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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1999
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 54-1681655
(State of Incorporation) (I.R.S. Employer
Identification No.)
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
Ernest A. Gerardi, Jr.
President
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: From time to time after this Registration Statement becomes effective,
as determined by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. \ \
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. \X\
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. \ \
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. \ \
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. \ \.
------------------------
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CALCULATION OF REGISTRATION FEE (1)
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- --------------------------- ------------------------- ------------------------ ------------------------- -------------------------
Proposed Maximum Proposed Maximum
Title of Shares Amount to be Aggregate Price Aggregate Amount of
to be Registered Registered Per Share (1) Offering Price (1) Registration Fee
- --------------------------- ------------------------- ------------------------ ------------------------- -------------------------
- --------------------------- ------------------------- ------------------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share (2) 2,597,403 $31.46875 $81,757,025.66 $21,578.58
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) based on the average of the high and low
reported sales prices on the New York Stock Exchange on December 16, 1999.
(2) Includes associated rights to purchase Series D Junior Participating
Preferred Stock.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1999
[GRAPHIC OMITTED]
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PROSPECTUS
2,597,403 SHARES OF COMMON STOCK
The persons listed herein may offer and sell from time
to time up to 2,597,403 shares of our common stock under
this prospectus. We refer to these persons as the selling
shareholders. The selling shareholders may acquire these
shares if they elect to convert our Series H Preferred Shares
into common stock or if they convert Series H Preferred Units
of Charles E. Smith Residential Realty L.P., which we refer
to as "Smith L.P.," into Class A Units of Smith L.P. If a
selling shareholder requests redemption of the Class A Units
issued upon conversion of the Series H Preferred Units, we
may choose to issue the selling shareholder common stock in
exchange for the Class A Units. Our registration of the
offered shares does not mean that any of the selling
shareholders will offer or sell any of the offered shares.
We will receive no proceeds of any sales of the offered
shares by the selling shareholders.
The selling shareholders may sell the offered shares in
public or private transactions, on or off the New York Stock
Exchange, at prevailing prices or at privately negotiated
prices. The selling shareholders may sell the offered shares
directly or through agents or broker-dealers acting as
principal or agent, or in a distribution by underwriters.
Our common stock is listed on the New York Stock Exchange
under the trading symbol "SRW."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 IN
THIS PROSPECTUS FOR FACTORS THAT ARE RELEVANT TO AN INVESTMENT
IN THE COMMON STOCK.
------------------------------
The information contained in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement relating to these securities
has been declared effective by the Securities and Exchange
Commission. This prospectus is neither an offer to sell nor a
solicitation of an offer to buy these securities in any state
where the offer or sale is unlawful.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
DECEMBER __, 1999
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
PROSPECTUS SUMMARY................................................................. 1
Forward-Looking Information.................................................... 1
The Company.................................................................... 1
The Offered Shares............................................................. 2
Important Risks in Owning Our Common Stock..................................... 3
Tax Status of the Company...................................................... 3
RISK FACTORS....................................................................... 4
Some of Our Policies May Be Changed Without a Vote of Shareholders............. 4
Provisions of Our Charter Could Inhibit Changes of Control..................... 4
Our Ability to Issue Preferred Shares Could Inhibit Changes of Control......... 4
Maryland Law Limits Changes of Control......................................... 4
We Have Adopted a Shareholder Rights Plan Which Could Delay or Prevent a
Change of Control.......................................................... 5
We Have a Share Ownership Limit................................................ 5
The Large Number of Shares Available for Future Sale Could Adversely Affect
the Market Price of Our Common Stock....................................... 5
Changes in Market Conditions Could Adversely Affect the Market Price of Our
Common Stock............................................................... 5
Our Earnings and Cash Distributions Will Affect the Market Price of Our
Common Stock............................................................... 5
Market Interest Rates and Low Trading Volume May Have an Effect on the
Value of Our Common Stock.................................................. 6
We Believe, but Cannot Guarantee, that We Qualify as a REIT.................... 6
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences....... 6
We May Need to Borrow Money to Qualify as a REIT............................... 6
We Are Subject To Some Taxes Even If We Qualify as a REIT...................... 6
Holders Will Be Subject to the Operational Risks of Our Business............... 7
DESCRIPTION OF CAPITAL STOCK....................................................... 8
General Rights of Common Stock................................................. 8
Preferred Shares............................................................... 8
Classification and Removal of Board of Directors;
Other Provisions........................................................... 10
Special Statutory Requirements for Certain Transactions........................ 11
Restrictions on Transfer; Excess Stock......................................... 12
Transfer Agent and Registrar................................................... 13
REGISTRATION RIGHTS................................................................ 13
SELLING SHAREHOLDERS............................................................... 14
FEDERAL INCOME TAX CONSIDERATIONS.................................................. 15
General........................................................................ 15
Our Tax Treatment.............................................................. 15
Requirements for Qualification As a REIT....................................... 16
Tax Aspects of Our Investments in Smith L.P. and Property Service Businesses... 20
Taxation of Shareholders....................................................... 21
Other Tax Considerations....................................................... 26
PLAN OF DISTRIBUTION............................................................... 29
WHERE YOU CAN FIND MORE INFORMATION................................................ 29
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 29
EXPERTS............................................................................ 30
LEGAL MATTERS...................................................................... 30
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<PAGE>
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT
TO YOU. TO UNDERSTAND THIS COMMON STOCK OFFERING, YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND FEDERAL INCOME TAX
CONSIDERATIONS.
FORWARD-LOOKING INFORMATION
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. WHENEVER YOU SEE THE WORDS "BELIEVES," "ANTICIPATES," AND
"EXPECTS" AND SIMILAR WORDS INDICATING UNCERTAINTY, YOU SHOULD REMEMBER THAT THE
STATEMENTS ARE ASSUMPTIONS. THESE ASSUMPTIONS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL FINANCIAL RESULTS OR MANAGEMENT PLANS AND
OBJECTIVES TO DIFFER MATERIALLY FROM THOSE PROJECTED OR EXPRESSED IN THIS
PROSPECTUS. FOR EXAMPLE, SUCH DIFFERENCES MAY OCCUR BECAUSE OF CHANGES IN:
- NATIONAL AND REGIONAL ECONOMIC CONDITIONS (ESPECIALLY IN MULTIFAMILY
PROPERTY OCCUPANCIES AND RENTAL GROWTH IN THE WASHINGTON, D.C.
METROPOLITAN AREA);
- OUR ABILITY TO IDENTIFY AND SECURE ADDITIONAL PROPERTIES AND PROPERTY
LOCATIONS;
- THE EFFECT OF PREVAILING MARKET INTEREST RATES AND THE PRICING OF OUR
COMMON STOCK;
- THE ACCEPTANCE OF OUR FINANCING PLANS BY THE CAPITAL MARKETS; AND
- OTHER RISKS WHICH MAY HAVE BEEN OR WILL BE DISCUSSED IN THIS
PROSPECTUS OR IN OUR OTHER FILINGS WITH THE SEC.
WE RECOMMEND THAT YOU CONSIDER CAREFULLY THE RISKS OF SUCH ASSUMPTIONS BEFORE
MAKING ANY INVESTMENT IN OUR COMMON STOCK.
WE ARE NOT OBLIGATED TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS IN THIS PROSPECTUS. WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
THE COMPANY
As a self-managed equity REIT, we acquire, develop, manage and operate
multifamily properties primarily in the Washington, D.C., Chicago, Boston, and
Southeastern Florida metropolitan areas. We are a fully integrated real estate
organization with in-house acquisition, development, financing, marketing,
property management and leasing expertise. Our primary strategy for growth is to
acquire, develop, own and manage high quality multifamily properties to generate
long-term income and increases in value.
We are the sole general partner of Smith L.P. As of November 30, 1999, we
owned approximately 59.8% of its outstanding units. Smith L.P. and its
subsidiaries own all of our properties, property interests and business assets.
As of November 30, 1999, we owned all or a portion of 58 multifamily
apartment communities with a total of 25,169 units. 49 of the properties were
located in the Washington, D.C. metropolitan area, two in the Boston
metropolitan area, six in the Chicago metropolitan area and one in the Southeast
Florida area. We currently have approximately 1,800 units under construction and
approximately 1,200 additional units under construction which are subject to
pre-purchase agreements. We also manage approximately 2,800 additional apartment
units for other property owners. Besides our residential properties, we own two
retail centers in the Washington, D.C. metropolitan area with approximately
436,000 square feet of retail space.
Our principal executive offices are located at 2345 Crystal Drive,
Arlington, Virginia 22202, and our telephone number is (703) 920-8500.
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THE OFFERED SHARES
This prospectus relates to 2,597,403 shares of common stock that may be
sold by the selling shareholders, following conversion of their Series H
Cumulative Convertible Redeemable Preferred Shares or following redemption of
Class A Units issuable upon conversion of Series H Cumulative Convertible
Redeemable Preferred Units of Smith LP in the event we choose to issue shares
of our common stock in exchange for such Class A Units.
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IMPORTANT RISKS IN OWNING OUR COMMON STOCK
Before you decide to invest in our common stock, you should read the "Risk
Factors" section, which begins on page 4 of this prospectus.
TAX STATUS OF THE COMPANY
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code. We believe that we qualify for taxation as a REIT
and generally will not be subject to federal income tax on net income that we
distribute to our shareholders. We currently are required, among other
things, to distribute at least 95% of our taxable income, excluding any net
capital gain. For our taxable years beginning after December 31, 2000, this
requirement will be relaxed but we still will be required to distribute 90%
of this amount. Even if we qualify to be taxed as a REIT, we are subject to
certain federal, state and local taxes on our income and property and to
federal income and excise tax on the income we do not distribute. In
addition, the operating companies in which we own 99% non-voting interests
are subject to federal, state and local income taxes. See "Federal Income Tax
Considerations" for a more detailed explanation.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS.
SOME OF OUR POLICIES MAY BE CHANGED WITHOUT A VOTE OF SHAREHOLDERS.
Our Board of Directors establishes many of our major policies, including those
relating to investment, financing, growth, acquisitions, development, debt
capitalization and distributions. Although the Board of Directors currently has
no intention to amend or revise these and other policies, it may do so from time
to time without a vote of our shareholders. In order to change our policy of
seeking to maintain our REIT qualification status, however, we must have the
approval of our shareholders. Changes in our policies may not fully serve the
interests of all shareholders.
PROVISIONS OF OUR CHARTER COULD INHIBIT CHANGES OF CONTROL. There are
provisions of our charter that may delay or otherwise limit the ability of
outside parties to acquire control of us or engage in some other transaction.
These charter provisions include three-year staggered terms for directors, the
authority of the Board of Directors to classify capital stock into one or more
series having special preferences without shareholder approval, and a 9.8% share
ownership limit. See "-- We Have a Share Ownership Limit" below. These
limitations could prevent us from entering into a change of control transaction
or other transaction that could be in the best interests of our shareholders.
In addition, we cannot merge, consolidate or engage in any combination
with another person or sell all or substantially all of our assets unless the
transaction includes a merger of, or a sale of assets by, Smith L.P., which may
require approval of the holders of a majority of the units. We currently hold
approximately 59.8% of the common units in Smith L.P. This voting requirement
might limit the possibility for acquisition or change in control, even if a
change in control were in our shareholders' interest. In this regard, the
holders of units might incur different, and more adverse, tax consequences as a
result of an acquisition or change in control that could motivate them to
oppose a transaction that is in the shareholders' interest.
OUR ABILITY TO ISSUE PREFERRED SHARES COULD INHIBIT CHANGES OF CONTROL.
Our charter authorizes the Board of Directors to issue preferred shares and to
establish the preferences and rights of any preferred shares issued, including
the right to vote and the right to convert them into shares of common stock.
This power to issue preferred shares could have the effect of delaying or
preventing a change in control even if a change in control were in our
shareholders' interest. As of November 30, 1999, we had outstanding six series
of preferred shares. The preferred shares outstanding rank senior to the common
stock with respect to dividend rights and distributions upon liquidation,
dissolution and winding up. We are subject to the risks normally associated
with preferred equity financing, including the risk that our cash flow will be
insufficient to meet the required payments on the shares.
MARYLAND LAW LIMITS CHANGES OF CONTROL. Provisions of Maryland
corporate law prohibit "business combinations," including 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, or an
"interested stockholder," unless the transaction is approved by 80% of the
corporation's outstanding voting shares. In addition, an interested stockholder
may not engage in a business combination for five years following the date he
became an interested stockholder. Except as described below, we are subject to
these provisions. As a result, a change in control or other transaction that may
provide our shareholders with a premium or which might otherwise be in their
best interests may be prevented or delayed.
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<PAGE>
Our charter, as is permitted by Maryland corporate law, exempts any
business combination involving Messrs. Smith and Kogod and persons affiliated or
acting in concert with them. Consequently, Messrs. Smith and Kogod and their
affiliates are permitted to enter into business combinations with us without the
supermajority shareholder approval otherwise required by Maryland law.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN WHICH COULD DELAY OR PREVENT
A CHANGE OF CONTROL. Our rights plan provides, among other things, that if a
person or group attempts to acquire 15% or more of our common stock on terms not
approved by our Board of Directors, shareholders will be entitled to purchase
shares of our stock, subject to our charter's ownership limit. These purchase
rights would cause substantial dilution to a person or group that acquires or
attempts to acquire 15% or more of our common stock in this manner and, as a
result, could delay or prevent a change in control or other transaction that
could provide our shareholders with a premium over the then-prevailing market
price of their shares or which might otherwise be in their best interests.
WE HAVE A SHARE OWNERSHIP LIMIT. Primarily to assist us in maintaining
our REIT qualification, our charter limits ownership of the issued and
outstanding shares of capital stock by any single shareholder to 9.8% of our
outstanding capital stock. The attribution provisions of the federal tax laws
that are used in applying the ownership limit are complex. They may cause a
shareholder to be considered to own the stock of a number of related
shareholders. The ownership limit could inhibit changes of control.
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As of November 30, 1999, we had
outstanding approximately 20.7 million shares of common stock tradable without
restriction and had reserved for resale 15.7 million additional shares of common
stock for possible issuance upon redemption of units and 6.8 million shares for
possible issuance upon conversion of outstanding preferred stock. In addition,
we have reserved a number of shares available for possible issuance under our
employee benefit plans filed with the SEC. We may issue additional shares of
common stock and securities convertible into shares of common stock in the
future. We cannot predict the effect that future sales of shares of common
stock, or the perception that such sales could occur, will have on the market
prices of our shares.
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK. As with other publicly traded securities, the value of our
common stock depends on various market conditions, which may change from time to
time. Among the market conditions that may affect the value of our common stock
are:
- the extent of institutional investor interest in us;
- the reputation of REITs and residential REITs generally;
- the attractiveness of our equity securities in comparison to
other equity securities, including equity securities issued by
other real estate companies; and
- our financial condition and performance.
OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
COMMON STOCK. We believe that the market value of a REIT's equity securities is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, and is secondarily based
upon the real estate market value of the underlying assets. For that reason, our
shares may trade at prices that are higher or lower than the net asset value per
share. To the extent we retain operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our shares. In addition, we are subject to the risk that
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<PAGE>
our cash flow will be insufficient to meet the required payments on our
preferred shares. Our failure to meet the market's expectations with regard to
future earnings and cash distributions would likely adversely affect the market
price of our shares.
MARKET INTEREST RATES AND LOW TRADING VOLUME MAY HAVE AN EFFECT ON THE
VALUE OF OUR COMMON STOCK. One of the factors that investors consider important
in deciding whether to buy or sell shares of a REIT is the distribution rate on
those shares, as a percentage of the price of the shares, relative to market
interest rates. If market interest rates increase, prospective purchasers of our
shares may expect a higher annual distribution rate. Higher interest rates would
not, however, result in more funds for us to distribute and, in fact, would
likely increase our borrowing costs and potentially decrease funds available for
distribution. This could cause the market price of our common stock to go down.
In addition, although our common stock is listed on the New York Stock Exchange,
the daily trading volume of our shares may be lower than the trading volume for
certain other industries. As a result, our investors who desire to liquidate
substantial holdings may find that they are unable to dispose of their shares in
the market without causing a substantial decline in the market value of the
shares.
WE BELIEVE, BUT CANNOT GUARANTEE, THAT WE QUALIFY AS A REIT. We
believe we qualify as a REIT and generally will not be subject to federal
income tax on net income that we distribute to our shareholders. However, our
qualification as a REIT involves the application of technical and complex tax
rules. For instance, if we own a company's securities, we cannot qualify as a
REIT unless the value of those securities does not exceed 5% of the total
value of our assets. We believe that we meet this requirement, but this
belief is based on our analysis of the value of each of the corporations that
conduct our property service businesses and on our conclusion that each of
these corporations will be respected as a separate corporation. Also, to
qualify as a REIT, we cannot own more than 10% of a company's voting
securities. We also believe that we meet this requirement, but this belief is
based on our conclusion that the shares of stock that we own in each of the
property service businesses are not voting securities. We cannot guarantee
that the IRS will agree with us on these points.
Futhermore, for our taxable years beginning after December 31, 2000,
we will be precluded from owning more than 10% of the value of a company's
securities unless the company elects to be a taxable REIT subsidiary. The
securities of the property service businesses might be excepted from this
rule, but if they are not, then these corporations would have to make the
taxable REIT subsidiary election. We hold more than 10% of the value of the
securities of each of the property service businesses. At least two of our
subsidiaries will make the taxable REIT subsidiary election because they will
otherwise not be excepted from the 10% value test, but we have not yet made a
determination as to the others.
Moreover, our ability to qualify as a REIT may depend on facts and
circumstances that may not be within our control. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, it is
possible that new tax laws or new interpretations of existing tax laws will
affect both our ability to qualify as a REIT and the tax consequences of REIT
qualification. For example, the asset that is described above will be modified
for our taxable years beginning after December 31, 2000. We believe we will
satisfy the modified tests but we may need to change the tax status of one or
more of our subsidiaries to do so. For all of these reasons, we cannot guarantee
that we currently qualify or will be able to remain qualified as a REIT.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE
CONSEQUENCES. If we fail to qualify as a REIT, we will be subject to federal
income tax at regular corporate rates. This additional tax would significantly
reduce the cash we would have available to distribute to our shareholders and
could reduce significantly the value of our common stock. In addition, if we
fail to qualify as a REIT, we may be disqualified from electing to be treated as
a REIT for the next four taxable years.
WE MAY NEED TO BORROW MONEY TO QUALIFY AS A REIT. To obtain the
favorable tax treatment associated with REITs, we currently are required each
year to distribute to our shareholders at least 95% (90% for years beginning
after December 31, 2000) of our net taxable income, excluding net capital
gain. For our taxable years beginning after December 31, 2000, this
requirement will be relaxed but we still will be required to distribute 90%
of this amount. Differences in timing between when we receive income and when
we have to pay expenses could require us to borrow money to meet this
requirement. The impact of large expenses also could have this effect. We
might need to borrow money even if we believe that market conditions are not
favorable for borrowing.
WE ARE SUBJECT TO SOME TAXES EVEN IF WE QUALIFY AS A REIT. Even if we
qualify as a REIT, we are subject to some federal, state and local taxes on our
income and property. For example, we pay tax on certain types of income that we
do not distribute. Also, our income derived from
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properties located in the District of Columbia is subject to local tax and
our net income from some prohibited transactions will be subject to a 100%
tax. In addition, we derive income from the property service businesses,
whose income is subject to federal, state and local income tax. It should be
noted that the property service businesses currently take steps to limit
their tax liability. If any one or these corporations is required to elect to
be treated as a taxable REIT subsidiary, its ability to limit its tax
liability will be reduced.
HOLDERS WILL BE SUBJECT TO THE OPERATIONAL RISKS OF OUR BUSINESS. An
investment in our common stock will be subject to the various operational risks
of our business. These risks include the following:
- Our performance and ability to make distributions to our shareholders
are subject to risks associated with the real estate industry. In
particular --
- We are dependent on the Washington, D.C. metropolitan area
market.
- We may be unable to renew leases or relet space as leases expire.
- New acquisitions may fail to perform as expected.
- Because real estate investments are illiquid and we are subject
to other restrictions, we may not be able to sell properties when
appropriate.
- Our properties may be subject to federal, state or local
regulations that could adversely affect distributions to our
shareholders.
- Environmental problems are possible and can be costly.
- Our properties in the District of Columbia are subject to special
tenants rights that may impede our sale of those properties.
- Some potential losses are not covered by insurance.
- Debt financing, financial covenants, the amount or percentage of our
debt and increases in interest rates could adversely affect our
economic performance for the following reasons, among others --
- Our charter does not limit the amount or percentage of debt that
we may incur and this amount or percentage of debt may limit our
ability to obtain additional financing.
- Our policy to limit debt may not ensure that we can incur and
continue to make expected distributions to shareholders.
- We may not be able to refinance our debt on favorable terms or
make large payments on debt when our debts become due.
- Rising interest rates could adversely affect our cash flow.
- Our reliance on the property service businesses, where we lack voting
control, may adversely affect our shareholders. These property
services businesses, which provide management, leasing, financing,
insurance, engineering and technical services, and tenant construction
and renovation services, are conducted by three operating companies in
which Smith L.P. has a 99% economic interest but does not own voting
stock.
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- We are dependent on our key personnel with whom we do not have
employment agreements and for whom we do not have "key-person" life
insurance.
DESCRIPTION OF CAPITAL STOCK
As of November 30, 1999, our authorized capital stock was 145,000,000
shares. Those shares consisted of: (a) 80,000,000 shares of common stock, (b)
45,000,000 shares of excess stock, (c) 8,123,095 shares of classified preferred
stock, (d) 10,807,376 shares of undesignated preferred stock and (e) 1,069,529
shares which are not classified. Our charter gives the Board of Directors the
authority to issue, without a shareholder vote, shares of capital stock in one
or more series and to determine the rights of each series, including
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Such terms are fully described in the articles supplementary to the
charter adopted by the Board of Directors.
The following description of the terms and provisions of our shares of
capital stock and certain other matters is not complete. The description is
qualified by the applicable provisions of Maryland law and our charter, which is
on file with the SEC as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL RIGHTS OF COMMON STOCK
Each holder of common stock is entitled to one vote at shareholder
meetings for each share of common stock he owns. Neither our charter nor our
bylaws provide for cumulative voting for the election of directors. Subject to
the prior rights of any series of preferred stock that may be classified and
issued, holders of our common stock are entitled to receive, pro-rata, any
dividends declared by the Board of Directors out of legally available funds, and
are also entitled to share, pro-rata, in any other distributions to
shareholders. We pay quarterly dividends on our common stock and expect to
continue to do so. We depend upon distributions from Smith L.P. to fund our
dividends to shareholders.
Holders of common stock do not have any preemptive rights or other
rights to subscribe for additional shares.
PREFERRED SHARES
As of November 30, 1999, we have six series of preferred stock
outstanding. Each series of outstanding preferred stock ranks senior to the
common stock with respect to dividend rights and distributions upon our
liquidation, dissolution and winding up. The following are the principal terms
of each series of outstanding preferred stock:
- SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK: There are
2,640,325 Series A Preferred Shares outstanding. The Series A
Preferred Shares have a liquidation preference of $27.08 per share.
Dividends on the Series A Preferred Shares are cumulative from the
date of original issue and are payable quarterly at the greater of the
rate declared on the common stock or an annual rate of $2.02 per
share. We cannot redeem the Series A Preferred Shares prior to May 15,
2003. On or after May 15, 2003, we, at our option, may redeem the
Series A Preferred Shares for cash at a price of $27.08 per share,
plus accrued and unpaid dividends. Under certain circumstances, we may
elect to redeem the Series A Preferred Shares with common stock at the
then market price of the common stock. A holder of Series A Preferred
Shares may convert the Series A Preferred Shares into shares of
common stock on a one-
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for-one basis, subject to certain limitations.
- SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK: There are 500 Series C
Preferred Shares outstanding. The Series C Preferred Shares have a
liquidation preference of $100,000 per share and an initial annual
dividend of $7,910 per share (7.91% of purchase price). If the
securities receive an investment grade rating, the dividend will
decrease to $7,660 per share. Dividends are cumulative and are payable
quarterly. We may redeem Series C Preferred Shares after February 1,
2028, at the liquidation preference plus accrued dividends.
- SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK: There
are 684,931 Series E Preferred Shares outstanding. The Series E
Preferred Shares have a liquidation preference of $36.50 per share.
Dividends on the Series E Preferred Shares are cumulative from the
date of original issue (July 13, 1999) and are payable quarterly at
the greater of the rate declared on the common stock or an annual
rate of $2.82875 per share for the first year (beginning from the
original issue date up to and including the first anniversary of
the original issue date), $3.01125 for the second year after the
original issue date and $3.1025 for the third year after the
original issue date. We cannot redeem the Series E Preferred Shares
prior to July 13, 2002. On or after July 13, 2002, we, at our
option, may redeem the Series E Preferred Shares for cash at a
price of $36.50 per share, plus accrued and unpaid dividends. Under
certain circumstances, the Company may elect to make such
redemption with common stock at the then market price of the common
stock. A holder of Series E Preferred Shares may convert the Series
E Preferred Shares into shares of common stock on a one-for-one
basis, subject to certain limitations.
- SERIES F CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK: There are
666,667 Series F Preferred Shares outstanding. The Series F Preferred
Shares have a liquidation preference of $37.50 per share. Dividends on
the Series F Preferred Shares are cumulative from the date of original
issue (October 1, 1999) and are payable quarterly at the greater of
the rate declared on the common stock or an annual rate of $2.90625
per share for the first year (beginning from the original issue date
up to and including the first anniversary of the original issue date),
$3.09375 for the second year after the original issue date and $3.1875
for the third year after the original issue date. We cannot redeem the
Series F Preferred Shares prior to October 1, 2004. On or after
October 1, 2004, we, at our option, may redeem the Series F Preferred
Shares for cash at a price of $37.50 per share, plus accrued and
unpaid dividends. Under certain circumstances, the Company may elect
to make such redemption with common stock at the then market price of
the common stock. A holder of Series F Preferred Shares may convert
the Series F Preferred Shares into shares of common stock on a
one-for-one basis, subject to certain limitations.
- SERIES G CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK: There are
641,026 Series G Preferred Shares outstanding. The Series G Preferred
Shares have a liquidation preference of $39.00 per share. Dividends on
the Series G Preferred Shares are cumulative from the date of original
issue (November 5, 1999) and are payable quarterly at the greater of
the rate declared on the common stock or an annual rate of $3.0225 per
share for the first year (beginning from the original issue date up to
and including the first anniversary of the original issue date),
$3.2175 for the second year after the original issue date and $3.315
for the third year after the original issue date. We cannot redeem the
Series G Preferred Shares prior to November 5, 2005. On or after
November 5, 2005, we, at our option, may redeem the Series G Preferred
Shares for cash at a price of $39.00 per share,
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plus accrued and unpaid dividends. Under certain circumstances, the
Company may elect to make such redemption with common stock at the
then market price of the common stock. A holder of Series G Preferred
Shares may convert the Series G Preferred Shares into shares of common
stock on a one-for-one basis, subject to certain limitations.
- SERIES H CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK: There are
2,200,000 Series H Preferred Shares outstanding. The Series H
Preferred Shares have a liquidation preference of $25.00 per share.
Dividends on the Series H Preferred Shares are cumulative from the
date of original issue (September 13, 1999) and are payable quarterly
at the greater of the rate declared on the common stock or an annual
rate of $2.03125 per share. We cannot redeem the Series H Preferred
Shares prior to September 13, 2004. On or after September 13, 2004,
we, at our option, may redeem the Series H Preferred Shares for cash
at a price of $25.00 per share, plus accrued and unpaid dividends.
Under certain circumstances, the Company may elect to make such
redemption with common stock at the then market price of the common
stock. A holder of Series H Preferred Shares may convert the Series H
Preferred Shares into shares of common stock at a conversion rate of
approximately 0.65 shares of common stock per Series H Preferred
Share, subject to certain limitations.
CLASSIFICATION AND REMOVAL OF BOARD OF DIRECTORS; OTHER PROVISIONS
Our charter divides the Board of Directors into three classes, with
each class to consist of an equal number of the directors or to the nearest
extent possible. The terms of office of one class of directors (3 directors)
will expire at the 2000 annual meeting of shareholders; the term of the second
class of directors (2 directors) will expire at the 2001 annual meeting of
shareholders; and the term of the third class of directors (3 directors) will
expire at the 2002 annual meeting of shareholders. At each annual meeting of
shareholders, the class of directors to be elected at such meeting will be
elected for a three year term, and the directors in the other two classes will
continue in office. Because holders of common stock have no right to cumulative
voting for the election of directors, at each annual meeting of shareholders,
the holders of a majority of the shares of common stock will be able to elect
all of the successors of the class of directors whose term expires at that
meeting.
Our charter also provides that, except for any directors who may be
elected by holders of a class or series of capital stock other than common
stock, directors may be removed only for cause and only by the affirmative vote
of shareholders holding at least 80% of all the votes entitled to be cast for
the election of directors. Vacancies on the Board of Directors may be filled by
the affirmative vote of the remaining directors and, in the case of a vacancy
resulting from the removal of a director, by the shareholders by a majority of
the votes entitled to be cast for the election of directors. A vote of
shareholders holding at least 80% of all the votes entitled to be cast thereon
is required to amend, alter, change, repeal or adopt any provisions inconsistent
with the foregoing classified board and director removal provisions. Under our
charter, the power to amend our bylaws is vested exclusively in the Board of
Directors, and the shareholders will not have any power to adopt, alter or
repeal the bylaws absent amendment to our charter. These provisions may make it
more difficult and time consuming to change majority control of our Board of
Directors and, thus, reduce our vulnerability to an unsolicited proposal for a
takeover or the removal of incumbent management.
Because the Board of Directors has the power to establish the
preferences and rights of additional series of capital stock without further
shareholder vote, the Board of Directors may give the holders of any series of
capital stock preferences, powers and rights, voting or otherwise, senior to
those of holders of common stock. The issuance of any such senior capital stock
could have the effect of delaying or preventing a change in control of the
Company.
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SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
BUSINESS COMBINATION STATUTE. The MGCL establishes special requirements
with respect to "business combinations" between Maryland corporations and
"Interested Shareholders" unless exemptions are applicable. Among other things,
the law prohibits for a period of five years a merger and other specified or
similar transactions between a Company and an Interested Shareholder and
requires a supermajority vote for such transactions after the end of the
five-year period.
"Interested Shareholders" are all persons owning beneficially, directly
or indirectly, more than 10% of the outstanding voting stock of the Maryland
corporation. "Business Combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to Interested Shareholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an Interested Shareholder
or its affiliates for a period of five years after the date on which the
shareholder first became an Interested Shareholder. Thereafter, the transaction
may not be consummated unless recommended by the board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66-2/3% of the votes entitled
to be cast by all holders of outstanding shares of voting stock other than the
Interested Shareholder. A Business Combination with an Interested Shareholder
that is approved by the board of directors of a Maryland corporation at any time
before an Interested Shareholder first becomes an Interested Shareholder is not
subject to the special voting requirements. An amendment to a Maryland
corporation's charter electing not to be subject to the foregoing requirements
must be approved by the affirmative vote of at least 80% of the votes entitled
to be cast by all holders of outstanding shares of voting stock and 66-2/3% of
the votes entitled to be cast by holders of outstanding shares of voting stock
who are not Interested Shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply to any Business
Combination of a corporation with a shareholder who was an Interested
Shareholder on the date of the shareholder vote.
As permitted by Maryland law, we have exempted from the Maryland
business corporation statute any Business Combination with Messrs. Smith or
Kogod, and all persons, firms and corporations affiliated with, or acting in
concert or as a group with, either of them, as well as any Business Combination
that involves the redemption of Units for shares of common stock.
CONTROL SHARE ACQUISITION STATUTE. Maryland law imposes limitations on
the voting rights in a "control share acquisition." The Maryland statute defines
a "control share acquisition" at the 20%, 33-1/3% and 50% acquisition levels,
and requires a 2/3 shareholder vote (excluding shares owned by the acquiring
person and certain members of management) to accord voting rights to stock
acquired in a control share acquisition. The statute also requires Maryland
corporations to hold a special meeting at the request of an actual or proposed
control share acquirer generally within 50 days after a request is made with the
submission of an "acquiring person statement," but only if the acquiring person
(a) posts a bond for the cost of a meeting and (b) submits a definitive
financing agreement to the extent that financing is not provided by the
acquiring person. In addition, unless the charter or by-laws provide otherwise,
the statute gives the Maryland corporation, within certain time limitations,
various redemption rights if there is a shareholder vote on the issue and the
grant of voting rights is not approved, or if an acquiring person statement is
not delivered to the target within 10 days following a control share
acquisition. Moreover, unless the charter or by-laws provide otherwise, the
statute provides that if, before a control share acquisition occurs, voting
rights are accorded to control shares that result in the acquiring person having
majority voting power, then minority shareholders have appraisal rights. An
acquisition of shares may be exempted from the control share statute, provided
that a charter or bylaw provision is adopted for such purpose prior to the
control share acquisition. Our charter provides that any acquisition of our
shares of capital stock that is not prohibited by the terms of the restrictions
on transfer described below under "--
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Restrictions on Transfer; Excess Stock" is exempted from the provisions of the
control share acquisition statute.
RESTRICTIONS ON TRANSFER; EXCESS STOCK
OWNERSHIP LIMITS. Our charter restricts the number of shares of capital
stock that individual shareholders may own. For us to qualify as a REIT under
the Code, no more than 50% in value of our outstanding shares of capital stock
may be owned, directly or constructively under the applicable attribution rules
of the Code, by five or fewer individuals (which is defined in the Code to
include certain entities) during the last half of a taxable year. In addition,
the capital stock must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year or during a proportionate part of a shorter
taxable year (together with the restriction referred to in the preceding
sentence, the "Existing Holder Limit"). Our charter restricts certain
acquisitions of capital stock, including common stock, in order to comply with
these requirements. These restrictions are also intended to inhibit changes of
control of the Company.
Subject to certain exceptions specified in our charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% (the "Ownership Limit") in number or value of the issued and
outstanding shares of common stock. The Board of Directors in its discretion may
waive the Ownership Limit or the Existing Holder Limit with respect to a holder
that is an entity (but not an individual) if such holder's ownership will not
then or in the future jeopardize our status as a REIT.
Messrs. Smith and Kogod, members of their families and entities that
they control are subject to the Ownership Limit, and they also are subject to
certain additional special ownership limitations. Messrs. Smith and Kogod,
members of their families and entities that they control are prohibited from
acquiring additional shares of common stock (or rights to acquire shares), if,
as a result of, and giving effect to, such acquisition, any tenant would be
regarded as a related party tenant for purposes of Section 856(b)(2)(B) of the
Code (see "Federal Income Tax Considerations -- Requirements for Qualification
- -- Gross Income Tests" on page 21) and we would be considered to receive more
than 0.5% of our gross annual revenue from Related Party Tenants.
Notwithstanding any of the foregoing ownership limits, no holder may
own or acquire, either directly or constructively under the applicable
attribution rules of the Code, any shares of any class of our stock if such
ownership or acquisition (1) would cause more than 50% in value our outstanding
stock to be owned, either directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain tax-exempt entities, other than, in general, qualified
domestic pension funds), (2) would result in our stock being beneficially owned
by less than 100 persons (determined without reference to any rules of
attribution), or (3) would otherwise result in our failing to qualify as a REIT.
If any shareholder purports to transfer shares to a person and either
the transfer would result in our failing to qualify as a REIT, or such transfer
would cause the transferee to hold shares in excess of the Ownership Limit or
Existing Holder Limit, the purported transfer will be null and void. In that
event, the intended transferee will acquire no rights or economic interest in
the shares, and the shareholder will be deemed to have transferred the shares of
common stock to us in exchange for shares of Excess Stock, which will be deemed
to be held by us as trustee of a trust for the exclusive benefit of the person
or persons to whom the shares can be transferred without violating the ownership
limit. In addition, if any person owns, either directly or constructively under
the applicable attribution rules of the Code, shares of capital stock in excess
of the applicable Ownership Limit, such person will be deemed to have exchanged
the shares of capital stock that cause the Ownership Limit to be exceeded for an
equal number of shares of Excess Stock, which will be deemed to be held by us as
trustee of a trust for the exclusive benefit of the person or persons to whom
the share can be transferred without violating the Ownership Limit.
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A person who holds or transfers shares such that shares of capital
stock shall have been deemed to be exchanged for Excess Stock will not be
entitled to vote the Excess Stock and will not be entitled to receive any
dividends or distributions (any dividend or distribution paid on shares of
capital stock prior to our discovery that such shares have been exchanged for
Excess Stock shall be repaid to us upon demand, and any dividend or distribution
declared but unpaid shall be rescinded). Such person shall have the right to
designate a transferee of such Excess Stock so long as consideration received
for designating such transferee does not exceed a price that is equal to the
lesser of (1) in the case of a deemed exchange for Excess Stock resulting from a
transfer, the price paid for the shares in such transfer or, in the case of a
deemed exchange for Excess Stock resulting from some other event, the fair
market value, on the date of the deemed exchange, of the shares deemed
exchanged, and (2) the fair market value of the shares for which such Excess
Stock will be deemed to be exchanged on the date of the designation of the
transferee. For these purposes, fair market value on a given date is determined
by reference to the average closing price for the five preceding days. The
shares of Excess Stock so transferred will automatically be deemed to be
exchanged for shares of capital stock. We may purchase Excess Stock for the
lesser of the price paid or the average closing price for the five days
immediately preceding such purchase. We may elect to redeem the Excess Stock for
Units.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then the
intended transferee of any Excess Stock may be deemed, at our option, to have
acted as an agent on our behalf in acquiring such Excess Stock and to hold such
Excess Stock on our behalf.
All certificates representing shares of common stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage
as required by the Code or regulations thereunder) in number or value of the
issued and outstanding shares of capital stock, including common stock, must
file a written notice with us containing the information specified in our
charter no later than January 31 of each year. In addition, each shareholder
shall be required upon demand to disclose to us in writing such information as
we may request in order to determine the effect of such shareholder's direct,
indirect and constructive ownership of such shares on our REIT status.
The foregoing ownership limitations also may have the effect of
preventing or hindering any attempt to acquire control of us without the consent
of our Board of Directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent, Registrar and Dividend Disbursing Agent for the
shares of common stock is First Union National Bank of North Carolina.
REGISTRATION RIGHTS
We are a party to registration rights agreements with each of the
selling shareholders relating to the common stock offered hereby. Once the
SEC declares that the registration statement (of which this prospectus is a
part) is effective, we are required under the registration rights agreement
to use our reasonable efforts to keep this registration statement
continuously effective until the date on which all of the shares of common
stock issuable to the selling shareholders upon conversion of Series H
Preferred Shares and upon redemption of the Class A Units issuable upon
conversion of Series H Preferred Units have been sold under this registration
statement or Rule 144 of the Securities Act or can be sold freely without
restriction. The benefits of the registration rights agreements lapse with
respect to any shares that have been sold pursuant to each agreement or
otherwise transferred without legal restriction on further transfer.
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The registration rights agreements require that we pay all registration
expenses relating to the common stock covered by this registration statement
(other than underwriting discounts and commissions, fees and disbursements of
counsel, and transfer taxes, if any). We also have agreed to indemnify each
holder of common stock covered by the registration rights agreements, the
officers and directors of each holder and any person who controls any holder
against certain losses, claims, damages and expenses arising under the
securities laws. In addition, each holder of common stock covered by the
registration rights agreements has agreed to indemnify us and the other holders
of such common stock, each of our respective directors and officers (including
each director and officer who signs the registration statement on our behalf),
and any person who controls us or any other holder against other losses, claims
damages and expenses arising under the securities laws with respect to written
information furnished to us by such holder.
SELLING SHAREHOLDERS
We may issue up to 2,597,403 shares of common stock to selling
shareholders who currently hold Series H Preferred Shares or Series H
Preferred Units, if and to the extent the selling shareholders convert their
Series H Preferred Shares or to the extent that we redeem Class A Units
(issuable upon conversion of Series H Cumulative Convertible Redeemable
Preferred Units) and we choose to issue shares of common stock to them in
exchange therefor. Following our issuance of these shares, the selling
shareholders may resell the offered shares covered by this prospectus as
provided under the Plan of Distribution section of this prospectus or as
described in an applicable prospectus supplement.
The following table provides the name of each selling shareholder,
the number of offered shares to be owned upon conversion or redemption of
Series H Preferred Shares or Class A Units issuable upon conversion of Series
H Preferred Units by such selling shareholder before any offering to which
this prospectus relates and the number of offered shares that may be offered
by such selling shareholder. As used in this prospectus, the term "selling
shareholder" also includes permitted transferees, assignees, distributees or
pledgees (as permitted under the GE Capital and Allstate purchase agreements)
of any person identified as a selling shareholder. Because the selling
shareholders may sell all or some of their offered shares, no estimate can be
made of the number of offered shares that will be sold by the selling
shareholders or that will be owned by the selling shareholders upon
completion of the offering. There is no assurance that the selling
shareholders will sell any of the offered shares. The offered shares
represent 12.6% of the number of shares of common stock outstanding as of
November 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OFFERED
NAME HEREBY
- ---- --------------
<S> <C>
GE Capital Equity Investments, Inc..................................................2,337,663
Allstate Insurance Company............................................................259,740
</TABLE>
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of our common stock. The following
discussion is for general information only, is not exhaustive of all possible
tax considerations, and is not intended to be and should not be construed as tax
advice. For example, it does not include a detailed discussion of any state,
local or foreign tax considerations. Nor does it discuss all of the aspects of
federal income taxation that may be relevant to a prospective shareholder in
light of its particular circumstances or to certain types of shareholders who
are subject to special treatment under the federal income tax laws. For example,
the discussion does not discuss all of the aspects of federal income taxation
that may be relevant to insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the IRS, and court decisions. The reference to IRS interpretations and practices
includes IRS practices and policies as endorsed in private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that receives the
ruling. In each case, these sources are relied upon as they exist on the date of
this prospectus. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly change
current law or adversely affect existing interpretations of existing law. Any
change of this kind could apply retroactively to transactions preceding the date
of the change. Except as described below in "--Requirements for Qualification As
a REIT--Gross Income Tests," we have not received any rulings from the IRS
concerning our tax treatment. Therefore, no assurance can be provided that the
statements made in the following discussion, which do not bind the IRS or the
courts, will not be challenged by the IRS or will be sustained by a court if so
challenged.
EACH PROSPECTIVE HOLDER OF COMMON STOCK IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF ITS PERSONAL TAX SITUATION ON THE
ANTICIPATED TAX CONSEQUENCES OF THE OWNERSHIP AND SALE OF COMMON STOCK. THIS
INCLUDES THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
OWNERSHIP AND SALE OF COMMON STOCK, AND THE POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
OUR TAX TREATMENT
We have elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code commencing with our taxable year ending December
31, 1994. We believe that our company is organized and has operated in
conformity with the requirements for qualification and taxation as a REIT
under the Internal Revenue Code and we intend to continue to operate as a
REIT. We cannot ensure, however, that we have operated in a manner so as to
qualify as a REIT or that we will continue to operate as a REIT in the
future. Our qualification and taxation as a REIT depend upon our ability to
meet on a continuing basis the various qualification tests imposed under the
Internal Revenue Code. These tests must be met on a continuing basis through
actual annual operating results, distribution levels and diversity of stock
ownership. While we intend to operate so that we qualify 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 our
circumstances, we cannot ensure that the actual results of our operations for
any taxable year (our company) have satisfied or will satisfy the REIT
requirements. Further, the anticipated income tax treatment described herein
may be changed, perhaps retroactively, by legislative, administrative or
judicial action at any time. See "--Requirements for Qualification As a
REIT--Failure to Qualify."
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The following is a general description of the Internal Revenue Code
provisions that govern the federal income tax treatment of a REIT and its
shareholders. These provisions are highly technical and complex. This
description is qualified in its entirety by the applicable Internal Revenue Code
provisions, regulations, and administrative and judicial interpretations
thereof, all of which are subject to change prospectively or retroactively.
In any year in which we qualify for taxation as a REIT, we generally
will not be subject to federal corporate income taxes on net income that we
distribute currently to shareholders. This treatment substantially eliminates
the "double taxation" at the corporate and shareholder levels that generally
results from investment in a corporation. However, we will be subject to federal
income tax on any income that we do not distribute. In addition, in some
circumstances, we will be subject to federal income tax on some types of income
even though that income is distributed. Moreover, our property service business
subsidiaries do not qualify as REITs and are subject to federal corporate income
tax on their net income.
REQUIREMENTS FOR QUALIFICATION AS A REIT.
ORGANIZATIONAL REQUIREMENTS. The Internal Revenue Code defines a REIT as a
corporation, trust or association--
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial
interest;
(3) that would be taxable as a domestic corporation, but for
Sections 856 through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue
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
Internal Revenue Code to include certain entities); and
(7) that meets other tests, as described below, regarding the
nature of its income and assets.
The Internal Revenue 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. We believe that we
currently satisfy requirements (1) through (6). In addition, our charter
includes restrictions regarding the transfer of our shares that are intended to
assist us in continuing to satisfy the share ownership requirements described in
(5) and (6) above. Moreover, if we comply with regulatory rules pursuant to
which we are required to send annual letters to holders of common stock
requesting information regarding the actual ownership of the common stock, and
we do not know, or exercising reasonable diligence would not have known, whether
we failed to meet requirement (6) above, we will be treated as having met the
requirement.
GROSS INCOME TESTS. In order to maintain qualification as a REIT, we
must satisfy two gross income requirements, which are applied on an annual
basis. First, at least 75% of our 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 or from some types of temporary investments. Investments relating to
real property or mortgages on real property include "rents from real property"
and, in some circumstances, interest. Second, at
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least 95% of our 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.
Rents we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. These conditions relate to the identity of the
tenant, the computation of the rent payable, and the nature of the property
leased. We believe that the portion of the rents that we receive that fails to
qualify as "rents from real property" has not caused, and will not in the future
cause, us to fail to comply with the 75% and 95% gross income tests. Our belief
with respect to this matter, however, is based upon the advice of counsel with
respect to certain technical issues regarding the determination of "rents from
real property" that are not definitively answered under federal tax law. We
cannot ensure that the IRS will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," we generally must not operate or manage the property or furnish or
render services to tenants. There are two exceptions to this rule. First, we can
engage in these activities through an "independent contractor" from whom we
derive no revenue. Second, for taxable years beginning after December 31, 2000,
we will be able to engage in these activities through a "taxable REIT
subsidiary." A taxable REIT subsidiary is a corporation other than a REIT in
which a REIT directly or indirectly holds stock and that has made a joint
election with the REIT to be treated as a taxable REIT subsidiary. For a further
discussion of taxable REIT subsidiaries, see "--Asset Tests" below. In addition,
the rule restricting us from operating or managing properties or furnishing or
rendering services to tenants does not apply to the extent that the services we
render are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant." These services are referred to as permissible services.
Smith L.P. and the property service businesses provide certain services
with respect to our properties. The property service businesses are not
independent contractors. We have received rulings from the IRS that the
provision of some of the services provided by Smith L.P. and the property
service businesses will not cause the rents received with respect to the
properties to fail to qualify as "rents from real property." In addition, for
our taxable years beginning after December 31, 2000, if one or more of our
property service businesses elects to be treated as taxable REIT subsidiary,
they will be permitted to provide services to our tenants that we currently must
provide through an independent contractor. We should emphasize, though, that a
final decision has not been made regarding which, if any, property service
businesses will elect to be treated as taxable REIT subsidiaries.
We also have received rulings from the IRS to the effect that certain
revenues will qualify as "rents from real property." These revenues include the
following:
1. rents from corporate apartments,
2. revenues from laundry equipment,
3. certain parking revenues, and
4. certain revenues related to the provision of telephone and cable
television services.
Based upon our experience in the multifamily and retail property
rental markets in which our properties are located, we believe that all
services provided to tenants by us, whether through Smith L.P. or through the
property service businesses, should be considered permissible services,
although there can be no assurance that the IRS will not contend otherwise.
In this regard, if Smith L.P. contemplates providing services in the future
that reasonably might be expected not to meet the
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"usual or customary" standard, we will arrange to have such services provided by
an independent contractor from which we receive no income or, for taxable years
beginning after December 31, 2000, a taxable REIT subsidiary.
Even if we provide services that are not permissible services, rents
received generally will qualify as rents from real property so long as the
amount received for the "impermissible services" does not exceed a de minimis
amount. Specifically, so long as the amount received by us for all of the
impermissible services rendered at a specific property does not exceed one
percent of all of the amounts we receive, directly or indirectly, from that
property, then we can provide such services. The amount that we will be deemed
to have received for performing "impermissible services" will be the greater of
the actual amount received or 150% of the direct cost to us of providing
those services.
Smith L.P. may receive fees for the performance of property management
and other services with respect to properties in which Smith L.P. has a partial
interest. Only the portion of the management fee that corresponds to Smith
L.P.'s interest in such properties will qualify as "rents from real property."
The balance will not qualify. Smith L.P. also may receive certain other types of
non-qualifying income. This income includes, 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. We believe, however, that the aggregate amount of these fees and other
non-qualifying income in any taxable year will not cause us to exceed the limits
on non-qualifying income under the 75% and 95% gross income tests.
If we fail to satisfy one or both of the 75% or the 95% gross income
tests for any taxable year, we may nevertheless qualify as a REIT for the year
if we are entitled to relief under the Internal Revenue Code. We cannot state,
however, whether in all circumstances we would be entitled to this relief. Even
if this relief applied, 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. In order to maintain qualification as a REIT, we are
currently subject to certain tests relating to the composition of our assets.
As described below, as a result of the Work Incentives Improvement Act, for
our taxable years commencing after December 31, 2000, the third test listed
below will be modified and we will become subject to a new asset test as
described below. Currently, at the close of each quarter of our taxable year,
we must satisfy the following tests relating to the nature of our assets.
1. At least 75% of the value of our total assets must be represented by
"real estate assets," cash, cash items, and government securities.
2. Not more than 25% of our total assets may be represented by
securities, other than those in the 75% asset class.
3. Of the investments included in the 25% asset class, the value of any
one issuer's securities we own may not exceed 5% of the value of our
total assets, and we may not own more than 10% of any one issuer's
outstanding voting securities.
Smith L.P. owns 100% of the nonvoting stock of each of the property
service businesses. In addition, Smith L.P. holds notes from each of the
property service businesses. By virtue of our ownership of units, we are
considered to own our proportionate share of the assets of Smith L.P., including
the securities of each of the property service businesses. Other than through
our ownership of units, we do not own any assets in the 25% asset class. We
believe that our share of the aggregate value of the securities of the property
service businesses together with all other assets that do not qualify for
purposes of the 75% test does not exceed 25% of the total value of our assets.
We
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cannot ensure, however, that the IRS will not contend that our share of the
aggregate value of these assets exceeds the 25% value limitation. In
addition, we believe that the value of our share of the securities of each of
the property service businesses individually does not exceed 5% of the total
value of our assets. We cannot ensure, however, that the IRS will 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% value limitation.
Smith L.P. does not own more than 10% of the outstanding voting
securities of any of the property service businesses. Accordingly, we believe
that we meet the 10% voting securities test. We cannot ensure, however, that
the IRS will not contend that the nonvoting stock of one or more of the
property service businesses should be considered "voting securities" for
purposes of the 10% voting securities test.
The 25% value test must be satisfied on the last day of each calendar
quarter in which we acquire any securities in the 25% asset class. The 5% value
test must be satisfied with respect to a property service business on the last
day of each calendar quarter in which we acquire securities of that business.
Accordingly, each time a unitholder exercises its right to redeem units and our
interest in Smith L.P. increases, the requirement will have to be met. Although
we plan to take steps to ensure that we satisfy the 25% and 5% value tests for
any quarter with respect to which retesting is to occur, we cannot ensure that
these steps always will be successful or will not require a reduction in Smith
L.P.'s overall interest in the property service businesses.
As a result of the Work Incentives Improvement Act, for taxable
years beginning after December 31, 2000, the 5% value test and the 10% voting
security test will be modified in two respects. First, the 10% voting
securities test will be expanded so that we also will be prohibited from
owning more than 10% of the value of the outstanding securities of any one
issuer. Second, an exception to these tests will be created so that we will
be permitted to own securities of a subsidiary that exceed the 5% value test
and the new 10% vote or value test if the subsidiary elects to be a taxable
REIT subsidiary. We currently own more than 10% of the total value of the
outstanding securities of each property service business. The expanded 10%
vote or value test, however, will not apply to a property service business
unless it engages in a substantial new line of business or acquires any
substantial asset or we acquire any securities in the property service
businesses after July 12, 1999. At least two of the property service
businesses will make the taxable REIT subsidiary election, but a final
decision has not been made regarding which of the other property service
businesses, if any, will elect to be treated as taxable REIT subsidiaries.
For taxable years beginning after December 31, 2000, under a new asset test
not more than 20% of the value of our total assets will be permitted to be
represented by securities of taxable REIT subsidiaries.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, we generally
must distribute dividends to our shareholders in an amount at least equal to --
1. the sum of (a) 95% (90% for taxable years beginning after December
31, 2000) of our REIT taxable income, computed without regard to
the dividends paid deduction and our net capital gain, and (b) 95%
(90% for taxable years beginning after December 31, 2000) of our
net income after tax, if any, from foreclosure property, MINUS
2. the sum of certain items of noncash income.
Distributions must be made either during the taxable year to which they relate
or, if specific procedures are followed, during the subsequent taxable year. We
will be subject to tax on amounts not distributed at regular capital gains and
ordinary income rates.
In addition, if we fail to distribute during each calendar year at
least the sum of 85% of our ordinary income, 95% of our capital gain net income
and 100% of our undistributed income from
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prior years, we will be subject to a 4% nondeductible excise tax on the excess
of this required amount over the sum of the amounts we actually distribute and
amounts retained with respect to which we pay federal income tax.
We believe that we have made, and intend to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements. It is
possible, however, that we, from time to time, may not have sufficient cash or
other liquid assets to meet the 95% (90% for taxable years beginning after
December 31, 2000) distribution requirement. In that event, we may cause Smith
L.P. to arrange for short-term, or possibly long-term, borrowing to permit the
payments of required dividends.
FAILURE TO QUALIFY. If we fail to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, we will be subject to tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Unless we are entitled to relief under specific
statutory provisions, we also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
We cannot state whether in all circumstances we would be entitled to this
statutory relief.
TAX ASPECTS OF OUR INVESTMENTS IN SMITH L.P. AND THE PROPERTY SERVICE BUSINESSES
GENERAL. All of our investments are through Smith L.P. Smith L.P.
holds substantially all the real estate properties through some of the
subsidiary partnerships. This structure may involve special tax considerations.
These tax considerations include the following:
1. the allocations of income and expense items of Smith L.P. and
those subsidiary partnerships, which could affect the
computation of our taxable income;
2. the status of Smith L.P. and each applicable subsidiary
partnership as partnership (as opposed to an association
taxable as a corporation) for income tax purposes; and
3. the taking of actions by Smith L.P. or any of those subsidiary
partnerships that could adversely affect our qualification
as a REIT.
We believe that Smith L.P. 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, Smith L.P. or any of the subsidiary
partnerships were treated as an association taxable as a corporation, we
would fail to qualify as a REIT for a number of reasons.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Smith L.P. was
formed by way of contributions of appreciated property, including certain of
the apartment properties, at the time of its formation. In addition, 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."
Smith L.P.'s partnership agreement requires that all allocations of
partnership income, gain and loss be made in a manner consistent with Section
704(c) of the Internal Revenue Code and applicable regulations. Therefore,
allocations will tend to eliminate the book-tax differences with respect to
the contributed properties over the life of Smith L.P. However, the special
allocation rules of Section 704(c) of the Internal Revenue 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. Consequently, the
carryover basis of contributed properties in the hands of Smith L.P. could
cause us to be allocated lower amounts of depreciation and other deductions
for tax purposes than would be
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allocated to us if no property had a book-tax difference. Similarly, the
carryover basis of contributed properties in the hands of Smith L.P. could
cause us to possibly to be allocated taxable gain in the event of a sale of
contributed properties in excess of the economic or book income allocated to
us as a result of such sale.
PROPERTY SERVICE BUSINESSES. A significant portion of the amounts
used by Smith L.P. to fund distributions to partners, which in turn are used
by us 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 nonvoting stock of the property service
businesses held by Smith L.P. The property service businesses do not qualify
as REITs and therefore pay federal, state and local income taxes on their net
income at normal corporate rates. To the extent that they do so, the cash
available for distribution to shareholders will be reduced accordingly.
The property service businesses attempt to limit the amount of those
taxes. We cannot ensure, however, whether or the extent to which measures
taken to limit taxes will be successful. Even if those measures are
successful, future increases in the income of the property service businesses
inevitably will be subject to income tax. Moreover, as described above in
"--Requirements for Qualification As a REIT--Gross Income Tests" and "--Asset
Tests," two or more of the property service businesses will elect to be
treated as a taxable REIT subsidiary for years commencing after December 31,
2000. The property service businesses that make this election will be
restrained in their ability to limit their tax liability for two reasons.
First, taxable REIT subsidiaries will be limited in their ability to deduct
interest payments made to an affiliated REIT. Accordingly, if a property
service businesses elects to be treated as a taxable REIT subsidiary, it will
be limited significantly in its ability to deduct interest payments on notes
issued to Smith L.P. Second, if a taxable REIT subsidiary pays an amount to a
REIT that exceeds the amount that would be paid in an arm's length
transaction, the REIT generally will be subject to an excise tax equal to
100% of the excess. This rule generally will apply to amounts paid to Smith
L.P. by the property service businesses that elect to be treated as taxable
REIT subsidiaries.
Our ownership of the securities of the property service businesses
currently is subject to certain asset tests. Although, these tests will
change for our taxable years beginning after December 31, 2000, they will
continue to restrict the ability of the property service businesses to
increase the size of their respective businesses unless the value of the
assets of Smith L.P. increase at a commensurate rate. In addition, Smith L.P.
currently is prohibited from exercising control over any of the property
service businesses. For our taxable years beginning after December 31, 2000,
Smith L.P. will continue to be prohibited from exercising control over each
property service business that does not elect to be treated as taxable REIT
subsidiary. For a more detailed discussion of the ownership limitations
relating to our ownership of the property service businesses, see
"--Requirements for Qualification As a REIT--Asset Tests," above.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As used herein, the term
"U.S. shareholder" means a holder of common stock who for United States
federal income tax purposes is --
1. a citizen or resident of the United States,
2. a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any
political subdivision of the United States,
3. an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or
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4. a trust whose administration is subject to the primary
supervision of a United States court and which has one or
more United States persons who have the authority to
control all substantial decisions of the trust.
As long as we qualify as a REIT, distributions made to our taxable U.S.
shareholders out of current or accumulated earnings and profits, which are not
designated as capital gain dividends, will be taken into account by them as
ordinary income. Corporate shareholders will not be eligible for the dividends
received deduction with respect to these dividends. For purposes of determining
whether the distributions on shares of common stock are out of current or
accumulated earnings and profits, our earnings and profits will be allocated
first to shares of preferred stock and second to shares of common stock. We
cannot ensure that we will have sufficient earnings and profits to cover any
distributions on preferred stock or common stock.
To the extent they do not exceed our actual net capital gain for the
taxable year, distributions that are designated as capital gain dividends will
be taxed to taxable non-corporate U.S. shareholders as gains from the sale or
exchange of a capital asset held for more than one year. This tax treatment
applies regardless of the period non-corporate shareholders have held their
stock. Non-corporate U.S. shareholders include individuals, estates, and trusts.
On November 10, 1997, the IRS issued Notice 97-64, which provides generally that
we may classify portions of our designated capital gain dividend in the
following categories:
1. a 20% gain distribution, which would be taxable to taxable
non-corporate U.S. shareholders at a maximum rate of 20%,
2. an unrecaptured Section 1250 gain distribution, which would be
taxable to taxable non-corporate U.S. shareholders at a
maximum rate of 25%, or
3. a 28% gain distribution which would be taxable to taxable
non-corporate U.S. shareholders at a maximum rate of 28%.
In light of the IRS Restructuring and Reform Act of 1998, which
eliminates the 18-month holding period that was required to be met to take
advantage of the lowest capital gain tax rates, the IRS is expected to issue
clarifying guidance regarding the designation of REIT capital gain dividends.
Notice 97-64 provides that a REIT must determine the maximum amounts that it may
designate as 20% and 25% capital gain dividends by performing the computation
required by the Internal Revenue 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.
To the extent that they do not exceed our actual net capital gain for
the taxable year, distributions made by us that are properly designated as
capital gain dividends will be taxable to taxable corporate U.S. shareholders as
long-term capital gain. This tax treatment applies regardless of the period
corporate shareholders have held their stock. Those corporate U.S. shareholders,
however, may be required to treat up to 20% of certain capital gain dividends as
ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a taxable U.S. shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that distributions
exceed the adjusted basis of a taxable U.S. shareholder's common stock, they
will be included in income as capital gains, assuming the common stock is a
capital asset in the hands of the shareholder.
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In general, a taxable U.S. shareholder will realize gain or loss on the
disposition of common stock equal to the difference between the amount of cash
and the fair market value of any property received on such disposition and the
U.S. shareholder's adjusted basis of such common stock. This gain or loss will
be capital gain or loss if the common stock has been held as a capital asset. In
the case of a taxable U.S. shareholder that is a corporation, such capital gain
or loss will be long-term capital gain or loss if such common stock has been
held for more than one year. Generally, in the case of a taxable non-corporate
U.S. shareholder, such capital gain or loss will be taxed for dispositions
occurring after December 31, 1997, at a maximum rate of 20%, and for
dispositions occurring after December 31, 2000, at a maximum rate of 18% if the
common stock is acquired after December 31, 2000 and held for more than five
years. The Taxpayer Relief Act of 1997 allows the IRS to issue regulations
relating to how the act's new capital gain rates will apply to sales of capital
assets by "pass-through entities," which include REITs such as us, and to sales
of interests in "pass-through entities." The IRS has proposed regulations under
this authority, but as proposed, the regulations do not apply to the taxation of
gain and loss realized on the disposition of common stock. However, the proposed
regulations could be revised to apply to the disposition of common stock, and
additional regulations that would apply to the disposition of common stock could
be promulgated. Shareholders are urged to consult with their own tax advisors
with respect to the rules contained in the Taxpayer Relief Act.
Loss upon a sale or exchange of common stock by a taxable U.S.
shareholder who has held the common stock for six months or less, after applying
certain holding period rules, will be treated as long-term capital loss to the
extent the distributions from us are required to be treated by the shareholder
as long-term capital gain. For a taxable non-corporate U.S. shareholder, the
long-term capital loss will be apportioned among the applicable long-term
capital gain groups to the extent that distributions received by such U.S.
shareholder were previously so treated.
We may elect to require the holders of common stock to include our
undistributed net capital gains in their income. If we make this election, the
holders of common stock will include in their income as long-term capital gains
their proportionate share of such undistributed capital gains. They will be
deemed to have paid their proportionate share of the tax paid by us on the
undistributed capital gains and receive in return a credit or refund for this
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. Our earnings and profits will be
adjusted appropriately.
Under certain circumstances, U.S. shareholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. We do not expect our distributions
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 Internal Revenue Code, and the common stock is not otherwise used
in an unrelated trade or business of the tax-exempt entity. For a tax-exempt
shareholder that is a social club, voluntary employee benefit association,
supplemental unemployment benefit trust, or qualified group legal services plan
exempt from federal income taxation under Internal Revenue Code Sections 501
(c)(7), (c)(9), (c)(17) or (c)(20), respectively, income from an investment in
us will constitute UBTI unless the organization is able to properly deduct
amounts set aside or placed in reserve so as to offset the income generated by
its investment in us. The prospective shareholder should consult its own tax
advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation
Act of 1993 provides that, effective for taxable years beginning in 1994, a
portion of the dividends paid by a "pension held REIT" shall be treated as UBTI
as to any trust which is described in Section 401(a) of the Internal Revenue
Code, is tax exempt under Section 501(a) of the Internal Revenue Code and holds
more than 10%, by value, of the interests in the REIT. Tax-exempt pension funds
that are described in Section 401(a) of
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the Internal Revenue Code are referred to below as "qualified trusts." A REIT is
a "pension held REIT" if it meets the following two tests:
1. it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Internal Revenue Code, added by the 1993 Act,
provides that stock owned by qualified trusts shall be treated,
for purposes of determining whether the REIT is closely held, as
owned by the beneficiaries of the trust rather than by the trust
itself; and
2. either at least one such qualified trust holds more than 25% by
value, of the interests in the REIT, or one or more such qualified
trusts, each of which owns more than 10%, by value, of the
interests in the REIT, hold in the aggregate more than 50%, by
value, of the interests in the REIT.
The percentage of any REIT dividend treated as UBTI is equal to the
ratio of the UBTI earned by the REIT, treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI, to the total gross income
of the REIT. A DE MINIMIS exception applies where the percentage is less than 5%
for any year. The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to satisfy the
"not closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. Based on the current estimated ownership of
our common and preferred stock and as a result of certain limitations on
transfer and ownership of common and preferred stock contained in the our
charter, we believe that we should not be classified as a "pension held REIT."
TAXATION OF FOREIGN SHAREHOLDERS. In the following paragraphs,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders will be referred to collectively as foreign
shareholders. The rules governing U.S. federal income taxation of foreign
shareholders are complex. No attempt will be made in the following paragraphs to
provide more than a limited description of these rules. Prospective foreign
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 us of U.S. real property interests or are not designated by us as capital
gain dividends will be treated as dividends of ordinary income to the extent
that they are made out of our current or accumulated earnings and profits. These
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 our current and accumulated earnings and
profits will not be taxable to a foreign 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 foreign shareholder's common stock,
they will give rise to tax liability if the foreign shareholder otherwise would
be subject to tax on any gain from the sale or disposition of his common stock
as described below.
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that we will be required to withhold 10% of
any distribution in excess of our current and accumulated earnings and profits.
Consequently, although we intend to withhold at a rate of 30% on the entire
amount of any distribution, or a lower applicable treaty rate, to the extent
that we do 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 foreign shareholder may seek a refund
of such amounts from the IRS if it subsequently determined that the distribution
was,
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in fact, in excess of our current or accumulated earnings and profits, and the
amount withheld exceeded our foreign shareholder's United States tax liability,
if any, with respect to the distribution.
Distributions to a foreign shareholder that are designated by us as a
capital gain dividend, other than those arising form the disposition of a U.S.
real property interest, generally should not be subject to U.S. federal income
taxation unless the investment in the common stock is effectively connected with
a U.S. trade or business or the foreign shareholder is a nonresident alien
individual who is present in the U.S. for 183 days or more during the taxable
year and has a tax home in the US. We will be required to withhold and remit to
the IRS 35% of any distributions to foreign shareholders that are designated as
capital gain dividends, or, if greater, 35% of a distribution that could have
been designated as a capital gain dividend.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges of U.S. real property interests
will be taxed to a foreign 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. This tax treatment will apply whether or not the
distributions are designated as a capital gain dividend. Also, distributions
subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a
corporate foreign shareholder not entitled to treaty relief or exemption. We are
required by applicable regulations to withhold 35% of any distribution that we
could designate as a capital gain dividend. This amount is creditable against
the foreign shareholder's FIRPTA tax liability.
Although the law is not clear on the matter, it appears that amounts we
designate pursuant to the Taxpayer Relief Act as undistributed capital gains in
respect of shares of common stock generally should be treated with respect to
foreign shareholders in the same manner as actual distributions by us of capital
gain dividends. Under that approach, foreign shareholders would be able to
offset as a credit against the resulting United States federal income tax
liability their proportionate share of the tax we paid on such undistributed
capital gains. Also under that approach, foreign shareholders would be able to
receive from the IRS a refund to the extent their proportionate share of the tax
we paid exceeded their actual United States federal income tax liability.
Gain recognized by a foreign shareholder upon a sale of common stock
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT." Generally, a "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock was
held directly or indirectly by foreign persons. We believe that we currently are
a "domestically controlled REIT," and, therefore, the sale of common stock
generally will not be subject to taxation under FIRPTA. If gain on the sale of
common stock were to be subject to tax under FIRPTA, foreign shareholders would
be subject to the same treatment as U.S. shareholders with respect to this gain,
subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals. The purchaser of common stock
from a foreign shareholder would be required to withhold and remit to the IRS
10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding
tax generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements. Backup withholding tax and
information reporting will generally not apply to distributions paid to foreign
shareholders outside the United States that are treated as --
1. dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above,
2. capital gains dividends, or
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3. distributions attributable to gain from our sale or exchange
of United States real property interests.
As a general matter, backup withholding and information reporting will
not apply to a payment of the proceeds of a sale of common stock by or through a
foreign office of a foreign broker. Information reporting (but not backup
withholding) will apply, however, to a payment of the proceeds of a sale of
common stock by a foreign office of a broker that --
1. is a United States person,
2. derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States,
or
3. is a "controlled foreign corporation," generally, a foreign
corporation controlled by United States shareholders, for
United States tax purposes, unless the broker has documentary
evidence in its records that the holder is a foreign
shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the
proceeds of a sale of common stock is subject to both backup withholding and
information reporting unless the shareholder certifies under penalty of perjury
that the shareholder is a foreign shareholder, or otherwise establishes an
exemption. A foreign shareholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
The IRS has recently finalized regulations regarding the withholding
and information reporting rules discussed above. In general, these regulations
do not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. Pursuant to IRS Notice 98-16, these regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000 or the date of
expiration of the certificate under rules currently in effect (unless otherwise
invalidated due to changes in the circumstances of the person whose name is on
such certificate). A foreign shareholder should consult its own advisor
regarding the effect of these regulations.
OTHER TAX CONSIDERATIONS
STATE AND LOCAL TAXES; DISTRICT OF COLUMBIA UNINCORPORATED BUSINESS
TAX. Our company and our shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which we or they
transact business or reside. Our state and local tax treatment and that of our
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 some of our properties are located in the District of Columbia, the
partnership owning these properties will be subject to this tax. In effect, our
share of the "District of Columbia taxable income" attributable to properties
located in the District of Columbia will be subject to this tax. Smith L.P. and
its subsidiary partnerships will attempt to reduce the amount of income that is
considered "District of Columbia taxable income." However, it is likely that
some portion of the income attributable to properties located in the District of
Columbia will be subject to the District of Columbia tax. To the extent Smith
L.P. or a subsidiary partnership is required to pay this tax, the cash available
for distribution to us and, therefore, to our
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shareholders as dividends will be reduced. Moreover, our shareholder 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 Smith L.P. or a
subsidiary partnership. This tax would not apply if we were to own and operate
our assets directly, rather than through Smith L.P. However, our ability to
eliminate Smith L.P. and thus own its assets directly is severely limited.
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<PAGE>
PLAN OF DISTRIBUTION
Any of the selling shareholders may from time to time, in one or
more transactions, sell all or a portion of the offered shares on the New
York Stock Exchange, in the over-the-counter market, on any other national
securities exchange on which the common stock is listed or traded, in
negotiated transactions, in underwritten transactions or otherwise, at
prices then prevailing or related to the then current market price or at
negotiated prices. The offering price of the offered shares from time to time
will be determined by the selling shareholders and, at the time of such
determination, may be higher or lower than the market price of the common
stock on the New York Stock Exchange. In connection with an underwritten
offering, underwriters or agents may receive compensation in the form of
discounts, concessions or commissions from a selling shareholder or from
purchasers of the offered shares for whom they may act as agents, and
underwriters may sell the offered shares to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. The offered shares may be sold directly or
through broker-dealers acting as principal or agent, or pursuant to a
distribution by one or more underwriters on a firm commitment or
best-efforts basis. The methods by which the offered shares may be sold
include:
- a block trade in which a broker-dealer will attempt to sell the
offered shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the broker-
dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
- an exchange distribution in accordance with the rules of the New
York Stock Exchange;
- privately negotiated transactions; and
- underwritten transactions.
The selling shareholders and any underwriters, dealers or agents
participating in the distribution of the offered shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on
the sale of the offered shares by the selling shareholders and any
commissions received by an such broker-dealers may be deemed to be
underwriting commissions under the Securities Act.
When a selling shareholder elects to make a particular offer of the
offered shares, this prospectus and a prospectus supplement, if required,
will be distributed which will identify any underwriters, dealers or agents
and any discounts, commissions and other terms constituting compensation from
such selling shareholder and any other required information.
In order to comply with the securities laws of certain states, if
applicable, the offered shares may be sold only through registered or
licensed brokers or dealers. In addition, in certain states, the offered
shares may not be sold unless they have been registered or qualified for sale
in such state or an exemption from such registration or qualification
requirement is available and is complied with.
We have agreed to pay all costs and expenses incurred in connection with
the registration under the Securities Act of the offered shares, including,
without limitation, all registration and filing fees, printing expenses and
fees and disbursements of our counsel and accountants. The selling
shareholders will pay any brokerage fees and commissions, fees and
disbursements of legal counsel for the selling shareholders and stock
transfer and other taxes attributable to the sale of the offered shares.
Under agreements that may be entered into by us, underwriters, dealers and
agents who participate in the distribution of the offered shares, and their
respective directors, trustees, officers, partners, agents, employees and
affiliates, may be entitled to indemnification by us against specified
liabilities, including liabilities, losses, claims, damages and expenses and
any actions or proceedings arising under the securities laws in connection
with this offering, or to contribution with respect to payments which such
underwriters, dealers or agents may be required to make in respect thereof.
We also have agreed to indemnify each of the selling shareholders and each
person who controls (within the meaning of the Securities Act) such selling
shareholder, and their respective directors, trustees, officers, partners,
agents, employees and affiliates, against specified losses, claims, damages,
liabilities and expenses and any actions or proceedings arising under the
securities laws in connection with this offering. Each of the selling
shareholders has agreed to indemnify us, each person who controls us (within
the meaning of the Securities Act), underwriters, dealers and agents, and
each of our and their directors, trustees, officers, partners, agents,
employees and affiliates, against specified losses, claims, damages,
liabilities and expenses arising and any actions or proceedings under the
securities laws in connection with this offering with respect to written
information furnished to us by such selling shareholder, provided, however,
that the indemnification obligation is several, not joint, as to each selling
shareholder.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement in
accordance with the rules and regulations of the SEC. For further information,
we refer you to the registration statement on Form S-3, including its exhibits.
Statements contained in this prospectus about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that such agreement or document be filed as an exhibit to
the registration statement, please see such agreement or document for a complete
description of these matters. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of each
document.
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy materials that we have
filed with the SEC, including the registration statement, at the following SEC
public reference rooms:
<TABLE>
<S> <C> <C>
450 Fifth Street. N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms.
Our SEC filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our SEC filings are also available to the public on the SEC's Web Site
at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act.
1. Registration Statement on Form 8-A filed on August 16, 1994
registering our common stock under Section 12(b) of the Exchange
Act.
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2. Registration Statement on Form 8-A filed on December 9, 1998
registering our rights under Section 12(b) of the Exchange Act.
3. Annual Report on Form 10-K for the year ended December 31, 1998
(amended on Form 10-K/A).
4. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
the quarter ended June 30, 1999 and the quarter ended September 30,
1999.
5. Current Reports on Form 8-K dated January 5, 1999 (amended on Form
8-K/A), January 27, 1999, July 2, 1999 (amended on Form 8-K/A) and
September 8, 1999.
You may request a copy of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are specifically
incorporated by reference into this prospectus), at no cost, by writing or
calling us at the following address
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Mr. Gregory Samay, Vice President and Treasurer
(703) 769-1000
You should rely on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of the common stock in any
state where the offer is not permitted.
EXPERTS
Our financial statements for the fiscal year ended December 31, 1998
and the related schedule incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report dated February
9, 1999 relating to such financial statements, and are included in this
prospectus in reliance upon the authority of Arthur Andersen LLP as experts in
giving such report.
The consolidated balance sheets of Countryside Residential Partners,
Ltd. as of December 31, 1998, and the related consolidated statements of income,
changes in partners' capital and cash flows incorporated by reference in this
prospectus and elsewhere in the registration statement, have been audited by
Klayman & Korman LLC, independent public accountants, as indicated in their
report dated February 1, 1999, and are included in this prospectus in reliance
upon the authority of Klayman & Korman LLC as experts in giving such report.
The balance sheet of Somerset Limited Partnership as of December 31,
1998, and the related statements of income, changes in partners' capital and
cash flows incorporated by reference in this prospectus and elsewhere in the
registration statement, have been audited by Klayman & Korman LLC, independent
public accountants, as indicated in their report dated February 3, 1999, and are
included in this prospectus in reliance upon the authority of Klayman & Korman
LLC as experts in giving such report.
The balance sheet of 2900 Van Ness Associates as of December 31, 1998,
and the related statements of operations, partners' capital and cash flows
incorporated by reference in this prospectus and elsewhere in the registration
statement, have been audited by Ernst & Young LLP, independent public
accountants, as indicated in their report dated May 25, 1999, and are included
in
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this prospectus in reliance upon the authority of Ernst & Young LLP as experts
in giving such report.
LEGAL MATTERS
In connection with this prospectus, Hogan & Hartson L.L.P., Washington,
D.C. has provided its opinion as to the validity of the issuance of the common
stock offered by this prospectus and the discussion of tax matters in this
prospectus.
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YOU SHOULD RELY ON THE INFORMATION INCORPORATED BY REFERENCE OR PROVIDED IN THIS
PROSPECTUS. WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT MAKING AN OFFER OF THE COMMON STOCK IN ANY STATE WHERE THE OFFER IS
NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
PROSPECTUS SUMMARY............................... 1
RISK FACTORS..................................... 4
DESCRIPTION OF CAPITAL STOCK..................... 8
REGISTRATION RIGHTS.............................. 13
SELLING SHAREHOLDERS............................. 14
FEDERAL INCOME TAX CONSIDERATIONS................ 15
PLAN OF DISTRIBUTION............................. 29
WHERE YOU CAN FIND MORE INFORMATION.............. 29
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.. 29
EXPERTS.......................................... 30
LEGAL MATTERS.................................... 30
</TABLE>
[GRAPHIC OMITTED]
2,597,403 SHARES
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
COMMON STOCK
PROSPECTUS
DECEMBER __, 1999
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<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................................................................ $ 21,578
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........................................................................... $ 68,578
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our officers and directors are and will be indemnified under Maryland
law, our charter, and our partnership agreement of Smith L.P. against certain
liabilities. Our charter requires us to indemnify our directors and officers to
the fullest extent permitted from time to time by the laws of Maryland. Our
charter also provides that, to the fullest extent permitted under Maryland law,
our directors and officers will not be liable to us and our 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 us, or
any of our directors or officers, in our capacity as general partner of Smith
L.P., 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 Smith L.P.
as set forth in the partnership agreement.
ITEM 16. EXHIBITS
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3.1a Our Amended and Restated Articles of Incorporation
3.2b Articles Supplementary relating to Series A
Cumulative Convertible Redeemable Preferred Stock
3.3c Articles Supplementary relating to Series B
Cumulative Convertible Redeemable Preferred Stock
3.4c Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock
3.5d Articles Supplementary relating to Series C Cumulative
Redeemable Preferred Stock
3.6e Certificate of Correction relating to Series C Cumulative
Redeemable Preferred Stock
3.7f Articles Supplementary relating to Series D Junior
Participating Preferred Stock
</TABLE>
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<TABLE>
<S> <C>
3.8g Articles Supplementary relating to Series E, F and G
Cumulative Convertible Redeemable Preferred Stock
3.9h Articles Supplementary relating to Series H
Cumulative Convertible Redeemable Preferred Stock
3.10i Our Amended and Restated Bylaws
4.1j First Amended and Restated Agreement of Limited Partnership of
Smith L.P., as amended
4.2j Certificate of Limited Partnership of Smith L.P.
4.3k Rights Agreement
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of the
Common Stock
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Klayman & Korman LLC
23.5 Consent of Klayman & Korman LLC
23.6 Consent of Ernst & Young LLP
24 Power of Attorney (included on signature page (II-4))
</TABLE>
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a Incorporated by reference to Exhibit 3.1 to our registration statement
on Form S-11 (File No. 33-75288).
b Incorporated by reference to Exhibit 3.1 to our quarterly report on
Form 10-Q for the quarter ended June 30, 1997 (File No. 1-13174).
c Incorporated by reference to Exhibit 4.1 to our current report on Form
8-K dated October 3, 1997 (File No. 1-13174).
d Incorporated by reference to Exhibit 3.5 to our registration statement
on Form S-3 (File No. 333-17053).
e Incorporated by reference to Exhibit 3.6 to our registration statement
on Form S-3 (File No. 333-17053).
f Incorporated by reference to Exhibit 99.1 to our current report on Form
8-K dated December 2, 1998 (File No. 1-13174).
g Incorporated by reference to Exhibits 99.1, 99.2 and 99.3,
respectively, to our quarterly report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 1-13174).
h Incorporated by reference to Exhibit 99.1 to our quarterly report on
Form 10-Q for the quarter ended September 30, 1999 (File No. 1-13174).
i Incorporated by reference to Exhibit 3.2 to our registration statement
on Form S-3 (File No. 33-93986).
j Incorporated by reference to the same titled and numbered exhibit to
our Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 1-13174).
k Incorporated by reference to Exhibit 99.1 to our current report on Form
8-K dated December 2, 1998 (File No. 1-13174).
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of registration Fee"
table in the effective registration statement;
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(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in this registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the Securities offered herein, and the
offering of such Securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the termination of
the offering.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the County of Arlington, Commonwealth of
Virginia, on December 20, 1999.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /S/ ERNEST A. GERARDI, JR.
-------------------------------------------
Name: Ernest A. Gerardi, Jr.
Title: President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Ernest A. Gerardi, Jr. and Robert
D. Zimet, or either one of them, as true and lawful attorney-in-fact, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any amendments to this Registration Statement (including
post-effective amendments), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/S/ ROBERT H. SMITH Co-Chairman of the Board, Co-Chief Executive December 20, 1999
- ------------------------------------------
Robert H. Smith Officer, and Director
/S/ ROBERT P. KOGOD Co-Chairman of the Board, Co-Chief Executive December 20, 1999
- ------------------------------------------
Robert P. Kogod Officer, and Director
/S/ ERNEST A. GERARDI, JR. President, Chief Operating Officer, December 20, 1999
- ------------------------------------------
Ernest A. Gerardi, Jr. and Director
/S/ WESLEY D. MINAMI Senior Vice President and Chief Financial December 20, 1999
- ------------------------------------------
Wesley D. Minami Officer
/S/ STEVEN E. GULLEY Controller, and Chief Accounting Officer December 20, 1999
- ------------------------------------------
Steven E. Gulley
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
/S/ CHARLES B. GILL Director December 20, 1999
- ------------------------------------------
Charles B. Gill
/S/ R. MICHAEL MCCULLOUGH Director December 20, 1999
- ---------------------------
R. Michael McCullough
/S/ MANDELL J. OURISMAN Director December 20, 1999
- ------------------------------------------
Mandell J. Ourisman
/S/ L. RONALD SCHEMAN Director December 20, 1999
- ------------------------------------------
L. Ronald Scheman
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
<S> <C> <C>
3.1a Our Amended and Restated Articles of Incorporation.............................
3.2b Articles Supplementary relating to Series A Cumulative
Convertible Redeemable Preferred Stock.........................................
3.3c Articles Supplementary relating to Series B Cumulative
Convertible Redeemable Preferred Stock.........................................
3.4c Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock.........................................
3.5d Articles Supplementary relating to Series C Cumulative
Redeemable Preferred Stock.....................................................
3.6e Certificate of Correction relating to Series C Cumulative
Redeemable Preferred Stock.....................................................
3.7f Articles Supplementary relating to Series D Junior
Participating Preferred Stock..................................................
3.8g Articles Supplementary relating to Series E, F and G
Cumulative Convertible Redeemable Preferred Stock..............................
3.9h Articles Supplementary relating to Series H
Cumulative Convertible Redeemable Preferred Stock..............................
3.10i Our Amended and Restated Bylaws................................................
4.1j First Amended and Restated Agreement of Limited Partnership ...................
of Smith L.P., as amended......................................................
4.2j Certificate of Limited Partnership of Smith L.P................................
4.3k Rights Agreement...............................................................
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of the
Common Stock...................................................................
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters........................................................................
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)....................
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)....................
23.3 Consent of Arthur Andersen LLP.................................................
23.4 Consent of Klayman & Korman LLC................................................
23.5 Consent of Klayman & Korman LLC................................................
23.6 Consent of Ernst & Young LLP...................................................
24 Power of Attorney (included on signature page (II-4))
</TABLE>
a Incorporated by reference to Exhibit 3.1 to our registration statement
on Form S-11 (File No. 33-75288).
b Incorporated by reference to Exhibit 3.1 to our quarterly report on
Form 10-Q for the quarter ended June 30, 1997 (File No. 1-13174).
c Incorporated by reference to Exhibit 4.1 to our current report on Form
8-K dated October 3, 1997 (File No. 1-13174).
d Incorporated by reference to Exhibit 3.5 to our registration statement
on Form S-3 (File No. 333-17053).
e Incorporated by reference to Exhibit 3.6 to our registration statement
on Form S-3 (File No. 333-17053).
f Incorporated by reference to Exhibit 99.1 to our current report on Form
8-K dated December 2, 1998 (File No. 1-13174).
g Incorporated by reference to Exhibits 99.1, 99.2 and 99.3,
respectively, to our quarterly report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 1-13174).
h Incorporated by reference to Exhibit 99.1 to our quarterly report on
Form 10-Q for the quarter ended September 30, 1999 (File No. 1-13174).
i Incorporated by reference to Exhibit 3.2 to our registration statement
on Form S-3 (File No. 33-93986).
j Incorporated by reference to the same titled and numbered exhibit to
our Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 1-13174).
<PAGE>
k Incorporated by reference to Exhibit 99.1 to our current report on Form
8-K dated December 2, 1998 (File No. 1-13174).
<PAGE>
EXHIBIT 5.1
[Letterhead of Hogan & Hartson L.L.P.]
December 20, 1999
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
Ladies and Gentlemen:
We are acting as counsel to Charles E. Smith Residential
Realty, Inc., a Maryland corporation (the "Company"), in connection with its
registration statement on Form S-3 (the "Registration Statement") filed with the
Securities and Exchange Commission relating to the offer and sale of up to
2,597,403 shares of the Company's common stock, par value $.01 per share (the
"Shares"), by certain shareholders of the Company (the "Selling Stockholders")
and to be offered for sale by the Selling Stockholders if and to the extent that
they elect to convert shares of Series H Cumulative Convertible Redeemable
Preferred Stock of the Company ("Series H Preferred Shares") or if the Company
elects to convert Class A Units of limited partnership interest (the "Class A
Units") (issuable upon conversion of Series H Cumulative Convertible Redeemable
Preferred Units) of Charles E. Smith Residential Realty L.P. (the "Operating
Partnership"). This opinion letter is furnished to you at your request to enable
you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R.
Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies
of the following documents:
1. An executed copy of the Registration Statement.
2. An executed copy of the Purchase Agreement dated as of
September 8, 1999 between the Company, the Operating
Partnership and GE Capital Equity Investments, Inc.
3. An executed copy of the Preferred Share Purchase
Agreement dated as of September 10, 1999 between the
Company and Allstate Insurance Company.
<PAGE>
Board of Directors
December 20, 1999
Page 2
4. An executed copy of the Registration Rights Agreement
dated as of September 8, 1999 between the Company and
GE Capital Equity Investments, Inc.
5. An executed copy of the Registration Rights Agreement
dated as of September 13, 1999 between the Company and
Allstate Insurance Company.
6. The Amended and Restated Articles of Incorporation (the
"Articles") of the Company, as certified by the
Department of Assessments and Taxation of the State of
Maryland on December 13, 1999 and by the Secretary of
the Company on the date hereof as being complete,
accurate, and in effect.
7. The Bylaws of the Company, as certified by the
Secretary of the Company on the date hereof as being
complete, accurate, and in effect.
8. The Certificate of Limited Partnership of the Operating
Partnership, as amended, as certified by the Secretary
of State of the State of Delaware on December 13, 1999
and by the Secretary of the Company, as general partner
of the Operating Partnership, on the date hereof as
being complete, accurate, and in effect.
9. The First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended,
as certified by the Secretary of the Company, as
general partner of the Operating Partnership, on the
date hereof as being complete, accurate, and in effect
(the "Partnership Agreement").
10. Resolutions of the Board of Directors of the Company
adopted at a meeting held on July 20, 1999 and by
unanimous written consent on September 10, 1999, as
certified by the Secretary of the Company on the date
hereof as being complete, accurate, and in effect,
relating to, among other things, the issuance and sale
of the Shares and arrangements in connection therewith.
<PAGE>
Board of Directors
December 20, 1999
Page 3
In our examination of the aforesaid certificates, documents
and agreements, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the accuracy and completeness of all documents
submitted to us, the authenticity of all original documents, and the conformity
to authentic original documents of all documents submitted to us as copies
(including telecopies). We also have assumed that the Shares will not be issued
in violation of the ownership limit contained in the Articles. This opinion
letter is given, and all statements herein are made, in the context of the
foregoing.
This opinion letter is based as to matters of law solely on
the Maryland General Corporation Law, as amended. We express no opinion
herein as to any other laws, statutes, ordinances, rules, or regulations. As
used herein, the term "Maryland General Corporation Law, as amended" includes
the statutory provisions contained therein, all applicable provisions of the
Maryland Constitution and reported judicial decisions interpreting these laws.
Based upon, subject to and limited by the foregoing, we are of
the opinion that following (i) effectiveness of the Registration Statement and
(ii) issuance of the Shares, if and when issued and delivered in accordance with
the terms of the Articles (relating to conversion of the Series H Preferred
Shares) and the Partnership Agreement (relating to conversion of the Class A
Units) and the resolutions of the Board of Directors of the Company authorizing
the issuance of the Shares as contemplated thereby, the Shares will be validly
issued, fully paid, and nonassessable.
This opinion letter has been prepared for your use in
connection with the Registration Statement and speaks as of the date hereof. We
assume no obligation to advise you of any changes in the foregoing subsequent to
the delivery of this opinion letter.
We hereby consent to the filing of this opinion letter as
Exhibit 5.1 to the Registration Statement and to the reference to this firm
under the caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
EXHIBIT 8.1
[Letterhead of Hogan & Hartson L.L.P.]
December 20, 1999
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City
Arlington, VA 22202
Ladies and Gentlemen:
We have acted as counsel to Charles E. Smith Residential Realty, Inc., a
Maryland corporation (the "Company"), in connection with the registration
statement on Form S-3 (the "Registration Statement") and the prospectus included
therein (the "Prospectus") filed by the Company with the Securities and Exchange
Commission relating to up to 2,597,403 shares (the "Conversion Shares") of
common stock, par value $.01 per share, that the Company would issue to:
(i) holders of the Company's Series H Cumulative
Convertible Redeemable Preferred Stock, $.01 par
value per share (the "Preferred Shares") if the
holders of the Preferred Shares elect to convert the
Preferred Shares into Conversion Shares; and
(ii) holders of Class A Units ("Class A Units") of Charles
E. Smith Residential Realty L.P. (the "Operating
Partnership") who received their Class A Untis upon
the conversion of Series H Cumulative Convertible
Redeemable Preferred Units of the Operating
Partnership ("Series H Units") if the Company elects
to issue Conversion Shares to such holders who tender
the Class A Units for redemption.
In connection with the Registration Statement, we have been asked to provide you
with our opinion on certain federal income tax matters. Capitalized terms used
in this letter and not otherwise defined herein have the meanings set forth in
the Registration Statement.
<PAGE>
Charles E. Smith Residential Realty, Inc.
December 20, 1999
Page 2
BASES FOR OPINION
The opinion set forth in this letter is based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, existing administrative rulings and practices of the Internal Revenue
Service (the "IRS") (including the private letter ruling issued by the IRS to
the Company on June 8, 1994, as supplemented by the ruling letter dated June 16,
1995, and the private letter ruling issued by the IRS to the Company on August
27, 1997), and legislative history, all as of the date hereof. These provisions
and interpretations are subject to changes, which may or may not be retroactive
in effect, that might result in material modifications of our opinion.
In rendering the following opinion, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinion, including the following:
(1) the Registration Statement; (2) that certain Purchase Agreement by and among
the Company, the Operating Partnership and GE Capital Equity Investments, Inc.,
dated as of September 8, 1999; (3) that certain Preferred Share Purchase
Agreement by and between the Company and Allstate Insurance Company, dated as of
September 8, 1999; (4) the First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended as of January 31, 1995, as
certified by the Secretary of the Company on the date hereof as being a true,
correct and complete copy and as being in full force and effect; (5) the Amended
and Restated Articles of Incorporation of the Company dated as of June 27, 1994,
including the Company's Articles Supplementary relating to the Preferred Shares
dated as of September 10, 1999, as certified by the Department of Assessments
and Taxation of the State of Maryland on December 13, 1999 and by the Secretary
of the Company on the date hereof as being a true, correct and complete copy and
as being in full force and effect; (6) the agreements of limited partnership of
the partnership subsidiaries of the Operating Partnership; (7) the articles of
organization and stock ownership records of the four operating companies (Smith
Realty Company, Smith Management Construction, Inc., Combustioneer Corporation,
and Consolidated Engineering Services, Inc.) which provide property services to
the properties owned by the Operating Partnership and to other multifamily,
retail, and office properties (collectively, the "Property Service Businesses");
(8) the articles of incorporation of the wholly-owned subsidiaries of the
Company that serve as the general partners of the various subsidiary financing
partnerships (the "REIT Subs"); and (9) other
<PAGE>
Charles E. Smith Residential Realty, Inc.
December 20, 1999
Page 3
necessary documents. The opinion set forth in this letter also is premised on
certain written representations of the Company contained in a letter to us dated
as of the date hereof (the "Management Representation Letter"). Any variation or
difference in the facts from those set forth in the documents that we have
reviewed and upon which we have relied (including, in particular, those set
forth in the Management Representation Letter) may adversely affect the
conclusions stated herein.
We have made such factual and legal inquiries, including examination of the
documents set forth above, as we have deemed necessary or appropriate for
purposes of our opinion. For purposes of rendering our opinion, however, we have
not made an independent investigation or audit of the facts set forth in the
above referenced documents, including the Management Representation Letter. We
consequently have relied upon representations in the Management Representation
Letter that the information presented in such documents or otherwise furnished
to us accurately and completely describes all material facts relevant to our
opinion. We are not aware, however, of any material facts or circumstances
inconsistent with the representations we have relied upon as described herein or
other assumptions set forth herein.
Moreover, we have assumed that (i) the Company, the Operating Partnership,
each of the REIT Subs, each of the partnership subsidiaries, and each of the
Property Services Businesses have been and will continue to be operated in the
manner described in the relevant partnership agreement, articles (or
certificate) of incorporation, or other organizational documents; (ii) as
represented by the Company, there are no agreements or understandings between
the Company or the Operating Partnership, on the one hand, and the partnerships
that own the voting stock of the Property Services Businesses (the "Voting Stock
Partnerships") or their partners, on the other, that are inconsistent with the
relevant Voting Stock Partnership being considered to be both the record and
beneficial owner of more than 90% of the outstanding voting stock of the
respective Property Services Businesses; and (iii) the Company is a validly
organized and duly incorporated corporation under the laws of the State of
Maryland, each of the Property Services Businesses and each of the REIT Subs are
validly organized and duly incorporated corporations under the laws of the State
of Delaware or the Commonwealth of Virginia (as applicable), and the Operating
Partnership and each of the subsidiary partners are duly organized and validly
existing partnerships under the applicable laws of the State of Delaware.
<PAGE>
Charles E. Smith Residential Realty, Inc.
December 20, 1999
Page 4
In our review, we have assumed that all of the representations and
statements set forth in the documents that we reviewed (including the Management
Representation Letter) are true and correct, and all of the obligations imposed
by any such documents on the parties thereto, including obligations imposed
under the Articles of Incorporation of the Company, have been and will continue
to be performed or satisfied in accordance with their terms. We also have
assumed the genuineness of all signatures, the proper execution of all
documents, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals from which any copies were made.
OPINION
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein, we are of the opinion as follows:
1. The Company was organized and has operated in conformity with the
requirements for qualification and taxation as a real estate investment
trust ("REIT") under the Code for its taxable years ending December 31,
1994, December 31, 1995, December 31, 1996, December 31, 1997, and
December 31, 1998, and the Company's current organization and method of
operation, as described in the Management Representation Letter, will
enable it to continue to meet the requirements for qualification and
taxation as a REIT.
2. The discussion in the Prospectus under the heading "Federal Income
Tax Considerations" to the extent that it describes provisions of
federal income tax law, is correct in all material respects.
Our opinion is limited to the opinions described above. Our opinion does
not, and is not intended to, address the tax consequences to any holder of
Series H Units or Class A Units with respect to the acquisition, ownership,
redemption or disposition of its Series H Units or Class A Units, respectively,
or to any holder of Preferred Shares with respect to the acquisition, ownership,
redemption or disposition of its Preferred Shares.
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter. The Company's qualification
and taxation as a REIT depend upon the Company's ability to meet on a continuing
<PAGE>
Charles E. Smith Residential Realty, Inc.
December 20, 1999
Page 5
basis, through actual annual operating and other results, the various
requirements under the Code with regard to, among other things, the sources of
its gross income, the composition of its assets, the level of its distributions
to stockholders, and the diversity of its stock ownership. Hogan & Hartson
L.L.P. has relied upon representations of the Company with respect to these
matters and will not review the Company's compliance with these requirements on
a continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations, the sources of its income, the nature of
its assets, the level of its distributions to stockholders and the diversity of
its stock ownership for any given taxable year will satisfy the requirements
under the Code for qualification and taxation as a REIT.
An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the IRS or
the courts. There can be no assurance that positions contrary to our opinion
will not be taken by the IRS, or that a court considering the issue would not
hold contrary to such opinion. Furthermore, no assurance can be given that
future legislative, judicial or administrative changes, on either a prospective
or retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any such changes.
We hereby consent to the filing of this opinion letter as Exhibit 8.1 to
the Registration Statement and to the use of the name of the firm therein. In
giving the consent, we do not thereby admit that we are an "expert" within the
meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
--------------------------
Hogan & Hartson L.L.P.
<PAGE>
EXHIBIT 23.3
[Letterhead of Arthur Andersen]
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, 1999 included in Charles E. Smith Residential Realty, Inc.'s previously
filed Form 10-K for the year ended December 31, 1998 and to all references
to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
Vienna, Virginia
December 17, 1999
<PAGE>
EXHIBIT 23.4
[Letterhead of Klayman & Korman, LLC]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement on Form S-3 of our report dated February 1, 1999, on our audit
of the consolidated financial statements of Countryside Residential
Partners, Ltd. We also consent to the reference to our firm under the
caption "Experts".
/s/ Klayman & Korman, LLC
Chicago, Illinois
December 17, 1999
<PAGE>
EXHIBIT 23.5
[Letterhead of Klayman & Korman, LLC]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement on Form S-3 of our report dated February 3, 1999, on our audit
of the consolidated financial statements of Somerset Limited Partnership.
We also consent to the reference to our firm under the caption "Experts".
/s/ Klayman & Korman, LLC
Chicago, Illinois
December 17, 1999
<PAGE>
EXHIBIT 23.6
[Letterhead of Ernst & Young LLP]
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 25, 1999, in the Registration Statement on
Form S-3 and related Prospectus of Charles E. Smith Residential Realty,
Inc. for the registration of 2,597,403 shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated May 25, 1999 with respect to the financial statements of 2900 Van
Ness Associates for the year ended December 31, 1998 and included in the
Form 8-K/A (pages F-15 through F-23) of Charles E. Smith Residential
Realty, Inc. dated July 2, 1999, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
December 16, 1999
Indianapolis, Indiana
