<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1998
REGISTRATION NO. 333-17053
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
Amendment No. 3 to
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)
<TABLE>
<S> <C>
MARYLAND 54-1681655
(State of Incorporation) (I.R.S. Employer
Identification No.)
</TABLE>
------------------------
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. / /
------------------------
CALCULATION OF REGISTRATION FEE(1)
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM
SHARES AGGREGATE AGGREGATE AMOUNT OF
TO BE AMOUNT TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE (1) PRICE FEE (2)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share........... 12,384,773 $31.719 $392,832,614 $123,902.88
</TABLE>
<PAGE>
(1) Estimated solely for purposes of calculating the registration fee for
1,654,297 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
March 5, 1998.
(2) Fee of $15,479.43 paid herewith. Fee of $97,003 paid with Amendment No. 2
to this filing to register 9,230,476 shares. Fee of $11,420.45 previously
paid with initial filing to register 1,500,000 shares.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included in this Registration Statement also relates to 2,865,414
shares of Common Stock, $.01 par value per share, previously registered and
remaining under the Registrant's Registration Statement No. 33-93986 and 760,648
shares of Common Stock, $.01 par value per share, previously registered and
remaining under the Registrant's Registration Statement No. 333-8129. This
Registration Statement constitutes Post-Effective Amendment No. 1 to each of
Registration Statement No. 33-93986 and Registration No. 333-8129, which
Post-Effective Amendments shall become effective in accordance with Section 8(c)
of the Securities Act of 1933.
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<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
PRELIMINARY PROSPECTUS DATED MARCH 6, 1998
SUBJECT TO COMPLETION
15,640,196 SHARES
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
COMMON STOCK
------------------------
Charles E. Smith Residential Realty, Inc. (the "Company") is a
self-administered and self-managed equity real estate investment trust ("REIT")
that is engaged primarily in the acquisition, development, management and
operation of multifamily properties in the Washington, D.C. metropolitan area.
The Company, together with its subsidiaries, is a fully integrated real estate
organization with in-house acquisition, development, financing, marketing and
property management and leasing expertise.
This Prospectus relates to (i) the possible issuance by the Company of up to
15,164,714 shares (the "Redemption Shares") of common stock, par value $.01 per
share ("Common Stock"), if, and to the extent that, the Company elects to issue
such Redemption Shares to holders of up to 15,164,714 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 50.95% of the Units, upon the tender of such Units for
redemption; (ii) the offer and sale from time to time of up to 197,912 shares of
outstanding Common Stock of the Company (the "Original Restricted Shares") by
the holders thereof, (iii) the offer and sale from time to time by certain
affiliates of the Company of up to 277,570 shares of Common Stock (the "Original
Affiliate Shares"); and (iv) the offer and sale from time to time by the holders
thereof of any Redemption Shares that may be issued to and held by persons who
may be affiliates of the Company (such persons, together with the holders of the
Original Restricted Shares and the Original Affiliate Shares, the "Selling
Shareholders").
The Original Restricted Shares, the Original Affiliate Shares and
10,843,392 of the Units that may be redeemed for Redemption Shares (the
"Original Units") were issued in connection with the formation of the
Company. Of the remaining Units that may be redeemed for Redemption Shares,
2,302,029 Units (the "Acquisition Units") were issued in connection with the
acquisition of certain properties during the fiscal years ended December 31,
1995, December 31,1996 and December 31, 1997. The Company has registered the
Redemption Shares, the Original Restricted Shares and the Original Affiliate
Shares to permit the holders thereof to sell such shares without restriction
in the open market or otherwise, but the registration of such shares does not
necessarily mean that any of such shares will be offered or sold by the
holders thereof. See "The Company."
The Company will acquire Units in the Operating Partnership in exchange for
any Redemption Shares that the Company may issue to Unit holders.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "SRW." Ownership by any person of more than 9.8% of the Company's
Common Stock is restricted. See "Description of Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 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.
The Selling Shareholders from time to time may offer and sell shares of
Common Stock held by them (the "Secondary Shares") directly or through agents or
broker-dealers on terms to be determined at the time of sale. To the extent
required, the names of any agent or broker-dealer and applicable commissions or
discounts and any other required information with respect to any particular
offer will be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." Each of the Selling Shareholders reserves the right to accept or
reject, in whole or in part, any proposed purchase of the Secondary Shares.
The Selling Shareholders and any agents or broker-dealers that participate
with the Selling Shareholders in the distribution of Secondary Shares may be
deemed to be "underwriters" within the meaning of the Securities Act
<PAGE>
of 1933, as amended (the "Securities Act"), and any commissions received by
them and any profit on the resale of the Secondary Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
The Company will not receive any of the proceeds from the sale of any
Secondary Shares by the Selling Shareholders but has agreed to bear certain
expenses of registration of the Secondary Shares under Federal and state
securities laws, other than commissions and discounts of agents or
broker-dealers and transfer taxes, if any. The Company will acquire Units in the
Operating Partnership in exchange for any Redemption Shares that the Company may
issue to Unit holders.
------------------------
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 MARCH , 1998.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS. THE OFFERING OF THE COMMON STOCK
PURSUANT TO THIS PROSPECTUS IS REFERRED TO HEREIN AS THE "OFFERING." AS USED
HEREIN, THE TERM "COMPANY" MEANS CHARLES E. SMITH RESIDENTIAL REALTY, INC.,
CHARLES E. SMITH RESIDENTIAL REALTY L.P. AND THEIR PREDECESSORS AND SUBSIDIARIES
OR ANY OF THEM, UNLESS THE CONTEXT INDICATES OTHERWISE. AS USED HEREIN, THE TERM
"UNIT" MEANS A COMMON UNIT OF LIMITED PARTNERSHIP INTEREST IN CHARLES E. SMITH
RESIDENTIAL REALTY L.P., UNLESS THE CONTEXT INDICATES OTHERWISE. WHEN USED IN
THIS DOCUMENT, THE WORDS "BELIEVES," "ANTICIPATES," AND "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INDICATE THAT ASSUMPTIONS HAVE BEEN USED THAT ARE SUBJECT TO A NUMBER OF RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL FINANCIAL RESULTS OR MANAGEMENT PLANS
AND OBJECTIVES TO DIFFER MATERIALLY FROM THOSE PROJECTED OR EXPRESSED HEREIN,
INCLUDING: THE EFFECT OF NATIONAL AND REGIONAL ECONOMIC CONDITIONS, PARTICULARLY
WITH REGARD TO THE LEVELS OF MULTIFAMILY PROPERTY OCCUPANCY AND RENTAL GROWTH IN
THE WASHINGTON, D.C. METROPOLITAN AREA; THE COMPANY'S ABILITY TO IDENTIFY AND
SECURE ADDITIONAL PROPERTIES AND SITES THAT MEET ITS CRITERIA FOR ACQUISITION OR
DEVELOPMENT; THE ACCEPTANCE OF THE COMPANY'S FINANCING PLANS BY THE CAPITAL
MARKETS, AND THE EFFECT OF PREVAILING MARKET INTEREST RATES AND THE PRICING OF
THE COMPANY'S STOCK; AND OTHER RISKS DESCRIBED FROM TIME-TO-TIME IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. GIVEN THESE
UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH
STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN THAT MAY BE MADE TO REFLECT ANY CHANGE IN THE COMPANY'S
EXPECTATIONS WITH REGARD THERETO OR ANY FUTURE EVENTS OR CHANGE IN CIRCUMSTANCES
OR CONDITIONS UPON WHICH SUCH STATEMENTS ARE BASED.
THE COMPANY
The Company is a self-administered and self-managed equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. The Company,
together with its subsidiaries, is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing and property
management and leasing expertise. The Company's primary strategy for growth is
to acquire, develop, own and manage high quality multifamily properties for
long-term income generation and value appreciation.
The Company is the sole general partner of, and owned approximately 50.95%
of the Units in, the Operating Partnership as of January 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
January 31, 1998, the Company, through the Operating Partnership, owned 47
multifamily apartment communities containing a total of 18,523 units (the
"Multifamily Properties"), 45 of which are located in the Washington, D.C.
metropolitan area, and two retail centers containing approximately 436,000
square feet of retail space (the "Retail Properties"), both located in the
Washington, D.C. metropolitan area.
3
<PAGE>
RISK FACTORS
Prospective investors and Unit holders should carefully consider the matters
discussed under "Risk Factors" prior to making an investment decision regarding
the Common Stock offered hereby.
TAX STATUS OF THE COMPANY
The Company 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 (i) the possible issuance by the Company of up to
15,164,174 Redemption Shares, if, and to the extent that, the Company elects to
issue such Redemption Shares to holders of up to 15,164,714 Units, upon the
tender of such Units for redemption, (ii) the offer and sale from time to time
of up to 197,912 Original Restricted Shares by the holders thereof, (iii) the
offer and sale from time to time by certain affiliates of the Company of up to
277,570 Original Affiliate Shares and (iv) the offer and sale from time to time
by the holders thereof of any Redemption Shares that may be issued and held by
persons who may be affiliates of the Company. The Company will not receive any
cash proceeds from the issuance of the Redemption Shares but will acquire Units
in the Operating Partnership in exchange for any Redemption Shares that the
Company may issue to Unit holders.
At the time of the formation of the Company, its initial public offering
(the "Initial Offering") and the acquisition by the Company of its assets in
June 1994 (collectively, the "Formation Transactions"), the Operating
Partnership issued to participants in the Formation Transactions other than
the Company a total of 12,131,292 Units. During the fiscal year ended
December 31, 1995, the Operating Partnership acquired the Suburban Towers and
Connecticut Heights apartment complexes for consideration which included
560,478 Acquisition Units. 22,059 Acquisition Units were issued by the
Operating Partnership in March 1996 in connection with the acquisition of
Charter Oak, an apartment complex located in Virginia and 77,125 Acquisition
Units were issued by the Operating Partnership in November 1995 in connection
with the acquisition of limited partnership interests in Brandywine, an
apartment complex located in Washington, D.C. 1,149,623 Acquisition Units
were issued by the Operating Partnership in February 1997 in connection with
the acquisition of the Crystal Plaza and Crystal Towers apartment buildings
in Arlington, Virginia. An additional 510,674 Acquisition Units were issued
in connection with the acquisition of the Kenmore apartment building in
Washington, D.C. in March 1997. The holders of the Charter Oak Units and the
holders of the Brandywine Units became eligible to request redemption of such
Units in March 1997, and November 1997, respectively. The holders of the
Crystal Plaza and Crystal Towers Units became eligible to request redemption
of such Units in February, 1998 and the holders of the Kenmore Units became
eligible to request redemption of such Units in March 1998. During the period
from January 1, 1997 through January 31, 1998, 410,577 Units were redeemed by
the Company for shares of Common Stock.
Pursuant to the agreement of Limited Partnership of the Operating
Partnership (the "Partnership Agreement"), each Unit may be tendered by its
holder to the Operating Partnership for redemption for cash equal to the fair
market value of a share of Common Stock at the time of the redemption. In
addition, the Company, as general partner of the Operating Partnership, has
4
<PAGE>
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 January 31, 1998, the Company may
from time to time issue up to 15,197,103 shares of Common Stock upon the
acquisition of Units tendered for redemption. With each such acquisition, the
Company's interest in the Operating Partnership will increase.
5
<PAGE>
RISK FACTORS
Prospective investors and holders of Units should carefully consider, among
other factors, the matters described below.
SPECIAL CONSIDERATIONS APPLICABLE TO REDEEMING PARTNERS
TAX CONSEQUENCES OF REDEMPTION OF UNITS. The exercise by a holder of Units
(a "Limited Partner") of his or her right to require the redemption of his or
her Units will be treated for tax purposes as a sale of the Units by the Limited
Partner. Such a sale will be fully taxable to the redeeming Limited Partner and
such redeeming Limited Partner will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the Common Stock received in
the exchange plus the amount of the Operating Partnership nonrecourse
liabilities considered allocable to the redeemed Units at the time of the
redemption. It is possible that the amount of gain recognized (or even the tax
liability resulting from such gain) could exceed the amount of cash and the
value of other property (e.g., Redemption Shares) received upon such
disposition. See "Redemption of Units--Tax Consequences of Redemption." In
addition, the ability of the Limited Partner to sell a substantial number of
Redemption Shares in order to raise cash to pay tax liabilities associated with
redemption of Units may be restricted due to the Company's relatively low
trading volume, and, as a result of fluctuations in the stock price, the price
the Limited Partner receives for such shares may not equal the value of his
Units at the time of redemption. See "--Common Stock Price Fluctuations and
Trading Volume" below.
POTENTIAL CHANGE IN INVESTMENT UPON REDEMPTION OF UNITS. If a Limited
Partner exercises the right to require the redemption of his or her Units, such
Limited Partner may receive, at the Operating Partnership's election, cash or
shares of Common Stock of the Company in exchange for the Units. If the Limited
Partner receives cash, the Limited Partner will no longer have any interest in
the Company and will not benefit from any subsequent increases in share price
and will not receive any future distributions from the Company (unless the
Limited Partner currently owns or acquires in the future additional shares of
Common Stock or Units). If the Limited Partner receives shares of Common Stock,
the Limited Partner will become a shareholder of the Company rather than a
holder of Units in the Operating Partnership. Although an investment in shares
of Common Stock is substantially equivalent to an investment in Units in the
Operating Partnership, there are some differences between ownership of Units and
ownership of Common Stock relating to, among other things, form of organization,
permitted investments, policies and restrictions, management structure,
compensation and fees, investor rights and Federal income taxation. These
differences, some of which may be material to investors, are discussed in
"Redemption of Units--Comparison of Ownership of Units and Common Stock."
IMPACT ON GUARANTEES. Certain recipients of Units issued in connection with
the Formation Transactions joined in a guarantee of certain indebtedness of the
Operating Partnership (the "Institutional Loan Guarantee"). A Limited Partner
who joined in the Institutional Loan Guarantee and who exercises his or her
redemption right will remain liable to the lender with respect to the
Institutional Loan Guarantee even though that Limited Partner has no continuing
interest (or a reduced interest) in the Operating Partnership. See "Redemption
of Units--Continuing Liability Under the Institutional Loan Guarantee."
EFFECT ON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. As of January 31,
6
<PAGE>
1998, the Company had outstanding 14,971,204 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 January 31, 1998, the
Company had outstanding 2,878,410 shares of preferred stock ("Preferred
Shares"), 1,216,666 of which became eligible for conversion into Common Stock
on January 1, 1998 (subject to satisfaction of certain conditions). As of
January 31, 1998, the Company had reserved for possible issuance upon
redemption of Units approximately 18.7 million additional shares of Common
Stock. 15,209,714 shares issuable upon any future redemption of Units, or
issuable under employee benefit plans (the "Plans"), will be tradable without
restriction under the Securities Act pursuant to the Registration Statements
on Form S-8 filed by the Company in August, 1994, on Form S-3 filed by the
Company in June 1995 and July 1996, respectively or pursuant to the
Registration Statement of which this Prospectus is a part. As of January 31,
1998, an additional 14,971,204 Units were eligible to be redeemed for cash
or, at the Company's election, shares of Common Stock (such shares will be
restricted from sale in the public market unless registered under the
Securities Act). In addition, 1,000,000 shares have been reserved for
issuance under the Company's Dividend and Distribution Investment and Share
Purchase Plan, which plan was registered with the Commission on December 22,
1995. Also, the Company currently has on file with the Commission an
effective registration statement which would allow the sale of up to
approximately $312 million in unspecified securities, including shares of
Common Stock and securities convertible into shares of Common Stock. No
prediction can be made about the effect that future sales of shares of Common
Stock will have on the market prices of shares. See "Shares Available for
Future Sale."
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the Company's
Common Stock in the public 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
7
<PAGE>
relation to its value. Messrs. Smith and Kogod and their families also held a
substantial interest in the partnership that sold to the Company for $4.7
million a parcel of land located near the Worldgate Centre in Northern
Virginia on which the Company developed a 320-unit garden apartment project.
In connection with such development, the Operating Partnership entered into
an agreement with Charles E. Smith Construction, Inc. (a construction and
commercial and condominium development company), which is owned by Messrs.
Smith and Kogod and their spouses, to manage such development for a fee equal
to 4% of hard construction costs. Messrs. Smith and Kogod continue to have
interests in Charles E. Smith Management, Inc. (which provides property
management and leasing services to office and other commercial properties), a
substantial number of partnerships that own office and other properties
(including Limited Partnership interests or minority stock ownership in
unaffiliated partnerships and corporations that own or manage multifamily
properties), and the tenants that lease and operate health clubs in the
Retail Properties. The Company expects to continue to provide all property
services (including property management and leasing) for such affiliated
multifamily properties and certain property services (other than property
management and leasing) for certain unaffiliated multifamily and commercial
properties.
TAX CONSEQUENCES UPON SALE OR REFINANCING OF PROPERTIES. Holders of Units
may experience different and more adverse tax consequences than the Company upon
the sale or reduction of indebtedness on any of the Properties. Therefore, such
holders, including Messrs. Smith and Kogod, and the Company, may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of the Properties. While the Company, as the sole general partner of
the Operating Partnership, has the exclusive authority to determine whether and
on what terms to sell or refinance an individual Property, certain members of
the Board of Directors are holders of Units, and their status as Unit holders
may influence the Company not to sell particular Properties, even though such
sale might otherwise be financially advantageous to the Company and its
shareholders, or may influence the Company not to pay down or refinance
indebtedness on a particular Property with a significant level of debt. See
"Federal Income Tax Considerations." The Company has no current plans to sell
Properties.
RISKS OF CONFLICTS OF INTEREST. Although the Company has adopted certain
policies and has entered into agreements with Messrs. Smith and Kogod designed
to minimize the adverse effects from certain of these potential conflicts of
interest, there can be no assurance that these policies and agreements always
will be successful in eliminating the influence of such conflicts. Consequently,
the Company is subject to the risk that if such policies and agreements are
unsuccessful, decisions could be made at the Company level that might fail to
reflect fully the interests of all shareholders.
CHANGES IN POLICIES WITHOUT A VOTE OF SHAREHOLDERS
The major policies of the Company, including its policies with respect to
investment, financing, growth, acquisitions, development, debt capitalization
and distributions, are determined by its Board of Directors. Although it has no
present intention to amend or revise these and other policies, the Board of
Directors may do so from time to time without a vote of the shareholders of the
Company. The Company cannot change its policy of seeking to maintain its
qualification as a REIT, however, without the approval of its shareholders.
Changes in the Company's policies may not fully serve the interests of all
shareholders.
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
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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 $312
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 January 31, 1998 was
35.5%. The Company has adopted a policy of incurring debt (including debt
incurred under its line of credit) only if upon such incurrence the Company's
Debt-to-Total Market Capitalization Ratio would be 60% or less. The Company's
Articles of Incorporation, as amended (the "Charter"), however, do not
contain any limitation on the amount or percentage of indebtedness that the
Company may incur in the future. Accordingly, the Company could modify the
current policy at any time. If this policy were changed, the Company could
become more highly leveraged, resulting in an increase in debt service that,
in turn, could increase the Company's risk of default on its obligations and
adversely affect the Company's funds from operations and ability to make
expected distributions to its shareholders.
LIMITATIONS OF DEBT POLICY. The Company has established its debt policy
relative to the market capitalization of the Company rather than to the book
value of its assets, a ratio that is frequently employed. The market
capitalization of the Company, however, varies depending on the price at which
the Common Stock trades and may not reflect the fair market value of the
underlying assets of the Company at all times, which may result in the Company's
indebtedness at any particular time being substantially in excess of 60% of the
underlying value of its assets. Although the Company will consider factors other
than market capitalization in making decisions regarding the incurrence of
indebtedness (such as the estimated market value of such properties upon
refinancing and the ability of particular properties and the Company as a whole
to generate cash flow to cover expected debt service), there can be no assurance
that the Debt-to-Total Market Capitalization Ratio (or the ratio of indebtedness
to any other measure of asset value) will be an accurate measure of the
Company's ability to incur indebtedness while continuing to make distributions
to shareholders at expected levels.
DEBT FINANCING; UNCERTAINTY OF ABILITY TO REFINANCE BALLOON PAYMENTS ON
DEBT. The Company will be subject to the risks associated with debt
financing, including the risk that existing indebtedness on the Properties
that is secured by some or all of the Properties (which in most cases will
not have been fully amortized at maturity) (the "Secured Debt"), including
the debt incurred by the Company and its subsidiaries at the time of the
Formation Transactions, will not be able to be refinanced at maturity on
favorable terms or at all, or that the terms of such refinancing will not be
as favorable as the terms of existing indebtedness, and the risk that
necessary capital expenditures for such purposes as renovations and reletting
space will not be able to be financed. Higher interest rates at the time of
refinancing could have an adverse effect on distributions. In addition, some
of the Company's indebtedness is cross-collateralized among Properties so
that a failure of an individual Property to generate cash flow necessary for
scheduled debt repayments may place a larger number of Properties at risk of
foreclosure. The Company does not expect to have sufficient funds to make all
of the balloon payments of principal when due under the Secured Debt within
one to twenty-three years and other mortgages on the Properties. There can be
no assurance that the Company will be able to refinance this indebtedness or
to otherwise obtain funds by selling assets or by raising equity. If a
Property is mortgaged to secure payment of indebtedness and the Company is
unable to meet mortgage payments, the mortgagee could foreclose on the
Property, which would result in a loss of income and asset value to the
Company.
RISKS OF RISING INTEREST RATES. The Company currently has little variable
rate mortgage indebtedness outstanding. Should the Company incur additional
variable rate debt in the future
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(which it expects to do in connection with acquisitions and development), a
significant rise in interest rates could adversely affect the Company's
results of operations and its ability to make distributions to its
shareholders. Changes in the Company's interest expenses also will affect the
Company's net income and funds from operations.
RISKS ASSOCIATED WITH PREFERRED SHARES
The Company's Articles of Incorporation authorize 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 and December 1997 and
October 1997, the Company issued 1,661,744 shares of Series A Cumulative
Convertible Redeemable Preferred Stock, $.01 par value per share and
1,216,666 Series B Cumulative Convertible Redeemable Preferred Shares, $.01
par value per share, respectively, in two separate private placements, the
terms of which are more fully described in a Current Report on Form 8-K dated
October 3, 1997 and filed on October 20, 1997, as amended. The Company issued
500 shares of 7.91% Series C Cumulative Redeemable Preferred Stock in a
public offering on February 2, 1998 (such offering, together with the
offerings referred to in the previous sentence, 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 cannot be
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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 properly to remediate such substances, may adversely affect the
owner's ability to sell the real estate or to borrow using the real estate as
collateral. In addition to clean-up actions brought by federal, state and local
agencies, the presence of hazardous wastes or materials on a property could
result in personal injury or similar claims by private plaintiffs. The Company
believes that no Former Property Partnership has been notified by any
governmental authority of any liability or other claim in connection with any of
the Properties that the Company believes is material to its financial condition
or results of operations.
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
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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 may pursue acquisitions and development in other
markets, a decline in the economy or rental activities in this market may
adversely affect the ability of the Company to make distributions to its
shareholders.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid and, therefore, tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions.
Under the terms of the Secured Debt, the sale of certain 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
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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 January 31, 1998, thirteen of the Properties, representing 3,999
units or 21.59% 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 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 (excluding any
net capital gain) 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
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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 Board of Directors without a shareholder vote into one or more series of
capital stock having special preferences or rights. See "Description of Common
Stock." The issuance of capital stock having special preferences or rights could
have the effect of delaying or preventing a change in control of the Company
even if a change in control were in the shareholders' interest.
REQUIRED CONSENT OF THE OPERATING PARTNERSHIP FOR MERGER. The Company may
not merge, consolidate or engage in any combination with another person or sell
all or substantially all of its assets unless such transaction includes a merger
of, or a sale of assets by, the Operating Partnership, which transaction would
require approval of the holders of a majority of the Units. The Company
currently holds less than a majority of the Units. Thus, this voting requirement
might limit the possibility for acquisition or change in control of the Company,
even if a change in control were in the shareholders' interest. In this regard,
the holders of Units might incur different, and more adverse, tax consequences
as a result of such an acquisition or change in control that could motivate them
to oppose such a transaction that is in the shareholders' interest.
EXEMPTIONS FROM MARYLAND BUSINESS COMBINATIONS LAW. Under the Maryland
General Corporation Law ("MGCL"), certain "business combinations" (including
certain issuances of equity securities) between a Maryland corporation and
any person who owns 10% or more of the voting power of the corporation's
shares of capital stock (an "Interested Shareholder") must be approved by a
supermajority (80%) of voting shares. In addition, an Interested Shareholder
may not engage in a business combination for five years following the date he
or she became an Interested Shareholder. The Company, as permitted by the
MGCL, has exempted any business combinations involving Messrs. Smith and
Kogod and persons affiliated or acting in concert with them. Consequently,
Messrs. Smith and Kogod are permitted to enter into business combinations
with the Company without the supermajority shareholder approval otherwise
required by the MGCL.
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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 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.
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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 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
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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 15.31% of the outstanding Common Stock and Units as of January 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 Gary
G. Briggs, Senior Vice President, and 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.
SECURITIES LAW MATTERS
10,843,392 of the shares of Common Stock offered hereby may be issued upon
redemption of Original Units which became redeemable in June 1995. The Units
are, by their terms, redeemable for cash, or at the option of the Company in
its sole and absolute discretion, shares of Common Stock. For this reason,
the Company has maintained the view that it makes an offer of Common Stock
underlying a Unit only upon receipt of a notice of redemption from a Unit
holder, at which time the Company will be given the opportunity to decide
whether to redeem Units for Common Stock. Consistent with this view, at the
time the Original Units became redeemable in June 1995, the Company registered
only the number of shares of Common Stock that it anticipated it might issue
upon redemption of Original Units submitted to the Operating Partnership for
redemption. Had the Operating Partnership received notices of redemption
relating to all of the Original Units at any time since the Original Units
became redeemable in 1995, the Operating Partnership would not have been able
to redeem all such Original Units for Common Stock. In such a case, the
Company would have been required to redeem the Original Units for cash. The
Company has been informed by the staff of the SEC that the staff believes that
the Company may be deemed to have been engaged in a continuous offering of the
Common Stock underlying the Original Units since the time such Units became
redeemable. If this view is correct, the question arises as to whether such
offer of Common Stock should have been registered under the Securities Act at
the time when the Original Units became redeemable. Based on the fact that no
unregistered sales of Common Stock underlying Original Units were made by the
Company, if it were ultimately determined that the offer of the Common Stock
underlying the Original Units should have been registered under the Securities
Act, the Company does not believe that it has any material liability under the
federal securities laws as a result of the offer of Common Stock underlying
such Original Units. The Company is now registering the redemption of all of
the Original Units under the registration statement of which this prospectus
is a part.
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THE COMPANY
The Company is a self-administered and self-managed equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. The Company,
together with its subsidiaries, is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing and property
management and leasing expertise. The Company's primary strategy for growth is
to acquire, develop, own and manage high quality multifamily properties for
long-term income generation and value appreciation.
The Company is the sole general partner of and held approximately 50.95% of
the Units in the Operating Partnership as of January 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 January 31, 1998, the Company, through the Operating Partnership,
owned 47 Multifamily Properties and two Retail Properties, a substantial
majority of which are located in the Washington, D.C. metropolitan area.
The Company's executive offices are located at 2345 Crystal Drive, Crystal
City, Arlington, Virginia 22202, and its telephone number is (703) 920-8500. The
Company is a Maryland corporation formed in 1993. The Operating Partnership is a
Delaware Limited Partnership formed in 1993; it commenced business operations on
June 30, 1994.
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DESCRIPTION OF COMMON STOCK
GENERAL
The authorized capital stock of the Company consists of 145,000,000 shares
of capital stock, $.01 par value, of which 95,000,000 shares are classified as
Common Stock, 45,000,000 shares are classified as Excess Stock, 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 1998 annual meeting of
shareholders; the term of the next class of directors (2 directors) will expire
at the 1999 annual meeting of shareholders; and the term of the third class of
directors (3 directors) will expire at the 2000 annual meeting of shareholders.
At each annual meeting of shareholders, the class of directors to be elected at
such meeting will be elected for a three year term, and the directors in the
other two classes will continue in office. Because holders of Common Stock have
no right to cumulative voting for the election of directors, at each annual
meeting of shareholders, the holders of a majority of the shares of Common Stock
will be able to elect all of the successors of the class of directors whose term
expires at that meeting.
The Charter also provides that, except for any directors who may be elected
by holders of a class or series of capital stock other than Common Stock,
directors may be removed only for cause and only by the affirmative vote of
shareholders holding at least 80% of all the votes entitled to be cast for the
election of directors. Vacancies on the Board of Directors may be filled by the
affirmative vote of the remaining directors and, in the case of a vacancy
resulting from the removal of a director, by the shareholders by a majority of
the votes entitled to be cast for the election of directors. A vote of
shareholders holding at least 80% of all the votes entitled to be cast thereon
is required to amend, alter, change, repeal or adopt any provisions inconsistent
with the foregoing classified board and director removal provisions. Under the
Charter, the power to amend the Bylaws of the Company is
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vested exclusively in the Board of Directors, and the shareholders will not
have any power to adopt, alter or repeal the Bylaws absent amendment to the
Charter. These provisions may make it more difficult and time consuming to
change majority control of the Board of Directors of the Company and, thus,
reduce the vulnerability of the Company to an unsolicited proposal for the
takeover of the Company or the removal of incumbent management.
Because the Board of Directors has the power to establish the preferences
and rights of additional series of capital stock without further shareholder
vote, the Board of Directors may afford the holders of any series of senior
capital stock preferences, powers and rights, voting or otherwise, senior to the
rights of holders of Common Stock. The issuance of any such senior capital stock
could have the effect of delaying or preventing a change in control of the
Company. The Board of Directors, however, currently does not contemplate the
issuance of any series of capital stock other than the Common Stock and Excess
Stock (see "-- Restrictions on Transfer; Excess Stock" below).
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
BUSINESS COMBINATION STATUTE. The MGCL establishes special requirements
with respect to "business combinations" between Maryland corporations and
"interested shareholders" unless exemptions are applicable. Among other things,
the law prohibits for a period of five years a merger and other specified or
similar transactions between a Company and an interested shareholder and
requires a supermajority vote for such transactions after the end of the
five-year period.
"Interested Shareholders" are all persons owning beneficially, directly or
indirectly, more than 10% of the outstanding voting stock of the Maryland
corporation. "Business Combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to Interested Shareholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an Interested Shareholder
or its affiliates for a period of five years after the date on which the
shareholder first became an Interested Shareholder. Thereafter, the transaction
may not be consummated unless recommended by the board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66-2/3% of the votes entitled
to be cast by all holders of outstanding shares of voting stock other than the
Interested Shareholder. A Business Combination with an Interested Shareholder
that is approved by the board of directors of a Maryland corporation at any time
before an Interested Shareholder first becomes an Interested Shareholder is not
subject to the special voting requirements. An amendment to a Maryland
corporation's charter electing not to be subject to the foregoing requirements
must be approved by the affirmative vote of at least 80% of the votes entitled
to be cast by all holders of outstanding shares of voting stock and 66-2/3% of
the votes entitled to be cast by holders of outstanding shares of voting stock
who are not Interested Shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply to any Business
Combination of a corporation with a shareholder who was an Interested
Shareholder on the date of the shareholder vote.
As permitted by Maryland law, the Company has exempted from the Maryland
business corporation statute any Business Combination with Messrs. Smith or
Kogod, and all persons, firms and corporations affiliated with, or acting in
concert or as a group with, either of them, as well as any Business Combination
that involves the redemption of Units for shares of Common Stock.
CONTROL SHARE ACQUISITION STATUTE. Maryland law imposes limitations on the
voting rights in a "control share acquisition." The Maryland statute defines a
"control share acquisition" at the 20%, 33-1/3% and 50% acquisition levels, and
requires a 2/3 shareholder vote (excluding shares owned by the acquiring person
and certain members of management) to accord voting rights to stock acquired in
a control share acquisition. The statute also requires Maryland corporations to
hold a special meeting at the request of an actual or proposed control share
acquirer generally within 50 days after
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a request is made with the submission of an "acquiring person statement," but
only if the acquiring person (a) posts a bond for the cost of a meeting and
(b) submits a definitive financing agreement to the extent that financing is
not provided by the acquiring person. In addition, unless the charter or
by-laws provide otherwise, the statute gives the Maryland corporation, within
certain time limitations, various redemption rights if there is a shareholder
vote on the issue and the grant of voting rights is not approved, or if an
acquiring person statement is not delivered to the target within 10 days
following a control share acquisition. Moreover, unless the charter or
by-laws provide otherwise, the statute provides that if, before a control
share acquisition occurs, voting rights are accorded to control shares that
result in the acquiring person having majority voting power, then minority
shareholders have appraisal rights. An acquisition of shares may be exempted
from the control share statute, provided that a charter or bylaw provision is
adopted for such purpose prior to the control share acquisition. Pursuant to
the foregoing, the Company's Charter provides that any acquisition of shares
of capital stock of the Company that is not prohibited by the terms of the
restrictions on transfer described below under "-- Restrictions on Transfer;
Excess Stock" is exempted from the provisions of the control share
acquisition statute.
RESTRICTIONS ON TRANSFER; EXCESS STOCK
OWNERSHIP LIMITS. The Charter contains certain restrictions on the
number of shares of capital stock that individual shareholders may own. For
the Company to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of capital stock may be owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year (other than the first taxable year in which
the Company qualifies as a REIT). In addition, the capital stock must be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year
(together with the restriction referred to in the preceding sentence, the
"Existing Holder Limit"). The Charter of the Company contains restrictions on
the acquisition of capital stock, including Common Stock, which are intended
to ensure compliance with these requirements.
Subject to certain exceptions specified in the Charter, no holder may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.8% (the "Ownership Limit") in number or value of the issued and
outstanding shares of Common Stock. The Board of Directors in its discretion may
waive the Ownership Limit or the Existing Holder Limit with respect to a holder
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.
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If any shareholder purports to transfer shares to a person and either the
transfer would result in the Company failing to qualify as a REIT, or such
transfer would cause the transferee to hold shares in excess of more than the
applicable Ownership Limit or Existing Holder Limit, the purported transfer
shall be null and void, and the intended transferee will acquire no rights or
economic interest in the shares, and the shareholder will be deemed to have
transferred the shares of Common Stock to the Company in exchange for shares of
Excess Stock, which will be deemed to be held by the Company as trustee of a
trust for the exclusive benefit of the person or persons to whom the shares can
be transferred without violating the ownership limit. In addition, if any person
owns, either directly or constructively under the applicable attribution rules
of the Code, shares of capital stock in excess of the applicable Ownership
Limit, such person will be deemed to have exchanged the shares of capital stock
that cause the Ownership Limit to be exceeded for an equal number of shares of
Excess Stock, which will be deemed to be held by the Company as trustee of a
trust for the exclusive benefit of the person or persons to whom the share can
be transferred without violating the Ownership Limit.
A person who holds or transfers shares such that shares of capital stock
shall have been deemed to be exchanged for Excess Stock will not be entitled to
vote the Excess Stock and will not be entitled to receive any dividends or
distributions (any dividend or distribution paid on shares of capital stock
prior to the discovery by the Company that such shares have been exchanged for
Excess Stock shall be repaid to the Company upon demand, and any dividend or
distribution declared but unpaid shall be rescinded). Such person shall have the
right to designate a transferee of such Excess Stock so long as consideration
received for designating such transferee does not exceed a price that is equal
to the lesser of (i) in the case of a deemed exchange for Excess Stock resulting
from a transfer, the price paid for the shares in such transfer or, in the case
of a deemed exchange for Excess Stock resulting from some other event, the fair
market value, on the date of the deemed exchange, of the shares deemed
exchanged, and (ii) the fair market value of the shares for which such Excess
Stock will be deemed to be exchanged on the date of the designation of the
transferee. For these purposes, fair market value on a given date is determined
by reference to the average closing price for the five preceding days. The share
of Excess Stock so transferred will automatically be deemed to be exchanged for
shares of capital stock. Excess Stock may be purchased by the Company for the
lesser of the price paid or the average closing price for the five days
immediately preceding such purchase. The Company may elect to redeem the Excess
Stock for Units.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decisions, statute, rule or regulation, then the intended
transferee of any Excess Stock may be deemed, at the option of the Company, to
have acted as an agent on behalf of the Company in acquiring such Excess Stock
and to hold such Excess Stock on behalf of the Company.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage as
required by the Code or regulations thereunder) in number or value of the issued
and outstanding shares of capital stock, including Common Stock, must file a
written notice with the Company containing the information specified in the
Charter no later than January 31 of each year. In addition, each shareholder
shall be required upon demand to disclose to the Company in writing such
information as the Company may request in order to determine the effect on the
Company's status as a REIT of such shareholder's direct, indirect and
constructive ownership of the shares.
The foregoing ownership limitations also may have the effect of preventing
or hindering any attempt to acquire control of the Company without the consent
of the Board of Directors.
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent, Registrar and Dividend Disbursing Agent for the shares
of Common Stock is First Union National Bank of North Carolina.
DESCRIPTION OF UNITS
GENERAL
Holders of Units (including the Company in its capacity as general partner)
are entitled to share in cash distributions from, and in the profits and losses
of, the Operating Partnership.
The Operating Partnership has two classes of Units: (i) Class A Units are
Units that were issued to Limited Partners in connection with the formation of
the Operating Partnership, the Initial Offering and related transactions, and
any Units issued thereafter that are not designated as Class B Units, and (ii)
Class B Units are Units issued to Limited Partners admitted after June 30, 1994
in exchange for their contribution to the Operating Partnership of real property
or other assets, unless the Company elects to issue Class A Units. With the
exception of distributions (as described under "Distributions; Allocations of
Income and Loss--Class A Units; Class B Units"), restrictions on transfer (as
described under "Restrictions on Transfer of Units by Limited Partners"), and
restrictions on redemption (as described under "Redemption of Units"), Class B
Units have the same rights, preferences, powers and duties as Class A Units. All
references herein to Units include both Class A Units and Class B Units, unless
otherwise indicated.
Holders of Units have the rights of Limited Partners under the Partnership
Agreement and the Delaware Revised Uniform Limited Partnership Act (the "Act").
The Units are not listed on any exchange or quoted on any national market
system. Set forth below is a discussion of the current rights of redeeming Unit
holders. The Partnership Agreement imposes certain restrictions on the transfer
of Units, also as described below.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
DISTRIBUTIONS GENERALLY. The Partnership Agreement provides for the
quarterly distribution of Available Cash, as determined in the manner
provided in the Partnership Agreement. If no Class B Units are issued and
outstanding during a quarter, Available Cash is distributed for such quarter
to the holders of Class A Units on the record date for such quarter in
proportion to their percentage interests in the Operating Partnership.
"Available Cash" is generally defined as net income plus depreciation and
other adjustments 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.
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Limited Partners holding Class B Units on the applicable record date will
receive distributions of Available Cash in accordance with their percentage
interests in the Operating Partnership for the weighted average number of
days during that quarter for which such Limited Partners held their Class B
Units. Holders of Class B Units who are admitted to the Operating Partnership
between the end of a quarter and the record date applicable to distributions
for such quarter will not receive any distributions with respect to the
preceding quarter, but will receive distributions of Available Cash with
respect to the portion of the quarter in which their Class B Units were
issued. Each Class B Unit will be converted automatically into a Class A Unit
on the day immediately following the record date for distributions with
respect to the quarter in which the Class B Units were issued.
ALLOCATIONS OF INCOME AND LOSS. The Partnership Agreement provides that if
the Operating Partnership operates at a net loss, net losses shall be allocated
to the Company and the Limited Partners in proportion to their respective
percentage interests in the Operating Partnership, provided that net losses that
would have the effect of creating a deficit balance in a Limited Partner's
capital account (as specially adjusted for such purpose) ("Excess Losses") will
be reallocated to the Company, as general partner of the Operating Partnership.
The Partnership Agreement also provides that, if the Operating Partnership
operates at a net profit, net income shall be allocated first to the Company to
the extent of Excess Losses with respect to which the Company has not previously
been allocated net income, and any remaining net income shall be allocated in
proportion to the respective percentage interests of the Company and the Limited
Partners.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
The Company, as general partner of the Operating Partnership, is liable for
all general recourse obligations of the Operating Partnership to the extent not
paid by the Operating Partnership and to the extent that the assets of the
Operating Partnership are not sufficient for payment thereof (except for certain
tort liabilities, for which the general partner has joint and several
liability). The Operating Partnership is required to reimburse the Company in
the event it pays any obligations of the Operating Partnership. The Company is
not liable for the nonrecourse obligations of the Operating Partnership.
The Limited Partners are not required to make additional contributions to
the Operating Partnership. Assuming that a Limited Partner does not take part in
the control of the business of the Operating Partnership and otherwise acts in
conformity with the provisions of the Partnership Agreement, the liability of
the Limited Partner for obligations of the Operating Partnership under the
Partnership Agreement and the Act are limited, subject to certain possible
exceptions, generally to the loss of the Limited Partner's investment in the
Operating Partnership represented by his Units. Under the Act, a Limited Partner
may not receive a distribution from the Operating Partnership if, at the time of
the distribution and after giving effect thereto, the liabilities of the
Operating Partnership (other than liabilities to parties on account of their
interests in the Operating Partnership and liabilities for which recourse is
limited to specified property of the Operating Partnership) exceed the fair
value of the Operating Partnership's assets (other than the fair value of any
property subject to nonrecourse liabilities of the Operating Partnership but
only to the extent of such liabilities). The Act provides that a Limited Partner
who receives a distribution knowing at the time that it violates the foregoing
prohibition is liable to the Operating Partnership for the amount of the
distribution. Unless otherwise agreed, such a Limited Partner will not be liable
for the return of such distribution after the expiration of three years from the
date of such distribution.
The Operating Partnership is qualified to conduct business in the District
of Columbia, the State of Maryland and the Commonwealth of Virginia, and may
qualify to conduct business in the future in certain other jurisdictions.
Maintenance of limited liability may require compliance with certain legal
requirements of those jurisdictions and certain other jurisdictions. Limitations
on the liability of a Limited Partner for the obligations of a Limited
Partnership have not been clearly established in many jurisdictions.
Accordingly, if it were determined that the right, or exercise of the
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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 Articles of Incorporation. In this regard,
members of the Smith and Kogod families and entities that they control are
prohibited from exercising their right to require the redemption of Units
that they hold if the issuance of shares of Common Stock to them by the
Company would be prohibited under the special restrictions contained in the
Charter that are applicable to their acquisition and ownership of shares.
Limited Partners who hold Class B Units (or Class A Units into which Class B
Units were converted) will not be permitted to redeem their Units for shares of
Common Stock or for cash, at the option of the Company, for at least one year
following their admission to the Operating Partnership or such longer or shorter
term as may be set forth in the contribution agreement pursuant to which their
capital contributions are made to the Operating Partnership.
NO WITHDRAWAL BY LIMITED PARTNERS
No Limited Partner has the right to withdraw from or reduce his or her
capital contribution to the Operating Partnership, except as a result of the
redemption or transfer of his or her Units pursuant to the terms of the
Partnership Agreement.
ISSUANCE OF ADDITIONAL INTERESTS
The Company is authorized, without the consent of the Limited Partners, to
cause the Operating Partnership to issue additional Units (including, without
limitation, Class A Units or Class B Units) to itself, to the Limited Partners
or to other persons for such consideration and on such terms and conditions as
the Company deems appropriate. If additional Units are issued to the Company,
then the Company must issue additional shares of Common Stock and must
contribute to the Operating Partnership the entire proceeds received by the
Company from such issuance. In addition, the Company may cause the Operating
Partnership to issue to itself, to the Limited Partners or to other persons
additional partnership interests in different series or classes, which may
26
<PAGE>
be senior to the Units, for such consideration, on such terms and conditions,
and with such designations and preferences as the Company deems appropriate
(provided, however, that if such partnership interests are issued to the
Company, they must be issued in conjunction with an offering of securities of
the Company having substantially similar rights, in which the proceeds
thereof are contributed to the Operating Partnership). Consideration for
additional partnership interests may be cash or any property or other assets
permitted by the Act. No Limited Partner has preemptive, preferential or
similar rights with respect to additional capital contributions to the
Operating Partnership or the issuance or sale of any partnership interests
therein.
MEETINGS; VOTING
The Partnership Agreement does not provide for annual meetings of the
Limited Partners, and the Company does not anticipate calling such meetings.
Meetings of the Limited Partners may be called only by the Company, on its own
motion or upon written request of Limited Partners owning at least 25% of the
Units. Limited Partners may vote either in person or by proxy at meetings. Any
action that is required or permitted to be taken by the Limited Partners of the
Operating Partnership may be taken either at a meeting of the Limited Partners
or without a meeting if consents in writing setting forth the action so taken
are signed by Limited Partners owning not less than the minimum Units that would
be necessary to authorize or take such action at a meeting of the Limited
Partners at which all Limited Partners entitled to vote on such action were
present. On matters in which Limited Partners are entitled to vote, each Limited
Partner (including the Company to the extent it holds Units) will have a vote
equal to the number of Units he or she holds in the Operating Partnership. A
transferee of Units who has not been admitted as a substitute Limited Partner of
record with respect to such Units will have no voting rights with respect to
such Units, even if such transferee holds other Units as to which it has been
admitted as a Limited Partner.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by the Company or
by Limited Partners owning at least 25% of the Units. Generally, the
Partnership Agreement may be amended with the approval of the Company, as
general partner, and Limited Partners (including the Company) holding a
majority of the Units. Certain amendments that would, among other things,
convert a Limited Partner's interest into a general partner's interest;
modify the limited liability of a Limited Partner; alter the interest of a
partner in profits or losses, or the rights to receive any distributions;
alter or modify the redemption right described above; or cause the
termination of the Operating Partnership at a time or on terms inconsistent
with those set forth in the Partnership Agreement must be approved by the
Company and each Limited Partner that would be adversely affected by such
amendment. Notwithstanding the foregoing, the Company, as general partner,
will have the power, without the consent of the Limited Partners, to amend
the Partnership Agreement as may be required to (1) add to the obligations of
the Company as general partner or surrender any right or power granted to the
Company as general partner; (2) reflect the admission, substitution,
termination or withdrawal of partners in accordance with the terms of the
Partnership 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.
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<PAGE>
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2092, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term, and its affairs wound up upon the
occurrence of the earliest of: (1) the withdrawal of the Company as general
partner without the permitted transfer of the Company's interest to a successor
general partner (except in certain limited circumstances); (2) the sale of all
or substantially all of the Operating Partnership's assets and properties; (3)
the entry of a decree of judicial dissolution of the Operating Partnership
pursuant to the provisions of the Act or the entry of a final order for relief
in a bankruptcy proceeding of the general partner; (4) the entry of a final
judgment ruling that the general partner is bankrupt or insolvent; (5) (i) from
and after June 27, 1994 through December 31, 2013, an election by the Company,
unless any Limited Partner who became a Limited Partner on June 30, 1994 and who
holds Units issued at such time objects to such dissolution in writing, (ii)
from and after January 1, 2014 through December 31, 2043, an election by the
Company, unless Limited Partners who became Limited Partners on June 30, 1994
and who hold at least five percent (5%) of the Units issued at such time object
to such dissolution in writing and (iii) on or after January 1, 2044, an
election by the Company, in its sole and absolute discretion. Upon dissolution,
the Company, as general partner, or any liquidator will proceed to liquidate the
assets of the Operating Partnership and apply the proceeds therefrom in the
order of priority set forth in the Partnership Agreement.
SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. The Company is authorized to issue 95,000,000 shares of Common
Stock. As of January 31, 1998, the Company had outstanding 14,971,204 shares of
Common Stock. As of January 31, 1998, the Company had reserved for possible
issuance upon redemption of Units approximately 18.7 million additional shares
of Common Stock. 15,209,714 shares 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 and July 1996, respectively or the Registration Statement of which this
Prospectus is a part. As of January 31, 1998, an additional 14,971,204 Units are
eligible to be redeemed for cash or, at the Company's election, shares of Common
Stock (such shares will be restricted from sale in the public market unless
registered under the Securities Act). In addition, 1,000,000 shares have been
reserved for issuance under the Company's Dividend and Distribution Investment
and Share Purchase Plan, which plan was registered with the Commission on
December 22, 1995. Also, the Company currently has on file with the Commission
an effective registration statement which would allow the sale of up to $312
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 January 31,
1998, options to purchase up to 1,720,416 Units or shares of Common Stock
have been granted, awards of 104,000 restricted Units have been made (40,250
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, directors and certain key employees and
1,939,293 additional Units or shares of Common Stock were reserved for future
issuance under the Plans. As described elsewhere herein, Units are redeemable
for cash or shares of Common Stock in certain circumstances.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares for future sale, will have
on the market price prevailing from time to time. Sales of substantial amounts
of shares of Common Stock (including shares issued upon the redemption of Units
or the exercise of options), or the perception that such sales could occur,
could adversely affect the prevailing market price of the shares.
28
<PAGE>
SELLING SHAREHOLDERS
The Secondary Shares offered by this Prospectus may be offered from time to
time by the Selling Shareholders named below. As described elsewhere herein,
"Selling Shareholders" are only (i) those persons who acquired Original
Restricted Shares and Original Affiliate Shares in the Formation Transactions
and (ii) those persons who may receive Redemption Shares upon redemption of
Units and who may be affiliates of the Company.
The registration of Redemption Shares hereunder does not constitute a
determination that the holders of Units who are affiliates of the Company have a
right to require redemption of such Units. As noted above, see "Description of
Units--Redemption of Units," the rights of the Smith and Kogod families and
entities they control to redeem Units is subject to certain special limitations.
The Company has not made a determination as to whether or the extent to which,
the redemption of such Units would be permitted under such limitations. Resales
of Redemption Shares issued pursuant to this Prospectus to persons who are not
at the time of redemption affiliates of the Company will not be restricted under
the Securities Act. Holders of Original Units who are not affiliates of the
Company are therefore not included herein as Selling Shareholders.
The following table provides the names of and the number of shares of Common
Stock or Units known to the Company to be owned by each Selling Shareholder as
of March 1, 1998. As indicated in the footnotes, the number of shares
includes the number of shares of Common Stock into which Units held by the
Selling Shareholders are redeemable. Each Selling Shareholder may sell any or
all of the shares of Common Stock included herein, but the Company cannot
estimate the number of shares that may be offered and sold, or that will be
owned by each Selling Shareholder upon completion of the offering to which this
Prospectus relates.
The number of Redemption Shares being registered pursuant to the
Registration Statement of which this Prospectus forms a part represents the
Company's estimate of the aggregate number of shares of Common Stock that the
Company will elect to issue upon redemption of Units that are tendered for
redemption by the holders thereof in the foreseeable future.
29
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES AND/OR SHARES THAT
NAME UNITS OWNED MAY BE OFFERED
- ---------------------------------------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Charles E. Smith Management, Inc.(1).......................................................... 1,877,857 1,877,857
Charles E. Smith Management Construction, Inc.(1)............................................. 385,417 385,417
Charles E. Smith Service Co.(1)............................................................... 179,906 179,906
Conserv Inc.(1)............................................................................... 113,844 113,844
Robert H. Smith (2)........................................................................... 2,834,410 2,834,410
Robert P. Kogod (3)........................................................................... 2,751,583 2,751,583
Ernest A. Gerardi, Jr. (4).................................................................... 266,000 266,000
Leslie S. Kogod (5)........................................................................... 205,967 41,666
Lauren S. Kogod (6)........................................................................... 205,976 41,666
Stuart A. Kogod (7)........................................................................... 205,967 41,666
Harriet K. Bobb (8)........................................................................... 36,271 31,250
David B. Smith (9)............................................................................ 266,421 14,583
Elizabeth M. Smith (10)....................................................................... 8,121 7,291
Betty Chasen (11)............................................................................. 29,404 4,166
Gerald Chasen (12)............................................................................ 16,117 4,166
Stacy Liss (13)............................................................................... 56,042 7,292
Michael Liss (14)............................................................................. 55,818 4,166
</TABLE>
- ------------------------
(1) Consists solely of Units. A portion of the Units may not be tendered for
redemption by the Selling Shareholder or redeemed by the Company for cash or
shares of Common Stock except upon the instruction of a lender to the
Selling Shareholder (such loan being unrelated to Company business) in the
event of a default in the underlying obligation or upon the prior written
consent of such lender; no default exists at the time of the filing of this
Registration Statement. These Units (or shares of Common Stock that may be
issued upon redemption of such Units) are also listed in the table as
beneficially owned and offered by each of Messrs. Smith and Kogod. See notes
2 and 3 below.
(2) The aggregate amount of shares of Common Stock indicated in the table as
beneficially owned by Robert H. Smith consists of (i) 200 shares of Common
Stock directly owned by him, (ii) 90,732 Units directly owned by him,
(iii) 145,500 shares of Common Stock owned directly or indirectly by his
spouse, Clarice Smith, (iv) 40,954 Units owned directly by Clarice Smith,
(v) 2,557,024 Units owned by corporations wholly owned by Messrs. Smith and
Kogod and/or their spouses. The Units owned by these corporations are
reported three times in the table, once as beneficially owned by Robert
Smith, again as beneficially owned by Robert Kogod, and again in the name of
the corporations and also include all of the Units (or shares that may be
issued upon redemption of such Units) listed in the table as beneficially
owned and offered by Charles E. Smith Management, Inc., Charles E. Smith
Management Construction, Inc., Charles E. Smith Service Co. and Conserv Inc.
(3) The aggregate amount of shares of Common Stock indicated in the table as
beneficially owned by Robert P. Kogod consists of (i) 52,185 shares of
Common Stock directly owned by him, (ii) 57,464 Units directly owned by him,
(iii) 52,185 shares of Common Stock owned directly or indirectly by his
spouse, Arlene Kogod, (iv) 32,725 Units owned directly by Arlene Kogod, and
(v) 2,557,024 Units owned by corporations wholly owned by Messrs. Smith and
Kogod and/or their spouses. The Units owned by these corporations are
reported three times in the table, once as beneficially owned by Robert
Smith, again as beneficially owned by Robert Kogod, and again in the name of
the corporations and also include all of the Units (or shares that may be
issued upon redemption of such Units) listed in the table as beneficially
30
<PAGE>
owned and offered by Charles E. Smith Management, Inc., Charles E. Smith
Management Construction, Inc., Charles E. Smith Service Co. and Conserv Inc.
(4) Consists of 51,000 Units owned by Mr. Gerardi and his wife, options to
purchase 150,000 Units, options to purchase 50,000 shares of Common Stock
and 15,000 shares of Common Stock owned by Mr. Gerardi.
(5) Consists of 77,960 shares of Common Stock and 128,007 Units.
(6) Consists of 77,966 shares of Common Stock and 128,010 Units.
(7) Consists of 77,931 shares of Common Stock and 128,036 Units.
(8) Consists of 31,250 shares of Common Stock and 5,021 Units.
(9) Consists of 15,433 shares of Common Stock owned directly by David B. Smith,
215,827 Units owned directly by him, and 35,161 Units owned by a trust for
Mr. Smith's benefit.
(10) Consists solely of shares of Common Stock.
(11) Consists of 4,166 shares of Common Stock and 25,238 Units.
(12) Consists of 4,166 shares of Common Stock and 11,951 Units.
(13) Consists of 48,750 Units owned by a trust and 7,292 shares of Common Stock
owned by a trust for the benefit of Ms. Liss.
(14) Consists of 51,652 Units owned by a trust and 4,166 shares of Common Stock
owned by a trust for the benefit of Mr. Liss.
REDEMPTION OF UNITS
GENERAL
Each Limited Partner may, subject to certain limitations, require that the
Operating Partnership redeem his or her Units, by delivering a notice to the
Operating Partnership. Upon redemption, such Limited Partner will receive, with
respect to each Unit tendered, cash in an amount equal to the market value of
one share of Common Stock of the Company (subject to certain anti-dilution
adjustments). The market value of the Common Stock for this purpose will be
equal to the average of the closing trading price of the Company's Common Stock
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.
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
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<PAGE>
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 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
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<PAGE>
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.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act") for
individuals, trusts and estates, the maximum rate of tax on the net capital
gain from a sale or exchange occurring after July 28, 1997 of a long-term
capital asset held for more than 18 months has been reduced from 28% to
20%, and the maximum rate for long-term capital assets held for more than one
year but not more than 18 months remains at 28%. The maximum rate for net
capital gains attributable to the sale of depreciable real property held for
more than 18 months 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 1997 Act provides the IRS with 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, i.e., whether the
Unit is a long-term capital asset, a mid-term capital asset, or a short-term
capital asset. 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 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 mid-term capital asset, and partly as gain from the sale
of a short-term capital asset, and it also would be treated 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
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<PAGE>
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 Charter Oak or subsequently), (iii) his
or her share of losses of the Operating Partnership, and (iv) his or her
share of nondeductible expenditures of the Operating Partnership that are not
chargeable to capital.
EFFECT OF THE INSTITUTIONAL LOAN GUARANTEE. In connection with the
acquisition of their Units, certain Limited Partners joined in the Institutional
Loan Guarantee. If, and to the extent that, the amount for which such a Limited
Partner is liable under the Institutional Loan Guarantee is included in the
Limited Partner's basis in Units that are sold or transferred (including
pursuant to the Redemption Right), the Limited Partner will be treated as
receiving an additional amount of cash equal to the amount of such liability
included in determining such basis. Hence, in analyzing the amount of gain that
would be recognized upon a disposition of Units, a Limited Partner who is a
party to the Institutional Loan Guarantee must either (i) exclude from the basis
for such Units any amount attributable to the Institutional Loan Guarantee
(which could result in the Limited Partner having a "negative" basis with
respect to such Units), or (ii) include as additional proceeds that will be
realized on such disposition an amount equal to the amount included in basis
that is attributable to the Institutional Loan Guarantee.
CONTINUING LIABILITY UNDER THE INSTITUTIONAL LOAN GUARANTEE
A Limited Partner who has joined in the Institutional Loan Guarantee has
no right to be released from liability thereunder merely because such Limited
Partner sells or otherwise disposes of some or all of the Units that such
Limited Partner holds. Thus, unless the lender, in its sole and absolute
discretion, agrees to release a Limited Partner from liability, a Limited
Partner who is a party to the Institutional Loan Guarantee will continue to
remain liable thereunder following a disposition of his or her Units
(including pursuant to the Redemption Right), even though the Limited Partner
has no continuing interest in the Operating Partnership or the Company.
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.
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- -------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------------------------------
FORM OF ORGANIZATION AND ASSETS OWNED
The Operating Partnership is The Company is a Maryland
organized as a Delaware Limited corporation. The Company
Partnership. The Operating elected to be taxed as a REIT
Partnership owns interests under the Code and intends to
(directly and through a maintain its qualification as a
subsidiary) in the Properties REIT. The Company's only
and, through subsidiaries, significant asset is its
conducts the Company's interest in the Operating
management and leasing business. Partnership, which gives the
See "The Company." Company an indirect investment
in the Properties owned by the
Operating Partnership.
LENGTH OF INVESTMENT
The Operating Partnership The Company has a perpetual
has a stated term of 99 years. term and intends to continue its
operations for an indefinite
time period.
PERMITTED INVESTMENTS
The Operating Partnership's Under its Charter, the
purpose is to conduct any Company may engage in any lawful
business that may be lawfully activity permitted by the
conducted by a Limited General Corporation Law of
Partnership organized pursuant Maryland. However, under the
to the Act, provided that such Operating Partnership Agreement
business is to be conducted in a the Company, as general partner,
manner that permits the Company may not conduct any business
to be qualified as a REIT unless other than the business of the
the Company ceases to qualify Operating Partnership and cannot
as a REIT. The Operating own any assets other than its
Partnership is authorized to interest in the Operating
perform any and all acts for the Partnership except for any
furtherance of the purposes and wholly owned special purpose
business of the Operating corporate subsidiary which
Partnership, provided that the serves as the general partner of
Operating Partnership may not a partnership owned at least
take, or refrain from taking, 99%, directly or indirectly, by
any action which, in the the Operating Partnership and
judgment of the general partner other assets necessary to carry
(i) could adversely affect the out its responsibility under the
ability of the general partner Partnership Agreement or its
to continue to qualify as a Charter.
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).
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OPERATING PARTNERSHIP COMPANY
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ADDITIONAL EQUITY
The Operating Partnership is The Board of Directors may
authorized to issue Units and issue, in its discretion,
other partnership interests additional equity securities
(including partnership interests consisting of Common Stock or
of different series or classes any other series of capital
that may be senior to Units) as stock (which may be classified
determined by the Company as its and issued as a variety of
general partner in its sole equity securities, including one
discretion. The Operating or more classes of common or
Partnership may issue Units and preferred stock, in the
other partnership interests to discretion of the Board of
the Company, as long as such Directors), provided that the
interests are issued in total number of shares issued
connection with a comparable does not exceed the authorized
issuance of shares of Common number of shares of capital
Stock and proceeds raised in stock set forth in the Company's
connection with the issuance of Charter.
such shares are contributed to
the Operating Partnership. In
addition, the Operating
Partnership will issue
additional Units or shares of
Common Stock upon exercise of
the options granted pursuant to
the Plans.
BORROWING POLICIES
The Operating Partnership The Company is not restricted
has no restrictions on under its Charter from incurring
borrowings, and the Company as borrowings. However, under the
general partner has full power Partnership Agreement the Company,
and authority to borrow money on as general partner, may not incur
behalf of the Operating any debts except those for which
Partnership. The Company's Board it may be liable as general
of Directors has adopted a partner of the Operating
policy that currently limits the Partnership and certain other
Debt-to-Total Market limited circumstances. Therefore,
Capitalization Ratio to 60%, but all indebtedness incurred by the
this policy may be altered at Company will be through the
any time by the Board of Operating Partnership.
Directors.
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OPERATING PARTNERSHIP COMPANY
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OTHER INVESTMENT RESTRICTIONS
Other than restrictions Neither the Company's Charter nor
precluding investments by the its By-Laws impose any restrictions
Operating Partnership that would upon the types of investments that
adversely affect the qualification may be made by the Company except
of the Company as a REIT and that under the Charter the Board of
general restrictions on Directors is prohibited from taking
transactions with affiliates, any action that would terminate the
there are no restrictions upon Company's REIT status, unless a
the Operating Partnership's majority of the shareholders vote to
authority to enter into certain terminate such REIT status. The
transactions, including among Company's Charter and By-Laws do not
others, making investments, impose any restrictions upon dealings
lending Operating Partnership between the Company and directors,
funds, or re-investing the officers and affiliates thereof.
Operating Partnership's cash Applicable corporate law, however,
flow and net sale or refinancing requires that the material facts of
proceeds. the relationship, the interest and
the transaction must (i) be disclosed
to the Board of Directors and
approved by the affirmative vote of a
majority of the disinterested
directors; or (ii) be disclosed to
the shareholders and approved by the
affirmative vote of a majority of the
disinterested shareholders; or (iii)
be in fact fair and reasonable. In
addition, the Company has adopted a
policy which requires that all
contracts and transactions between
the Company and directors, officers
or affiliates thereof must be
approved by the affirmative vote of a
majority of the disinterested
directors. Lastly, the Company has
adopted a policy that it must conduct
its investment activities through the
Operating Partnership for so long as
the Operating Partnership exists.
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OPERATING PARTNERSHIP COMPANY
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MANAGEMENT CONTROL
All management powers over The Board of Directors has
the business and affairs of the exclusive control over the
Operating Partnership are vested Company's business and affairs
in the general partner of the subject only to the restrictions
Operating Partnership, and no in the Charter and By-Laws, the
limited partner of the Operating Partnership Agreement and
Partnership has any right to applicable law. The Board of
participate in or exercise Directors is classified into
control or management power over three classes of directors. At
the business and affairs of the each annual meeting of the
Operating Partnership except (i) shareholders, the successors of
the general partner of the the class of directors whose
Operating Partnership may not, terms expire at that meeting
without written consent of all will be elected. The policies
the Limited Partners, take any adopted by the Board of
action in contravention of the Directors may be altered or
Partnership Agreement; (ii) the eliminated without a vote of the
general partner of the Operating shareholders. Accordingly,
Partnership may not dispose of except for their vote in the
all or substantially all of the elections of directors,
Operating Partnership's assets shareholders will have no
without the consent of the control over the ordinary
holders of a majority of the business policies of the Company.
outstanding Limited Partnership The Board of Directors cannot
Units; (iii) until December 31, change the Company's policy of
2013, the general partner of the maintaining its status as a REIT,
Operating Partnership may not however, without the approval of
cause or permit the Operating a majority of the votes entitled
Partnership to dissolve if one to be cast thereon.
or more of the original Limited
Partners objects to such
dissolution; and (iv) from
January 1, 2014 through December
31, 2043, the general partner of
the Operating Partnership may
not cause or permit the
Operating Partnership to
dissolve if original Limited
Partners holding at least 5% of
the Units object to such
dissolution. The general partner
may not be removed by the Limited
Partners with or without cause.
FIDUCIARY DUTIES
Under Delaware law, the Under Maryland law, the
general partner of the Operating directors must perform their
Partnership is accountable to duties in good faith, in a
the Operating Partnership as a manner that they reasonably
fiduciary and, consequently, is believe to be in the best
required to exercise good faith interests of the Company and
and integrity in all of its with the care of an ordinarily
dealings with respect to prudent person in a like
partnership affairs. However, position. Directors of the
under the Partnership Agreement, Company who act in such a manner
the general partner is under no generally will not be liable to
obligation to consider the the Company for monetary damages
separate interests of the arising from their activities.
Limited Partners in deciding
whether to cause the Operating
Partnership to take (or decline
to take) any actions, and the
general partner is not liable
for monetary damages for losses
sustained, liabilities incurred,
or benefits not derived by the
Limited Partners in connection
with such decisions, provided
that the general partner has
acted in good faith.
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OPERATING PARTNERSHIP COMPANY
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MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of Delaware law, The Company's Charter
the general partner has provides that the liability of
liability for the payment of the the Company's directors and
obligations and debts of the officers to the Company and its
Operating Partnership unless shareholders for money damages
limitations upon such liability is limited to the fullest extent
are stated in the document or permitted under Maryland law.
instrument evidencing the The Charter and state law
obligation. Under the provide broad indemnification to
Partnership Agreement, the directors and officers, whether
Operating Partnership agrees to serving the Company or at its
indemnify the general partner or request any other entity, to the
any director or officer of the full extent permitted under
general partner from and against Maryland law.
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.
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OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------------------------------
ANTITAKEOVER PROVISIONS
Except in limited circumstances The Charter and By-Laws of
see "Voting Rights" below), the Company and the Maryland
the general partner of the General Corporation Law contain
Operating Partnership has a number of provisions that may
exclusive management power over have the effect of delaying or
the business and affairs of the discouraging an unsolicited
Operating Partnership. The proposal for the acquisition of
general partner may not be the Company or the removal of
removed by the Limited Partners incumbent management. These
with or without cause. Under the provisions include, among
Partnership Agreement, the others, (i) a staggered Board of
general partner may, in its sole Directors; (ii) authorized
discretion, prevent a limited capital stock that may be
partner from transferring his classified and issued as a
interest or any rights as a variety of equity securities in
limited partner except in the discretion of the Board of
certain limited circumstances. Directors, including securities
The general partner may exercise having superior voting rights to
this right of approval to deter, the Common Stock; (iii)
delay or hamper attempts by restrictions on business
persons to acquire a majority combinations with persons who
interest in the Operating acquire more than a certain
Partnership. See "Description of percentage of Common Stock; (iv)
Units." a requirement that directors may
be removed only for cause and
only by a vote of at least 80%
of the outstanding Common Stock;
and (v) provisions designed to
avoid concentration of share
ownership in a manner that would
jeopardize the Company's status
as a REIT under the Code. See
"Description of Common Stock."
VOTING RIGHTS
Under the Partnership Agreement, The Company is managed and
Limited Partners have controlled by a Board of
voting rights only as to the Directors consisting of three
dissolution of the Operating classes having staggered terms
Partnership, the sale of all or of office. Each class is elected
substantially all of the assets by the shareholders at annual
of the Operating Partnership and meetings of the Company.
amendments of the Partnership Maryland law requires that
Agreement, as more fully certain major corporate
described below. Otherwise, all transactions, including most
decisions relating to the amendments to the Charter, may
operation and management of the not be consummated without the
Operating Partnership are made approval of shareholders as set
by the general partner. See forth below. All shares of
"Description of Units." As of Common Stock have one vote, and
January 31, 1998, the Company the Charter permits the Board of
owned approximately 50.95% of Directors to classify and issue
the Units. As Units are redeemed capital stock in one or more
by partners, the Company's series having voting power which
percentage ownership of the may differ from that of the
Units will increase. If Common Stock. See "Description of
additional Units are issued to Common Stock."
third parties, the Company's
percentage ownership of the
Units will decrease.
40
<PAGE>
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OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------------------------------
AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
The Partnership Agreement Amendments to the Company's
may be amended through a Charter must be approved by the
proposal by the general partner Board of Directors and by the
or any limited partner holding vote of at least two-thirds of
25% or more of the Units. Such the votes entitled to be cast at
proposal, in order to be a meeting of shareholders,
effective, must be approved by except that an amendment of the
the written vote of holders of provisions relating to the
at least a majority in interest classified Board of Directors,
of the Operating Partnership. In the power to remove directors
addition, the general partner and the share ownership limits
may, without the consent of the designed to maintain qualified
Limited Partners, amend the REIT status must be approved by
Partnership Agreement as to an 80% vote. An amendment
ministerial matters. relating to termination of REIT
status requires a majority of
the votes entitled to be cast
thereon.
VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY
Through December 31, 2013, Under Maryland law, the Board
the general partner of the of Directors must obtain
Operating Partnership may not approval of holders of at least
elect to dissolve the Operating two-thirds of the outstanding
Partnership if any original shares of Common Stock in order
Limited Partner who became a to dissolve the Company.
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.
VOTE REQUIRED TO SELL ASSETS
Under the Partnership Agreement, Under Maryland law, the
the general partner of the Board of Directors is required
Operating Partnership may to obtain approval of the
not sell, exchange, transfer or shareholders by the affirmative
otherwise dispose of all or vote of two-thirds of all the
substantially all of the votes entitled to be cast on the
Operating Partnership's assets matter in order to sell all or
without the consent of holders substantially all of the assets
of a majority of the outstanding of the Company. No approval of
Units. the shareholders is required for
the sale of less than all or
substantially all of the
Company's assets.
VOTE REQUIRED TO MERGE
Under the Partnership Under Maryland law, the
Agreement, the general partner Board of Directors is required
of the Operating Partnership may to obtain approval of the
not merge or consolidate the shareholders by the affirmative
Operating Partnership without vote of two-thirds of all the
the consent of holders of a votes entitled to be cast on the
majority of the outstanding matter in order to merge or
Units. consolidate the Company.
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OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------------------------------
COMPENSATION, FEES AND DISTRIBUTIONS
The general partner does not The directors of the Company
receive any compensation for its receive compensation for their
services as general partner of services.
the Operating Partnership. As a
partner in the Operating
Partnership, however, the
general partner has the same
right to allocations and
distributions as other partners
of the Operating Partnership. In
addition, the Operating
Partnership reimburses the
general partner for all expenses
incurred relating to the ongoing
operation of the Company and any
other offering of additional
Units or shares of Common Stock,
including all expenses, damages
and other payments resulting
from or arising in connection
with litigation related to any
of the foregoing.
LIABILITY OF INVESTORS
Under the Partnership Agreement Under Maryland law, shareholders
and applicable state law, the are not personally liable for
liability of the Limited the debts or obligations of the
Partners for the Operating Company. Shares of Common Stock,
Partnership's debts and upon issuance, will be fully
obligations is generally limited paid and nonassessable.
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.
REVIEW OF INVESTOR LISTS
Under the Partnership Agreement, Under Maryland law, a
Limited Partners, upon written shareholder holding at least 5%
demand with a statement of the of the outstanding stock of a
purpose of such demand and at corporation may upon written
the limited partner's expense, request inspect and copy during
are entitled to obtain a current usual business hours the list of
list of the name and last known the shareholders of such
business, residence or mailing corporation.
address of each Limited Partner
of the Operating Partnership.
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<PAGE>
The following compares certain of the investment attributes and legal rights
associated with the ownership of Units and Shares.
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UNITS SHARES
- -------------------------------------------------------------------------------
NATURE OF INVESTMENT
The Units constitute equity Shares of Common Stock
interests entitling each Limited constitute equity interests in
Partner to his pro rata share of the Company. The Company is
cash distributions made to the entitled to receive its pro rata
Limited Partners of the share of distributions made by
Operating Partnership. The the Operating Partnership with
Operating Partnership generally respect to the Units, and each
intends to retain and reinvest shareholder is entitled to his
proceeds of the sale of property pro rata share of any dividends
or excess refinancing proceeds or distributions paid with
in its business. respect to the Common Stock. The
dividends payable to the
shareholders are not fixed in
amount and are only paid if,
when and as declared by the
Board of Directors. In order to
qualify as a REIT, the Company
must distribute at least 95% of
its taxable income (excluding
capital gains), and any taxable
income (including capital gains)
not distributed will be subject
to corporate income tax.
POTENTIAL DILUTION OF RIGHTS
The general partner of the The Board of Directors may
Operating Partnership is issue, in its discretion,
authorized, in its sole additional shares of Common
discretion and without Limited Stock and Preferred Shares and
Partner approval, to cause the has the authority to issue from
Operating Partnership to issue the authorized capital stock a
additional Limited Partnership variety of other equity
interests and other equity securities of the Company with
securities for any partnership such powers, preferences and
purpose at any time to the rights as the Board of Directors
Limited Partners or to other may designate at the time. The
persons on terms established by issuance of additional shares of
the general partner. Common Stock, Preferred Shares
or other similar equity
securities may result in the
dilution of the interests of the
shareholders.
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UNITS SHARES
- -------------------------------------------------------------------------------
LIQUIDITY
Units may be transferred by The Common Stock is freely
a Limited Partner only with the transferable. The Common Stock
consent of the general partner is listed on the NYSE, and a
of the Operating Partnership, public market for the Common
which consent may be withheld in Stock exists. The breadth and
its sole discretion. The general strength of this secondary
partner will permit transfers of market will depend, among other
Units only in connection with things, upon the number of
gifts, bequests and transfers by shares outstanding, the Company's
a Unit holder to family members financial results and prospects,
and certain other persons. the general interest in the
Subject to certain conditions, Company's and other real estate
each Limited Partner has the investments, and the Company's
right to elect to have his Units dividend yield compared to that
redeemed by the Operating of other debt and equity
Partnership. Upon redemption, securities.
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.
44
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UNITS SHARES
- -------------------------------------------------------------------------------
TAXATION
The Operating Partnership will The Company has elected to be
not be subject to federal income taxed as a REIT. So long as it
taxes. Instead, each holder of qualifies as a REIT, the Company
Units includes his allocable will be permitted to deduct
share of the Operating distributions paid to its
Partnership's taxable income or shareholders, which effectively
loss in determining his will reduce the "double taxation"
individual federal income tax that typically results when a
liability. The maximum effective corporation earns income and
federal tax rate for individuals distributes that income to its
under current law is 39.6%. shareholders in the form of
dividends. The Property Service
Income and loss from the Businesses, however, will not
Operating Partnership generally qualify as REITs and thus they
will be subject to the "passive will be subject to federal
activity" limitations. Under the income tax on their net income
"passive activity" rules, income at normal corporate rates. The
and loss from the Operating maximum effective tax rate for
Partnership that is considered corporations under current law
passive income generally can be is 35%.
offset against income and loss
from other investments that Dividends paid by the Company
constitute "passive activities" will be treated as "portfolio"
(unless the Operating income and cannot be offset with
Partnership is considered a losses from "passive activities."
"publicly traded partnership," in
which case income and loss from Distributions made by the
the Operating Partnership can be Company to its taxable domestic
offset only against other income shareholders out of current or
and loss from the Operating accumulated earnings and profits
Partnership). Income of the will be taken into account by
Operating Partnership, however, them as ordinary income.
attributable to dividends from Distributions in excess of
the Property Service Businesses current or accumulated earnings
or interest paid by the Property and profits that are not
Service Businesses will not designated as capital gain
qualify as passive income and dividends will be treated as a
cannot be offset with losses and non-taxable return of basis to
deductions from a "passive the extent of a shareholder's
activity" (including losses and adjusted basis in its shares of
deductions attributable to the Common Stock, with the excess
Operating Partnership's taxed as capital gain.
multifamily rental activities). 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 SHARES
- -------------------------------------------------------------------------------
Cash distributions from the Each year, Shareholders will
Operating Partnership will not receive Form 1099 used by
be taxable to a holder of Units corporations to report dividends
except to the extent they exceed paid to their shareholders.
such holder's basis in his
interest in the Operating Shareholders who are individuals
Partnership (which will include generally will not be required
such holder's allocable share of to file state income tax returns
the Operating Partnership's and/or pay state income taxes
debt). outside of their state of
residence with respect to the
Each year, holders of Units will Company's operations and
receive a Schedule K-1 tax form distributions. The Company may
containing detailed tax be required to pay state income
information for inclusion in taxes in certain states.
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.
46
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Stock. The following
discussion, which is not exhaustive of all possible tax considerations, does
not include a detailed discussion of any state, local or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a prospective shareholder in light of its
particular circumstances or to certain types of shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under
the federal income tax laws.
As used in this discussion, the term "Company" refers solely to Charles
E. Smith Residential Realty, Inc.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS URGED TO CONSULT WITH ITS OWN
TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S PERSONAL TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company 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.
47
<PAGE>
In any year in which the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on net income
that it distributes currently to shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder levels)
that generally results from investment in a corporation. However, the Company
will be subject to federal income tax on any income that it does not
distribute, and in some circumstances, on certain types of income even though
that income is distributed. In addition, the Property Services Businesses,
which do not qualify as REITs, are subject to federal corporate income tax on
their net income.
REQUIREMENTS FOR QUALIFICATION.
ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or
directors; (2) the beneficial ownership of which is evidenced by transferable
shares, or by 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
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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 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
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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.
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 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.,
in 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.
Because the Company owns more than 10% of the value of the securities of
the Property Service Businesses, it could not presently satisfy the new 10%
value limitation with respect to such corporations. Accordingly, if the
proposal were enacted as currently drafted and the Property Service
Businesses were to engage in a new trade or business or acquire substantial
new assets, the grandfathered status of the Company's ownership of stock in
these entities would terminate and the Company would fail to qualify as a
REIT. Moreover, the Company would not be able to own more than 10% of the
vote or value of any subsidiary formed after the effective date of the
proposal. Thus, the proposal, if enacted as currently drafted, would
materially impede the ability of the Company to engage in new third-party
management or similar activities.
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.
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FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN THE OPERATING PARTNERSHIP AND
PROPERTY SERVICE BUSINESSES
GENERAL. All of the Company's investments are through the Operating
Partnership, and the Operating Partnership holds substantially all of the
Properties through certain subsidiary partnerships. This structure may involve
special tax considerations. These tax considerations include: (a) the
allocations of income and expense items of the Operating Partnership and such
subsidiary partnerships, which could affect the computation of taxable income of
the Company, (b) the status of the Operating Partnership and each such
subsidiary partnership as partnership (as opposed to an association taxable as a
corporation) for income tax purposes, and (c) the taking of actions by the
Operating Partnership or any of such subsidiary partnerships that could
adversely affect the Company's qualification as a REIT. The Company believes
that the Operating Partnership and each of the subsidiary partnerships will be
treated for tax purposes as a partnership (and not as an association taxable as
a corporation). If, however, the Operating Partnership or any of such subsidiary
partnerships were treated as an association taxable as a corporation, the
Company would fail to qualify as a REIT for a number of reasons.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The Operating Partnership
was formed by way of contributions of appreciated property (including certain of
the Properties) to the Partnership 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
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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 (and the Clinton proposal
discussed above in "Requirements for Qualification--Asset Tests," if enacted)
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 long as the Company
qualifies as a REIT, distributions made to the Company's taxable domestic
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income, and corporate shareholders will not be eligible for the
dividends received deduction as to such amounts.
Distributions that are designated as capital gain dividends will be taxed
as gains from the sale or exchange of a capital asset held for more than one
year (to the extent they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the shareholder
has held its stock. Corporate shareholders, however, may be required to treat
up to 20% of certain capital gain dividends as ordinary income. On
November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that the Company may classify portions of its designated capital
gains dividend as (i) a 20% rate gain distribution (which would be taxable
to taxable domestic shareholders who are individuals, estates or trusts at a
maximum rate of 20%), (ii) an unrecaptured Section 1250 gain distribution
(which would be taxable to taxable domestic shareholders who are individuals,
estates or trusts at a maximum rate of 25%), or (iii) a 28% rate gain
distribution (which would be taxable to taxable domestic shareholders who are
individuals, estates or trusts at a maximum rate of 28%). (If no
designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution.) Notice 97-64 provides that a REIT
must determine the maximum amounts that it may designate as 20% and 25% rate
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 a 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 in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Stock, but rather will reduce the
adjusted basis of such Common Stock. To the extent that such distributions
exceed the adjusted basis of a shareholder's Common Stock, they will be included
in income as capital gains, assuming the Common Stock is a capital asset in the
hands of the shareholder.
In general, a domestic 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 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 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 domestic shareholder who is an individual or an estate or trust,
such capital gain or loss will be taxed (i) at a maximum rate of 20% if
such Common Stock has been held for more than 18 months; (ii) at a maximum
rate of 28% if such Common Stock has been held for more than one year but not
more than 18 months; and (iii) 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. Loss upon a sale or exchange of Common Stock
by a shareholder who has held such Common Stock for six months or less (after
applying certain holding period rules) will be treated as long-term capital
loss to the extent of distribution from the Company required to be treated by
such shareholder as long-term capital gain.
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The 1997 Act allows the IRS to issue regulations relating to
the manner in which 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.
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, domestic shareholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. The Company does not expect the
distributions by the Company to a shareholder that is a tax-exempt entity will
constitute "unrelated business taxable income" ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of its Common Stock with
"acquisition indebtedness" within the meaning of the Code, and the Common Stock
is not otherwise used in an unrelated trade or business of the tax-exempt
entity. 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
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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 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.
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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. These provisions are effective for the Company's current and
future taxable years.
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.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the Company of up to
15,164,714 Redemption Shares of Common Stock, if, and to the extent that, the
Company elects to issue such Redemption Shares to holders of up to 15,164,714
Units, upon the tender of such Units for redemption, (ii) the offer and sale
from time to time of up to 197,912 Original Restricted Shares by the holders
thereof, (iii) the offer and sale from time to time by certain affiliates of the
Company of up to 277,570 Original Affiliate Shares and (iv) the offer and sale
from time to time by the holders thereof of Redemption Shares that may be issued
and held by persons who may be affiliates of the
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Company. The Company has registered the Redemption Shares, the Original
Affiliate Shares and the Original Restricted Shares for sale to permit the
holders thereof to sell such shares without restriction in the open market or
otherwise, but registration of such shares does not necessarily mean that any
of such shares will be offered or sold by the holders thereof.
The Company will not receive any cash proceeds from the offering by the
Selling Shareholders or from the issuance of the Redemption Shares to holders of
Units upon receiving a notice of redemption (but it will acquire from such
holders the Units tendered for redemption). The Secondary Shares may be sold
from time to time by any of the Selling Shareholders on terms to be determined
at the time of sale directly or to purchasers through dealers or agents, who may
receive compensation in the form of commissions from the Selling Shareholders
and/or the purchasers of Secondary Shares from whom they may act as agent. The
Selling Shareholders and any dealers or agents that participate in the
distribution of Secondary Shares may be deemed to be "underwriters" within the
meaning of the Securities Act and any profit on the sale of Secondary Shares by
them and any commissions received by any such dealers or agents might be deemed
to be underwriting commissions under the Securities Act.
The Company 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 equity holders with annual reports containing
consolidated financial statements audited by its independent public
accountants and with quarterly reports
56
<PAGE>
containing unaudited condensed consolidated financial statements for each of
the first three quarters of each fiscal year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The 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,
1996.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
5. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
6. The Company's Current Reports on Form 8-K dated January 31, 1997 (as
amended on Form 8-K/A) and October 3, 1997 (as amended on Form 8-K/A).
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. Brian A. Cass,
Director-Corporation Finance (telephone: (703) 769-1000).
EXPERTS
The Company's financial statements for the fiscal year ended December 31,
1996 and the related schedule and the audited statements of revenues and
certain expenses of Crystal Tower, Crystal Plaza, and Lincoln Tower
incorporated by reference herein and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The audited statements of revenues and certain expenses of One East Delaware
incorporated by reference herein and elsewhere in the Registration Statement
have been audited by Altshuler, Melvoin and Glasser L.L.P., independent
public accountants, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said report. The audited statements of revenues and certain expenses
of Commonwealth Reservoir Park incorporated by reference herein and elsewhere
in the Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
LEGAL MATTERS
The legality of the issuance of the Redemption Shares has been passed
upon for the Company by Hogan & Hartson L.L.P., Washington, D.C.
57
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
--------------
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 6
The Company 18
Description of Common Stock 19
Description of Units 23
Shares Available for Future Sale 28
Selling Shareholders 29
Redemption of Units 31
Federal Income Tax Considerations 47
Plan of Distribution 55
Available Information 56
Incorporation of Certain Documents by Reference 57
Experts 57
Legal Matters 57
-----------
15,640,196 Shares
Charles E. Smith
Residential Realty, Inc.
Common Stock
(par value $.01 per share)
PROSPECTUS
March 6, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth those expenses for distribution to be
incurred in connection with the issuance and distribution of the securities
being registered.
<TABLE>
<S> <C>
Registration Fee....................... $123,902.88
-----------
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.................................. $170,902.88
-----------
</TABLE>
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Company's officers and directors are and will be indemnified under
Maryland law, the Charter of the Company, and the Partnership Agreement
against certain liabilities. The Charter requires the Company to indemnify
its directors and officers to the fullest extent permitted from time to time
by the laws of Maryland. The Company's Charter also provides that, to the
fullest extent permitted under Maryland law, directors and officers of the
Company will not be liable to the Company and its shareholders for money
damages.
Section 2-418 of the Maryland General Corporation Law generally permits
indemnification of any director made a party to any proceedings by reason of
service as a director unless it is established that (i) the act or omission
of such person was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty; or (ii) such person actually received an improper personal
benefit in money property or services; or (iii) in the case of any criminal
proceeding, such person had reasonable cause to believe that the act or
omission was unlawful. The indemnity may include judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director in
connection with the proceeding; but, if the proceeding is one by or in the
right of the corporation, indemnification is not permitted with respect to
any proceeding in which the director has been adjudged to be liable to the
corporation, or if the proceeding is one charging improper personal benefit
to the director, whether or not involving action in the director's official
capacity, indemnification of the director is not permitted if the director
was adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction or upon a plea of
nolo contendere or its equivalent, or any entry of an order of probation
prior to judgment, creates a rebuttable presumption that the director did not
meet the requisite standard of conduct required for permitted
indemnification. The termination of any proceeding by judgment, order or
settlement, however, does not create a presumption that the director failed
to meet the requisite standard of conduct for permitted indemnification.
The Partnership Agreement also provides for indemnification of the
Company, or any director or officer of the Company, in its capacity as
general partner of the Operating Partnership, from and against all losses,
claims, damages, liabilities, joint or several, expenses (including legal
fees), fines, settlements and other amounts incurred in connection with any
actions relating to the operations of the Operating Partnership as set forth
in the Partnership Agreement.
II-1
<PAGE>
ITEM 16. EXHIBITS
*3.1 Amended and Restated Articles of Incorporation of the Company
**3.2 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 Coopers & Lybrand L.L.P.
23.4 Consent of Altschuler, Melvoin and Glasser L.L.P.
24 Power of Attorney (included in signature page of initial filing)
- ------------------------
* 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 3.2 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).
****** Previously filed.
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.
II-2
<PAGE>
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the Securities offered herein,
and the offering of such Securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the termination
of the offering.
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 March 6, 1998.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ Ernest A. Gerardi, Jr.
-----------------------------------
Name: Ernest A. Gerardi, Jr.
Title: President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ * Co-Chairman of the Board, March 6, 1998
- -------------------------- Co-Chief Executive Officer,
Robert H. Smith and Director
/s/ * Co-Chairman of the Board, March 6, 1998
- -------------------------- Co-Chief Executive Officer,
Robert P. Kogod and Director
/s/ * President, Chief Operating March 6, 1998
- -------------------------- Officer, and Director
Ernest A. Gerardi, Jr.
/s/ * Senior Vice President and March 6, 1998
- -------------------------- Chief Financial Officer
Wesley D. Minami
/s/ Steven E. Gulley Controller March 6, 1998
- --------------------------
Steven E. Gulley
/s/ * Director March 6, 1998
- --------------------------
Fred J. Brinkman
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ * Director March 6, 1998
- --------------------------
Charles B. Gill
/s/ * Director March 6, 1998
- --------------------------
Mandell J. Ourisman
/s/ * Director March 6, 1998
- --------------------------
Mallory Walker
* By: /s/ Ernest A. Gerardi, Jr.
- --------------------------------
Ernest A. Gerardi, Jr.
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
- ---------- ---------------------------------------------------- -------------
<S> <C> <C>
*3.1 Amended and Restated Articles of Incorporation of
the Company.............................................
**3.2 Articles Supplementary relating to Series A Cumulative
Convertible Redeemable Preferred Stock...................
***3.3 Articles Supplementary relating to Series B Cumulative
Convertible Redeemable Preferred Stock...................
***3.4 Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock...................
3.5 Articles Supplementary relating to Series C Cumulative
Redeemable Preferred Stock...............................
3.6 Certificate of Correction relating to Series C
Cumulative Redeemable Preferred Stock....................
****3.7 Amended and Restated Bylaws of the Company.................
*****4.1 First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended.....
*****4.2 Certificate of Limited Partnership of the Operating
Partnership..............................................
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality
of the Common Stock.....................................
******8.1 Opinion of Hogan & Hartson L.L.P. regarding certain
tax matters.............................................
23.1 Consent of Hogan & Hartson L.L.P. (included in
Exhibit 5.1).............................................
23.2 Consent of Arthur Andersen LLP.............................
23.3 Consent of Coopers & Lybrand L.L.P..........................
23.4 Consent of Altschuler, Melvoin and Glasser L.L.P............
24 Power of Attorney (included in signature page of
initial filing)..........................................
</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 and filed October 20, 1997
(File No. 1-13174).
**** 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).
****** Previously filed.
<PAGE>
Exhibit 3.5
Series C Cumulative
Redeemable Preferred Stock
ARTICLES SUPPLEMENTARY
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
------------------------------
Articles Supplementary of Board of Directors
Classifying and Designating a Series of
Preferred Stock as
Series C Cumulative Redeemable
Preferred Stock and
Fixing Distribution and Other Preferences
and Rights of Such Series
------------------------------
Dated as of January 30, 1998
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
------------------------------
Articles Supplementary of Board of Directors
Classifying and Designating a Series of
Preferred Stock as
Series C Cumulative Redeemable
Preferred Stock and
Fixing Distribution and Other Preferences
and Rights of Such Series
------------------------------
Charles E. Smith Residential Realty, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland pursuant to section 2-602(b) of the Annotated Code of
Maryland that:
FIRST: Pursuant to authority granted by the Amended and Restated Articles
of Incorporation of the Corporation, the Board of Directors on January 12,
1998 adopted a resolution designating and classifying 500 unissued and
unclassified shares of capital stock as Series C Cumulative Redeemable
Preferred Stock.
SECOND: The following is a description of the Series C Cumulative
Redeemable Preferred Stock, including the preferences, voting powers,
restrictions, limitations as to dividends, qualifications, terms and
conditions of redemption and other rights thereof:
Section 1. Number of Shares and Designation. This class of preferred
stock shall be designated as Series C Cumulative Redeemable Preferred Stock
and the number of shares which shall constitute such series shall not be more
than 500 shares, par value $0.01 per share, which number may be decreased
(but not below the number thereof then outstanding) from time to time by the
Board of Directors.
Section 2. Definitions. For purposes of the Series C Preferred Shares,
the following terms shall have the meanings indicated:
"Additional Dividend Rate" means $15,000.00 per share per annum.
"Affiliate" means, with respect to any specified Person, any Person
that controls, or is controlled by, or is under common control with such
specified Person.
"Aggregate Purchase Price" shall mean, with respect to the
purchase of any Property, without duplication, (i) Cash and Cash
Equivalents paid as consideration for such purchase, plus (ii) the
principal amount of any note delivered or other deferred payment to
be made in connection with such purchase, plus (iii) the value of any
other consideration delivered in connection with such purchase
(including without limitation, shares of the Corporation and
partnership interests of any kind in CESLP), provided that shares of
the Corporation and partnership interests of any class in CESLP
redeemable therefor (with or without the
1
<PAGE>
passage of time) shall be valued based on the market price of such shares
as reported on the New York Stock Exchange on the date of the closing of
the applicable purchase.
"Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate for such day and (ii) the sum of 0.5% plus
the Federal Funds Rate for such day.
"Board of Directors" shall mean the Board of Directors of the
Corporation or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series C
Preferred Shares.
"Business Day" shall mean any day other than a Saturday, Sunday
or a day on which state or federally chartered banking institutions in
New York City, New York are not required to be open.
"Call Date" shall mean February 1, 2028.
"Capital Expenditures" means any expenditures for any item that
would be treated or defined as a capital expenditure under GAAP.
"Capital Leases" as applied to any Person, means any lease of
any property (whether real, personal or mixed) by that Person as lessee
which, in conformity with GAAP, is or should be accounted for as a
capital lease on the balance sheet of that Person.
"Capital Reserve" shall mean, for any period, $62.50 for each
residential unit for each fiscal quarter to occur during such period (in
connection with any annualized calculation, the Capital Reserve used in
such calculation shall also be annualized).
"Cash and Cash Equivalents" shall mean (i) cash (excluding cash
reserve accounts, tenant credit balances and pledged assets), (ii) direct
obligations of the United States Government, including without
limitation, treasury bills, notes and bonds, (iii) interest-bearing or
discounted obligations of federal agencies and federal
government-sponsored entities or pools of such instruments offered by
banks, finance companies or other financial institutions and dealers,
including without limitation, Federal Home Loan Mortgage Corporation
participation sale certificates, Government National Mortgage Association
modified pass-through certificates, Federal National Mortgage Association
bonds and notes and Federal Farm Credit System securities, (iv) time
deposits, domestic and Euro-Dollar certificates of deposit, bankers
acceptances, commercial paper, floating rate notes, other money market
instruments and letters of credit, each issued by banks, finance
companies or other financial institutions, (v) obligations of domestic
corporations, including without limitation, commercial paper, bonds and
debentures, (vi) repurchase agreements with banks, finance companies or
other financial institutions and primary government security dealers
fully secured by the U.S. Government or agency collateral equal to or
exceeding the principal amount in a daily basis and held in safekeeping
and (vii) real estate loan pool participations.
"CESLP" means Charles E Smith Residential Realty, L.P., a
Delaware limited partnership or its successor.
"CES Share" means CESLP's percentage ownership of an Investment
Affiliate or Consolidated Subsidiary, as the case may be.
2
<PAGE>
"Change of Control" shall mean an occurrence of any of the following:
(i) the acquisition, directly or indirectly, by any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), other than Permitted Holders, of beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act, except that a
Person shall be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is
exercisable immediately or only after passage of time) of 50% or
more of the Corporation's outstanding capital stock with voting
power, under ordinary circumstances, to elect directors of the
Corporation;
(ii) (A) the Corporation consolidates with, or merges with or into,
another Person or conveys, transfers, leases or otherwise disposes
of all or substantially all of its assets (including, but not
limited to, real property investments) to any Person, or (B) any
Person consolidates with, or merges with or into the Corporation,
(unless no "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act), other than Permitted Holders,
Beneficially Owns 50% or more of the securities of the surviving or
transferee corporation); provided that the events described in this
clause (ii) shall not be deemed to be a Change of Control if (1) the
Persons who are shareholders of the Corporation immediately
preceding such transaction as a group Beneficially Own at least 50%
of the Corporation's shares after such transaction or (2) the sole
purpose of such event is that the Corporation is seeking to change
its domicile or to change its form of organization from a
corporation to a statutory business trust; or
(iii) the Corporation is liquidated or dissolved or adopts a plan of
liquidation or dissolution; provided that no transaction described
in (i) or (ii) above shall constitute a Change of Control unless the
rating assigned to the Series C Preferred Shares by the Rating
Agency on the Rating Determination Date is lower than the Initial
Rating and the rating assigned to the Series C Preferred Shares by
the Rating Agency immediately prior to the first public announcement
of such transaction shall have been higher than the rating on the
Rating Determination Date. The Company shall request the Rating
Agency to reaffirm its rating promptly after such public
announcement.
"Common Shares" shall mean the shares of Common Stock, par value
$0.01 per share, of the Corporation.
"Consolidated EBITDA" for any period means the consolidated net
income of CESLP (before extraordinary income or gains) as reported in the
CESLP's financial statements filed with the Securities and Exchange
Commission increased by the sum of the following (without duplication):
(i) all ordinary income and state franchise taxes paid or
accrued according to GAAP for such period and all such taxes paid or
accrued by the Property Service Businesses according to GAAP for such
period (in each case, other than income taxes attributable to
extraordinary, unusual or non-recurring gains or losses except to the
extent that such gains were not included in Consolidated EBITDA);
(ii) all interest expense paid or accrued in accordance with
GAAP for such period (including financing fees and amortization of
deferred financing fees and amortization of original issue discount);
3
<PAGE>
(iii) depreciation and depletion reflected in such reported
net income;
(iv) amortization reflected in such reported net income
including, without limitation, amortization of capitalized debt issuance
costs (only to the extent that such amounts have not been previously
included in the amount of Consolidated EBITDA pursuant to clause (ii)
above), goodwill, other intangibles and management fees; and
(v) any other non-cash charges or discretionary prepayment
penalties, to the extent deducted from consolidated net income
(including, but not limited to, income allocated to minority interests);
minus the gains (and plus the losses) from extraordinary items or asset
sales or write-ups or forgiveness of indebtedness included on the
calculation of net income.
"Consolidated Fixed Charges" for any period means the sum of:
(i) all interest expense paid or accrued in accordance with
GAAP for such period (including financing fees and amortization of
deferred financing fees and amortization of original issue discount);
(ii) preferred stock dividend requirements for such period,
whether or not declared or paid; and
(iii) regularly scheduled amortization of principal during
such period (other than any balloon payments at maturity).
"Consolidated Subsidiary" means at any date, any Subsidiary or
other entity which is consolidated with the Corporation or CESLP in
accordance with GAAP.
"Contingent Obligation" as to any Person means, without
duplication, (i) any contingent obligation of such Person required to be
shown on such Person's balance sheet in accordance with GAAP and (ii) any
obligation required to be disclosed in the footnotes to such Person's
financial statements, with respect to a guaranty by such Person of any
Indebtedness or of any other Person. The amount of any Contingent
Obligation described in clause (ii), with respect to a guaranty of
interest and principal, shall be deemed to equal the Net Present Value of
the sum of all payments required to be made thereunder, through, in the
case of a guaranty of an interest only or of interest and principal, the
stated date of maturity of the obligation (and commencing on the date
interest could first be payable thereunder). Notwithstanding anything
contained herein to the contrary, guarantees of completion shall not be
deemed to be Contingent Obligations unless and until a claim for payment
or performance has been made thereunder, at which time any such guaranty
of completion shall be deemed to be a Contingent Obligation in an amount
equal to any such claim. Subject to the preceding sentence, (x) in the
case of a joint and several guaranty given by such Person and another
Person (but only to the extent such guaranty is recourse, directly or
indirectly to CESLP), the amount of the guaranty shall be deemed to be
100% thereof unless and only to the extent that such other Person has
delivered Cash or Cash Equivalents to secure all or any part of such
Person's guaranteed obligations and (y) in the case of a guaranty
(whether or not joint and several) of an obligation otherwise
constituting Indebtedness of such Person, the amount of such guaranty
shall be deemed to be only that amount in excess of the amount of the
obligation constituting Indebtedness of such Person.
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"Dividend Payment Date" shall mean the 15th day (or if such day is
not a Business Day, the next Business Day thereafter) of February, May,
August and November of each year; commencing February 15, 1998.
"Dividend Periods" shall mean the periods commencing on, and
including, February 15, May 15, August 15, and November 15 of each year
and ending on the date prior to the next succeeding Dividend Payment Date
(other than the initial Dividend Period, which shall commence on the
Issue Date and end on and include February 14, 1998, and other than the
Dividend Period during which any Series C Preferred Shares shall be
redeemed pursuant to Section 5, which shall end on and include the
Redemption Date with respect to the Series C Preferred Shares being
redeemed).
"Dividend Rate" means (i) the Initial Dividend Rate for all periods
except when the Reduced Dividend Rate, the Increased Dividend Rate, or
the Additional Dividend Rate is in effect; or (ii) the Reduced Dividend
Rate from and including a Reduced Dividend Trigger Date; or (iii) the
Increased Dividend Rate for any Dividend Period specified in Section
3(c)(iii) or 3(c)(iv)(A); or (iv) the Additional Dividend Rate for any
Dividend Period specified in Section 3(c)(v).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the
weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by federal funds
brokers on such day, as published by the Federal Reserve Bank of New York
on the Business Day next succeeding such day, provided that (i) if such
day is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on such next succeeding Business Day and (ii) if no such rate
is so published on such next succeeding Business Day, the Federal Funds
Rate for such day shall be the average rate quoted to the Corporation on
such day on such transactions as determined by the Corporation.
"Fixed Charge Coverage Ratio" means, as of any date of
determination, the ratio of Consolidated EBITDA to Consolidated Fixed
Charges for the four fiscal quarters ending on or before such date for
which financial statements are then available.
"Fully Junior Shares" shall mean the Common Shares and any other
class or series of shares of capital stock of the Corporation now or
hereafter issued and outstanding over which the Series C Preferred Shares
have preference or priority in both (i) the payment of dividends and (ii)
the distribution of assets on any liquidation, dissolution or winding up
of the Corporation.
"GAAP" means generally accepted accounting principles recognized as
such in the opinions and pronouncements of the Accounting Principles
Board and the American Institute of Certified Public Accountants and the
Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the
accounting profession, which are applicable to the circumstances as of
the date of determination.
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"Increased Dividend Rate" means, following any Trigger Event, an
amount equal to $9,910.00 per share per annum.
"Indebtedness" as applied to any Person means, without duplication,
(a) all indebtedness, obligations or other liabilities of such Person for
borrowed money, (b) all indebtedness, obligations or other liabilities of
such Person evidenced by securities or other similar instruments, (c) all
Contingent Obligations of such Person with respect to obligations of
another Person described in clauses (a), (b) or (d) through (h), (d) all
reimbursement obligations and other liabilities of such Person with
respect to letters of credit or banker's acceptances issued for such
Person's account or other similar instruments for which a contingent
liability exists, (e) all obligations of such Person to pay the deferred
purchase price of property acquired by such Person (but not including
items properly included as trade payables in accordance with GAAP), (f)
all obligations in respect of Capital Leases of such Person, (g) all
indebtedness, obligations or other liabilities of such Person or others
secured by a voluntarily granted Lien on any asset of such Person (other
than statutory Liens arising by operation of law), whether or not such
indebtedness, obligations or liabilities are assumed by, or are a
personal liability of, such Person, and (h) all indebtedness, obligations
or other liabilities (other than interest expense liability) in respect
of Interest Rate Contracts and foreign currency exchange agreements
(other than Interest Rate Contracts purchased to hedge Indebtedness), in
each case to the extent any such items described in clauses (a) through
(h) would be included in accordance with GAAP as liabilities on the
liability side of the balance sheet of such Person.
"Initial Dividend Rate" means $7,910.00 per share per annum.
"Initial Rating" means BB+.
"Interest Rate Contracts" means, collectively, interest rate swap,
collar, cap or similar agreements providing interest rate protection.
"Investment Affiliate" means any Person in whom CESLP holds an
equity interest, directly or indirectly, whose financial results are not
consolidated under GAAP with the financial results of CESLP on the
consolidated financial statements of CESLP.
"Issue Date" shall mean the date on which the first Series C
Preferred Shares are issued.
"Junior Shares" shall mean the Common Shares and any other class or
series of capital stock of the Corporation now or hereafter issued and
outstanding over which the Series C Preferred Shares have preference or
priority in the payment of dividends or in the distribution of assets on
any liquidation, dissolution or winding up of the Corporation.
"Land" means unimproved real estate, including future phases of a
partially completed project, owned or leased for the purpose of future
development of improvements. For purposes of the foregoing definition,
"unimproved" shall mean Land on which the construction of building
improvements has not commenced or has been discontinued for a continuous
period longer than sixty (60) days prior to completion.
"Lease-Up Property" means any Property which has been substantially
completed within the preceding two (2) year period and which has not been
occupied by tenants under
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<PAGE>
bona fide leases totaling at least seventy-five percent (75%) of the
residential units in such Property for at least four (4) consecutive
fiscal quarters.
"Leverage Ratio" means the percentage determined by dividing the
Total Debt of CESLP by Market Value.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind, or any
other type of preferential arrangement, in each case that has the effect
of creating a security interest in respect of such asset. For the
purposes of these Articles Supplementary, the Corporation, CESLP or any
Consolidated Subsidiary shall be deemed to own subject to a Lien any
asset which it has acquired or holds subject to the interest of a vendor
or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Liquidation Preference" means an amount per Series C Preferred
Share equal to $100,000.
"Make-Whole Amount" means, in connection with any redemption of the
Series C Preferred Shares pursuant to Section 5(a)(ii), an amount with
respect to each Series C Preferred Share equal to the excess, if any of
(i) the sum of (A) the aggregate of the present values as of the
applicable Redemption Date or Repurchase Date of the dividends payable
thereon at the Initial Dividend Rate on each Dividend Payment Date
occurring on or prior to the Call Date (exclusive of dividends accrued to
the Redemption Date) that would have been payable in respect of such
Series C Preferred Share if such redemption had not been made, determined
by discounting, on a quarterly basis, each such dividend payment at the
Reinvestment Rate (determined on the third Business Day preceding the
date notice of such redemption is given) from the respective Dividend
Payment Date on which such dividend would have been payable if such
redemption had not been made, to the Redemption Date or Repurchase Date,
plus (B) the present value as of the applicable Redemption Date or
Repurchase Date of a payment equal to the amount that would be payable if
such Series C Preferred Share were redeemed by the Corporation on the
Call Date, pursuant to Section 5(a)(i) (including accrued and unpaid
dividends from the first day of the Dividend Period in which such
redemption would have occurred to such Redemption Date or Repurchase
Date), determined by discounting, on a quarterly basis, such payment at
the Reinvestment Rate (determined on the third Business Day preceding the
date notice of such redemption is given) from the Call Date to the
Redemption Date or Repurchase Date, over (ii) the Liquidation Preference
of such Series C Preferred Share.
"Market Value" means the sum, without duplication, of (i) the book
value of all Unrestricted Tangible Assets, plus (ii) for all
income-producing residential rental Properties, other than Lease-Up
Properties, owned and operated by CESLP or a Consolidated Subsidiary for
at least two (2) consecutive fiscal quarters but less than four (4)
fiscal quarters, the estimated market value thereof, as determined by
dividing the annualized aggregate Net Operating Income of such Properties
for the number of fiscal quarters actually owned, less the annualized
Capital Reserve for such Properties, by a nine percent (9%)
capitalization rate, plus (iii) for all income-producing residential
rental Properties, other than Lease-Up Properties, owned and operated by
CESLP or a Consolidated Subsidiary for four (4) fiscal quarters or more,
the estimated market value thereof, as determined by dividing the
aggregate Net Operating Income of such Properties for the immediately
preceding four (4) fiscal quarters, less the annualized Capital Reserve
for such Properties, by a nine percent
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<PAGE>
(9%) capitalization rate, plus (iv) for all income-producing retail
Properties owned and operated by CESLP or a Consolidated Subsidiary for
at least two (2) consecutive fiscal quarters but less than four (4)
consecutive fiscal quarters, the estimated market value thereof, as
determined by dividing the annualized aggregate Net Operating Income of
such Properties for the number of fiscal quarters actually owned, less
the annualized Retail Capital Reserve Reduction Amount for such
Properties, by a ten percent (10%) capitalization rate, plus (v) for all
income-producing retail Properties owned and operated by CESLP or a
Consolidated Subsidiary for four (4) consecutive fiscal quarters or more,
the estimated market value thereof, as determined by dividing the
aggregate Net Operating Income of such Properties for the immediately
preceding four (4) fiscal quarters, less the annualized Retail Capital
Reserve Reduction Amount for such Properties, by a ten percent (10%)
capitalization rate, plus (vi) for any Properties owned and operated by
CESLP or a Consolidated Subsidiary for a period of less than two (2)
consecutive fiscal quarters, the Aggregate Purchase Price for such
Properties, plus (vii) for the Property Service Businesses, the estimated
market value thereof, determined by dividing the Propert Service Business
EBITDA for such Property Service Businesses for the immediately preceding
four (4) fiscal quarters by a fourteen percent (14%) capitalization rate,
plus (viii) the estimated market value of each Lease-Up Property and of
all Properties which are not revenue generating, such as Land and
Properties under Development, based upon the lower of (A) the cost of
such Properties or (B) the estimated market value of such Property plus
(ix) the CES Share of the estimated market value of any Property owned by
any Investment Affiliate determined based upon the status of such
Property in accordance with the applicable preceding subparagraphs (ii)
through (viii).
"Net Operating Income" means, for any period with respect to any
Property, the net operating income of such Property for such period (i)
determined in accordance with GAAP, (ii) determined in accordance with
past practices of CESLP, (iii) inclusive of an allocation of reasonable
management fees and administrative costs to each Property and (iv)
exclusive of any deduction for depreciation, amortization or interest
expense.
"Net Present Value" shall mean, as to a specified or ascertainable
dollar amount, the present value, as of the date of calculation of any
such amount using a discount rate equal to the Base Rate in effect as of
the date of such calculation.
"Parity Shares" shall have the meaning set forth in Section 8(b).
"Paying Agent" means any Person authorized by the Corporation to
make payments of the Repurchase Price with respect to the Series C
Preferred Shares on behalf of the Corporation.
"Permitted Holder" shall mean any of Robert H. Smith, Robert P.
Kogod, any member of their immediate families, and any of their
respective Affiliates.
"Person" shall mean any individual, firm, partnership, corporation,
association, limited liability company, trust or other entity or
organization, (including a government or political subdivision or an
agency or instrumentality thereof), and shall include any successor (by
merger or otherwise) of such entity or organization.
"Prime Rate" means the rate of interest publicly announced by PNC
Bank, National Association in Pittsburgh, Pennsylvania from time to time
as its the Prime Rate, or if PNC
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Bank, National Association is no longer the administrative agent for the
Corporation's revolving credit facility, then such other administrative
agent as designated under the Corporation's revolving credit facility,
or, if there is no such revolving credit facility, the rate published on
the date of determination (or, if it is not a Business Day, the
immediately preceding Business Day) as the "Prime Rate" under the heading
"Money Rates" in the Wall Street Journal.
"Properties Under Development" means Properties primarily used for
residential rental purposes owned by CESLP, a Consolidated Subsidiary or
an Investment Affiliate and on which CESLP, a Consolidated Subsidiary or
an Investment Affiliate has commenced and continues to pursue
construction of a building or other improvements, provided that any such
Property will no longer be considered a Property under Development when
seventy-five percent (75%) of the rental units contained therein are
occupied by tenants under leases.
"Property" means, with respect to any Person, any real or personal
property, building, facility, structure, equipment or unit, or other
tangible asset owned by such Person.
"Property Service Businesses" means any Person primarily engaged in
providing services to owners of real property, including Smith Realty,
Company, Consolidated Engineering Services, Inc. and Smith Management
Construction, Inc., so long as the Company and/or CESLP shall own,
directly or indirectly, 50.1% or more of the economic interests therein.
"Property Service Business EBITDA" means, for any period (i) net
income for such Property Service Business for such period, plus (ii)
depreciation and amortization expense and other non-cash items deducted
in the calculation of net income for such period, plus (iii) interest
expense deducted in the calculation of net income for such period, plus
(iv) all federal, state, local and foreign income and gross receipts
taxes deducted the calculation of net income for such period, minus (v)
the gains (and plus the losses) from extraordinary items or asset sales
or write-ups or forgiveness of indebtedness included in the calculation
of net income, for such period, all of the foregoing without duplication.
"Rating Agency" shall mean Duff & Phelps Credit Rating Company
("DCR") or its successor, or if DCR is not the Rating Agency, then
another rating agency acceptable to holders of a majority of the
outstanding Series C Preferred Shares.
"Rating Determination Date" shall mean the earlier of (i) the date
following the public announcement of a Change of Control or REIT
Termination Event, as the case may be, on which the Rating Agency first
affirms or changes the rating of the Corporation or its preferred stock
and (ii) the date six (6) months after occurrence of a Change of Control
or REIT Termination Event, as the case may be, or, if such date is not a
Business Day, the next Business Day, unless on such date the Corporation
or its preferred stock has been placed on a credit watch with negative
implications by the Rating Agency in which event the Rating Determination
Date shall be the first date thereafter on which the ratings relating to
the Corporation or its preferred stock have been either affirmed or
changed.
"Redemption Date" shall mean the date specified in the notice to
holders required under Section 5(d) as the date for redemption of Series
C Preferred Shares pursuant to Section 5.
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<PAGE>
"Reduced Dividend Rate" means an amount equal to the Initial
Dividend Rate less $250.00 per share per annum.
"Reduced Dividend Trigger Date" means the date on which the Series
C Preferred Shares first receive a public or shadow rating of BBB- or
higher by the Rating Agency.
"Reinvestment Rate" means the arithmetic mean of the yields under
the heading "Week Ending" published in the most recent Statistical
Release under the caption "Treasury Constant Maturities" for the maturity
(rounded to the nearest month) corresponding to the Call Date, as of the
payment date of the Series C Preferred Shares being redeemed. If no
maturity exactly corresponds to such Call Date, yields for the two
published maturities most closely corresponding to such Call Date shall
be calculated pursuant to the immediately preceding sentence and the
Reinvestment Rate shall be interpolated or extrapolated from such yields
on a straight-line basis, rounding in each of such relevant periods to
the nearest month. For the purposes of calculating the Reinvestment Rate,
the most recent Statistical Release published prior to the date of
determination of the Make-Whole Amount shall be used. If the format or
content of the Statistical Release changes in a manner that precludes
determination of the Treasury yield in the above manner, then the
Treasury yield shall be determined in the manner that most closely
approximates the above manner, as reasonably determined by the
Corporation.
"REIT Termination Event" shall mean the earliest to occur of:
(i) the filing of a federal income tax return by the Corporation
for any taxable year on which the Corporation does not elect
to be taxed as a real estate investment trust;
(ii) the approval by the stockholders of the Corporation of a
proposal for the Corporation to cease to qualify as a real
estate investment trust for United States federal income tax
purposes;
(iii) the public announcement by the Company that it has ceased to
qualify as a real estate investment trust; or
(iv) a "determination" within the meaning of Section 1313(a) of
the Internal Revenue Code of 1986, as amended, that the
Corporation has ceased to qualify as a real estate investment
trust.
None of the foregoing events shall be deemed to constitute a REIT
Termination Event, if the Board of Directors shall have received an
opinion from nationally recognized independent tax counsel experienced in
such matters to the effect that, on or after the Issue Date, as a result,
directly or indirectly, of (a) any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations
thereunder) of the United States, (b) any judicial decision, official
administrative pronouncement, ruling, regulatory procedure, notice, or
announcement, including any notice or announcement of intent to adopt
such procedures or regulations (an "Administrative Action"), or (c) any
amendment to, clarification of, or a change in the official position or
the interpretation of any Administrative Action or judicial decision that
differs from the theretofore generally accepted position, in each case,
by any legislative body, court, governmental authority, or regulatory
body, irrespective of the manner in which such amendment, clarification,
or change is made known, which
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amendment, clarification, or change is effective, or such pronouncement
or decision is announced, in each case on or after the Issue Date
(collectively, a "Change in Tax Law"), there is the creation, directly or
indirectly, by such Change in Tax Law of more than an insubstantial risk
that the Corporation will no longer be qualified to be taxed as a real
estate investment trust for United States federal income tax purposes.
"Repurchase Date" shall mean the date of repurchase of the Series C
Preferred Shares or the date such payment is made available.
"Repurchase Offer" shall have the meaning set forth in Section 6.
"Repurchase Price" shall have the meaning set forth in Section 6.
"Retail Capital Reserve" means for any period, $.0425 per square
foot of retail improvements for each fiscal quarter to occur during such
period (in connection with any annualized calculation, the Retail Capital
Reserve used in such calculation shall also be annualized).
"Retail Capital Reserve Reduction Amount" means the greater of (i)
the Retail Capital Reserve for the applicable period or (ii) the actual
Capital Expenditures incurred for the applicable period (in connection
with any annualized calculation, the Retail Capital Reserve Reduction
Amount used in such calculation shall also be annualized).
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Series C Preferred Shares" shall mean the shares of Series C
Cumulative Redeemable Preferred Stock.
"set apart for payment" shall be deemed to include, without any
action other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which
indicates, pursuant to a declaration of dividends or other distribution
by the Board of Directors, the allocation of funds to be so paid on any
series or class of shares of capital stock of the Corporation; provided,
however, that if any funds for any class or series of Junior Shares or
any class or series of shares of capital stock ranking on a parity with
the Series C Preferred Shares as to the payment of dividends are placed
in a separate account of the Corporation or delivered to a disbursing,
paying or other similar agent, then "set apart for payment" with respect
to the Series C Preferred Shares shall mean placing such funds in a
separate account or delivering such funds to a disbursing, paying or
other similar agent.
"Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which reports yields on actively traded United
States government securities adjusted to constant maturities, or such
other comparable index which shall be designated by the Corporation.
"Subsidiary" means any corporation or other entity of which
securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing
similar functions or having management control of any such entity are at
the same time directly or indirectly owned by the Corporation or CESLP.
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"Total Debt" means all Indebtedness of CESLP, on a consolidated
basis, and the CES Share of the Indebtedness of any Investment Affiliate
(without offset or reduction in respect of prepaid interest,
restructuring fees or similar items).
"Transfer Agent" shall mean Smith Realty Company or such other
agent or agents of the Corporation as may be designated by the Board of
Directors or their designee as the transfer agent, registrar and dividend
disbursing agent for the Series C Preferred Shares.
"Trigger Event" shall mean the occurrence any of the following
events prior to the Reduced Dividend Trigger Date:
(i) As of the end of any fiscal quarter of the Corporation, the
Leverage Ratio shall be greater than 60%; or
(ii) As of the end of any fiscal quarter of the Corporation, the
Fixed Charge Coverage Ratio shall be less than 1.5 to 1.0; or
(iii) A REIT Termination Event shall have occurred, without the prior
consent of holders of a majority of the outstanding Series C
Preferred Shares, and the rating assigned to the Series C
Preferred Shares by the Rating Agency on the Rating
Determination Date shall be lower than the Initial Rating and
the rating assigned to the Series C Preferred Shares by the
Rating Agency immediately prior to the first public announcement
of such REIT Termination Event shall have been higher than the
rating on the Rating Determination Date. The Company shall
request the Rating Agency to reaffirm its rating promptly after
such public announcement.
"Unrestricted Tangible Assets" means the tangible assets of CESLP
and its Consolidated Subsidiaries other than real estate assets, security
deposits, escrow accounts and other reserve accounts.
"Voting Preferred Shares" shall have the meaning set forth in
Section 8.
Section 3. Dividends.
(a) The holders of Series C Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available for the payment of dividends, cumulative preferential
dividends payable in cash in an amount per share equal to the Dividend
Rate. The dividends shall begin to accrue and shall be fully cumulative
from the first day of the applicable Dividend Period, whether or not in
any Dividend Period or Periods there shall be funds of the Corporation
legally available for the payment of such dividends, and shall be payable
quarterly, when, as and if declared by the Board of Directors, in arrears
on Dividend Payment Dates. Each such dividend shall be payable in arrears
to the holders of record of Series C Preferred Shares as they appear in
the records of the Corporation at the close of business on such record
dates, not less than 10 nor more than 50 days preceding such Dividend
Payment Dates thereof, as shall be fixed by the Board of Directors.
Accrued and unpaid dividends for any past Dividend Periods may be
declared and paid at any time and for such interim periods, without
reference to any regular Dividend Payment Date, to holders of record on
such date, not less than 10 nor more than 50 days preceding the payment
date thereof, as may be fixed by the Board of Directors. Any dividend
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<PAGE>
payment made on Series C Preferred Shares shall first be credited against
the earliest accrued but unpaid dividend due with respect to Series C
Preferred Shares which remains payable.
(b) Except as provided below, the amount of dividends referred to
in Section 3(a) payable for each full Dividend Period on the Series C
Preferred Shares shall be computed by dividing the applicable Dividend
Rate by four. The initial Dividend Period will include a partial dividend
for the period from the Issue Date until February 14, 1998. The amount of
dividends payable for such period, or any other period shorter than a
full Dividend Period, on the Series C Preferred Shares shall be computed
on the basis of a 360-day year of twelve 30-day months. For any Dividend
Period in which a Reduced Dividend Trigger Date occurs, the dividend
amount for such Dividend Period shall be equal to the sum of: (x) the
product of (i) the Initial Dividend Rate divided by four, times (ii) the
number of days during the Dividend Period when the Reduced Dividend Rate
is not in effect divided by (iii) the total number of days in the
Dividend Period, plus (y) the product of (i) the Reduced Dividend Rate
divided by four times (ii) the number of days during the Dividend Period
when the Initial Dividend Rate is not in effect divided by (iii) the
total number of days in the Dividend Period. Holders of Series C
Preferred Shares shall not be entitled to any dividends, whether payable
in cash, property or shares, in excess of cumulative dividends, as herein
provided, on the Series C Preferred Shares. The Reduced Dividend Rate
shall remain in effect for all Dividend Periods after the Reduced
Dividend Trigger Date. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on the
Series C Preferred Shares which may be in arrears.
(c) In the event a Trigger Event shall have occurred, the Dividend
Rate for any Dividend Period thereafter but prior to the Reduced Dividend
Trigger Date shall be determined as follows:
(i) The Dividend Rate for the Dividend Period in which such Trigger
Event occurs and the immediately following two full Dividend
Periods shall be the same as the Dividend Rate in effect
immediately prior to the occurrence of such Trigger Event.
(ii) In the event that such Trigger Event is no longer in effect
as of the end of the second full Dividend Period following the
occurrence of such Trigger Event, the provisions of this
Section 3(c) shall no longer apply with respect to such
Trigger Event.
(iii) In the event that such Trigger Event continues to be in effect
as of the end of the second full Dividend Period following the
occurrence of such Trigger Event, then the Dividend Rate for
the immediately following two full Dividend Periods shall be
the Increased Dividend Rate.
(iv) In the event that such Trigger Event is no longer in effect as
of the end of the fourth full Dividend Period following the
occurrence of such Trigger Event, then the Dividend Rate for
the immediately following Dividend Period shall be (A) the
Increased Dividend Rate if the Trigger Event was in effect as
of the immediately preceding Dividend Payment Date or (B) if
such Trigger Event shall not have been in effect as of the
immediately preceding Dividend Payment Date, the Initial
Dividend Rate, unless another Trigger Event shall
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have occurred, in which case the Dividend Rate shall be
determined under this Section 3(c) with respect to such
additional Trigger Event.
(v) In the event that such Trigger Event continues to be in
effect as of the end of the fourth full Dividend Period
following the occurrence of such Trigger Event, then the
Dividend Rate for the immediately following Dividend Period
shall be the Additional Dividend Rate. The Dividend Rate
shall continue to be the Additional Dividend Rate until such
time as such Trigger Event shall not have been in effect for
two consecutive Dividend Payment Dates, in which event the
Dividend Rate for the Dividend Period ending on the second of
such Dividend Payment Dates shall equal the Initial Dividend
Rate, as applicable, unless another Trigger Event shall have
occurred, in which case the Dividend Rate shall be determined
under this Section 3(c) with respect to such additional
Trigger Event.
(vi) The provisions of this Section 3(c) shall not apply with
respect to any Dividend Period ending on or after the Reduced
Dividend Trigger Date.
(d) So long as any Series C Preferred Shares are outstanding, no
dividends, except as described in the immediately following sentence,
shall be declared or paid or set apart for payment on any class or series
of Parity Shares for any period unless full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the
Series C Preferred Shares for all Dividend Periods terminating on or
prior to the dividend payment date on such class or series of Parity
Shares. When dividends are not paid in full or a sum sufficient for such
payment is not set apart, as aforesaid, all dividends declared upon
Series C Preferred Shares and all dividends declared upon any other class
or series of Parity Shares shall be declared ratably in proportion to the
respective amounts of dividends accumulated and unpaid on the Series C
Preferred Shares and accumulated and unpaid on such Parity Shares.
(e) So long as any Series C Preferred Shares are outstanding, no
dividends (other than dividends or distributions paid solely in shares
of, or options, warrants or rights to subscribe for or purchase shares
of, Fully Junior Shares) shall be declared or paid or set apart for
payment or other distribution shall be declared or made or set apart for
payment upon Junior Shares, nor shall any Junior Shares be redeemed,
purchased or otherwise acquired (other than a redemption, purchase or
other acquisition of Common Shares made for purposes of an employee
incentive or benefit plan of the Corporation or any subsidiary) for any
consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any Junior Shares) by the Corporation,
directly or indirectly (except by conversion into or exchange for Fully
Junior Shares), unless in each case (i) the full cumulative dividends on
all outstanding Series C Preferred Shares and any other Parity Shares of
the Corporation shall have been or contemporaneously are declared and
paid or declared and set apart for payment for all past Dividend Periods
with respect to the Series C Preferred Shares and all past dividend
periods with respect to such Parity Shares and (ii) sufficient funds
shall have been or contemporaneously are declared and paid or declared
and set apart for the payment of the dividend for the current Dividend
Period with respect to the Series C Preferred Shares and the current
dividend period with respect to such Parity Shares.
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(f) No distributions on Series C Preferred Shares shall be
declared by the Board of Directors or paid or set apart for payment by
the Corporation at such time as the terms and provisions of any agreement
of the Corporation, including any agreement relating to its indebtedness,
prohibits such declaration, payment or setting apart for payment or
provides that such declaration, payment or setting apart for payment
would constitute a breach thereof or a default thereunder, or if such
declaration or payment shall be restricted or prohibited by law.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or
surplus) shall be made to or set apart for the holders of Junior Shares,
the holders of the Series C Preferred Shares shall be entitled to receive
an amount per Series C Preferred Share equal to the sum of (i) the
Liquidation Preference plus (ii) an amount equal to all dividends
(whether or not earned or declared) accrued and unpaid thereon to the
date of final distribution to such holders; but such holders shall not be
entitled to any further payment. If, upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of the Series C Preferred Shares
shall be insufficient to pay in full the preferential amount aforesaid
and liquidating payments on any other shares of any class or series of
Parity Shares, then such assets, or the proceeds thereof, shall be
distributed among the holders of Series C Preferred Shares and any such
other Parity Shares ratably in accordance with the respective amounts
that would be payable on such Series C Preferred Shares and any such
other Parity Shares if all amounts payable thereon were paid in full. For
the purposes of this Section 4, (i) a consolidation or merger of the
Corporation with one or more corporations, real estate investment trusts
or other entities, (ii) a sale, lease or conveyance of all or
substantially all of the Corporation's property or business or (iii) a
statutory share exchange shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary, of the Corporation.
(b) Subject to the rights of the holders of shares of any series
or class or classes of shares of capital stock ranking on a parity with
or prior to the Series C Preferred Shares upon liquidation, dissolution
or winding up, upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders of
the Series C Preferred Shares, as provided in this Section 4, any other
series or class or classes of Junior Shares shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the
holders of the Series C Preferred Shares shall not be entitled to share
therein.
Section 5. Redemption at the Option of the Corporation.
(a) The Series C Preferred Shares shall not be redeemable by the
Corporation except as follows:
(i) On and after the Call Date and on any Dividend Payment Date
thereafter, the Corporation, at its option, may redeem the
Series C Preferred Shares, in whole at any time, or from time
to time in part, out of funds legally available therefor at a
redemption price per Series C Preferred Share payable in cash
equal to sum of (A) the Liquidation Preference plus (B) all
dividends (whether
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<PAGE>
or not earned or declared) accrued and unpaid thereon to the
Redemption Date.
(ii) At any time after a Trigger Event shall have occurred and be
continuing, but prior to the Reduced Dividend Trigger Date,
the Corporation shall have the right to redeem all (but not
less than all) of the outstanding Series C Preferred Shares
at a redemption price per Series C Preferred Share equal to
the sum of (i) the Liquidation Preference plus (ii) all
dividends (whether or not earned or declared) accrued and
unpaid thereon to the Redemption Date plus (iii) the
Make-Whole Amount as of the Redemption Date.
(b) Upon any redemption of Series C Preferred Shares pursuant to
this Section 5, the Corporation shall pay all accrued and unpaid
dividends, if any, thereon to the Redemption Date, without interest. If
the Redemption Date falls after a dividend payment record date and prior
to the corresponding Dividend Payment Date, then each holder of Series C
Preferred Shares at the close of business on such dividend payment record
date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding any redemption of
such shares before such Dividend Payment Date. Except as provided above,
the Corporation shall make no payment or allowance for unpaid dividends,
whether or not in arrears, on Series C Preferred Shares called for
redemption.
(c) If full cumulative dividends on the Series C Preferred Shares
and any other class or series of Parity Shares of the Corporation have
not been declared and paid or declared and set apart for payment for all
dividend periods ended on or before the Redemption Date, the Series C
Preferred Shares may not be redeemed under this Section 5 in part and the
Corporation may not purchase or acquire Series C Preferred Shares,
otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of Series C Preferred Shares.
(d) Notice of the redemption of any Series C Preferred Shares
under this Section 5 shall be mailed by first-class mail to each holder
of record of Series C Preferred Shares to be redeemed at the address of
each such holder as shown on the Corporation's records, not less than 30
nor more than 90 days prior to the Redemption Date. Neither the failure
to mail any notice required by this paragraph (d), nor any defect therein
or in the mailing thereof, to any particular holder, shall affect the
sufficiency of the notice or the validity of the proceedings for
redemption with respect to the other holders. Any notice which was mailed
in the manner herein provided shall be conclusively presumed to have been
duly given on the date mailed whether or not the holder receives the
notice. Each such mailed notice shall state, as appropriate: (1) the
Redemption Date; (2) the number of Series C Preferred Shares to be
redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (3)
the Redemption Price; (4) the place or places at which certificates for
such shares are to be surrendered; and (5) that dividends on the shares
to be redeemed shall cease to accrue on such Redemption Date except as
otherwise provided herein. Notice having been mailed as aforesaid, from
and after the Redemption Date (unless the Corporation shall fail to make
available an amount of cash necessary to effect such redemption), except
as otherwise provided herein, (i) dividends on the Series C Preferred
Shares so called for redemption shall cease to accrue, (ii) such shares
shall no longer be deemed to be outstanding, and (iii) all rights of the
holders thereof as holders of Series C Preferred Shares of the
Corporation shall cease (except the rights to
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receive the cash payable upon redemption, without interest thereon, upon
surrender and endorsement of their certificates if so required and to
receive any dividends payable thereon). The Corporation's obligation to
provide cash in accordance with the preceding sentence shall be deemed
fulfilled if, on or before the Redemption Date, the Corporation shall
deposit with a bank or trust company (which may be an affiliate of the
Corporation) that has an office in the Borough of Manhattan, City of New
York, and that has, or is an affiliate of a bank or trust company that
has, capital and surplus of at least $50,000,000, necessary for such
redemption, in trust, with irrevocable instructions that such cash be
applied to the redemption of the Series C Preferred Shares so called for
redemption. No interest shall accrue for the benefit of the holders of
Series C Preferred Shares to be redeemed on any cash so set aside by the
Corporation. Subject to applicable escheat laws, any such cash unclaimed
at the end of two years from the Redemption Date shall revert to the
general funds of the Corporation, after which reversion the holders of
such shares so called for redemption shall look only to the general funds
of the Corporation for the payment of such cash.
As promptly as practicable after the surrender in accordance with
such notice of the certificates for any such shares so redeemed (properly
endorsed or assigned for transfer, if the Corporation shall so require
and if the notice shall so state), such shares shall be exchanged for any
cash (without interest thereon) for which such shares have been redeemed.
If fewer than all the outstanding Series C Preferred Shares are to be
redeemed, shares to be redeemed shall be selected by the Corporation from
outstanding Series C Preferred Shares not previously called for
redemption pro rata (as nearly as may be), by lot or by any other method
determined by the Corporation in its sole discretion to be equitable. If
fewer than all the Series C Preferred Shares represented by any
certificate are redeemed, then new certificates representing the
unredeemed shares shall be issued without cost to the holder thereof.
Section 6. Change of Control.
(a) If a Change of Control shall occur prior to the Reduced
Dividend Trigger Date, then the following provisions shall apply:
(i) Each holder of Series C Preferred Shares shall have the right
to require the Corporation, to the extent that the
Corporation shall have funds legally available therefor, to
repurchase all (but not less than all) of such holder's
Series C Preferred Shares held on the date that such holder
receives the notice described in subsection 6(a)(ii) at a
repurchase price (the "Repurchase Price") payable in cash in
an amount equal to the sum of (i) the Liquidation Preference
plus (ii) all dividends (whether or not earned or declared)
accrued and unpaid thereon to the Repurchase Date, plus (iii)
the Make-Whole Amount computed as of the Repurchase Date,
pursuant to the offer described below.
(ii) Within 15 days following the Corporation becoming aware that
a Change of Control has occurred, the Corporation shall mail
by first class mail or overnight courier a notice (the
"Repurchase Offer") to each holder of Series C Preferred
Shares stating (A) that a Change of Control has occurred and
that such holder has the right to require the Corporation to
repurchase all Series C Preferred Shares then held by such
holder in cash; (B) the Repurchase Date (which shall be a
Business Day, no earlier than 30 days and
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<PAGE>
no later than 60 days from the date such notice is mailed, or
such later date as may be necessary to comply with the
requirements of the Exchange Act); (C) the Repurchase Price;
(D) the place or places at which certificates for such shares
are to be surrendered; (E) that dividends on the shares to be
repurchased shall cease to accrue on such Repurchase Date
except as otherwise provided herein; and (F) the instructions
determined by the Corporation, consistent with this
subsection, that such holder must follow in order to have its
Series C Preferred Shares repurchased.
(iii) On the Repurchase Date, the Corporation shall, to the extent
lawful (and to the extent any payment is unlawful, promptly
after the date on which such payment thereafter becomes
lawful), accept for payment Series C Preferred Shares
tendered pursuant to the Repurchase Offer described in
Subsection 6(a)(ii). The Corporation's obligation to provide
cash in accordance with Subsection 6(a)(ii) shall be deemed
fulfilled if, on or before the Repurchase Date, the
Corporation shall deposit with a bank or trust company (which
may be an affiliate of the Corporation) that has an office in
the Borough of Manhattan, City of New York, and that has, or
is an affiliate of a bank or trust company that has, capital
and surplus of at least $50,000,000, necessary for such
repurchase, in trust, with irrevocable instructions that such
cash be applied to the repurchase of the Series C Preferred
Shares so called for repurchase. No interest shall accrue for
the benefit of the holders of Series C Preferred Shares to be
repurchased on any cash so set aside by the Corporation.
Subject to applicable escheat laws, any such cash unclaimed
at the end of two years from the Repurchase Date shall revert
to the general funds of the Corporation, after which
reversion the holders of such shares so called for repurchase
shall look only to the general funds of the Corporation for
the payment of such cash.
(iv) As promptly as practicable after the surrender in accordance
with such notice of the certificates for any such shares so
redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and if the notice shall so
state), such shares shall be exchanged for any cash (without
interest thereon) for which such shares have been repurchased.
(b) Notwithstanding anything else herein, to the extent they are
applicable to any Repurchase Offer, the Corporation will comply with any
federal and state securities laws, rules and regulations and all time
periods and requirements shall be adjusted accordingly.
(c) The provisions of this Section 6 shall not apply with respect
to any Change of Control occurring on or after the Reduced Dividend
Trigger Date.
Section 7. Shares To Be Retired. All Series C Preferred Shares which shall
have been issued and reacquired in any manner by the Corporation shall be
restored to the status of authorized but unissued shares of capital stock of the
Corporation, without designation as to class or series.
Section 8. Ranking. Any class or series of shares of capital stock of the
Corporation shall be deemed to rank:
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(a) prior to the Series C Preferred Shares, as to the payment of
dividends and as to distribution of assets upon liquidation, dissolution
or winding up, if the holders of such class or series shall be entitled
to the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority
to the holders of Series C Preferred Shares;
(b) on a parity with the Series C Preferred Shares, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share thereof shall
be different from those of the Series C Preferred Shares, if the holders
of such class or series and the Series C Preferred Shares shall be
entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in proportion to their respective
amounts of accrued and unpaid dividends per share or liquidation
preferences, without preference or priority one over the other ("Parity
Shares"); the Series A Cumulative Convertible Redeemable Preferred Stock
and Series B Cumulative Convertible Redeemable Preferred Stock of the
Corporation are Parity Shares;
(c) junior to the Series C Preferred Shares, as to the payment of
dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, if such class or series shall be Junior
Shares; and
(d) junior to the Series C Preferred Shares, as to the payment of
dividends and as to the distribution of assets upon liquidation,
dissolution or winding up, if such class or series shall be Fully Junior
Shares.
Section 9. Voting. If and whenever six quarterly dividends (whether or
not consecutive) payable on the Series C Preferred Shares or any series or
class of Parity Shares shall be in arrears (which shall, with respect to any
such quarterly dividend, mean that any such dividend has not been paid in
full), whether or not earned or declared, the number of directors then
constituting the Board of Directors shall be increased by two and the holders
of Series C Preferred Shares, together with the holders of shares of every
other series of Parity Shares (any such other series, the "Voting Preferred
Shares"), voting as a single class regardless of series, shall be entitled to
elect the two additional directors to serve on the Board of Directors at any
annual meeting of stockholders or special meeting held in place thereof, or
at a special meeting of the holders of the Series C Preferred Shares and the
Voting Preferred Shares called as hereinafter provided. Whenever all arrears
in dividends on the Series C Preferred Shares and the Voting Preferred Shares
then outstanding shall have been paid and dividends thereon for the current
quarterly dividend period shall have been paid or declared and set apart for
payment, then the right of the holders of the Series C Preferred Shares and
the Voting Preferred Shares to elect such additional two directors shall
cease (but subject always to the same provision for the vesting of such
voting rights in the case of any similar future arrearage in quarterly
dividends), and the terms of office of all persons elected as directors by
the holders of the Series C Preferred Shares and the Voting Preferred Shares
shall forthwith terminate and the number of the Board of Directors shall be
reduced accordingly. At any time after such voting power shall have been so
vested in the holders of Series C Preferred Shares and the Voting Preferred
Shares, the Secretary of the Corporation may, and upon the written request of
any holder of Series C Preferred Shares (addressed to the Secretary at the
principal office of the Corporation) shall, call a special meeting of the
holders of the Series C Preferred Shares and of the Voting Preferred Shares
for the election of the directors to be elected by them as herein provided,
such call to be made by notice similar to that provided in the Bylaws of the
Corporation for a special meeting of the stockholders or as required by law.
If any such special meeting required to be called as above provided shall not
be called by the
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Secretary within 20 days after receipt of any such request, then any holder
of Series C Preferred Shares may call such meeting, upon the notice above
provided, and for that purpose shall have access to the records of the
Corporation. The directors elected at any such special meeting shall hold
office until the next annual meeting of the stockholders or special meeting
held in lieu thereof if such office shall not have previously terminated as
above provided. If any vacancy shall occur among the directors elected by the
holders of the Series C Preferred Shares and the Voting Preferred Shares, a
successor shall be elected by the Board of Directors, upon the nomination of
the then-remaining director elected by the holders of the Series C Preferred
Shares and the Voting Preferred Shares or the successor of such remaining
director, to serve until the next annual meeting of the stockholders or
special meeting held in place thereof if such office shall not have
previously terminated as provided above.
So long as any Series C Preferred Shares are outstanding, in addition to
any other vote or consent of stockholders required by law or by the
Corporation's Articles of Incorporation, the affirmative vote of at least
66-2/3% of the votes entitled to be cast by the holders of the Series C
Preferred Shares given in person or by proxy, either in writing without a
meeting or by vote at any meeting called for the purpose, shall be necessary
for effecting or validating:
(a) Any amendment, alteration or repeal of any of the provisions
of the Corporation's Articles of Incorporation, the Corporation's By-Laws
or these Articles Supplementary that materially and adversely affects the
voting powers, rights or preferences of the holders of the Series C
Preferred Shares; provided, however, that the amendment of the provisions
of the Corporation's Articles of Incorporation so as to authorize or
create or to increase the authorized amount of, any Fully Junior Shares,
Junior Shares that are not senior in any respect to the Series C
Preferred Shares or any Parity Shares shall not be deemed to materially
adversely affect the voting powers, rights or preferences of the holders
of Series C Preferred Shares; or
(b) A share exchange that affects the Series C Preferred Shares,
a consolidation with or merger of the Corporation into another entity, or
a consolidation with or merger of another entity into the Corporation,
unless in each such case each Series C Preferred Share (i) shall remain
outstanding without a material and adverse change to its terms and rights
or (ii) shall be converted into or exchanged for convertible preferred
shares of the surviving entity having preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption thereof identical to
that of a Series C Preferred Share (except for changes that do not
materially and adversely affect the holders of the Series C Preferred
Shares); or
(c) The authorization, reclassification or creation of, or the
increase in the authorized amount of, any shares of any class or any
security convertible into shares of any class ranking prior to the Series
C Preferred Shares in the distribution of assets on any liquidation,
dissolution or winding up of the Corporation or in the payment of
dividends;
provided, however, that no such vote of the holders of Series C Preferred
Shares shall be required if, at or prior to the time when such amendment,
alteration or repeal is to take effect, or when the issuance of any such
prior shares or convertible security is to be made, as the case may be,
provision is made for the redemption of all Series C Preferred Shares at the
time outstanding.
For purposes of the foregoing provisions of this Section 9, each Series C
Preferred Share shall have one (1) vote per share, except that when any other
series of Preferred Shares shall have the
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right to vote with the Series C Preferred Shares as a single class on any
matter, then the Series C Preferred Shares and such other series shall have
with respect to such matters one (1) vote per $28.00 of stated liquidation
preference. Except as otherwise required by applicable law or as set forth
herein, the Series C Preferred Shares shall not have any relative,
participating, optional or other special voting rights and powers other than
as set forth herein, and the consent of the holders thereof shall not be
required for the taking of any Corporation action.
Section 10. Record Holders. The Corporation and the Transfer Agent may
deem and treat the record holder of any Series C Preferred Shares as the true
and lawful owner thereof for all purposes, and neither the Corporation nor
the Transfer Agent shall be affected by any notice to the contrary.
Section 11. Reporting. For so long as the provisions of Section 3(c)
remain in effect, the Corporation shall include in its periodic financial
reports provided to holders of the Series C Preferred Shares a computation of
the Leverage Ratio and the Fixed Charge Coverage Ratio as of the end of the
most recent fiscal quarter of the Corporation for which financial statements
are included in such reports.
[Page Break Intentionally Inserted]
21
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary
to be duly executed by its President and attested by its Secretary this 29th day
of January, 1998.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ Ernest A. Gerardi, Jr.
---------------------------
By: Ernest A. Gerardi, Jr.
Its: President
I, Robert D. Zimet, Secretary, hereby acknowledge on behalf of Charles E.
Smith Residential Realty, Inc. that the foregoing Articles Supplementary are the
corporate act of said corporation under the penalties of perjury.
Attest:
/s/ Robert D. Zimet
22
<PAGE>
Exhibit 3.6
CERTIFICATE OF CORRECTION
To Correct an Error
in
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Articles Supplementary
of Board of Directors
Classifying and Designating a Series of
Preferred Stock as
Series C Cumulative Redeemable
Preferred Stock and
Fixing Distribution and Other Preferences
And Rights of Such Series
Pursuant to the provisions of Section 1-207 of Corporations and
Associations Articles, Annotated Code of Maryland, the undersigned executes the
following certificate of correction.
1. The name of the only party to the document being corrected is Charles
E. Smith Residential Realty, Inc.
2. An Articles Supplementary of Board of Directors Classifying and
Designating a Series of Preferred Stock as Series C Cumulative Redeemable
Preferred Stock and Fixing Distribution and Other Preferences and Rights of Such
Series of Charles E. Smith Residential Realty, Inc. ("Series C Articles
Supplementary") was filed with the Department of Assessments and Taxation of the
State of Maryland on January 30, 1998, and said document requires correction as
permitted under the provisions of Section 1-207 of the Corporations and
Associations Articles, Annotated Code of Maryland.
3. The errors in said document to be corrected are highlighted below:
Section 2. Definitions
"Property Service Businesses" means any Person primarily engaged in
providing services to owners of real property, including Smith Realty,
Company, Consolidated Engineering Services, Inc. and Smith Management
Construction, Inc., so long as the Company and/or CESLP shall own, directly
or indirectly, 50.1% or more of the economic interests therein.
<PAGE>
4. The foregoing inaccuracies in the document are corrected to read as
highlighted below:
Section 2. Definitions
"Property Service Businesses" means any Person primarily engaged in
providing services related to real estate properties, including Smith
Realty, Company, Consolidated Engineering Services, Inc. and Smith
Management Construction, Inc., so long as the Company and/or CESLP shall
own, directly or indirectly, 50.1% or more of the economic interests
therein.
5. The foregoing corrections are necessary in order to clarify that the
term "Property Service Businesses" relates to real estate properties in general
and is not limited to owners of real property. The holders of such Series C
Cumulative Redeemable Stock did not detrimentally rely on the Series C Articles
Supplementary as originally filed, and the foregoing corrections provide for the
true meaning of the term "Property Service Businesses," as such holders
originally contemplated.
2
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Correction to be duly executed by its President and attested by its Secretary
this 19th day of February, 1998.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ Ernest Gerardi Jr.
Its: President
I, Robert Zimet, Secretary, hereby acknowledge on behalf of Charles E.
Smith Residential Realty, Inc. that the foregoing Certificate of Correction is
the corporate act of said corporation under the penalties of perjury.
Attest:
/s/ Robert D. Zimet
3
<PAGE>
[Hogan & Hartson L.L.P.]
Exhibit 5.1
March 6, 1998
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Virginia 22202
Gentlemen:
We are acting as counsel to Charles E. Smith Residential
Realty, Inc., a Maryland corporation (the "Company"), in connection with its
registration statement on Form S-3, as amended (the "Registration Statement")
filed with the Securities and Exchange Commission relating to the proposed
public offering of up to 15,640,196 shares of the Company's common stock, par
value $.01 per share, up to 15,164,714 of which shares (the "Company Shares")
are to be offered for sale by the Company upon redemption of units of limited
partnership interest in Charles E. Smith Residential Realty L.P. and up to
475,482 of which shares (the "Selling Stockholder Shares") are to be offered
for sale by certain shareholders (the "Selling Stockholders") of the Company.
This opinion letter is furnished to you at your request to enable you to
fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R.
Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of the opinions expressed in this letter, which
are set forth in Paragraphs (a) and (b) (the "Opinions"), 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 February 10, 1998
and by the Secretary of the Company on the date hereof as
being complete, accurate and in effect.
3. The Amended and Restated Bylaws of the Company, as
certified by the Secretary of the Company on the date
hereof as being complete, accurate and in effect.
<PAGE>
Board of Directors
March 6, 1998
Page 2
4. Resolutions of the Board of Directors of the Company
adopted on January 29, 1997, February 9, 1997 and July 22,
1997, as certified by the Secretary of the Company on the
date hereof as then being complete, accurate and in
effect, relating to the issuance and sale of the Company
Shares and arrangements in connection therewith.
5. Resolutions of the Board of Directors of the Company
adopted on May 25, 1994, May 23, 1995 and June 28, 1996,
as certified by the Secretary of the Company on the date
hereof as then being complete, accurate and in effect,
relating to the issuance and sale by the Company to the
Selling Stockholders of the Selling Stockholder Shares
and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed
the genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us
as certified, telecopied, photostatic, or reproduced copies. This opinion
letter is given, and all statements herein are made, in the context of the
foregoing.
This opinion letter is based as to matters of law solely on
the Maryland General Corporation Law. We express no opinion herein as to any
other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of
the opinion that:
(a) Following (i) effectiveness of the Registration
Statement and (ii) issuance of the Company Shares in accordance with the
resolutions of the Board of Directors referred to in Paragraph 4, the Company
Shares will be validly issued, fully paid and nonassessable under the
Maryland General Corporation Law.
(b) The Selling Stockholder Shares are validly issued, fully
paid and nonassessable under the Maryland General Corporation Law.
<PAGE>
Board of Directors
March 6, 1998
Page 3
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. We hereby
consent to the filing of this opinion letter as Exhibit 5 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters"
in the prospectus constituting a part of the Registration Statement. In
giving this consent, we do not thereby admit that we are an "expert" within
the meaning of the Securities Act of 1933, as amended. Subject to the
foregoing consent, 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.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
----------------------------
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our report dated
January 30, 1997 included in Charles E. Smith Residential Realty, Inc.'s Form
10-K for the year ended December 31, 1996 and our reports dated May 9, 1997
and October 17, 1997 on the audited statements of revenues and certain
expenses included in Charles E. Smith Residential Realty, Inc.'s Form 8-Ks
and to all references to our Firm included in this registration statement.
/s/
ARTHUR ANDERSEN LLP
Washington, D.C.
March 5, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-3 (File No. 333-17053) of Charles E. Smith Residential Realty, Inc.
of our report dated November 4, 1997 on our audit of the statement of excess
of revenues over specific operating expenses of Commonwealth Reservoir Park
Limited Partnership contained in the companies form 8KA dated October 3, 1997.
We also consent to the reference to our Firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 6, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this registration
statement of our report dated February 12, 1997 on the audited statements of
revenues and certain expenses included in Charles E. Smith Residential
Realty, Inc.'s previously filed Form 8-K/A dated October 3, 1997 and to all
references to our Firm included in this registration statement.
ALTSCHULER, MELVOIN AND GLASSER LLP
/s/
Chicago, Illinois
March 6, 1998
