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As filed with the Securities and Exchange Commission on March 31, 1998
Registration No. 333-39691
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMMENDMENT NO. 1 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)
Maryland 54-1681655
(State of Incorporation) (I.R.S. Employer
Identification No.)
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
-----------------------
Ernest A. Gerardi, Jr.
President
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
-----------------------
Approximate date of commencement of the proposed sale of the securities to the
public: From time to time after this Registration Statement becomes effective,
as determined by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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This Post-Effective Amendment No. 1 is being filed with the Securities and
Exchange Commission for the purpose of updating the information contained in
the Prospectus to include the delaying amendment language set forth above and
to update the information contained in the Prospectus.
<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 31, 1998
Subject to Completion
2,666,666 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 offer and sale from time to time of up
to 1,450,000 shares (the "Secondary Shares") of outstanding common stock, par
value $.01 per share of the Company (the "Common Stock") by the holders
thereof; and (ii) the offer and sale from time to time by the holders thereof
of up to 1,216,666 shares (the "Conversion Shares") of Common Stock issuable
upon conversion or redemption of Series B Cumulative Convertible Redeemable
Preferred Stock of the Company. The Secondary Shares and Conversion Shares
(together, the "Shares") were issued in a private offering on October 3, 1997
pursuant to a purchase agreement dated as of September 17, 1997 (the
"Purchase Agreement").
The Company has registered the Shares to permit the holders thereof (the
"Selling Shareholders") to sell such shares without restriction in the open
market or otherwise, but the registration of such shares does not necessarily
mean that any of such shares will be offered or sold by the holders thereof.
See The Company and "Registration Rights."
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "SRW." Ownership by any person of more than 9.8% of the
Company's Common Stock is restricted. See "Description of Common Stock."
--------------------------
See "Risk Factors" beginning on page 5 for a discussion of certain factors
relating to an investment in the Securities.
--------------------------
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 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 Shares.
The Selling Shareholders and any agents or broker-dealers that
participate with the Selling Shareholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), and any commissions received by
them and any profit on the resale of the Shares may be deemed to be
underwriting commissions or discounts under the Securities Act. See
"Registration Rights" for indemnification arrangements between the Company
and the Selling Shareholders.
The Company will not receive any of the proceeds from the sale of any of
the Shares by the Selling Shareholders but has agreed to bear certain
expenses of registration of the Shares under Federal and state securities
laws, other than commissions and discounts of agents or broker-dealers and
transfer taxes, if any.
--------------------------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Prospectus is , 1998.
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PROSPECTUS SUMMARY
This Summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. The offering of the
Common Stock pursuant to this Prospectus is referred to herein as the
"Offering." As used herein, the term "Company" 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
51.99% of the Units in Charles E. Smith Residential Realty L.P. (the
"Operating Partnership") as of March 2, 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 March 3, 1998, the Company, through the Operating
Partnership, owned 46 multifamily apartment communities containing a total of
18,296 units (the "Multifamily Properties"), 44 of which are located in the
Washington, D.C. metropolitan area, two retail centers containing
approximately 436,000 square feet of retail space (the "Retail Properties"),
both located in the Washington, D.C. metropolitan area, and had three
properties under construction containing approximately 2,000 units.
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Risk Factors
Prospective investors 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 offer and sale from time to time of up
to 1,450,000 Secondary Shares by the holders thereof; and (ii) the offer and
sale from time to time by the holders thereof of up to 1,216,666 Conversion
Shares. The Shares were issued in a private offering on October 3, 1997
pursuant to the Purchase Agreement.
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RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
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 March 2, 1998, the Company had
outstanding 15,281,679 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 March 2, 1998, the Company had outstanding
2,878,910 shares of Preferred Stock, 1,216,666 of which became eligible for
conversion into Common Stock on January 1, 1998 (subject to satisfaction of
certain conditions). As of March 2, 1998, the Company had reserved for
possible issuance upon redemption of Units approximately 18.6 million
additional shares of Common Stock. 5,481,132 shares issuable upon any future
redemption of Units, or issuable under employee benefit plans (the "Plans"),
will be tradable without restriction under the Securities Act pursuant to the
Registration Statements on Form S-8 filed by the Company in August, 1994, on
Form S-3 filed by the Company in June 1995 and July 1996, respectively or the
Registration Statement of which this Prospectus is a part. As of March 2,
1998, an additional 15,281,679 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
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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
a series of transactions in which the Company was formed, engaged in an
initial public offering (the "Initial Offering") and acquired its assets in
June 1994 (the "Formation Transactions"). In addition, Messrs. Smith, Kogod
and other executive officers of the Company continue to hold an interest in a
Limited Partnership that owns a multifamily property that was not acquired by
the Company because of the amount of its third party indebtedness in relation
to its value. Messrs. Smith and Kogod and their families also held a
substantial interest in the partnership that sold to the Company for $4.7
million a parcel of land located near the Worldgate Centre in Northern
Virginia on which the Company developed a 320-unit garden apartment project.
In connection with such development, the Operating Partnership entered into
an agreement with Charles E. Smith Construction, Inc. (a construction and
commercial and condominium development company), which is owned by Messrs.
Smith and Kogod and their spouses, to manage such development for a fee equal
to 4% of hard construction costs. Messrs. Smith and Kogod continue to have
interests in Charles E. Smith Management, Inc. (which provides property
management and leasing services to office and other commercial properties)
and a substantial number of partnerships that own office and other properties
(including Limited Partnership interests or minority stock ownership in
unaffiliated partnerships and corporations that own or manage multifamily
properties). The Company expects to continue to provide all property services
(including property management and leasing) for such affiliated multifamily
properties and certain property services (other than property management and
leasing) for certain unaffiliated multifamily and commercial properties.
Tax Consequences Upon Sale or Refinancing of Properties. 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
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policies, the Board of Directors may do so from time to time without a vote
of the shareholders of the Company. The Company cannot change its policy of
seeking to maintain its qualification as a REIT, however, without the
approval of its shareholders. Changes in the Company's policies may not
fully serve the interests of all shareholders.
Risks Associated with Leverage
No Limitations on Debt. The Company intends to fund acquisitions and
development of properties primarily through short-term borrowings, and also
out of undistributed cash flow from operating activities. The Company
expects to finance or refinance such properties on a longer term basis when
market conditions are appropriate either with long-term indebtedness or
equity financing, depending upon the economic conditions at the time of
refinancing. Moreover, the Company currently has on file with the Commission
an effective registration statement which would allow the sale of up to
approximately $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
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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 (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 Charter authorizes the Board of Directors to issue
preferred shares of stock, $.01 par value per share ("Preferred Shares") and
to establish the preferences and rights (including the right to vote and the
right to convert into shares of Common Stock) of any Preferred Shares issued.
The power to issue Preferred Shares could have the effect of delaying or
preventing a change in control of the Company even if a change in control
were in the shareholders' interest. In June 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 ($27.08 liquidation
preference per share) and 1,216,666 Series B Cumulative Convertible
Redeemable Preferred Shares, $.01 par value per share ($28.50 liquidation
preference per share), respectively, in three 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,
$.01 par value per share ($100,000 liquidation preference per share), in a
public offering to an institutional investor 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.
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Lack of Voting Control over Property Service Businesses
The Company owns 100% of the nonvoting common stock, which represents 99%
of the equity, of each Property Service Business. The Property Service
Businesses conduct the Company's property services business for properties
not owned by the Company. The members of the boards of directors of the
Property Service Businesses are Messrs. Smith, Kogod and Ernest A. Gerardi,
Jr., the Company's Chief Operating Officer. Separate partnerships consisting
of certain executives active in the management of the Company and the
Property Service Businesses and adult children of Messrs. Smith and Kogod own
100% of the voting common stock, representing 1% of the equity, of each
Property Service Business. Therefore, such holders of the voting stock have
the ability to elect and remove all members of the boards of directors of the
Property Service Businesses. Although the Company's right to receive
distributions with respect to its nonvoting common stock cannot be changed by
the holders of the voting common stock, the Company is not able to elect
directors of the Property Service Businesses, and, therefore, it does not
have the right to control the day-to-day decisions of the Property Service
Businesses. As a result, decisions relating to the day-to-day operations of
the Property Service Businesses may not always reflect the interests of the
Company and all of its shareholders.
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.
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Risks Related to Retail Properties. With respect to the Retail
Properties, the Company is subject to the risks that upon expiration of
leases for space in the Retail Properties, the leases may not be renewed, the
space may not be relet, or the terms of the renewal or reletting (including
the cost of required renovations or concessions to tenants) may be less
favorable than current terms. In addition, the Company is subject to the
risks that if sales by retail tenants decline sufficiently, tenants may not
be able to pay their minimum rents, and that if a tenant were to default on
rental payments, the Company could experience delays and costs in enforcing
its rights as lessor. If any of the above occurred, the Company's ability to
make expected distributions to shareholders could be adversely affected.
Competition. All of the Multifamily Properties are located in developed
areas that include other multifamily properties. The number of competitive
multifamily properties in a particular area could have a material effect on
the Company's ability to lease apartment units and on the rents charged. In
addition, other forms of single- and multifamily residential properties
provide housing alternatives to tenants and potential tenants of the
Multifamily Properties. The Retail Properties face competition from other
retail properties. The Company also faces competition from other real estate
companies that provide management, leasing and other services similar to
those currently provided by the Company.
Dependence on the Washington, D.C. Metropolitan Area Market. A
substantial majority of the Properties are located in the Washington, D.C.
metropolitan area market. While the Company may pursue acquisitions and
development in other markets, a decline in the economy or rental activities
in this market may adversely affect the ability of the Company to make
distributions to its shareholders.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid and, therefore, tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions.
Under the terms of the Secured Debt, the sale of certain of the Properties is
either prohibited or significantly restricted for the five to seven years
following the Initial Offering. 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.
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Regulatory Risks. The Properties may be subject to various forms of
regulation, including regulation under the Fair Housing Amendments Act of
1988 (the "FHA"), the Americans with Disabilities Act (the "ADA") and, in the
case of Properties located in the District of Columbia and built before 1976,
local rent control ordinances. Under the FHA, the Company is required to
make reasonable accommodations for persons with disabilities in rules,
policies and modifications related to the Multifamily Properties when
necessary to afford such persons equal opportunity to use, or obtain full
enjoyment of, the Properties. Noncompliance with the FHA could result in the
imposition of fines or an award of damages to private litigants. The Company
believes the Properties are in compliance with the FHA in all material
respects. The ADA requires removal of structural barriers to access by
persons with disabilities in certain public areas. Noncompliance with the
ADA could result in the imposition of fines or an award of damages to private
litigants. The ADA does not, however, apply to multifamily properties, such
as apartment complexes, except to the extent that portions of such
facilities, such as a leasing office, are open to the public. The costs of
any alterations or additions required to date have been included in the
operating budget for each affected Property. All costs for remaining
modifications are expected to be paid from cash flow from operating
activities and reserves established for this purpose.
As of March 3, 1998, twelve of the Properties, representing 3,772
units or 20.6% 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
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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 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.
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Exemptions from Maryland Business Combinations Law. Under the Maryland
General Corporation Law ("MGCL"), certain "business combinations" (including
certain issuances of equity securities) between a Maryland corporation and
any person who owns 10% or more of the voting power of the corporation's
shares of capital stock (an "Interested Shareholder") must be approved by a
supermajority (80%) of voting shares. In addition, an Interested Shareholder
may not engage in a business combination for five years following the date he
or she became an Interested Shareholder. The Company, as permitted by the
MGCL, has exempted any business combinations involving Messrs. Smith and
Kogod and persons affiliated or acting in concert with them. Consequently,
Messrs. Smith and Kogod are permitted to enter into business combinations
with the Company without the supermajority shareholder approval otherwise
required by the MGCL.
Possible Adverse Consequences of Limits on Ownership of Shares
In order to maintain its qualification as a REIT, not more than 50% in
number or value of the outstanding capital stock of the Company may be owned,
directly or constructively under the applicable attribution rules of the
Code, by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. In order to protect the
Company from the risk of losing its REIT status due to a concentration of
ownership among its shareholders, the Company has limited ownership of the
issued and outstanding shares of capital stock by any single shareholder to
9.8% of the outstanding Common Stock (determined taking into account certain
ownership attribution rules). The Board of Directors may waive the
percentage ownership limit for certain entities (but not individuals) if it
is satisfied that ownership in excess of this limit will not jeopardize the
Company's status as a REIT and the Board of Directors otherwise decides such
action is in the best interests of the Company. The Board of Directors has
waived the percentage ownership limit in one instance, in the case of an
investment adviser which holds Common Stock as the record owner on behalf of
other beneficial owners. A transfer of shares of capital stock to a person
who, as a result of the transfer, violates the ownership limit will be void.
Shares of Common Stock acquired in breach of the limitation will be
automatically exchanged for shares of a separate class of stock not entitled
to vote or to participate in distributions ("Excess Stock"). In addition,
ownership, either directly or indirectly under the applicable attribution
rules of the Code, of stock in excess of the ownership limit generally will
result in the conversion of those shares into Excess Stock. The Company will
direct a holder of Excess Stock to sell such stock to the Company for the
lesser of the price paid or the average closing price for the five trading
days preceding the sale or to sell such stock to a person whose ownership of
the stock does not violate the ownership limit. See "Description of Common
Stock -- Restrictions on Transfer; Excess Stock" for additional information
regarding the ownership limits.
Adverse Consequences of Failure to Qualify as a REIT; Other Tax Liabilities
Tax Consequences of the Failure of the Company to Qualify as a REIT. A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders as long as it distributes currently
at least 95% of its taxable income (excluding net capital gains). 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.
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Among the requirements for REIT qualification are that the value of any
one issuer's securities held by a REIT may not exceed 5% of the value of the
REIT's total assets on certain testing dates, and that a REIT may not own
more than 10% of any one issuer's outstanding voting securities. See
"Federal Income Tax Considerations -- Requirements for Qualification -- Asset
Tests." The Company and its senior management believe that the value of the
securities of each of the Property Service Businesses will be less than 5% of
the value of the Company's total assets, based on its analysis of the
operating cash flows of each of the Property Service Businesses, but there
can be no assurance that the IRS might not contend otherwise, or that all or
some of the Property Service Businesses should be considered a single
corporation for purposes of the 5% value limitation and that the value of the
securities of that corporation exceeds the 5% limitation, or that the
nonvoting stock of one or more of the Property Service Businesses should be
considered "voting securities" for purposes of the 10% limitation.
If the Company fails to satisfy the 5% value requirement or the 10%
ownership limit or otherwise fails to qualify as a REIT, it will be subject
to federal income tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. In addition, unless entitled
to relief under certain statutory provisions, the Company will be
disqualified from treatment as a REIT for the four taxable years following
the year during which REIT qualification is lost. The additional tax would
significantly reduce the cash flow available for distributions by the Company
to its shareholders. See "Federal Income Tax Considerations -- Taxation of
the Company."
REIT Distribution Requirements and Potential Impact of Borrowings. To
obtain the favorable tax treatment associated with REITs qualifying under the
Code, the Company generally will be required each year to distribute to its
shareholders at least 95% of its net taxable income (excluding net capital
gain). In addition, the Company will be subject to a 4% nondeductible excise
tax on the amount, if any, by which the sum of certain distributions paid by
it with respect to any calendar year and certain amounts retained by it with
respect to which it pays federal income tax are less than the sum of 85% of
its ordinary income, 95% of its capital gain net income and 100% of its
undistributed income from prior years.
Differences in timing between the receipt of income, the payment of
expenses, and the inclusion of such income and the deduction of such expenses
in arriving at taxable income (of the Company or the Operating Partnership),
or the effect of nondeductible capital expenditures, the creation of reserves
or required debt or amortization payments, could require the Company,
directly or through the Operating Partnership, to borrow funds on a
short-term basis to meet the distribution requirements that are necessary to
achieve the tax benefits associated with qualifying as a REIT. In such
instances, the Company might need to borrow funds in order to avoid adverse
tax consequences even if management believed that then prevailing market
conditions were not generally favorable for such borrowings.
Consequences of Failure of the Operating Partnership to Qualify as a
Partnership. If the IRS were to challenge successfully the tax status of the
Operating Partnership or any of its subsidiary partnerships as a partnership
for federal income tax purposes, the Operating Partnership or such affected
subsidiary partnership would be taxable as a corporation. In such event,
since the value of the Company's ownership interest in the Operating
Partnership exceeds, and the value of the Operating Partnership's interest in
the affected subsidiary partnership could exceed, 5% of the Company's assets,
the Company could cease to qualify as a REIT. In addition, the imposition of
a corporate tax on the Operating Partnership or any of such subsidiary
partnerships would reduce the amount of cash available for distribution to
the Company and its shareholders. See "Federal Income Tax Considerations --
Tax Aspects of the Company's Investment in the Operating Partnership and
Property Service Businesses."
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Other Tax Liabilities. Notwithstanding the Company's qualification as a
REIT, the Company will be subject -- through the Operating Partnership and the
Property Service Businesses -- to certain federal, state and local taxes on
its income and property. See "Federal Income Tax Considerations -- Tax Aspects
of the Company's Investment in the Operating Partnership and Property Service
Businesses." In particular, the Company will derive a portion of its
operating cash flow from the activities of the Property Service Businesses.
While the taxable income of the Property Service Businesses initially has
been reduced significantly as a result of interest deductions on promissory
notes issued by the Operating Partnership in the Formation Transactions and
amortization deductions, the taxable income resulting from the Property
Service Businesses will be subject to federal, state and local income tax.
In addition, income derived by the Company from Properties located in the
District of Columbia will be subject to the District of Columbia
Unincorporated Business Tax. See "Federal Income Tax Considerations -- Other
Tax Considerations -- State and Local Taxes; District of Columbia
Unincorporated Business Tax" and " --Tax Aspects of the Company's Investment
in the Operating Partnership and Property Service Businesses -- Property
Service Businesses." Finally, if the Company has net income from any
prohibited transaction, such income will be subject to a 100% tax. See
"Federal Income Tax Considerations -- Requirements for Qualification -- Gross
Income Tests."
Potential Influence of Certain Officers and Directors
The officers and directors of the Company include Messrs. Smith and
Kogod. Messrs. Smith and Kogod and their families together beneficially owned
approximately 14% of the outstanding Common Stock and Units as of March 2,
1998. Messrs. Smith and Kogod have, and are expected to continue to
have, substantial influence on the affairs of the Company, which influence
might not be consistent with the interests of other shareholders, and
(if their Units were redeemed for Common Stock) on the outcome of any
matters submitted to the Company's shareholders for approval.
Dependence on Key Personnel
The Company is dependent on the efforts of its executive officers and
other key members of senior management. Such key members of senior
management are Philip Sayers, Senior Vice President, and acting Chief
Operating Officer of Consolidated Engineering Services, Inc. (an affiliate of
the Company) and Frederick Wreiden, Senior Vice President and Chief Operating
Officer of Smith Management Construction, Inc. (an affiliate of the Company).
The loss of the services of one or more of these individuals and the
inability of the Company to find a substitute with the same level of
expertise and experience could be disruptive to the operations of the Company
and could result in an adverse effect on the Company. The Company does not
maintain "key-person" life insurance for any of its personnel.
Securities Law Matters
10,841,584 shares of Common Stock (210,292 of which the Commission has
declared effective, the remainder pending such declaration) may be issued
(under certain conditions) upon redemption of units of limited partnership
interest in the Operating Partnership ("Units") which became redeemable in
June 1995 ("Original Units"). 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 Commission 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. Accordingly, the Company has filed a registration statement
with the Commission to register the redemption of all of the Original Units.
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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
51.99% of the Units in the Operating Partnership as of March 2, 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 March 3, 1998 the Company, through the Operating Partnership,
owned 46 Multifamily Properties, two Retail Properties, a substantial
majority of which are located in the Washington, D.C. metropolitan area, and
three properties under construction.
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.
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 March 2, 1998, the Company had
outstanding 15,281,679 shares of Common Stock. As of March 2, 1998, the
Company had reserved for possible issuance upon redemption of Units
approximately 18.6 million additional shares of Common Stock. 5,481,132
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, as amended, respectively or the Registration Statement of
which this Prospectus is a part. As of March 2, 1998, an additional
15,281,679 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 March 27,
1998, there were 1,599,917 Unit and/or stock options granted and outstanding,
104,000 restricted Unit awards 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 1,891,626 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.
REGISTRATION RIGHTS
The Company is a party to a Registration Rights Agreement dated as of
October 3, 1997 (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, the Company is obligated to certain holders of
Common Stock to use its reasonable efforts to keep a registration statement
continuously effective for a period expiring on the date on which all of the
shares of Common Stock covered by the Registration Rights Agreement have been
sold pursuant to the Registration Statement or Rule 144 of the Securities
Act. The benefits of the Registration Rights Agreement lapse with respect to
any shares that have been sold pursuant to the Registration Rights Agreement
or otherwise transferred without legal restriction on further transfer.
Pursuant to the Registration Rights Agreement, the Selling Shareholders
may propose to sell the Shares in an underwritten public offering and select
underwriters for such an offering, subject to the approval of the Company
(such approval not to be unreasonably withheld). If the Selling Shareholders
so elect, the Company shall cooperate with such Selling Shareholders in any
selling efforts relating to the underwritten public offering, subject to
certain conditions specified in the Registration Rights Agreement.
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The Registration Rights Agreement requires the Company to pay all
expenses of effecting the registration of shares covered by the Registration
Rights Agreement (other than underwriting discounts and commissions, fees and
disbursements of counsel, and transfer taxes, if any) pursuant to a
registration statement. The Company also agreed to indemnify each holder of
Common Stock covered by the Registration Rights Agreement and its officers
and directors and any person who controls any holder against certain losses,
claims, damages and expenses arising under the securities laws. In addition,
each holder of Common Stock covered by the Registration Rights Agreement
agreed to indemnify the Company and the other holders of such Common Stock,
and each of their respective directors and officers (including each director
and officer of the Company who signs the registration statement), and any
person who controls the Company or any holder against other losses, claims
damages and expenses arising under the securities laws with respect to
written information furnished to the Company by such holder.
SELLING SHAREHOLDERS
The 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 those persons who acquired Common Stock
pursuant to the Purchase Agreement.
The following table provides the names of and the number of Secondary
Shares or Series B Cumulative Convertible Redeemable Preferred Stock
convertible or redeemable into Conversion Shares known to the Company to be
owned by each Selling Shareholder as of March 1, 1998. Each Selling
Shareholder may sell any or all of the Shares 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.
Number of Number of
Name Shares Owned(1) Shares Offered Hereby
- ------------------------------------ --------------- ----------------------
The Prudential Insurance Company
of America (2) . . . . . . . . . . 280,000 280,000
Strategic Value Investors, LLC (3) . . 2,095,238 2,095,238
Strategic Value Investors
International, LLC (4) . . . . . . 291,428 291,428
- --------------------
(1) A wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"), The Prudential Investment Company ("PIC"), is (a) the
investment advisor of Strategic Value Investors, LLC ("SVI-US") pursuant
to an Investor Advisory Agreement dated as of October 2, 1997, between
PIC and SVI-US (the "SVI-US Advisory Agreement") and (b) the investment
advisor of Strategic Value Investors International, LLC
("SVI-International") pursuant to an Investor Advisory Agreement dated as
of October 2, 1997, between PIC and SVI-International (the
"SVI-International Advisory Agreement"). By virtue of the SVI-US Advisory
Agreement and the SVI-International Advisory Agreement, Prudential,
acting through its wholly-owned subsidiary PIC, has the sole ability to
vote and dispose of (i) the 2,095,238 Shares owned of record by SVI-US and
(ii) the 291,428 Shares owned of record by SVI-International. As such, in
addition to the 280,000 Shares beneficially owned and owned of record by
Prudential, Prudential may also be deemed to beneficially own the
2,386,666 Shares owned of record by SVI-US and SVI-International.
(2) Consists of an aggregate of 152,250 shares of Common Stock and 127,750
shares of Common Stock issuable upon conversion or redemption of Series B
Cumulative Convertible Redeemable Preferred Stock, which became eligible
for conversion on January 1, 1998 (subject to satisfaction of certain
conditions). In addition, Prudential Securities Incorporated, an indirect
wholly-owned subsidiary of Prudential ("PSI"), beneficially owns on the
date hereof 500 common shares in certain discretionary accounts
on behalf of clients of PSI. Prudential disclaims beneficial ownership of
such common shares because the voting and disposition of such common
shares is controlled by the management of PSI and not by Prudential.
(3) Consists of an aggregate of 1,139,286 shares of Common Stock and 955,952
shares of Common Stock issuable upon conversion or redemption of Series B
Cumulative Convertible Redeemable Preferred Stock, which became eligible
for conversion on January 1, 1998 (subject to satisfaction of certain
conditions).
(4) Consists of an aggregate of 158,464 shares of Common Stock and 132,964
shares of Common Stock issuable upon conversion or redemption of Series B
Cumulative Convertible Redeemable Preferred Stock, which became eligible
for conversion on January 1, 1998 (subject to satisfaction of certain
conditions).
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FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Stock. The following
discussion, which is not exhaustive of all possible tax considerations, does
not include a detailed discussion of any state, local or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a prospective shareholder in light of its
particular circumstances or to certain types of shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under
the federal income tax laws.
As used in this discussion, the term "Company" refers solely to Charles
E. Smith Residential Realty, Inc.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S
PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Taxation of the Company
General. The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Code commencing with its taxable year ending December
31, 1994. The Company believes that it was organized and has operated in
conformity with the requirements for qualification and taxation as a REIT
under the Code for its taxable years ended December 31, 1994, December 31,
1995, December 31, 1996 and December 31, 1997, and the Company believes that
its current organization and method of operation should enable it to continue
to meet the requirements for qualification and taxation as a REIT. No
assurances, however, can be provided that the Company has operated in a
manner so as to qualify as a REIT or that it will continue to operate in such
a manner in the future. The Company's qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis (through
actual annual operating results, distribution levels and diversity of stock
ownership) the various qualification tests imposed under the Code, which are
summarized below. While the Company intends to operate so that it qualifies
as a REIT, given the highly complex nature of the rules governing REITs, the
ongoing importance of factual determinations, and the possibility of future
changes in the circumstances of the Company, no assurance can be given that
the actual results of the operations of the Company for any taxable year has
satisfied or will satisfy the requirements under the Code for qualification
and taxation as a REIT. Further, the anticipated income tax treatment
described herein may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure to Qualify."
The following is a general summary of the Code provisions that govern
the federal income tax treatment of a REIT and its shareholders. These
provisions of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations thereof.
In any year in which the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on net income
that it distributes currently to shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder
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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 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
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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 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
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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.
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
26
<PAGE>
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 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
27
<PAGE>
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--Assets," 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 at
least 28%. Notice 97-64 further provides that designations made by the REIT
only will be effective to the extent that they comply with Revenue Ruling
89-81, which requires that distributions made to different classes of shares
be composed proportionately of dividends of a particular type.
Distributions 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.
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
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<PAGE>
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 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
29
<PAGE>
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.
30
<PAGE>
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 offer and sale from time to time of
up to 1,450,000 Secondary Shares by the holders thereof; and (ii) the offer
and sale from time to time by the holders thereof of up to 1,216,666
Conversion Shares. The Shares were issued in a private offering on October
3, 1997 pursuant to the Purchase Agreement. The Company has registered the
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. The sale of shares of Common Stock by the Selling
Shareholders, or by pledgees, donees, transferees or other successors in
interest, may also be
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<PAGE>
effected from time to time by selling shares directly to purchasers or to or
through broker-dealers. In connection with any such sales, any such
broker-dealer may act as agent for the Selling Shareholders or may purchase
from the Selling Shareholders all or a portion of such shares as principal.
Such sales may be made on the New York Stock Exchange or any exchange on
which the shares of Common Stock are then traded, in the over-the-counter
market, in negotiated transactions or otherwise at prices and at terms then
prevailing or at prices related to the then-current market prices or at prices
otherwise negotiated. Shares may also be sold in one or more of the following
transactions: (i) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may
position and resell all or a portion of the block as principal to facilitate
the transaction; (ii) purchases by any such broker-dealer as principal and
resale by such broker-dealer for its own account pursuant to this
Prospectus; (iii) a special offering, an exchange distribution or a
secondary distribution in accordance with applicable New York Stock Exchange
rules; (iv) ordinary brokerage transactions and transactions in which any
such broker-dealer solicits purchasers; (v) sales "at the market" to
or through a market maker or into an existing trading market, on an exchange
or otherwise, for such shares; and (vi) sales in other ways not involving
market makers or established trading markets, including direct sales or
distributions to institutions, individual purchasers or constituent members of
a Selling Shareholder. In effecting sales, broker-dealers engaged by the
Selling Shareholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the
Selling Shareholders in amounts to be negotiated immediately prior to the sale
that are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may also receive compensation from purchasers of the
shares which is not expected to exceed that customary in the types of
transactions involved. Pursuant to the Registration Rights Agreement, the
Selling Shareholders may propose to sell the Shares in an underwritten public
offering and select underwriters for such an offering, subject to the
approval of the Company (such approval not to be unreasonably withheld). If
the Selling Shareholders so elect, the Company shall cooperate with such
Selling Shareholders in any selling efforts relating to the underwritten
public offering, subject to certain conditions specified in the Registration
Rights Agreement.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
on Form S-3 under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in
the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules hereto. For further
information regarding the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed reports and other information with the Commission and is
subject to the periodic reporting and informational requirements of the
Exchange Act. The Registration Statement, the exhibits and schedules forming
a part thereof as well as such reports and other information filed by the
Company with the Commission can be inspected and copies obtained from the
Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. In
addition, the Company's Common Stock is listed on the NYSE and similar
information concerning the Company can be inspected and copied at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
The Company furnishes its equityholders with annual reports containing
consolidated financial statements audited by its independent public
accountants and with quarterly reports 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, 1997.
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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, 1997 and related schedule incorporated by reference herein and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
LEGAL MATTERS
The legality of the issuance of the Common Stock has been passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C.
33
<PAGE>
No person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and, if
given or made, such information or
representations must not be relied upon
as having been authorized. This
Prospectus does not constitute an offer
to sell or the solicitation of an offer
to buy any securities other than the
securities to which it relates or an
offer to sell or the solicitation of an
offer to buy such securities in any
circumstances in which such offer or
solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale
made hereunder shall, under any
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information contained
herein is correct as of any time
subsequent to its date.
------------
TABLE OF CONTENTS
Page
Prospectus Summary . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . 5
The Company. . . . . . . . . . . . . . 16
Description of Common Stock. . . . . . 17
Shares Available for Future Sale . . . 21
Registration Rights. . . . . . . . . . 21
Selling Shareholders . . . . . . . . . 22
Federal Income Tax Considerations. . . 23
Plan of Distribution . . . . . . . . . 31
Available Information. . . . . . . . . 32
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . 32
Experts. . . . . . . . . . . . . . . . 33
Legal Matters. . . . . . . . . . . . . 33
------------
2,666,666 Shares
Charles E. Smith
Residential Realty, Inc.
Common Stock
(par value $.01 per share)
PROSPECTUS
, 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. . . . . . . . . . . . . . . . . $24,945
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 . . . . . . . . . . . . . . . . . . . . . . $73,945
-------
-------
</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 agreement of Limited
Partnership of the Operating Partnership (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
********5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of the
Common Stock
*********8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters
**********10.1 Registration Rights Agreement dated as of October 3, 1997
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
***********24.1 Power of Attorney
- ----------
* 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 4.2 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 Exhibit 3.5 to the Company's amendment
to the registration statement on Form S-3 (File No. 333-17053).
******* Incorporated by reference to Exhibit 3.6 to the Company's amendment
to the registration statement on Form S-3 (File No. 333-17053).
******** Incorporated by reference to Exhibit 5.1 to the Company's
registration statement on Form S-3 (File No. 333-39691).
********* Incorporated by reference to Exhibit 8.1 to the Company's
registration statement on Form S-3 (File No. 333-39691).
********** Incorporated by reference to Exhibit 10.1 to the Company's
registration statement on Form S-3 (File No. 333-39691).
*********** Filed as part of the signature page of the Company's Registration
Statement on Form S-3 (File No. 333-39691).
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
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Arlington, Commonwealth of Virginia, on March 31, 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
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 has been
signed by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Robert H. Smith* Co-Chairman of the Board, March 31, 1998
- ------------------------- Co-Chief Executive Officer,
Robert H. Smith and Director
/s/ Robert P. Kogod* Co-Chairman of the Board, March 31, 1998
- ------------------------- Co-Chief Executive Officer,
Robert P. Kogod and Director
/s/ Ernest A. Gerardi, Jr.* President, Chief Operating March 31, 1998
- ------------------------- Officer, and Director
Ernest A. Gerardi, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Wesley D. Minami* Senior Vice President, March 31, 1998
- ------------------------- Chief Financial Officer,
Wesley D. Minami and Treasurer
/s/ Steven E. Gulley* Vice President, Controller, March 31, 1998
- ------------------------- and Chief Accounting
Steven E. Gulley Officer
/s/ Fred J. Brinkman* Director March 31, 1998
- -------------------------
Fred J. Brinkman
/s/ Charles B. Gill* Director March 31, 1998
- -------------------------
Charles B. Gill
/s/ Mandell J. Ourisman* Director March 31, 1998
- -------------------------
Mandell J. Ourisman
/s/ Mallory Walker* Director March 31, 1998
- --------------------------
Mallory Walker
*By: Ernest A. Gerardi, Jr. March 31, 1998
----------------------
Ernest A. Gerardi, Jr.,
Attorney-In-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
- ---------- ------------------- -------------
<S> <C> <C>
*3.1 Amended and Restated Articles of Incorporation
of the Company
**3.2 Articles Supplementary relating to Series A
Cumulative Convertible Redeemable Preferred Stock
***3.3 Articles Supplementary relating to Series B
Cumulative Convertible Redeemable Preferred Stock
****3.4 Certificate of Correction relating to Series B
Cumulative Convertible Redeemable Preferred Stock
******3.5 Articles Supplementary relating to Series C
Cumulative Redeemable Preferred Stock
*******3.6 Certificate of Correction relating to Series C
Cumulative Redeemable Preferred Stock
*****3.7 Amended and Restated Bylaws of the Company
********5.1 Opinion of Hogan & Hartson L.L.P. regarding legality
of the Common Stock
*********8.1 Opinion of Hogan & Hartson L.L.P. regarding certain
tax matters
**********10.1 Registration Rights Agreement dated as of October 3,
1997
23.1 Consent of Hogan & Hartson L.L.P. (included in
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
***********24.1 Power of Attorney
</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 4.2 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 Exhibit 3.5 to the Company's amendment
to the registration statement on Form S-3 (File No. 333-17053).
******* Incorporated by reference to Exhibit 3.6 to the Company's amendment
to the registration statement on Form S-3 (File No. 333-17053).
******** Incorporated by reference to Exhibit 5.1 to the Company's
registration statement on Form S-3 (File No. 333-39691).
********* Incorporated by reference to Exhibit 8.1 to the Company's
registration statement on Form S-3 (File No. 333-39691).
********** Incorporated by reference to Exhibit 10.1 to the Company's
registration statement on Form S-3 (File No. 333-39691).
*********** Filed as part of the signature page of the Company's registration
statement on Form S-3 (File No. 333-39691).
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 9, 1998
included in Charles E. Smith Residential Realty, Inc.'s Form 10-K for the
year ended December 31, 1997 and to all references to our Firm included in
this registration statement.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Washington, D.C.
March 31, 1998
