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As filed with the Securities and Exchange Commission on November 2, 1998
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 54-1681655
(State of Incorporation) (I.R.S. Employer
Identification No.)
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Address, including zip code and telephone number,
including area code, of Registrant's principal
executive offices)
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Ernest A. Gerardi, Jr.
President
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
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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. / /.
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<PAGE>
CALCULATION OF REGISTRATION FEE (1)
<TABLE>
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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
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share 2,640,325 $30.781 $81,271,843.83 $22,593.57
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</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 October 30, 1998.
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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.
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<PAGE>
Subject to Completion
[LOGO] Charles E. Smith Residential Realty, Inc.
2,640,325 shares of Common Stock
Prospectus
This prospectus relates to 2,640,325 shares of common
stock that a holder of our Series A Cumulative Convertible
Redeemable Preferred Stock, a selling shareholder, may sell
from time to time to the public if it elects to convert such
preferred stock into shares of our common stock. We will not
receive any part of the proceeds from the sale.
We are a self-managed equity real estate investment trust.
Through the Operating Partnership and its subsidiaries, we
own, acquire, develop, and manage multifamily residential
properties, and provide a full range of real estate services
to other property owners. Our properties are located primarily
in the Washington, D.C., Chicago, and Boston metropolitan
areas.
Our common stock is listed on the New York Stock Exchange
under the trading symbol "SRW."
Consider carefully the risk factors beginning on page 3 in
this prospectus.
------------------------------
The information contained in this prospectus is not
complete and may be changed. We may not sell these securities
until the Registration Statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
Neither the Securities and Exchange Commission nor any
state securities commission has approved or disapproved these
securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
November __, 1998
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary................................................................. 1
Some Important Terms........................................................... 1
Forward-Looking Information.................................................... 1
The Company.................................................................... 1
Recent Developments............................................................ 2
The Stock Offering............................................................. 2
Important Risks in Owning Our Common Stock..................................... 2
Tax Status of the Company...................................................... 2
Risk Factors....................................................................... 3
Our Performance and Ability to Make Distributions to
Our Shareholders are Subject to Risks Associated with
the Real Estate Industry................................................... 3
Debt Financing, Financial Covenants, Degree of Leverage
and Increases in Interest Rates Could Adversely Affect
Our Economic Performance................................................... 5
The Common Stock Ranks Junior to Outstanding Preferred Shares.................. 6
Shareholders' Ability to Effect Changes in Control
of the Company is Limited.................................................. 6
Our Reliance on the Property Service Businesses and Lack of Voting Control Over
Them May Adversely Affect Our Shareholders................................. 8
Conflicts of Interest Could Result in Decisions Not in the Company's Best
Interest .................................................................. 9
We are Dependent on Our Key Personnel.......................................... 10
The Market Value of Our Common Stock Could Be
Adversely Affected By a Number of Factors.................................. 10
Our Success as a REIT Depends on Our Compliance with
Complicated Tax Rules...................................................... 11
Description of Capital Stock....................................................... 12
General Rights of Common Stock................................................. 12
Preferred Shares............................................................... 12
Classification and Removal of Board of Directors;
Other Provisions........................................................... 13
Special Statutory Requirements for Certain Transactions........................ 14
Restrictions on Transfer; Excess Stock......................................... 15
Transfer Agent and Registrar................................................... 16
Shares Available for Future Sale................................................... 16
Registration Rights................................................................ 17
Selling Shareholders............................................................... 17
Federal Income Tax Considerations.................................................. 19
General........................................................................ 19
Taxation of the Company........................................................ 19
Requirements for Qualification................................................. 20
Tax Aspects of the Company's Investments in the
Operating Partnership and Property Service Businesses...................... 23
Taxation of Shareholders....................................................... 25
Other Tax Considerations....................................................... 29
Plan of Distribution............................................................... 30
Available Information.............................................................. 31
Incorporation of Certain Documents by Reference.................................... 31
Experts............................................................................ 32
Legal Matters...................................................................... 32
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that is important
to you. To understand this common stock offering, you should read the entire
prospectus carefully, including the risk factors and federal income tax
considerations.
Some Important Terms
References in this prospectus to "the Company," "we," "us," and "our" refer
to Charles E. Smith Residential Realty, Inc., Charles E. Smith Residential
Realty L.P., their predecessors and subsidiaries, or any of them, unless the
context indicates otherwise. References in this prospectus to the "Operating
Partnership" refer to Charles E. Smith Residential Realty L.P., its
subsidiaries, or any of them. References in this prospectus to "Units" refer to
common units of limited partnership interest of Charles E. Smith Residential
Realty L.P. References in this prospectus to "Series A Preferred Shares" refer
to Series A Cumulative Convertible Redeemable Preferred Stock of Charles E.
Smith Residential Realty, Inc.
Forward-Looking Information
This prospectus includes forward-looking statements which involve risks and
uncertainties. Whenever you see the words "believes," "anticipates," and
"expects" and similar words indicating uncertainty, you should remember that the
statements are assumptions. These assumptions are subject to risks and
uncertainties that could cause actual financial results or management plans and
objectives to differ materially from those projected or expressed in this
prospectus. For example, such differences may occur because of changes in:
- national and regional economic conditions (especially in multifamily
property occupancies and rental growth in the Washington, D.C.
metropolitan area);
- our ability to identify and secure additional properties and property
locations;
- the effect of prevailing market interest rates and the pricing of our
common stock;
- the acceptance of our financing plans by the capital markets; and
- other risks which may have been or will be discussed in our filings
with the SEC.
We recommend that you consider carefully the risks of such assumptions
before making any investment in our common stock.
We disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements in this prospectus. We may make
such updates or revisions to reflect a change in our expectations or a future
event or change in a circumstance or condition upon which such forward-looking
statements are based.
The Company
We are a self-administered and self-managed equity REIT which acquires,
develops, manages and operates multifamily properties primarily in the
Washington, D.C., Chicago, and Boston metropolitan areas. We are a fully
integrated real estate organization with in-house acquisition, development,
financing, marketing, property management and leasing expertise. Our primary
strategy for growth is to acquire, develop, own and manage high quality
multifamily properties to generate long-term income and increase in value. We
are a Maryland corporation. The Operating Partnership is a Delaware limited
partnership. We commenced business operations on June 30, 1994.
We are the sole general partner of the Operating Partnership. As of
September 30, 1998, we owned approximately 56% of its outstanding Units. The
Operating Partnership and its subsidiaries own all of our properties, property
interests and business assets.
<PAGE>
As of September 30, 1998, we owned 49 multifamily apartment communities
with a total of 19,951 units. 45 of the properties were located in the
Washington, D.C. metropolitan area, two in the Boston metropolitan area and two
in the Chicago metropolitan area. We currently have approximately 2,100 units
under construction. We also manage over 3,500 additional apartment units for
other property owners. Besides our residential properties, we own two retail
centers in the Washington, D.C. metropolitan area with approximately 436,000
square feet of retail space.
Recent Developments
We have made preliminary arrangements to develop three new residential
projects totaling 843 units. We will develop two of these projects in
northern Virginia and one project in southeast Florida, which we believe are
strong submarkets consistent with our urban franchise strategy. We expect to
purchase the land necessary for these projects in 2000 and 2001.
We have also negotiated a new standby credit facility with Fannie Mae
through Green Park Financial as the lender. This new credit facility will
provide us with up to $300 million of non-recourse long-term secured debt for
up to 15 years. The initial draw on this facility will be $140 million at
6.75% for 15 years, with proceeds to be used to retire a $125 million debt
and associated prepayment penalty scheduled to mature in 2001. Terms and
rates of subsequent draws will be determined at the time of use.
The Stock Offering
This prospectus relates to 2,640,325 shares of common stock that may be
sold by Security Capital Preferred Growth Incorporated, a Maryland
corporation ("SCPG"), and/or its permitted transferees (collectively, the
"Selling Shareholders") following conversion of its Series A Preferred Shares
into common stock. SCPG received its Series A Preferred Shares in a series of
private offerings beginning on June 30, 1997.
On or after January 31, 1999, the Selling Shareholders, at their option,
may convert their Series A Preferred Shares into shares of our common stock
on a one-for-one basis, subject to certain limitations. Prior to January 31,
1999, the Series A Preferred Shares will not be convertible unless we undergo
a change of control, as defined in the purchase agreement for such shares, or
fail to qualify as a REIT for tax purposes. We cannot redeem the Series A
Preferred Shares prior to May 15, 2003. On or after May 15, 2003, we may, at
our option, redeem the Series A Preferred Shares for cash at a price of
$27.08 per share, plus accrued and unpaid dividends. Under certain
circumstances, we may elect to redeem such shares in exchange for shares of
common stock based on the market price of the common stock at the time of
redemption.
Important Risks in Owning Our Common Stock
Before you decide to invest in our common stock, you should read the
"Risk Factors" section, which begins on page 3 of this prospectus.
Tax Status of the Company
We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). We believe that we
qualify for taxation as a REIT and generally will not be subject to federal
income tax on net income that we distribute to our shareholders. We are
required, among other things, to distribute at least 95% of our taxable income
(excluding any net capital gain). Even if we qualify to be taxed as a REIT, we
are subject to certain federal, state and local taxes on our income and property
and to federal income and excise tax on the income we do not distribute. In
addition, the operating companies that we own do not qualify as REITs and are
subject to federal, state and local income taxes. See page 11 and pages 19-29
for a more detailed explanation.
2
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RISK FACTORS
In addition to the other information in this prospectus, you should
consider carefully the following risk factors.
Our Performance and Ability to Make Distributions to Our Shareholders are
Subject to Risks Associated With the Real Estate Industry
We Are Subject to A Number of General Real Estate Industry Risks. If
our properties do not generate sufficient income to pay our operating expenses,
service our debt and maintain our properties, we may be unable to make expected
distributions to our shareholders. Several factors may adversely affect the
economic performance and value of our properties. These factors include:
- Changes in the national, regional and local economic climate;
- Local real estate conditions such as an oversupply of, or a reduction
in demand for, apartments and retail space;
- The attractiveness of our properties to tenants and shoppers;
- The quality and philosophy of our management; and
- Our ability to provide adequate maintenance of our properties and
insurance, and pay increased operating costs (including real estate
taxes).
Our performance also depends on our ability to collect rent from
tenants and to rent apartments and retail space on favorable terms. Also, the
expenses of owning and operating a property generally do not decline when
circumstances such as market factors and competition cause a reduction in income
from the property. In addition, changes in laws and governmental regulation
(including those governing usage, zoning, taxes, construction and safety),
potential liability under applicable laws, interest rate levels and the
availability of financing may adversely affect our ability to make expected
distributions to our shareholders.
Environmental Problems Are Possible and Can Be Costly. Laws and
regulations relating to the protection of the environment may require a
current or previous owner or operator of real estate to investigate and clean
up hazardous or toxic substances on or in such property. The owner or
operator may have to pay a governmental entity or third parties for property
damage and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws often impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants. Even if more than one
person may have been responsible for the contamination, each person covered
by the environmental laws may be held responsible for all of the clean-up
costs incurred. In addition, third parties may sue the owner or operator of a
site for damages and costs resulting from environmental contamination
emanating from a site. If any contaminants exist on one of our properties, or
if we fail to properly clean up such substances, our ability to sell the
property or to borrow using the property as collateral may be adversely
affected. We believe that our properties are in compliance in all material
respects with applicable environmental laws. Unidentified environmental
liabilities could arise, however, and could have an adverse effect on our
financial condition and performance.
We May Be Unable to Renew Leases or Relet Space as Leases Expire. If
our tenants in our retail properties decide not to renew their leases when they
expire, we may not be able to relet the space. Even if the tenants renew their
leases or we can relet the space, the terms of the renewal or reletting
(including the cost of required renovations to tenants) may be less favorable
than our
3
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current lease terms. In addition, if sales by retail tenants decline
sufficiently, tenants may be unable to pay their minimum rents. If a tenant
were to default on rental payments, we could experience delays and costs in
enforcing our rights as lessor and our results of operation and financial
condition would be adversely affected. Any of these events could adversely
affect our ability to make expected distributions to our shareholders.
We Compete with Other Properties and Management Companies. All of
our apartment 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 our ability to lease
apartment units and on the rents we charge. In addition, other forms of
single and multifamily residential properties provide housing alternatives to
tenants and potential tenants of our multifamily properties. Our retail
properties face competition from other retail properties. We also face
competition from other real estate companies that provide management, leasing
and other services similar to those we currently provide.
We Are Dependent on the Washington, D.C. Metropolitan Area Market. A
substantial majority of our properties are located in the Washington, D.C.
metropolitan area market. While we seek to acquire and develop additional
properties in other targeted urban markets, a decline in the economy or
rental activities in the Washington, D.C. metropolitan area market may
adversely affect our ability to make distributions to our shareholders.
Because Real Estate Investments are Illiquid and We Are Subject to
Other Restrictions, We May Not Be Able to Sell Properties When Appropriate.
Real estate investments generally cannot be sold quickly. Therefore, we may
not be able to vary our portfolio promptly in response to changes in economic
or other conditions. Some of our loan agreements and agreements under which
certain properties were contributed to us contain provisions that prevent or
restrict us from selling certain properties for a specified periods of time.
In addition, the Internal Revenue Code places limits on our ability to sell
properties held for fewer than four years. These restrictions could make it
difficult for us to sell properties without adversely affecting returns to
shareholders, even if a sale were in their best interests.
Our Properties May Be Subject to Certain Regulations that Could
Adversely Affect Distributions to Our Shareholders. Our 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, we are
required to make reasonable and necessary accommodations for persons with
disabilities in rules, policies and modifications related to our multifamily
properties to allow such persons to use, or fully enjoy our properties. If we do
not comply with the FHA, we may have to pay fines or damages to persons who sue
us for noncompliance. We believe our properties are in compliance with the FHA
in all material respects. The ADA requires that we remove barriers on our
properties that could prevent persons with disabilities to access certain public
areas. If we do not comply with the ADA, we may have to pay fines or damages to
persons who sue us for noncompliance. 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.
We have included the costs of any alterations or additions required to date in
the operating budget for each affected property. We expect to pay all costs for
remaining modifications from cash flow from operating activities and reserves
established for this purpose.
As of September 30, 1998, twelve of our properties, 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. This represents 3,772 units or 18.9% of the total
number of apartment units we owned on that date. Although these rent control
provisions currently allow property owners to increase the maximum rent
"ceiling" annually in response to several factors, recent legislative changes
have limited our ability to take full advantage of the available "ceilings" in
any one year. Thus, we cannot guarantee that we will be able to raise rents
under the new legislation to levels that reflect future market rates. If we are
unable to do so, our distributions to shareholders would be adversely affected.
Our Properties in the District of Columbia Are Subject to Special
Tenants Rights That May Impede Our Sale of Those Properties. If we decided to
sell one of our residential properties located in the District of Columbia,
tenants of the property would have a right of first
4
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refusal to purchase the property as well as a right to match offers made on the
property by prospective purchasers under the District of Columbia Rental Housing
Conversion and Sale Act of 1980 (the "Conversion Act"). If we wanted to transfer
all of our partnership interests of a partnership that owns one of our
properties or wanted to transfer all of our stock in a corporation that owns
such a property to a potential purchaser, tenants would have the right to bid on
the property first. As a result, essentially all of our future acquisitions and
sales of residential properties located in the District of Columbia will be
subject to tenant rights under the Conversion Act. Such tenants' rights may make
it difficult for us to purchase or sell residential properties located in the
District of Columbia, even if a purchase or sale were in the interests of our
shareholders.
Some Potential Losses Are Not Covered By Insurance. We carry
comprehensive liability, fire, flood, extended coverage and rental loss
insurance on all of our properties. We believe the policy specifications and
insured limits of these policies are adequate and appropriate. There are,
however, certain types of losses (such as from wars), that generally are not
insured. If such an uninsured loss occurs, we could lose all or a portion of the
capital we invested in a property, as well as anticipated future revenue from
the property. In such an event, we might nevertheless remain obligated for any
mortgage debt or other financial obligations related to the property.
New Acquisitions May Fail to Perform as Expected. We intend to
continue to actively acquire and develop new multifamily and retail
properties (including expansions of existing properties on the land adjacent
to those properties) where we believe that doing so is consistent with our
business strategies. Newly acquired properties may fail to perform as
expected. We may underestimate the costs necessary to bring an acquired
property up to standards established for its intended market. In addition, we
expect to acquire properties with cash from secured or unsecured financings
and proceeds from offerings of equity or debt. If we are not in a position to
or have the opportunity in the future to make suitable property acquisitions
on favorable terms or are unable to meet our debt service obligations,
distributions to shareholders may be adversely affected.
Debt Financing, Financial Covenants, Degree of Leverage and Increases in
Interest Rates Could Adversely Affect Our Economic Performance
Our Articles of Incorporation Do Not Limit the Amount or Percentage
of Debt that We May Incur and Our Degree of Leverage May Limit Our Ability to
Obtain Additional Financing. We intend to fund acquisitions and development
of properties primarily through short-term borrowings, and also out of
undistributed cash flow from operating activities. We expect 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, we
currently have on file with the SEC two effective registration statements
allowing for the sale of up to approximately $266 million in unspecified
securities, including debt securities. As of September 30, 1998, our
Debt-to-Total Market Capitalization Ratio (total debt as a percentage of
total debt plus the market value of our outstanding common and preferred
stock and Units) was 40.4%. We have adopted a policy of incurring debt
(including debt incurred under our line of credit) only if when doing so our
Debt-to-Total Market Capitalization Ratio would be 60% or less. Our Articles
of Incorporation ("Charter"), however, do not limit the amount or
percentage of debt that we may incur in the future. Accordingly, we could
modify the current policy at any time. If we changed this policy, we could
become more highly leveraged. This would result in an increase in debt
service that, in turn, could increase our risk of default on our obligations
and adversely affect our funds from operations and ability to make expected
distributions to our shareholders.
Our Policy to Limit Debt May Not Ensure that We Can Incur Debt and
Continue to Make Expected Distributions to Shareholders. We established our
debt policy relative to our market capitalization rather than to the book
value of our assets, a commonly used ratio in our industry. Our market
capitalization, however, varies depending on the price at which the common
stock trades
5
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and may not reflect the fair market value of our underlying assets at all times.
This may result in our debt at any particular time to be substantially more than
60% of the underlying value of our assets. Although we will consider factors
other than market capitalization in making decisions regarding whether to incur
debt (such as the estimated market value of our properties upon refinancing and
the ability of particular properties and the Company as a whole to generate cash
flow to cover expected debt service), we cannot guarantee that the Debt-to-Total
Market Capitalization Ratio (or the ratio of indebtedness to any other measure
of asset value) will be an accurate measure of our ability to incur debt while
continuing to make distributions to shareholders at expected levels.
We May Not Be Able to Refinance Our Debt on Favorable Terms or Make
Balloon Payments When Certain Debts Become Due. We are subject to certain
risks associated with debt financing, including the risk that we will not be
able to refinance the existing debt on our properties at maturity on
favorable terms or at all. The terms of any refinancing may not be as
favorable as the current terms and that we may not be able to finance
necessary capital expenditures for renovations and reletting space. Higher
interest rates at the time of refinancing could have an adverse effect on
distributions. In addition, some of our debt 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. We cannot guarantee that we will be able
to refinance this debt or otherwise obtain funds by selling assets or by
raising equity when all debts become due. If a property is mortgaged to
secure payment of debt and we are unable to meet mortgage payments, the
mortgagee could foreclose on the property, which would result in a loss of
our income and asset value.
Rising Interest Rates Could Adversely Affect Our Cash Flow. We
currently have approximately $250 million of variable rate mortgage debt
outstanding. A significant rise in interest rates could adversely affect our
results of operations and our ability to make distributions to our shareholders.
Changes in our interest expenses also will affect our net income and funds from
operations.
The Common Stock Ranks Junior to Outstanding Preferred Shares
Our Charter authorizes the Board of Directors to issue preferred
shares of stock ("Preferred Shares") and to establish the preferences and
rights of any Preferred Shares issued, including the right to vote and the
right to convert them into shares of common stock. We have three series of
outstanding Preferred Shares, which rank senior to the common stock with
respect to dividend rights and distributions upon liquidation, dissolution
and winding of the Company. Accordingly, holders of common stock are subject
to the risks normally associated with preferred equity financing, including
the risk that our cash flow will be insufficient to meet the required
payments of the Preferred Shares.
Shareholders' Ability to Effect Changes in Control of the Company is Limited
Certain Company Policies May Be Changed Without a Vote of Shareholders.
Certain of our major policies are decided by our Board of Directors, including
those relating to investment, financing, growth, acquisitions, development, debt
capitalization and distributions. Although the Board of Directors currently has
no intention to amend or revise these and other policies, it may do so from time
to time without a vote of the shareholders of the Company. In order to change
our policy of seeking to maintain our REIT qualification status, however, we
must have the approval of our shareholders. Changes in our policies may not
fully serve the interests of all shareholders.
Provisions of our Charter Could Inhibit Changes of Control. Certain
provisions of our Charter may delay or otherwise limit the ability of outside
parties to acquire control of the Company or engage in some other transaction.
Such Charter provisions provide for three-year staggered terms for directors,
the authority of the Board of Directors to classify presently unclassified
capital stock into one or more series having special preferences without
shareholder approval and imposition of a 9.8% ownership limit relating to third
party ownership of shares. See "-- We Have a Share Ownership Limit" below and
"Description of Capital Stock--Classification and Removal of Board of
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Directors; Other Provisions" on page 13. Such limitations could prevent the
Company from entering into a change of control transaction or some other
transaction that could be in the best interests of the shareholders.
In addition, we cannot merge, consolidate or engage in any combination
with another person or sell all or substantially all of our assets unless such
transaction includes a merger of, or a sale of assets by, the Operating
Partnership, which may require approval of the holders of a majority of the
Units. We currently own approximately 56% of the Units. This voting requirement
might limit the possibility for acquisition or change in control of the Company,
even if a change in control were in the shareholders' interest. In this regard,
the holders of Units might incur different, and more adverse, tax consequences
as a result of such an acquisition or change in control that could motivate them
to oppose such a transaction that is in the shareholders' interest.
Our Ability to Issue Preferred Shares Could Inhibit Changes of
Control. The power of the Board of Directors under our Charter to issue
Preferred Shares and to establish the preferences and rights of any Preferred
Shares issued 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.
Maryland Law Contains Limitations on Change of Control. Provisions of
the Maryland General Corporation Law ("MGCL") prohibit 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") unless
the transaction is 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 became an Interested Shareholder. The Company's
Charter, as is permitted by the MGCL, exempts any business combination involving
Messrs. Smith and Kogod and persons affiliated or acting in concert with them.
Consequently, Messrs. Smith and Kogod and their affiliates are permitted to
enter into business combinations with the Company without the supermajority
shareholder approval otherwise required by the MGCL.
We Have a Share Ownership Limit. Under the REIT tax rules, not more
than 50% in number or value of our outstanding 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. In order to help us comply
with this rule, we have 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). This
ownership limit is also intended to inhibit changes of control of the Company.
Our Board of Directors has in the past and may in the future waive the
percentage ownership limit for certain entities if it is satisfied that
ownership in excess of this limit will not jeopardize our status as a REIT
and it otherwise decides such action is in the best interests of the Company.
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
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distributions ("Excess Stock"). In addition, ownership, either directly or
constructively under the applicable attribution rules of the Code, of stock in
excess of the ownership limit generally will result in the conversion of those
shares into Excess Stock. We will direct a holder of Excess Stock to sell such
stock to us 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
Capital Stock--Restrictions on Transfer; Excess Stock" on page 15 for additional
information regarding the ownership limits.
Our Reliance on the Property Service Businesses and Lack of Voting Control Over
Them May Adversely Affect Our Shareholders
If the Property Services Businesses Lose Their Contracts or Fail to
Expand, Distributions to Shareholders May Decline. Three property service
businesses, which provide management, leasing, financing, insurance, engineering
and technical services, and tenant construction and renovation services, are
conducted by three operating companies (the "Property Service Businesses").
These businesses are subject to certain risks associated with providing services
to affiliated and unaffiliated multifamily, retail and office properties, which
include the following:
- The Property Service Businesses will lose management, leasing and
other service contracts with property owners to competitors;
- Property owners will not renew such contracts when they expire or will
renew them on terms that are inconsistent with current terms;
- 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, further resulting in decreased management fee income;
- Leasing, financing and other service activity generally may decline;
and
- Property owners may not retain the Property Service Businesses to
provide certain property services that are outside of under their
existing contracts.
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.
We Lack Voting Control Over the Property Service Businesses. We own
100% of the nonvoting common stock, which represents 99% of the equity, of each
Property Service Business. The Property Service Businesses conduct our property
services business for properties not owned by us. The members of the boards of
directors of the Property Service Businesses are Robert H. Smith, Robert P.
Kogod (co-chief executive officers and directors) and Ernest A. Gerardi, Jr.,
our Chief Operating Officer. Separate partnerships consisting of Ernest A.
Gerardi, Jr. 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 holders of the voting common stock cannot change our
right to receive distributions from the Property Service Businesses, we cannot
elect the directors of the Property Service Businesses, and, therefore, do 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 our interests and those of
all of our shareholders. The board of
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directors and management of a Property Service Business may implement policies
that would not have been implemented had we controlled the Property Service
Business. These policies may be adverse to our interests and could impact our
financial performance.
Conflicts of Interest Could Result in Decisions Not in the Company's Best
Interest
Certain Officers and Directors Have Conflicts of Interest and Could
Exercise Influence in a Manner Inconsistent with Our Shareholders' Best
Interests. As of September 30, 1998, Messrs. Smith and Kogod and their families
together beneficially owned approximately 14.6% of our outstanding common stock
and Units. Messrs. Smith and Kogod have, and are expected to continue to have,
substantial influence on our affairs. This influence might not be consistent
with the interests of other shareholders, and on the outcome of any matters
submitted to the Company's shareholders for approval if their Units are redeemed
for common stock.
Certain of Our Officers and Directors Have Dealings With Affiliates and
Could Exercise Influence in a Manner Inconsistent with Our Shareholders' Best
Interests. As part of the transactions pursuant to which we formed the Company
in June 1994, which we sometimes refer to as the "Formation Transactions," we
acquired a number of properties held by various partnerships. For various
reasons, we were unable to acquire all of the properties we desired in the
Formation Transactions and some of these properties were partially owned by
either or both of Messrs. Smith and Kogod. As a result, Messrs. Smith and Kogod
have ownership interests in partnerships in which we may also have an interest,
but in which additional outside partners hold interests. They also hold
ownership interests in various affiliates that currently provide services to us
or have done so in the past. For example, Messrs. Smith and Kogod and their
families held a substantial interest in the partnership that sold to us a $4.7
million a parcel of land located near the Worldgate Centre in Northern Virginia
where we developed a 320-unit garden apartment project. In connection with this
development, the Operating Partnership entered into an agreement with Charles E.
Smith Construction, Inc., a construction and commercial and condominium
development company owned by Messrs. Smith and Kogod and their spouses, to
manage the development for a fee equal to 4% of hard construction costs. Messrs.
Smith and Kogod also have interests in Charles E. Smith Commercial Realty, Inc.
and its affiliates (which provides property management and leasing services to
office and other commercial properties), and 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). We expect to continue
to provide all property services (including property management and leasing) for
all affiliated multifamily properties and certain property services (other than
property management and leasing) for certain unaffiliated multifamily and
commercial properties. These affiliations of Messrs. Smith and Kogod may result
in decisions that do not fully reflect the interests of other shareholders.
Certain Holders of Units Who Are Also Directors May Influence Decisions
Concerning Whether to Sell or Refinance Properties Based On Their Interests.
Some members of our Board of Directors, such as Messrs. Smith and Kogod, hold
Units. They may experience different tax consequences than the Company if a
property is sold or if debt secured by a property is paid down or refinanced.
Therefore, these members of our Board of Directors may influence us not to sell
a property, even if the sale might otherwise be financially advantageous to us
and our shareholders. Also, they may influence us not to pay down or refinance
indebtedness on a particular property, even if the current level of debt may not
be in our best interests. Our Board of Directors has approved potential sales of
three separate properties located in the Washington, D.C. metropolitan area.
Other than these potential sales, we have no current plans to sell properties.
Certain Policies and Agreements Designed to Alleviate Adverse Effects
from Conflicts of Interest May Not Be Successful. Although we have adopted
certain policies and have entered into agreements with Messrs. Smith and Kogod
to minimize the adverse effects from
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certain of the potential conflicts of interest described above, there can be no
assurance that these policies and agreements always will be successful in
eliminating the influence of such conflicts. Consequently, we are 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.
We are Dependent on Our Key Personnel
We depend on the efforts of our executive officers and members of our
senior management. If they resigned and we were unable to find substitutes with
the same level of expertise and experience, our operations could be adversely
affected. We do not have "key-person" life insurance for these or any other
officers.
The Market Value of Our Common Stock Could Be Adversely Affected by a Number of
Factors
The Large Number of Shares Available for Future Sale Could Adversely
Affect the Market Price of Our Common Stock. As of September 30, 1998, we had
outstanding approximately 17.5 million shares of common stock tradable without
restriction (excluding shares held by our affiliates) and had reserved 17.8
million additional shares of common stock for possible issuance upon redemption
of Units and 3.6 million shares for possible issuance upon conversion of
outstanding preferred stock. In addition, we have reserved a number of shares
available for possible issuance under any of our employee benefit plans filed
with the SEC. We also have on file with the SEC two effective registration
statements which together allow for the sale of up to approximately $266 million
in unspecified securities, including shares of common stock and securities
convertible into shares of common stock. We cannot predict the effect that
future sales of shares of common stock, or the perception that such sales could
occur, will have on the market prices of our shares.
Changes in Market Conditions Could Adversely Affect the Market Price of
Our Common Stock. As with other publicly traded securities, the value of our
common stock depends on various market conditions, which may change from time to
time. Among the market conditions that may affect the value of our common stock
are the following: the extent of institutional investor interest in us; the
reputation of REITs and residential REITs generally and the attractiveness of
their equity securities in comparison to other equity securities (including
equity securities issued by other real estate companies); our financial
condition and performance; and general financial market conditions.
Our Earnings and Cash Distributions Will Affect the Market Price of Our
Common Stock. We believe that the market value of a REIT's equity securities is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, and is secondarily based
upon the real estate market value of the underlying assets. For that reason, our
shares may trade at prices that are higher or lower than the net asset value per
share. To the extent we retain operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our shares. In addition, we are subject to certain risks
normally associated with preferred equity financing, including the risk that the
Company's cash flow will be insufficient to meet the required payments on our
preferred shares. Our failure to meet the market's expectations with regard to
future earnings and cash distributions would likely adversely affect the market
price of our shares.
Market Interest Rates and Low Trading Volume May Have an Effect on the
Value of Our Common Stock. One of the factors that investors consider important
in deciding whether to buy or sell shares of a REIT is the distribution rate on
such shares (as a percentage of the price of such shares) relative to market
interest rates. If market interest rates increase, prospective
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purchasers of our shares may expect a higher annual distribution rate. Higher
interest rates would not, however, result in more funds for us to distribute
and, in fact, would likely increase our borrowing costs and potentially decrease
funds available for distribution. This could cause the market price of our
common stock to go down. In addition, although our common stock is listed on the
New York Stock Exchange, the daily trading volume of REITs in general or our
shares in particular may be lower than the trading volume for certain other
industries. As a result, our investors 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.
Our Success as a REIT Depends on Our Compliance with Complicated Tax Rules
We Believe, But Cannot Guarantee, That We Qualify as a REIT. We believe
we qualify as a REIT and generally will not be subject to federal income tax on
net income that we distribute to our shareholders. However, our qualification as
a REIT involves the application of technical and complex tax rules. For
instance, if we own a company's securities, we cannot qualify as a REIT unless
the value of those securities does not exceed 5% of the total value of our
assets. We believe that we meet this requirement, but this belief is based on
our analysis of the value of each of the corporations that conduct our property
service businesses and on our conclusion that each of these corporations will be
respected as a separate corporation. Also, to qualify as a REIT, we cannot own
more than 10% of a company's voting securities. We also believe that we meet
this requirement, but this belief is based on our conclusion that the shares of
stock that we own in each of the property service business corporations are not
voting securities. We cannot guarantee that the IRS will agree with us on these
points.
Moreover, our ability to qualify as a REIT may depend on facts and
circumstances that may not be within our control. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, it is
possible that new tax laws or new interpretations of existing tax laws will
affect both our ability to qualify as a REIT and the tax consequences of REIT
qualification. For all of these reasons, we cannot guarantee that we currently
qualify or will be able to remain qualified as a REIT.
Our Failure to Qualify as a REIT Would Have Serious Adverse
Consequences. If we fail to qualify as a REIT, we will be subject to federal
income tax at regular corporate rates. This additional tax would significantly
reduce the cash we would have available to distribute to our shareholders and
could reduce significantly the value of our common stock. In addition, if we
fail to qualify as a REIT, we may be disqualified from electing to be treated as
a REIT for the next four taxable years.
We May Need to Borrow Money to Qualify as a REIT. To obtain the
favorable tax treatment associated with REITs, we generally will be required
each year to distribute to our shareholders at least 95% of our net taxable
income (excluding net capital gain). Differences in timing between when we
receive income and when we have to pay expenses could require us to borrow money
to meet this requirement. The impact of large expenses also could have this
effect. We might need to borrow money even if we believe that market conditions
are not favorable for such borrowings.
We Are Subject To Some Taxes Even If We Qualify as a REIT. Even if we
qualify as a REIT, we are subject to some federal, state and local taxes on our
income and property. For example, we pay tax on certain income we do not
distribute. Also, our income derived from properties located in the District of
Columbia is subject to local tax and our net income from certain prohibited
transactions will be subject to a 100% tax. In addition, we derive income from
the property service business corporations, whose income is subject to federal,
state and local income tax.
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DESCRIPTION OF CAPITAL STOCK
As of September 30, 1998, our authorized capital stock was 145,000,000
shares. Those shares consisted of: (a) 95,000,000 shares of common stock; (b)
45,000,000 shares of Excess Stock; (c) 3,857,491 shares of preferred stock; and
(d) 1,142,509 unclassified shares. Our Charter gives the Board of Directors the
authority to issue, without a shareholder vote, shares of capital stock in one
or more series and to determine the rights of each series, including
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Such terms are fully described in the articles supplementary to the
Charter adopted by the Board of Directors.
The following description of the terms and provisions of our shares of
capital stock and certain other matters is not complete. The description is
qualified by the applicable provisions of Maryland law and our Charter, which is
on file with the SEC as an exhibit to the Registration Statement of which this
prospectus is a part.
General Rights of Common Stock
Each holder of common stock is entitled to one vote at shareholder
meetings for each share of common stock he owns. Neither our Charter nor our
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 our common stock are entitled to receive, pro-rata, any
dividends declared by the Board of Directors out of legally available funds, and
are also entitled to share, pro-rata, in any other distributions to
shareholders. We pay quarterly dividends on our common stock and expect to
continue to do so. We depend upon distributions from the Operating Partnership
to fund our dividends to shareholders.
Holders of common stock do not have any preemptive rights or other
rights to subscribe for additional shares.
Preferred Shares
We have three series of Preferred Shares outstanding. Each series of
Preferred Shares ranks senior to the common stock with respect to dividend
rights and distributions upon liquidation, dissolution and winding up of the
Company. The following are the principal terms of each series of Preferred
Shares:
- Series A Cumulative Convertible Redeemable Preferred Stock: There
are 2,640,325 Series A Preferred Shares outstanding. The Series A
Preferred Shares have a liquidation preference of $27.08 per
share. Dividends on the Series A Preferred Shares are cumulative
from the date of original issue and are payable quarterly at the
greater of the rate declared on the common stock or an annual rate
of $2.02 per share. The Series A Preferred Shares are not
redeemable by the Company prior to May 15, 2003. On or after May
15, 2003, the Company, at its option, may redeem the Series A
Preferred Shares for cash at a price of $27.08 per share, plus
accrued and unpaid dividends. Under certain circumstances, the
Company may elect to make such redemption with common stock at the
then market price of the common stock. On or after January 31,
1999, a holder of Series A Preferred Shares may convert the Series
A Preferred Shares into shares of common stock on a one-for-one
basis, subject to certain limitations. Prior to January 31, 1999,
the Series A Preferred Shares will not be convertible unless the
Company undergoes a change in control, as defined by the purchase
agreement for such shares, or fails to qualify as a REIT for tax
purposes.
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- Series B Cumulative Convertible Redeemable Preferred Stock: There
are 973,933 Series B Preferred Shares outstanding. The Series B
Preferred Shares have a liquidation preference of $28.50 per
share. Dividends on the Series B Preferred Shares are cumulative
and are payable quarterly at the greater of the rate declared on
the shares of common stock or an annual rate of $2.02 per share. A
holder of Series B Preferred Shares may convert the Series B
Preferred Shares into shares of common stock on a one-for-one
basis, subject to certain adjustments and limitations related to
its ownership of common stock of the Company. The Company, at its
option, may redeem Series B Preferred Shares at any time for
common stock, plus accrued and unpaid dividends.
- Series C Cumulative Redeemable Preferred Stock: There are 500
Series C Preferred Shares outstanding. The Series C Preferred
Shares have a liquidation preference of $100,000 per share and an
initial annual dividend of $7,910 per share (7.91% of purchase
price). If the securities receive an investment grade rating, the
dividend will decrease to $7,660 per share. Dividends are
cumulative and are payable quarterly. The Company may redeem
Series C Preferred Shares after February 1, 2028, at the
liquidation preference plus accrued dividends.
Classification and Removal of Board of Directors; Other Provisions
Our Charter divides the Board of Directors into three classes, with
each class to consist of an equal number of the directors or to the nearest
extent possible. The terms of office of one class of directors (2 directors)
will expire at the 1999 annual meeting of shareholders; the term of the second
class of directors (3 directors) will expire at the 2000 annual meeting of
shareholders; and the term of the third class of directors (2 directors) will
expire at the 2001 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.
Our 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 our
Charter, the power to amend our Bylaws is vested exclusively in the Board of
Directors, and the shareholders will not have any power to adopt, alter or
repeal the Bylaws absent amendment to our Charter. These provisions may make it
more difficult and time consuming to change majority control of our Board of
Directors and, thus, reduce our vulnerability to an unsolicited proposal for a
takeover 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 give the holders of any series of
capital stock preferences, powers and rights, voting or otherwise, senior to
those 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.
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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, we have 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 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. Our Charter provides that any acquisition of our
shares of capital stock that is not prohibited by the terms of the restrictions
on transfer described below under "--
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Restrictions on Transfer; Excess Stock" is exempted from the provisions of the
control share acquisition statute.
Restrictions on Transfer; Excess Stock
Ownership Limits. Our Charter restricts the number of shares of capital
stock that individual shareholders may own. For us to qualify as a REIT under
the Code, no more than 50% in value of our outstanding shares of capital stock
may be owned, directly or constructively under the applicable attribution rules
of the Code, by five or fewer individuals (which is defined in the Code to
include certain entities) during the last half of a taxable year. 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"). Our Charter restricts certain
acquisitions of capital stock, including common stock, in order to comply with
these requirements. These restrictions are also intended to inhibit changes of
control of the Company.
Subject to certain exceptions specified in our Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% (the "Ownership Limit") in number or value of the issued and
outstanding shares of common stock. The Board of Directors in its discretion may
waive the Ownership Limit or the Existing Holder Limit with respect to a holder
that is an entity (but not an individual) if such holder's ownership will not
then or in the future jeopardize our 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" on page 21) and we would be considered to receive more
than 0.5% of our 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 our stock if such
ownership or acquisition (1) would cause more than 50% in value our 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), (2) would result in our stock being beneficially owned
by less than 100 persons (determined without reference to any rules of
attribution), or (3) would otherwise result in our failing to qualify as a REIT.
If any shareholder purports to transfer shares to a person and either
the transfer would result in our failing to qualify as a REIT, or such transfer
would cause the transferee to hold shares in excess of the Ownership Limit or
Existing Holder Limit, the purported transfer will be null and void. In that
event, 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 us in exchange for shares of Excess Stock, which will be deemed
to be held by us 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 us 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.
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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 our discovery that such shares have been exchanged for
Excess Stock shall be repaid to us 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 (1) 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 (2) 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
shares of Excess Stock so transferred will automatically be deemed to be
exchanged for shares of capital stock. We may purchase Excess Stock for the
lesser of the price paid or the average closing price for the five days
immediately preceding such purchase. We 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 our option, to have
acted as an agent on our behalf in acquiring such Excess Stock and to hold such
Excess Stock on our behalf.
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 us containing the information specified in our
Charter no later than January 31 of each year. In addition, each shareholder
shall be required upon demand to disclose to us in writing such information as
we may request in order to determine the effect of such shareholder's direct,
indirect and constructive ownership of such shares on our REIT status.
The foregoing ownership limitations also may have the effect of
preventing or hindering any attempt to acquire control of us without the consent
of our Board of Directors.
Transfer Agent and Registrar
The Transfer Agent, Registrar and Dividend Disbursing Agent for the
shares of common stock is First Union National Bank of North Carolina.
SHARES AVAILABLE FOR FUTURE SALE
As of September 30, 1998, we had outstanding 17,471,741 shares of
common stock tradable without restriction (excluding shares held by our
affiliates) and Preferred Shares convertible into or redeemable for 3,614,258
shares of common stock (subject to limitations on conversion or redemption). As
of September 30, 1998, we had reserved 17.8 million additional shares of common
stock for possible issuance upon redemption of Units (including the shares
offered by this prospectus). Holders of approximately 15.3 million Units are
currently entitled to request redemption. In addition, 1 million shares have
been reserved for issuance under our Dividend and Distribution Investment and
Share Purchase Plan filed with the SEC. We also have on file with the SEC two
effective registration statements, which together allow for the sale of up to
approximately
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$266 million in unspecified securities, including shares of common stock and
securities convertible into shares of common stock.
Approximately 1.8 million Units or shares of common stock are available
and are reserved for future issuance under our employee benefit plans (the
"Plans") filed with the SEC. We established the Plans to attract and retain
executive officers and other key employees. As of September 30, 1998, options to
purchase up to approximately 1.6 million Units or shares of common stock have
been granted and are outstanding, 104,000 restricted Unit awards have been made
and are outstanding (20,250 of which remain restricted securities), and awards
of 21,000 restricted shares of common stock have been made (all of which remain
restricted securities) to executive officers and certain key employees. An
additional option to purchase 5,000 shares of common stock has been issued and
is outstanding to one of our directors.
We cannot predict the effect that future sales of shares of common
stock, or the perception that such sales could occur, will have on the market
prices of our shares.
REGISTRATION RIGHTS
The Company is a party to a registration rights agreement with SCPG
dated as of May 15, 1997. Once the SEC declares that the Registration
Statement (of which this prospectus is a part) is effective, we are required
under the registration rights agreement to use our reasonable efforts to keep
this Registration Statement continuously effective until the date on which
all of the shares of common stock issuable to the Selling Stockholders upon
conversion of Series A Preferred shares have been sold under this
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 such agreement or otherwise transferred without legal
restriction on further transfer.
Under the registration rights agreement, the Selling Shareholders may
propose to sell the shares in an underwritten public offering and select
underwriters for such an offering, subject to our approval (which we cannot
unreasonably withhold). If the Selling Shareholders so elect, we will
cooperate with the Selling Shareholders in any selling efforts relating to the
underwritten public offering, subject to certain conditions specified in the
registration rights agreement.
The registration rights agreement requires that we pay all
registration expenses relating to the common stock covered by this
Registration Statement (other than underwriting discounts and commissions,
fees and disbursements of counsel, and transfer taxes, if any). We also have
agreed to indemnify each holder of common stock covered by the registration
rights agreement, the officers and directors of each holder 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 has agreed to indemnify (1) us
and the other holders of such common stock, (2) each of our respective
directors and officers (including each director and officer who signs the
Registration Statement on our behalf), and (3) any person who controls us or
any other holder against other losses, claims damages and expenses arising
under the securities laws with respect to written information furnished to us
by such holder.
SELLING SHAREHOLDERS
SCPG is the only person who acquired common stock pursuant to the
purchase agreement relating to such shares.
The following table provides the number of Series A Preferred Shares
convertible or redeemable into shares of common stock known to us to be owned
by the Selling Shareholders as of
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September 30, 1998. The Selling Shareholders may sell any or all of the
shares included in this prospectus, but we cannot estimate the number of
shares that it may offer and sell, or the number of shares that it will own
upon completion of this stock offering.
<TABLE>
<CAPTION>
Name of Selling Shareholder Number of Shares Number of Shares
- --------------------------- ---------------- ------------------------
Owned (1) Offered (1)
--------- -----------
<S> <C> <C>
Security Capital Preferred Growth Incorporated 2,640,325 2,640,325
</TABLE>
- ------------------
(1) Consists of an aggregate of 2,640,325 shares of our common stock
issuable upon conversion or redemption of Series A Preferred Shares.
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FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes the material federal income tax
considerations to a prospective holder of common stock. The following discussion
is for general information only and is not exhaustive of all possible tax
considerations. It is not intended to be and should not be construed as tax
advice. For example, it 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.
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations, the legislative history of the
Code, current administrative interpretations and practices of the IRS (including
its practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives the
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
adversely affect existing interpretations of existing law. Any such change could
apply retroactively to transactions preceding the date of the change. Except as
described below in "--Requirements for Qualification--Income Tests," the Company
has not received any rulings from the IRS concerning the tax treatment of the
Company. Therefore, no assurance can be provided that the statements made in the
following discussion, which do not bind the IRS or the courts, will not be
challenged by the IRS or will be sustained by a court if so challenged.
As used in this discussion, the term "Company" refers solely to Charles
E. Smith Residential Realty, Inc.
Each prospective holder of common stock is urged to consult with its
own tax advisor to determine the impact of its personal tax situation on the
anticipated tax consequences of the ownership and sale of common stock. This
includes the federal, state, local, foreign and other tax consequences of the
ownership and sale of common stock, and the potential changes in applicable tax
laws.
Taxation of the Company
General. The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Code beginning 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
and it intends to continue to operate in such a manner. No assurance, however,
can be provided that the Company has operated in a manner so as to qualify as a
REIT or that it will continue to operate in such a manner in the future. 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 results,
distribution levels and diversity of stock ownership) the various qualification
tests imposed under the Code, which are summarized below. While the Company
intends to operate so that it qualifies as a REIT, given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company, no assurance can be given that the actual results of the operations
of the Company for any taxable year has satisfied or will satisfy the
requirements under the Code for qualification and taxation as a REIT. Further,
the anticipated income tax
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treatment described below may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure to Qualify."
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, all of
which are subject to change prospectively or retroactively.
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 in
some circumstances, on certain types of income even though that income is
distributed. In addition, the Property Services Businesses, which do not qualify
as REITs, are subject to federal corporate income tax on their net income.
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 transferable 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) 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 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 Capital Stock --Restrictions on Transfer; Excess
Stock on page 15." Moreover, if the Company complies with regulatory rules
pursuant to which it is required to send annual letters to holders of common
stock requesting information regarding the actual ownership of the common stock,
and the Company does
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not know, or exercising reasonable diligence would not have known, whether it
failed to meet requirement (6) above, the Company will be treated as having met
the requirement.
Gross Income Tests. In order to maintain qualification as a REIT, the
Company must satisfy two gross income requirements, which are applied on an
annual basis. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of the Company'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 these
sources. In addition, for its taxable years ending on or before December 31,
1997, the Company was required to derive less than 30% of its gross income
(including gross income from prohibited transactions) from gain on the sale or
other disposition of stock or securities held for less than one year, property
in a prohibited transaction and real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property).
Rents will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT 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 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 that are not definitively answered under the Code, the Treasury
Regulations, and published administrative interpretations. There can be no
assurance that 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 are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant"
("Permissible Services"). The Operating Partnership itself and the Property
Service Businesses, which are not independent contractors, provide certain
services with respect to the Company's properties. The Company received rulings
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 rulings from the IRS to the effect
that certain revenues (including rents from corporate apartments, revenues from
laundry equipment, certain parking revenues, and certain revenues related to the
provision of telephone and cable television services) will qualify as "rents
from real property." Based upon its experience in the multifamily and retail
property rental markets in which the Company's properties are located, the
Company believes that all services provided to tenants by the Company should be
considered "usually or customarily rendered" in connection with the rental of
apartments or retail space for occupancy only. There can be no assurance,
however, that the IRS will not contend otherwise. In this regard, if the
Operating Partnership contemplates providing services that reasonably might be
expected not to meet the "usual or customary" standard, it will arrange to have
such services provided by an independent contractor from which neither the
Company nor the Operating Partnership receives any income.
Rents received generally will qualify as rents from real property even
if the Company provides services that are not Permissible Services so long as
the amount received for such services meets a de minimis standard. The amount
received for "impermissible services" with respect to a property cannot exceed
one percent of all amounts received, directly or indirectly, by the REIT with
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<PAGE>
respect to such property . If services are available only to certain tenants,
then the measurement possibly could be made with respect to such tenants. The
amount that a REIT will be deemed to have received for performing "impermissible
services" will be the greater of the actual amount received or 150% of the
direct cost to the REIT of providing those services.
The Operating Partnership may receive fees for the performance of
property management and other services with respect to properties in which it
has a partial interest. Only the portion of the management fee that corresponds
to the Operating Partnership's interest in such properties will qualify as
"rents from real property." The balance will be non-qualifying income. The
Operating Partnership also may receive 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 the Code. It is not possible,
however, to state whether in all circumstances the Company would be entitled to
relief. Even if the Company were entitled to relief, a 100% tax would be imposed
on 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.
Through its ownership of Units, the Company will be considered to own
its pro rata share of the assets of the Operating Partnership, including
securities of the Property Service Businesses. Although the Operating
Partnership owns 100% of the nonvoting stock of each of the Property Service
Businesses and holds notes from each of the Property Service Businesses, it does
not own more than 10% of the voting securities of any of the Property Service
Businesses. In addition, the Company believes that its 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 considered held by the Company
exceeds the 5% value limitation, or that all or some of the Property Service
Businesses should be viewed as a single corporation and that the value of the
securities of that corporation held by the Company exceeds the 5% limitation. In
addition, there can be no assurance that the IRS might not contend that the
nonvoting stock of one or more of the Property Service Businesses should be
considered voting securities for purposes of the 10% limitation.
The 5% value requirement must be satisfied not only on the date the
Company acquired securities of the Property Service Businesses, but also each
time the Company increases its ownership of securities of the Property Service
Businesses. This increase will occur each time the Company's interest in the
Operating Partnership increases after a limited partner redeems its Units.
Although the Company plans to take steps to ensure that it satisfies the 5%
value test for any quarter with respect to which retesting occurs, 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.
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On February 2, 1998, the Clinton administration released its budget
proposal for fiscal year 1999. The proposal includes a number of provisions
affecting REITs. One proposed provision would amend the 10% limitation described
above to preclude a REIT from owning more than 10% of the vote or value of all
classes of stock of any one issuer (other than a qualified REIT subsidiary or
another REIT). Stock currently owned by the Company in the Property Service
Businesses would be "grandfathered" (i.e., with respect to such stock, the
Company would be subject only to the existing 10% voting securities test
described above). However, if a corporation in which grandfathered stock is held
were to engage in a new trade or business or acquire substantial new assets, the
grandfathered status would terminate. Accordingly, if the proposal were enacted
and the Property Service Businesses (in which the Company's stock ownership
exceeds 10% of the value of the securities) engaged in a new trade or business
or acquired substantial new assets, the grandfathered status of the Company's
ownership of stock in these entities would terminate and the Company would fail
to qualify as a REIT. Moreover, the Company would not be able to own more than
10% of the vote or value of any subsidiary formed after the effective date of
the proposal. Thus, the proposal, if enacted as currently drafted, would
materially impede the ability of the Company to engage in new third-party
management or similar activities. Although the proposal is not expected to be
enacted in 1998, it cannot be predicted whether, in what form, or with what
effective date, any future legislation affecting the Company might be enacted.
Annual Distribution Requirements. To qualify as a REIT, the Company
generally must distribute dividends to its shareholders in an amount at least
equal to (1) the sum of (a) 95% of the Company's REIT taxable income (computed
without regard to the dividends paid deduction and the Company's net capital
gain) and (b) 95% of the net income (after tax), if any, from foreclosure
property, minus (2) the sum of certain items of noncash income. Distributions
must be made either during the taxable year to which they relate or, if certain
procedures are followed, during the next taxable year. The Company will be
subject to tax on amounts not distributed at regular capital gains and ordinary
income rates.
In addition, if the Company fails to distribute during each calendar
year at least the sum of 85% of its ordinary income, 95% of its capital gain net
income and 100% of its undistributed income from prior years, it will be subject
to a 4% nondeductible excise tax on the excess of this required amount over the
sum of the amounts it actually distributes and amounts retained with respect to
which it pays federal income tax.
The Company believes that it has made timely distributions sufficient
to satisfy the annual distribution requirements. The Company intends to continue
to do so. 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 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 its
properties through certain subsidiary partnerships. This structure may involve
special tax considerations. These tax considerations
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include: (1) 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, (2) 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 (3) 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.
Tax Allocations with Respect to the Properties. The Operating
Partnership was formed through contributions of appreciated property at its
formation and has acquired a number of appreciated properties by contribution
since that time. 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. The difference between
the contributing partner's adjusted basis in the property and the fair market
value of the property is referred to as a "Book-Tax Difference." Many of the
Operating Partnership's properties have a Book-Tax Difference.
The Partnership Agreement requires that tax allocations be made in a
manner consistent with Section 704(c) of the Code and the regulations
thereunder, which will tend to eliminate the Book-Tax Differences with respect
to contributed properties over the life of the Operating Partnership. However,
because of certain technical limitations, the rules of Section 704(c) of the
Code may not always eliminate a Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Consequently, the
Company could be allocated lower amounts of depreciation and other deductions
and, in the event of a sale of a property with a Book-Tax Difference, more
taxable gain than would have been the case if all properties had a tax basis
equal to their fair market value at the time they were acquired.
Property Service Businesses. A substantial portion of the amounts used
by the Operating Partnership to fund distributions to partners (which in turn
are used by the Company to fund distributions to holders of common stock) 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 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 these 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 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.
As described above, the value of the Company's share of the securities
of each of the Property Service Businesses held by the Operating Partnership
cannot exceed 5% of the value of the Company's assets at a time when a limited
partner redeems his Units or the Company otherwise is considered to acquire
additional securities of a Property Service Business. In addition, the Company
cannot own 10% or more of the voting securities of any of the Property Service
Businesses. See "--Requirements for Qualification--Asset Tests." These
limitations 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 Company increases at a commensurate rate. These limitations also prohibit
the Company from exercising control over the Property Service Businesses.
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Taxation of Shareholders
Taxation of Taxable Domestic Shareholders. As used below, the term
"U.S. Shareholder" means a holder of common stock who for United States federal
income tax purposes is (1) a citizen or resident of the United States, (2) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (3) an estate
or trust the income of which is subject to United States federal income taxation
regardless of its source, or (4) a trust whose administration is subject to the
primary supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial decisions of
the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. 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. Corporate shareholders will not be eligible
for the dividends received deduction as to such distributions. For purposes of
determining whether the distributions on shares of common stock are out of
current or accumulated earnings and profits, the earnings and profits of the
Company will be allocated first to shares of preferred stock and second to
shares of common stock. There can be no assurance that the Company will have
sufficient earnings and profits to cover any distributions on preferred stock.
Distributions that are designated as capital gain dividends will be
taxed to taxable non-corporate (i.e., individuals, estates, or trusts) U.S.
shareholders as gains from the sale or exchange of a capital asset held for more
than one year (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
shareholders have held their stock. On November 10, 1997, the IRS issued Notice
97-64, which provides generally that the Company may classify portions of its
designated capital gain dividend as (1) a 20% gain distribution (which would be
taxable to taxable non-corporate U.S. Shareholders at a maximum rate of 20%),
(2) an unrecaptured Section 1250 gain distribution (which would be taxable to
taxable non-corporate U.S. Shareholders at a maximum rate of 25%), or (3) a 28%
gain distribution (which would be taxable to taxable non-corporate U.S.
Shareholders at a maximum rate of 28%). In light of the IRS Restructuring and
Reform Act of 1998, which eliminates the 18-month holding period that was
required to be met to take advantage of the lowest capital gain tax rates, the
IRS is expected to issue clarifying guidance regarding the designation of REIT
capital gain dividends. Notice 97-64 provides that a REIT must determine the
maximum amounts that it may designate as 20% and 25% capital gain dividends by
performing the computation required by the Code as if the REIT were an
individual whose ordinary income were subject to a marginal tax rate of at least
28%. Notice 97-64 further provides that designations made by the REIT only will
be effective to the extent that they comply with Revenue Ruling 89-81, which
requires that distributions made to different classes of shares be composed
proportionately of dividends of a particular type.
Distributions made by the Company that are properly designated as
capital gain dividends will be taxable to taxable corporate U.S. Shareholders as
long-term gain (to the extent that they do not exceed the Company's actual net
capital gain for the taxable year) without regard to the period for which such
corporate U.S. Shareholders have held their common stock. Such corporate U.S.
Shareholders, however, 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 taxable U.S. Shareholder to the extent that they do not
exceed the adjusted basis of such U.S. 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 taxable U.S. Shareholder's common
stock, they will be included in income as capital gains, assuming the common
stock is a capital asset in the hands of the shareholder.
25
<PAGE>
In general, a taxable U.S. Shareholder will realize gain or loss on the
disposition of common stock equal to the difference between (1) the amount of
cash and the fair market value of any property received on such disposition and
(2) the U.S. Shareholder's adjusted basis of such common stock. This gain or
loss will be capital gain or loss if the common stock has been held as a capital
asset. In the case of a taxable U.S. Shareholder that is a corporation, this
capital gain or loss will be long-term capital gain or loss if such common stock
has been held for more than one year. Generally, in the case of a taxable
non-corporate U.S. Shareholder, such capital gain or loss will be taxed (1) for
dispositions occurring after December 31, 1997, at a maximum rate of 20% and (2)
for dispositions occurring after December 31, 2000, at a maximum rate of 18% if
the common stock is acquired after December 31, 2000 and held for more than five
years. The Taxpayer Relief Act of 1997 (the "1997 Act") allows the IRS to issue
regulations relating to how the 1997 Act's new capital gain rates will apply to
sales of capital assets by "pass-through entities," which include REITs such as
the Company, and to sales of interests in "pass-through entities." To date, the
IRS has not issued such regulations, but if issued, they could affect the
taxation of gain and loss realized on the disposition of common stock.
Shareholders are urged to consult with their own tax advisors with respect to
the rules contained in the 1997 Act.
Loss upon a sale or exchange of common stock by a taxable U.S.
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 distributions from the Company required to be treated by such
shareholder as long-term capital gain. For a taxable non-corporate U.S.
Shareholder, the long-term capital loss will be apportioned among the applicable
long-term capital gain groups to the extent that distributions received by such
U.S. Shareholder were previously so treated.
The Company may elect to require the holders of common stock to include
the Company's undistributed net capital gains in their income. If the Company
makes such an election, the holders of common stock will (1) include in their
income as long-term capital gains their proportionate share of such
undistributed capital gains and (2) be deemed to have paid their proportionate
share of the tax paid by the Company on such undistributed capital gains and
thereby receive a credit or refund for such amount. A holder of common stock
will increase the basis in its common stock by the difference between the amount
of capital gain included in its income and the amount of the tax it is deemed to
have paid. The earnings and profits of the Company will be adjusted
appropriately.
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at the rate of 31% with respect to distributions.
Taxation of Tax-Exempt Shareholders. The Company does not expect the
distributions by the Company to a shareholder that is a tax-exempt entity will
constitute unrelated business taxable income ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of its common stock with
"acquisition indebtedness" within the meaning of the Code, and the common stock
is not otherwise used in an unrelated trade or business of the tax-exempt
entity. For a tax-exempt shareholder that is a social club, voluntary employee
benefit association, supplemental unemployment benefit trust, or qualified group
legal services plan exempt from federal income taxation under Code Sections 501
(c)(7), (c)(9), (c)(17) or (c)(20), respectively, income from an investment in
the Company will constitute UBTI unless the organization is able to properly
deduct amounts set aside or placed in reserve for certain purposes so as to
offset the income generated by its investment in the Company. Such a prospective
shareholder should consult its own tax advisors concerning these "set aside" and
reserve requirements.
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. No attempt is made here to provide more than a
limited summary of the rules. Prospective Non-U.S. Shareholders should
26
<PAGE>
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. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's common
stock, they will give rise to gain from the sale or exchange of its common
stock, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate) will
be subject to withholding at a rate of 10%. However, the Non-U.S. Shareholder
may seek a refund of such amounts from the IRS if it subsequently determined
that such distribution was, in fact, in excess of current or accumulated
earnings and profits of the Company, and the amount withheld exceeded the
Non-U.S. Shareholder's United States tax liability, if any, with respect to the
distribution.
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 (whether or not designated as a capital gain dividend)
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 35% 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.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of shares of common stock (see "Taxation of
Shareholders -- Taxation of Taxable Domestic Shareholders" above) would be
treated with respect to Non-U.S. Shareholders in the manner outlined in the
preceding paragraph for actual distributions by the Company of capital gain
dividends. Under that approach, the Non-U.S. Shareholders would be able to
offset as a credit against their United States federal income tax liability
resulting therefrom their proportionate share of the tax paid by the Company on
such undistributed capital gains (and to receive from the IRS a refund to the
extent their proportionate share of such tax paid by the Company were to exceed
their actual United States federal income 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." Generally, a "domestically controlled REIT" is a REIT in which
at all times during a specified testing period less than 50% in value of the
stock is held directly or indirectly by foreign persons. The Company
27
<PAGE>
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.
Backup Withholding Tax and Information Reporting. Backup withholding
tax (which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (1) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (2) capital gains dividends or (3)
distributions attributable to gain from the sale or exchange by the Company of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of common stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of common stock by a foreign office of a broker that (a) is a
United States person, (b) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (c) is a
"controlled foreign corporation" (generally, a foreign corporation controlled by
United States shareholders) for United States tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-U.S.
Shareholder and certain other conditions are met, or the shareholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the proceeds of a sale of common stock is subject to both backup
withholding and information reporting unless the shareholder certifies under
penalty of perjury that the shareholder is a Non-U.S. Shareholder, or otherwise
establishes an exemption. A Non-U.S. Shareholder may obtain a refund of any
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
The IRS has recently finalized regulations regarding the withholding
and information reporting rules discussed above. In general, these regulations
do not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. Pursuant to IRS Notice 98-16, these regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000 or the date of
expiration of the certificate under rules currently in effect (unless otherwise
invalidated due to changes in the circumstances of the person whose name is on
such certificate). A Non-U.S. Shareholder should consult its own advisor
regarding the effect of these regulations.
28
<PAGE>
Other Tax Considerations
Recent Legislation. The 1997 Act contains a number of technical
provisions that either (1) reduce the risk that the Company will inadvertently
cease to qualify as a REIT, or (2) provide additional flexibility with which the
Company can meet the REIT qualification requirements.
State and Local Taxes; District of Columbia Unincorporated Business
Tax. The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in common stock.
In this regard, the District of Columbia imposes an unincorporated
business income tax, at an effective rate of 9.975% 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.
29
<PAGE>
PLAN OF DISTRIBUTION
The Selling Shareholders may acquire the shares of common stock
covered by this prospectus if they convert the Series A Preferred Shares that
they hold into common stock. If the Selling Shareholders receive the shares
covered by this prospectus, they will be entitled to sell such shares without
restriction in the open market or otherwise. The Selling Shareholders may
from time to time offer and sell the shares of common stock covered by this
prospectus on the NYSE, in the over-the-counter market or otherwise, in
ordinary brokerage transactions, in block transactions, in privately
negotiated transactions, through put or call transactions, through short
sales, pursuant to Rule 144 or otherwise. Those transactions may or may not
involve brokers or dealers. The Selling Shareholders may include Merrill
Lynch International Private Finance Limited, a Delaware corporation and
pledgee of SCPG, or any donees or other pledgees of the Selling Shareholders
after the date of this Prospectus. If the Selling Shareholders sell the
shares of common stock covered by this prospectus through brokers, they
expect to pay customary brokerage commissions and charges. The Company is
registering the shares of common stock covered by this prospectus to permit
the Selling Shareholders to resell the shares of common stock covered by this
prospectus and to permit public secondary trading of the shares of common
stock covered by this prospectus. The Company is required to register the
shares of common stock covered by this prospectus under the terms of a
Registration Rights Agreement between SCPG and the Company. See "Registration
Rights." We will not receive any cash proceeds from sale of such shares by
the Selling Shareholders.
Under the registration rights agreement, the Selling Shareholders
may propose to sell the shares in an underwritten public offering and select
underwriters for such an offering, subject to our approval (which we cannot
unreasonably withhold). If the Selling Shareholders so elect, we will
cooperate with them in any selling efforts relating to the underwritten
public offering, subject to certain conditions specified in the registration
rights agreement.
We have agreed to pay all registration expenses (other than
underwriting discounts and commissions, and fees and disbursements of counsel
and transfer taxes, if any) of the Selling Shareholders in connection with
the registration and sale of the shares of common stock covered by this
prospectus.
The Selling Shareholders and any dealer, broker or other agent
selling the shares of common stock covered by this prospectus for a Selling
Shareholder or purchasing the shares of common stock covered by this
prospectus from a Selling Shareholder for purposes of resale may be deemed to
be an underwriter under the Securities Act and any compensation received by
only such Selling Shareholder, dealer, broker or other agent may be deemed to
be underwriting compensation. The amount of that compensation cannot
currently be estimated. The Company knows of no existing arrangements between
any Selling Shareholder and any dealer, broker or other agent.
To comply with certain states' securities laws, if applicable, the
shares of common stock covered by this prospectus may be sold in those states
only through brokers or dealers. In addition, the shares of common stock
covered by this prospectus may not be sold in certain states unless they have
been registered or qualified for sale in that state or an exemption from
registration or qualification is available and is complied with.
We also have agreed to indemnify each holder of common stock covered
by the registration rights agreement, the officers and directors of each
holder 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 has
agreed to indemnify (1) us and the other holders of such common stock, (2)
each of our respective directors and officers (including each director and
officer who signs the Registration Statement on our behalf), and (3) any
person who controls us or any other holder against other losses, claims
damages and expenses arising under the securities laws with respect to
written information furnished to us by such holder.
30
<PAGE>
AVAILABLE INFORMATION
We have filed with the SEC a Registration Statement (of which this
prospectus is a part) on Form S-3 under the Securities Act with respect to the
securities offered in this prospectus. 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 SEC.
Statements contained in this prospectus as to the content of any contract or
other document are not necessarily complete, and, therefore, we recommend that
you refer to the copy of any such contract or other document filed as an exhibit
to the Registration Statement. Any statement relating to any such contract or
document is qualified in all respects by its copy contained in the exhibits and
schedules incorporated by reference into this prospectus. For further
information about us and our common stock offered in this prospectus, refer to
the Registration Statement and its exhibits and schedules.
We are subject to the informational requirements of the Securities
Exchange Act (the "Exchange Act"). We have filed reports and other information
with the SEC and are subject to the periodic reporting and informational
requirements of the Exchange Act. The Registration Statement, its exhibits and
schedules, as well as such reports and other information we have filed with the
SEC can be inspected and copies obtained from the SEC at Room 1204, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the SEC: 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. You can obtain copies of such material and
information on the operation of the Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates, or by calling the SEC at
1-800-SEC-0330. The SEC 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 SEC. Our electronic SEC
filings may also be obtained from our website at http://www.smithreit.com. In
addition, our common stock is listed on the NYSE and similar information about
us can be inspected and copied at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
We furnish our equityholders with annual reports containing
consolidated financial statements audited by our independent public accountants
and, upon request by its equityholders, 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
We file annual, quarterly and special reports, proxy statements and
other information with the SEC (using file number 1-13174). You may read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our
electronic SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934.
1. Registration Statement on Form 8-A filed on August 16, 1994
registering our common stock under Section 12(b) of the Exchange Act.
31
<PAGE>
2. Annual Report on Form 10-K for the year ended December 31, 1997.
3. Quarterly Reports on Form 10-Q for the quarter ended March 31, 1998
(as amended on Form 10-Q/A), and for the quarter ended June 30, 1998.
4. Current Reports on Form 8-K dated April 17, 1998 (as amended on Form
8-K/A) and July 1, 1998.
You may request a copy of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are specifically
incorporated by reference into this prospectus), at no cost, by writing or
calling us at the following address:
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Mr. Gregory Samay, Vice President and Treasurer
(703) 769-1020
You should rely on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of the common stock in any
state where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of this document.
EXPERTS
Our financial statements for the fiscal year ended December 31, 1997
and the related schedule incorporated by reference in this prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report dated February
9, 1998 relating to such financial statements, and are included in this
prospectus in reliance upon the authority of Arthur Andersen LLP as experts in
giving such report.
The consolidated balance sheets of McClurg Court Associates Limited
Partnership as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in partners' capital and cash flows for the years
then ended incorporated by reference in this prospectus and elsewhere in the
Registration Statement, have been audited by Altschuler, Melvoin and Glasser
LLP, independent public accountants, as indicated in their report dated February
17, 1998 with respect thereto, and are included herein in reliance upon the
authority of Altschuler, Melvoin and Glasser LLP as experts in giving such
report.
LEGAL MATTERS
In connection with this prospectus, Hogan & Hartson L.L.P., Washington,
D.C. has provided its opinion as to the validity of the issuance of the common
stock offered by this prospectus and the discussion of tax matters in this
prospectus.
32
<PAGE>
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- --------------------------------------------------------------------------------
You should rely on the information incorporated by reference or provided in this
prospectus. We have authorized no one to provide you with different information.
We are not making an offer of the common stock in any state where the offer is
not permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of this document.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................... 1
Risk Factors..................................... 3
Description of Capital Stock..................... 12
Shares Available for Future Sale................. 16
Registration Rights.............................. 17
Selling Shareholders............................. 17
Federal Income Tax Considerations................ 19
Plan of Distribution............................. 30
Available Information............................ 31
Incorporation of Certain Documents by Reference.. 31
Experts.......................................... 32
Legal Matters.................................... 32
</TABLE>
[GRAPHIC OMITTED]
2,640,325 Shares
Charles E. Smith
Residential Realty, Inc.
Common Stock
PROSPECTUS
November __, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.......................................................................... $22,594
Printing and Duplicating Expenses......................................................... 1,000
Legal Fees and Expenses................................................................... 30,000
Accounting Fees and Expenses.............................................................. 10,000
Blue Sky Fees and Expenses................................................................ 5,000
Miscellaneous............................................................................. 1,000
-----------
Total..................................................................................... $69,594
-----------
-----------
</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.
Item 16. Exhibits
<TABLE>
<S> <C>
*3.1 Amended and Restated Articles of Incorporation of the Company
**3.2 Articles Supplementary relating to Series A
Cumulative Convertible Redeemable Preferred Stock
***3.3 Articles Supplementary relating to Series B
Cumulative Convertible Redeemable Preferred Stock
***3.4 Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock
****3.5 Articles Supplementary relating to Series C Cumulative
Redeemable Preferred Stock
*****3.6 Certificate of Correction relating to Series C Cumulative
Redeemable Preferred Stock
******3.7 Amended and Restated Bylaws of the Company
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
*******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
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Altschuler, Melvoin and Glasser LLP
24 Power of Attorney (included on signature page (II-4))
</TABLE>
- ------------------------
<TABLE>
<S> <C>
* 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 3.1 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1997 (File No.
1-13174).
*** Incorporated by reference to Exhibit 4.1 to the Company's current
report on Form 8-K dated October 3, 1997 (File No. 1-13174).
**** Incorporated by reference to Exhibit 3.5 to the Company's registration
statement on Form S-3 (File No. 333-17053).
***** Incorporated by reference to Exhibit 3.6 to the Company's registration
statement on Form S-3 (File No. 333-17053).
****** 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).
</TABLE>
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. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in this registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and 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.
(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.
II-2
<PAGE>
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), the 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, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in 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 County of Arlington, Commonwealth of Virginia, on October 30,
1998.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ Ernest A Gerardi, Jr.
--------------------------------
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 each of Ernest A. Gerardi, Jr. and Robert
D. Zimet, or either one of them, 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/ Robert H. Smith Co-Chairman of the Board, Co-Chief October 30, 1998
- ------------------------------------------ Executive Officer, and Director
Robert H. Smith
/s/ Robert P. Kogod Co-Chairman of the Board, Co-Chief October 30, 1998
- ------------------------------------------ Executive Officer, and Director
Robert P. Kogod
/s/ Ernest A. Gerardi, Jr. President, Chief Operating Officer, October 30, 1998
- -------------------------------------------- and Director
Ernest A. Gerardi, Jr.
/s/ Wesley D. Minami Senior Vice President and Chief Financial October 30, 1998
- ------------------------------------------ Officer
Wesley D. Minami
/s/ Steven E. Gulley Vice President, Controller, and Chief October 30, 1998
- ------------------------------------------ Accounting Officer
Steven E. Gulley
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Fred J. Brinkman Director October 30, 1998
- ------------------------------------------
Fred J. Brinkman
/s/ Charles B. Gill Director October 30, 1998
- ------------------------------------------
Charles B. Gill
/s/ Mandell J. Ourisman Director October 30, 1998
- ------------------------------------------
Mandell J. Ourisman
/s/ Mallory Walker Director October 30, 1998
- ------------------------------------------
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 Articles Supplementary relating to Series A Cumulative
Convertible Redeemable Preferred Stock.........................................
***3.3 Articles Supplementary relating to Series B Cumulative
Convertible Redeemable Preferred Stock.........................................
***3.4 Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock.........................................
****3.5 Articles Supplementary relating to Series C Cumulative
Redeemable Preferred Stock.....................................................
*****3.6 Certificate of Correction relating to Series C Cumulative
Redeemable Preferred Stock.....................................................
******3.7 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........................................................................
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)....................
23.2 Consent of Arthur Andersen LLP.................................................
23.3 Consent of Altschuler, Melvoin and Glasser LLP.................................
24 Power of Attorney (included on signature page (II-4))
</TABLE>
- -------------------
<TABLE>
<S> <C>
* 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 3.1 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1997 (File No.
1-13174).
*** Incorporated by reference to Exhibit 4.1 to the Company's current
report on Form 8-K dated October 3, 1997 (File No. 1-13174).
**** Incorporated by reference to Exhibit 3.5 to the Company's registration
statement on Form S-3 (File No. 333-17053).
***** Incorporated by reference to Exhibit 3.6 to the Company's registration
statement on Form S-3 (File No. 333-17053).
****** 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).
</TABLE>
<PAGE>
Exhibit 5.1
[Letterhead of Hogan & Hartson L.L.P.]
October 30, 1998
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, 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 (the "Registration Statement") filed with the
Securities and Exchange Commission relating to the offer and sale of up to
2,640,325 shares (the "Conversion Shares") of the Company's common stock, par
value $.01 per share, by a certain shareholder (the "Selling Stockholder")
and to be offered for sale by the Selling Stockholder upon conversion of
Series A Cumulative Convertible Preferred Stock (the "Preferred 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.
Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of the opinion expressed in this letter, which is set forth
below (the "Opinion"), 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
(the "Amended and Restated Articles"), as certified by the
Department of Assessments and Taxation of the State of Maryland on
October 21, 1998 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. Series A Cumulative Convertible Redeemable Preferred Share
Purchase Agreement dated as of May 15, 1997 between the Company
and Security Capital Preferred Growth Incorporated.
<PAGE>
Board of Directors
October 30, 1998
Page 2
5. Registration Rights Agreement, dated as of May 15, 1997, between
the Company and Security Capital Preferred Growth Incorporated.
6. Certain resolutions of the Board of Directors of the Company
adopted on May 14, 1997 and October 13, 1998 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 Conversion Shares and arrangements in connection
therewith.
In our examination of the aforesaid certificates, documents and agreements,
we have assumed the genuineness of all signatures, the legal capacity of all
natural persons, the accuracy and completeness of all documents submitted to us,
the authenticity of all original documents and the conformity to authentic
original documents of all documents submitted to us as copies (including
telecopies). We also have assumed the authenticity, accuracy and completeness of
the foregoing certifications (of public officials and corporate officers) and
statements of fact, on which we are relying, and have made no independent
investigations thereof. 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 applicable
provisions of Maryland General Corporation Law. We express no opinion herein as
to any other laws, statutes, regulations or ordinances or as to compliance with
the securities (or "blue sky") laws or the real estate syndication laws of
Maryland.
Based upon, subject to and limited by the foregoing, we are of the opinion
that following (i) effectiveness of the Registration Statement and (ii) issuance
of the Conversion Shares, if and when issued and delivered in accordance with
the terms of the Amended and Restated Articles and the resolutions of the Board
of Directors of the Company authorizing the issuance of the Conversion Shares
upon conversion of the Preferred Shares as contemplated thereby, the Conversion
Shares will be validly issued, fully paid and nonassessable under the laws of
the State of Maryland.
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.
We hereby consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal
<PAGE>
Board of Directors
October 30, 1998
Page 3
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.
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 8.1
[Letterhead of Hogan & Hartson L.L.P.]
October 30, 1998
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City
Arlington, VA 22202
Ladies and Gentlemen:
We have acted as counsel to Charles E. Smith Residential Realty, Inc., a
Maryland corporation (the "Company"), in connection with the registration
statement on Form S-3 (the "Registration Statement") and the prospectus
included therein (the "Prospectus") filed by the Company with the Securities
and Exchange Commission relating to 2,640,325 shares of common stock, par
value $.01 per share, which Security Capital Preferred Growth, Incorporated,
a Maryland corporation, may sell upon the conversion of the shares of Series
A Cumulative Convertible Redeemable Preferred Stock of the Company it holds.
In connection with the Registration Statement, we have been asked to provide
you with our opinion on certain federal income tax matters. Capitalized terms
used in this letter and not otherwise defined herein have the meanings set
forth in the Registration Statement.
BASES FOR OPINION
The opinion set forth in this letter is 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, existing
administrative rulings and practices of the Internal Revenue Service (the "IRS")
(including the private letter ruling issued by the IRS) to the Company on
June 8, 1994, as supplemented by the ruling letter dated June 16, 1995, and the
private letter ruling issued by the IRS to the Company on August 27, 1997), and
legislative history, all 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 opinion.
<PAGE>
Charles E. Smith Residential Realty, Inc.
October 30, 1998
Page 2
In rendering the following opinion, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinion, 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,
1995, as certified by the Secretary of State of the State of Delaware on October
20, 1998 and by the Secretary of the Company on the date hereof as being a true,
correct and complete copy and as being in full force and effect; (3) the Amended
and Restated Articles of Incorporation of the Company dated as of June 27, 1994,
as certified by the Department of Assessments and Taxation of the State of
Maryland on October 21, 1998 and by the Secretary of the Company on the date
hereof as being a true, correct and complete copy and as being in full force and
effect; (4) the agreements of limited partnership of the partnership
subsidiaries of the Operating Partnership; (5) the articles of organization and
stock ownership records 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"); and (7) other necessary documents. The opinion set forth in this letter
also is premised on certain written representations of the Company contained in
a letter to us dated as of the date hereof (the "Management Representation
Letter").
We have made such factual and legal inquiries, including examination of the
documents set forth above, as we have deemed necessary or appropriate for
purposes of our opinion. For purposes of rendering our opinion, however, we have
not made an independent investigation or audit of the facts set forth in the
above referenced documents, including the Management Representation Letter. We
consequently have 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
opinion.
Moreover, we have assumed that (i) the Company, the Operating Partnership,
each of the REIT Subs, each of the partnership subsidiaries, and each of the
Property Services Businesses have been and will continue to be operated in the
manner described in the relevant partnership agreement, articles (or
certificate) of incorporation, or other organizational documents; (ii) as
represented by the Company, there are no agreements or understandings between
the Company or the Operating Partnership, on the one hand, and the partnerships
that own the voting stock of the Property Services Businesses (the "Voting Stock
Partnerships") or their partners, on the other, that are inconsistent with the
relevant Voting Stock
<PAGE>
Charles E. Smith Residential Realty, Inc.
October 30, 1998
Page 3
Partnership being considered to be both the record and beneficial owner of more
than 90% of the outstanding voting stock of the respective Property Services
Businesses; and (iii) the Company is a validly organized and duly incorporated
corporation under the laws of the State of Maryland, each of the Property
Services Businesses and each of the REIT Subs are validly organized and duly
incorporated corporations under the laws of the State of Delaware or Virginia
(as applicable), and the Operating Partnership and each of the subsidiary
partners are duly organized and validly existing partnerships under the
applicable laws of the State of Delaware.
In our review, we have assumed that all of the representations and
statements set forth in the documents that we reviewed (including the Management
Representation Letter) 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.
OPINION
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein, we are of the opinion as follows:
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, December 31, 1995, December 31, 1996, and December 31, 1997, and the
Company's current organization and method of operation, as described in the
Management Representation Letter, will enable it to continue to meet the
requirements for qualification and taxation as a REIT.
2. The discussion in the Prospectus under the heading "Federal Income Tax
Considerations," to the extent that it describes matters of federal income
tax law, is correct in all material respects.
<PAGE>
Charles E. Smith Residential Realty, Inc.
October 30, 1998
Page 4
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery 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 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.
An opinion of counsel merely represents counsel's best judgment with respect
to the probable outcome on the merits and is not binding on the IRS or the
courts. There can be no assurance that positions contrary to our opinion will
not be taken by the IRS, or that a court considering the issue would not hold
contrary to such opinion. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any such changes.
<PAGE>
Charles E. Smith Residential Realty, Inc.
October 30, 1998
Page 5
We hereby consent to the filing of this opinion letter, which has been
prepared solely for your use in connection with the filing of the Registration
Statement, as Exhibit 8.1 to the Registration Statement and to the use of the
name of the firm therein. In giving the 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.
Hogan & Hartson L.L.P.
<PAGE>
Exhibit 23.2
[Letterhead of Arthur Andersen LLP]
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 9, 1998
included in Charles E. Smith Residential Realty, Inc.'s previously filed Form
10-K for the year ended December 31, 1997 and to all references to our Firm
included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
October 30, 1998
<PAGE>
Exhibit 23.3
[Letterhead of Altschuler, Melvoin and Glasser LLP]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this registration
statement of our report dated February 17, 1998, with respect to the
consolidated balance sheets of McClurg Court Associates Limited Partnership as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in partners' capital and cash flows for the years then ended,
which report is included in Charles E. Smith Residential Realty, Inc.'s
previously filed Form 8-K/A dated April 17, 1998, and to all references to our
Firm included in this registration statement.
ALTSCHULER, MELVOIN AND GLASSER LLP
/s/ ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
October 30, 1998
