<PAGE>
As filed with the Securities and Exchange Commission on November 27, 1996
Registration No. 333-____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 54-1681657
(State of Incorporation) (I.R.S. Employer
Identification No.)
2345 Crystal Drive
Crystal City, Virginia 22202
(703) 920-8500
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
Ernest A. Gerardi, Jr.
President
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Virginia 22202
(703) 920-8500
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
------------------------
Approximate date of commencement of the proposed sale of the securities to the
public: From time to time after this Registration Statement becomes effective,
as determined by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, 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,
please check the following box. [ ].
------------------------
CALCULATION OF REGISTRATION FEE(1)
================================================================================
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Shares Amount to be Aggregate Price Aggregate Amount of
to be Registered Registered Per Share(2) Offering Price(2) Registration Fee
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share 1,500,000 $ 25.125 $ 37,687,500 $ 11,420.45
=========================================================================================================================
</TABLE>
(1) This Registration Statement also relates to 3,080,795 shares of Common
Stock previously registered under Registration Statement No. 33-93986 and
1,051,186 shares of Common Stock previously registered under Registration
Statement No. 333-8129.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) based on the average of the high and low
reported sales prices on the New York Stock Exchange on November 25, 1996.
------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included in this Registration Statement also relates to 3,080,795
shares of Common Stock, $.01 par value per share, previously registered and
remaining under the Registrant's Registration Statement No. 33-93986 and
1,051,186 shares of Common Stock, $.01 par value per share, previously
registered and remaining under the Registrant's Registration Statement No. 333-
8129. This Registration Statement constitutes Post-Effective Amendment No. 1 to
Registration Statement No. 33-93986 and Post-Effective Amendment No. 1 to
Registration No. 333-8129, which Post-Effective Amendments shall become
effective in accordance with Section 8(c) of the Securities Act of 1933.
<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 STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
- ----------
Preliminary Prospectus dated November 27, 1996
Subject to Completion
5,631,981 Shares
Charles E. Smith Residential Realty, Inc.
Common Stock
-------------------------
Charles E. Smith Residential Realty, Inc. (the "Company") is a self-
administered and self-managed equity real estate investment trust ("REIT") that
is engaged primarily in the acquisition, development, management and operation
of multifamily properties in the Washington, D.C. metropolitan area. The
Company, together with its subsidiaries, is a fully integrated real estate
organization with in-house acquisition, development, financing, marketing and
property management and leasing expertise.
This Prospectus relates to (i) the possible issuance by the Company of up to
4,702,520 shares (the "Redemption Shares") of common stock, par value $.01 per
share ("Common Stock"), if, and to the extent that, the Company, as general
partner of Charles E. Smith Residential Realty L.P. (the "Operating
Partnership"), elects to issue such Redemption Shares to holders of up to
4,702,520 units of limited partnership interest ("Units") in the Operating
Partnership, of which the Company is the sole general partner and owns
approximately 45% of the Units, upon the tender of such Units for redemption;
(ii) the offer and sale from time to time of up to 406,451 shares of outstanding
Common Stock of the Company (the "Original Restricted Shares") by the holders
thereof; (iii) the offer and sale from time to time by certain affiliates of the
Company of up to 523,010 shares of Common Stock (the "Original Affiliate
Shares"); and (iv) the offer and sale from time to time by the holders thereof
of any Redemption Shares that may be issued to and held by persons who may be
affiliates of the Company (such persons, together with the holders of the
Original Restricted Shares and the Original Affiliate Shares, the "Selling
Shareholders").
The Original Restricted Shares, the Original Affiliate Shares and 2,101,334
of the Units that may be redeemed for Redemption Shares (the "Original Units")
were issued in connection with the formation of the Company. Of the remaining
Units that may be redeemed for Redemption Shares, 2,050,000 Units were issued or
are authorized for issuance under certain benefit plans of the Operating
Partnership and 551,186 Units (the "Acquisition Units") were issued in
connection with the acquisition of certain properties during the fiscal year
ended December 31, 1995. The Company has registered the Redemption Shares, the
Original Restricted Shares and the Original Affiliate Shares to permit the
holders thereof to sell such shares without restriction in the open market or
otherwise, but the registration of such shares does not necessarily mean that
any of such shares will be offered or sold by the holders thereof. See "The
Company" and "Registration Rights."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "SRW." Ownership by any person of more than 9.8% of the Company's
Common Stock is restricted. See "Description of Common Stock."
------------------------
See "Risk Factors" beginning on page 5 for a discussion of certain factors
relating to an investment in the Securities.
------------------------
The Selling Shareholders from time to time may offer and sell shares of
Common Stock held by them (the "Secondary Shares") directly or through agents or
broker-dealers on terms to be determined at the time of sale. To the extent
required, the names of any agent or broker-dealer and applicable commissions or
discounts and any other required information with respect to any particular
offer will be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." Each of the Selling Shareholders reserves the right to accept or
reject, in whole or in part, any proposed purchase of the Secondary Shares.
The Selling Shareholders and any agents or broker-dealers that participate
with the Selling Shareholders in the distribution of Secondary Shares may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Secondary Shares may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Registration Rights" for
indemnification arrangements between the Company and the Selling Shareholders.
The Company will not receive any of the proceeds from the sale of any
Secondary Shares by the Selling Shareholders but has agreed to bear certain
expenses of registration of the Secondary Shares under Federal and state
securities laws, other than commissions and discounts of agents or broker-
dealers and transfer taxes, if any. The Company will acquire Units in the
Operating Partnership in exchange for any Redemption Shares that the Company may
issue to Unitholders.
<PAGE>
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
--------------------------
The date of this Prospectus is [ ], 1996.
2
<PAGE>
PROSPECTUS SUMMARY
This Summary is qualified in its entirety by the more detailed information
appearing elsewhere in this Prospectus. The offering of the Common Stock
pursuant to this Prospectus is referred to herein as the "Offering." As used
herein, the term "Company" means Charles E. Smith Residential Realty, Inc.,
Charles E. Smith Residential Realty L.P. and their predecessors and
subsidiaries or any of them, unless the context indicates otherwise. When used
in this document, the words "believes," "anticipates," and "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements indicate that assumptions have been used that are subject to a
number of risks and uncertainties which could cause actual financial results or
management plans and objectives to differ materially from those projected or
expressed herein, including: the effect of national and regional economic
conditions, particularly with regard to the levels of multifamily property
occupancy and rental growth in the Washington, D.C. metropolitan area; the
Company's ability to identify and secure additional properties and sites that
meet its criteria for acquisition or development; the acceptance of the
Company's financing plans by the capital markets, and the effect of prevailing
market interest rates and the pricing of the Company's stock; and other risks
described from time-to-time in the Company's filings with the Securities and
Exchange Commission. Given these uncertainties, readers are cautioned not to
place undue reliance on such statements. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein that may be made to reflect any
change in the Company's expectations with regard thereto or any future events
or change in circumstances or conditions upon which such statements are based.
The Company
The Company is a self-administered and self-managed equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. The Company,
together with its subsidiaries, is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing and property
management and leasing expertise. The Company's primary strategy for growth is
to acquire, develop, own and manage high quality multifamily properties for
long-term income generation and value appreciation.
The Company is the sole general partner and owned approximately 45% of the
Units in the Operating Partnership as of September 30, 1996. The other limited
partners of the Operating Partnership are the former limited and general
partners of partnerships that owned the properties, and the former owners of
certain property service businesses, acquired by the Operating Partnership
either at the time of its formation in June 1994 or at various times
thereafter. All of the Company's properties, property interests, and business
assets are owned by, and its operations conducted through, the Operating
Partnership and its subsidiaries. In addition, the Operating Partnership owns
100% of the nonvoting common stock, which represents 99% of the total economic
interest, of three operating companies (collectively, the "Property Service
Businesses") which provide property services to the properties owned by the
Operating Partnership and to other multifamily, retail, and office properties.
As of September 30, 1996, the Company, through the Operating Partnership, owned
42 multifamily apartment communities containing a total of 15,200 units (the
"Multifamily Properties") and two retail centers containing approximately
436,000 square feet of retail space (the "Retail Properties"), all located in
the Washington, D.C. metropolitan area.
3
<PAGE>
Risk Factors
Prospective investors and Unit holders should carefully consider the
matters discussed under "Risk Factors" prior to making an investment decision
regarding the Common Stock offered hereby.
Tax Status of the Company
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1994. As a REIT, the Company generally is not
subject to federal income tax on net income that it distributes to its
shareholders. REITs are subject to a number of organizational and operational
requirements, including a requirement that they currently distribute at least
95% of their taxable income. Even if the Company qualifies for taxation as a
REIT, the Company will be subject to certain federal, state and local taxes on
its income and property and to federal income and excise tax on its
undistributed income. The Property Service Businesses, which do not qualify as
REITs, also are subject to federal, state and local income taxes. See "Federal
Income Tax Considerations" and "Risk Factors--Certain Tax Risks."
Securities to be Offered
This Prospectus relates to (i) the possible issuance by the Company of up
to 4,702,520 Redemption Shares, if, and to the extent that, the Company elects,
as general partner of the Operating Partnership, to issue such Redemption
Shares to holders of up to 4,702,520 Units, upon the tender of such Units for
redemption, (ii) the offer and sale from time to time of up to 406,451 Original
Restricted Shares by the holders thereof, (iii) the offer and sale from time to
time by certain affiliates of the Company of up to 523,010 Original Affiliate
Shares and (iv) the offer and sale from time to time by the holders thereof of
any Redemption Shares that may be issued and held by persons who may be
affiliates of the Company. The Company will not receive any cash proceeds from
the issuance of the Redemption Shares or the sale of any Secondary Shares by
the Selling Shareholders, but will acquire Units in the Operating Partnership
in exchange for any Redemption Shares that the Company may issue to
Unitholders. The Company is registering the Redemption Shares and the
Affiliate Shares for sale to permit the holders thereof to sell such shares
without restriction in the open market or otherwise, but the registration of
such shares does not necessarily mean that any of such Units will be tendered
for redemption or that any such shares will be offered or sold by the holders
thereof; 1,500,000 of the Secondary Shares registered hereby for resale by an
affiliate of the Company are being registered solely for the purpose of
complying with the terms of a collateral agreement entered into by that
affiliate. During the nine months ended September 30, 1996, 235,388 Units were
redeemed by the Company for shares of Common Stock.
Pursuant to the agreement of limited partnership of the Operating
Partnership (the "Partnership Agreement"), each Unit may be tendered by its
holder to the Operating Partnership for redemption for cash equal to the fair
market value of a share of Common Stock at the time of the redemption (subject
to certain adjustments and certain restrictions applicable to Units held by
Robert Smith, Robert Kogod, and their families and affiliates). In addition,
the Company, as general partner of the Operating Partnership, has the right to
elect to acquire directly any Units tendered to the Operating Partnership for
redemption, rather than causing the Operating Partnership to redeem such Units.
The Company currently anticipates that it generally will elect to acquire
directly Units tendered for redemption and to issue shares of Common Stock in
exchange therefor rather than paying cash, although the determination whether
to pay cash or issue shares of Common Stock upon redemption of Units will be
made by the Company at the time
4
<PAGE>
Units are tendered for redemption. As a result, as of October 31, 1996, the
Company may from time to time issue up to 13,996,839 shares of Common Stock
upon the acquisition of Units tendered for redemption. With each such
acquisition, the Company's interest in the Operating Partnership will increase.
5
<PAGE>
RISK FACTORS
Prospective investors and Unit holders should carefully consider,
among other factors, the matters described below.
Special Considerations Applicable to Redeeming Partners
Tax Consequences of Redemption of Units. The exercise by a holder of
Units (a "Limited Partner") of his or her right to require the redemption of his
or her Units will be treated for tax purposes as a sale of the Units by the
Limited Partner. Such a sale will be fully taxable to the redeeming Limited
Partner and such redeeming Limited Partner will be treated as realizing for tax
purposes an amount equal to the sum of the cash or the value of the Common Stock
received in the exchange plus the amount of the Operating Partnership
nonrecourse liabilities considered allocable to the redeemed Units at the time
of the redemption. It is possible that the amount of gain recognized (or even
the tax liability resulting from such gain) could exceed the amount of cash and
the value of other property (e.g., Redemption Shares) received upon such
disposition. See "Redemption of Units--Tax Consequences of Redemption." In
addition, the ability of the Limited Partner to sell a substantial number of
Redemption Shares in order to raise cash to pay tax liabilities associated with
redemption of Units may be restricted due to the Company's relatively low
trading volume, and, as a result of fluctuations in the stock price, the price
the Limited Partner receives for such shares may not equal the value of his
Units at the time of redemption. See "--Common Stock Price Fluctuations and
Trading Volume" below.
Potential Change in Investment Upon Redemption of Units. If a Limited
Partner exercises the right to require the redemption of his or her Units, such
Limited Partner may receive, at the Operating Partnership's election, cash or
shares of Common Stock of the Company in exchange for the Units. If the Limited
Partner receives cash, the Limited Partner will no longer have any interest in
the Company and will not benefit from any subsequent increases in share price
and will not receive any future distributions from the Company (unless the
Limited Partner currently owns or acquires in the future additional shares of
Common Stock or Units). If the Limited Partner receives shares of Common Stock,
the Limited Partner will become a shareholder of the Company rather than a
holder of Units in the Operating Partnership. Although an investment in shares
of Common Stock is substantially equivalent to an investment in Units in the
Operating Partnership, there are some differences between ownership of Units and
ownership of Common Stock relating to, among other things, form of organization,
permitted investments, policies and restrictions, management structure,
compensation and fees, investor rights and Federal income taxation. These
differences, some of which may be material to investors, are discussed in
"Redemption of Units--Comparison of Ownership of Units and Common Stock."
Impact on Guarantees. Certain recipients of Units issued in
connection with the Formation Transactions joined in a guarantee of certain
indebtedness of the Operating Partnership (the "Institutional Loan Guarantee").
A Limited Partner who joined in the Institutional Loan Guarantee and who
exercises his or her redemption right will remain liable to the lender with
respect to the Institutional Loan Guarantee even though that Limited Partner has
no continuing interest (or a reduced interest) in the Operating Partnership.
See "Redemption of Units--Continuing Liability Under the Institutional Loan
Guarantee."
Effect on Share Price of Shares Available for Future Sale
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Common Stock. As of October 31, 1996, the Company had
outstanding 9,957,625 shares of Common Stock and had reserved for
6
<PAGE>
possible issuance upon redemption of Units approximately 19.1 million additional
shares of Common Stock. All of the 8,632,800 shares issued or sold by the
Company in the Initial Offering, 416,867 other shares issued in connection with
the Formation Transactions and 907,958 shares issued upon redemption of Units
through October 31, 1996, are tradable without restriction under the Securities
Act (unless such shares are held by affiliates of the Company). 4,762,520 shares
issuable upon any future redemption of Units, or issuable under employee benefit
plans (the "Plans"), will be tradable without restriction under the Securities
Act pursuant to the Registration Statements on Form S-8 filed by the Company in
August, 1994, on Form S-3 filed by the Company in June 1995 and July 1996,
respectively or the Registration Statement of which this Prospectus is a part.
An additional 9,287,660 Units are eligible to be redeemed for cash or, at the
Company's election, shares of Common Stock (such shares will be restricted from
sale in the public market unless registered under the Securities Act). In
addition, 1,000,000 shares have been reserved for issuance under the Company's
Dividend and Distribution Investment and Share Purchase Plan, which plan was
registered with the Commission on December 22, 1995. Also, the Company currently
has on file with the Commission an effective registration statement which would
allow the sale of up to $200 million in unspecified securities, including shares
of Common Stock and securities convertible into shares of Common Stock. No
prediction can be made about the effect that future sales of shares of Common
Stock will have on the market prices of shares. See "Shares Available for Future
Sale."
Common Stock Price Fluctuations and Trading Volume
A number of factors may adversely influence the price of the Company's
Common Stock in the public markets, many of which are beyond the control of the
Company. In particular, an increase in market interest rates may lead
purchasers of shares of Common Stock to demand a higher annual yield from
distributions by the Company in relation to the price paid for shares, which
could adversely affect the market price of the shares of Common Stock. In
addition, although the Company's Common Stock is listed on the New York Stock
Exchange, the daily trading volume of REITs in general and the Company's shares
in particular may be lower than the trading volume for certain other industries.
As a result, investors in the Company who desire to liquidate substantial
holdings at a single point in time may find that they are unable to dispose of
such shares in the market without causing a substantial decline in the market
value of such shares.
Conflicts of Interest
Dealings with Affiliates of the Company. The outside interests of
certain officers and directors of the Company (including Robert H. Smith and
Robert P. Kogod) may give rise to certain conflicts of interest concerning the
fulfillment of their responsibilities as officers and directors of the Company,
and such conflicts of interest could result in decisions that do not fully
reflect the interests of all shareholders. Mr. Kogod continues to hold minor
general partnership interests (less than 1%) in two limited partnerships (in
which the Company holds an interest) that cannot be transferred without the
consent of the other partners, and he and Mr. Smith continue to hold interests
in another limited partnership that owns one multifamily and three commercial
properties which were not acquired by the Company because another general
partner declined to consent to the bifurcation of the multifamily and commercial
properties and the indebtedness thereon. Mr. Smith continues to hold a general
and a limited partnership interest (7.4% in total) and a general partnership
interest 1%, respectively, in two limited partnerships that were withdrawn from
participation in the Formation Transactions to avoid delay that could have
resulted from litigation threatened by a limited partner of these partnerships.
Mr. Kogod continues to own general partnership interests (ranging from a 1.3% to
a 4.5% ownership interest) in three general partnerships that own multifamily
properties which were not acquired by the Company because another general
partner declined to consent to participation by such partnerships in the
Formation
7
<PAGE>
Transactions. In addition, Messrs. Smith, Kogod and other executive officers of
the Company continue to hold an interest in a limited partnership that owns a
multifamily property that was not acquired by the Company because of the amount
of its third party indebtedness in relation to its value. Messrs. Smith and
Kogod and their families also held a substantial interest in the partnership
that sold to the Company for $4.7 million a parcel of land located near the
Worldgate Centre in Northern Virginia on which the Company developed a 320-unit
garden apartment project. In connection with such development, the Operating
Partnership entered into an agreement with Charles E. Smith Construction, Inc.
(a construction and commercial and condominium development company), which is
owned by Messrs. Smith and Kogod and their spouses, to manage such development
for a fee equal to 4% of hard construction costs. Messrs. Smith and Kogod
continue to have interests in Charles E. Smith Management, Inc. (which provides
property management and leasing services to office and other commercial
properties), a substantial number of partnerships that own office and other
properties (including limited partnership interests or minority stock ownership
in unaffiliated partnerships and corporations that own or manage multifamily
properties), and the tenants that lease and operate health clubs in the Retail
Properties. The Company expects to continue to provide all property services
(including property management and leasing) for such affiliated multifamily
properties and certain property services (other than property management and
leasing) for certain unaffiliated multifamily and commercial properties.
Tax Consequences Upon Sale or Refinancing of Properties. Holders of
Units may experience different and more adverse tax consequences than the
Company upon the sale or reduction of indebtedness on any of the Properties.
Therefore, such holders, including Messrs. Smith and Kogod, and the Company, may
have different objectives regarding the appropriate pricing and timing of any
sale or refinancing of the Properties. While the Company, as the sole general
partner of the Operating Partnership, has the exclusive authority to determine
whether and on what terms to sell or refinance an individual Property, certain
members of the Board of Directors are holders of Units, and their status as Unit
holders may influence the Company not to sell particular Properties, even though
such sale might otherwise be financially advantageous to the Company and its
shareholders, or may influence the Company not to pay down or refinance
indebtedness on a particular Property with a significant level of debt. See
"Federal Income Tax Considerations." The Company has no current plans to sell
Properties.
Risks of Conflicts of Interest. Although the Company has adopted
certain policies and has entered into agreements with Messrs. Smith and Kogod
designed to minimize the adverse effects from certain of these potential
conflicts of interest, there can be no assurance that these policies and
agreements always will be successful in eliminating the influence of such
conflicts. Consequently, the Company is subject to the risk that if such
policies and agreements are unsuccessful, decisions could be made at the Company
level that might fail to reflect fully the interests of all shareholders.
Changes in Policies Without a Vote of Shareholders
The major policies of the Company, including its policies with respect
to investment, financing, growth, acquisitions, development, debt capitalization
and distributions, are determined by its Board of Directors. Although it has no
present intention to amend or revise these and other policies, the Board of
Directors may do so from time to time without a vote of the shareholders of the
Company. The Company cannot change its policy of seeking to maintain its
qualification as a REIT, however, without the approval of its shareholders.
Changes in the Company's policies may not fully serve the interests of all
shareholders.
8
<PAGE>
Risks Associated with Leverage
No Limitations on Debt. The Company intends to fund acquisitions and
development of properties primarily through short-term borrowings, and also out
of undistributed cash flow from operating activities. The Company expects to
finance or refinance such properties on a longer term basis when market
conditions are appropriate either with long-term indebtedness or equity
financing, depending upon the economic conditions at the time of refinancing.
Moreover, the Company currently has on file with the Commission effective
registration statement which would allow the sale of up to $200 million in
unspecified securities, including debt securities. The Company's debt-to-total
market capitalization ratio (i.e., the ratio of total indebtedness to the market
value of issued and outstanding Common Stock and Units plus total indebtedness)
(the "Debt-to-Total Market Capitalization Ratio") as of September 30, 1996 was
50.7%. The Company has adopted a policy of incurring debt (including debt
incurred under its line of credit) only if upon such incurrence the Company's
Debt-to-Total Market Capitalization Ratio would be 60% or less. The Company's
Articles of Incorporation, as amended (the "Charter"), however, do not contain
any limitation on the amount or percentage of indebtedness that the Company may
incur in the future. Accordingly, the Company could modify the current policy
at any time. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that, in turn, could
increase the Company's risk of default on its obligations and adversely affect
the Company's funds from operations and ability to make expected distributions
to its shareholders.
Limitations of Debt Policy. The Company has established its debt
policy relative to the market capitalization of the Company rather than to the
book value of its assets, a ratio that is frequently employed. The market
capitalization of the Company, however, varies depending on the price at which
the Common Stock trades and may not reflect the fair market value of the
underlying assets of the Company at all times, which may result in the Company's
indebtedness at any particular time being substantially in excess of 60% of the
underlying value of its assets. Although the Company will consider factors
other than market capitalization in making decisions regarding the incurrence of
indebtedness (such as the estimated market value of such properties upon
refinancing and the ability of particular properties and the Company as a whole
to generate cash flow to cover expected debt service), there can be no assurance
that the Debt-to-Total Market Capitalization Ratio (or the ratio of indebtedness
to any other measure of asset value) will be an accurate measure of the
Company's ability to incur indebtedness while continuing to make distributions
to shareholders at expected levels.
Debt Financing; Uncertainty of Ability to Refinance Balloon Payments
on Debt. The Company will be subject to the risks associated with debt
financing, including the risk that existing indebtedness on the Properties that
is secured by some or all of the Properties (which in most cases will not have
been fully amortized at maturity) (the "Secured Debt"), including the debt
incurred by the Company and its subsidiaries at the time of the Formation
Transactions, will not be able to be refinanced at maturity on favorable terms
or at all, or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness, and the risk that necessary capital expenditures
for such purposes as renovations and reletting space will not be able to be
financed. Higher interest rates at the time of refinancing could have an
adverse effect on distributions. In addition, some of the Company's
indebtedness is cross-collateralized among Properties so that a failure of an
individual Property to generate cash flow necessary for scheduled debt
repayments may place a larger number of Properties at risk of foreclosure. The
Company does not expect to have sufficient funds to make all of the balloon
payments of principal when due under the Secured Debt within one to thirteen
years and other mortgages on the Properties. There can be no assurance that the
Company will be able to refinance this indebtedness or to otherwise obtain funds
by selling assets or by raising equity. If a Property is mortgaged to secure
payment of indebtedness and the Company
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is unable to meet mortgage payments, the mortgagee could foreclose on the
Property, which would result in a loss of income and asset value to the Company.
Risks of Rising Interest Rates. The Company currently has little
variable rate mortgage indebtedness outstanding. Should the Company incur
additional variable rate debt in the future (which it expects to do in
connection with acquisitions and development), a significant rise in interest
rates could adversely affect the Company's results of operations and its ability
to make distributions to its shareholders. Changes in the Company's interest
expenses also will affect the Company's net income and funds from operations.
Risks Associated with Property Services
For the twelve months ended December 31, 1995 and the nine months
ended September 30, 1996, approximately 9.1% and 7.89%, respectively, of the
Company's net operating income before intercompany interest, depreciation and
amortization was generated through the Property Service Businesses with respect
to services provided to properties not owned by the Company. The Property
Service Businesses will continue to be subject to the risks associated with
providing these services to affiliated and unaffiliated multifamily, retail and
office properties. These risks include the risk that management, leasing and
other service contracts with property owners will be lost to competitors; that
such contracts will not be renewed upon expiration or will not be renewed on
terms consistent with current terms; that the rental revenues upon which
management fees are based will decline as a result of general real estate market
conditions or specific market factors affecting properties managed by the
Property Service Businesses, resulting in decreased management fee income; that
leasing and other service activity generally may decline; and that the Property
Service Businesses may not be retained to provide certain property services that
property owners are not obligated to retain the Company to provide under
existing contractual arrangements. Each of these developments could adversely
affect the ability of the Property Service Businesses to make expected
distributions to shareholders. In addition, the restrictions applicable to
REITs under the Code may limit the Company's ability to expand its Property
Service Businesses, and net income from such businesses will be subject to
corporate income tax.
Lack of Voting Control over Property Service Businesses
The Company owns 100% of the nonvoting common stock, which represents
99% of the equity, of each Property Service Business. The Property Service
Businesses conduct the Company's property services business for properties not
owned by the Company. The members of the boards of directors of the Property
Service Businesses are Messrs. Smith, Kogod and Ernest A. Gerardi, Jr., the
Company's Chief Operating Officer. Separate partnerships consisting of certain
executives active in the management of the Company and the Property Service
Businesses and adult children of Messrs. Smith and Kogod own 100% of the voting
common stock, representing 1% of the equity, of each Property Service Business.
Therefore, such holders of the voting stock have the ability to elect and remove
all members of the boards of directors of the Property Service Businesses.
Although the Company's right to receive distributions with respect to its
nonvoting common stock cannot be changed by the holders of the voting common
stock, the Company is not able to elect directors of the Property Service
Businesses, and, therefore, it does not have the right to control the day-to-day
decisions of the Property Service Businesses. As a result, decisions relating
to the day-to-day operations of the Property Service Businesses may not always
reflect the interests of the Company and all of its shareholders.
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Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. The effective yields available from equity investments in real estate
depend in large part on the amount of income generated and expenses incurred.
The Company's income and ability to make distributions to its shareholders is
dependent upon the ability of its properties to generate income in excess of
operating expenses, debt service and necessary capital expenditures. Income from
multifamily and retail properties may be adversely affected by the general
economic climate, local real estate conditions (such as an oversupply of, or a
reduction in demand for, apartments and retail space), the attractiveness of the
properties to tenants and shoppers, the quality and philosophy of management,
the ability of the owner to provide adequate maintenance and (with respect to
the apartments) insurance, and increased operating costs (including real estate
taxes). In addition, income from properties and real estate values also are
affected by such factors as the costs of governmental regulation, including
zoning, tenants' rights and tax laws, the potential for liability under
applicable laws, interest rate levels and the availability of financing. The
Company's income would be adversely affected if a significant number of tenants
were unable to pay rent or if apartments or retail space could not be rented on
favorable terms. Certain significant expenditures associated with each equity
investment in a property ( such as mortgage payments, if any, real estate taxes
and maintenance costs) generally are not reduced when circumstances cause a
reduction in income from the property. If any of the above occurred, the
Company's ability to make expected distributions to its shareholders could be
adversely affected.
Risks Related to Retail Properties. With respect to the Retail
Properties, the Company is subject to the risks that upon expiration of leases
for space in the Retail Properties, the leases may not be renewed, the space may
not be relet, or the terms of the renewal or reletting (including the cost of
required renovations or concessions to tenants) may be less favorable than
current terms. In addition, the Company is subject to the risks that if sales by
retail tenants decline sufficiently, tenants may not be able to pay their
minimum rents, and that if a tenant were to default on rental payments, the
Company could experience delays and costs in enforcing its rights as lessor. If
any of the above occurred, the Company's ability to make expected distributions
to shareholders could be adversely affected.
Competition. All of the Multifamily Properties are located in developed
areas that include other multifamily properties. The number of competitive
multifamily properties in a particular area could have a material effect on the
Company's ability to lease apartment units and on the rents charged. In
addition, other forms of single- and multifamily residential properties provide
housing alternatives to tenants and potential tenants of the Multifamily
Properties. The Retail Properties face competition from other retail properties.
The Company also faces competition from other real estate companies that provide
management, leasing and other services similar to those currently provided by
the Company.
Dependence on the Washington, D.C. Metropolitan Area Market. All of the
Properties are located in the Washington, D.C. metropolitan area market. While
the Company may pursue acquisitions and development in other markets, a decline
in the economy or rental activities in this market may adversely affect the
ability of the Company to make distributions to its shareholders.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid and, therefore, tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. Under
the terms of the Secured Debt, the sale of certain of the Properties is either
prohibited or significantly restricted for the five to seven years following the
Initial Offering. In addition, the Code places limits on the Company's ability
to sell properties held for fewer than four years. These restrictions could make
it difficult for the Company to sell Properties during such
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time without adversely affecting returns to shareholders, even if a sale were in
the interest of such shareholders.
Changes in Laws. Increases in real estate taxes and income, service or
transfer taxes cannot always be passed through to tenants in the form of higher
rents, and may adversely affect the Company's funds from operations and its
ability to make distributions to its shareholders. Similarly, changes in laws
increasing the potential liability for environmental conditions existing on
Properties or increasing the restrictions on environmental discharges or other
conditions, as well as changes in laws affecting construction and safety
requirements, may result in significant unanticipated expenditures, which would
adversely affect the Company's cash available for distributions.
Investments in Mortgages. Although the Company currently has no plans to
invest in mortgages, it may invest in mortgages in the future. If the Company
were to invest in mortgages, it would be subject to the risks of such
investment, which include the risks that borrowers may not be able to make debt
service payments or pay principal when due, that the value of mortgaged property
may be less than the amounts owed, and that interest rates payable on the
mortgages may be lower than the Company's cost of funds. If the Company were to
invest in mortgages and if any of the above occurred, cash available for
distributions could be adversely affected.
Regulatory Risks. The Properties may be subject to various forms of
regulation, including regulation under the Fair Housing Amendments Act of 1988
(the "FHA"), the Americans with Disabilities Act (the "ADA") and, in the case of
Properties located in the District of Columbia and built before 1976, local rent
control ordinances. Under the FHA, the Company is required to make reasonable
accommodations for persons with disabilities in rules, policies and
modifications related to the Multifamily Properties when necessary to afford
such persons equal opportunity to use, or obtain full enjoyment of, the
Properties. Noncompliance with the FHA could result in the imposition of fines
or an award of damages to private litigants. The Company believes the Properties
are in compliance with the FHA in all material respects. The ADA requires
removal of structural barriers to access by persons with disabilities in certain
public areas. Noncompliance with the ADA could result in the imposition of fines
or an award of damages to private litigants. The ADA does not, however, apply to
multifamily properties, such as apartment complexes, except to the extent that
portions of such facilities, such as a leasing office, are open to the public.
The costs of any alterations or additions required to date have been included in
the operating budget for each affected Property. All costs for remaining
modifications are expected to be paid from cash flow from operating activities
and reserves established for this purpose.
As of September 30, 1996, eleven of the Properties, representing 3,713
units or 24.4% of the total apartment units owned by the Company, which were
built prior to 1976 and are located in the District of Columbia, are subject to
the District's rent control laws that potentially restrict a property owner's
ability to increase rents and to recover increases in operating expenses and the
costs of capital improvements. Although these rent control provisions currently
allow the maximum rent "ceiling" to be increased annually in response to several
factors, recent legislative changes have limited the Company's ability to take
full advantage of the available "ceilings" in any one year. Thus, no assurance
can be given that the Company will be able to raise rents under the new
legislation to levels that reflect future market rates.
Uninsured Loss. The Company carries comprehensive liability, fire,
flood, extended coverage and rental loss insurance with respect to the
Properties with policy specification and insured limits customarily carried for
similar properties. Certain types of losses (such as from wars), however, may be
either uninsurable or not economically insurable. Should an uninsured loss
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occur, the Company could lose both its capital invested in, and anticipated
profits from, one or more Properties.
District of Columbia Tenants' Rights
Under the District of Columbia Rental Housing Conversion and Sale Act of
1980 (the "Conversion Act"), in the event of a "sale" of a residential property
in the District of Columbia, the tenants have a right of first refusal to
purchase the property as well as a right to match offers made on the property by
prospective purchasers. A transfer of all of the partnership interests of a
partnership that owns such property, or a transfer of all of the stock of a
corporation that owns such property, is considered to be a "sale" within the
meaning of the Conversion Act. Consequently, essentially all future acquisitions
and sales by the Company of residential properties located in the District of
Columbia will be subject to the rights of the tenants of such properties to
purchase the properties at the offered price. Such tenants' rights may make it
difficult for the Company to purchase or sell residential properties located in
the District of Columbia even if a purchase or sale were in the interests of the
Company's shareholders.
Acquisition and Development Risks
The Company intends to continue development of new multifamily and retail
properties (including expansions of existing Properties on the land adjacent to
those Properties) and to consider acquisitions of multifamily and retail
properties where it believes that such development or acquisition is consistent
with the business strategies of the Company. New project development is subject
to a number of risks, including construction delays or cost overruns that may
increase project costs, financing risks as described above, the failure to meet
anticipated occupancy or rent levels as and when expected, failure to receive
required zoning, occupancy and other governmental permits and authorizations and
changes in applicable zoning and land use laws, which may result in the
incurrence of development costs in connection with projects that are not pursued
to completion. In addition, because the Company must distribute 95% of its
taxable income in order to maintain its qualification as a REIT, the Company
anticipates that new developments and acquisitions will be financed primarily
through lines of credit or other forms of secured or unsecured construction
financing. If permanent debt or equity financing is not available on acceptable
terms to refinance such new developments or acquisitions are undertaken without
permanent financing, further development activities or acquisitions may be
curtailed or cash available for distribution to shareholders or to meet debt
service obligations may be adversely affected. Acquisitions entail risks that
investments will fail to perform in accordance with expectations and that
judgments with respect to the costs of improvements to bring an acquired
property up to standards established for the market position intended for that
property will prove inaccurate, as well as general investment risks associated
with any new real estate investment. See "Real Estate Investment Risks" above.
Risks of Limitations on Acquisition and Change in Control
The Company's Charter contains the following provisions, which may limit
the ability of outside parties to acquire control of the Company:
Ownership Limit. The 9.8% ownership limit described under "--Possible
Adverse Consequences of Limits on Ownership of Shares" below may have the effect
of precluding acquisition of control of the Company by a third party without the
consent of the Board of Directors even if a change in control were in the
interest of the shareholders of the Company.
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Staggered Board. The Board of Directors of the Company has three classes
of directors. Directors for each class are chosen for a three-year term upon the
expiration of the then current class's term. The staggered terms for directors
may affect the shareholders' ability to change control of the Company even if a
change in control were in the shareholders' interest.
Capital Stock. The Company's Charter authorizes the Board of Directors
to issue up to 145,000,000 shares of capital stock and to establish the
preferences and rights of any capital stock issued. Currently, 5,000,000 of
those shares are not classified as part of an existing class of stock and could
be classified by the Board of Directors without a shareholder vote into one or
more series of capital stock having special preferences or rights. See
"Description of Common Stock." The issuance of capital stock having special
preferences or rights could have the effect of delaying or preventing a change
in control of the Company even if a change in control were in the shareholders'
interest.
Required Consent of the Operating Partnership for Merger. The Company may
not merge, consolidate or engage in any combination with another person or sell
all or substantially all of its assets unless such transaction includes a merger
of, or a sale of assets by, the Operating Partnership, which transaction would
require approval of the holders of a majority of the Units. The Company
currently holds less than a majority of the Units. Thus, this voting requirement
might limit the possibility for acquisition or change in control of the Company,
even if a change in control were in the shareholders' interest. In this regard,
the holders of Units might incur different, and more adverse, tax consequences
as a result of such an acquisition or change in control that could motivate them
to oppose such a transaction that is in the shareholders' interest.
Exemptions from Maryland Business Combinations Law. Under the Maryland
General Corporation Law ("MGCL"), certain "business combinations" (including
certain issuances of equity securities) between a Maryland corporation and any
person who owns 10% or more of the voting power of the corporation's shares of
capital stock (an "Interested Shareholder") must be approved by a supermajority
(80%) of voting shares. In addition, an Interested Shareholder may not engage
in a business combination for five years following the date he or she became an
Interested Shareholder. The Company, as permitted by the MGCL, has exempted any
business combinations involving Messrs. Smith and Kogod and persons affiliated
or acting in concert with them. Consequently, Messrs. Smith and Kogod are
permitted to enter into business combinations with the Company without the
supermajority shareholder approval otherwise required by the MGCL.
Possible Adverse Consequences of Limits on Ownership of Shares
In order to maintain its qualification as a REIT, not more than 50% in
number or value of the outstanding capital stock of the Company may be owned,
directly or constructively under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. In order to protect the
Company from the risk of losing its REIT status due to a concentration of
ownership among its shareholders, the Company has limited ownership of the
issued and outstanding shares of capital stock by any single shareholder to 9.8%
of the outstanding Common Stock (determined taking into account certain
ownership attribution rules). The Board of Directors may waive the percentage
ownership limit for certain entities (but not individuals) if it is satisfied
that ownership in excess of this limit will not jeopardize the Company's status
as a REIT and the Board of Directors otherwise decides such action is in the
best interests of the Company. The Board of Directors has waived the percentage
ownership limit in one instance, in the case of an investment adviser which
holds Common Stock as the record owner on behalf of other beneficial owners. A
transfer of shares of capital stock to a person who, as a result of the
transfer, violates the ownership limit will be void. Shares of Common Stock
acquired in breach of the limitation will be automatically exchanged for
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shares of a separate class of stock not entitled to vote or to participate in
distributions ("Excess Stock"). In addition, ownership, either directly or
indirectly under the applicable attribution rules of the Code, of stock in
excess of the ownership limit generally will result in the conversion of those
shares into Excess Stock. The Company will direct a holder of Excess Stock to
sell such stock to the Company for the lesser of the price paid or the average
closing price for the five trading days preceding the sale or to sell such stock
to a person whose ownership of the stock does not violate the ownership limit.
See "Description of Common Stock--Restrictions on Transfer; Excess Stock" for
additional information regarding the ownership limits.
Adverse Consequences of Failure to Qualify as a REIT; Other Tax Liabilities
Tax Consequences of the Failure of the Company to Qualify as a REIT. A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders as long as it distributes currently at
least 95% of its taxable income. The Company believes it is qualified as a REIT,
but no assurance can be given that it will be able to remain so qualified.
Qualification as a REIT involves the application of highly technical and complex
Code provisions as to which there are only limited judicial and administrative
interpretations. Certain facts and circumstances that may be wholly or partially
beyond the Company's control may affect its ability to qualify as a REIT. In
addition, no assurance can be given that new legislation, Treasury Regulations,
administrative interpretations, or court decisions will not significantly change
the tax laws with respect to the Company's qualification as a REIT or the
federal income tax consequences of such qualification.
Among the requirements for REIT qualification is that the value of any
one issuer's securities held by a REIT may not exceed 5% of the value of the
REIT's total assets on certain testing dates. See "Federal Income Tax
Considerations--Requirements for Qualification--Asset Tests." The Company and
its senior management believe that the value of the securities of each of the
Property Service Businesses will be less than 5% of the value of the Company's
total assets, based on its analysis of the operating cash flows of each of the
Property Service Businesses, but there can be no assurance that the IRS might
not contend otherwise.
If the Company fails to satisfy the 5% value requirement or otherwise
fails to qualify as a REIT, it will be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. In addition, unless entitled to relief under certain statutory
provisions, the Company will be disqualified from treatment as a REIT for the
four taxable years following the year during which REIT qualification is lost.
The additional tax would significantly reduce the cash flow available for
distributions by the Company to its shareholders. See "Federal Income Tax
Considerations--Taxation of the Company."
REIT Distribution Requirements and Potential Impact of Borrowings. To
obtain the favorable tax treatment associated with REITs qualifying under the
Code, the Company generally will be required each year to distribute to its
shareholders at least 95% of its net taxable income. In addition, the Company
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income, 95% of its capital gain net income and
100% of its undistributed income from prior years.
Differences in timing between the receipt of income, the payment of
expenses, and the inclusion of such income and the deduction of such expenses in
arriving at taxable income (of the Company or the Operating Partnership), or the
effect of nondeductible capital expenditures, the creation of reserves or
required debt or amortization payments, could require the Company, directly or
through the Operating Partnership, to borrow funds on a short-term basis to meet
the
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distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT. In such instances, the Company might need
to borrow funds in order to avoid adverse tax consequences even if management
believed that then prevailing market conditions were not generally favorable for
such borrowings.
Consequences of Failure of the Operating Partnership to Qualify as a
Partnership. If the IRS were to challenge successfully the tax status of the
Operating Partnership or any of its subsidiary partnerships as a partnership for
federal income tax purposes, the Operating Partnership or such affected
subsidiary partnership would be taxable as a corporation. In such event, since
the value of the Company's ownership interest in the Operating Partnership
exceeds, and the value of the Operating Partnership's interest in the affected
subsidiary partnership could exceed, 5% of the Company's assets, the Company
could cease to qualify as a REIT. In addition, the imposition of a corporate
tax on the Operating Partnership or any of such subsidiary partnerships would
reduce the amount of cash available for distribution to the Company and its
shareholders. See "Federal Income Tax Considerations--Tax Aspects of the
Company's Investment in the Operating Partnership and Property Service
Businesses."
Other Tax Liabilities. Notwithstanding the Company's qualification as a
REIT, the Company will be subject--through the Operating Partnership and the
Property Service Businesses--to certain federal, state and local taxes on its
income and property. See "Federal Income Tax Considerations--Tax Aspects of the
Company's Investment in the Operating Partnership and Property Service
Businesses." In particular, the Company will derive a portion of its operating
cash flow from the activities of the Property Service Businesses. While the
taxable income of the Property Service Businesses initially has been reduced
significantly as a result of interest deductions on promissory notes issued by
the Operating Partnership in the Formation Transactions and amortization
deductions, the taxable income resulting from the Property Service Businesses
will be subject to federal, state and local income tax. In addition, income
derived by the Company from Properties located in the District of Columbia will
be subject to the District of Columbia Unincorporated Business Tax. See "Federal
Income Tax Considerations--Other Tax Considerations--State and Local Taxes;
District of Columbia Unincorporated Business Tax" and "--Tax Aspects of the
Company's Investment in the Operating Partnership and Property Service
Businesses--Property Service Businesses." Finally, if the Company has net
income from any prohibited transaction, such income will be subject to a 100%
tax. See "Federal Income Tax Considerations--Requirements for Qualification--
Gross Income Tests."
Potential Claims in Connection with Formation Transactions
Although the transfers of the Properties to the Company were
overwhelmingly approved by the partners of the partnerships that formerly held
the Properties (the "Former Property Partnerships"), and the general partners
thereof believe that the terms of such transfers were fair to and in the best
interests of the Former Property Partnerships and their partners, there can be
no assurance that one or more partners of Former Property Partnerships will not
seek to challenge such transfers or other aspects of the Formation Transactions
or that such challenges will not be successful. Claims could be made against the
Company relating to its interpretation of the procedures required in certain
Former Property Partnership agreements for sales of Properties. These procedures
require that certain rights of first refusal be granted to dissenting partners
in certain transactions involving sales of Properties. The Company believes that
these procedures either were followed in accordance with such agreements or were
not applicable, but no assurance can be given that such dissenting partners may
not successfully assert actions for damages or specific performance. Messrs.
Smith and Kogod and Charles E. Smith Management, Inc. have agreed to indemnify
the Company and the Operating Partnership against costs and liabilities that may
be incurred by the Company or the Operating Partnership in connection with any
such
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litigation filed within one year after the closing of the Initial Offering.
However, there can be no assurance as to the consequences of any such potential
litigation.
Potential Influence of Certain Officers and Directors
The officers and directors of the Company include Messrs. Smith and Kogod.
Messrs. Smith and Kogod and their families together own approximately 20% of the
outstanding Common Stock and Units as of September 30, 1996. Messrs. Smith and
Kogod have, and are expected to continue to have, substantial influence on the
affairs of the Company, which influence might not be consistent with the
interests of other shareholders, and (if their Units were redeemed for Common
Stock) on the outcome of any matters submitted to the Company's shareholders for
approval.
Dependence on Key Personnel
The Company is dependent on the efforts of its executive officers and
other key members of senior management. The loss of the services of one or more
of these individuals could have an adverse effect on the operations of the
Company.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property.
Such laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. The
presence of such substances, or the failure properly to remediate such
substances, may adversely affect the owner's ability to sell the real estate or
to borrow using the real estate as collateral. In addition to clean-up actions
brought by federal, state and local agencies, the presence of hazardous wastes
or materials on a property could result in personal injury or similar claims by
private plaintiffs. The Company believes that no Former Property Partnership has
been notified by any governmental authority of any liability or other claim in
connection with any of the Properties that the Company believes is material to
its financial condition or results of operations.
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THE COMPANY
The Company is a self-administered and self-managed equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. The Company,
together with its subsidiaries, is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing and property
management and leasing expertise. The Company's primary strategy for growth is
to acquire, develop, own and manage high quality multifamily properties for
long-term income generation and value appreciation.
The Company is the sole general partner of and holds approximately 45% of
the Units in the Operating Partnership. The other limited partners of the
Operating Partnership are the former limited and general partners of the Former
Property Partnerships and the former owners of the property service businesses
acquired by the Operating Partnership at the time of its formation in June 1994
or thereafter. All of the Company's properties, property interests, and
business assets are owned by, and its operations conducted through, the
Operating Partnership and its subsidiaries. In addition, the Operating
Partnership owns 100% of the nonvoting common stock, which represents 99% of the
total economic interest of the Property Service Businesses, which provide
property services to the properties owned by the Operating Partnership and to
other multifamily, retail, and office properties. The three Property Service
Businesses are: Smith Realty Company, which provides management, leasing,
financing, and insurance services; Consolidated Engineering Services, Inc.,
which provides engineering and technical services; and Smith Management
Construction, Inc., which provides tenant construction and renovation services.
As the sole general partner of the Operating Partnership, the Company has the
exclusive power to manage and conduct the business of the Operating Partnership,
subject to the consent of the holders of Units in connection with the sale of
all or substantially all of the assets of the Operating Partnership.
As of September 30, 1996, the Company, through the Operating Partnership,
owned 42 Multifamily Properties and two Retail Properties, all located in the
Washington, D.C. metropolitan area.
The Company's executive offices are located at 2345 Crystal Drive,
Crystal City, Arlington, Virginia 22202, and its telephone number is
(703) 920-8500. The Company is a Maryland corporation formed in 1993. The
Operating Partnership is a Delaware limited partnership formed in 1993; it
commenced business operations on June 30, 1994.
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DESCRIPTION OF COMMON STOCK
General
The authorized capital stock of the Company consists of 145,000,000
shares of capital stock, $.01 par value, of which 95,000,000 shares are
classified as Common Stock, 45,000,000 shares are classified as Excess Stock and
5,000,000 shares are not classified. Under the Company's Charter, the Board of
Directors may issue, without any further action by the shareholders, shares of
capital stock in one or more series having such preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as the Board of Directors
may determine and as may be evidenced by articles supplementary to the Charter
adopted by the Board of Directors. The following description of the terms and
provisions of the shares of capital stock of the Company and certain other
matters does not purport to be complete and is subject to and qualified in its
entirety by reference to the applicable provisions of Maryland law and the
Company's Charter.
Each holder of Common Stock is entitled to one vote at shareholder
meetings for each share of Common Stock held. Neither the Charter nor the Bylaws
provide for cumulative voting for the election of directors. Subject to the
prior rights of any series of preferred stock that may be classified and issued,
holders of the Common Stock of the Company are entitled to receive, pro-rata,
such dividends as may be declared by the Board of Directors out of funds legally
available therefor, and are also entitled to share, pro-rata, in any other
distributions to shareholders. The Company pays quarterly dividends on its
Common Stock and it expects to continue to do so. The Company depends upon
distributions from the Operating Partnership to fund its dividends to
shareholders.
There are no redemption or sinking fund provisions and no direct
limitations in any indenture or agreement on the payment of dividends.
Holders of Common Stock do not have any preemptive rights or other rights
to subscribe for additional shares.
Classification and Removal of Board of Directors; Other Provisions
The Charter of the Company provides for the Board of Directors to be
divided into three classes of directors, with each class to consist as nearly as
possible of an equal number of the directors. The terms of office of one class
of directors (3 directors) will expire at the 1997 annual meeting of
shareholders; the term of the next class of directors (2 directors) will expire
at the 1998 annual meetings of shareholders; and the term of the third class of
directors (2 directors) will expire at the 1999 annual meeting of shareholders.
At each annual meeting of shareholders, the class of directors to be elected at
such meeting will be elected for a three year term, and the directors in the
other two classes will continue in office. Because holders of Common Stock have
no right to cumulative voting for the election of directors, at each annual
meeting of shareholders, the holders of a majority of the shares of Common Stock
will be able to elect all of the successors of the class of directors whose term
expires at that meeting.
The Charter also provides that, except for any directors who may be
elected by holders of a class or series of capital stock other than Common
Stock, directors may be removed only for cause and only by the affirmative vote
of shareholders holding at least 80% of all the votes entitled to be cast for
the election of directors. Vacancies on the Board of Directors may be filled by
the affirmative vote of the remaining directors and, in the case of a vacancy
resulting from the removal of a director, by the shareholders by a majority of
the votes entitled to be cast for the election of directors. A vote of
shareholders holding at least 80% of all the votes entitled to be cast thereon
is required to amend, alter, change, repeal or adopt any provisions inconsistent
with the foregoing
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classified board and director removal provisions. Under the Charter, the power
to amend the Bylaws of the Company is vested exclusively in the Board of
Directors, and the shareholders will not have any power to adopt, alter or
repeal the Bylaws absent amendment to the Charter. These provisions may make it
more difficult and time consuming to change majority control of the Board of
Directors of the Company and, thus, reduce the vulnerability of the Company to
an unsolicited proposal for the takeover of the Company or the removal of
incumbent management.
Because the Board of Directors has the power to establish the preferences
and rights of additional series of capital stock without further shareholder
vote, the Board of Directors may afford the holders of any series of senior
capital stock preferences, powers and rights, voting or otherwise, senior to the
rights of holders of Common Stock. The issuance of any such senior capital
stock could have the effect of delaying or preventing a change in control of the
Company. The Board of Directors, however, currently does not contemplate the
issuance of any series of capital stock other than the Common Stock and Excess
Stock (see "--Restrictions on Transfer; Excess Stock" below).
Special Statutory Requirements for Certain Transactions
Business Combination Statute. The MGCL establishes special requirements
with respect to "business combinations" between Maryland corporations and
"interested shareholders" unless exemptions are applicable. Among other things,
the law prohibits for a period of five years a merger and other specified or
similar transactions between a Company and an interested shareholder and
requires a supermajority vote for such transactions after the end of the five-
year period.
"Interested Shareholders" are all persons owning beneficially, directly
or indirectly, more than 10% of the outstanding voting stock of the Maryland
corporation. "Business Combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to Interested Shareholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an Interested Shareholder
or its affiliates for a period of five years after the date on which the
shareholder first became an Interested Shareholder. Thereafter, the transaction
may not be consummated unless recommended by the board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66-2/3% of the votes entitled
to be cast by all holders of outstanding shares of voting stock other than the
Interested Shareholder. A Business Combination with an Interested Shareholder
that is approved by the board of directors of a Maryland corporation at any time
before an Interested Shareholder first becomes an Interested Shareholder is not
subject to the special voting requirements. An amendment to a Maryland
corporation's charter electing not to be subject to the foregoing requirements
must be approved by the affirmative vote of at least 80% of the votes entitled
to be cast by all holders of outstanding shares of voting stock and 66-2/3% of
the votes entitled to be cast by holders of outstanding shares of voting stock
who are not Interested Shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply to any Business
Combination of a corporation with a shareholder who was an Interested
Shareholder on the date of the shareholder vote.
As permitted by Maryland law, the Company has exempted from the Maryland
business corporation statute any Business Combination with Messrs. Smith or
Kogod, and all persons, firms and corporations affiliated with, or acting in
concert or as a group with, either of them, as well as any Business Combination
that involves the redemption of Units for shares of Common Stock.
Control Share Acquisition Statute. Maryland law imposes limitations on
the voting rights in a "control share acquisition." The Maryland statute defines
a "control share acquisition" at the 20%, 33-1/3% and 50% acquisition levels,
and requires a 2/3 shareholder vote (excluding shares
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owned by the acquiring person and certain members of management) to accord
voting rights to stock acquired in a control share acquisition. The statute also
requires Maryland corporations to hold a special meeting at the request of an
actual or proposed control share acquirer generally within 50 days after a
request is made with the submission of an "acquiring person statement," but only
if the acquiring person (a) posts a bond for the cost of a meeting and (b)
submits a definitive financing agreement to the extent that financing is not
provided by the acquiring person. In addition, unless the charter or by-laws
provide otherwise, the statute gives the Maryland corporation, within certain
time limitations, various redemption rights if there is a shareholder vote on
the issue and the grant of voting rights is not approved, or if an acquiring
person statement is not delivered to the target within 10 days following a
control share acquisition. Moreover, unless the charter or by-laws provide
otherwise, the statute provides that if, before a control share acquisition
occurs, voting rights are accorded to control shares that result in the
acquiring person having majority voting power, then minority shareholders have
appraisal rights. An acquisition of shares may be exempted from the control
share statute, provided that a charter or bylaw provision is adopted for such
purpose prior to the control share acquisition. Pursuant to the foregoing, the
Company's Charter provides that any acquisition of shares of capital stock of
the Company that is not prohibited by the terms of the restrictions on transfer
described below under "--Restrictions on Transfer; Excess Stock" is exempted
from the provisions of the control share acquisition statute.
Restrictions on Transfer; Excess Stock
Ownership Limits. The Charter contains certain restrictions on the
number of shares of capital stock that individual shareholders may own. For the
Company to qualify as a REIT under the Code, no more than 50% in value of its
outstanding shares of capital stock may be owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year (other than the first taxable year in which the Company qualifies
as a REIT). In addition, the capital stock must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year (together with the restriction
referred to in the preceding sentence, the "Existing Holder Limit"). The Charter
of the Company contains restrictions on the acquisition of capital stock,
including Common Stock, which are intended to ensure compliance with these
requirements.
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") in number or value of the issued and
outstanding shares of Common Stock. The Board of Directors in its discretion may
waive the Ownership Limit or the Existing Holder Limit with respect to a holder
that is an entity (but not an individual) if such holder's ownership will not
then or in the future jeopardize the Company's status as a REIT.
Messrs. Smith and Kogod, members of their families and entities that they
control are subject to the Ownership Limit, and they also are subject to certain
additional special ownership limitations. Messrs. Smith and Kogod, members of
their families and entities that they control are prohibited from acquiring
additional shares of Common Stock (or rights to acquire shares), if, as a result
of, and giving effect to, such acquisition, any tenant would be regarded as a
Related Party Tenant for purposes of Section 856(b)(2)(B) of the Code (see
"Federal Income Tax Considerations--Requirements for Qualification--Gross Income
Tests") and the Company would be considered to receive more than 0.5% of its
gross annual revenue from Related Party Tenants.
Notwithstanding any of the foregoing ownership limits, no holder may own
or acquire, either directly or constructively under the applicable attribution
rules of the Code, any shares of any class of the Company's stock if such
ownership or acquisition (i) would cause more than 50% in value of the Company's
outstanding stock to be owned, either directly or constructively under the
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applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in the Company's
stock being beneficially owned by less than 100 persons (determined without
reference to any rules of attribution), or (iii) would otherwise result in the
Company failing to qualify as REIT.
If any shareholder purports to transfer shares to a person and either the
transfer would result in the Company failing to qualify as a REIT, or such
transfer would cause the transferee to hold shares in excess of more than the
applicable Ownership Limit or Existing Holder Limit, the purported transfer
shall be null and void, and the intended transferee will acquire no rights or
economic interest in the shares, and the shareholder will be deemed to have
transferred the shares of Common Stock to the Company in exchange for shares of
Excess Stock, which will be deemed to be held by the Company as trustee of a
trust for the exclusive benefit of the person or persons to whom the shares can
be transferred without violating the ownership limit. In addition, if any
person owns, either directly or constructively under the applicable attribution
rules of the Code, shares of capital stock in excess of the applicable Ownership
Limit, such person will be deemed to have exchanged the shares of capital stock
that cause the Ownership Limit to be exceeded for an equal number of shares of
Excess Stock, which will be deemed to be held by the Company as trustee of a
trust for the exclusive benefit of the person or persons to whom the share can
be transferred without violating the Ownership Limit.
A person who holds or transfers shares such that shares of capital stock
shall have been deemed to be exchanged for Excess Stock will not be entitled to
vote the Excess Stock and will not be entitled to receive any dividends or
distributions (any dividend or distribution paid on shares of capital stock
prior to the discovery by the Company that such shares have been exchanged for
Excess Stock shall be repaid to the Company upon demand, and any dividend or
distribution declared but unpaid shall be rescinded). Such person shall have
the right to designate a transferee of such Excess Stock so long as
consideration received for designating such transferee does not exceed a price
that is equal to the lesser of (i) in the case of a deemed exchange for Excess
Stock resulting from a transfer, the price paid for the shares in such transfer
or, in the case of a deemed exchange for Excess Stock resulting from some other
event, the fair market value, on the date of the deemed exchange, of the shares
deemed exchanged, and (ii) the fair market value of the shares for which such
Excess Stock will be deemed to be exchanged on the date of the designation of
the transferee. For these purposes, fair market value on a given date is
determined by reference to the average closing price for the five preceding
days. The share of Excess Stock so transferred will automatically be deemed to
be exchanged for shares of capital stock. Excess Stock may be purchased by the
Company for the lesser of the price paid or the average closing price for the
five days immediately preceding such purchase. The Company may elect to redeem
the Excess Stock for Units.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then the
intended transferee of any Excess Stock may be deemed, at the option of the
Company, to have acted as an agent on behalf of the Company in acquiring such
Excess Stock and to hold such Excess Stock on behalf of the Company.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage
as required by the Code or regulations thereunder) in number or value of the
issued and outstanding shares of capital stock, including Common Stock, must
file a written notice with the Company containing the information specified in
the Charter no later than January 31 of each year. In addition, each shareholder
shall be required upon demand to disclose to the Company in writing such
information
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as the Company may request in order to determine the effect on the
Company's status as a REIT of such shareholder's direct, indirect and
constructive ownership of the shares.
The foregoing ownership limitations also may have the effect of preventing
or hindering any attempt to acquire control of the Company without the consent
of the Board of Directors.
Transfer Agent and Registrar
The Transfer Agent, Registrar and Dividend Disbursing Agent for the shares
of Common Stock is First Union National Bank of North Carolina.
DESCRIPTION OF UNITS
General
Holders of Units (including the Company in its capacity as general partner)
are entitled to share in cash distributions from, and in the profits and losses
of, the Operating Partnership.
The Operating Partnership has two classes of Units: (i) Class A Units are
Units that were issued to Limited Partners in connection with the formation of
the Operating Partnership, the Initial Offering and related transactions, and
any Units issued thereafter that are not designated as Class B Units, and (ii)
Class B Units are Units issued to Limited Partners admitted after June 30, 1994
in exchange for their contribution to the Operating Partnership of real property
or other assets, unless the Company elects to issue Class A Units. With the
exception of distributions (as described under "Distributions; Allocations of
Income and Loss--Class A Units; Class B Units"), restrictions on transfer (as
described under "Restrictions on Transfer of Units by Limited Partners"), and
restrictions on redemption (as described under "Redemption of Units"), Class B
Units have the same rights, preferences, powers and duties as Class A Units.
All references herein to Units include both Class A Units and Class B Units,
unless otherwise indicated.
Holders of Units have the rights of limited partners under the Partnership
Agreement and the Delaware Revised Uniform Limited Partnership Act (the "Act").
The Units are not listed on any exchange or quoted on any national market
system. The Partnership Agreement imposes certain restrictions on the transfer
of Units, as described below.
Distributions; Allocations of Income and Loss
Distributions Generally. The Partnership Agreement provides for the
quarterly distribution of Available Cash, as determined in the manner provided
in the Partnership Agreement. If no Class B Units are issued and outstanding
during a quarter, Available Cash is distributed for such quarter to the holders
of Class A Units on the record date for such quarter in proportion to their
percentage interests in the Operating Partnership. "Available Cash" is
generally defined as net income plus depreciation and other adjustments and
minus reserves, principal payments on debt and capital expenditures and other
adjustments. Neither the Company nor the Limited Partners are entitled to any
preferential or disproportionate distributions of Available Cash. Each Unit
generally receives distributions in the same amount paid on each share of Common
Stock.
Class A Units; Class B Units. If Class B Units are issued and outstanding
for any portion of a quarter, Available Cash for such quarter is distributed
among holders of Class A Units (which includes the Company) and Class B Units on
the applicable record date in accordance with their percentage interests in the
Operating Partnership and the weighted average number of days during
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the quarter that the Class A Units and Class B Units, respectively, were issued
and outstanding. Class A Units are always treated for this purpose as having
been outstanding for the entire quarter regardless of when they are issued.
Consequently, Limited Partners holding Class A Units (which includes the
Company) on the applicable record date will receive distributions of Available
Cash in accordance with their percentage interests in the Operating Partnership
for the entire quarter. Limited Partners holding Class B Units on the applicable
record date will receive distributions of Available Cash in accordance with
their percentage interests in the Operating Partnership for the weighted average
number of days during that quarter for which such limited partners held their
Class B Units. Holders of Class B Units who are admitted to the Operating
Partnership between the end of a quarter and the record date applicable to
distributions for such quarter will not receive any distributions with respect
to the preceding quarter, but will receive distributions of Available Cash with
respect to the portion of the quarter in which their Class B Units were issued.
Each Class B Unit will be converted automatically into a Class A Unit on the day
immediately following the record date for distributions with respect to the
quarter in which the Class B Units were issued.
Allocations of Income and Loss. The Partnership Agreement provides that if
the Operating Partnership operates at a net loss, net losses shall be allocated
to the Company and the Limited Partners in proportion to their respective
percentage interests in the Operating Partnership, provided that net losses that
would have the effect of creating a deficit balance in a Limited Partner's
capital account (as specially adjusted for such purpose) ("Excess Losses") will
be reallocated to the Company, as general partner of the Operating Partnership.
The Partnership Agreement also provides that, if the Operating Partnership
operates at a net profit, net income shall be allocated first to the Company to
the extent of Excess Losses with respect to which the Company has not previously
been allocated net income, and any remaining net income shall be allocated in
proportion to the respective percentage interests of the Company and the Limited
Partners.
Liability of General Partner and Limited Partners
The Company, as general partner of the Operating Partnership, is liable for
all general recourse obligations of the Operating Partnership to the extent not
paid by the Operating Partnership and to the extent that the assets of the
Operating Partnership are not sufficient for payment thereof (except for certain
tort liabilities, for which the general partner has joint and several
liability). The Operating Partnership is required to reimburse the Company in
the event it pays any obligations of the Operating Partnership. The Company is
not liable for the nonrecourse obligations of the Operating Partnership.
The Limited Partners are not required to make additional contributions to
the Operating Partnership. Assuming that a Limited Partner does not take part in
the control of the business of the Operating Partnership and otherwise acts in
conformity with the provisions of the Partnership Agreement, the liability of
the Limited Partner for obligations of the Operating Partnership under the
Partnership Agreement and the Act are limited, subject to certain possible
exceptions, generally to the loss of the Limited Partner's investment in the
Operating Partnership represented by his Units. Under the Act, a Limited Partner
may not receive a distribution from the Operating Partnership if, at the time of
the distribution and after giving effect thereto, the liabilities of the
Operating Partnership (other than liabilities to parties on account of their
interests in the Operating Partnership and liabilities for which recourse is
limited to specified property of the Operating Partnership) exceed the fair
value of the Operating Partnership's assets (other than the fair value of any
property subject to nonrecourse liabilities of the Operating Partnership but
only to the extent of such liabilities). The Act provides that a Limited Partner
who receives a distribution knowing at the time that it violates the foregoing
prohibition is liable to the Operating Partnership for the amount of the
distribution. Unless otherwise agreed, such a Limited Partner will not be
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liable for the return of such distribution after the expiration of three years
from the date of such distribution.
The Operating Partnership is qualified to conduct business in the District
of Columbia, the State of Maryland and the Commonwealth of Virginia, and may
qualify to conduct business in the future in certain other jurisdictions.
Maintenance of limited liability may require compliance with certain legal
requirements of those jurisdictions and certain other jurisdictions. Limitations
on the liability of a Limited Partner for the obligations of a limited
partnership have not been clearly established in many jurisdictions.
Accordingly, if it were determined that the right, or exercise of the right by
the Limited Partners, to make certain amendments to the Partnership Agreement or
to take other action pursuant to the Partnership Agreement constituted "control"
of the Operating Partnership's business for the purposes of the statutes of any
relevant jurisdiction, the Limited Partners might be held personally liable for
the Operating Partnership's obligations. The Operating Partnership will operate
in a manner that the general partner deems reasonable, necessary and appropriate
to preserve the limited liability of the Limited Partners.
Sales of Assets
Under the Partnership Agreement, the Company generally has the exclusive
authority to determine whether, when and on what terms the assets of the
Operating Partnership will be sold. A sale of all or substantially all of the
assets of the Operating Partnership (or a merger of the Operating Partnership
with another entity), however, requires an affirmative vote of a majority of the
outstanding Units (including Units held by the Company).
Removal of the General Partner; Transfer of the General Partner's Interest
The Partnership Agreement provides that the Limited Partners may not remove
the Company as general partner of the Operating Partnership. The Company may
not transfer any of its interests as general or limited partner in the Operating
Partnership except in connection with a merger or sale of all or substantially
all its assets. The Company also may not sell all or substantially all of its
assets, or enter into a merger unless the sale or merger includes the sale of
all or substantially all of the assets of, or the merger of, the Operating
Partnership with partners of the Operating Partnership receiving substantially
the same consideration as holders of shares of Common Stock.
Restrictions on Transfer of Units by Limited Partners
Limited partners who hold Class A Units may transfer such Units to members
of the immediate family, any trust set up for the benefit of members of the
immediate family, or any partnership consisting only of members of the immediate
family, but may not transfer such Units to any other person without obtaining
the prior written consent of the general partner, which consent may be withheld
in the sole and absolute discretion of the general partner. Subject to
compliance with federal and state securities law restrictions, Limited Partners
who hold Class B Units may transfer their Class B Units to members of the
immediate family, any trust set up for the benefit of members of the immediate
family, or any partnership consisting only of members of the immediate family,
but may not transfer such Units to any other persons without obtaining the prior
written consent of the general partner, which consent may be withheld in the
sole and absolute discretion of the general partner. In addition, all transfers
of Units are subject to the requirement that the holder obtain an opinion of
legal counsel to the Operating Partnership that the transfer would not (a)
result in the Operating Partnership's being treated as an association taxable as
a corporation for federal income tax purposes; (b) result in the termination of
the Operating Partnership for federal income tax purposes; or (c) adversely
affect the ability of the Company to continue to qualify as a REIT or subject
the Company to any additional taxes under the Code. No transfer, however, may
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be effectuated through an "established securities market" or a "secondary market
(or the substantial equivalent thereof)" within the meaning of the Code.
Limited Partners who hold Class B Units (or Class A Units into which Class B
Units were converted) will be subject, in addition to the limitations set forth
above, to such restrictions on transfer as may be set forth in the contribution
agreement or Partnership Agreement amendment pursuant to which their capital
contributions are to be made to the Operating Partnership.
The right of any permitted transferee of Units to become a substitute
limited partner is subject to the consent of the general partner, which the
general partner may withhold in its sole and absolute discretion. If the general
partner does not consent to the admission of a transferee of Units as a
substitute limited partner, the transferee will succeed to all economic rights
and benefits attributable to such Units (including the right of redemption), but
will not become a Limited Partner or possess any other rights of Limited
Partners (including the right to vote).
Redemption of Units
Subject to certain limitations, Limited Partners who hold Class A Units may
require that the Operating Partnership redeem their Class A Units by notifying
the Operating Partnership. Unless the Company, as general partner of the
Operating Partnership, elects to assume and perform the Operating Partnership's
redemption obligation, as outlined below, the redeeming Limited Partner will
receive cash in an amount equal to the market value of the Units to be redeemed.
The market value of a Unit for this purpose is the average of the closing
trading price of a share of Common Stock (or substitute information, if no such
closing price is available) for the ten trading days before the day on which the
redemption notice was given. In lieu of the Operating Partnership's redeeming
Units, the Company will have the right to elect to acquire the Units directly
from a Limited Partner seeking a redemption, and upon such acquisition, become
the owner of the Units. Such an acquisition by the Company will be treated as a
sale of the Units to the Company for federal income tax purposes. Upon
redemption or the direct acquisition of Units by the general partner, the
Limited Partner's right to receive distributions for the Units redeemed will
cease. At least 1,000 Units must be redeemed each time the redemption right is
exercised (or all remaining Units owned by the Limited Partner if less than
1,000 Units). The redemption generally will occur on the tenth business day
after the notice to the Operating Partnership, except that no redemption can
occur if delivery of shares of Common Stock would be prohibited under the
ownership limit or other provisions of the Company's Articles of Incorporation.
In this regard, members of the Smith and Kogod families and entities that they
control are prohibited from exercising their right to require the redemption of
Units that they hold if the issuance of shares of Common Stock to them by the
Company would be prohibited under the special restrictions contained in the
Charter that are applicable to their acquisition and ownership of shares.
Limited Partners who hold Class B Units (or Class A Units into which Class
B Units were converted) will not be permitted to redeem their Units for shares
of Common Stock or for cash, at the option of the Company, for at least one year
following their admission to the Operating Partnership or such longer or shorter
term as may be set forth in the contribution agreement pursuant to which their
capital contributions are made to the Operating Partnership.
No Withdrawal by Limited Partners
No Limited Partner has the right to withdraw from or reduce his or her
capital contribution to the Operating Partnership, except as a result of the
redemption or transfer of his or her Units pursuant to the terms of the
Partnership Agreement.
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Issuance of Additional Interests
The Company is authorized, without the consent of the Limited Partners, to
cause the Operating Partnership to issue additional Units (including, without
limitation, Class A Units or Class B Units) to itself, to the Limited Partners
or to other persons for such consideration and on such terms and conditions as
the Company deems appropriate. If additional Units are issued to the Company,
then the Company must issue additional shares of Common Stock and must
contribute to the Operating Partnership the entire proceeds received by the
Company from such issuance. In addition, the Company may cause the Operating
Partnership to issue to itself, to the Limited Partners or to other persons
additional partnership interests in different series or classes, which may be
senior to the Units, for such consideration, on such terms and conditions, and
with such designations and preferences as the Company deems appropriate
(provided, however, that if such partnership interests are issued to the
Company, they must be issued in conjunction with an offering of securities of
the Company having substantially similar rights, in which the proceeds thereof
are contributed to the Operating Partnership). Consideration for additional
partnership interests may be cash or any property or other assets permitted by
the Act. No Limited Partner has preemptive, preferential or similar rights with
respect to additional capital contributions to the Operating Partnership or the
issuance or sale of any partnership interests therein.
Meetings; Voting
The Partnership Agreement does not provide for annual meetings of the
Limited Partners, and the Company does not anticipate calling such meetings.
Meetings of the Limited Partners may be called only by the Company, on its own
motion or upon written request of Limited Partners owning at least 25% of the
Units. Limited partners may vote either in person or by proxy at meetings. Any
action that is required or permitted to be taken by the Limited Partners of the
Operating Partnership may be taken either at a meeting of the Limited Partners
or without a meeting if consents in writing setting forth the action so taken
are signed by Limited Partners owning not less than the minimum Units that would
be necessary to authorize or take such action at a meeting of the Limited
Partners at which all Limited Partners entitled to vote on such action were
present. On matters in which Limited Partners are entitled to vote, each Limited
Partner (including the Company to the extent it holds Units) will have a vote
equal to the number of Units he or she holds in the Operating Partnership. A
transferee of Units who has not been admitted as a substitute Limited Partner of
record with respect to such Units will have no voting rights with respect to
such Units, even if such transferee holds other Units as to which it has been
admitted as a Limited Partner.
Amendment of the Partnership Agreement
Amendments to the Partnership Agreement may be proposed by the Company or
by Limited Partners owning at least 25% of the Units. Generally, the Partnership
Agreement may be amended with the approval of the Company, as general partner,
and Limited Partners (including the Company) holding a majority of the Units.
Certain amendments that would, among other things, convert a Limited Partner's
interest into a general partner's interest; modify the limited liability of a
Limited Partner; alter the interest of a partner in profits or losses, or the
rights to receive any distributions; alter or modify the redemption right
described above; or cause the termination of the Operating Partnership at a time
or on terms inconsistent with those set forth in the Partnership Agreement must
be approved by the Company and each Limited Partner that would be adversely
affected by such amendment. Notwithstanding the foregoing, the Company, as
general partner, will have the power, without the consent of the Limited
Partners, to amend the Partnership Agreement as may be required to (1) add to
the obligations of the Company as general partner or surrender any right or
power granted to the Company as general partner; (2) reflect the admission,
substitution, termination or withdrawal of partners in accordance with the terms
of the Partnership
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Agreement; (3) establish the rights, powers, duties and preferences of any
additional partnership interests issued in accordance with the terms of the
Partnership Agreement; (4) reflect a change of an inconsequential nature that
does not materially adversely affect the Limited Partners, or cure any
ambiguity, correct or supplement any provisions of the Partnership Agreement not
inconsistent with law or with other provisions of the Partnership Agreement, or
make other changes concerning matters under the Partnership Agreement that are
not otherwise inconsistent with the Partnership Agreement or law; or (5) satisfy
any requirements of federal or state law. Certain provisions affecting the
rights and duties of the Company as general partner (e.g., restrictions on the
Company's power to conduct businesses other than owning Units) may not be
amended without the approval of a majority of the Units not held by the Company.
Dissolution, Winding Up and Termination
The Operating Partnership will continue until December 31, 2092, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term, and its affairs wound up upon the
occurrence of the earliest of: (1) the withdrawal of the Company as general
partner without the permitted transfer of the Company's interest to a successor
general partner (except in certain limited circumstances); (2) the sale of all
or substantially all of the Operating Partnership's assets and properties; (3)
the entry of a decree of judicial dissolution of the Operating Partnership
pursuant to the provisions of the Act or the entry of a final order for relief
in a bankruptcy proceeding of the general partner; (4) the entry of a final
judgment ruling that the general partner is bankrupt or insolvent; (5) (i) from
and after June 27, 1994 through December 31, 2013, an election by the Company,
unless any Limited Partner who became a Limited Partner on June 30, 1994 and who
holds Units issued at such time objects to such dissolution in writing, (ii)
from and after January 1, 2014 through December 31, 2043, an election by the
Company, unless Limited Partners who became Limited Partners on June 30, 1994
and who hold at least five percent (5%) of the Units issued at such time object
to such dissolution in writing and (iii) on or after January 1, 2044, an
election by the Company, in its sole and absolute discretion. Upon dissolution,
the Company, as general partner, or any liquidator will proceed to liquidate the
assets of the Operating Partnership and apply the proceeds therefrom in the
order of priority set forth in the Partnership Agreement.
SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. As of October 31, 1996, the Company had outstanding 9,957,625
shares of Common Stock and had reserved for possible issuance upon redemption of
Units approximately 19.1 million additional shares of Common Stock. All of the
8,632,800 shares issued or sold by the Company in the Initial Offering, 416,867
other shares issued in connection with the Formation Transactions and 907,958
shares issued upon redemption of Units through October 31, 1996, are tradable
without restriction under the Securities Act (unless such shares are held by
affiliates of the Company). 4,762,520 shares issuable upon any future
redemption of Units, or issuable under employee benefit plans (the "Plans"),
will be tradable without restriction under the Securities Act pursuant to the
Registration Statements on Form S-8 filed by the Company in August, 1994, on
Form S-3 filed by the Company in June 1995 and July 1996, respectively or the
Registration Statement of which this Prospectus is a part. An additional
9,287,660 Units are eligible to be redeemed for cash or, at the Company's
election, shares of Common Stock (such shares will be restricted from sale in
the public market unless registered under the Securities Act). In addition,
1,000,000 shares have been reserved for issuance under the Company's Dividend
and Distribution Investment and Share Purchase Plan, which plan was registered
with the Commission on December 22, 1995. Also, the Company currently has on
file with the Commission an effective registration statement which would allow
the
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<PAGE>
sale of up to $200 million in unspecified securities, including shares of Common
Stock and securities convertible into shares of Common Stock.
In certain circumstances, holders of Redemption Shares may elect to sell
their shares in accordance with the exemptions provided by Rule 144 under the
Securities Act rather than pursuant to this Prospectus. In general, under Rule
144 as currently in effect, a person (or persons whose shares are aggregated in
accordance with the Rule) who has beneficially owned his or her shares for at
least two years, as well as any persons who may be deemed "affiliates" of the
Company (as defined in the Securities Act), would be entitled to sell within any
three month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding number of shares or the average weekly
trading volume of the shares during the four calendar weeks preceding each such
sale. After shares are held for three years, a person who is not deemed an
"affiliate" of the Company is entitled to sell such shares under Rule 144
without regard to the volume limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through the
use of one or more intermediaries, controls, or is controlled by, or is under
common control with, such issuer.
The Company also has established the Plans for the purpose of attracting
and retaining executive officers and other key employees. As of September 30,
1996, options to purchase up to 815,000 Units have been granted, 80,000 Units
(40,000 of which are restricted securities) have been issued to executive
officers, directors and certain key employees and 2,015,000 additional Units or
shares of Common Stock were reserved for future issuance under the Plans. As
described elsewhere herein, Units are redeemable for cash or shares of Common
Stock in certain circumstances.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares for future sale, will have
on the market price prevailing from time to time. Sales of substantial amounts
of shares of Common Stock (including shares issued upon the redemption of Units
or the exercise of options), or the perception that such sales could occur,
could adversely affect prevailing market price of the shares.
REGISTRATION RIGHTS
The Company is a party to a Registration Rights and Lock-Up Agreement dated
June 30, 1994 (the "Registration Rights Agreement"). Under the Registration
Rights Agreement, the Company is obligated to certain holders of Units to use
its reasonable efforts to keep a registration statement continuously effective
for a period expiring on the date on which all of the shares of Common Stock
covered by the Registration Rights Agreement have been sold pursuant to the
Registration Statement or Rule 144 of the Securities Act. The benefits of the
Registration Rights Agreement lapse with respect to any shares that have been
sold pursuant to the Registration Rights Agreement or otherwise transferred
without legal restriction on further transfer.
The Company has no obligation under the Registration Rights Agreement to
retain any underwriter to effect the sale of the shares covered thereby and the
Registration Statement is not available for use for an underwritten public
offering.
The Registration Rights Agreement requires the Company to pay all expenses
of effecting the registration of shares covered by the Registration Rights
Agreement (other than underwriting discounts and commissions, fees and
disbursements of counsel, and transfer taxes, if any) pursuant to a registration
statement. The Company also agreed to indemnify each holder of Common Stock
covered by the Registration Rights Agreement and its officers and directors and
any person who controls any holder against certain losses, claims, damages and
expenses arising under the securities laws. In addition, each holder of Common
Stock covered by the Registration Rights Agreement agreed to indemnify the
Company and the other holders of such Common Stock, and
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<PAGE>
each of their respective directors and officers (including each director and
officer of the Company who signs the registration statement), and any person who
controls the Company or any holder against other losses, claims damages and
expenses arising under the securities laws with respect to written information
furnished to the Company by such holder.
SELLING SHAREHOLDERS
The Secondary Shares offered by this Prospectus may be offered from time to
time by the Selling Shareholders named below. As described elsewhere herein,
"Selling Shareholders" are only (i) those persons who acquired Original
Restricted Shares and Original Affiliate Shares in the Formation Transactions
and (ii) those persons who may receive Redemption Shares upon redemption of
Units and who may be affiliates of the Company.
The registration of Redemption Shares hereunder does not constitute a
determination that the holders of Units who are affiliates of the Company have a
right to require redemption of such Units. As noted above, see "Description of
Units --Redemption of Units," the rights of the Smith and Kogod families and
entities they control to redeem Units is subject to certain special limitations.
The Company has not made a determination as to whether or the extent to which,
the redemption of such Units would be permitted under such limitations. Resales
of Redemption Shares issued pursuant to this Prospectus to persons who are not
at the time of redemption affiliates of the Company will not be restricted under
the Securities Act. Holders of Original Units who are not affiliates of the
Company are therefore not included herein as Selling Shareholders.
The following table provides the names of and the number of shares of
Common Stock or Units known to the Company to be owned by each Selling
Shareholder as of October 31, 1996. As indicated in the footnotes, the number
of shares includes the number of shares of Common Stock into which Units held by
the Selling Shareholders are redeemable. Each Selling Shareholder may sell any
or all of the shares of Common Stock included herein, but the Company cannot
estimate the number of shares that may be offered and sold, or that will be
owned by each Selling Shareholder upon completion of the offering to which this
Prospectus relates.
The number of Redemption Shares being registered pursuant to the
Registration Statement of which this Prospectus forms a part represents the
Company's estimate of the aggregate number of shares of Common Stock that the
Company will elect to issue upon redemption of Units that are tendered for
redemption by the holders thereof in the foreseeable future.
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<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Shares and/or Shares That
Name Units Owned May Be Offered
---- ------------- --------------
<S> <C> <C>
Charles E. Smith Management, Inc. (1).. 1,880,982 1,500,000
Robert H. Smith (2).................... 3,143,240 1,711,873
Robert P. Kogod (3).................... 3,025,436 1,610,137
Ernest A. Gerardi, Jr. (4)............. 201,000 201,000
Leslie S. Kogod (5).................... 200,000 41,666
Lauren S. Kogod (6).................... 200,000 41,666
Stuart A. Kogod (7).................... 200,000 41,666
Harriet K. Bobb (8).................... 36,271 31,250
David B. Smith (9)..................... 262,119 14,583
Elizabeth M. Smith (10)................ 8,121 7,291
Betty Chasen (11)...................... 29,404 4,166
Gerald Chasen (12)..................... 16,117 4,166
Stacy Liss (13)........................ 7,292 7,292
Michael Liss (14)...................... 4,166 4,166
- ------------------
</TABLE>
(1) Consists solely of Units. A portion of the Units may not be tendered for
redemption by the Selling Shareholder or redeemed by the Company for cash
or shares of Common Stock except upon the instruction of a lender to the
Selling Shareholder (such loan being unrelated to Company business) in the
event of a default in the underlying obligation or upon the prior written
consent of such lender; no default exists at the time of the filing of this
Registration Statement. These Units (or shares of Common Stock that may be
issued upon redemption of such Units) are being registered for resale at
the request of such lender, and are also listed in the table as
beneficially owned and offered by each of Messrs. Smith and Kogod. See
notes 2 and 3 below.
(2) The aggregate amount of shares of Common Stock indicated in the table as
beneficially owned by Robert H. Smith consists of (i) 41,870 shares of
Common Stock directly owned by him, (ii) 57,034 Units directly owned by
him, (iii) 145,500 shares of Common Stock owned directly or indirectly by
his spouse, Clarice Smith, (iv) 38,687 Units owned directly by Clarice
Smith, (v) 2,860,149 Units owned by corporations wholly owned by Messrs.
Smith and Kogod and/or their spouses. The Units owned by these
corporations are reported twice in the table, once as beneficially owned by
Robert Smith and again as beneficially owned by Robert Kogod, and also
include all of the Units (or shares that may be issued upon redemption of
such Units) listed in the table as beneficially owned and offered by
Charles E. Smith Management, Inc. The number of shares of Common Stock
that may be offered shown for Mr. Smith includes 1,500,000 Shares issuable
upon redemption of Units owned by Charles E. Smith Management, Inc., and
pledged to a lender, as described in note (1) above.
(3) The aggregate amount of shares of Common Stock indicated in the table as
beneficially owned by Robert P. Kogod consists of (i) 52,185 shares of
Common Stock directly owned by him, (ii) 30,459 Units directly owned by
him, (iii) 52,185 shares of Common Stock owned directly or indirectly by
his spouse, Arlene Kogod, (iv) 30,458 Units owned directly by Arlene Kogod,
and (v) 2,860,149 Units owned by corporations wholly owned by Messrs. Smith
and Kogod and/or their spouses. The Units owned by these corporations are
reported twice in the table, once as beneficially owned by Robert Smith and
again as beneficially owned by Robert Kogod, and also include all of the
Units (or shares that may be issued upon redemption of such Units) listed
in the table as beneficially owned and offered by Charles E. Smith
Management, Inc. The number of shares that may be offered shown for Mr.
Kogod includes 1,500,000 Shares issuable upon redemption of Units owned by
Charles E. Smith Management, Inc., and pledged to a lender, as described in
note (1) above.
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(4) Consists of 51,000 Units owned by Mr. Gerardi and options to purchase
150,000 Units.
(5) Consists of 77,960 shares of Common Stock and 122,040 Units.
(6) Consists of 77,966 shares of Common Stock and 122,034 Units.
(7) Consists of 77,931 shares of Common Stock and 122,069 Units.
(8) Consists of 31,250 shares of Common Stock and 5,021 Units.
(9) Consists of 15,433 shares of Common Stock owned directly by David B. Smith,
211,525 Units owned directly by him, and 35,161 Units owned by a trust for
Mr. Smith's benefit.
(10) Consists solely of shares of Common Stock.
(11) Consists of 4,166 shares of Common Stock and 25,238 Units.
(12) Consists of 4,166 shares of Common Stock and 11,951 Units.
(13) Consists solely of 7,292 shares of Common Stock owned by a trust for the
benefit of Ms. Liss.
(14) Consists solely of 4,166 shares of Common Stock owned by a trust for the
benefit of Mr. Liss.
REDEMPTION OF UNITS
General
Each Limited Partner may, subject to certain limitations, require that the
Operating Partnership redeem his or her Units, by delivering a notice to the
Operating Partnership. Upon redemption, such Limited Partner will receive, with
respect to each Unit tendered, cash in an amount equal to the market value of
one share of Common Stock of the Company (subject to certain anti-dilution
adjustments). The market value of the Common Stock for this purpose will be
equal to the average of the closing trading price of the Company's Common Stock
(or substitute information, if no such closing price is available) for the ten
trading days before the day on which the redemption notice was received by the
Operating Partnership.
In lieu of the Operating Partnership redeeming Units for cash, the Company,
as general partner of the Operating Partnership, has the right to assume
directly and satisfy the redemption right of a Limited Partner described in the
preceding paragraph. The Company currently anticipates that it generally will
elect to assume directly and satisfy any redemption right exercised by a Limited
Partner through the issuance of shares of Common Stock (the Redemption Shares),
whereupon the Company will acquire the Units being redeemed and will become the
owner of the Units. However, the determination whether to pay cash or issue
shares of Common Stock upon redemption of Units will be made by the Company at
the time Units are tendered for redemption. Such an acquisition of Units by the
Company will be treated as a sale of the Units to the Company for Federal income
tax purposes. See "--Tax Consequences of Redemption" below. Upon redemption,
such Limited Partner's right to receive distributions with respect to the Units
redeemed will cease (but if such right is exchanged for Redemption Shares, the
Limited Partner will have rights as a shareholder of the Company from the time
of its acquisition of the Redemption Shares).
A Limited Partner must notify the Company, as the general partner of the
Operating Partnership, of his or her desire to require the Operating Partnership
to redeem Units by sending a notice in the form attached as an exhibit to the
Partnership Agreement, a copy of which is available from the Company. A Limited
Partner must request the redemption of at least 1,000 Units (or all of the Units
held by such holder, if less). The redemption generally will occur on the tenth
business day after the notice is delivered by the Limited Partner, except that
no redemption can occur if the delivery of Redemption Shares would be prohibited
under the provisions of the Articles of
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Incorporation designed to protect the Company's qualification as a REIT. Messrs.
Smith and Kogod and their families and entities with which they are affiliated
are restricted by this prohibition in their ability to tender Units for
redemption.
Tax Consequences of Redemption
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Limited Partner who exercises his right
to require the redemption of his or her Units.
Tax Treatment of Redemption of Units. If the Company assumes and performs
the redemption obligation, the Partnership Agreement provides that the
redemption will be treated by the Company, the Operating Partnership and the
redeeming Limited Partner as a sale of Units by such Limited Partner to the
Company at the time of such redemption. (A Limited Partner's right to require
the redemption of Units is referred to as the "Redemption Right.") In that
event, such sale will be fully taxable to the redeeming Limited Partner and such
redeeming Limited Partner will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the Common Stock received in
the exchange plus the amount of Operating Partnership nonrecourse liabilities
allocable to the redeemed Units at the time of the redemption. The
determination of the amount of gain or loss is discussed more fully below.
If the Company does not elect to assume the obligation to redeem a Limited
Partner's Units, the Operating Partnership will redeem such Units for cash. If
the Operating Partnership redeems Units for cash that the Company contributes to
the Operating Partnership to effect such redemption, the redemption likely would
be treated for tax purposes as a sale of such Units to the Company in a fully
taxable transaction, although the matter is not free from doubt. In that event,
the redeeming Limited Partner would be treated as realizing an amount equal to
the sum of the cash received in the exchange plus the amount of Operating
Partnership nonrecourse liabilities allocable to the redeemed Units at the time
of the redemption. The determination of the amount of gain or loss in the event
of sale treatment is discussed more fully below.
If, instead, the Operating Partnership chooses to redeem a Limited
Partner's Units for cash that is not contributed by the Company to effect the
redemption, the tax consequences would be the same as described in the previous
paragraph, except that if the Operating Partnership redeems less than all of a
Limited Partner's Units, the Limited Partner would not be permitted to recognize
any loss occurring on the transaction and would recognize taxable gain only to
the extent that the cash, plus the share of Operating Partnership nonrecourse
liabilities allocable to the redeemed Units, exceeded the Limited Partner's
adjusted basis in all of such Limited Partner's Units immediately before the
redemption.
Tax Treatment of Disposition of Units by Limited Partner Generally. If a
Unit is redeemed in a manner that is treated as a sale of the Unit, or a Limited
Partner otherwise disposes of a Unit, the determination of gain or loss from the
sale or other disposition will be based on the difference between the amount
considered realized for tax purposes and the tax basis in such Unit. See "Basis
of Units" below. Upon the sale of a Unit, the "amount realized" will be measured
by the sum of the cash and fair market value of other property received (e.g.,
Redemption Shares) plus the portion of the Operating Partnership's nonrecourse
liabilities allocable to the Unit sold. To the extent that the amount of cash
or property received plus the allocable share of the Operating Partnership's
nonrecourse liabilities exceeds the Limited Partner's basis for the Unit
disposed of, such Limited Partner will recognize gain. It is possible that the
amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and the value of any other property (e.g.,
Redemption Shares) received upon such disposition.
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<PAGE>
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount
realized upon the sale of a Unit attributable to a Limited Partner's share of
"unrealized receivables" of the Operating Partnership (as defined in Section 751
of the Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Operating Partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include
amounts that would be subject to recapture as ordinary income if the Operating
Partnership had sold its assets at their fair market value at the time of the
transfer of a Unit.
Basis of Units. In general, a Limited Partner who was deemed at the time
of the Formation Transactions or a subsequent acquisition to have received his
or her Units upon liquidation of a partnership had an initial tax basis in his
or her Units ("Initial Basis") equal to his or her basis in his or her
partnership interest at the time of such liquidation. Similarly, in general, a
Limited Partner who at the time of the Formation Transactions or a subsequent
acquisition contributed property in exchange for his or her Units had an Initial
Basis in the Units equal to his or her basis in the contributed property. A
Limited Partner who acquired Units as the result of the exercise of an option
granted pursuant to one of the Plans generally will have an Initial Basis in
such Units equal to the fair market value of such Units at the time the option
was exercised. A Limited Partner's Initial Basis in his or her Units generally
is increased by (a) such Limited Partner's share of Operating Partnership
taxable income and (b) increases in his or her share of the liabilities of the
Operating Partnership (including any increase in his or her share of nonrecourse
liabilities occurring in connection with the Formation Transactions or
subsequently). Generally, such Partner's basis in his or her Units is decreased
(but not below zero) by (i) his or her share of Operating Partnership
distributions, (ii) decreases in his or her share of liabilities of the
Operating Partnership (including any decrease in his or her share of nonrecourse
liabilities of the Operating Partnership occurring in connection with the
Formation Transactions or subsequently), (iii) his or her share of losses of the
Operating Partnership, and (iv) his or her share of nondeductible expenditures
of the Operating Partnership that are not chargeable to capital.
Effect of the Institutional Loan Guarantee. In connection with the
Formation Transactions, certain Limited Partners joined in the Institutional
Loan Guarantee. If, and to the extent that, the amount for which such a Limited
Partner is liable under the Institutional Loan Guarantee is included in the
Limited Partner's basis in Units that are sold or transferred (including
pursuant to the Redemption Right), the Limited Partner will be treated as
receiving an additional amount of cash equal to the amount of such liability
included in determining such basis. Hence, in analyzing the amount of gain that
would be recognized upon a disposition of Units, a Limited Partner who is a
party to the Institutional Loan Guarantee must either (i) exclude from the basis
for such Units any amount attributable to the Institutional Loan Guarantee
(which could result in the Limited Partner having a "negative" basis with
respect to such Units), or (ii) include as additional proceeds that will be
realized on such disposition an amount equal to the amount included in basis
that is attributable to the Institutional Loan Guarantee.
Continuing Liability Under the Institutional Loan Guarantee
A Limited Partner who has joined in the Institutional Loan Guarantee has no
right to be released from liability thereunder merely because such Limited
Partner sells or otherwise disposes of some or all of the Units that such
Limited Partner holds. Thus, unless the lender, in its sole and absolute
discretion, agrees to release a Limited Partner from liability, a Limited
Partner who is a party to the Institutional Loan Guarantee will continue to
remain liable thereunder following a disposition of his or her Units (including
pursuant to the Redemption Right), even though the Limited Partner has no
continuing interest in the Operating Partnership or the Company.
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<PAGE>
Comparison of Ownership of Units And Common Stock
Generally, the nature of an investment in shares of Common Stock of the
Company is substantially equivalent economically to an investment in Units in
the Operating Partnership. A holder of a share of Common Stock receives the
same distribution that a holder of a Unit receives and shareholders and
Unitholders generally share in the risks and rewards of ownership in the
enterprise being conducted by the Company (through the Operating Partnership).
However, there are some differences between ownership of Units and ownership of
shares of Common Stock, some of which may be material to investors.
The information below highlights a number of the significant differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and Federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Stock, respectively. These comparisons are intended to assist
Limited Partners of the Operating Partnership in understanding how their
investment will be changed if their Units are redeemed for Common Stock. This
discussion is summary in nature and does not constitute a complete discussion of
these matters, and holders of Units should carefully review the balance of this
Prospectus and the registration statement of which this Prospectus is a part for
additional important information about the Company.
Form of Organization and Assets Owned
-------------------------------------
OPERATING PARTNERSHIP
The Operating Partnership is organized as a Delaware limited partnership. The
Operating Partnership owns interests (directly and through a subsidiary) in the
Properties and, through subsidiaries, conducts the Company's management and
leasing business. See "The Company."
COMPANY
The Company is a Maryland corporation. The Company elected to be taxed as a REIT
under the Code and intends to maintain its qualification as a REIT. The
Company's only significant asset is its interest in the Operating Partnership,
which gives the Company an indirect investment in the Properties owned by the
Operating Partnership.
Length of Investment
--------------------
OPERATING PARTNERSHIP
The Operating Partnership has a stated term of 99 years.
COMPANY
The Company has a perpetual term and intends to continue its operations for an
indefinite time period.
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Permitted Investments
---------------------
OPERATING PARTNERSHIP
The Operating Partnership's purpose is to conduct any business that may be
lawfully conducted by a limited partnership organized pursuant to the Act,
provided that such business is to be conducted in a manner that permits the
Company to be qualified as a REIT unless the Company ceases to qualify as a
REIT. The Operating Partnership is authorized to perform any and all acts for
the furtherance of the purposes and business of the Operating Partnership,
provided that the Operating Partnership may not take, or refrain from taking,
any action which, in the judgment of the general partner (i) could adversely
affect the ability of the general partner to continue to qualify as a REIT, (ii)
could subject the general partner to any additional taxes under Section 857 or
Section 4981 of the Code, or (iii) could violate any law or regulation of any
governmental body (unless such action, or inaction, is specifically consented to
by the general partner).
COMPANY
Under its Charter, the Company may engage in any lawful activity permitted by
the General Corporation Law of Maryland. However, under the Operating
Partnership Agreement the Company, as general partner, may not conduct any
business other than the business of the Operating Partnership and cannot own any
assets other than its interest in the Operating Partnership except for any
wholly owned special purpose corporate subsidiary which serves as the general
partner of a partnership owned at least 99%, directly or indirectly, by the
Operating Partnership and other assets necessary to carry out its responsibility
under the Partnership Agreement or its Charter.
Additional Equity
-----------------
OPERATING PARTNERSHIP
The Operating Partnership is authorized to issue Units and other partnership
interests (including partnership interests of different series or classes that
may be senior to Units) as determined by the Company as its general partner in
its sole discretion. The Operating Partnership may issue Units and other
partnership interests to the Company, as long as such interests are issued in
connection with a comparable issuance of shares of Common Stock and proceeds
raised in connection with the issuance of such shares are contributed to the
Operating Partnership. In addition, the Operating Partnership will issue
additional Units or shares of Common Stock upon exercise of the options granted
pursuant to the Plans.
COMPANY
The Board of Directors may issue, in its discretion, additional equity
securities consisting of Common Stock or any other series of capital stock
(which may be classified and issued as a variety of equity securities, including
one or more classes of common or preferred stock, in the discretion of the Board
of Directors), provided that the total number of shares issued does not exceed
the authorized number of shares of capital stock set forth in the Company's
Charter.
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Borrowing Policies
------------------
OPERATING PARTNERSHIP
The Operating Partnership has no restrictions on borrowings, and the Company as
general partner has full power and authority to borrow money on behalf of the
Operating Partnership. The Company's Board of Directors has adopted a policy
that currently limits the Debt-to-Total Market Capitalization Ratio to 60%, but
this policy may be altered at any time by the Board of Directors.
COMPANY
The Company is not restricted under its Charter from incurring borrowings.
However, under the Partnership Agreement the Company, as general partner, may
not incur any debts except those for which it may be liable as general partner
of the Operating Partnership and certain other limited circumstances. Therefore,
all indebtedness incurred by the Company will be through the Operating
Partnership.
Other Investment Restrictions
-----------------------------
OPERATING PARTNERSHIP
Other than restrictions precluding investments by the Operating Partnership that
would adversely affect the qualification of the Company as a REIT and general
restrictions on transactions with affiliates, there are no restrictions upon the
Operating Partnership's authority to enter into certain transactions, including
among others, making investments, lending Operating Partnership funds, or re-
investing the Operating Partnership's cash flow and net sale or refinancing
proceeds.
COMPANY
Neither the Company's Charter nor its By-Laws impose any restrictions upon the
types of investments that may be made by the Company except that under the
Charter the Board of Directors is prohibited from taking any action that would
terminate the Company's REIT status, unless a majority of the shareholders vote
to terminate such REIT status. The Company's Charter and By-Laws do not impose
any restrictions upon dealings between the Company and directors, officers and
affiliates thereof. Applicable corporate law, however, requires that the
material facts of the relationship, the interest and the transaction must (i) be
disclosed to the Board of Directors and approved by the affirmative vote of a
majority of the disinterested directors; or (ii) be disclosed to the
shareholders and approved by the affirmative vote of a majority of the
disinterested shareholders or (iii) be in fact fair and reasonable. In addition,
the Company has adopted a policy which requires that all contracts and
transactions between the Company and directors, officers or affiliates thereof
must be approved by the affirmative vote of a majority of the disinterested
directors. Lastly, the Company has adopted a policy that it must conduct its
investment activities through the Operating Partnership for so long as the
Operating Partnership exists.
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Management Control
------------------
OPERATING PARTNERSHIP
All management powers over the business and affairs of the Operating Partnership
are vested in the general partner of the Operating Partnership, and no limited
partner of the Operating Partnership has any right to participate in or exercise
control or management power over the business and affairs of the Operating
Partnership except (i) the general partner of the Operating Partnership may not,
without written consent of all the limited partners, take any action in
contravention of the Partnership Agreement; (ii) the general partner of the
Operating Partnership may not dispose of all or substantially all of the
Operating Partnership's assets without the consent of the holders of a majority
of the outstanding limited partnership Units; (iii) until December 31, 2013, the
general partner of the Operating Partnership may not cause or permit the
Operating Partnership to dissolve if one or more of the original Limited
Partners objects to such dissolution; and (iv) from January 1, 2014 through
December 31, 2043, the general partner of the Operating Partnership may not
cause or permit the Operating Partnership to dissolve if original Limited
Partners holding at least 5% of the Units object to such dissolution. The
general partner may not be removed by the Limited Partners with or without
cause.
COMPANY
The Board of Directors has exclusive control over the Company's business
and affairs subject only to the restrictions in the Charter and By-Laws, the
Partnership Agreement and applicable law. The Board of Directors is classified
into three classes of directors. At each annual meeting of the shareholders, the
successors of the class of directors whose terms expire at that meeting will be
elected. The policies adopted by the Board of Directors may be altered or
eliminated without a vote of the shareholders. Accordingly, except for their
vote in the elections of directors, shareholders will have no control over the
ordinary business policies of the Company. The Board of Directors cannot change
the Company's policy of maintaining its status as a REIT, however, without the
approval of a majority of the votes entitled to the cast thereon.
Fiduciary Duties
----------------
OPERATING PARTNERSHIP
Under Delaware law, the general partner of the Operating Partnership is
accountable to the Operating Partnership as a fiduciary and, consequently, is
required to exercise good faith and integrity in all of its dealings with
respect to partnership affairs. However, under the Partnership Agreement, the
general partner is under no obligation to consider the separate interests of the
limited partners in deciding whether to cause the Operating Partnership to take
(or decline to take) any actions, and the general partner is not liable for
monetary damages for losses sustained, liabilities incurred, or benefits not
derived by limited partners in connection with such decisions, provided that the
general partner has acted in good faith.
COMPANY
Under Maryland law, the directors must perform their duties in good faith, in a
manner that they reasonably believe to be in the best interests of the Company
and with the care of an ordinarily prudent person in a like position. Directors
of the Company who act in such a manner generally will not be liable to the
Company for monetary damages arising from their activities.
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Management Liability and Indemnification
----------------------------------------
OPERATING PARTNERSHIP
As a matter of Delaware law, the general partner has liability for the payment
of the obligations and debts of the Operating Partnership unless limitations
upon such liability are stated in the document or instrument evidencing the
obligation. Under the Partnership Agreement, the Operating Partnership agrees to
indemnify the general partner or any director or officer of the general partner
from and against all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees), fines, settlements and other amounts incurred
in connection with any actions relating to the operations of the Operating
Partnership as set forth in the Partnership Agreement in which the general
partner or any such director or officer is involved, unless (i) the act was in
bad faith and was material to the action; (ii) such party received an improper
personal benefit; or (iii) in the case of any criminal proceeding, such party
had reasonable cause to believe the act was unlawful. The reasonable expenses
incurred by an indemnitee may be reimbursed by the Operating Partnership in
advance of the final disposition of the proceeding upon receipt by the Operating
Partnership of an affirmation by indemnitee of his, her or its good faith belief
that the standard of conduct necessary for indemnification has been met and an
undertaking by such indemnitee to repay the amount if it is determined that such
standard was not met.
COMPANY
The Company's Charter provides that the liability of the Company's directors and
officers to the Company and its shareholders for money damages is limited to the
fullest extent permitted under Maryland law. The Charter and state law provide
broad indemnification to directors and officers, whether serving the Company or
at its request any other entity, to the full extent permitted under Maryland
law.
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Antitakeover Provisions
-----------------------
OPERATING PARTNERSHIP
Except in limited circumstances (see "Voting Rights" below), the general partner
of the Operating Partnership has exclusive management power over the business
and affairs of the Operating Partnership. The general partner may not be removed
by the limited partners with or without cause. Under the Partnership Agreement,
the general partner may, in its sole discretion, prevent a limited partner from
transferring his interest or any rights as a limited partner except in certain
limited circumstances. The general partner may exercise this right of approval
to deter, delay or hamper attempts by persons to acquire a majority interest in
the Operating Partnership. See "Description of Units."
COMPANY
The Charter and By-Laws of the Company and the Maryland General Corporation law
contain a number of provisions that may have the effect of delaying or
discouraging an unsolicited proposal for the acquisition of the Company or the
removal of incumbent management. These provisions include, among others, (i) a
staggered Board of Directors; (ii) authorized capital stock that may be
classified and issued as a variety of equity securities in the discretion of the
Board of Directors, including securities having superior voting rights to the
Common Stock; (iii) restrictions on business combinations with persons who
acquire more than a certain percentage of Common Stock; (iv) a requirement that
directors may be removed only for cause and only by a vote of at least 80% of
the outstanding Common Stock; and (v) provisions designed to avoid concentration
of share ownership in a manner that would jeopardize the Company's status as a
REIT under the Code. See "Description of Common Stock."
Voting Rights
-------------
OPERATING PARTNERSHIP
Under the Partnership Agreement, Limited Partners have voting rights only as to
the dissolution of the Operating Partnership, the sale of all or substantially
all of the assets of the Operating Partnership and amendments of the Partnership
Agreement, as more fully described below. Otherwise, all decisions relating to
the operation and management of the Operating Partnership are made by the
general partner. See "Description of Units." As of September 30, 1996, the
Company owned approximately 45% of the Units. As Units are redeemed by partners,
the Company's percentage ownership of the Units will increase. If additional
Units are issued to third parties, the Company's percentage ownership of the
Units will decrease.
COMPANY
The Company is managed and controlled by a Board of Directors consisting of
three classes having staggered terms of office. Each class is elected by the
shareholders at annual meetings of the Company. Maryland law requires that
certain major corporate transactions, including most amendments to the Charter,
may not be consummated without the approval of shareholders as set forth below.
All shares of Common Stock have one vote, and the Charter permits the Board of
Directors to classify and issue capital stock in one or more series having
voting power which may differ from that of the Common Stock. See "Description of
Common Stock."
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Amendment of the Partnership Agreement or the Charter
-----------------------------------------------------
OPERATING PARTNERSHIP
The Partnership Agreement may be amended through a proposal by the general
partner or any limited partner holding 25% or more of the Units. Such proposal,
in order to be effective, must be approved by the written vote of holders of at
least a majority in interest of the Operating Partnership. In addition, the
general partner may, without the consent of the limited partners, amend the
Partnership Agreement as to ministerial matters.
COMPANY
Amendments to the Company's Charter must be approved by the Board of Directors
and by the vote of at least two-thirds of the votes entitled to be cast at a
meeting of shareholders, except that an amendment of the provisions relating to
the classified Board of Directors, the power to remove directors and the share
ownership limits designed to maintain qualified REIT status must be approved by
an 80% vote. An amendment relating to termination of REIT status requires a
majority of the votes entitled to be cast thereon.
Vote Required to Dissolve the Operating Partnership or the Company
------------------------------------------------------------------
OPERATING PARTNERSHIP
Through December 31, 2013, the general partner of the Operating Partnership may
not elect to dissolve the Operating Partnership if any original Limited Partner
who became a limited partner on June 30, 1994 holding Units issued at such time
objects to such dissolution. From January 1, 2014 through December 31, 2043, the
general partner may not elect to dissolve the Operating Partnership if any
original Limited Partner who became a limited partner on June 30, 1994 and who
held at least 5% of the Units on June 30, 1994 objects to such dissolution.
After January 1, 2044, the general partner may dissolve the Operating
Partnership without the consent of the limited partners, in its sole discretion.
COMPANY
Under Maryland law, the Board of Directors must obtain approval of holders of at
least two-thirds of the outstanding shares of Common Stock in order to dissolve
the Company.
Vote Required to Sell Assets
----------------------------
OPERATING PARTNERSHIP
Under the Partnership Agreement, the general partner of the Operating
Partnership may not sell, exchange, transfer or otherwise dispose of all or
substantially all of the Operating Partnership's assets without the consent of
holders of a majority of the outstanding Units.
COMPANY
Under Maryland law, the Board of Directors is required to obtain approval of the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter in order to sell all or substantially all of the assets of
the Company. No approval of the shareholders is required for the sale of less
than all or substantially all of the Company's assets.
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Vote Required to Merge
----------------------
OPERATING PARTNERSHIP
Under the Partnership Agreement, the general partner of the Operating
Partnership may not merge or consolidate the Operating Partnership without the
consent of holders of a majority of the outstanding Units.
COMPANY
Under Maryland law, the Board of Directors is required to obtain approval of the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter in order to merge or consolidate the Company.
Compensation, Fees and Distributions
------------------------------------
OPERATING PARTNERSHIP
The general partner does not receive any compensation for its services as
general partner of the Operating Partnership. As a partner in the Operating
Partnership, however, the general partner has the same right to allocations and
distributions as other partners of the Operating Partnership. In addition, the
Operating Partnership reimburses the general partner for all expenses incurred
relating to the ongoing operation of the Company and any other offering of
additional Units or shares of Common Stock, including all expenses, damages and
other payments resulting from or arising in connection with litigation related
to any of the foregoing.
COMPANY
The directors of the Company receive compensation for their services.
Liability of Investors
----------------------
OPERATING PARTNERSHIP
Under the Partnership Agreement and applicable state law, the liability of the
limited partners for the Operating Partnership's debts and obligations is
generally limited to the amount of their investment in the Operating
Partnership, together with an interest in any undistributed income, if any.
Units, upon issuance, will be fully paid and nonassessable.
COMPANY
Under Maryland law, shareholders are not personally liable for the debts or
obligations of the Company. Shares of Common Stock, upon issuance, will be fully
paid and nonassessable.
Review of Investor Lists
------------------------
OPERATING PARTNERSHIP
Under the Partnership Agreement, Limited Partners, upon written demand with a
statement of the purpose of such demand and at the limited partner's expense,
are entitled to obtain a current list of the name and last known business,
residence or mailing address of each Limited Partner of the Operating
Partnership.
COMPANY
Under Maryland law, a shareholder holding at least 5% of the outstanding stock
of a corporation, may upon written request inspect and copy during usual
business hours the list of the shareholders of such corporation.
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The following compares certain of the investment attributes and legal
rights associated with the ownership of Units and Shares.
Nature of Investment
--------------------
UNITS
The Units constitute equity interests entitling each Limited Partner to his pro
rata share of cash distributions made to the limited partners of the Operating
Partnership. The Operating Partnership generally intends to retain and reinvest
proceeds of the sale of property or excess refinancing proceeds in its business.
SHARES
Shares of Common Stock constitute equity interests in the Company. The Company
is entitled to receive its pro rata share of distributions made by the Operating
Partnership with respect to the Units, and each shareholder is entitled to his
pro rata share of any dividends or distributions paid with respect to the Common
Stock. The dividends payable to the shareholders are not fixed in amount and are
only paid if, when and as declared by the Board of Directors. In order to
qualify as a REIT, the Company must distribute at least 95% of its taxable
income (excluding capital gains), and any taxable income (including capital
gains) not distributed will be subject to corporate income tax.
Potential Dilution of Rights
----------------------------
UNITS
The general partner of the Operating Partnership is authorized, in its sole
discretion and without Limited Partner approval, to cause the Operating
Partnership to issue additional limited partnership interests and other equity
securities for any partnership purpose at any time to the limited partners or to
other persons on terms established by the general partner.
SHARES
The Board of Directors may issue, in its discretion, additional shares of Common
Stock and have the authority to issue from the authorized capital stock a
variety of other equity securities of the Company with such powers, preferences
and rights as the Board of Directors may designate at the time. The issuance of
additional shares of either Common Stock or other similar equity securities may
result in the dilution of the interests of the shareholders.
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Liquidity
---------
UNITS
Units may be transferred by a Limited Partner only with the consent of the
general partner of the Operating Partnership, which consent may be withheld in
its sole discretion. The general partner will permit transfers of Units only in
connection with gifts, bequests and transfers by a Unit holder to family members
and certain other persons. Subject to certain conditions, each Limited Partner
has the right to elect to have his Units redeemed by the Operating Partnership.
Upon redemption, such Limited Partner will receive, at the election of the
general partner, either shares of Common Stock or the cash equivalent in
exchange for such Units.
SHARES
The Common Stock is freely transferable. The Common Stock is listed on the NYSE,
and a public market for the Common Stock exists. The breadth and strength of
this secondary market will depend, among other things, upon the number of shares
outstanding, the Company's financial results and prospects, the general interest
in the Company's and other real estate investments, and the Company's dividend
yield compared to that of other debt and equity securities.
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Taxation
--------
UNITS
The Operating Partnership will not be subject to federal income taxes. Instead,
each holder of Units includes his allocable share of the Operating Partnership's
taxable income or loss in determining his individual federal income tax
liability. The maximum effective federal tax rate for individuals under current
law is 39.6%.
Income and loss from the Operating Partnership generally will be subject to the
"passive activity" limitations. Under the "passive activity" rules, income and
loss from the Operating Partnership that is considered "passive income"
generally can be offset against income and loss from other investments that
constitute "passive activities" (unless the Operating Partnership is considered
a "publicly traded partnership," in which case income and loss from the
Operating Partnership can be offset only against other income and loss from the
Operating Partnership). Income of the Operating Partnership, however,
attributable to dividends from the Property Service Businesses or interest paid
by the Property Service Businesses will not qualify as passive income and cannot
be offset with losses and deductions from a "passive activity" (including losses
and deductions attributable to the Operating Partnership's multifamily rental
activities).
SHARES
The Company has elected to be taxed as a REIT. So long as it qualifies as a
REIT, the Company will be permitted to deduct distributions paid to its
shareholders, which effectively will reduce the "double taxation" that typically
results when a corporation earns income and distributes that income to its
shareholders in the form of dividends. The Property Service Businesses, however,
will not qualify as REITs and thus they will be subject to federal income tax on
their net income at normal corporate rates. The maximum effective tax rate for
corporations under current law is 35%.
Dividends paid by the Company will be treated as "portfolio" income and cannot
be offset with losses from "passive activities."
Distributions made by the Company to its taxable domestic shareholders out of
current or accumulated earnings and profits will be taken into account by them
as ordinary income. Distributions in excess of current or accumulated earnings
and profits that are not designated as capital gain dividends will be treated as
a non-taxable return of basis to the extent of a shareholder's adjusted basis in
its shares of Common Stock, with the excess taxed as capital gain. Distributions
that are designated as capital gain dividends generally will be taxed as long-
term capital gain.
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- -------------------------------------------------------------------------------
UNITS
- -------------------------------------------------------------------------------
Cash distributions from the Operating Partnership will not be taxable to a
holder of Units except to the extent they exceed such holder's basis in his
interest in the Operating Partnership (which will include such holder's
allocable share of the Operating Partnership's debt).
Each year, holders of Units will receive a Schedule K-1 tax form containing
detailed tax information for inclusion in preparing their federal income tax
returns.
Holders of Units will be required, in some cases, to file state income tax
returns and/or pay state income taxes in the states in which the Operating
Partnership owns property, even if they are not residents of those states.
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Each year, Shareholders will receive Form 1099 used by corporations to report
dividends paid to their shareholders.
Shareholders who are individuals generally will not be required to file state
income tax returns and/or pay state income taxes outside of their state of
residence with respect to the Company's operations and distributions. The
Company may be required to pay state income taxes in certain states.
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FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Stock. The following
discussion, which is not exhaustive of all possible tax considerations, does not
include a detailed discussion of any state, local or foreign tax considerations.
Nor does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective shareholder in light of its particular circumstances
or to certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws. As used in this
discussion, the term "Company" refers solely to Charles E. Smith Residential
Realty, Inc.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS URGED TO CONSULT WITH
ITS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S
PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT,
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 elected REIT status under Sections 856 through
860 of the Code commencing with its taxable year ending December 31, 1994. The
Company believes that it was organized and has operated in conformity with the
requirements for qualification and taxation as a REIT under the Code for its
taxable years ended December 31, 1994 and December 31, 1995, and the Company's
current organization and method of operation should enable it to continue to
meet the requirements for qualification and taxation as a REIT. It must be
emphasized that the Company's qualification and taxation as a REIT depend upon
the Company's ability to meet on a continuing basis, through actual annual
operating and other results, the various requirements under the Code with regard
to, among other things, the sources of its gross income, the composition of its
assets, the level of its distributions to its shareholders, and the diversity of
its share ownership. No assurance can be given that the actual results of the
operations of the Company for any taxable year will satisfy the requirement
under the Code for qualification and taxation as a REIT.
The following is a general summary of the Code provisions that govern
the federal income tax treatment of a REIT and its shareholders. These
provisions of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations thereof.
In any year in which the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on net income
that it distributes currently to shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder levels) that
generally results from investment in a corporation. However, the Company will
be subject to federal income tax on any income that it does not distribute and
will be subject to federal income tax in certain circumstances on certain types
of income even though that income is distributed. In addition, the Property
Services Businesses, which will not qualify as REITs, will be subject to federal
corporate income tax on their net income.
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Requirements for Qualification.
Organizational Requirements. The Code defines a REIT as a
corporation, trust or association (1) that is managed by one or more trustees or
directors; (2) the beneficial ownership of which is evidenced by transferable
shares, or by transfer certificates of beneficial interest; (3) that would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(4) that 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) during the last half of each taxable year not more than
50% in value of the outstanding stock of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities); and (7) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (1)
through (4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company believes that it currently satisfies requirements (1) through (6).
In addition, the Company's Charter includes restrictions regarding the transfer
of its shares 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; Excess Stock."
Gross Income Tests. In order to maintain qualification as a REIT,
there are three gross income requirements that must be satisfied annually.
First, at least 75% of the REIT'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 certain types of temporary investments. Second, at least 95%
of the REIT's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from sources that qualify for purposes of
the 75% test, and from dividends, interest and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. Third, the
Company must derive less than 30% of the its gross income (including gross
income from prohibited transactions) for each taxable year from short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property).
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions (relating to the identity of the tenant, the
computation of the rent payable, and the nature of the property leased) are met.
The Company believes that the portion, if any, of the rents that it receives
that fails to qualify as "rents from real property" has been and will continue
to be sufficiently small that the Company will satisfy the 75% and 95% gross
income tests. The Company's belief with respect to this matter, however, is
based upon the advice of counsel with respect to certain technical issues
regarding the determination of "rents from real property" that are not
definitively answered under the Code, the Treasury Regulations, and published
administrative interpretations. There can be no assurance that the Internal
Revenue Service (the "IRS") will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection with
the rental space for occupancy only and are not otherwise considered "rendered
to the occupant." The Operating Partnership itself and the Property Service
Businesses, which are not independent contractors, provide certain services with
respect to the Properties. The Company received a ruling from the IRS that the
provision of certain of these services will not cause the rents received with
respect to
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the Properties to fail to qualify as "rents from real property." The Company
also received a ruling from the IRS to the effect that certain revenues
(including rents from corporate apartments, revenues from laundry equipment,
certain parking revenues, and certain revenues related to the provision of
telephone services) will qualify as "rents from real property." The Company will
not provide services that it does not consider "usually or customarily rendered"
in connection with the rental of property for occupancy only except through an
"independent contractor."
The Operating Partnership may receive fees for the performance of
services with respect to properties in which the Operating Partnership has a
partial interest. Only the portion of the management fee that corresponds to
the Operating Partnership interest in such properties will qualify as "rents
from real property." The Operating Partnership also may receive certain other
types of non-qualifying income (including, for example, certain expense
reimbursements, and dividends and interest from the Property Service Businesses
(which qualify under the 95% gross income test but not under the 75% gross
income test)). The Company believes, however, that the aggregate amount of such
fees and other non-qualifying income in any taxable year will not cause the
Company to exceed the limits on non-qualifying income under the 75% and 95%
gross income tests.
If the Company fails to satisfy one or both of the 75% or the 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.
It is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. Even if these
relief provisions were to apply, a tax would be imposed with respect to the
"excess net income" attributable to the failure to satisfy the 75% and 95% gross
income tests.
Asset Tests. At the close of each quarter of the Company's taxable
year, the Company must satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by "real estate assets," cash, cash items, and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities. The Operating Partnership owns 100% of the
nonvoting stock of each of the Property Service Businesses. In addition, the
Operating Partnership holds notes from each of the Property Service Businesses,
and by virtue of its ownership of Units, the Company will be considered to own
its pro rata share of the assets of the Operating Partnership, including the
securities of each of the Property Service Businesses described above. The
Operating Partnership, however, does not own more than 10% of the voting
securities of any of the Property Service Businesses. In addition, the Company
believes that the Company's pro rata share of the value of the securities of
each of the Property Service Businesses does not exceed 5% of the total value of
the Company's assets. There can be no assurance, however, that the IRS might
not contend either that the value of the securities of one or more of the
Property Service Businesses exceeds the 5% value limitation or that all or some
of the Property Service Businesses shall be viewed as a single corporation for
purposes of the 5% value limitation and that the value of the securities of that
corporation exceeds the 5% limitation.
The 5% value requirement must be satisfied not only on the date the
Company acquired securities of the Property Service Businesses, but also each
time the Company increases its ownership of securities of the Property Service
Businesses (including as a result of increasing its interest in the Operating
Partnership as limited partners exercise their rights to have Units redeemed for
shares of Common Stock and, at the options of the Company, cash). Although the
Company plans to take steps to ensure that it satisfies the 5% value test for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps always will be
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<PAGE>
successful or will not require a reduction in the Operating Partnership's
overall interest in the Property Service Businesses.
Annual Distribution Requirements. To qualify as a REIT, the Company
generally must distribute to its shareholders at least 95% of its income each
year. In addition, the Company will be subject to tax on the undistributed
amount at regular capital gains and ordinary income rates and also may be
subject to a 4% excise tax on undistributed income in certain events.
The Company believes that it has made, and intends to continue to
make, timely distributions sufficient to satisfy the annual distribution
requirements. It is possible, however, that the Company, from time to time, may
not have sufficient cash or other liquid assets to meet the 95% distribution
requirement. In that event, the Company may cause the Operating Partnership to
arrange for short-term, or possibly long-term, borrowing to permit the payments
of required 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. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
Tax Aspects of the Company's Investments in the Operating Partnership and
Property Service Businesses
General. All of the Company's investments are through the Operating
Partnership, and the Operating Partnership holds substantially all of the
Properties through certain subsidiary partnerships. This structure may involve
special tax considerations. These tax considerations include: (a) the
allocations of income and expense items of the Operating Partnership and such
subsidiary partnerships, which could affect the computation of taxable income of
the Company, (b) the status of the Operating Partnership and each such
subsidiary partnership as partnership (as opposed to an association taxable as a
corporation) for income tax purposes, and (c) the taking of actions by the
Operating Partnership or any of such subsidiary partnerships that could
adversely affect the Company's qualification as a REIT. The Company believes
that the Operating Partnership and each of the subsidiary partnerships will be
treated for tax purposes as a partnership (and not as an association taxable as
a corporation). If, however, the Operating Partnership or any of such
subsidiary partnerships were treated as an association taxable as a corporation,
the Company would fail to qualify as a REIT for a number of reasons.
Tax Allocations with Respect to the Properties. The Operating
Partnership was formed by way of contributions of appreciated property
(including certain of the Properties) to the Partnership in the Formation
Transactions. When property is contributed to a partnership in exchange for an
interest in the partnership, the partnership generally takes a carryover basis
in that property for tax purposes equal to the adjusted basis of the
contributing partner in the property, rather than a basis equal to the fair
market value of the property at the time of contribution (this difference is
referred to as a "Book-Tax Difference"). The Partnership Agreement requires
such allocations to be made in a manner consistent with Section 704(c) of the
Code and the regulations thereunder, which allocations will tend to eliminate
the Book-Tax Differences with respect to the contributed Properties over the
life of the Operating Partnership. However, because of certain technical
limitations, the special allocation rules of Section 704(c) of the Code may not
always entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed Properties in the hands of
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the Operating Partnership could cause the Company (i) to be allocated lower
amounts of depreciation and other deductions for tax purposes than would be
allocated to the Company if all Properties were to have a tax basis equal to
their fair market value at the time of the Formation Transactions or a
subsequent acquisition, and (ii) possibly to be allocated taxable gain in the
event of a sale of such contributed Properties in excess of the economic or book
income allocated to the Company as a result of such sale.
Property Service Businesses. A substantial portion of the amounts
used by the Operating Partnership to fund distributions to partners comes from
the Property Service Businesses, through payments on notes issued by the
Property Service Businesses and dividends on non-voting stock of the Property
Service Businesses held by the Operating Partnership. The Property Service
Businesses do not qualify as REITs and thus pay federal, state and local income
taxes on their net income at normal corporate rates. The Property Service
Businesses attempt to limit the amount of such taxes. There can be no
assurance, however, whether or the extent to which measures taken to limit taxes
will be successful. Moreover, even if those measures initially are successful,
future increases in the income of the Property Service Businesses inevitably
will be subject to income tax. To the extent that the Property Service
Businesses are required to pay federal, state and local income taxes, the cash
available for distribution to shareholders will be reduced accordingly. In
addition, as described above, the value of the securities of each of the
Property Service Businesses held by the Operating Partnership cannot exceed 5%
of the value of the Operating Partnership's assets at a time when a Limited
Partner exercises his or her redemption right (or the Company otherwise is
considered to acquire additional securities of a Property Service Business).
See "Requirements for Qualification Asset Tests." This limitation may restrict
the ability of the Property Service Businesses to increase the size of their
respective businesses unless the value of the assets of the Operating
Partnership is increasing at a commensurate rate.
Taxation of Shareholders
Taxation of Taxable Domestic Shareholders. As long as the Company
qualifies as a REIT, distributions made to the Company's taxable domestic
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income, and corporate shareholders will not be eligible for the
dividends received deduction as to such amounts. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the shareholder has held
its stock. However, corporate shareholders may be required to treat up to 20%
of certain capital gain dividends as ordinary income. Distributions in excess
of current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of such
Common Stock. To the extent that such distributions exceed the adjusted basis
of a shareholder's Common Stock, they will be included in income as long-term
capital gain (or short-term capital gain if the Common Stock have been held for
one year or less), assuming the Common Stock is a capital asset in the hands of
the shareholder.
In general, a domestic shareholder will realize capital gain or loss
on the disposition of Common Stock equal to the difference between (i) the
amount of cash and the fair market value of any property received on such
disposition and (ii) the shareholder's adjusted basis of such Common Stock.
Such gain or loss generally will constitute long-term capital gain or loss if
the shareholder has held the shares for more than one year. Loss upon a sale or
exchange of Common Stock by a shareholder who has held such Common Stock for six
months or less (after applying certain holding period rules) will be treated as
long-term capital loss to the extent of distribution from the Company required
to be treated by such shareholder as long-term capital gain.
51
<PAGE>
Under certain circumstances, domestic shareholders may be subject to
backup withholding at the rate of 31% with respect to dividends paid.
Taxation of Tax-Exempt Shareholders. The Company does not expect the
distributions by the Company to a shareholder that is a tax-exempt entity will
constitute "unrelated business taxable income" ("UBTI"), provided that the tax-
exempt entity has not financed the acquisition of its Common Stock with
"acquisition indebtedness" within the meaning of the Code and the Common Stock
is not otherwise used in an unrelated trade or business of the tax-exempt
entity.
Taxation of Non-U.S. Shareholders. The rules governing U.S. federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign shareholders (collectively, "Non-U.S.
Shareholders") are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Shareholders should
consult with their own tax advisors to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in Common Stock,
including any reporting requirements.
Distributions that are not attributable to gain from sales or
exchanges by the Company of U.S. real property interests and not designated by
the Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions, ordinarily, will be subject to
a withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces that tax. Distributions in excess of current and
accumulated earnings and profits of the Company will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of such
Common Stock. To the extent that such distributions exceed the adjusted basis
of a Non-U.S. Shareholder's Common Stock, they will give rise to tax liability
if the Non-U.S. Shareholder otherwise would be subject to tax on any gain from
the sale or disposition of his Common Stock as described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to dividends.
However, the Non-U.S. Shareholder may seek a refund of such amounts from the IRS
if it is subsequently determined that such distribution was, in fact, in excess
of current and accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief or exemption. The Company is
required by applicable Treasury Regulations to withhold 34% of any distribution
that could be designated by the Company as a capital gain dividend. This amount
is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Company believes that it currently is a
"domestically controlled REIT," and, therefore, the sale of Common Stock will
not be subject to taxation under FIRPTA. If the gain on the sale of Common
Stock were to be subject to tax under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative
52
<PAGE>
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Common Stock would be required to withhold and remit to the IRS 10% of the
purchase price.
Other Tax Considerations
State and Local Taxes; District of Columbia Unincorporated Business
Tax. The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in Common Stock.
In this regard, the District of Columbia imposes an unincorporated
business income tax, at the rate of 10.25% on the "District of Columbia taxable
income" of partnerships doing business in the District of Columbia. Because
certain of the Properties are located in the District of Columbia, the
subsidiary partnership owning these properties will be subject to this tax.
Thus, in effect, the Company's share of the "District of Columbia taxable
income" attributable to the Properties located in the District of Columbia will
be subject to this tax. The Operating Partnership and such subsidiary
partnership will attempt to reduce the amount of income that is considered
"District of Columbia taxable income," but it is likely that some portion of the
income attributable to the Properties located in the District of Columbia will
be subject to the District of Columbia tax. To the extent the Operating
Partnership or such subsidiary partnership is required to pay the District of
Columbia unincorporated business income tax, the cash available for distribution
to the Company and, therefore, to its shareholders as dividends will be reduced
accordingly. Moreover, a shareholder of the Company will not receive a credit
against its own state income tax liability for its share of any District of
Columbia unincorporated business income tax paid by the Operating Partnership or
such subsidiary partnership. This tax would not apply if the Company were to
own and operate its assets directly, rather than through the Operating
Partnership; however, the Company's ability to eliminate the Operating
Partnership and thus own its assets directly is severely limited.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the Company of
up to 4,702,520 Redemption Shares of Common Stock, if, and to the extent that,
the Company elects to issue such Redemption Shares to holders of up to 4,702,520
Units, upon the tender of such Units for redemption, (ii) the offer and sale
from time to time of up to 406,451 Original Restricted Shares by the holders
thereof, (iii) the offer and sale from time to time by certain affiliates of the
Company of up to 523,010 Original Affiliate Shares and (iv) the offer and sale
from time to time by the holders thereof of any Redemption Shares that may be
issued and held by persons who may be affiliates of the Company. The Company
has registered the Redemption Shares, the Original Affiliate Shares and the
Original Restricted Shares for sale to permit the holders thereof to sell such
shares without restriction in the open market or otherwise, but registration of
such shares does not necessarily mean that any of such shares will be offered or
sold by the holders thereof.
The Company will not receive any cash proceeds from the offering by
the Selling Shareholders or from the issuance of the Redemption Shares to
holders of Units upon receiving a notice of redemption (but it will acquire from
such holders the Units tendered for redemption). The Secondary Shares may be
sold from time to time by any of the Selling Shareholders on terms to be
determined at the time of sale directly or to purchasers through dealers or
agents, who may receive compensation in the form of commissions from the Selling
Shareholders and/or the purchasers of Secondary Shares from whom they may act as
agent. The Selling Shareholders and any dealers or agents that participate in
the distribution of Secondary Shares may be deemed to be "underwriters"
53
<PAGE>
within the meaning of the Securities Act and any profit on the sale of Secondary
Shares by them and any commissions received by any such dealers or agents might
be deemed to be underwriting commissions under the Securities Act. The Company
has no obligation under the Registration Rights Agreement to retain any
underwriter to effect the sale of the shares covered thereby and the
Registration Statement is not available for use for an underwritten public
offering.
At the time a particular offer of Secondary Shares is made, a
Prospectus Supplement, if required, will be distributed that will set forth the
name of any dealers or agents and any commissions and other terms constituting
compensation from the Selling Shareholders and any other required information.
In order to comply with the securities laws of certain states, the
Secondary Shares may be sold in such states only through registered or licensed
brokers or dealers. In addition, in certain states, the Secondary shares may
not be sold unless they have been registered or qualified for sale in such state
or an exemption from such registration or qualification requirement is available
and is complied with.
The Company will acquire the exchanging partner's Unit in exchange for
each Redemption Share that the Company issues. Consequently, with each
redemption, the Company's interest in the Operating Partnership will increase.
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 under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all 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 such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules hereto. For further information regarding the Company
and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has filed reports and other information with the Commission and is subject to
the periodic reporting and informational requirements of the Exchange Act. The
Registration Statement, the exhibits and schedules forming a part thereof as
well as such reports and other information filed by the Company with the
Commission can be inspected and copies obtained from the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. 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 also
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, the Company's Common Stock is
listed on the NYSE and similar information concerning the Company can be
inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
The Company furnishes its equityholders with annual reports containing
consolidated financial statements audited by its independent public accountants
and with quarterly reports
54
<PAGE>
containing unaudited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December
31, 1995, the Company's Report on Form 10-Q for the quarter ended March 31,
1996, the Company's Report on Form 10-Q for the quarter ended June 30, 1996, the
Company's Report on Form 10-Q for the quarter ended September 30, 1996, and the
Company's current report Form 8-K dated August 13, 1996, heretofore filed with
the Commission pursuant to the Exchange Act, are hereby incorporated by
reference into this Prospectus.
All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering of the securities offered hereby shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modified or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of any such person, a copy of any or all of the documents incorporated
by reference in this Prospectus (other than exhibits and schedules thereto,
unless such exhibits or schedules are specifically incorporated by reference
into the information that this Prospectus incorporates). Written or telephonic
requests for copies should be directed to Charles E. Smith Residential Realty,
Inc., 2345 Crystal Drive, Crystal City, Virginia 22202, Attention: Mr. M.
Bruce Snyder, Vice President - Institutional Investor Relations (telephone:
(703) 769-1000).
EXPERTS
The Company's financial statements and related schedule incorporated
by reference herein and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
LEGAL MATTERS
The legality of the issuance of the Redemption Shares has been passed
upon for the Company by Hogan & Hartson L.L.P., Washington, D.C.
55
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
The Company................................................................ 18
Description of Common Stock................................................ 19
Description of Units....................................................... 23
Shares Available for Future Sale........................................... 28
Registration Rights........................................................ 29
Selling Shareholders....................................................... 30
Redemption of Units........................................................ 32
Federal Income Tax Considerations.......................................... 47
Plan of Distribution....................................................... 53
Available Information...................................................... 54
Incorporation of Certain Documents
by Reference............................................................. 55
Experts.................................................................... 55
Legal Matters.............................................................. 55
------------
- --------------------------------------------------------------------------------
================================================================================
================================================================================
- --------------------------------------------------------------------------------
5,631,981 Shares
Charles E. Smith
Residential Realty, Inc.
Common Stock
(par value $.01 per share)
PROSPECTUS
, 1996
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth those expenses for distribution to be
incurred in connection with the issuance and distribution of the securities
being registered.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee............................................... $
Printing and Duplicating Expenses.............................. 1,000
Legal Fees and Expenses........................................ 18,000
Accounting Fees and Expenses................................... 8,000
Blue Sky Fees and Expenses..................................... 5,000
Miscellaneous.................................................. 1,000
-------
Total.......................................................... $
=======
</TABLE>
Item 15. Indemnification of Trustees and Officers
The Company's officers and directors are and will be indemnified under
Maryland law, the Charter of the Company, and the Partnership Agreement against
certain liabilities. The Charter requires the Company to indemnify its
directors and officers to the fullest extent permitted from time to time by the
laws of Maryland. The Company's Charter also provides that, to the fullest
extent permitted under Maryland law, directors and officers of the Company will
not be liable to the Company and its shareholders for money damages.
Section 2-418 of the Maryland General Corporation Law generally permits
indemnification of any director made a party to any proceedings by reason of
service as a director unless it is established that (i) the act or omission of
such person was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty; or
(ii) such person actually received an improper personal benefit in money
property or services; or (iii) in the case of any criminal proceeding, such
person had reasonable cause to believe that the act or omission was unlawful.
The indemnity may include judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director in connection with the
proceeding; but, if the proceeding is one by or in the right of the corporation,
indemnification is not permitted with respect to any proceeding in which the
director has been adjudged to be liable to the corporation, or if the proceeding
is one charging improper personal benefit to the director, whether or not
involving action in the director's official capacity, indemnification of the
director is not permitted if the director was adjudged to be liable on the basis
that personal benefit was improperly received. The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
any entry of an order of probation prior to judgment, creates a rebuttable
presumption that the director did not meet the requisite standard of conduct
required for permitted indemnification. The termination of any proceeding by
judgment, order or settlement, however, does not create a presumption that the
director failed to meet the requisite standard of conduct for permitted
indemnification.
The Partnership Agreement also provides for indemnification of the Company,
or any director or officer of the Company, in its capacity as general partner of
the Operating Partnership, from and against all losses, claims, damages,
liabilities, joint or several, expenses (including legal fees), fines,
settlements and other amounts incurred in connection with any actions relating
to the operations of the Operating Partnership as set forth in the Partnership
Agreement.
II-1
<PAGE>
Item 16. Exhibits
*3.1 Amended and Restated Articles of Incorporation of the Company
**3.2 Amended and Restated Bylaws of the Company
***4.1 First Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, as amended
***4.2 Certificate of Limited Partnership of the Operating Partnership
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of the Common
Stock
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
****10.1 Registration Rights and Lock-up Agreement dated June 30, 1994
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
- --------------------
* Incorporated by reference to Exhibit 3.1 to the Company's registration
statement on Form S-11 (file No. 33-75288).
** Incorporated by reference to Exhibit 3.2 to the Company's registration
statement on Form S-3 (file No. 33-93986).
*** Incorporated by reference to the same titled and numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994
(file No. 1-13174).
**** Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 (file No. 1-13174).
Item 17. Undertakings
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 of 1933;
(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
distributions not previously disclosed in this registration
statement or any material change to such information in this
registration statement; provided, however, that subparagraphs
(i) and (ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
registration statement.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered herein, and the
offering of such Securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE>
(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 further undertakes that, for the purposes
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or 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 herein, and the offering of such Securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance under Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), this Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such 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, office or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
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 the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Arlington, Commonwealth of Virginia, on
November 27, 1996.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/
---------------------------------------------
Name: Ernest A. Gerardi, Jr.
Title: President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ernest A. Gerardi, Jr. as true and lawful
attorney-in-fact, with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any amendments to this
Registration Statement (including post-effective amendments), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Co-Chairman of the Board, Co-Chief November 27, 1996
- ------------------------- Executive Officer, and Director
Robert H. Smith
/s/ Co-Chairman of the Board, Co-Chief November 27, 1996
- ------------------------- Executive Officer, and Director
Robert P. Kogod
/s/ President, Chief Operating Officer, November 27, 1996
- ------------------------- and Director
Ernest A. Gerardi, Jr.
</TABLE>
II-4
<PAGE>
/s/ Vice President, Controller, November 27, 1996
- ----------------------- Chief Accounting Officer and
Charles R. Hagen Chief Financial Officer
/s/ Director November 27, 1996
- -----------------------
Fred J. Brinkman
/s/ Director November 27, 1996
- -----------------------
Charles B. Gill
/s/ Director November 27, 1996
- -----------------------
Mandell J. Ourisman
/s/ Director November 27, 1996
- -----------------------
Mallory Walker
II-5
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Sequentially
------- -------------
Number Exhibit Description Numbered Page
------ ------------------- -------------
*3.1 Amended and Restated Articles of Incorporation of the
Company................................................
**3.2 Amended and Restated Bylaws of the Company.................
***4.1 First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as
amended................................................
***4.2 Certificate of Limited Partnership of the Operating
Partnership............................................
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of
the Common Stock.......................................
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters................................................
****10.1 Registration Rights and Lock-up Agreement dated
June 30, 1994..........................................
23.1 Consent of Hogan & Hartson L.L.P. (included in
Exhibit 5.1)...........................................
23.2 Consent of Arthur Andersen LLP.............................
- -----------------------
* Incorporated by reference to Exhibit 3.1 to the Company's registration
statement on Form S-11 (file No. 33-75288).
** Incorporated by reference to Exhibit 3.2 to the Company's registration
statement on Form S-3 (file No. 33-93986).
*** Incorporated by reference to the same titled and numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994
(file No. 1-13174).
**** Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 (file No. 1-13174).
<PAGE>
Exhibit 5.1
HOGAN & HARTSON L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
202/637-5600
November 27, 1996
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Virginia 22202
Gentlemen:
We are acting as counsel to Charles E. Smith Residential Realty, Inc.,
a Maryland corporation (the "Company"), in connection with its registration
statement on Form S-3, as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission relating to the proposed public offering of
up to 1,500,000 shares of the Company's common stock, par value $.01 per share
(the "Shares"). This opinion letter is furnished to you at your request to
enable you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17
C.F.R. (S) 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinions expressed in this letter, we have
examined copies of the following documents:
1. An executed copy of the Registration Statement.
2. The Amended and Restated Articles of Incorporation of the
Company, as certified by the Department of Assessments and
Taxation of the State of Maryland on November 7, 1996 and by the
Secretary of the Company on the date hereof as then being
complete, accurate and in effect.
3. The Amended and Restated Bylaws of the Company, as certified by
the Secretary of the Company on the date hereof as being
complete, accurate and in effect.
4. An executed copy of the Registration Rights and Lock-Up
Agreement, dated as of June 30, 1994.
<PAGE>
Board of Directors
November 27, 1996
Page 2
5. Resolutions of the Board of Directors of the Company adopted on
October 22, 1996, as certified by the Secretary of the Company
on the date hereof as being complete, accurate and in effect,
relating to the issuance and sale of the Shares and arrangements
in connection therewith.
6. The First Amended and Restated Agreement of Limited Partnership
of Charles E. Smith Residential Realty L.P. (the "Operating
Partnership"), as amended (the "Operating Partnership
Agreement"), as certified by the Secretary of the Company on the
date hereof as being complete, accurate and in effect.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter
is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
Maryland General Corporation Law. We express no opinion herein as to any other
laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) effectiveness of the Registration Statement, (ii)
appropriate action having been taken by the Board of Directors regarding the
issuance of the Shares, and (iii) issuance of the Shares upon redemption of
outstanding units of limited partnership interest in the Operating Partnership
in accordance with the terms of the Operating Partnership Agreement, the Shares
will be validly issued, fully paid and nonassessable under the Maryland General
Corporation Law.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter and should not be quoted in whole
or in part or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
<PAGE>
Board of Directors
November 27, 1996
Page 3
We hereby consent to the filing of this opinion letter as Exhibit 5 to
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus constituting a part of the Registration
Statement. In giving this consent, we do not thereby admit that we are an
"expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 8.1
[LETTERHEAD OF HOGAN & HARTSON LLP]
November 27, 1996
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City
Arlington, VA 22202
Gentlemen:
We have acted as counsel to Charles E. Smith Residential Realty, Inc.
(the "Company") in connection with the registration of Common Stock of the
Company described in the "Registration Statement" on Form S-3 to be filed with
the Securities and Exchange Commission under the Securities Act of 1933 on or
about November 27, 1996, as amended through the date hereof (the "Registration
Statement," which includes the "Prospectus" and all filings with the Securities
and Exchange Commission incorporated by reference). In connection with the
registration of the Common Stock, we have been asked to provide opinions on
certain federal income tax matters. Capitalized terms used in this letter and
not otherwise defined herein have the meaning set forth in the Registration
Statement.
The opinions set forth in this letter are based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, administrative determinations (including the private letter ruling
issued by the Internal Revenue Service on June 8, 1994, as supplemented by the
ruling letter dated June 16, 1995), and legislative history as of the date
hereof. These provisions and interpretations are subject to changes, which may
or may not be retroactive in effect, that might result in material modifications
of our opinions.
In rendering the following opinions, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinions, including the following:
(1) the Registration Statement; (2) the First Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as amended, as of January 31,
<PAGE>
Charles E. Smith Residential Realty, Inc.
November 27, 1996
Page 2
1995; (3) the Amended and Restated Articles of Incorporation of the Company
dated as of June 27, 1994; (4) the agreements of limited partnership of the
partnership subsidiaries of the Operating Partnership; (5) the articles of
organization of the Property Service Businesses; (6) the articles of
incorporation of the wholly-owned subsidiaries of the Company that serve as the
general partners of the various subsidiary financing partnerships (the "REIT
Subs"); (7) other necessary documents; and (8) the facts as we have deemed
necessary to render the opinions set forth in this letter.
In our review, we have assumed, with the Company's consent, that all
of the representations and statements set forth in such documents are true and
correct, and all of the obligations imposed by any such documents on the parties
thereto, including obligations imposed under the Articles of Incorporation of
the Company, have been and will continue to be performed or satisfied in
accordance with their terms. We also have assumed the genuineness of all
signatures, the proper execution of all documents, the authenticity of all
documents submitted to us as originals, the conformity to originals of documents
submitted to us as copies, and the authenticity of the originals from which any
copies were made.
The opinions set forth in this letter also are premised on certain
written representations of the Company contained in a letter to us that is dated
as of the date hereof (the "Management Representation Letter").
For purposes of rendering our opinion, we have not made an
independent investigation of the facts set forth in any of the above-referenced
documents, including the Registration Statement and the Management
Representation Letter. We have consequently relied upon representations in the
Management Representation Letter that the information presented in such
documents or otherwise furnished to us accurately and completely describes all
material facts relevant to our opinions.
Based upon, and subject to, the assumptions and qualifications set
forth herein, we are of the opinion as follows:
<PAGE>
Charles E. Smith Residential Realty, Inc.
November 27, 1996
Page 3
1. The Company was organized and has operated in conformity
with the requirements for qualification and taxation as a real estate investment
trust ("REIT") under the Code for its taxable years ending December 31, 1994,
and December 31, 1995, and the Company's current organization and method of
operation, as of the date hereof, should enable it to continue to meet the
requirements for qualification and taxation as a REIT.
2. The discussions in the Registration Statement under the
heading "FEDERAL INCOME TAX CONSIDERATIONS" and "REDEMPTION OF UNITS -- Tax
Consequences of Redemption," to the extent that it describes matters of law or
legal conclusions, are correct in all material respects.
We assume no obligation to advise you of any changes in our opinion
subsequent to the deliveries of this opinion letter. The Company's qualification
and taxation as a REIT depend upon the Company's ability to meet on a continuing
basis, through actual annual operating and other results, the various
requirements under the Code and described in the Prospectus with regard to,
among other things, the sources of its gross income, the composition of its
assets, the level of its distributions to stockholders, and the diversity of its
stock ownership. Hogan & Hartson L.L.P. has relied upon representations of the
Company with respect to these matters and will not review the Company's
compliance with these requirements on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations, the
sources of its income, the nature of its assets, the level of its distributions
to stockholders and the diversity of its stock ownership for any given taxable
year will satisfy the requirements under the Code for qualification and taxation
as a REIT.
This opinion letter has been prepared solely for your use in
connection with the filing of the Registration Statement on the date of this
opinion letter and should not be quoted in whole or in part or otherwise be
referred to, nor filed with or furnished to any governmental agency or other
person or entity, without the prior written consent of this firm.
<PAGE>
Charles E. Smith Residential Realty, Inc.
November 27, 1996
Page 4
We hereby consent to the filing of this opinion letter as Exhibit 8.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/
Hogan & Hartson L.L.P.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 8, 1996
included in Charles E. Smith Residential Realty, Inc.'s Form 10-K for the year
ended December 31, 1995 and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
November 27, 1996
Washington, DC
