions will be taxable to a Non-U.S.
Stockholder if the Non-U.S. Stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and certain other conditions apply, in which case the nonresident alien
individual will be subject to a 30% tax on such individual's capital gains.
If the Company was not a domestically controlled REIT, whether a Non-U.S.
Stockholder's sale of shares of Stock would be subject to tax under the
FIRPTA provisions as a sale of a United States real property interest would
depend on whether the shares were "regularly traded" (as defined by
applicable Treasury Regulations) on an established securities market (e.g.,
the NYSE on which the shares of Stock are listed) and whether such Non-U.S.
Stockholder holds more than 5% of such shares during a specified testing
period. If the gain on the sale of the Company's shares were subject to the
taxation under the FIRPTA provisions, 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 the FIRPTA provisions to withhold on the purchase price if the
purchased shares of Stock are "regularly traded" on an established securities
market or if the Company is a domestically controlled REIT. Otherwise, under
the FIRPTA provisions the purchaser of shares of Stock may be required to
withhold 10% of the purchase price and remit such amount to the IRS.
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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 Operating Partnership that has more than
one owner and was in existence and claimed partnership classification prior
to January 1, 1997 (the "Effective Date"), will be classified as a
partnership rather than as an association taxable as a corporation for
periods beginning on the Effective Date, provided it does not elect to change
its classification. In general, the entity's claimed partnership
classification will be respected for all periods prior to the Effective Date
if it had a reasonable basis for its claimed classification.
The Operating Partnership has not requested, and does not intend to
request, a ruling from the IRS that it will be treated as a partnership for
Federal income tax purposes. In the opinion of Kramer Levin, based on the
provisions of the Partnership Agreement of the Operating Partnership (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 were taxable as a
corporation rather than as a partnership for Federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for
status as a REIT. See "-- Taxation of the Company -- Income Tests," and "--
Taxation of the Company -- Asset Tests," above. In addition, any change in
the Operating Partnership's status for tax purposes might be treated as a
taxable event, in which case the Company might incur a tax liability without
any related cash distribution. See "-- Taxation of the Company -- Annual
Distribution Requirements," above. Further, items of income and deduction of
the Operating Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. The Operating
Partnership would be required to pay Federal income tax at regular corporate
tax rates on its net income, and distributions to partners would constitute
dividends (to the extent of the Operating Partnership's current and
accumulated earnings and profits) that would not be deductible in computing
the Operating Partnership's taxable income.
Partners, Not the Operating Partnership, Subject to Tax
A partnership is not a taxable entity for Federal income tax
purposes. Rather, the Company is required to take into account its allocable
share of the Operating Partnership's income, gains, losses, deductions and
credits for the taxable year of the Operating Partnership ending within or
with the taxable year of the Company without regard to whether the Company
has received or will receive any cash distributions from the Operating
Partnership.
Operating Partnership Allocations
The allocation of income, gains, losses, deductions and credits among
partners will generally be determined in accordance with the provisions of
the Partnership Agreement. However, the allocations provided in the
Partnership Agreement will be disregarded for Federal income tax purposes if
they do not comply with the provisions of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder.
If an allocation is not recognized for Federal income tax purposes,
the item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking
into
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account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The Operating
Partnership's allocations of income, gains, losses, deductions and credits
are intended to comply with the requirements of section 704(b) of the Code
and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Pre-Contribution Gain
Pursuant to section 704(c) of the Code, items of income, gain, loss,
deduction and credit attributable to appreciated or depreciated property that
is contributed to a partnership in exchange for an interest in the
partnership must be allocated for Federal income tax purposes in a manner
such that the contributor is charged with, or benefits from, the unrealized
gain or unrealized loss associated with the property at the time of the
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value and the
adjusted tax basis of the contributed property at the time of contribution
(the "Book-Tax Difference"). In general, the fair market value of the
Properties contributed to the Operating Partnership was in excess of their
adjusted tax bases. The Partnership Agreement requires allocations of income,
gains, losses, deductions and credits attributable to each item of
contributed property be made in a manner that is consistent with section
704(c) of the Code. As a result, the tax depreciation available with respect
to such property will be allocated first to the partners other than the
partner that contributed the property, to the extent of, and in proportion
to, such other partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property.
Accordingly, the depreciation deductions allocable to the parties for tax
purposes will not correspond to the percentage interests of the partners.
While the Company will generally be allocated tax depreciation deductions
with respect to the Properties in excess of its percentage interest in the
Operating Partnership, its share of tax depreciation may be less than the
depreciation deductions that would have been allocated to the Company had the
basis of the Properties been equal to their fair market value. Upon the
disposition of any item of contributed property, all or a portion of gain
attributable to the excess, if any, at such time of basis for book purposes
over basis for tax purposes may 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 (a) the
Company's allocable share of the Operating Partnership's loss and (b) the
amount of cash distributed to the Company, the basis of property distributed
to the Company and by constructive distributions resulting from a reduction
in the Company's share of the indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the
Operating Partnership's loss would reduce the adjusted tax basis of the
Company's partnership interest in the Operating Partnership below zero, the
recognition of such loss will be deferred until such time as the recognition
of such loss would not reduce the Company's adjusted tax basis below zero. To
the extent that the Operating Partnership's distributions or any decrease in
the Company's share of the indebtedness of the Operating Partnership (each
such decrease being considered a constructive cash distribution to the
partners) would reduce the Company's adjusted tax basis in the Operating
Partnership below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally will be characterized
as a capital gain, and if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), such distributions and constructive
distributions will constitute long-term capital gain.
Depreciation Deductions Available to the Partnerships
The Operating Partnership's assets other than cash consist largely of
appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction carry over their depreciation
schedules. Accordingly, the Operating Partnership's depreciation deductions
for its real property are based largely on the
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historic depreciation schedules for the Properties. The real property is
being depreciated over a range of 15 to 39 years using various methods of
depreciation which were determined at the time that each item of depreciable
property was placed in service. Any real property purchased or developed by
the Operating Partnership will be depreciated over at least 39 years.
Sale of Partnership Property
Generally, any gain realized by the Operating Partnership on the sale
of property held by it, if the property is held for more than one year, will
be long-term capital gain, except for any portion of such gain that is
treated as depreciation or cost recovery recapture. However, under the REIT
requirements, the Company's share as a partner of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "-- Taxation of the Company," above. Such
prohibited transaction income will also have an adverse effect upon the
Company's ability to satisfy the income tests for status as a REIT. Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. A safe harbor is
provided for certain sales of real estate assets held for at least four
years, which sales might otherwise be considered prohibited transactions. The
safe harbor applies to a sale only if, among other things, the expenditures
made during the four-year period preceding the date of the sale which are
includible in the basis of the property sold do not exceed 30% of the
property's net sales price and in the taxable year of the sale either the
REIT has made no more than seven sales of property or the aggregate adjusted
bases of all the properties sold does not exceed 10% of the adjusted bases of
all of the REIT's properties as of the beginning of the year. The Operating
Partnership has held and intends to continue to hold the Properties for
investment with a view to long-term appreciation, to engage in the business
of acquiring, developing, owning and operating and leasing the Properties and
to make such occasional sales of the Properties, including peripheral land,
as are consistent with the Company's and the Operating Partnership's
investment objectives. No assurance can be given, however, that every
property sale by the Operating Partnership will constitute a sale of property
held for investment.
Conversion Rights
In the event that the Company acquires limited partnership units in
the Operating Partnership ("OP Units") from the holders thereof by reason of
the exercise of conversion rights, the Company will have a basis in the OP
Units so acquired equal to the fair market value of the stock it issues, or
the amount of cash it pays, in exchange for such OP Units. If the Operating
Partnership makes an election under section 754, the portion of the Operating
Partnership's basis in its assets with respect to the Company will be
adjusted to reflect the price paid for the OP Units. If the Company acquires
all the OP Units, the Operating Partnership will terminate and the Company
will, as a result, directly own all the Properties directly held by the
Operating Partnership, and the basis of those Properties in the hands of the
Company would be determined by reference to the Company's basis in its
partnership interest in the Operating Partnership.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its Domestic Stockholders and the IRS the
amount of distributions paid during each calendar year and the amount of tax
withheld, if any. Under certain circumstances, Domestic Stockholders may be
subject to backup withholding at a rate of 31% with respect to distributions
paid. Backup withholding will apply only if the holder (i) fails to furnish
its taxpayer identification number ("TIN") (which, for an individual, would
be his Social Security number), (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of
interest and dividends, or (iv) under certain circumstances, fails to
certify, under penalty of perjury, that it has furnished a correct TIN and
has not been notified by the IRS that it is subject to backup withholding for
failure to report interest and dividend payments. Backup withholding will not
apply with respect to payments made to certain exempt recipients, such as
corporations and tax-exempt organizations.Domestic Stockholders should
consult their own tax advisors regarding their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption.
Backup withholding is not an additional tax.
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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.
EMPLOYEE BENEFIT PLANS
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN OF ANY SORT, WHETHER
OR NOT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED ("ERISA"), IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF ERISA, THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE
OFFERED SECURITIES 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, or
"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
- 24 -
<PAGE>
"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 a
security that is "widely held," "freely transferable," and either a part of a
class of securities registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the
end of the fiscal year of the issuer during which the offering occurred). The
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 Charter 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 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
- 25 -
<PAGE>
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.
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.
- 26 -
<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:
<TABLE>
<CAPTION>
Total
-----
<S> <C>
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...................................................... *
========
<FN>
- ---------
* To be completed by amendment.
</TABLE>
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 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 the liability of officers and
directors to the Company and its stockholders.
II-1
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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)
<FN>
- ---------
* To be filed by amendment or incorporated by reference prior to the
offering of the securities registered hereby, if applicable.
** Filed herewith.
+ Previously filed.
</TABLE>
II-2
<PAGE>
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 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 Securities 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 that are incorporated by reference in
the Registration Statement;
(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 a 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 April 22, 1998.
AGREE REALTY CORPORATION
/s/ Richard Agree
------------------------------------
Name: Richard Agree
Title: President and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title(s)
Date
/s/ Richard Agree President and Chairman of the
- ---------------------- Board (Principal Executive Officer)
Richard Agree
/s/ Kenneth Howe Vice President - Finance and
- ---------------------- Secretary (Principal Financial
Kenneth Howe and Accounting Officer)
II-4
<PAGE>
/s/ Edward Rosenberg
____________________________ Director
Edward Rosenberg
/s/ Farris G. Kalil
____________________________ Director
Farris G. Kalil
/s/ Michael Rotchford
____________________________ Director
Michael Rotchford
/s/ Ellis G. Wachs
____________________________ Director
Ellis G. Wachs
/s/ Gene Silverman
____________________________ Director
Gene Silverman
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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)
<FN>
- ---------
* To be filed by amendment or incorporated by reference prior to the
offering of the securities registered hereby, if applicable.
** Filed herewith.
+ Previously filed.
</TABLE>
II-6
Exhibit 5.1
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET
BALTIMORE, MARYLAND 21201-3018
410-539-2530 WASHINGTON
FAX: 410-539-0489 NEW YORK
PHILADELPHIA
EASTON
April 17, 1998
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, as amended, 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 our capacity as special Maryland counsel, 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 the date hereof, 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
<PAGE>
Agree Realty Corporation PIPER & MARBURY
April 17, 1998 L.L.P.
Page 2
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.
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
<PAGE>
Agree Realty Corporation PIPER & MARBURY
April 17, 1998 L.L.P.
Page 3
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 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 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.
Very truly yours,
/s/ Piper & Marbury L.L.P.
Exhibit 12.1
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
(THE COMPANY)
----------------------------------------------------
APRIL 22,
YEAR ENDED YEAR ENDED YEAR ENDED 1994 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (Loss) before extraordinary item $ 6,163,510 $ 4,633,295 $4,032,381 $2,393,158
Add:
Interest on indebtedness 5,200,851 5,717,126 4,186,492 2,856,661
Amortization of financing costs 410,361 408,436 247,195 179,374
----------- ----------- ---------- ----------
Earnings $11,774,722 $10,758,857 $8,466,068 $5,429,193
=========== =========== ========== ==========
Fixed charges and preferred stock
dividends:
Interest on indebtedness $ 5,318,743 $ 5,795,829 $4,246,244 $2,856,661
Amortization and financing costs 410,361 408,436 247,195 179,374
----------- ----------- ---------- ----------
Fixed charges 5,729,104 6,204,265 4,493,439 3,036,035
Add:
Preferred stock dividends -- -- -- --
----------- ----------- ---------- ----------
Combined fixed charges and
preferred stock dividends $ 5,729,104 $ 6,204,265 $4,493,439 $3,036,035
=========== =========== ========== ==========
Earnings coverage deficiency N/A N/A N/A N/A
=========== =========== ========== ==========
Ratio of earnings to fixed charges 2.06x 1.73x 1.88x 1.79x
=========== =========== ========== ==========
<CAPTION>
(PREDECESSOR ENTITIES)
-------------------------------------
JANUARY 1,
1994 TO YEAR ENDED YEAR ENDED
APRIL 21, DECEMBER 31, DECEMBER 31,
1994 1993 1992
---------- ------------ ------------
<S> <C> <C> <C>
Income (Loss) before extraordinary item $ 60,968 $ (22,654) $ (635,882)
Add:
Interest on indebtedness 2,559,695 8,623,084 9,058,829
Amortization of financing costs 31,395 189,232 125,760
---------- ----------- -----------
Earnings $2,652,058 $ 8,789,662 $ 8,548,707
========== =========== ===========
Fixed charges and preferred stock
dividends:
Interest on indebtedness $2,559,695 $ 8,623,084 $ 9,058,829
Amortization and financing costs 31,395 189,232 125,760
---------- ----------- -----------
Fixed charges 2,591,090 8,812,316 9,184,589
Add:
Preferred stock dividends -- -- --
---------- ----------- -----------
Combined fixed charges and
preferred stock dividends $2,591,090 $ 8,812,316 $ 9,184,589
========== =========== ===========
Earnings coverage deficiency N/A $ 22,654 $ 635,882
========== =========== ===========
Ratio of earnings to fixed charges 1.02x .99x .93X
========== =========== ===========
</TABLE>
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 11, 1998 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, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Troy, Michigan
April 21, 1998
