<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ______, 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.
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. [_].
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Shares Amount to be Aggregate Price Aggregate Amount of
to be Registered Registered Per Share(1) Offering Price (1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share.......
1,060,478 $23.625 $25,053,792.75 $8,639.24
==================================================================================================================================
</TABLE>
(1) 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 [___], 1996.
<PAGE>
------------------------
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.
- --------------------------------------------------------------------------------
2
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
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 JULY 15, 1996
SUBJECT TO COMPLETION
1,060,478 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
company with in-house acquisition, development, financing, marketing and
property management and leasing expertise.
This Prospectus relates to the possible issuance by the Company of up to
1,060,478 shares (the "Redemption Shares") of common stock, par value $.01 per
share ("Common Stock"), if, and to the extent that, the Company elects to issue
such Redemption Shares to holders of up to 1,060,478 units of limited
partnership interest ("Units") in Charles E. Smith Residential Realty L.P. (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. Of the Units that may be redeemed for Redemption Shares, 500,000
were issued in connection with the formation of the Company (the "Original
Units"), and the remaining 560,478 were issued in connection with the
acquisition of certain properties during the fiscal year ended December 31, 1995
(the "Acquisition Units"). The Company has registered the Redemption 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 Company will acquire Units in
the Operating Partnership in exchange for any Redemption Shares that the Company
may issue to Unit holders.
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.
_________________
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 July 15, 1996
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<PAGE>
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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" includes 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 undertakes no obligation
to publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
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 company 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 owns approximately 45% of the
Units in the Operating Partnership as of June 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 June
30, 1996, the Company, through the Operating Partnership, owns 40 multifamily
apartment communities containing a total of 14,460 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.
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.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
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 the possible issuance by the Company of up to
1,060,478 Redemption Shares if, and to the extent that, the Company elects to
issue such Redemption Shares to holders of up to 1,060,478 Units upon the tender
of such Units for redemption.
At the time of the formation of the Company, its initial public offering
(the "Initial Offering") and the acquisition by the Company of its assets in
June 1994 (collectively, the "Formation Transactions"), the Operating
Partnership issued to participants in the Formation Transactions a total of
12,131,292 Units, including the 500,000 Original Units. During the fiscal year
ended December 31, 1995, the Operating Partnership acquired two properties for
consideration which included 560,478 Acquisition Units. The number of Redemption
Shares being offered hereby represents the number of shares of Common Stock that
the Company anticipates it will elect to issue upon redemption of Units tendered
in the foreseeable future.
Pursuant to the agreement of limited partnership of the Operating
Partnership (the "Partnership Agreement"), each Unit (including the Original
Units) 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). In addition, the Company 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 Units are tendered
for redemption. As a result, as of the date of this Prospectus, the Company may
from time to time issue up to 14,079,274 shares of Common Stock upon the
acquisition of Units tendered for redemption, although, as discussed above, the
Company anticipates that it will not issue more than 3,352,982 Redemption Shares
in the foreseeable future. With each such acquisition, the Company's interest in
the Operating Partnership will increase.
The Company will not receive any of the proceeds from the issuance of the
Redemption Shares, 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 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
shares will be offered or sold by the holders thereof.
- --------------------------------------------------------------------------------
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 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 the nature of 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."
Potential Application of the Disguised Sale Regulations to a Redemption of
Units. There is a risk that a redemption of Units issued in the Formation
Transactions may cause the original transfer of property to the Operating
Partnership in exchange for Units in connection with the Formation Transactions
to be treated as a "disguised sale" of property, if the original contribution of
the property otherwise would have qualified as a tax deferred contribution of
property to the Operating Partnership. The Internal Revenue Code and the
Treasury Regulations thereunder (the "Disguised Sale Regulations") generally
provide that, unless one of the prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous or subsequent
transfer of money or other consideration (including the assumption of or taking
subject to a liability) from the partnership to the partner will be presumed to
be a sale, in whole or in part, of such property by the partner to the
partnership. Further, the Disguised Sale Regulations provide generally that in
the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a sale of the
contributed property unless the facts and circumstances clearly establish that
the
6
<PAGE>
transfers do not constitute a sale. The Disguised Sale Regulations also provide
that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will not be
presumed to be a sale unless the facts and circumstances clearly establish that
the transfers constitute a sale. If a Unit is redeemed, the IRS could contend
that the Disguised Sale Regulations apply because as a result of the redemption
a Limited Partner receives cash or shares of Common Stock subsequent to the
Limited Partner's previous contribution of property to the Operating
Partnership. In that event, the IRS would contend that the original issuance of
the Units was taxable as a disguised sale under the Disguised Sale Regulations.
See "Redemption of Units--Tax Consequences of Redemption -- Potential
Application of Disguised Sale Regulations to a Redemption of Units."
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. Pursuant to this Prospectus or otherwise, a total of
11,110,155 shares of Common Stock issued in the Formation Transactions or upon
subsequent redemption of Units are now eligible to be sold in the public market.
This represents an approximately 10.6% increase in the number of shares of
Common Stock of the Company now eligible to be sold in the public market as
compared to the 10,049,677 shares eligible to be sold in the public market
before the Registration Statement of which this Prospectus is a part became
effective on _______ ___, 1996. In addition, 11,969,274 other Units issued in
the Formation Transactions or in subsequent acquisitions are eligible to be
redeemed for cash or, at the Company's option, shares of Common Stock. If the
Company were to elect to issue shares of Common Stock upon such redemption
pursuant to this Prospectus, an additional 11,969,274 shares (or 19.1% of the
shares eligible to be sold in the public market before the Registrations
Statement of which this Prospectus is a part became effective) would be eligible
for sale in the public market. Moreover, 2,110,000 shares of Common Stock of the
Company have been reserved for issuance pursuant to the Plans, and these shares,
upon issuance, will be available for sale in the public market. An additional
one million shares have been reserved for issuance under the Company's Dividend
and Distribution Investment and Share Purchase Plan, which plan was registered
with the Securities and Exchange Commission (the "Commission") on December 22,
1995. Moreover, 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. As of June 30, 1996, options
to purchase 915,000 Units have been granted and 95,000 Units (47,500 of which
are restricted Units) have been issued or authorized to be issued to certain
directors, officers and employees of the Company and its subsidiaries and remain
outstanding. No prediction can be made about the effect that future sales of
shares of Common Stock will have on the market prices of shares.
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
7
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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 was 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 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,
8
<PAGE>
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 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.
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 March 31, 1996 was 49%.
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
9
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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 (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 that is secured by some or all of the Properties ,
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. In addition, 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 four to nine 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 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 three months ended
March 31, 1996, approximately 9.1% and 7.8%, respectively, of the Company's
operating income before 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
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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.
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.
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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 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 June 30, 1996, nine of the Properties, representing 2,973 units or
20.6% 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,
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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 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
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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.
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.
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 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
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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.
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 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.
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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 should be 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 are 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. Three lawsuits were filed against Messrs.
Smith and/or Kogod and Charles E. Smith Management, Inc. (one of which purported
to be a class action on behalf of 24 Former Property Partnerships) by one
partner in two partnerships whose properties were originally proposed to be
included in the Formation Transactions, but were not so included; this partner
subsequently filed a similar suit which names as a defendant the Operating
Partnership and the Property Services Business which currently manages these
properties. It is possible that the Company and/or the Operating Partnership
could become involved in additional litigation that might be filed by a partner
of a Former Property Partnership related to the Formation Transactions. Such
litigation may include claims 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
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Operating Partnership in connection with any such 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 June 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
GENERAL
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 company 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 June 30, 1996, the Company, through the Operating Partnership, owns
40 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.
PROPERTY SERVICE BUSINESSES
Residential Management and Leasing. The residential management and leasing
business of Smith Realty Company, an operating subsidiary of the Company, is an
established, integrated property management business with extensive experience
in leasing and managing multifamily properties. This subsidiary has been
managing and leasing multifamily housing in the Washington, D.C. metropolitan
area since 1946 and, as of June 30, 1996, manages 18 apartment properties with
approximately 6,400 apartment units. In addition, Smith Realty Company provides
certain services to the Operating Partnership in connection with the Operating
Partnership's management of its 40 Multifamily Properties. It also assists in
the development and acquisition of additional multifamily properties and carries
out a periodic inspection program that addresses all aspects of the property and
property management.
Retail Management, Leasing and Development. The retail management and
leasing business, also conducted through Smith Realty Company, approaches the
management and leasing of its retail portfolio with an integrated program of
regular direct communication with retail tenants, proactive assistance with
marketing, merchandising and monitoring store operations, and
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maintenance. A retail marketing staff works to promote the shopping centers as a
whole and to work with individual tenants to ensure the effectiveness of store
design, marketing, merchandising and sales efforts. As of June 30, 1996, the
retail management and leasing group, in addition to providing complete property
management and leasing services for the Retail Properties, with approximately
436,000 square feet of retail space, also provides such services for three other
retail properties with approximately 292,000 square feet of retail space that
are owned by affiliated third parties, and provides retail leasing and brokerage
services for additional, unaffiliated third parties on a fee-for-service basis.
Smith Realty Company also expects to provide development, management and leasing
services to a third party with respect to 660,000 square feet of retail space
under development.
Financing and Corporate Services. The financing and corporate services
businesses, also conducted through Smith Realty Company, enable a central office
to provide supporting services in the areas of financing, insurance, legal
advice, accounting, information systems, human resources, office services and
marketing services to the Company and its subsidiaries, as well as to other
companies. The finance department negotiates and administers all debt financing
for the Company and its subsidiaries, and, for a fee, other properties owned by
third parties (the majority of which are affiliated with Messrs. Smith and
Kogod). This responsibility includes obtaining new sources of funding by
actively soliciting prospective lenders, monitoring, analyzing and negotiating
changes in loan status and/or structure, and satisfying reporting requirements
of lenders. The accounting department is responsible for all accounting,
auditing and controls, procedures and management information systems as they
relate to the Company and the Properties, and for certain other partnerships and
corporate entities (including affiliates of Messrs. Smith and Kogod) on a cost-
sharing basis. The legal department provides real estate and corporate advice
to management, performs legal services and in some cases coordinates
representation by outside counsel. The marketing department develops and
implements a variety of marketing programs for the Company and its subsidiaries,
and for specific properties. The human resources department administers all
personnel functions. The insurance subsidiary provides property and casualty
insurance placement services for both corporate and individual property
requirements.
Engineering and Technical Services. The engineering and technical services
business is conducted through Consolidated Engineering Services, Inc., an
operating subsidiary of the Company, which manages, operates, maintains and
repairs the "physical plant" of office, multifamily, and retail properties.
Through its staff of on-site and off-site engineers, supervisors, technical
specialists and maintenance personnel, this subsidiary provides various
services, including on-site building systems operations and maintenance,
engineering, and technical consulting, automated environmental monitoring and
controls, preventive maintenance, management of building environmental systems
and repair and replacement of mechanical/electrical systems. This business
serves the Properties and also provides facilities management services for both
affiliated and unaffiliated third parties, including condominium, bank,
university and government buildings. During 1995, services were provided with
respect to approximately 28 million square feet of facilities.
Interior Construction and Renovation Services. The management construction
business, conducted through Smith Management Construction, Inc., an operating
subsidiary of the Company, is a construction management and general contracting
company that provides interior construction and renovation services to the
Properties and various other affiliated and unaffiliated third party clients.
This subsidiary focuses primarily on capital improvement projects and office and
retail tenant space construction and alteration, and provides the expertise
necessary to take a project from the initial planning and preconstruction stage
through the completion of the construction phase. In 1995, oversight was
provided to over $45 million of construction activity.
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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 classified board and director removal provisions. Under the
Charter, the power to amend the Bylaws of the Company is
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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 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
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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
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
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.
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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 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.
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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 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
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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. 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 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
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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 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).
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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 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.
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.
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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 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
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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
As of June 30, 1996, the Company had outstanding 9,867,163 shares of Common
Stock and had reserved for possible issuance upon redemption of Units
approximately 19.2 million additional shares of Common Stock. All of the
8,632,810 shares issued or sold by the Company in the Initial Offering are
tradable without restriction under the Securities Act (unless such shares are
held by affiliates of the Company). 416,667 other shares of Common Stock issued
in connection with the Formation Transactions and 4,170,478 Redemption Shares
issued or issuable upon redemption of Units are tradable without restriction
under the Securities Act pursuant to the Registration Statement on Form S-3
filed by the Company in June 1995 or the Registration Statement of which this
Prospectus is a part. An additional one million 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.
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 June 30, 1996,
options to purchase up to 915,000 Units have been granted, 95,000 Units (47,500
of which are restricted shares) have been issued or authorized to be issued to
executive officers and certain key employees and 2,110,000 additional Units 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.
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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 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.
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, 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
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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 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
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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.
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.
Potential Application of the Disguised Sale Regulations to a Redemption of
Units. There is a risk that a redemption of Units issued in the Formation
Transactions or a subsequent acquisition may cause the original transfer of
property or a subsequent acquisition to the Operating Partnership
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in exchange for Units in connection with the Formation Transactions or a
subsequent acquisition to be treated as a "disguised sale" of property. The Code
and the Treasury Regulations thereunder (the "Disguised Sale Regulations")
generally provide that, unless one of the prescribed exceptions is applicable, a
partner's contribution of property to a partnership and a simultaneous or
subsequent transfer of money or other consideration (including the assumption of
or taking subject to a liability) from the partnership to the partner will be
presumed to be a sale, in whole or in part, of such property by the partner to
the partnership. Further, the Disguised Sale Regulations provide generally that
in the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a sale of the
contributed property unless the facts and circumstances clearly establish that
the transfers do not constitute a sale. The Disguised Sale Regulations also
provide that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will not be
presumed to be a sale unless the facts and circumstances clearly establish that
the transfers constitute a sale.
If a Unit is redeemed, the IRS could contend that the Disguised Sale
Regulations apply because as a result of the redemption a Limited Partner
receives cash or shares of Common Stock subsequent to the Limited Partner's
previous contribution of property to the Operating Partnership. In that event,
the IRS would contend that the Formation Transactions themselves or a subsequent
acquisition were taxable as a disguised sale under the Disguised Sale
Regulations.
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.
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.
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OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
FORM OF ORGANIZATION AND ASSETS OWNED
-------------------------------------
The Operating Partnership is organized The Company is a Maryland corporation.
as a Delaware limited partnership. The The Company elected to be taxed as a
Operating Partnership owns interests REIT under the Code and intends to
(directly and through a subsidiary) in maintain its qualification as a REIT.
the Properties and, through The Company's only significant asset
subsidiaries, conducts the Company's is its interest in the Operating
management and leasing business. See Partnership, which gives the Company
"The Company." an indirect investment in the
Properties owned by the Operating
Partnership.
LENGTH OF INVESTMENT
--------------------
The Operating Partnership has a stated The Company has a perpetual term and
term of 99 years. intends to continue its operations for
an indefinite time period.
PERMITTED INVESTMENTS
---------------------
The Operating Partnership's purpose is Under its Charter, the Company may
to conduct any business that may be engage in any lawful activity
lawfully conducted by a limited permitted by the General Corporation
partnership organized pursuant to the Law of Maryland. However, under the
Act, provided that such business is to Operating Partnership Agreement the
be conducted in a manner that permits Company, as general partner, may not
the Company to be qualified as a REIT conduct any business other than the
unless the Company ceases to qualify business of the Operating Partnership
as a REIT. The Operating Partnership and cannot own any assets other than
is authorized to perform any and all its interest in the Operating
acts for the furtherance of the Partnership except for any wholly
purposes and business of the Operating owned special purpose corporate
Partnership, provided that the subsidiary which serves as the general
Operating Partnership may not take, or partner of a partnership owned at
refrain from taking, any action which, least 99%, directly or indirectly, by
in the judgment of the general partner the Operating Partnership and other
(i) could adversely affect the ability assets necessary to carry out its
of the general partner to continue to responsibility under the Partnership
qualify as a REIT, (ii) could subject Agreement or its Charter.
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).
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OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
ADDITIONAL EQUITY
-----------------
The Operating Partnership is The Board of Directors may issue, in
authorized to issue Units and other its discretion, additional equity
partnership interests (including securities consisting of Common Stock
partnership interests of different or any other series of capital stock
series or classes that may be senior (which may be classified and issued as
to Units) as determined by the Company a variety of equity securities,
as its general partner in its sole including one or more classes of
discretion. The Operating Partnership common or preferred stock, in the
may issue Units and other partnership discretion of the Board of Directors),
interests to the Company, as long as provided that the total number of
such interests are issued in shares issued does not exceed the
connection with a comparable issuance authorized number of shares of capital
of shares of Common Stock and proceeds stock set forth in the Company's
raised in connection with the issuance Charter.
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.
BORROWING POLICIES
------------------
The Operating Partnership has no The Company is not restricted under
restrictions on borrowings, and the its Charter from incurring borrowings.
Company as general partner has full However, under the Partnership
power and authority to borrow money on Agreement the Company, as general
behalf of the Operating Partnership. partner, may not incur any debts
The Company's Board of Directors has except those for which it may be
adopted a policy that currently limits liable as general partner of the
the Debt-to-Total Market Operating Partnership and certain
Capitalization Ratio to 60%, but this other limited circumstances.
policy may be altered at any time by Therefore, all indebtedness incurred
the Board of Directors. by the Company will be through the
Operating Partnership.
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OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
OTHER INVESTMENT RESTRICTIONS
-----------------------------
Other than restrictions precluding Neither the Company's Charter nor its
investments by the Operating By-Laws impose any restrictions upon
Partnership that would adversely the types of investments that may be
affect the qualification of the made by the Company except that under
Company as a REIT and general the Charter the Board of Directors is
restrictions on transactions with prohibited from taking any action that
affiliates, there are no restrictions would terminate the Company's REIT
upon the Operating Partnership's status, unless a majority of the
authority to enter into certain shareholders vote to terminate such
transactions, including among others, REIT status. The Company's Charter and
making investments, lending Operating By-Laws do not impose any restrictions
Partnership funds, or re-investing the upon dealings between the Company and
Operating Partnership's cash flow and directors, officers and affiliates
net sale or refinancing proceeds. 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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OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
MANAGEMENT CONTROL
------------------
All management powers over the The Board of Directors has exclusive
business and affairs of the Operating control over the Company's business
Partnership are vested in the general and affairs subject only to the
partner of the Operating Partnership, restrictions in the Charter and By-
and no limited partner of the Laws, the Partnership Agreement and
Operating Partnership has any right to applicable law. The Board of Directors
participate in or exercise control or is classified into three classes of
management power over the business and directors. At each annual meeting of
affairs of the Operating Partnership the shareholders, the successors of
except (i) the general partner of the the class of directors whose terms
Operating Partnership may not, without expire at that meeting will be
written consent of all the limited elected. The policies adopted by the
partners, take any action in Board of Directors may be altered or
contravention of the Partnership eliminated without a vote of the
Agreement; (ii) the general partner of shareholders. Accordingly, except for
the Operating Partnership may not their vote in the elections of
dispose of all or substantially all of directors, shareholders will have no
the Operating Partnership's assets control over the ordinary business
without the consent of the holders of policies of the Company. The Board of
a majority of the outstanding limited Directors cannot change the Company's
partnership Units; (iii) until policy of maintaining its status as a
December 31, 2013, the general partner REIT, however, without the approval of
of the Operating Partnership may not a majority of the votes entitled to
cause or permit the Operating the cast thereon.
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.
FIDUCIARY DUTIES
----------------
Under Delaware law, the general Under Maryland law, the directors must
partner of the Operating Partnership perform their duties in good faith, in
is accountable to the Operating a manner that they reasonably believe
Partnership as a fiduciary and, to be in the best interests of the
consequently, is required to exercise Company and with the care of an
good faith and integrity in all of its ordinarily prudent person in a like
dealings with respect to partnership position. Directors of the Company who
affairs. However, under the act in such a manner generally will
Partnership Agreement, the general not be liable to the Company for
partner is under no obligation to monetary damages arising from their
consider the separate interests of the activities.
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.
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OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
MANAGEMENT LIABILITY AND INDEMNIFICATION
----------------------------------------
As a matter of Delaware law, the The Company's Charter provides that
general partner has liability for the the liability of the Company's
payment of the obligations and debts directors and officers to the Company
of the Operating Partnership unless and its shareholders for money damages
limitations upon such liability are is limited to the fullest extent
stated in the document or instrument permitted under Maryland law. The
evidencing the obligation. Under the Charter and state law provide broad
Partnership Agreement, the Operating indemnification to directors and
Partnership agrees to indemnify the officers, whether serving the Company
general partner or any director or or at its request any other entity, to
officer of the general partner from the full extent permitted under
and against all losses, claims, Maryland law.
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.
38
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- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
ANTITAKEOVER PROVISIONS
-----------------------
Except in limited circumstances (see The Charter and By-Laws of the Company
"Voting Rights" below), the general and the Maryland General Corporation
partner of the Operating Partnership law contain a number of provisions
has exclusive management power over that may have the effect of delaying
the business and affairs of the or discouraging an unsolicited
Operating Partnership. The general proposal for the acquisition of the
partner may not be removed by the Company or the removal of incumbent
limited partners with or without management. These provisions include,
cause. Under the Partnership among others, (i) a staggered Board of
Agreement, the general partner may, in Directors; (ii) authorized capital
its sole discretion, prevent a limited stock that may be classified and
partner from transferring his interest issued as a variety of equity
or any rights as a limited partner securities in the discretion of the
except in certain limited Board of Directors, including
circumstances. The general partner may securities having superior voting
exercise this right of approval to rights to the Common Stock; (iii)
deter, delay or hamper attempts by restrictions on business combinations
persons to acquire a majority interest with persons who acquire more than a
in the Operating Partnership. See certain percentage of Common Stock;
"Description of Units." (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
-------------
Under the Partnership Agreement, The Company is managed and controlled
Limited Partners have voting rights by a Board of Directors consisting of
only as to the dissolution of the three classes having staggered terms
Operating Partnership, the sale of all of office. Each class is elected by
or substantially all of the assets of the shareholders at annual meetings of
the Operating Partnership and the Company. Maryland law requires
amendments of the Partnership that certain major corporate
Agreement, as more fully described transactions, including most
below. Otherwise, all decisions amendments to the Charter, may not be
relating to the operation and consummated without the approval of
management of the Operating shareholders as set forth below. All
Partnership are made by the general shares of Common Stock have one vote,
partner. See "Description of Units." and the Charter permits the Board of
As of June 30, 1996, the Company owned Directors to classify and issue
approximately 45% of the Units. As capital stock in one or more series
Units are redeemed by partners, the having voting power which may differ
Company's percentage ownership of the from that of the Common Stock. See
Units will increase. If additional "Description of Common Stock."
Units are issued to third parties, the
Company's percentage ownership of the
Units will decrease.
39
<PAGE>
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
-----------------------------------------------------
The Partnership Agreement may be Amendments to the Company's Charter
amended through a proposal by the must be approved by the Board of
general partner or any limited partner Directors and by the vote of at least
holding 25% or more of the Units. Such two-thirds of the votes entitled to be
proposal, in order to be effective, cast at a meeting of shareholders,
must be approved by the written vote except that an amendment of the
of holders of at least a majority in provisions relating to the classified
interest of the Operating Partnership. Board of Directors, the power to
In addition, the general partner may, remove directors and the share
without the consent of the limited ownership limits designed to maintain
partners, amend the Partnership qualified REIT status must be approved
Agreement as to ministerial matters. 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
------------------------------------------------------------------
Through December 31, 2013, the general Under Maryland law, the Board of
partner of the Operating Partnership Directors must obtain approval of
may not elect to dissolve the holders of at least two-thirds of the
Operating Partnership if any original outstanding shares of Common Stock in
Limited Partner who became a limited order to dissolve the Company.
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.
VOTE REQUIRED TO SELL ASSETS
----------------------------
Under the Partnership Agreement, the Under Maryland law, the Board of
general partner of the Operating Directors is required to obtain
Partnership may not sell, exchange, approval of the shareholders by the
transfer or otherwise dispose of all affirmative vote of two-thirds of all
or substantially all of the Operating the votes entitled to be cast on the
Partnership's assets without the matter in order to sell all or
consent of holders of a majority of substantially all of the assets of the
the outstanding Units. Company. No approval of the
shareholders is required for the sale
of less than all or substantially all
of the Company's assets.
VOTE REQUIRED TO MERGE
----------------------
Under the Partnership Agreement, the Under Maryland law, the Board of
general partner of the Operating Directors is required to obtain
Partnership may not merge or approval of the shareholders by the
consolidate the Operating Partnership affirmative vote of two-thirds of all
without the consent of holders of a the votes entitled to be cast on the
majority of the outstanding Units. matter in order to merge or
consolidate the Company.
40
<PAGE>
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- --------------------------------------------------------------------------------
COMPENSATION, FEES AND DISTRIBUTIONS
------------------------------------
The general partner does not receive The directors of the Company receive
any compensation for its services as compensation for their services.
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.
LIABILITY OF INVESTORS
----------------------
Under the Partnership Agreement and Under Maryland law, shareholders are
applicable state law, the liability of not personally liable for the debts or
the limited partners for the Operating obligations of the Company. Shares of
Partnership's debts and obligations is Common Stock, upon issuance, will be
generally limited to the amount of fully paid and nonassessable.
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.
REVIEW OF INVESTOR LISTS
------------------------
Under the Partnership Agreement, Under Maryland law, a shareholder
Limited Partners, upon written demand holding at least 5% of the outstanding
with a statement of the purpose of stock of a corporation, may upon
such demand and at the limited written request inspect and copy
partner's expense, are entitled to during usual business hours the list
obtain a current list of the name and of the shareholders of such
last known business, residence or corporation.
mailing address of each Limited
Partner of the Operating Partnership.
41
<PAGE>
The following compares certain of the investment attributes and legal
rights associated with the ownership of Units and Shares.
- --------------------------------------------------------------------------------
UNITS SHARES
- --------------------------------------------------------------------------------
NATURE OF INVESTMENT
--------------------
The Units constitute equity interests Shares of Common Stock constitute
entitling each Limited Partner to his equity interests in the Company. The
pro rata share of cash distributions Company is entitled to receive its pro
made to the limited partners of the rata share of distributions made by
Operating Partnership. The Operating the Operating Partnership with respect
Partnership generally intends to to the Units, and each shareholder is
retain and reinvest proceeds of the entitled to his pro rata share of any
sale of property or excess refinancing dividends or distributions paid with
proceeds in its business. 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
----------------------------
The general partner of the Operating The Board of Directors may issue, in
Partnership is authorized, in its sole its discretion, additional shares of
discretion and without Limited Partner Common Stock and have the authority to
approval, to cause the Operating issue from the authorized capital
Partnership to issue additional stock a variety of other equity
limited partnership interests and securities of the Company with such
other equity securities for any powers, preferences and rights as the
partnership purpose at any time to the Board of Directors may designate at
limited partners or to other persons the time. The issuance of additional
on terms established by the general shares of either Common Stock or other
partner. similar equity securities may result
in the dilution of the interests of
the shareholders.
42
<PAGE>
- --------------------------------------------------------------------------------
UNITS SHARES
- --------------------------------------------------------------------------------
LIQUIDITY
---------
Units may be transferred by a Limited The Common Stock is freely
Partner only with the consent of the transferable. The Common Stock is
general partner of the Operating listed on the NYSE, and a public
Partnership, which consent may be market for the Common Stock exists.
withheld in its sole discretion. The The breadth and strength of this
general partner will permit transfers secondary market will depend, among
of Units only in connection with other things, upon the number of
gifts, bequests and transfers by a shares outstanding, the Company's
Unit holder to family members and financial results and prospects, the
certain other persons. Subject to general interest in the Company's and
certain conditions, each Limited other real estate investments, and the
Partner has the right to elect to have Company's dividend yield compared to
his Units redeemed by the Operating that of other debt and equity
Partnership. Upon redemption, such securities.
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.
TAXATION
--------
The Operating Partnership will not be The Company has elected to be taxed as
subject to federal income taxes. a REIT. So long as it qualifies as a
Instead, each holder of Units includes REIT, the Company will be permitted to
his allocable share of the Operating deduct distributions paid to its
Partnership's taxable income or loss shareholders, which effectively will
in determining his individual federal reduce the "double taxation" that
income tax liability. The maximum typically results when a corporation
effective federal tax rate for earns income and distributes that
individuals under current law is income to its shareholders in the form
39.6%. of dividends. The Property Service
Businesses, however, will not qualify
Income and loss from the Operating as REITs and thus they will be subject
Partnership generally will be subject to federal income tax on their net
to the "passive activity" limitations. income at normal corporate rates. The
Under the "passive activity" rules, maximum effective tax rate for
income and loss from the Operating corporations under current law is 35%.
Partnership that is considered
"passive income" generally can be Dividends paid by the Company will be
offset against income and loss from treated as "portfolio" income and
other investments that constitute cannot be offset with losses from
"passive activities" (unless the "passive activities."
Operating Partnership is considered a
"publicly traded partnership," in Distributions made by the Company to
which case income and loss from the its taxable domestic shareholders out
Operating Partnership can be offset of current or accumulated earnings and
only against other income and loss profits will be taken into account by
from the Operating Partnership). them as ordinary income. Distributions
Income of the Operating Partnership, in excess of current or accumulated
however, attributable to dividends earnings and profits that are not
from the Property Service Businesses designated as capital gain dividends
or interest paid by the Property will be treated as a non-taxable
Service Businesses will not qualify as return of basis to the extent of a
passive income and cannot be offset shareholder's adjusted basis in its
with losses and deductions from a shares of Common Stock, with the
"passive activity" (including losses excess taxed as capital gain.
and deductions attributable to the Distributions that are designated as
Operating Partnership's multifamily capital gain dividends generally will
rental activities). be taxed as long-term capital gain.
43
<PAGE>
- --------------------------------------------------------------------------------
UNITS SHARES
- --------------------------------------------------------------------------------
Cash distributions from the Operating Each year, Shareholders will receive
Partnership will not be taxable to a Form 1099 used by corporations to
holder of Units except to the extent report dividends paid to their
they exceed such holder's basis in his shareholders.
interest in the Operating Partnership
(which will include such holder's Shareholders who are individuals
allocable share of the Operating generally will not be required to file
Partnership's debt). state income tax returns and/or pay
state income taxes outside of their
Each year, holders of Units will state of residence with respect to the
receive a Schedule K-1 tax form Company's operations and
containing detailed tax information distributions. The Company may be
for inclusion in preparing their required to pay state income taxes in
federal income tax returns. certain states.
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.
44
<PAGE>
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.
45
<PAGE>
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 the
Properties to fail to qualify as "rents from real property." The Company also
received a ruling from the IRS to the effect
46
<PAGE>
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 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
acquires 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 successful or will not require a reduction in the
Operating Partnership's overall interest in the Property Service Businesses.
47
<PAGE>
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 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.
48
<PAGE>
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.
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
49
<PAGE>
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 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,
50
<PAGE>
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 the possible issuance by the Company of the
Redemption Shares if, and to the extent that, the Company elects to issue such
Redemption Shares to holders of Units upon the tender of such Units for
redemption. The Company has registered the Redemption 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 proceeds 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).
Pursuant to the Registration Statement of which this Prospectus forms a
part, the Company may from time to time issue up to 1,060,478 Redemption Shares
upon the acquisition of Units tendered for redemption. 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.
51
<PAGE>
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 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, and the Company's Report on Form 10-Q for the quarter ended March 31,
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.
52
<PAGE>
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.
53
<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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................... 4
Risk Factors............................................. 6
The Company.............................................. 18
Description of Common Stock.............................. 20
Description of Units..................................... 24
Shares Available for Future Sale......................... 29
Registration Rights...................................... 30
Redemption of Units...................................... 30
Federal Income Tax Considerations........................ 45
Plan of Distribution..................................... 51
Available Information.................................... 51
Incorporation of Certain Documents
by Reference............................................ 52
Experts.................................................. 52
Legal Matters............................................ 53
</TABLE>
____________
================================================================================
1,060,478 SHARES
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
PROSPECTUS
================================================================================
<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>
<S> <C>
Registration Fee................................ $ 8,639.24
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........................................... $41,639.24
==========
</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 June 28,
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 June 28, 1996
- --------------------------------- Executive Officer, and Director
Robert H. Smith
/s/ Co-Chairman of the Board, Co-Chief June 28, 1996
- --------------------------------- Executive Officer, and Director
Robert P. Kogod
/s/ President, Chief Operating Officer, June 28, 1996
- --------------------------------- and Director
Ernest A. Gerardi, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Executive Vice President, Treasurer, June 28, 1996
- --------------------------------- and Chief Financial Officer
Anthony J. LoPinto
/s/ Vice President, Controller, and June 28, 1996
- --------------------------------- Chief Accounting Officer
Charles R. Hagen
/s/ Director June 28, 1996
- ---------------------------------
Fred J. Brinkman
/s/ Director June 28, 1996
- ---------------------------------
Charles B. Gill
/s/ Director June 28, 1996
- ---------------------------------
Mandell J. Ourisman
/s/ Director June 28, 1996
- ---------------------------------
Mallory Walker
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
- ------- ------------
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
- ------ ------------------- -------------
<S> <C> <C>
*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..............................
</TABLE>
__________________
* 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
July 15, 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 1,060,478 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 opinion 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 July 10, 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 then 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
July 15, 1996
Page 2
5. Resolutions of the Board of Directors of the Company adopted on
May 24, 1994, May 23, 1995 and June 28, 1996, as certified by the
Secretary of the Company on the date hereof as then being
complete, accurate and in effect, relating to the issuance and
sale of the Company 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 then 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 Company Shares, and (iii) issuance of the Company 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 Company 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
July 15, 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
HOGAN & HARTSON L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
Tel (202) 637-5600
Fax (202) 637-5910
July 15, 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 July 15, 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 Securities, 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.
July 15, 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
July 15, 1996 (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.
July 15, 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 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.
July 15, 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>
Exhibit 23.2
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
July 12, 1996
Washington, D.C.
