<PAGE>
As filed with the Securities and Exchange Commission on August 13, 1998
Registration No. _____
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 54-1681655
(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)
------------------------
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)
------------------------
Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
------------------------
Approximate date of commencement of the proposed sale of the securities to the
public: From time to time after this Registration Statement becomes effective,
as determined by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<PAGE>
------------------------
CALCULATION OF REGISTRATION FEE(1)
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Shares Amount to be Aggregate Price Aggregate Amount of
to be Registered Registered Per Share Offering Price (1) Registration Fee (2)
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share................ 79,600 $29.71875 $2,365,612.50 $697.86
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee for
79,600 shares 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 August
7, 1998.
(2) Fee of $697.86 paid herewith. ($1,001.81 is currently in the Company's
account with the Securities and Exchange Commission and is being applied to
the total fee due hereunder.)
------------------------
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.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS
Prospectus dated August 13, 1998
Subject to Completion
79,600 Shares
Charles E. Smith Residential Realty, Inc.
Common Stock
------------------------
Charles E. Smith Residential Realty, Inc. (the "Company") is a
self-administered and self-managed equity real estate investment trust ("REIT")
that is engaged primarily in the acquisition, development, management and
operation of multifamily properties primarily in the Washington, D.C.
metropolitan area and certain other targeted urban areas. The Company, together
with its subsidiaries, is a fully integrated real estate organization with
in-house acquisition, development, financing, marketing and property management
and leasing expertise.
This Prospectus relates to the possible issuance by the Company of
up to 79,600 shares (the "Redemption Shares") of common stock, par value $.01
per share ("Common Stock"), if, and to the extent that, the Company elects to
issue such Redemption Shares to the holder of up to 79,600 units of Limited
Partnership interest ("Units") in Charles E. Smith Residential Realty L.P. (the
"Operating Partnership"), of which the Company is the sole general partner and
owns approximately 55.6% of the Units, upon the tender of such Units for
redemption.
79,600 Units (the "Acquisition Units") were issued in connection with
the acquisition of 1841 Columbia Road Apartments, an apartment complex located
in Washington, D.C. ("Columbia Road") during the fiscal year ended December 31,
1996. The Company has registered the Redemption Shares to permit the holder
thereof to sell such shares without restriction in the open market or otherwise,
but the registration of such shares does not necessarily mean that any of such
shares will be offered or sold by the holder thereof. See "The Company."
The Company will acquire Units in the Operating Partnership in exchange
for any Redemption Shares that the Company may issue to a Unitholder.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "SRW." Ownership by any person of more than 9.8% of the
Company's Common Stock is restricted. See "Description of Common Stock."
------------------------
See "Risk Factors" beginning on page 4 for a discussion of certain factors
relating to an investment in the Securities.
------------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------
The date of this Prospectus is August __, 1998.
<PAGE>
PROSPECTUS SUMMARY
This Summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. The offering of the Common
Stock pursuant to this Prospectus is referred to herein as the "Offering." As
used herein, the term "Operating Partnership" means Charles E. Smith Residential
Realty L.P. and the term "Company" means Charles E. Smith Residential Realty,
Inc., the Operating Partnership and their predecessors and subsidiaries or any
of them, unless the context indicates otherwise. As used herein, the term "Unit"
means a common unit of limited partnership interest in the Operating
Partnership, unless the context indicates otherwise. When used in this document,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements. Such statements indicate that
assumptions have been used that are subject to a number of risks and
uncertainties which could cause actual financial results or management plans and
objectives to differ materially from those projected or expressed herein,
including: the effect of national and regional economic conditions, particularly
with regard to the levels of multifamily property occupancy and rental growth in
the Washington, D.C. metropolitan area; the Company's ability to identify and
secure additional properties and sites that meet its criteria for acquisition or
development; the acceptance of the Company's financing plans by the capital
markets, and the effect of prevailing market interest rates and the pricing of
the Company's stock; and other risks described from time-to-time in the
Company's filings with the Securities and Exchange Commission. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein that may be made to reflect any change in the Company's
expectations with regard thereto or any future events or change in circumstances
or conditions upon which such statements are based.
The Company
The Company is a self-administered and self-managed equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties primarily in the Washington, D.C. metropolitan area and
certain other targeted urban areas. The Company, together with its subsidiaries,
is a fully integrated real estate organization with in-house acquisition,
development, financing, marketing and property management and leasing expertise.
The Company's primary strategy for growth is to acquire, develop, own and manage
high quality multifamily properties for long-term income generation and value
appreciation.
The Company is the sole general partner of, and owned approximately
55.6% of the Units in, the Operating Partnership as of July 31, 1998. The
other Limited Partners of the Operating Partnership are the former limited
and general partners of partnerships that owned the properties, and the
former owners of certain property service businesses, acquired by the
Operating Partnership either at the time of its formation in June 1994 or at
various times thereafter. All of the Company's properties, property
interests, and business assets are owned by, and its operations conducted
through, the Operating Partnership and its subsidiaries. In addition, the
Operating Partnership owns 100% of the nonvoting common stock, which
represents 99% of the total economic interest, of three operating companies
(collectively, the "Property Service Businesses") which provide property
services to the properties owned by the Operating Partnership and to other
multifamily, retail, and office properties. As of July 31, 1998, the Company,
through the Operating Partnership, owned 49 multifamily apartment communities
containing a total of 19,951 units (the "Multifamily Properties"), 45 of
which are located in the Washington, D.C. metropolitan area, two retail
centers containing approximately 436,000 square feet of retail space (the
"Retail Properties"), both located in the Washington, D.C. metropolitan area,
and had approximately 2,100 units under construction. The Company also
manages over 3,500 additional apartment units for other owners.
2
<PAGE>
Risk Factors
Prospective investors and Unitholders should carefully consider the
matters discussed under "Risk Factors" prior to making an investment decision
regarding the Common Stock offered hereby.
Tax Status of the Company
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1994. The Company believes
that it qualifies for taxation as a REIT, in which case the Company generally
will not be subject to federal income tax on net income that it distributes to
its shareholders. REITs are subject to a number of organizational and
operational requirements, including a requirement that they currently distribute
at least 95% of their taxable income (excluding any net capital gain). Even if
the Company qualifies for taxation as a REIT, the Company will be subject to
certain federal, state and local taxes on its income and property and to federal
income and excise tax on its undistributed income. The Property Service
Businesses, which do not qualify as REITs, also are subject to federal, state
and local income taxes. See "Federal Income Tax Considerations" and "Risk
Factors--Certain Tax Risks."
Securities to be Offered
This Prospectus relates to the possible issuance by the Company of
up to 79,600 Redemption Shares, if, and to the extent that, the Company
elects to issue such Redemption Shares to the holder of up to 79,600 Units in
the Operating Partnership, upon the tender of such Units for redemption. The
Company will not receive any cash proceeds from the issuance of the
Redemption Shares but will acquire Units in the Operating Partnership in
exchange for any Redemption Shares that the Company may issue to a Unitholder.
During the fiscal year ended December 31, 1996, the Operating
Partnership acquired the Columbia Road apartment complex for consideration which
included 79,600 Acquisition Units. The holder of the Columbia Road Units became
eligible to request redemption of such Units on August 2, 1998.
Pursuant to the agreement of Limited Partnership of the Operating
Partnership (the "Partnership Agreement"), each Unit may be tendered by its
holder to the Operating Partnership for redemption for cash equal to the fair
market value of a share of Common Stock at the time of the redemption. In
addition, the Company, as general partner of the Operating Partnership, has the
right to elect to acquire directly any Units tendered to the Operating
Partnership for redemption, rather than causing the Operating Partnership to
redeem such Units. The Company currently anticipates that it generally will
elect to acquire directly Units tendered for redemption and to issue shares of
Common Stock in exchange therefor rather than paying cash, although the
determination whether to pay cash or issue shares of Common Stock upon
redemption of Units will be made by the Company at the time Units are tendered
for redemption. As a result, as of August 2, 1998, the Company may from time to
time issue up to 14,880,164 shares of Common Stock upon the acquisition of Units
tendered for redemption. With each such acquisition, the Company's interest in
the Operating Partnership will increase.
3
<PAGE>
RISK FACTORS
Prospective investors and Unitholders should carefully consider, among
other factors, the matters described below.
Special Considerations Applicable to Redeeming Partners
Tax Consequences of Redemption of Units. The exercise by a holder of
Units (a "Limited Partner") of his or her right to require the redemption of his
or her Units will be treated for tax purposes as a sale of the Units by the
Limited Partner. Such a sale will be fully taxable to the redeeming Limited
Partner and such redeeming Limited Partner will be treated as realizing for tax
purposes an amount equal to the sum of the cash or the value of the Common Stock
received in the exchange plus the amount of the Operating Partnership
nonrecourse liabilities considered allocable to the redeemed Units at the time
of the redemption. It is possible that the amount of gain recognized (or even
the tax liability resulting from such gain) could exceed the amount of cash and
the value of other property (e.g., Redemption Shares) received upon such
disposition. See "Redemption of Units--Tax Consequences of Redemption." In
addition, the ability of the Limited Partner to sell a substantial number of
Redemption Shares in order to raise cash to pay tax liabilities associated with
redemption of Units may be restricted due to the Company's relatively low
trading volume, and, as a result of fluctuations in the stock price, the price
the Limited Partner receives for such shares may not equal the value of his
Units at the time of redemption. See "--Common Stock Price Fluctuations and
Trading Volume" below.
Potential Change in Investment Upon Redemption of Units. If a
Limited Partner exercises the right to require the redemption of his or her
Units, such Limited Partner may receive, at the Company's election, cash or
shares of Common Stock of the Company in exchange for the Units. If the
Limited Partner receives cash, the Limited Partner will no longer have any
interest in the Company and will not benefit from any subsequent increases in
share price and will not receive any future distributions from the Company
(unless the Limited Partner currently owns or acquires in the future
additional shares of Common Stock or Units). If the Limited Partner receives
shares of Common Stock, the Limited Partner will become a shareholder of the
Company rather than a holder of Units in the Operating Partnership. Although
an investment in shares of Common Stock is substantially equivalent to an
investment in Units in the Operating Partnership, there are some differences
between ownership of Units and ownership of Common Stock relating to, among
other things, form of organization, permitted investments, policies and
restrictions, management structure, compensation and fees, investor rights
and Federal income taxation. These differences, some of which may be material
to investors, are discussed in "Redemption of Units--Comparison of Ownership
of Units and Common Stock."
Effect on Share Price of Shares Available for Future Sale
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Common Stock. As of July 31, 1998, the Company had outstanding
17,272,783 shares of Common Stock, all of which are tradable without restriction
under the Securities Act (unless such shares are held by affiliates of the
Company). As of July 31, 1998, the Company had outstanding 3,766,024 shares of
preferred stock ("Preferred Shares"). As of July 31, 1998, the Company had
reserved for possible issuance upon redemption of Units approximately 17.8
million additional shares of Common Stock. 14,929,202 shares issuable upon any
future redemption of Units, or issuable under employee benefit plans (the
"Plans"), will be tradable without restriction under the Securities Act pursuant
to the Registration Statements on Form S-8 filed by the Company in August 1994,
on Form S-3 filed by the Company in June 1995, July 1996 and April 1998,
respectively or pursuant to the Registration Statement of which this Prospectus
is a part. As of July 31, 1998, the Company owned 17,272,783 Units of the
Operating Partnership. In addition, 1,000,000 shares have been reserved for
issuance under the Company's Dividend and Distribution Investment and Share
Purchase Plan, which plan was registered with the Commission on December 22,
1995. Also, the Company currently has on file with the Commission an effective
registration statement which would allow the sale of up to approximately $266
million in unspecified securities, including shares of Common Stock and
securities convertible into shares of Common Stock. No prediction can be made
about the effect that future sales of shares of Common Stock will have on the
market prices of shares. See "Shares Available for Future Sale."
4
<PAGE>
Common Stock Price Fluctuations and Trading Volume
A number of factors may adversely influence the price of the Company's
Common Stock in the public market, many of which are beyond the control of the
Company. In particular, an increase in market interest rates may lead purchasers
of shares of Common Stock to demand a higher annual yield from distributions by
the Company in relation to the price paid for shares, which could adversely
affect the market price of the shares of Common Stock. In addition, although the
Company's Common Stock is listed on the New York Stock Exchange, the daily
trading volume of REITs in general and the Company's shares in particular may be
lower than the trading volume for certain other industries. As a result,
investors in the Company who desire to liquidate substantial holdings at a
single point in time may find that they are unable to dispose of such shares in
the market without causing a substantial decline in the market value of such
shares.
Conflicts of Interest
Dealings with Affiliates of the Company. The outside interests of
certain officers and directors of the Company (including Robert H. Smith and
Robert P. Kogod) may give rise to certain conflicts of interest concerning the
fulfillment of their responsibilities as officers and directors of the Company,
and such conflicts of interest could result in decisions that do not fully
reflect the interests of all shareholders. Mr. Kogod continues to hold minor
general partnership interests (less than 1%) in a Limited Partnership (in which
the Company holds an interest) that cannot be transferred without the consent of
the other partners, and he and Mr. Smith continue to hold interests in another
Limited Partnership that owns one multifamily and three commercial properties
which were not acquired by the Company because another general partner declined
to consent to the bifurcation of the multifamily and commercial properties and
the indebtedness thereon. Mr. Kogod also owns limited partnership interests in
two general partnerships and continues to own a general partnership interest in
a general partnership that owns multifamily properties which were not acquired
by the Company because another general partner declined to consent to
participation by such partnerships in the Formation Transactions. In addition,
Messrs. Smith, Kogod and other executive officers of the Company continue to
hold an interest in a Limited Partnership that owns a multifamily property that
was not acquired by the Company because of the amount of its third party
indebtedness in relation to its value. Messrs. Smith and Kogod and their
families also held a substantial interest in the partnership that sold to the
Company for $4.7 million a parcel of land located near the Worldgate Centre in
Northern Virginia on which the Company developed a 320-unit garden apartment
project. In connection with such development, the Operating Partnership entered
into an agreement with Charles E. Smith Construction, Inc. (a construction and
commercial and condominium development company), which is owned by Messrs. Smith
and Kogod and their spouses, to manage such development for a fee equal to 4% of
hard construction costs. Messrs. Smith and Kogod 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). The Company expects to continue to provide all property services
(including property management and leasing) for such affiliated multifamily
properties and certain property services (other than property management and
leasing) for certain unaffiliated multifamily and commercial properties.
Tax Consequences Upon Sale or Refinancing of Properties. A Holder of
Units may experience different and more adverse tax consequences than the
Company upon the sale or reduction of indebtedness on any of the Properties.
Therefore, any such holder, including Messrs. Smith and Kogod, and the
Company, may have different objectives regarding the appropriate pricing and
timing of any sale or refinancing of the Properties. While the Company, as
the sole general partner of the Operating Partnership, has the exclusive
authority to determine whether and on what terms to sell or refinance an
individual Property, certain members of the Board of Directors are holders of
Units, and their status as Unitholders may influence the Company not to sell
particular Properties, even though such sale might otherwise be financially
advantageous to the Company and its shareholders, or may influence the
Company not to pay down or refinance indebtedness on a particular Property
with a significant level of debt. See "Federal Income Tax Considerations."
The Board of Directors of the Company has approved potential sales of two
separate Properties located in the Washington, D.C. area. Other than the
potential sales of the two Properties, the Company has no current plans to
sell Properties.
Risks of Conflicts of Interest. Although the Company has adopted
certain policies and has entered into agreements with Messrs. Smith and Kogod
designed to minimize the adverse effects from certain of these
5
<PAGE>
potential conflicts of interest, there can be no assurance that these policies
and agreements always will be successful in eliminating the influence of such
conflicts. Consequently, the Company is subject to the risk that if such
policies and agreements are unsuccessful, decisions could be made at the Company
level that might fail to reflect fully the interests of all shareholders.
Changes in Policies Without a Vote of Shareholders
The major policies of the Company, including its policies with respect
to investment, financing, growth, acquisitions, development, debt capitalization
and distributions, are determined by its Board of Directors. Although it has no
present intention to amend or revise these and other policies, the Board of
Directors may do so from time to time without a vote of the shareholders of the
Company. The Company cannot change its policy of seeking to maintain its
qualification as a REIT, however, without the approval of its shareholders.
Changes in the Company's policies may not fully serve the interests of all
shareholders.
Risks Associated with Leverage
No Limitations on Debt. The Company intends to fund acquisitions and
development of properties primarily through short-term borrowings, and also out
of undistributed cash flow from operating activities. The Company expects to
finance or refinance such properties on a longer term basis when market
conditions are appropriate either with long-term indebtedness or equity
financing, depending upon the economic conditions at the time of refinancing.
Moreover, the Company currently has on file with the Commission an effective
registration statement which would allow the sale of up to approximately $266
million in unspecified securities, including debt securities. The Company's
debt-to-total market capitalization ratio (i.e., the ratio of total indebtedness
to the market value of issued and outstanding Common Stock, including Preferred
Shares, and Units plus total indebtedness) (the "Debt-to-Total Market
Capitalization Ratio") as of June 30, 1998 was 38.3%. The Company has adopted a
policy of incurring debt (including debt incurred under its line of credit) only
if upon such incurrence the Company's Debt-to-Total Market Capitalization Ratio
would be 60% or less. The Company's Articles of Incorporation, as amended (the
"Charter"), however, do not contain any limitation on the amount or percentage
of indebtedness that the Company may incur in the future. Accordingly, the
Company could modify the current policy at any time. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that, in turn, could increase the Company's risk of
default on its obligations and adversely affect the Company's funds from
operations and ability to make expected distributions to its shareholders.
Limitations of Debt Policy. The Company has established its debt policy
relative to the market capitalization of the Company rather than to the book
value of its assets, a ratio that is frequently employed. The market
capitalization of the Company, however, varies depending on the price at which
the Common Stock trades and may not reflect the fair market value of the
underlying assets of the Company at all times, which may result in the Company's
indebtedness at any particular time being substantially in excess of 60% of the
underlying value of its assets. Although the Company will consider factors other
than market capitalization in making decisions regarding the incurrence of
indebtedness (such as the estimated market value of such properties upon
refinancing and the ability of particular properties and the Company as a whole
to generate cash flow to cover expected debt service), there can be no assurance
that the Debt-to-Total Market Capitalization Ratio (or the ratio of indebtedness
to any other measure of asset value) will be an accurate measure of the
Company's ability to incur indebtedness while continuing to make distributions
to shareholders at expected levels.
Debt Financing; Uncertainty of Ability to Refinance Balloon Payments on
Debt. The Company will be subject to the risks associated with debt financing,
including the risk that existing indebtedness on the Properties that is secured
by some or all of the Properties (which in most cases will not have been fully
amortized at maturity) (the "Secured Debt"), including the debt incurred by the
Company and its subsidiaries at the time of the Formation Transactions, will not
be able to be refinanced at maturity on favorable terms or at all, or that the
terms of such refinancing will not be as favorable as the terms of existing
indebtedness, and the risk that necessary capital expenditures for such purposes
as renovations and reletting space will not be able to be financed. Higher
interest rates at the time of refinancing could have an adverse effect on
distributions. In addition, some of the Company's indebtedness is
cross-collateralized among Properties so that a failure of an individual
Property to generate cash flow necessary for scheduled debt repayments may place
a larger number
6
<PAGE>
of Properties at risk of foreclosure. The Company does not expect to have
sufficient funds to make all of the balloon payments of principal when due under
the Secured Debt within one to twenty-two years and other mortgages on the
Properties. There can be no assurance that the Company will be able to refinance
this indebtedness or to otherwise obtain funds by selling assets or by raising
equity. If a Property is mortgaged to secure payment of indebtedness and the
Company is unable to meet mortgage payments, the mortgagee could foreclose on
the Property, which would result in a loss of income and asset value to the
Company.
Risks of Rising Interest Rates. The Company currently has
approximately $250 million of variable rate mortgage indebtedness
outstanding. A significant rise in interest rates could adversely affect the
Company's results of operations and its ability to make distributions to its
shareholders. Changes in the Company's interest expenses also will affect the
Company's net income and funds from operations.
Risks Associated with Preferred Shares
The Company's Charter authorizes the Board of Directors to issue
preferred shares of stock, $.01 par value per share ("Preferred Shares") and
to establish the preferences and rights (including the right to vote and the
right to convert into shares of Common Stock) of any Preferred Shares issued.
The power to issue Preferred Shares 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. In June 1997, December 1997 and April
1998, the Company issued 2,640,325 shares of Series A Cumulative Convertible
Redeemable Preferred Stock, $.01 par value per share; in October 1997, the
Company issued 1,216,666 Series B Cumulative Convertible Redeemable Preferred
Shares, $.01 par value per share, of which it redeemed 91,467 Preferred
Shares in June 1998; and in February 1998, the Company issued 500 Series C
Cumulative Redeemable Preferred Shares, $.01 par value per share (together,
the "Preferred Share Offerings"). The Preferred Shares issued in the
Preferred Share Offerings rank senior to the Common Stock with respect to
dividend rights and distributions upon liquidation, dissolution and winding
up of the Company. The Company is subject to the 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 the Preferred
Shares.
Risks Associated with Property Services
The Property Service Businesses are subject to the risks associated
with providing services to affiliated and unaffiliated multifamily, retail and
office properties. These risks include the risk that management, leasing and
other service contracts with property owners will be lost to competitors; that
such contracts will not be renewed upon expiration or will not be renewed on
terms consistent with current terms; that the rental revenues upon which
management fees are based will decline as a result of general real estate market
conditions or specific market factors affecting properties managed by the
Property Service Businesses, resulting in decreased management fee income; that
leasing and other service activity generally may decline; and that the Property
Service Businesses may not be retained to provide certain property services that
property owners are not obligated to retain the Company to provide under
existing contractual arrangements. Each of these developments could adversely
affect the ability of the Property Service Businesses to make expected
distributions to shareholders. In addition, the restrictions applicable to REITs
under the Code may limit the Company's ability to expand its Property Service
Businesses, and net income from such businesses will be subject to corporate
income tax.
Lack of Voting Control over Property Service Businesses
The Company owns 100% of the nonvoting common stock, which represents
99% of the equity, of each Property Service Business. The Property Service
Businesses conduct the Company's property services business for properties not
owned by the Company. The members of the boards of directors of the Property
Service Businesses are Messrs. Smith, Kogod and Ernest A. Gerardi, Jr., the
Company's Chief Operating Officer. Separate partnerships consisting of certain
executives active in the management of the Company and the Property Service
Businesses and adult children of Messrs. Smith and Kogod own 100% of the voting
common stock, representing 1% of the equity, of each Property Service Business.
Therefore, such holders of the voting stock have the ability to elect and remove
all members of the boards of directors of the Property Service Businesses.
Although the Company's right to receive distributions with respect to its
nonvoting common stock
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cannot be changed by the holders of the voting common stock, the Company is not
able to elect directors of the Property Service Businesses, and, therefore, it
does not have the right to control the day-to-day decisions of the Property
Service Businesses. As a result, decisions relating to the day-to-day operations
of the Property Service Businesses may not always reflect the interests of the
Company and all of its shareholders.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. The effective yields available from equity investments in real estate
depend in large part on the amount of income generated and expenses incurred.
The Company's income and ability to make distributions to its shareholders is
dependent upon the ability of its properties to generate income in excess of
operating expenses, debt service and necessary capital expenditures. Income from
multifamily and retail properties may be adversely affected by the general
economic climate, local real estate conditions (such as an oversupply of, or a
reduction in demand for, apartments and retail space), the attractiveness of the
properties to tenants and shoppers, the quality and philosophy of management,
the ability of the owner to provide adequate maintenance and (with respect to
the apartments) insurance, and increased operating costs (including real estate
taxes). In addition, income from properties and real estate values also are
affected by such factors as the costs of governmental regulation, including
zoning, tenants' rights and tax laws, the potential for liability under
applicable laws, interest rate levels and the availability of financing. The
Company's income would be adversely affected if a significant number of tenants
were unable to pay rent or if apartments or retail space could not be rented on
favorable terms. Certain significant expenditures associated with each equity
investment in a property (such as mortgage payments, if any, real estate taxes
and maintenance costs) generally are not reduced when circumstances cause a
reduction in income from the property. If any of the above occurred, the
Company's ability to make expected distributions to its shareholders could be
adversely affected.
Possible Environmental Liabilities. Under various federal, state and
local laws, ordinances and regulations, an owner or operator of real property
may become liable for the costs of removal or remediation of certain
hazardous substances released on or in its property. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous substances. The presence of
such substances, or the failure to properly remediate such substances, may
adversely affect the owner's ability to sell the real estate or to borrow
using the real estate as collateral. In addition to clean-up actions brought
by federal, state and local agencies, the presence of hazardous wastes or
materials on a property could result in personal injury or similar claims by
private plaintiffs. The Company believes that no Former Property Partnership
has been notified by any governmental authority of any liability or other
claim in connection with any of the Properties that the Company believes is
material to its financial condition or results of operations.
Risks Related to Retail Properties. With respect to the Retail
Properties, the Company is subject to the risks that upon expiration of leases
for space in the Retail Properties, the leases may not be renewed, the space may
not be relet, or the terms of the renewal or reletting (including the cost of
required renovations or concessions to tenants) may be less favorable than
current terms. In addition, the Company is subject to the risks that if sales by
retail tenants decline sufficiently, tenants may not be able to pay their
minimum rents, and that if a tenant were to default on rental payments, the
Company could experience delays and costs in enforcing its rights as lessor. If
any of the above occurred, the Company's ability to make expected distributions
to shareholders could be adversely affected.
Competition. All of the Multifamily Properties are located in developed
areas that include other multifamily properties. The number of competitive
multifamily properties in a particular area could have a material effect on the
Company's ability to lease apartment units and on the rents charged. In
addition, other forms of single- and multifamily residential properties provide
housing alternatives to tenants and potential tenants of the Multifamily
Properties. The Retail Properties face competition from other retail properties.
The Company also faces competition from other real estate companies that provide
management, leasing and other services similar to those currently provided by
the Company.
Dependence on the Washington, D.C. Metropolitan Area Market. A
substantial majority of the Properties are located in the Washington, D.C.
metropolitan area market. While the Company is pursuing
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acquisitions and development in other targeted urban markets, a decline in the
economy or rental activities in this market may adversely affect the ability of
the Company to make distributions to its shareholders.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid and, therefore, tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. Under
the terms of the Secured Debt, the sale of certain Properties is either
prohibited or significantly restricted for the five to seven years following the
Initial Offering. The terms of the agreements under which certain Properties
have been contributed to the Company also restrict the ability of the Company to
sell such Properties for specified periods of times. In addition, the Code
places limits on the Company's ability to sell properties held for fewer than
four years. These restrictions could make it difficult for the Company to sell
Properties during such time without adversely affecting returns to shareholders,
even if a sale were in the interest of such shareholders.
Changes in Laws. Increases in real estate taxes and income, service or
transfer taxes cannot always be passed through to tenants in the form of higher
rents, and may adversely affect the Company's funds from operations and its
ability to make distributions to its shareholders. Similarly, changes in laws
increasing the potential liability for environmental conditions existing on
Properties or increasing the restrictions on environmental discharges or other
conditions, as well as changes in laws affecting construction and safety
requirements, may result in significant unanticipated expenditures, which would
adversely affect the Company's cash available for distributions.
Investments in Mortgages. Although the Company currently has no plans
to invest in mortgages, it may invest in mortgages in the future. If the Company
were to invest in mortgages, it would be subject to the risks of such
investment, which include the risks that borrowers may not be able to make debt
service payments or pay principal when due, that the value of mortgaged property
may be less than the amounts owed, and that interest rates payable on the
mortgages may be lower than the Company's cost of funds. If the Company were to
invest in mortgages and if any of the above occurred, cash available for
distributions could be adversely affected.
Regulatory Risks. The Properties may be subject to various forms of
regulation, including regulation under the Fair Housing Amendments Act of 1988
(the "FHA"), the Americans with Disabilities Act (the "ADA") and, in the case of
Properties located in the District of Columbia and built before 1976, local rent
control ordinances. Under the FHA, the Company is required to make reasonable
accommodations for persons with disabilities in rules, policies and
modifications related to the Multifamily Properties when necessary to afford
such persons equal opportunity to use, or obtain full enjoyment of, the
Properties. Noncompliance with the FHA could result in the imposition of fines
or an award of damages to private litigants. The Company believes the Properties
are in compliance with the FHA in all material respects. The ADA requires
removal of structural barriers to access by persons with disabilities in certain
public areas. Noncompliance with the ADA could result in the imposition of fines
or an award of damages to private litigants. The ADA does not, however, apply to
multifamily properties, such as apartment complexes, except to the extent that
portions of such facilities, such as a leasing office, are open to the public.
The costs of any alterations or additions required to date have been included in
the operating budget for each affected Property. All costs for remaining
modifications are expected to be paid from cash flow from operating activities
and reserves established for this purpose.
As of July 31, 1998, twelve of the Properties, representing 3,772 units
or 18.9% of the total apartment units owned by the Company at such date, which
were built prior to 1976 and are located in the District of Columbia, are
subject to the District's rent control laws that potentially restrict a property
owner's ability to increase rents and to recover increases in operating expenses
and the costs of capital improvements. Although these rent control provisions
currently allow the maximum rent "ceiling" to be increased annually in response
to several factors, recent legislative changes have limited the Company's
ability to take full advantage of the available "ceilings" in any one year.
Thus, no assurance can be given that the Company will be able to raise rents
under the new legislation to levels that reflect future market rates.
Uninsured Loss. The Company carries comprehensive liability, fire,
flood, extended coverage and rental loss insurance with respect to the
Properties with policy specification and insured limits customarily carried for
similar properties. Certain types of losses (such as from wars), however, may be
either uninsurable
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or not economically insurable. Should an uninsured loss occur, the Company could
lose both its capital invested in, and anticipated profits from, one or more
Properties.
District of Columbia Tenants' Rights
Under the District of Columbia Rental Housing Conversion and Sale Act
of 1980 (the "Conversion Act"), in the event of a "sale" of a residential
property in the District of Columbia, the tenants have a right of first refusal
to purchase the property as well as a right to match offers made on the property
by prospective purchasers. A transfer of all of the partnership interests of a
partnership that owns such property, or a transfer of all of the stock of a
corporation that owns such property, is considered to be a "sale" within the
meaning of the Conversion Act. Consequently, essentially all future acquisitions
and sales by the Company of residential properties located in the District of
Columbia will be subject to the rights of the tenants of such properties to
purchase the properties at the offered price. Such tenants' rights may make it
difficult for the Company to purchase or sell residential properties located in
the District of Columbia even if a purchase or sale were in the interests of the
Company's shareholders.
Acquisition and Development Risks
The Company intends to continue development of new multifamily and
retail properties (including expansions of existing Properties on the land
adjacent to those Properties) and to consider acquisitions of multifamily and
retail properties where it believes that such development or acquisition is
consistent with the business strategies of the Company. New project development
is subject to a number of risks, including construction delays or cost overruns
that may increase project costs, financing risks as described above, the failure
to meet anticipated occupancy or rent levels as and when expected, failure to
receive required zoning, occupancy and other governmental permits and
authorizations and changes in applicable zoning and land use laws, which may
result in the incurrence of development costs in connection with projects that
are not pursued to completion. In addition, because the Company must distribute
95% of its taxable income in order to maintain its qualification as a REIT, the
Company anticipates that new developments and acquisitions will be financed
primarily through lines of credit or other forms of secured or unsecured
construction financing. If permanent debt or equity financing is not available
on acceptable terms to refinance such new developments or acquisitions are
undertaken without permanent financing, further development activities or
acquisitions may be curtailed or cash available for distribution to shareholders
or to meet debt service obligations may be adversely affected. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that judgments with respect to the costs of improvements to
bring an acquired property up to standards established for the market position
intended for that property will prove inaccurate, as well as general investment
risks associated with any new real estate investment. See "Real Estate
Investment Risks" above.
Risks of Limitations on Acquisition and Change in Control
The Company's Charter contains the following provisions, which may
limit the ability of outside parties to acquire control of the Company:
Ownership Limit. The 9.8% ownership limit described under "--Possible
Adverse Consequences of Limits on Ownership of Shares" below may have the effect
of precluding acquisition of control of the Company by a third party without the
consent of the Board of Directors even if a change in control were in the
interest of the shareholders of the Company.
Staggered Board. The Board of Directors of the Company has three
classes of directors. Directors for each class are chosen for a three-year term
upon the expiration of the then current class's term. The staggered terms for
directors may affect the shareholders' ability to change control of the Company
even if a change in control were in the shareholders' interest.
Capital Stock. The Company's Charter authorizes the Board of Directors
to issue up to 145,000,000 shares of capital stock and to establish the
preferences and rights of any capital stock issued. Currently, 1,109,175 of
those shares are not classified as part of an existing class of stock and could
be classified by the
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Board of Directors without a shareholder vote into one or more series of capital
stock having special preferences or rights. See "Description of Common Stock."
The issuance of capital stock having special preferences or rights could have
the effect of delaying or preventing a change in control of the Company even if
a change in control were in the shareholders' interest.
Required Consent of the Operating Partnership for Merger. The
Company may not merge, consolidate or engage in any combination with another
person or sell all or substantially all of its assets unless such transaction
includes a merger of, or a sale of assets by, the Operating Partnership,
which transaction would require approval of the holders of a majority of the
Units. The Company currently holds approximately 55.6% 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.
Exemptions from Maryland Business Combinations Law. Under the Maryland
General Corporation Law ("MGCL"), certain "business combinations" (including
certain issuances of equity securities) between a Maryland corporation and any
person who owns 10% or more of the voting power of the corporation's shares of
capital stock (an "Interested Shareholder") must be approved by a supermajority
(80%) of voting shares. In addition, an Interested Shareholder may not engage in
a business combination for five years following the date he or she became an
Interested Shareholder. The Company, as permitted by the MGCL, has exempted any
business combinations involving Messrs. Smith and Kogod and persons affiliated
or acting in concert with them. Consequently, Messrs. Smith and Kogod are
permitted to enter into business combinations with the Company without the
supermajority shareholder approval otherwise required by the MGCL.
Possible Adverse Consequences of Limits on Ownership of Shares
In order to maintain its qualification as a REIT, not more than 50% in
number or value of the outstanding capital stock of the Company may be owned,
directly or constructively under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. In order to protect the
Company from the risk of losing its REIT status due to a concentration of
ownership among its shareholders, the Company has limited ownership of the
issued and outstanding shares of capital stock by any single shareholder to 9.8%
of the outstanding Common Stock (determined taking into account certain
ownership attribution rules). The Board of Directors may waive the percentage
ownership limit for certain entities (but not individuals) if it is satisfied
that ownership in excess of this limit will not jeopardize the Company's status
as a REIT and the Board of Directors otherwise decides such action is in the
best interests of the Company. The Board of Directors has waived the percentage
ownership limit in one instance, in the case of an investment adviser which
holds Common Stock as the record owner on behalf of other beneficial owners. A
transfer of shares of capital stock to a person who, as a result of the
transfer, violates the ownership limit will be void. Shares of Common Stock
acquired in breach of the limitation will be automatically exchanged for shares
of a separate class of stock not entitled to vote or to participate in
distributions ("Excess Stock"). In addition, ownership, either directly or
indirectly under the applicable attribution rules of the Code, of stock in
excess of the ownership limit generally will result in the conversion of those
shares into Excess Stock. The Company will direct a holder of Excess Stock to
sell such stock to the Company for the lesser of the price paid or the average
closing price for the five trading days preceding the sale or to sell such stock
to a person whose ownership of the stock does not violate the ownership limit.
See "Description of Common Stock--Restrictions on Transfer; Excess Stock" for
additional information regarding the ownership limits.
Adverse Consequences of Failure to Qualify as a REIT; Other Tax Liabilities
Tax Consequences of the Failure of the Company to Qualify as a REIT. A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders as long as it distributes currently at
least 95% of its taxable income (excluding net capital gain). The Company
believes it is qualified as a REIT, but no assurance can be given that it will
be able to remain so qualified. Qualification as a REIT involves the application
of highly technical and complex Code provisions as to which there are only
limited judicial and administrative interpretations. Certain facts and
circumstances that may be wholly or partially beyond the Company's control may
affect its ability to qualify as a REIT. In addition, no assurance can be
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given that new legislation, Treasury Regulations, administrative
interpretations, or court decisions will not significantly change the tax laws
with respect to the Company's qualification as a REIT or the federal income tax
consequences of such qualification.
Among the requirements for REIT qualification are that the value of any
one issuer's securities held by a REIT may not exceed 5% of the value of the
REIT's total assets on certain testing dates, and that a REIT may not own more
than 10% of any one issuer's outstanding voting securities. See "Federal Income
Tax Considerations--Requirements for Qualification--Asset Tests." The
Company and its senior management believe that the value of the securities of
each of the Property Service Businesses will be less than 5% of the value of the
Company's total assets, based on its analysis of the operating cash flows of
each of the Property Service Businesses, but there can be no assurance that the
IRS might not contend otherwise, or that all or some of the Property Service
Businesses should be considered a single corporation for purposes of the 5%
value limitation and that the value of the securities of that corporation
exceeds the 5% limitation, or that the nonvoting stock of one or more of the
Property Service Businesses should be considered "voting securities" for
purposes of the 10% limitation.
If the Company fails to satisfy the 5% value requirement or the 10%
ownership limit or otherwise fails to qualify as a REIT, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, unless entitled to
relief under certain statutory provisions, the Company will be disqualified from
treatment as a REIT for the four taxable years following the year during which
REIT qualification is lost. The additional tax would significantly reduce the
cash flow available for distributions by the Company to its shareholders. See
"Federal Income Tax Considerations--Taxation of the Company."
REIT Distribution Requirements and Potential Impact of Borrowings. To
obtain the favorable tax treatment associated with REITs qualifying under the
Code, the Company generally will be required each year to distribute to its
shareholders at least 95% of its net taxable income (excluding net capital
gain). In addition, the Company will be subject to a 4% nondeductible excise tax
on the amount, if any, by which the sum of certain distributions paid by it with
respect to any calendar year and certain amounts retained by it with respect to
which it pays federal income tax are less than the sum of 85% of its ordinary
income, 95% of its capital gain net income and 100% of its undistributed income
from prior years.
Differences in timing between the receipt of income, the payment of
expenses, and the inclusion of such income and the deduction of such expenses in
arriving at taxable income (of the Company or the Operating Partnership), or the
effect of nondeductible capital expenditures, the creation of reserves or
required debt or amortization payments, could require the Company, directly or
through the Operating Partnership, to borrow funds on a short-term basis to meet
the distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT. In such instances, the Company might need
to borrow funds in order to avoid adverse tax consequences even if management
believed that then prevailing market conditions were not generally favorable for
such borrowings.
Consequences of Failure of the Operating Partnership to Qualify as a
Partnership. If the IRS were to challenge successfully the tax status of the
Operating Partnership or any of its subsidiary partnerships as a partnership for
federal income tax purposes, the Operating Partnership or such affected
subsidiary partnership would be taxable as a corporation. In such event, since
the value of the Company's ownership interest in the Operating Partnership
exceeds, and the value of the Operating Partnership's interest in the affected
subsidiary partnership could exceed, 5% of the Company's assets, the Company
could cease to qualify as a REIT. In addition, the imposition of a corporate tax
on the Operating Partnership or any of such subsidiary partnerships would reduce
the amount of cash available for distribution to the Company and its
shareholders. See "Federal Income Tax Considerations--Tax Aspects of the
Company's Investment in the Operating Partnership and Property Service
Businesses."
Other Tax Liabilities. Notwithstanding the Company's qualification as a
REIT, the Company will be subject--through the Operating Partnership and the
Property Service Businesses--to certain federal, state and local taxes on its
income and property. See "Federal Income Tax Considerations--Tax Aspects of
the Company's Investment in the Operating Partnership and Property Service
Businesses." In particular, the
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Company will derive a portion of its operating cash flow from the activities
of the Property Service Businesses. While the taxable income of the Property
Service Businesses initially has been reduced significantly as a result of
interest deductions on promissory notes issued by the Operating Partnership
in the Formation Transactions and amortization deductions, the taxable income
resulting from the Property Service Businesses will be subject to federal,
state and local income tax. In addition, income derived by the Company from
Properties located in the District of Columbia will be subject to the
District of Columbia Unincorporated Business Tax. See "Federal Income Tax
Considerations--Other Tax Considerations--State and Local Taxes; District of
Columbia Unincorporated Business Tax" and "--Tax Aspects of the Company's
Investment in the Operating Partnership and Property Service
Businesses--Property Service Businesses." Finally, if the Company has net
income from any prohibited transaction, such income will be subject to a 100%
tax. See "Federal Income Tax Considerations--Requirements for
Qualification--Gross Income Tests."
Potential Influence of Certain Officers and Directors
The officers and directors of the Company include Messrs. Smith and
Kogod. Messrs. Smith and Kogod and their families together beneficially owned
approximately 14.5% of the outstanding Common Stock and Units as of July 31,
1998. Messrs. Smith and Kogod have, and are expected to continue to have,
substantial influence on the affairs of the Company, which influence might not
be consistent with the interests of other shareholders, and (if their Units were
redeemed for Common Stock) on the outcome of any matters submitted to the
Company's shareholders for approval.
Dependence on Key Personnel
The Company is dependent on the efforts of its executive officers and
other key members of senior management. Such key members of senior management
are Philip Sayers, Senior Vice President and acting Chief Operating Officer of
Consolidated Engineering Services, Inc. (an affiliate of the Company) and
Frederick Wreiden, Senior Vice President and Chief Operating Officer of Smith
Management Construction, Inc. (an affiliate of the Company). The loss of the
services of one or more of these individuals and the inability of the Company to
find a substitute with the same level of expertise and experience could be
disruptive to the operations of the Company and could result in an adverse
effect on the Company. The Company does not maintain "key-person" life insurance
for any of its personnel.
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THE COMPANY
The Company is a self-administered and self-managed equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties primarily in the Washington, D.C. metropolitan area and
certain other targeted urban areas. The Company, together with its subsidiaries,
is a fully integrated real estate organization with in-house acquisition,
development, financing, marketing and property management and leasing expertise.
The Company's primary strategy for growth is to acquire, develop, own and manage
high quality multifamily properties for long-term income generation and value
appreciation.
The Company is the sole general partner of and held approximately 55.6%
of the Units in the Operating Partnership as of July 31, 1998. The other Limited
Partners of the Operating Partnership are the former limited and general
partners of the Former Property Partnerships and the former owners of the
property service businesses acquired by the Operating Partnership at the time of
its formation in June 1994 or thereafter. All of the Company's properties,
property interests, and business assets are owned by, and its operations
conducted through, the Operating Partnership and its subsidiaries. In addition,
the Operating Partnership owns 100% of the nonvoting common stock, which
represents 99% of the total economic interest of the Property Service
Businesses, which provide property services to the properties owned by the
Operating Partnership and to other multifamily, retail, and office properties.
The three Property Service Businesses are: Smith Realty Company, which provides
management, leasing, financing, and insurance services; Consolidated Engineering
Services, Inc., which provides engineering and technical services; and Smith
Management Construction, Inc., which provides tenant construction and renovation
services. As the sole general partner of the Operating Partnership, the Company
has the exclusive power to manage and conduct the business of the Operating
Partnership, subject to the consent of the holders of Units in connection with
the sale of all or substantially all of the assets of the Operating Partnership.
As of July 31, 1998, the Company, through the Operating Partnership,
owned 49 Multifamily Properties, two Retail Properties, a substantial
majority of which are located in the Washington, D.C. metropolitan area, and
had approximately 2,100 units under construction. The Company also manages
over 3,500 additional apartment units for other owners.
The Company's executive offices are located at 2345 Crystal Drive,
Crystal City, Arlington, Virginia 22202, and its telephone number is (703)
920-8500. The Company is a Maryland corporation formed in 1993. The Operating
Partnership is a Delaware Limited Partnership formed in 1993; it commenced
business operations on June 30, 1994.
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DESCRIPTION OF COMMON STOCK
General
The authorized capital stock of the Company consists of 145,000,000
shares of capital stock, $.01 par value, of which 95,000,000 shares are
classified as Common Stock, 45,000,000 shares are classified as Excess Stock,
3,890,825 shares are classified as Preferred Stock and 1,109,175 shares are not
classified. Under the Company's Charter, the Board of Directors may issue,
without any further action by the shareholders, shares of capital stock in one
or more series having such preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption as the Board of Directors may determine and as may be
evidenced by articles supplementary to the Charter adopted by the Board of
Directors. The following description of the terms and provisions of the shares
of capital stock of the Company and certain other matters does not purport to be
complete and is subject to and qualified in its entirety by reference to the
applicable provisions of Maryland law and the Company's Charter.
Each holder of Common Stock is entitled to one vote at shareholder
meetings for each share of Common Stock held. Neither the Charter nor the Bylaws
provide for cumulative voting for the election of directors. Subject to the
prior rights of any series of preferred stock that may be classified and issued,
holders of the Common Stock of the Company are entitled to receive, pro-rata,
such dividends as may be declared by the Board of Directors out of funds legally
available therefor, and are also entitled to share, pro-rata, in any other
distributions to shareholders. The Company pays quarterly dividends on its
Common Stock and it expects to continue to do so. The Company depends upon
distributions from the Operating Partnership to fund its dividends to
shareholders.
There are no redemption or sinking fund provisions and no direct
limitations in any indenture or agreement on the payment of dividends.
Holders of Common Stock do not have any preemptive rights or other
rights to subscribe for additional shares.
Classification and Removal of Board of Directors; Other Provisions
The Charter of the Company provides for the Board of Directors to be
divided into three classes of directors, with each class to consist as nearly as
possible of an equal number of the directors. The terms of office of one class
of directors (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.
The Charter also provides that, except for any directors who may be
elected by holders of a class or series of capital stock other than Common
Stock, directors may be removed only for cause and only by the affirmative vote
of shareholders holding at least 80% of all the votes entitled to be cast for
the election of directors. Vacancies on the Board of Directors may be filled by
the affirmative vote of the remaining directors and, in the case of a vacancy
resulting from the removal of a director, by the shareholders by a majority of
the votes entitled to be cast for the election of directors. A vote of
shareholders holding at least 80% of all the votes entitled to be cast thereon
is required to amend, alter, change, repeal or adopt any provisions inconsistent
with the foregoing classified board and director removal provisions. Under the
Charter, the power to amend the Bylaws of the Company is vested exclusively in
the Board of Directors, and the shareholders will not have any power to adopt,
alter or repeal the Bylaws absent amendment to the Charter. These provisions may
make it more difficult and time consuming to change majority control of the
Board of Directors of the Company and, thus, reduce the vulnerability of the
Company to an unsolicited proposal for the takeover of the Company or the
removal of incumbent management.
Because the Board of Directors has the power to establish the
preferences and rights of additional series of capital stock without further
shareholder vote, the Board of Directors may afford the holders of any
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series of senior capital stock preferences, powers and rights, voting or
otherwise, senior to the rights of holders of Common Stock. The issuance of any
such senior capital stock could have the effect of delaying or preventing a
change in control of the Company. The Board of Directors, however, currently
does not contemplate the issuance of any series of capital stock other than the
Common Stock and Excess Stock (see "--Restrictions on Transfer; Excess Stock"
below).
Special Statutory Requirements for Certain Transactions
Business Combination Statute. The MGCL establishes special requirements
with respect to "business combinations" between Maryland corporations and
"interested shareholders" unless exemptions are applicable. Among other things,
the law prohibits for a period of five years a merger and other specified or
similar transactions between a Company and an interested shareholder and
requires a supermajority vote for such transactions after the end of the
five-year period.
"Interested Shareholders" are all persons owning beneficially, directly
or indirectly, more than 10% of the outstanding voting stock of the Maryland
corporation. "Business Combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to Interested Shareholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an Interested Shareholder
or its affiliates for a period of five years after the date on which the
shareholder first became an Interested Shareholder. Thereafter, the transaction
may not be consummated unless recommended by the board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66-2/3% of the votes entitled
to be cast by all holders of outstanding shares of voting stock other than the
Interested Shareholder. A Business Combination with an Interested Shareholder
that is approved by the board of directors of a Maryland corporation at any time
before an Interested Shareholder first becomes an Interested Shareholder is not
subject to the special voting requirements. An amendment to a Maryland
corporation's charter electing not to be subject to the foregoing requirements
must be approved by the affirmative vote of at least 80% of the votes entitled
to be cast by all holders of outstanding shares of voting stock and 66-2/3% of
the votes entitled to be cast by holders of outstanding shares of voting stock
who are not Interested Shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply to any Business
Combination of a corporation with a shareholder who was an Interested
Shareholder on the date of the shareholder vote.
As permitted by Maryland law, the Company has exempted from the
Maryland business corporation statute any Business Combination with Messrs.
Smith or Kogod, and all persons, firms and corporations affiliated with, or
acting in concert or as a group with, either of them, as well as any Business
Combination that involves the redemption of Units for shares of Common Stock.
Control Share Acquisition Statute. Maryland law imposes limitations on
the voting rights in a "control share acquisition." The Maryland statute defines
a "control share acquisition" at the 20%, 33-1/3% and 50% acquisition levels,
and requires a 2/3 shareholder vote (excluding shares owned by the acquiring
person and certain members of management) to accord voting rights to stock
acquired in a control share acquisition. The statute also requires Maryland
corporations to hold a special meeting at the request of an actual or proposed
control share acquirer generally within 50 days after a request is made with the
submission of an "acquiring person statement," but only if the acquiring person
(a) posts a bond for the cost of a meeting and (b) submits a definitive
financing agreement to the extent that financing is not provided by the
acquiring person. In addition, unless the charter or by-laws provide otherwise,
the statute gives the Maryland corporation, within certain time limitations,
various redemption rights if there is a shareholder vote on the issue and the
grant of voting rights is not approved, or if an acquiring person statement is
not delivered to the target within 10 days following a control share
acquisition. Moreover, unless the charter or by-laws provide otherwise, the
statute provides that if, before a control share acquisition occurs, voting
rights are accorded to control shares that result in the acquiring person having
majority voting power, then minority shareholders have appraisal rights. An
acquisition of shares may be exempted from the control share statute, provided
that a charter or bylaw provision is adopted for such purpose prior to the
control share acquisition. Pursuant to the foregoing, the Company's Charter
provides that any acquisition of shares of capital stock of the Company that is
not prohibited by the terms of the restrictions on transfer described below
under "--Restrictions on Transfer; Excess Stock" is exempted from the
provisions of the control share acquisition statute.
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Restrictions on Transfer; Excess Stock
Ownership Limits. The Charter contains certain restrictions on the
number of shares of capital stock that individual shareholders may own. For the
Company to qualify as a REIT under the Code, no more than 50% in value of its
outstanding shares of capital stock may be owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year (other than the first taxable year in which the Company qualifies
as a REIT). In addition, the capital stock must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year (together with the restriction
referred to in the preceding sentence, the "Existing Holder Limit"). The Charter
of the Company contains restrictions on the acquisition of capital stock,
including Common Stock, which are intended to ensure compliance with these
requirements.
Subject to certain exceptions specified in the Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% (the "Ownership Limit") in number or value of the issued and
outstanding shares of Common Stock. The Board of Directors in its discretion may
waive the Ownership Limit or the Existing Holder Limit with respect to a holder
that is an entity (but not an individual) if such holder's ownership will not
then or in the future jeopardize the Company's status as a REIT.
Messrs. Smith and Kogod, members of their families and entities that
they control are subject to the Ownership Limit, and they also are subject to
certain additional special ownership limitations. Messrs. Smith and Kogod,
members of their families and entities that they control are prohibited from
acquiring additional shares of Common Stock (or rights to acquire shares),
if, as a result of, and giving effect to, such acquisition, any tenant would
be regarded as a Related Party Tenant for purposes of Section 856(b)(2)(B) of
the Code (see "Federal Income Tax Considerations--Requirements for
Qualification--Gross Income Tests") and the Company would be considered to
receive more than 0.5% of its gross annual revenue from Related Party Tenants.
Notwithstanding any of the foregoing ownership limits, no holder may
own or acquire, either directly or constructively under the applicable
attribution rules of the Code, any shares of any class of the Company's stock if
such ownership or acquisition (i) would cause more than 50% in value of the
Company's outstanding stock to be owned, either directly or constructively under
the applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in the Company's
stock being beneficially owned by less than 100 persons (determined without
reference to any rules of attribution), or (iii) would otherwise result in the
Company failing to qualify as REIT.
If any shareholder purports to transfer shares to a person and either
the transfer would result in the Company failing to qualify as a REIT, or such
transfer would cause the transferee to hold shares in excess of more than the
applicable Ownership Limit or Existing Holder Limit, the purported transfer
shall be null and void, and the intended transferee will acquire no rights or
economic interest in the shares, and the shareholder will be deemed to have
transferred the shares of Common Stock to the Company in exchange for shares of
Excess Stock, which will be deemed to be held by the Company as trustee of a
trust for the exclusive benefit of the person or persons to whom the shares can
be transferred without violating the ownership limit. In addition, if any person
owns, either directly or constructively under the applicable attribution rules
of the Code, shares of capital stock in excess of the applicable Ownership
Limit, such person will be deemed to have exchanged the shares of capital stock
that cause the Ownership Limit to be exceeded for an equal number of shares of
Excess Stock, which will be deemed to be held by the Company as trustee of a
trust for the exclusive benefit of the person or persons to whom the share can
be transferred without violating the Ownership Limit.
A person who holds or transfers shares such that shares of capital
stock shall have been deemed to be exchanged for Excess Stock will not be
entitled to vote the Excess Stock and will not be entitled to receive any
dividends or distributions (any dividend or distribution paid on shares of
capital stock prior to the discovery by the Company that such shares have been
exchanged for Excess Stock shall be repaid to the Company upon demand, and any
dividend or distribution declared but unpaid shall be rescinded). Such person
shall have the right to designate a transferee of such Excess Stock so long as
consideration received for designating such transferee does not exceed a price
that is equal to the lesser of (i) in the case of a deemed exchange for Excess
Stock resulting from a transfer, the price paid for the shares in such transfer
or, in the case of a deemed exchange for Excess Stock resulting from some other
event, the fair market value, on the date of the deemed
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exchange, of the shares deemed exchanged, and (ii) the fair market value of the
shares for which such Excess Stock will be deemed to be exchanged on the date of
the designation of the transferee. For these purposes, fair market value on a
given date is determined by reference to the average closing price for the five
preceding days. The share of Excess Stock so transferred will automatically be
deemed to be exchanged for shares of capital stock. Excess Stock may be
purchased by the Company for the lesser of the price paid or the average closing
price for the five days immediately preceding such purchase. The Company may
elect to redeem the Excess Stock for Units.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then the
intended transferee of any Excess Stock may be deemed, at the option of the
Company, to have acted as an agent on behalf of the Company in acquiring such
Excess Stock and to hold such Excess Stock on behalf of the Company.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage
as required by the Code or regulations thereunder) in number or value of the
issued and outstanding shares of capital stock, including Common Stock, must
file a written notice with the Company containing the information specified in
the Charter no later than January 31 of each year. In addition, each shareholder
shall be required upon demand to disclose to the Company in writing such
information as the Company may request in order to determine the effect on the
Company's status as a REIT of such shareholder's direct, indirect and
constructive ownership of the shares.
The foregoing ownership limitations also may have the effect of
preventing or hindering any attempt to acquire control of the Company without
the consent of the Board of Directors.
Transfer Agent and Registrar
The Transfer Agent, Registrar and Dividend Disbursing Agent for the
shares of Common Stock is First Union National Bank of North Carolina.
DESCRIPTION OF UNITS
General
Holders of Units (including the Company in its capacity as general
partner) are entitled to share in cash distributions from, and in the profits
and losses of, the Operating Partnership.
The Operating Partnership has two classes of Units: (i) Class A Units
are Units that were issued to Limited Partners in connection with the formation
of the Operating Partnership, the Initial Offering and related transactions, and
any Units issued thereafter that are not designated as Class B Units, and (ii)
Class B Units are Units issued to Limited Partners admitted after June 30, 1994
in exchange for their contribution to the Operating Partnership of real property
or other assets, unless the Company elects to issue Class A Units. With the
exception of distributions (as described under "Distributions; Allocations of
Income and Loss--Class A Units; Class B Units"), restrictions on transfer (as
described under "Restrictions on Transfer of Units by Limited Partners"), and
restrictions on redemption (as described under "Redemption of Units"), Class B
Units have the same rights, preferences, powers and duties as Class A Units. All
references herein to Units include both Class A Units and Class B Units, unless
otherwise indicated.
Holders of Units have the rights of Limited Partners under the
Partnership Agreement and the Delaware Revised Uniform Limited Partnership Act
(the "Act"). The Units are not listed on any exchange or quoted on any national
market system. Set forth below is a discussion of the current rights of
redeeming Unitholders. The Partnership Agreement imposes certain restrictions on
the transfer of Units, also as described below.
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Distributions; Allocations of Income and Loss
Distributions Generally. The Partnership Agreement provides for the
quarterly distribution of Available Cash, as determined in the manner provided
in the Partnership Agreement. If no Class B Units are issued and outstanding
during a quarter, Available Cash is distributed for such quarter to the holders
of Class A Units on the record date for such quarter in proportion to their
percentage interests in the Operating Partnership. "Available Cash" is generally
defined as net income plus depreciation and other adjustments minus reserves,
principal payments on debt and capital expenditures and other adjustments.
Neither the Company nor the Limited Partners are entitled to any preferential or
disproportionate distributions of Available Cash. Each Unit generally receives
distributions in the same amount paid on each share of Common Stock.
Class A Units; Class B Units. If Class B Units are issued and
outstanding for any portion of a quarter, Available Cash for such quarter is
distributed among holders of Class A Units (which includes the Company) and
Class B Units on the applicable record date in accordance with their percentage
interests in the Operating Partnership and the weighted average number of days
during the quarter that the Class A Units and Class B Units, respectively, were
issued and outstanding. Class A Units are always treated for this purpose as
having been outstanding for the entire quarter regardless of when they are
issued. Consequently, Limited Partners holding Class A Units (which includes the
Company) on the applicable record date will receive distributions of Available
Cash in accordance with their percentage interests in the Operating Partnership
for the entire quarter. Limited Partners holding Class B Units on the applicable
record date will receive distributions of Available Cash in accordance with
their percentage interests in the Operating Partnership for the weighted average
number of days during that quarter for which such Limited Partners held their
Class B Units. Holders of Class B Units who are admitted to the Operating
Partnership between the end of a quarter and the record date applicable to
distributions for such quarter will not receive any distributions with respect
to the preceding quarter, but will receive distributions of Available Cash with
respect to the portion of the quarter in which their Class B Units were issued.
Each Class B Unit will be converted automatically into a Class A Unit on the day
immediately following the record date for distributions with respect to the
quarter in which the Class B Units were issued.
Allocations of Income and Loss. The Partnership Agreement provides that
if the Operating Partnership operates at a net loss, net losses shall be
allocated to the Company and the Limited Partners in proportion to their
respective percentage interests in the Operating Partnership, provided that net
losses that would have the effect of creating a deficit balance in a Limited
Partner's capital account (as specially adjusted for such purpose) ("Excess
Losses") will be reallocated to the Company, as general partner of the Operating
Partnership. The Partnership Agreement also provides that, if the Operating
Partnership operates at a net profit, net income shall be allocated first to the
Company to the extent of Excess Losses with respect to which the Company has not
previously been allocated net income, and any remaining net income shall be
allocated in proportion to the respective percentage interests of the Company
and the Limited Partners.
Liability of General Partner and Limited Partners
The Company, as general partner of the Operating Partnership, is liable
for all general recourse obligations of the Operating Partnership to the extent
not paid by the Operating Partnership and to the extent that the assets of the
Operating Partnership are not sufficient for payment thereof (except for certain
tort liabilities, for which the general partner has joint and several
liability). The Operating Partnership is required to reimburse the Company in
the event it pays any obligations of the Operating Partnership. The Company is
not liable for the nonrecourse obligations of the Operating Partnership.
The Limited Partners are not required to make additional contributions
to the Operating Partnership. Assuming that a Limited Partner does not take part
in the control of the business of the Operating Partnership and otherwise acts
in conformity with the provisions of the Partnership Agreement, the liability of
the Limited Partner for obligations of the Operating Partnership under the
Partnership Agreement and the Act are limited, subject to certain possible
exceptions, generally to the loss of the Limited Partner's investment in the
Operating Partnership represented by his Units. Under the Act, a Limited Partner
may not receive a distribution from the Operating Partnership if, at the time of
the distribution and after giving effect thereto, the liabilities of the
Operating Partnership (other than liabilities to parties on account of their
interests in the Operating Partnership and liabilities for which recourse is
limited to specified property of the Operating Partnership) exceed the fair
value of the Operating Partnership's assets (other than the fair value of any
property subject to
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nonrecourse liabilities of the Operating Partnership but only to the extent of
such liabilities). The Act provides that a Limited Partner who receives a
distribution knowing at the time that it violates the foregoing prohibition is
liable to the Operating Partnership for the amount of the distribution. Unless
otherwise agreed, such a Limited Partner will not be liable for the return of
such distribution after the expiration of three years from the date of such
distribution.
The Operating Partnership is qualified to conduct business in the
District of Columbia, the State of Maryland, the Commonwealth of Virginia,
the Commonwealth of Massachusetts and the State of Illinois, and may qualify
to conduct business in the future in certain other jurisdictions. Maintenance
of limited liability may require compliance with certain legal requirements
of those jurisdictions and certain other jurisdictions. Limitations on the
liability of a Limited Partner for the obligations of a Limited Partnership
have not been clearly established in many jurisdictions. Accordingly, if it
were determined that the right, or exercise of the right by the Limited
Partners, to make certain amendments to the Partnership Agreement or to take
other action pursuant to the Partnership Agreement constituted "control" of
the Operating Partnership's business for the purposes of the statutes of any
relevant jurisdiction, the Limited Partners might be held personally liable
for the Operating Partnership's obligations. The Operating Partnership will
operate in a manner that the general partner deems reasonable, necessary and
appropriate to preserve the limited liability of the Limited Partners.
Sales of Assets
Under the Partnership Agreement, the Company generally has the
exclusive authority to determine whether, when and on what terms the assets of
the Operating Partnership will be sold. A sale of all or substantially all of
the assets of the Operating Partnership (or a merger of the Operating
Partnership with another entity), however, requires an affirmative vote of a
majority of the outstanding Units (including Units held by the Company).
Removal of the General Partner; Transfer of the General Partner's Interest
The Partnership Agreement provides that the Limited Partners may not
remove the Company as general partner of the Operating Partnership. The Company
may not transfer any of its interests as general or limited partner in the
Operating Partnership except in connection with a merger or sale of all or
substantially all of its assets. The Company also may not sell all or
substantially all of its assets, or enter into a merger unless the sale or
merger includes the sale of all or substantially all of the assets of, or the
merger of, the Operating Partnership with partners of the Operating Partnership
receiving substantially the same consideration as holders of shares of Common
Stock.
Restrictions on Transfer of Units by Limited Partners
Limited Partners who hold Class A Units may transfer such Units to
members of the immediate family, any trust set up for the benefit of members of
the immediate family, or any partnership consisting only of members of the
immediate family, but may not transfer such Units to any other person without
obtaining the prior written consent of the general partner, which consent may be
withheld in the sole and absolute discretion of the general partner. Subject to
compliance with federal and state securities law restrictions, Limited Partners
who hold Class B Units may transfer their Class B Units to members of the
immediate family, any trust set up for the benefit of members of the immediate
family, or any partnership consisting only of members of the immediate family,
but may not transfer such Units to any other persons without obtaining the prior
written consent of the general partner, which consent may be withheld in the
sole and absolute discretion of the general partner. In addition, all transfers
of Units are subject to the requirement that the holder obtain an opinion of
legal counsel to the Operating Partnership that the transfer would not (a)
result in the Operating Partnership's being treated as an association taxable as
a corporation for federal income tax purposes; (b) result in the termination of
the Operating Partnership for federal income tax purposes; or (c) adversely
affect the ability of the Company to continue to qualify as a REIT or subject
the Company to any additional taxes under the Code. No transfer, however, may be
effectuated through an "established securities market" or a "secondary market
(or the substantial equivalent thereof)" within the meaning of the Code. Limited
Partners who hold Class B Units (or Class A Units into which Class B Units were
converted) will be subject, in addition to the limitations set forth above, to
such restrictions on transfer as may be set forth in the contribution agreement
or Partnership Agreement amendment pursuant to which their capital contributions
are made to the Operating Partnership.
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The right of any permitted transferee of Units to become a substitute
limited partner is subject to the consent of the general partner, which the
general partner may withhold in its sole and absolute discretion. If the general
partner does not consent to the admission of a transferee of Units as a
substitute limited partner, the transferee will succeed to all economic rights
and benefits attributable to such Units (including the right of redemption), but
will not become a Limited Partner or possess any other rights of Limited
Partners (including the right to vote).
Redemption of Units
Subject to certain limitations, Limited Partners who hold Class A Units
may require that the Operating Partnership redeem their Class A Units by
notifying the Operating Partnership. Unless the Company, as general partner of
the Operating Partnership, elects to assume and perform the Operating
Partnership's redemption obligation, as outlined below, the redeeming Limited
Partner will receive cash in an amount equal to the market value of the Units to
be redeemed. The market value of a Unit for this purpose is the average of the
closing trading price of a share of Common Stock (or substitute information, if
no such closing price is available) for the ten trading days before the day on
which the redemption notice was given. In lieu of the Operating Partnership's
redeeming Units, the Company will have the right to elect to acquire the Units
directly from a Limited Partner seeking a redemption, and upon such acquisition,
become the owner of the Units. Such an acquisition by the Company will be
treated as a sale of the Units to the Company for federal income tax purposes.
Upon redemption or the direct acquisition of Units by the general partner, the
Limited Partner's right to receive distributions for the Units redeemed will
cease. At least 1,000 Units must be redeemed each time the redemption right is
exercised (or all remaining Units owned by the Limited Partner if less than
1,000 Units). The redemption generally will occur on the tenth business day
after the notice to the Operating Partnership, except that no redemption can
occur if delivery of shares of Common Stock would be prohibited under the
ownership limit or other provisions of the Company's Charter. In this regard,
members of the Smith and Kogod families and entities that they control are
prohibited from exercising their right to require the redemption of Units that
they hold if the issuance of shares of Common Stock to them by the Company would
be prohibited under the special restrictions contained in the Charter that are
applicable to their acquisition and ownership of shares.
Limited Partners who hold Class B Units (or Class A Units into which
Class B Units were converted) will not be permitted to redeem their Units for
shares of Common Stock or for cash, at the option of the Company, for at least
one year following their admission to the Operating Partnership or such longer
or shorter term as may be set forth in the contribution agreement pursuant to
which their capital contributions are made to the Operating Partnership.
No Withdrawal by Limited Partners
No Limited Partner has the right to withdraw from or reduce his or her
capital contribution to the Operating Partnership, except as a result of the
redemption or transfer of his or her Units pursuant to the terms of the
Partnership Agreement.
Issuance of Additional Interests
The Company is authorized, without the consent of the Limited Partners,
to cause the Operating Partnership to issue additional Units (including, without
limitation, Class A Units or Class B Units) to itself, to the Limited Partners
or to other persons for such consideration and on such terms and conditions as
the Company deems appropriate. If additional Units are issued to the Company,
then the Company must issue additional shares of Common Stock and must
contribute to the Operating Partnership the entire proceeds received by the
Company from such issuance. In addition, the Company may cause the Operating
Partnership to issue to itself, to the Limited Partners or to other persons
additional partnership interests in different series or classes, which may be
senior to the Units, for such consideration, on such terms and conditions, and
with such designations and preferences as the Company deems appropriate
(provided, however, that if such partnership interests are issued to the
Company, they must be issued in conjunction with an offering of securities of
the Company having substantially similar rights, in which the proceeds thereof
are contributed to the Operating Partnership). Consideration for additional
partnership interests may be cash or any property or other assets permitted by
the Act. No Limited Partner has preemptive, preferential or similar rights with
respect to additional capital contributions to the Operating Partnership or the
issuance or sale of any partnership interests therein.
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Meetings; Voting
The Partnership Agreement does not provide for annual meetings of the
Limited Partners, and the Company does not anticipate calling such meetings.
Meetings of the Limited Partners may be called only by the Company, on its own
motion or upon written request of Limited Partners owning at least 25% of the
Units. Limited Partners may vote either in person or by proxy at meetings. Any
action that is required or permitted to be taken by the Limited Partners of the
Operating Partnership may be taken either at a meeting of the Limited Partners
or without a meeting if consents in writing setting forth the action so taken
are signed by Limited Partners owning not less than the minimum Units that would
be necessary to authorize or take such action at a meeting of the Limited
Partners at which all Limited Partners entitled to vote on such action were
present. On matters in which Limited Partners are entitled to vote, each Limited
Partner (including the Company to the extent it holds Units) will have a vote
equal to the number of Units he or she holds in the Operating Partnership. A
transferee of Units who has not been admitted as a substitute Limited Partner of
record with respect to such Units will have no voting rights with respect to
such Units, even if such transferee holds other Units as to which it has been
admitted as a Limited Partner.
Amendment of the Partnership Agreement
Amendments to the Partnership Agreement may be proposed by the Company
or by Limited Partners owning at least 25% of the Units. Generally, the
Partnership Agreement may be amended with the approval of the Company, as
general partner, and Limited Partners (including the Company) holding a majority
of the Units. Certain amendments that would, among other things, convert a
Limited Partner's interest into a general partner's interest; modify the limited
liability of a Limited Partner; alter the interest of a partner in profits or
losses, or the rights to receive any distributions; alter or modify the
redemption right described above; or cause the termination of the Operating
Partnership at a time or on terms inconsistent with those set forth in the
Partnership Agreement must be approved by the Company and each Limited Partner
that would be adversely affected by such amendment. Notwithstanding the
foregoing, the Company, as general partner, will have the power, without the
consent of the Limited Partners, to amend the Partnership Agreement as may be
required to (1) add to the obligations of the Company as general partner or
surrender any right or power granted to the Company as general partner; (2)
reflect the admission, substitution, termination or withdrawal of partners in
accordance with the terms of the Partnership Agreement; (3) establish the
rights, powers, duties and preferences of any additional partnership interests
issued in accordance with the terms of the Partnership Agreement; (4) reflect a
change of an inconsequential nature that does not materially adversely affect
the Limited Partners, or cure any ambiguity, correct or supplement any
provisions of the Partnership Agreement not inconsistent with law or with other
provisions of the Partnership Agreement, or make other changes concerning
matters under the Partnership Agreement that are not otherwise inconsistent with
the Partnership Agreement or law; or (5) satisfy any requirements of federal or
state law. Certain provisions affecting the rights and duties of the Company as
general partner (e.g., restrictions on the Company's power to conduct businesses
other than owning Units) may not be amended without the approval of a majority
of the Units not held by the Company.
Dissolution, Winding Up and Termination
The Operating Partnership will continue until December 31, 2092, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term, and its affairs wound up upon the
occurrence of the earliest of: (1) the withdrawal of the Company as general
partner without the permitted transfer of the Company's interest to a successor
general partner (except in certain limited circumstances); (2) the sale of all
or substantially all of the Operating Partnership's assets and properties; (3)
the entry of a decree of judicial dissolution of the Operating Partnership
pursuant to the provisions of the Act or the entry of a final order for relief
in a bankruptcy proceeding of the general partner; (4) the entry of a final
judgment ruling that the general partner is bankrupt or insolvent; (5) (i) from
and after June 27, 1994 through December 31, 2013, an election by the Company,
unless any Limited Partner who became a Limited Partner on June 30, 1994 and who
holds Units issued at such time objects to such dissolution in writing, (ii)
from and after January 1, 2014 through December 31, 2043, an election by the
Company, unless Limited Partners who became Limited Partners on June 30, 1994
and who hold at least five percent (5%) of the Units issued at such time object
to such dissolution in writing and (iii) on or after January 1, 2044, an
election by the Company, in its sole and absolute discretion. Upon dissolution,
the Company, as general partner, or any liquidator will proceed to liquidate the
assets of the Operating Partnership and apply the proceeds therefrom in the
order of priority set forth in the Partnership Agreement.
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SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock. The Company is authorized to issue
95,000,000 shares of Common Stock. As of July 31, 1998, the Company had
outstanding 17,272,783 shares of Common Stock. As of July 31, 1998, the
Company had reserved for possible issuance upon redemption of Units
approximately 17.8 million additional shares of Common Stock. 14,929,202
shares of Common Stock issuable upon any future redemption of Units, or
issuable under employee benefit plans, will be tradable without restriction
under the Securities Act pursuant to the Registration Statements on Form S-8
filed by the Company in August, 1994, on Form S-3 filed by the Company in
June 1995, July 1996 and April 1998, respectively or the Registration
Statement of which this Prospectus is a part. As of July 31, 1998, the
Company owned 17,272,783 Units of the Operating Partnership. In addition,
1,000,000 shares have been reserved for issuance under the Company's Dividend
and Distribution Investment and Share Purchase Plan, which plan was
registered with the Commission on December 22, 1995. Also, the Company
currently has on file with the Commission an effective registration statement
which would allow the sale of up to $266 million in unspecified securities,
including shares of Common Stock and securities convertible into shares of
Common Stock.
The Company also has established the Plans for the purpose of
attracting and retaining executive officers and other key employees. As of July
31, 1998, options to purchase up to 1,567,784 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 a director of the Company. Approximately 1,825,493 Units
or shares of Common Stock are available and are reserved for future issuance
under the Plans. As described elsewhere herein, Units are redeemable for cash or
shares of Common Stock in certain circumstances.
No prediction can be made as to the effect, if any, that future sales
of shares of Common Stock, or the availability of shares for future sale, will
have on the market price prevailing from time to time. Sales of substantial
amounts of shares of Common Stock (including shares issued upon the redemption
of Units or the exercise of options), or the perception that such sales could
occur, could adversely affect the prevailing market price of the shares.
REDEMPTION OF UNITS
General
Each Limited Partner may, subject to certain limitations, require that
the Operating Partnership redeem his or her Units, by delivering a notice to the
Operating Partnership. Upon redemption, such Limited Partner will receive, with
respect to each Unit tendered, cash in an amount equal to the market value of
one share of Common Stock of the Company (subject to certain anti-dilution
adjustments). The market value of the Common Stock for this purpose will be
equal to the average of the closing trading price of the Company's Common Stock
for the ten trading days before the day on which the redemption notice was
received by the Operating Partnership. The Operating Partnership Agreement
provides that if such trading information is not available, another method which
the General Partner of the Operating Partnership considers appropriate, in its
reasonable judgment, shall be used to determine the value of the Common Stock.
The Operating Partnership Agreement does not specify alternative valuation
methodologies. The valuation methodology to be used will depend upon all of the
facts and circumstances at the time.
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In lieu of the Operating Partnership redeeming Units for cash, the
Company, as general partner of the Operating Partnership, has the right to
assume directly and satisfy the redemption right of a Limited Partner described
in the preceding paragraph. The Company currently anticipates that it generally
will elect to assume directly and satisfy any redemption right exercised by a
Limited Partner through the issuance of shares of Common Stock (the Redemption
Shares), whereupon the Company will acquire the Units being redeemed and will
become the owner of the Units. However, the determination whether to pay cash or
issue shares of Common Stock upon redemption of Units will be made by the
Company at the time Units are tendered for redemption. Any such determination
will be made based on all of the facts and circumstances at the time, primarily
including the availability of cash, whether the acquisition of Units for cash is
a good investment and the market price of shares of Common Stock. Any such
acquisition of Units by the Company will be treated as a sale of the Units to
the Company for Federal income tax purposes. See "--Tax Consequences of
Redemption" below. Upon redemption, such Limited Partner's right to receive
distributions with respect to the Units redeemed will cease (but if such right
is exchanged for Redemption Shares, the Limited Partner will have rights as a
shareholder of the Company from the time of its acquisition of the Redemption
Shares).
A Limited Partner must notify the Company, as the general partner of
the Operating Partnership, of his or her desire to require the Operating
Partnership to redeem Units by sending a notice in the form attached as an
exhibit to the Partnership Agreement, a copy of which is available from the
Company. A Limited Partner must request the redemption of at least 1,000 Units
(or all of the Units held by such holder, if less). The redemption generally
will occur on the tenth business day after the notice is delivered by the
Limited Partner, except that no redemption can occur if the delivery of
Redemption Shares would be prohibited under the provisions of the Charter
designed to protect the Company's qualification as a REIT.
Tax Consequences of Redemption
The following discussion summarizes the material federal income tax
considerations that may be relevant to a Limited Partner who exercises his right
to require the redemption of his or her Units.
Tax Treatment of Redemption of Units. If the Company assumes and
performs the redemption obligation, the Partnership Agreement provides that the
redemption will be treated by the Company, the Operating Partnership and the
redeeming Limited Partner as a sale of Units by such Limited Partner to the
Company at the time of such redemption. (A Limited Partner's right to require
the redemption of Units is
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referred to as the "Redemption Right.") In that event, such sale will be fully
taxable to the redeeming Limited Partner and such redeeming Limited Partner will
be treated as realizing for tax purposes an amount equal to the sum of the cash
or the value of the Common Stock received in the exchange plus the amount of
Operating Partnership nonrecourse liabilities allocable to the redeemed Units at
the time of the redemption. The determination of the amount of gain or loss is
discussed more fully below.
If the Company does not elect to assume the obligation to redeem a
Limited Partner's Units, the Operating Partnership will redeem such Units for
cash. If the Operating Partnership redeems Units for cash that the Company
contributes to the Operating Partnership to effect such redemption, the
redemption likely would be treated for tax purposes as a sale of such Units to
the Company in a fully taxable transaction, although the matter is not free from
doubt. In that event, the redeeming Limited Partner would be treated as
realizing an amount equal to the sum of the cash received in the exchange plus
the amount of Operating Partnership nonrecourse liabilities allocable to the
redeemed Units at the time of the redemption. The determination of the amount of
gain or loss in the event of sale treatment is discussed more fully below.
If, instead, the Operating Partnership chooses to redeem a Limited
Partner's Units for cash that is not contributed by the Company to effect the
redemption, the tax consequences would be the same as described in the previous
paragraph, except that if the Operating Partnership redeems less than all of a
Limited Partner's Units, the Limited Partner would not be permitted to recognize
any loss occurring on the transaction and would recognize taxable gain only to
the extent that the cash, plus the share of Operating Partnership nonrecourse
liabilities allocable to the redeemed Units, exceeded the Limited Partner's
adjusted basis in all of such Limited Partner's Units immediately before the
redemption.
Tax Treatment of Disposition of Units by Limited Partner Generally. If
a Unit is redeemed in a manner that is treated as a sale of the Unit, or a
Limited Partner otherwise disposes of a Unit, the determination of gain or loss
from the sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the tax basis in such Unit. See
"Basis of Units" below. Upon the sale of a Unit, the "amount realized" will be
measured by the sum of the cash and fair market value of other property received
(e.g., Redemption Shares) plus the portion of the Operating Partnership's
nonrecourse liabilities allocable to the Unit sold. To the extent that the
amount exceeds the Limited Partner's basis for the Unit disposed of, such
Limited Partner will recognize gain. It is possible that the amount of gain
recognized or even the tax liability resulting from such gain could exceed the
amount of cash and the value of any other property (e.g., Redemption Shares)
received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a Unit attributable to a Limited Partner's share of "unrealized
receivables" of the Operating Partnership (as defined in Section 751 of the
Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Operating Partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include amounts
that would be subject to recapture as ordinary income if the Operating
Partnership had sold its assets at their fair market value at the time of the
transfer of a Unit.
For individuals, trusts and estates, the maximum rate of tax on the net
capital gain from a sale or exchange of a long-term capital asset (i.e., a
capital asset held for more than one year) is (i) 20% for sales or exchanges
occurring after December 31, 1997 and (ii) if the capital asset has been held
for more than five year, 18% for sales or exchanges occurring after December 31,
2000. The maximum rate for net capital gains attributable to the sale of
depreciable real property held for more than one year is 25% to the extent of
the prior deductions for "unrecaptured Section 1250 gain" (that is depreciation
deductions not otherwise recaptured as ordinary income under the existing
depreciation recapture rules).
The IRS has authority to issue regulations that could, among other
things, apply these rates on a look-through basis in the case of "pass-through"
entities such as the Company. The IRS has not yet issued such regulations, and
if it does not issue such regulations in the future, the rate of tax that would
apply to the disposition of a Unit by an individual, trust or estate would be
determined based upon the period of time over which such individual, trust or
estate held such Unit. No assurances, however, can be provided that the IRS will
not issue regulations that would provide that the rate of tax that would apply
to the disposition of a Unit by an individual, trust or estate would be
determined based upon the nature of the assets of the Operating Partnership and
the periods of time over which the Operating Partnership held such assets.
Moreover, no
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assurances can be provided that such regulations would not be applied
retroactively. If such regulations were to apply to the disposition of a Unit,
any gain on such disposition likely would be treated partly as gain from the
sale of a long-term capital asset, partly as gain from the sale of a short-term
capital asset (i.e., a capital asset hold for one year or less), and partly as
gain from the sale of depreciable real property.
Basis of Units. In general, a Limited Partner who received Units in
exchange for contributing an interest in a partnership had an initial tax basis
in such Units ("Initial Basis") equal to his or her basis in the contributed
partnership interest. A Limited Partner's Initial Basis in his or her Units
generally is increased by (a) such Limited Partner's share of Operating
Partnership taxable income and (b) increases in his or her share of the
liabilities of the Operating Partnership (including any increase in his or her
share of nonrecourse liabilities). Generally, such Partner's basis in his or her
Units is decreased (but not below zero) by (i) his or her share of Operating
Partnership distributions, (ii) decreases in his or her share of liabilities of
the Operating Partnership (including any decrease in his or her share of
nonrecourse liabilities of the Operating Partnership occurring in connection
with the acquisition of Columbia Road or subsequently), (iii) his or her share
of losses of the Operating Partnership, and (iv) his or her share of
nondeductible expenditures of the Operating Partnership that are not chargeable
to capital.
Comparison of Ownership of Units And Common Stock
Generally, the nature of an investment in shares of Common Stock of the
Company is substantially equivalent economically to an investment in Units in
the Operating Partnership. A holder of a share of Common Stock receives the same
distribution that a holder of a Unit receives and shareholders and Unit holders
generally share in the risks and rewards of ownership in the enterprise being
conducted by the Company (through the Operating Partnership). However, there are
some differences between ownership of Units and ownership of shares of Common
Stock, some of which may be material to investors.
The information below highlights a number of the material differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and Federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Stock, respectively. These comparisons are intended to assist
Limited Partners of the Operating Partnership in understanding how their
investment will be changed if their Units are redeemed for Common Stock. This
discussion is summary in nature and does not constitute a complete discussion of
these matters, and holders of Units should carefully review the balance of this
Prospectus and the registration statement of which this Prospectus is a part for
additional important information about the Company.
OPERATING PARTNERSHIP
Form of Organization and Assets Owned
The Operating Partnership is organized as a Delaware Limited Partnership. The
Operating Partnership owns interests (directly and through a subsidiary) in the
Properties and, through subsidiaries, conducts the Company's management and
leasing business. See "The Company."
COMPANY
Form of Organization and Assets Owned
The Company is a Maryland corporation. The Company elected to be taxed as a REIT
under the Code and intends to maintain its qualification as a REIT. The
Company's only significant asset is its interest in the Operating Partnership,
which gives the Company an indirect investment in the Properties owned by the
Operating Partnership.
OPERATING PARTNERSHIP
Length of Investment
The Operating Partnership has a stated term of 99 years.
COMPANY
Length of Investment
The Company has a perpetual term and intends to continue its operations for an
indefinite time period.
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OPERATING PARTNERSHIP
Permitted Investments
The Operating Partnership's purpose is to conduct any business that may be
lawfully conducted by a Limited Partnership organized pursuant to the Act,
provided that such business is to be conducted in a manner that permits the
Company to be qualified as a REIT unless the Company ceases to qualify as a
REIT. The Operating Partnership is authorized to perform any and all acts for
the furtherance of the purposes and business of the Operating Partnership,
provided that the Operating Partnership may not take, or refrain from taking,
any action which, in the judgment of the general partner (i) could adversely
affect the ability of the general partner to continue to qualify as a REIT, (ii)
could subject the general partner to any additional taxes under Section 857 or
Section 4981 of the Code, or (iii) could violate any law or regulation of any
governmental body (unless such action, or inaction, is specifically consented to
by the general partner).
COMPANY
Permitted Investments
Under its Charter, the Company may engage in any lawful activity permitted by
the General Corporation Law of Maryland. However, under the Operating
Partnership Agreement the Company, as general partner, may not conduct any
business other than the business of the Operating Partnership and cannot own any
assets other than its interest in the Operating Partnership except for any
wholly owned special purpose corporate subsidiary which serves as the general
partner of a partnership owned at least 99%, directly or indirectly, by the
Operating Partnership and other assets necessary to carry out its responsibility
under the Partnership Agreement or its Charter.
OPERATING PARTNERSHIP
Additional Equity
The Operating Partnership is authorized to issue Units and other partnership
interests (including partnership interests of different series or classes that
may be senior to Units) as determined by the Company as its general partner in
its sole discretion. The Operating Partnership may issue Units and other
partnership interests to the Company, as long as such interests are issued in
connection with a comparable issuance of shares of Common Stock and proceeds
raised in connection with the issuance of such shares are contributed to the
Operating Partnership. In addition, the Operating Partnership will issue
additional Units or shares of Common Stock upon exercise of the options granted
pursuant to the Plans.
COMPANY
Additional Equity
The Board of Directors may issue, in its discretion, additional equity
securities consisting of Common Stock or any other series of capital stock
(which may be classified and issued as a variety of equity securities, including
one or more classes of common or preferred stock, in the discretion of the Board
of Directors), provided that the total number of shares issued does not exceed
the authorized number of shares of capital stock set forth in the Company's
Charter.
OPERATING PARTNERSHIP
Borrowing Policies
The Operating Partnership has no restrictions on borrowings, and the Company as
general partner has full power and authority to borrow money on behalf of the
Operating Partnership. The Company's Board of Directors has adopted a policy
that currently limits the Debt-to-Total Market Capitalization Ratio to 60%, but
this policy may be altered at any time by the Board of Directors.
COMPANY
Borrowing Policies
The Company is not restricted under its Charter from incurring borrowings.
However, under the Partnership Agreement the Company, as general partner, may
not incur any debts except those for which it may be liable as general partner
of the Operating Partnership and certain other limited circumstances. Therefore,
all indebtedness incurred by the Company will be through the Operating
Partnership.
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OPERATING PARTNERSHIP
Other Investment Restrictions
Other than restrictions precluding investments by the Operating Partnership that
would adversely affect the qualification of the Company as a REIT and general
restrictions on transactions with affiliates, there are no restrictions upon the
Operating Partnership's authority to enter into certain transactions, including
among others, making investments, lending Operating Partnership funds, or
re-investing the Operating Partnership's cash flow and net sale or refinancing
proceeds.
COMPANY
Other Investment Restrictions
Neither the Company's Charter nor its By-Laws impose any restrictions upon the
types of investments that may be made by the Company except that under the
Charter the Board of Directors is prohibited from taking any action that would
terminate the Company's REIT status, unless a majority of the shareholders vote
to terminate such REIT status. The Company's Charter and By-Laws do not impose
any restrictions upon dealings between the Company and directors, officers and
affiliates thereof. Applicable corporate law, however, requires that the
material facts of the relationship, the interest and the transaction must (i) be
disclosed to the Board of Directors and approved by the affirmative vote of a
majority of the disinterested directors; or (ii) be disclosed to the
shareholders and approved by the affirmative vote of a majority of the
disinterested shareholders; or (iii) be in fact fair and reasonable. In
addition, the Company has adopted a policy which requires that all contracts and
transactions between the Company and directors, officers or affiliates thereof
must be approved by the affirmative vote of a majority of the disinterested
directors. Lastly, the Company has adopted a policy that it must conduct its
investment activities through the Operating Partnership for so long as the
Operating Partnership exists.
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OPERATING PARTNERSHIP
Management Control
All management powers over the business and affairs of the Operating Partnership
are vested in the general partner of the Operating Partnership, and no limited
partner of the Operating Partnership has any right to participate in or exercise
control or management power over the business and affairs of the Operating
Partnership except (i) the general partner of the Operating Partnership may not,
without written consent of all the Limited Partners, take any action in
contravention of the Partnership Agreement; (ii) the general partner of the
Operating Partnership may not dispose of all or substantially all of the
Operating Partnership's assets without the consent of the holders of a majority
of the outstanding Limited Partnership Units; (iii) until December 31, 2013, the
general partner of the Operating Partnership may not cause or permit the
Operating Partnership to dissolve if one or more of the original Limited
Partners objects to such dissolution; and (iv) from January 1, 2014 through
December 31, 2043, the general partner of the Operating Partnership may not
cause or permit the Operating Partnership to dissolve if original Limited
Partners holding at least 5% of the Units object to such dissolution. The
general partner may not be removed by the Limited Partners with or without
cause.
COMPANY
Management Control
The Board of Directors has exclusive control over the Company's business and
affairs subject only to the restrictions in the Charter and By-Laws, the
Partnership Agreement and applicable law. The Board of Directors is classified
into three classes of directors. At each annual meeting of the shareholders, the
successors of the class of directors whose terms expire at that meeting will be
elected. The policies adopted by the Board of Directors may be altered or
eliminated without a vote of the shareholders. Accordingly, except for their
vote in the elections of directors, shareholders will have no control over the
ordinary business policies of the Company. The Board of Directors cannot change
the Company's policy of maintaining its status as a REIT, however, without the
approval of a majority of the votes entitled to be cast thereon.
OPERATING PARTNERSHIP
Fiduciary Duties
Under Delaware law, the general partner of the Operating Partnership is
accountable to the Operating Partnership as a fiduciary and, consequently, is
required to exercise good faith and integrity in all of its dealings with
respect to partnership affairs. However, under the Partnership Agreement, the
general partner is under no obligation to consider the separate interests of the
Limited Partners in deciding whether to cause the Operating Partnership to take
(or decline to take) any actions, and the general partner is not liable for
monetary damages for losses sustained, liabilities incurred, or benefits not
derived by the Limited Partners in connection with such decisions, provided that
the general partner has acted in good faith.
COMPANY
Fiduciary Duties
Under Maryland law, the directors must perform their duties in good faith, in a
manner that they reasonably believe to be in the best interests of the Company
and with the care of an ordinarily prudent person in a like position. Directors
of the Company who act in such a manner generally will not be liable to the
Company for monetary damages arising from their activities.
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OPERATING PARTNERSHIP
Management Liability and Indemnification
As a matter of Delaware law, the general partner has liability for the payment
of the obligations and debts of the Operating Partnership unless limitations
upon such liability are stated in the document or instrument evidencing the
obligation. Under the Partnership Agreement, the Operating Partnership agrees to
indemnify the general partner or any director or officer of the general partner
from and against all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees), fines, settlements and other amounts incurred
in connection with any actions relating to the operations of the Operating
Partnership as set forth in the Partnership Agreement in which the general
partner or any such director or officer is involved, unless (i) the act was in
bad faith and was material to the action; (ii) such party received an improper
personal benefit; or (iii) in the case of any criminal proceeding, such party
had reasonable cause to believe the act was unlawful. The reasonable expenses
incurred by an indemnitee may be reimbursed by the Operating Partnership in
advance of the final disposition of the proceeding upon receipt by the Operating
Partnership of an affirmation by the indemnitee of his, her or its good faith
belief that the standard of conduct necessary for indemnification has been met
and an undertaking by such indemnitee to repay the amount if it is determined
that such standard was not met.
COMPANY
Management Liability and Indemnification
The Company's Charter provides that the liability of the Company's directors and
officers to the Company and its shareholders for money damages is limited to the
fullest extent permitted under Maryland law. The Charter and state law provide
broad indemnification to directors and officers, whether serving the Company or
at its request any other entity, to the full extent permitted under Maryland
law.
OPERATING PARTNERSHIP
Antitakeover Provisions
Except in limited circumstances (see "Voting Rights" below), the general partner
of the Operating Partnership has exclusive management power over the business
and affairs of the Operating Partnership. The general partner may not be removed
by the Limited Partners with or without cause. Under the Partnership Agreement,
the general partner may, in its sole discretion, prevent a limited partner from
transferring his interest or any rights as a limited partner except in certain
limited circumstances. The general partner may exercise this right of approval
to deter, delay or hamper attempts by persons to acquire a majority interest in
the Operating Partnership. See "Description of Units."
COMPANY
Antitakeover Provisions
The Charter and By-Laws of the Company and the Maryland General Corporation Law
contain a number of provisions that may have the effect of delaying or
discouraging an unsolicited proposal for the acquisition of the Company or the
removal of incumbent management. These provisions include, among others, (i) a
staggered Board of Directors; (ii) authorized capital stock that may be
classified and issued as a variety of equity securities in the discretion of the
Board of Directors, including securities having superior voting rights to the
Common Stock; (iii) restrictions on business combinations with persons who
acquire more than a certain percentage of Common Stock; (iv) a requirement that
directors may be removed only for cause and only by a vote of at least 80% of
the outstanding Common Stock; and (v) provisions designed to avoid concentration
of share ownership in a manner that would jeopardize the Company's status as a
REIT under the Code. See "Description of Common Stock."
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OPERATING PARTNERSHIP
Voting Rights
Under the Partnership Agreement, Limited Partners have voting rights only as to
the dissolution of the Operating Partnership, the sale of all or substantially
all of the assets of the Operating Partnership and amendments of the Partnership
Agreement, as more fully described below. Otherwise, all decisions relating to
the operation and management of the Operating Partnership are made by the
general partner. See "Description of Units." As of July 31, 1998, the Company
owned approximately 55.6% of the Units. As Units are redeemed by partners, the
Company's percentage ownership of the Units will increase. If additional Units
are issued to third parties, the Company's percentage ownership of the Units
will decrease.
COMPANY
Voting Rights
The Company is managed and controlled by a Board of Directors consisting of
three classes having staggered terms of office. Each class is elected by the
shareholders at annual meetings of the Company. Maryland law requires that
certain major corporate transactions, including most amendments to the Charter,
may not be consummated without the approval of shareholders as set forth below.
All shares of Common Stock have one vote, and the Charter permits the Board of
Directors to classify and issue capital stock in one or more series having
voting power which may differ from that of the Common Stock. See "Description of
Common Stock."
OPERATING PARTNERSHIP
Amendment of the Partnership Agreement or the Charter
The Partnership Agreement may be amended through a proposal by the general
partner or any limited partner holding 25% or more of the Units. Such proposal,
in order to be effective, must be approved by the written vote of holders of at
least a majority in interest of the Operating Partnership. In addition, the
general partner may, without the consent of the Limited Partners, amend the
Partnership Agreement as to ministerial matters.
COMPANY
Amendment of the Partnership Agreement or the Charter
Amendments to the Company's Charter must be approved by the Board of Directors
and by the vote of at least two-thirds of the votes entitled to be cast at a
meeting of shareholders, except that an amendment of the provisions relating to
the classified Board of Directors, the power to remove directors and the share
ownership limits designed to maintain qualified REIT status must be approved by
an 80% vote. An amendment relating to termination of REIT status requires a
majority of the votes entitled to be cast thereon.
OPERATING PARTNERSHIP
Vote Required to Dissolve the Operating Partnership or the Company
Through December 31, 2013, the general partner of the Operating Partnership may
not elect to dissolve the Operating Partnership if any original Limited Partner
who became a limited partner on June 30, 1994 holding Units issued at such time
objects to such dissolution. From January 1, 2014 through December 31, 2043, the
general partner may not elect to dissolve the Operating Partnership if any
original Limited Partner who became a limited partner on June 30, 1994 and who
held at least 5% of the Units on June 30, 1994 objects to such dissolution.
After January 1, 2044, the general partner may dissolve the Operating
Partnership without the consent of the Limited Partners, in its sole discretion.
COMPANY
Vote Required to Dissolve the Operating Partnership or the Company
Under Maryland law, the Board of Directors must obtain approval of holders of at
least two-thirds of the outstanding shares of Common Stock in order to dissolve
the Company.
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OPERATING PARTNERSHIP
Vote Required to Sell Assets
Under the Partnership Agreement, the general partner of the Operating
Partnership may not sell, exchange, transfer or otherwise dispose of all or
substantially all of the Operating Partnership's assets without the consent of
holders of a majority of the outstanding Units.
COMPANY
Vote Required to Sell Assets
Under Maryland law, the Board of Directors is required to obtain approval of the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter in order to sell all or substantially all of the assets of
the Company. No approval of the shareholders is required for the sale of less
than all or substantially all of the Company's assets.
OPERATING PARTNERSHIP
Vote Required to Merge
Under the Partnership Agreement, the general partner of the Operating
Partnership may not merge or consolidate the Operating Partnership without the
consent of holders of a majority of the outstanding Units.
COMPANY
Vote Required to Merge
Under Maryland law, the Board of Directors is required to obtain approval of the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter in order to merge or consolidate the Company.
OPERATING PARTNERSHIP
Compensation, Fees and Distributions
The general partner does not receive any compensation for its services as
general partner of the Operating Partnership.As a partner in the Operating
Partnership, however, the general partner has the same right to allocations and
distributions as other partners of the Operating Partnership. In addition, the
Operating Partnership reimburses the general partner for all expenses incurred
relating to the ongoing operation of the Company and any other offering of
additional Units or shares of Common Stock, including all expenses, damages and
other payments resulting from or arising in connection with litigation related
to any of the foregoing.
COMPANY
Compensation, Fees and Distributions
The directors of the Company receive compensation for their services.
OPERATING PARTNERSHIP
Liability of Investors
Under the Partnership Agreement and applicable state law, the liability of the
Limited Partners for the Operating Partnership's debts and obligations is
generally limited to the amount of their investment in the Operating
Partnership, together with an interest in any undistributed income, if
any. Units, upon issuance, will be fully paid and nonassessable.
COMPANY
Liability of Investors
Under Maryland law, shareholders are not personally liable for the debts or
obligations of the Company. Shares of Common Stock, upon issuance, will be
fully paid and nonassessable.
OPERATING PARTNERSHIP
Review of Investor Lists
Under the Partnership Agreement, Limited Partners, upon written demand with a
statement of the purpose of such demand and at the limited partner's expense,
are entitled to obtain a current list of the name and last known business,
residence or mailing address of each Limited Partner of the Operating
Partnership.
COMPANY
Review of Investor Lists
Under Maryland law, a shareholder holding at least 5% of the outstanding stock
of a corporation may upon written request inspect and copy during usual business
hours the list of the shareholders of such corporation.
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The following compares certain of the investment attributes and legal rights
associated with the ownership of Units and Shares.
UNITS
Nature of Investment
The Units constitute equity interests entitling each Limited Partner to his
pro rata share of cash distributions made to the Limited Partners of the
Operating Partnership. The Operating Partnership generally intends to retain
and reinvest proceeds of the sale of property or excess refinancing proceeds
in its business.
SHARES
Nature of Investment
Shares of Common Stock constitute equity interests in the Company. The
Company is entitled to receive its pro rata share of distributions made by
the Operating Partnership with respect to the Units, and each shareholder is
entitled to his pro rata share of any dividends or distributions paid with
respect to the Common Stock. The dividends payable to the shareholders are
not fixed in amount and are only paid if, when and as declared by the Board
of Directors. In order to qualify as a REIT, the Company must distribute at
least 95% of its taxable income (excluding capital gains), and any taxable
income (including capital gains) not distributed will be subject to corporate
income tax.
UNITS
Potential Dilution of Rights
The general partner of the Operating Partnership is authorized, in its sole
discretion and without Limited Partner approval, to cause the Operating
Partnership to issue additional Limited Partnership interests and other equity
securities for any partnership purpose at any time to the Limited Partners or to
other persons on terms established by the general partner.
SHARES
Potential Dilution of Rights
The Board of Directors may issue, in its discretion, additional shares of Common
Stock and Preferred Shares and has the authority to issue from the authorized
capital stock a variety of other equity securities of the Company with such
powers, preferences and rights as the Board of Directors may designate at the
time.The issuance of additional shares of Common Stock, Preferred Shares or
other similar equity securities may result in the dilution of the interests of
the shareholders.
UNITS
Liquidity
Units may be transferred by a Limited Partner only with the consent of the
general partner of the Operating Partnership, which consent may be withheld
in its sole discretion. The general partner will permit transfers of Units
only in connection with gifts, bequests and transfers by a Unit holder to
family members and certain other persons. Subject to certain conditions, each
Limited Partner has the right to elect to have his Units redeemed by the
Operating Partnership. Upon redemption, such Limited Partner will receive, at
the election of the general partner, either shares of Common Stock or the
cash equivalent in exchange for such Units.
SHARES
Liquidity
The Common Stock is freely transferable. The Common Stock is listed on the
NYSE, and a public market for the Common Stock exists. The breadth and
strength of this secondary market will depend, among other things, upon the
number of shares outstanding, the Company's financial results and prospects,
the general interest in the Company's and other real estate investments, and
the Company's dividend yield compared to that of other debt and equity
securities.
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UNITS
Taxation
The Operating Partnership will not be subject to federal income taxes. Instead,
each holder of Units includes his allocable share of the Operating Partnership's
taxable income or loss in determining his individual federal income tax
liability. The maximum effective federal tax rate for individuals under current
law is 39.6%.
Income and loss from the Operating Partnership generally will be subject to
the "passive activity" limitations. Under the "passive activity" rules,
income and loss from the Operating Partnership that is considered "passive
income" generally can be offset against income and loss from other
investments that constitute "passive activities" (unless the Operating
Partnership is considered a "publicly traded partnership," in which case
income and loss from the Operating Partnership can be offset only against
other income and loss from the Operating Partnership). Income of the
Operating Partnership, however, attributable to dividends from the Property
Service Businesses or interest paid by the Property Service Businesses will
not qualify as "passive income" and cannot be offset with losses and
deductions from a "passive activity" (including losses and deductions
attributable to the Operating Partnership's multifamily rental activities).
SHARES
Taxation
The Company has elected to be taxed as a REIT.So long as it qualifies as a
REIT, the Company will be permitted to deduct distributions paid to its
shareholders, which effectively will reduce the "double taxation" that
typically results when a corporation earns income and distributes that income
to its shareholders in the form of dividends. The Property Service
Businesses, however, will not qualify as REITs and thus they will be subject
to federal income tax on their net income at normal corporate rates. The
maximum effective tax rate for corporations under current law is 35%.
Dividends paid by the Company will be treated as "portfolio" income and
cannot be offset with losses from "passive activities."
Distributions made by the Company to its taxable domestic shareholders out of
current or accumulated earnings and profits will be taken into account by
them as ordinary income. Distributions in excess of current or accumulated
earnings and profits that are not designated as capital gain dividends will
be treated as a non-taxable return of basis to the extent of a shareholder's
adjusted basis in its shares of Common Stock, with the excess taxed as
capital gain. Distributions that are designated as capital gain dividends
generally will be taxed as 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). For the Company's taxable
years commencing on or after January 1, 1998, the Company may elect to
require its shareholders to include the Company's undistributed net capital
gains in their income. If the Company so elects, shareholders would include
their proportionate share of such gains in their income and be deemed to have
paid their share of the tax paid by the Company on such gains.
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UNITS
Taxation
Cash distributions from the Operating Partnership will not be taxable to a
holder of Units except to the extent they exceed such holder's basis in his
interest in the Operating Partnership (which will include such holder's
allocable share of the Operating Partnership's debt).
Each year, holders of Units will receive a Schedule K-1 tax form containing
detailed tax information for inclusion in preparing their federal income tax
returns.
Holders of Units will be required, in some cases, to file state income tax
returns and/or pay state income taxes in the states in which the Operating
Partnership owns property, even if they are not residents of those states.
SHARES
Taxation
Each year, Shareholders will receive Form 1099 used by corporations to report
dividends paid to their shareholders.
Shareholders who are individuals generally will not be required to file state
income tax returns and/or pay state income taxes outside of their state of
residence with respect to the Company's operations and distributions. The
Company may be required to pay state income taxes in certain states.
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FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Stock. The following
discussion, which is not exhaustive of all possible tax considerations, does not
include a detailed discussion of any state, local or foreign tax considerations.
Nor does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective shareholder in light of its particular circumstances
or to certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws.
As used in this discussion, the term "Company" refers solely to Charles
E. Smith Residential Realty, Inc.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S PERSONAL
TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of the Company
General. The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Code commencing with its taxable year ending December 31,
1994. The Company believes that it was organized and has operated in conformity
with the requirements for qualification and taxation as a REIT under the Code
for its taxable years ended December 31, 1994, December 31, 1995, December 31,
1996, and December 31, 1997, and the Company believes that its current
organization and method of operation should enable it to continue to meet the
requirements for qualification and taxation as a REIT. No assurances, 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 treatment described herein 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.
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.
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Requirements for Qualification.
Organizational Requirements. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transfer certificates of beneficial interest; (3) that would be taxable as a
domestic corporation, but for Sections 856 through 859 of the Code; (4) that is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities);
and (7) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. The Company
believes that it currently satisfies requirements (1) through (6). In addition,
the Company's Charter includes restrictions regarding the transfer of its shares
that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Common Stock--Restrictions on Transfer; Excess Stock." 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 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 the
foregoing. In addition, for its taxable years ending on or before December 31,
1997, the Company was required to derive less than 30% of the its gross income
(including gross income from prohibited transactions) from short-term gain from
the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property).
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions (relating to the identity of the tenant, the
computation of the rent payable, and the nature of the property leased) are met.
The Company believes that the portion, if any, of the rents that it receives
that fails to qualify as "rents from real property" has been and will continue
to be sufficiently small that the Company will satisfy the 75% and 95% gross
income tests. The Company's belief with respect to this matter, however, is
based upon the advice of counsel with respect to certain technical issues
regarding the determination of "rents from real property" that are not
definitively answered under the Code, the Treasury Regulations, and published
administrative interpretations. There can be no assurance that the Internal
Revenue Service (the "IRS") will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services are
"usually or customarily rendered" in connection with the rental 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 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
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related to the provision of telephone and CATV 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 (whether
through the Operating Partnership or through the Property Services Businesses)
should be considered "usually or customarily rendered" in connection with the
rental of apartments or retail space, as applicable, for occupancy only,
although there can be no assurance 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
notwithstanding the fact that 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 (or, if services are available only to certain tenants, possibly
with respect to such tenants) cannot exceed one percent of all amounts received,
directly or indirectly, by the REIT with respect to such property (or, if
services are available only to certain tenants, possibly 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 so 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 the
Operating Partnership 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," with the balance being nonqualifying
income. The Operating Partnership also may receive certain other types of
non-qualifying income (including, for example, certain expense reimbursements,
and dividends and interest from the Property Service Businesses (which qualify
under the 95% gross income test but not under the 75% gross income test)). The
Company believes, however, that the aggregate amount of such fees and other
non-qualifying income in any taxable year will not cause the Company to exceed
the limits on non-qualifying income under the 75% and 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code. It
is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. Even if these
relief provisions were to apply, a 100% tax would be imposed with respect to the
"excess net income" attributable to the failure to satisfy the 75% and 95% gross
income tests.
Asset Tests. At the close of each quarter of the Company's taxable
year, the Company must satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by "real estate assets," cash, cash items, and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities, other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities. The Operating Partnership owns 100% of the
nonvoting stock of each of the Property Service Businesses. In addition, the
Operating Partnership holds notes from each of the Property Service Businesses,
and by virtue of its ownership of Units, the Company will be considered to own
its pro rata share of the assets of the Operating Partnership, including the
securities of each of the Property Service Businesses described above. The
Operating Partnership, however, does not own more than 10% of the voting
securities of any of the Property Service Businesses. In addition, the Company
believes that the Company's pro rata share of the value of the securities of
each of the Property Service Businesses does not exceed 5% of the total value of
the Company's assets. There can be no assurance, however, that the IRS might not
contend either that the value of the securities of one or more of the Property
Service Businesses exceeds the 5% value limitation, or that all or some of the
Property Service Businesses shall be viewed as a single corporation for purposes
of the 5% value limitation and that the value of the securities of that
corporation exceeds the 5% limitation, or that the nonvoting stock of one or
more of the Property Service Businesses should be considered "voting securities"
for purposes of the 10% limitation.
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The 5% value requirement must be satisfied not only on the date the
Company acquired securities of the Property Service Businesses, but also each
time the Company increases its ownership of securities of the Property Service
Businesses (including as a result of increasing its interest in the Operating
Partnership as Limited Partners exercise their rights to have Units redeemed for
shares of Common Stock or, at the option of the Company, cash). Although the
Company plans to take steps to ensure that it satisfies the 5% value test for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps always will be successful or will not require a
reduction in the Operating Partnership's overall interest in the Property
Service Businesses.
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. Pursuant to the Clinton administration proposal, a REIT would remain
subject to the current restriction and also would be precluded from owning more
than 10% of the value of all classes of stock of any one issuer. If the proposal
were enacted as currently drafted, it would be effective with respect to stock
acquired on or after the date of first committee action. To the extent that the
Company's current stock ownership in a subsidiary (e.g., the Property Service
Businesses) is grandfathered by virtue of this effective date, the grandfathered
status would terminate with respect to the subsidiary if the subsidiary engaged
in a new trade or business or acquired substantial new assets. Accordingly, if
the proposal were enacted as currently drafted and the Property Service
Businesses (in which the Company's stock ownership exceeds 10% of the value of
the securities) were to engage in a new trade or business or acquire substantial
new assets after the effective date, 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.
Annual Distribution Requirements. To qualify as a REIT, the Company
generally must distribute to its shareholders at least 95% of its income
(excluding any net capital gains) from each taxable year either during such
taxable year or, if certain procedures are followed, during the subsequent
taxable year. The Company will be subject to tax on amounts not distributed at
regular capital gains and ordinary income rates. With respect to income
distributed during a year subsequent to the year in which it was earned by the
Company, if the Company does not pay federal income tax with respect to such
income, the Company may be subject to a 4% excise tax on such income.
The Company believes that it has made, and intends to continue to make,
timely distributions sufficient to satisfy the annual distribution requirements.
It is possible, however, that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement.
In that event, the Company may cause the Operating Partnership to arrange for
short-term, or possibly long-term, borrowing to permit the payments of required
dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief.
Tax Aspects of the Company's Investments in the Operating Partnership and
Property Service Businesses
General. All of the Company's investments are through the Operating
Partnership, and the Operating Partnership holds substantially all of the
Properties through certain subsidiary partnerships. This structure may involve
special tax considerations. These tax considerations include: (a) the
allocations of income and expense items of the Operating Partnership and such
subsidiary partnerships, which could affect the computation of taxable income of
the Company, (b) the status of the Operating Partnership and each such
subsidiary partnership as partnership (as opposed to an association taxable as a
corporation) for income tax purposes, and (c) the taking of actions by the
Operating Partnership or any of such subsidiary partnerships that could
adversely affect the
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Company's qualification as a REIT. The Company believes that the Operating
Partnership and each of the subsidiary partnerships will be treated for tax
purposes as a partnership (and not as an association taxable as a corporation).
If, however, the Operating Partnership or any of such subsidiary partnerships
were treated as an association taxable as a corporation, the Company would fail
to qualify as a REIT for a number of reasons.
Tax Allocations with Respect to the Properties. The Operating
Partnership was formed by way of contributions of appreciated property
(including certain of the Properties) to the Partnership at the time of its
formation, and it has acquired a number of 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 (this difference is referred to as a
"Book-Tax Difference"). The Partnership Agreement requires such allocations to
be made in a manner consistent with Section 704(c) of the Code and the
regulations thereunder, which allocations will tend to eliminate the Book-Tax
Differences with respect to the contributed Properties over the life of the
Operating Partnership. However, because of certain technical limitations, the
special allocation rules of Section 704(c) of the Code may not always entirely
eliminate the Book-Tax Difference on an annual basis or with respect to a
specific taxable transaction such as a sale. Thus, the carryover basis of the
contributed Properties in the hands of the Operating Partnership could cause the
Company (i) to be allocated lower amounts of depreciation and other deductions
for tax purposes than would be allocated to the Company if all Properties were
to have a tax basis equal to their fair market value at the time of the
Formation Transactions or a subsequent acquisition, and (ii) possibly to be
allocated taxable gain in the event of a sale of such contributed Properties in
excess of the economic or book income allocated to the Company as a result of
such sale.
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 thus pay federal, state and local income
taxes on their net income at normal corporate rates. The Property Service
Businesses attempt to limit the amount of such taxes. There can be no assurance,
however, whether or the extent to which measures taken to limit taxes will be
successful. Moreover, even if those measures are successful, future increases in
the income of the Property Service Businesses inevitably will be subject to
income tax. To the extent that the Property Service Businesses are required to
pay federal, state and local income taxes, the cash available for distribution
to shareholders will be reduced accordingly. In addition, as described above,
the value of the securities of each of the Property Service Businesses held by
the Operating Partnership cannot exceed 5% of the value of the Operating
Partnership's assets at a time when a Limited Partner exercises his or her
redemption right (or the Company otherwise is considered to acquire additional
securities of a Property Service Business) and the Company cannot own 10% or
more of the voting securities 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 Operating
Partnership is increasing at a commensurate rate, and they prohibit the
Operating Partnership from exercising control over the Property Service
Businesses.
Taxation of Shareholders
Taxation of Taxable Domestic Shareholders. As used herein, the term
"U.S. Shareholder" means a holder of Common Stock who (for United States federal
income tax purposes) is (i) a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate or trust the income of which is subject to United States federal income
taxation regardless of its source, or (iv) 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
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be taken into account by them as ordinary income, and corporate shareholders
will not be eligible for the dividends received deduction as to such amounts.
Distributions that are designated as capital gain dividends will be
taxed 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 such
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 (i) a 20% gain distribution (which would be
taxable to taxable non-corporate U.S. Shareholders at a maximum rate of 20%),
(ii) an unrecaptured Section 1250 gain distribution (which would be taxable to
taxable non-corporate U.S. Shareholders at a maximum rate of 25%), or (iii) 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.
In general, a taxable U.S. Shareholder will realize gain or loss on the
disposition of Common Stock equal to the difference between (i) the amount of
cash and the fair market value of any property received on such disposition and
(ii) the U.S. Shareholder's adjusted basis of such Common Stock. Such 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, such
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 (i) for
dispositions occurring after December 31, 1997, at a maximum rate of 20% and
(ii) for dispositions occurring after December 31, 2000, at a maximum rate of
18% if the Common Stock has been 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, such regulations 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 new 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.
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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 (i) include in their
income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) 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 dividends paid.
Taxation of Tax-Exempt Shareholders. The Company does not expect the
distributions by the Company to a shareholder that is a tax-exempt entity will
constitute "unrelated business taxable income" ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of its Common Stock with
"acquisition indebtedness" within the meaning of the Code, and the Common Stock
is not otherwise used in an unrelated trade or business of the tax-exempt
entity. For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (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
prospective shareholders should consult their 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, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Shareholders should
consult with their own tax advisors to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in Common Stock,
including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of U.S. real property interests and not designated by the Company
as capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
the Company. Such distributions, ordinarily, will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such Common Stock. To the
extent that such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's Common Stock, they will give rise to tax liability if the Non-U.S.
Shareholder otherwise would be subject to tax on any gain from the sale or
disposition of his Common Stock as described below. 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 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
42
<PAGE>
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," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Company believes that it currently is a
"domestically controlled REIT," and, therefore, the sale of Common Stock will
not be subject to taxation under FIRPTA. If the gain on the sale of Common Stock
were to be subject to tax under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals), and the purchaser of the
Common Stock would be required to withhold and remit to the IRS 10% of the
purchase price.
Other Tax Considerations
Recent Legislation. The 1997 Act contains a number of technical
provisions that either (i) reduce the risk that the Company will inadvertently
cease to qualify as a REIT, or (ii) 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.
43
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by the Company of
up to 79,600 Redemption Shares of Common Stock, if, and to the extent that,
the Company elects to issue such Redemption Shares to the holder of up to
79,600 Units, upon the tender of such Units for redemption. The Company has
registered the Redemption Shares for sale to permit the holder thereof to
sell such shares without restriction in the open market or otherwise, but
registration of such shares does not necessarily mean that any of such shares
will be offered or sold by the holder thereof.
The Company will acquire one Unit from an exchanging partner, in
exchange for each Redemption Share that the Company issues. Consequently, with
each redemption, the Company's interest in the Operating Partnership will
increase.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form S-3 under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules hereto. For further information regarding the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has filed reports and other information with the Commission and is subject to
the periodic reporting and informational requirements of the Exchange Act. The
Registration Statement, the exhibits and schedules forming a part thereof as
well as such reports and other information filed by the Company with the
Commission can be inspected and copies obtained from the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
a Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. In addition, the Company's Common Stock is listed on the
NYSE and similar information concerning the Company can be inspected and copied
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company furnishes its equityholders with annual reports
containing consolidated financial statements audited by its independent
public accountants and, upon request by its equityholders, quarterly reports
containing unaudited condensed consolidated financial statements for each of
the first three quarters of each fiscal year.
44
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed under the Exchange Act by
the Company (Exchange Act file number 1-13174) with the Commission and are
incorporated herein by reference:
1. The Company's Registration Statement on Form 8-A filed on August 16,
1994 registering the Common Stock of the Company under Section 12(b) of the
Exchange Act.
2. The Company's Annual Report on Form 10-K for the year ended December
31, 1997.
3. The Company's 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. The Company's Current Reports on Form 8-K dated April 17, 1998 (as
amended on Form 8-K/A) and July 1, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the securities offered hereby shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modified or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company undertakes to provide without charge to each person to whom
a copy of this Prospectus has been delivered, upon the written or oral request
of any such person, a copy of any or all of the documents incorporated by
reference in this Prospectus (other than exhibits and schedules thereto, unless
such exhibits or schedules are specifically incorporated by reference into the
information that this Prospectus incorporates). Written or telephonic requests
for copies should be directed to Charles E. Smith Residential Realty, Inc., 2345
Crystal Drive, Crystal City, Arlington, Virginia 22202, Attention: Mr. Gregory
Samay, Vice President and Treasurer (telephone: (703) 769-1020).
EXPERTS
The Company's financial statements for the fiscal year ended December
31, 1997 and the related schedule incorporated by reference herein and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report dated February 9,
1998 with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said 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 herein and elsewhere in the
Registration Statement, have been audited by Altschuler, Melvoin and Glasser
LLP, independent auditors, as indicated in their report dated February 17,
1998 with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
LEGAL MATTERS
The legality of the issuance of the Redemption Shares has been passed
upon for the Company by Hogan & Hartson L.L.P., Washington, D.C.
45
<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..................................... $ 698
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................................................ $47,698
-------
</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
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
***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>
- -------------
* 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).
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this registration
statement;
(iii) To include any material information with respect to the
plan of distributions not previously disclosed in this registration statement or
any material change to such information in this registration statement;
provided, however, that subparagraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the Securities offered herein, and the
offering of such Securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the Securities offered herein, and the offering of such
Securities at that time shall be deemed to be the initial bona fide offering
thereof. The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance under Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), 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 City of Arlington, Commonwealth of Virginia, on August 13,
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 Executive August 13, 1998
Robert H. Smith Officer, and Director
/s/ Robert P. Kogod Co-Chairman of the Board,
- --------------------------------- Co-Chief Executive August 13, 1998
Robert P. Kogod Officer, and Director
/s/ Ernest A. Gerardi, Jr. President, Chief Operating August 13, 1998
- --------------------------------- Officer, and Director
Ernest A. Gerardi, Jr.
/s/ Wesley D. Minami Senior Vice President and August 13, 1998
- --------------------------------- Chief Financial Officer
Wesley D. Minami
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Steven E. Gulley Vice President, Controller,
- --------------------------------- and Chief Accounting August 13, 1998
Steven E. Gulley Officer
/s/ Fred J. Brinkman Director August 13, 1998
- ---------------------------------
Fred J. Brinkman
/s/ Charles B. Gill Director August 13, 1998
- ---------------------------------
Charles B. Gill
/s/ Mandell J. Ourisman Director August 13, 1998
- ---------------------------------
Mandell J. Ourisman
/s/ Mallory Walker Director August 13, 1998
- ---------------------------------
Mallory Walker
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
- ------- ------------------- -------------
<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.........................
*******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>
- ---------------
* 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).
<PAGE>
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
------------
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
Prospectus Summary................................... 2
Risk Factors......................................... 4
The Company.......................................... 13
Description of Common Stock.......................... 15
Description of Units................................. 18
Shares Available for Future Sale..................... 23
Redemption of Units.................................. 23
Federal Income Tax Considerations.................... 35
Plan of Distribution................................. 43
Available Information................................ 43
Incorporation of Certain Documents
by Reference...................................... 44
Experts.............................................. 44
Legal Matters........................................ 44
</TABLE>
------------
- ------------------------------------------------------------------------------
<PAGE>
-----------------------------------------
79,600 Shares
Charles E. Smith
Residential Realty, Inc.
Common Stock
(par value $.01 per share)
PROSPECTUS
August ___, 1998
-----------------------------------------
<PAGE>
Exhibit 5.1
[Letterhead of Hogan & Hartson L.L.P.]
August 13, 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 proposed issuance of
up to 79,600 shares of the Company's common stock, par value $.01 per share
(the "Shares"), which may be issued if and to the extent that the holder of
79,600 units of limited partnership interest (the "Units") in Charles E.
Smith Residential Realty L.P. (the "Operating Partnership") tenders such
Units for redemption. 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. ss. 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, as certified by the Department of
Assessments and Taxation of the State of Maryland on
August 10, 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. The Certificate of Limited Partnership of the
Operating Partnership, as amended, as certified by
the Secretary of the State of Delaware on August 10,
1998 and as certified by the Secretary of the
Company, as general partner of the Operating
Partnership, on the date hereof as being complete,
accurate and in effect.
<PAGE>
Board of Directors
August 13, 1998
Page 2
5. The First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended,
as certified by the Secretary of the Company, as
general partner of the Operating Partnership, on the
date hereof as being complete, accurate and in effect
(the "Partnership Agreement").
6. Real Estate Contribution Agreement, dated as of
December 12, 1995, between the Operating Partnership
and 1841 Columbia Road Limited Partnership ("Columbia
Road").
7. Registration Rights and Lock-Up Agreement, dated as
of August 2, 1996, among the Company, the Operating
Partnership and Columbia Road.
8. Certain resolutions of the Board of Directors of the
Company adopted on July 21, 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 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 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 Shares, if and when issued and delivered in accordance with
the terms of the Partnership Agreement and the resolutions of the Board of
Directors of the Company authorizing the issuance of the Shares upon redemption
of the Units as contemplated thereby, the Shares will be validly issued, fully
paid and nonassessable under the laws of the State of Maryland.
<PAGE>
Board of Directors
August 13, 1998
Page 3
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 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.]
August 13, 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 the possible issuance by the
Company of up to 79,600 shares (the "Redemption Shares") of common stock, par
value $.01 per share ("Common Stock"), if, and to the extent that, the Company
elects to issue such Redemption Shares to the holder of up to 79,600 units of
Limited Partnership interest ("Units") in Charles E. Smith Residential Realty
L.P. (the "Operating Partnership"), which Units were issued by the Operating
Partnership in connection with the acquisition of 1841 Columbia Road Apartments,
an apartment complex located in Washington, D.C., upon the tender of such Units
for redemption. 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
meaning 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
<PAGE>
Charles E. Smith Residential Realty, Inc.
August 13, 1998
Page 2
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.
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 August 10, 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 August 10, 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
<PAGE>
Charles E. Smith Residential Realty, Inc.
August 13, 1998
Page 3
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 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.
<PAGE>
Charles E. Smith Residential Realty, Inc.
August 13, 1998
Page 4
2. The discussion in the Prospectus under the heading "Federal Income
Tax Considerations," to the extent that it describes matter of federal
income tax law, is correct in all material respects.
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.
August 13, 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
----------------------
ARTHUR ANDERSEN LLP
Washington, D.C.
August 12, 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.
/s/ALTSCHULER, MELVOIN AND GLASSER LLP
--------------------------------------
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
August 13, 1998
