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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1999
Registration No. 333-_____
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.
James E. Showen, 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)
<TABLE>
<CAPTION>
- ----------------------- ---------------- ------------------ ------------------ ------------------
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 254,189 $30.59 $7,775,641.51 $2,162
- ----------------------- ---------------- ------------------ ------------------ ------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration
fee in accordance with Rule 457(c) based on the average of the high and
low reported sales prices on the New York Stock Exchange on
January 13, 1999.
-------------------------
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 JANUARY 14, 1999
LOGO CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PROSPECTUS
254,189 SHARES OF COMMON STOCK
This prospectus relates to 254,189 shares of common stock that we may
issue to the holders of 254,189 units of limited partnership interest of
Charles E. Smith Residential Realty L.P., or "Smith L.P.," upon tender of
such units for redemption. These units were issued on January 1, 1998, in
exchange for Tunlaw Gardens and a majority interest in Tunlaw Park
Apartments, each of which is a Washington, D.C. apartment complex.
We are registering the issuance of the common stock to permit the
holders to sell without restriction in the open market or otherwise, but the
registration of the common stock does not necessarily mean that any holders
will elect to redeem their units. Also, we may elect to pay cash for the
units tendered rather than issue common stock. Although we will incur
expenses in connection with the registration of the 254,189 shares of common
stock, we will not receive any cash proceeds upon their issuance.
Our common stock is listed on the New York Stock Exchange under the
trading symbol "SRW."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 IN THIS
PROSPECTUS FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON
STOCK, INCLUDING SPECIAL CONSIDERATIONS APPLICABLE TO REDEEMING UNITHOLDERS.
-------------------------
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.
JANUARY __, 1999
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TABLE OF CONTENTS
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Page
----
<S> <C>
PROSPECTUS SUMMARY................................................................................. 1
Forward-Looking Information.................................................................. 1
The Company.................................................................................. 1
Recent Developments.......................................................................... 2
The Stock Offering........................................................................... 2
Important Risks in Owning Our Common Stock................................................... 2
Tax Status of the Company.................................................................... 2
RISK FACTORS....................................................................................... 3
A Unitholder Who Redeems Units for Common Stock May Have Adverse Tax Effects................. 3
If a Unitholder Redeems Units, the Original Receipt of the Units May Be Subject to Tax....... 3
Differences Between an Investment in Shares of Common Stock and Units May Affect Redeeming
Unitholders................................................................................ 3
Certain Company Policies May Be Changed Without a Vote of Shareholders....................... 3
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... 4
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............................................................................... 5
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
Redeeming Unitholders Will Continue to be Subject to the Operational Risks of Our Business... 6
REDEMPTION OF UNITS................................................................................ 7
General...................................................................................... 7
Tax Consequences of Redemption............................................................... 8
Comparison of Ownership of Units and Common Stock............................................ 10
FEDERAL INCOME TAX CONSIDERATIONS.................................................................. 19
General...................................................................................... 19
Taxation of Charles E. Smith................................................................. 19
Requirements for Qualification............................................................... 20
Tax Aspects of Charles E. Smith's Investments in Smith L.P. and Property Service Businesses.. 24
Taxation of Shareholders..................................................................... 25
Other Tax Considerations..................................................................... 29
PLAN OF DISTRIBUTION............................................................................... 30
WHERE YOU CAN FIND MORE INFORMATION................................................................ 30
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................................... 31
EXPERTS............................................................................................ 31
LEGAL MATTERS...................................................................................... 32
</TABLE>
-i-
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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 OUR FILINGS
WITH THE SEC.
WE RECOMMEND THAT YOU CONSIDER CAREFULLY THE RISKS OF SUCH ASSUMPTIONS
BEFORE MAKING ANY INVESTMENT IN OUR COMMON STOCK.
WE DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
WE MAY MAKE SUCH UPDATES OR REVISIONS TO REFLECT A CHANGE IN OUR
EXPECTATIONS OR A FUTURE EVENT OR CHANGE IN A CIRCUMSTANCE OR CONDITION UPON
WHICH SUCH FORWARD-LOOKING STATEMENTS ARE BASED.
THE COMPANY
As a self-managed equity REIT, we acquire, develop, manage and operate
multifamily properties primarily in the Washington, D.C., Chicago, and Boston
metropolitan areas. We are a fully integrated real estate organization with
in-house acquisition, development, financing, marketing, property management
and leasing expertise. Our primary strategy for growth is to acquire,
develop, own and manage high quality multifamily properties to generate
long-term income and increases in value.
We are the sole general partner of Smith L.P. As of December 31,
1998, we owned approximately 57.9% of the outstanding units. Smith
L.P. and its subsidiaries own all of our properties, property interests and
business assets.
As of December 31, 1998, we owned 48 multifamily apartment communities
with a total of 19,279 units. 44 of the properties were located in the
Washington, D.C. metropolitan area, two in the Boston metropolitan area and
two in the Chicago metropolitan area. We currently have approximately 2,100
units under construction and approximately 1,200 additional units under
construction which are
<PAGE>
subject to pre-purchase agreements. We also manage
over 3,500 additional apartment units for other property owners. Besides
our residential properties, we own two retail centers in the Washington,
D.C. metropolitan area with approximately 436,000 square feet of retail
space.
RECENT DEVELOPMENTS
We have made arrangements with Freddie Mac for three long-term secured
non-recourse debt financings through its Program Plus lender, Columbia
National Real Estate Finance, Inc. The debt financings consist of a $49.3
million 12-year loan at 6.45%, a $17.1 million eight-year loan at 6.30% and
a $38.2 million 12-year loan at 6.29%. Proceeds from the debt financings
were used to retire $95.5 million of corporate bank debt and $9.1 million of
property debt.
We have agreed to acquire a portfolio of four apartment properties
totaling 2,444 units. All four properties are located in the Chicago,
Illinois area. The properties will be acquired for $137 million, which will
include over $30 million in units at prices ranging from $31 to $35 per
unit, plus closing costs and debt assumption. Closing on two of the assets is
expected in early 1999, with the remaining two properties to settle by
mid-year 1999.
In addition, we recently acquired a 442-unit high-rise apartment
building known as the Buchanan House apartments located in Crystal City,
Arlington, Virginia for a purchase price of $60 million from a private
investment company. The acquisition of Buchanan House was financed in part
with $18 million in proceeds from the December 1998 sale of Marbury Plaza, a
672-unit property in southeast Washington, D.C. The remaining financing for
the acquisition was derived from our bank line of credit and debt assumption.
On December 2, 1998, we announced that our Board of Directors adopted a
shareholder rights plan. In implementing the rights plan, the Board of
Directors distributed one preferred stock purchase right for each share of
our common stock outstanding as of the close of business on December 14,
1998. The rights plan is intended to protect the rights of our shareholders
by deferring coercive or unfair takeover tactics in response to any
acquisition proposal. The rights plan was not adopted in response to any
acquisition proposal.
THE STOCK OFFERING
This prospectus relates to 254,189 shares of common stock that we may
issue to holders of 254,189 units of limited partnership interest in Smith
L.P. The units were issued on January 1, 1998, in exchange for Tunlaw
Gardens and a majority interest in Tunlaw Park Apartments, both of which are
apartment complexes in the District of Columbia.
On January 1, 1999, the unitholders became eligible to redeem their
units for cash or, at our election, shares of our common stock equal to the
number of units being redeemed.
IMPORTANT RISKS IN OWNING OUR COMMON STOCK
Before you decide to redeem your units for common stock, you should
read the "Risk Factors" section, which begins on page 3 of this prospectus.
TAX STATUS OF THE COMPANY
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code. We believe that we qualify for taxation as a
REIT and generally will not be subject to federal income tax on net income
that we distribute to our shareholders. We are required, among other
things, to distribute at least 95% of our taxable income, excluding any net
capital gain. Even if we qualify to be taxed as a REIT, we are subject to
certain federal, state and local taxes on our income and property and to
federal income and excise tax on the income we do not distribute. In
addition, the operating companies 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.
2
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS.
A UNITHOLDER WHO REDEEMS UNITS FOR COMMON STOCK MAY HAVE ADVERSE TAX
EFFECTS. A unitholder who redeems units for common stock will be treated for
tax purposes as having sold the units. The sale will be taxable and the
unitholder will be treated as realizing an amount equal to the sum of the
value of the common stock the unitholder receives plus the amount of Smith
L.P. nonrecourse liabilities allocable to the redeemed units. It is possible
that the amount of gain the unitholder recognizes could exceed the value of
the common stock the unitholder receives. It is even possible that the tax
liability resulting from this gain could exceed the value of the common stock
the unitholder receives. See "Redemption of Units--Tax Consequences of
Redemption."
In addition, the unitholder's ability to sell common stock in order to
raise cash to pay the resulting tax liability may be restricted due to our
common stock's relatively low trading volume. As a result of fluctuations
in the stock price, the price a unitholder receives for the shares may not
equal the value of the units redeemed. See "--Market Interest Rates and Low
Trading Volume May Have an Effect on the Value of Our Common Stock."
IF A UNITHOLDER REDEEMS UNITS, THE ORIGINAL RECEIPT OF THE UNITS MAY BE
SUBJECT TO TAX. If a unitholder redeems units, particularly within two
years of receiving them, there is a risk that the original receipt of the
units may be treated as a taxable sale under the "disguised sale" rules of
the Internal Revenue Code. Subject to several exceptions, the tax law
generally provides that a partner's contribution of property to a
partnership and a simultaneous or subsequent transfer of money or other
consideration from the partnership to the partner will be presumed to be a
taxable sale. In particular, if money or other consideration is transferred
by a partnership to a partner within two years of the partner's contribution
of property, the transactions are presumed to be a taxable sale of the
contributed property unless the facts and circumstances clearly establish
that the transfers are not a sale. On the other hand, if two years have
passed between the original contribution of property and the transfer of
money or other consideration, the transactions will not be presumed to be a
taxable sale unless the facts and circumstances clearly establish that they
should be.
DIFFERENCES BETWEEN AN INVESTMENT IN SHARES OF COMMON STOCK AND UNITS
MAY AFFECT REDEEMING UNITHOLDERS. If a unitholder elects to redeem units,
we will determine whether the unitholder receives cash or shares of our
common stock in exchange for the units. Although an investment in shares of
our common stock is substantially similar to an investment in units in Smith
L.P., there are some differences between ownership of units and ownership of
common stock. These differences include form of organization, management
structure, voting rights, liquidity and federal income taxation. These
differences, some of which may be material to investors, are discussed in
"Redemption of Units -- Comparison of Ownership of Units and Common Stock."
CERTAIN COMPANY 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.
3
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PROVISIONS OF OUR CHARTER COULD INHIBIT CHANGES OF CONTROL. Certain
provisions of our charter may delay or otherwise limit the ability of
outside parties to acquire control of us or engage in some other
transaction. Such 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. Such 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
such 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 57.9% of the 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 such an acquisition or change in control
that could motivate them to oppose such a transaction that is in the
shareholders' interest.
OUR ABILITY TO ISSUE PREFERRED SHARES COULD INHIBIT CHANGES OF CONTROL.
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. We currently have outstanding three 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 certain "business combinations," including certain
issuances of equity securities, between a Maryland corporation and any person
who owns 10% or more of the voting power of the corporation's shares of
capital stock, 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.
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
upon the occurrence of certain events, shareholders will be entitled to
purchase shares of our stock, subject to the 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 on terms not
approved by the Board of Directors 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.
4
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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 December 31, 1998, we
had outstanding approximately 18.2 million shares of common stock tradable
without restriction and had reserved 17.3 million additional shares of
common stock for possible issuance upon redemption of units and 3.4 million
shares for possible issuance upon conversion of outstanding preferred stock.
In addition, we have reserved a number of shares available for possible
issuance under any of our employee benefit plans filed with the SEC. We 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 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 such shares, as a percentage of the price of such
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
such shares in the market without causing a substantial decline in the
market value of such shares.
5
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WE BELIEVE, BUT CANNOT GUARANTEE, THAT WE QUALIFY AS A REIT. We
believe we qualify as a REIT and generally will not be subject to federal
income tax on net income that we distribute to our shareholders. However,
our qualification as a REIT involves the application of technical and
complex tax rules. For instance, if we own a company's securities, we
cannot qualify as a REIT unless the value of those securities does not
exceed 5% of the total value of our assets. We believe that we meet this
requirement, but this belief is based on our analysis of the value of each
of the corporations that conduct our property service businesses and on our
conclusion that each of these corporations will be respected as a separate
corporation. Also, to qualify as a REIT, we cannot own more than 10% of a
company's voting securities. We also believe that we meet this requirement,
but this belief is based on our conclusion that the shares of stock that we
own in each of the property service business corporations are not voting
securities. We cannot guarantee that the IRS will agree with us on these
points.
Moreover, our ability to qualify as a REIT may depend on facts and
circumstances that may not be within our control. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, it is
possible that new tax laws or new interpretations of existing tax laws will
affect both our ability to qualify as a REIT and the tax consequences of
REIT qualification. For all of these reasons, we cannot guarantee that we
currently qualify or will be able to remain qualified as a REIT.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE
CONSEQUENCES. If we fail to qualify as a REIT, we will be subject to
federal income tax at regular corporate rates. This additional tax would
significantly reduce the cash we would have available to distribute to our
shareholders and could reduce significantly the value of our common stock.
In addition, if we fail to qualify as a REIT, we may be disqualified from
electing to be treated as a REIT for the next four taxable years.
WE MAY NEED TO BORROW MONEY TO QUALIFY AS A REIT. To obtain the
favorable tax treatment associated with REITs, we generally will be required
each year to distribute to our shareholders at least 95% of our net taxable
income, excluding net capital gain. Differences in timing between when we
receive income and when we have to pay expenses could require us to borrow
money to meet this requirement. The impact of large expenses also could have
this effect. We might need to borrow money even if we believe that market
conditions are not favorable for such borrowings.
WE ARE SUBJECT TO SOME TAXES EVEN IF WE QUALIFY AS A REIT. Even if we
qualify as a REIT, we are subject to some federal, state and local taxes on
our income and property. For example, we pay tax on certain income we do
not distribute. Also, our income derived from properties located in the
District of Columbia is subject to local tax and our net income from certain
prohibited transactions will be subject to a 100% tax. In addition, we
derive income from the property service business corporations, whose income
is subject to federal, state and local income tax.
REDEEMING UNITHOLDERS WILL CONTINUE TO BE SUBJECT TO THE OPERATIONAL
RISKS OF OUR BUSINESS. A unitholder who receives our common stock upon
redemption of units will continue to 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.
6
<PAGE>
- 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 certain 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, degree of leverage 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 our degree of leverage 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 balloon payments when certain debts become due.
- Rising interest rates could adversely affect our cash flow.
- - Our reliance on the property service businesses, where we lack of
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.
- - We are dependent on our key personnel for whom we do not have
"key-person" life insurance.
REDEMPTION OF UNITS
GENERAL
Each unitholder may, subject to certain limitations, require that
Smith L.P. redeem units held by the unitholder. If we do not assume Smith
L.P.'s obligation to redeem such units, upon redemption the unitholder will
receive cash from Smith L.P. in an amount equal to the market value of the
units to be redeemed. The market value of a unit for this purpose will be
equal to the average of the closing trading price of a share of our common
stock for the ten trading days before the day on which the redemption notice
was received by Smith L.P. The partnership agreement of Smith L.P. provides
that if such trading information is not available, we can use another method
to determine the value of the common stock. The partnership agreement does
not specify alternative valuation methodologies.
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We have the right, however, to assume directly and satisfy the
redemption right of a unitholder by issuing our common stock or cash in
exchange for any units tendered for redemption. We generally expect that we
will elect to issue shares of our common stock in exchange for units tendered
for redemption rather than paying cash, although we will make the
determination whether to pay cash or issue common stock at the time units are
tendered for redemption. With each redemption, our interest in Smith L.P.
will increase. Upon redemption, the unitholder will no longer be entitled to
receive distributions with respect to the units redeemed. If units are
redeemed for common stock, the unitholder will have rights as a shareholder
from the time the common stock is acquired.
A unitholder must notify Smith L.P. and us of the unitholder's
desire to require Smith L.P. to redeem units by sending a notice in the form
attached as an exhibit to Smith L.P.'s partnership agreement, a copy of which
we can provide to you upon request. The unitholder must request the
redemption of at least 1,000 units or all of the units held by such holder,
if less. The redemption generally will occur on the tenth business day after
the notice is delivered by the unitholder, except that no redemption or
exchange can occur if the delivery of common stock therefore would be
prohibited under the provisions of our charter designed to protect our REIT
qualification or under applicable federal or state securities laws.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes the material federal income tax
considerations that may be relevant to a unitholder who desires to have units
redeemed.
TAX TREATMENT OF A REDEMPTION OF UNITS. If we assume and perform
Smith L.P.'s redemption obligation, the redemption will be treated as a sale
of units by the unitholder at the time of such redemption. The sale
will be fully taxable to the unitholder in an amount equal to the sum of the
cash or the value of the common stock received in the exchange plus the
amount of Smith L.P. nonrecourse liabilities allocable to the redeemed units
at the time of the redemption.
If we do not elect to assume the obligation to redeem units, Smith
L.P. will redeem the units for cash. If Smith L.P. redeems units for cash
that we contribute to Smith L.P. to effect the redemption, the redemption
likely would be treated for tax purposes as a sale of the units in a
fully taxable transaction, although the matter is not free from doubt. In
that event, the unitholder would be treated as realizing an amount equal to
the sum of the cash received in the exchange plus the amount of Smith L.P.'s
nonrecourse liabilities allocable to the redeemed units at the time of the
redemption.
If Smith L.P. redeems units for cash that is not contributed by us
to effect the redemption, the tax consequences would be the same as described
in the previous paragraph, except that if Smith L.P. redeems less than all of
a unitholder's units, the unitholder would not be permitted to recognize any
loss occurring on the transaction and would recognize taxable gain only to
the extent that the cash, plus the share of Smith L.P.'s nonrecourse
liabilities allocable to the redeemed units, exceeded the unitholder's
adjusted basis in all of the unitholder's units immediately before the
redemption.
TAX TREATMENT OF A SALE OF UNITS. If a unit redemption is treated
as a sale of the unit, the determination of gain or loss will be based on the
difference between the amount realized for tax purposes and the tax basis in
the unit. See "Basis of Units" below. The "amount realized" will be
measured by the sum of the cash and fair market value of common stock or
other property received plus the portion of Smith L.P.'s nonrecourse
liabilities allocable to the unit sold. To the extent that this amount
exceeds the unitholder's basis in the unit, the unitholder will recognize
gain. It is possible that the amount of gain recognized or even the tax
liability resulting from the gain could exceed the amount of cash and the
value of common stock or any other property received upon the disposition.
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Except as described below, any gain recognized upon a sale or other
disposition of units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount
realized attributable to a unitholder's share of "unrealized receivables" of
Smith L.P. exceeds the unitholder's basis attributable to those assets, the
excess will be treated as ordinary income. Unrealized receivables include,
to the extent not previously included in Smith L.P.'s income, any rights to
payment for services rendered or to be rendered. Unrealized receivables also
include amounts that would be subject to recapture as ordinary income if
Smith L.P. had sold its assets at their fair market value at the time of the
transfer of a unit.
For individuals, trusts and estates, the maximum rate of tax on the
net capital gain from a sale or exchange of an asset held for more than 12
months is 20%. If the capital asset is acquired after December 31, 2000 and
is held for more than five years, the maximum rate of tax will be 18%. Net
capital gain from the sale of an asset held 12 months or less is subject to
tax at the applicable rate for ordinary income. The maximum rate for net
capital gains attributable to the sale of depreciable real property held for
more than 12 months is 25% to the extent of the prior depreciation deductions
not otherwise recaptured as ordinary income under existing depreciation
recapture rules.
The IRS has authority to issue regulations that could, among other
things, apply these rates on a look-through basis in the case of
"pass-through" entities such as our company. The IRS has not yet issued such
regulations, and if it does not issue such regulations in the future, the
rate of tax that would apply to the disposition of a unit by an individual,
trust or estate would depend upon the period of time over which the
individual, trust or estate held the unit. The IRS could, however, issue
regulations that would provide that the rate of tax that would apply to the
disposition of a unit by an individual, trust or estate would be determined
based upon the nature of the assets of Smith L.P. and the periods of time
over which Smith L.P. held such assets. Such regulations could not be
applied retroactively. If such regulations were to apply to the disposition
of a unit, any gain on such disposition likely would be treated partly as
gain from the sale of a long-term capital asset, partly as gain from the sale
of a short-term capital asset, and partly as gain from the sale of
depreciable real property.
BASIS OF UNITS. In general, a unitholder who received units in
exchange for a contribution of property had an initial tax basis in the units
equal to the unitholder's basis in the contributed property. A unitholder's
initial basis generally is increased by the unitholder's share of Smith
L.P.'s taxable income and increases in the unitholder's share of the
liabilities of Smith L.P., including any increase in the unitholder's share
of nonrecourse liabilities. A unitholder's initial basis generally is
decreased, but not below zero, by the unitholder's share of Smith L.P.'s
distributions, decreases in the unitholder's share of liabilities of Smith
L.P., including nonrecourse liabilities, the unitholder's share of losses of
Smith L.P., and the unitholder's share of nondeductible expenditures of Smith
L.P. that are not chargeable to capital.
POTENTIAL APPLICATION OF THE DISGUISED SALE RULES TO A REDEMPTION OF
UNITS. There is a risk that if a unit is redeemed, particularly if it is
redeemed within two years of when it was issued, the IRS might contend that
the original transaction pursuant to which the units were issued should be
treated as a "disguised sale" of property. Under the IRS's disguised sale
rules, unless an exception applies, a partner's contribution of property to a
partnership and a simultaneous or subsequent transfer of money or other
consideration, including the assumption of or taking subject to a liability,
from the partnership to the partner may be treated as be a sale, in whole or
in part, of the property by the partner to the partnership. If money or
other consideration is transferred by a partnership to a partner within two
years of the partner's contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale.
If two years have passed between the transfer of
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money or other consideration and the contribution of property, the
transactions will not be presumed to be a sale unless the facts and
circumstances clearly establish that the transfers constitute a sale.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON STOCK
An investment in our common stock is substantially equivalent
economically to an investment in units in Smith L.P. A holder of a share of
common stock receives the same distribution that a holder of a unit receives
and shareholders and unitholders generally share equally in the risks and
rewards of ownership in our enterprise. There are, however, some differences
between ownership of units and ownership of shares of common stock, some of
which may be material to investors.
The comparisons below are intended to assist unitholders in
understanding how their investment will be changed if their units are
redeemed for common stock.
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SMITH L.P. CHARLES E. SMITH RESIDENTIAL
REALTY, INC.
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FORM OF ORGANIZATION AND ASSETS OWNED
Smith L.P. is a Delaware limited partnership. Smith L.P. owns interests,
directly and through a subsidiary, in our properties and, through
subsidiaries, conducts our management and leasing business. Smith L.P. is
not permitted to take any action which would adversely affect our REIT status.
We are a Maryland corporation. We elected to be taxed as a REIT under the
Internal Revenue Code and intend to maintain our qualification as a REIT.
Our only significant asset is our interest in Smith L.P., which gives us an
indirect investment in the properties owned by Smith L.P. Under Smith L.P.'s
partnership agreement, we generally may not conduct any business other than
in connection with the ownership of interests in, and management of the
business of, Smith L.P.
ADDITIONAL EQUITY
Smith L.P. is authorized to issue units and such other partnership interests,
including partnership interests of different series or classes that may be
senior to units, as we may determine. Smith L.P. may issue units and other
partnership interests to us in exchange for the proceeds we raised in an
offering of our comparable shares. In addition, Smith L.P. will issue
additional units or shares of common stock upon exercise of the options
granted pursuant to our benefit plans.
Our Board of Directors may authorize the issuances from time to time of
additional equity securities of any class or series, or securities or rights
convertible into such equity securities, for such consideration as the Board
of Directors determines.
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BORROWING POLICIES
Smith L.P. has no restrictions on borrowings, and we are authorized to borrow
money on behalf of Smith L.P. Our Board of Directors has adopted a policy
that currently limits the debt-to-total market capitalization ratio of Smith
L.P. to 60%, but the Board of Directors may alter this policy at any time.
Under Smith L.P.'s partnership agreement, we may not incur any debts except
those for which we may be liable as general partner of Smith L.P. and in
certain other limited circumstances. Therefore, all debt we incur will be
through Smith L.P.
MANAGEMENT CONTROL
Generally, all management powers over the business and affairs of Smith L.P.
are vested in us as general partner of Smith L.P., and no limited partner of
Smith L.P. has any right to participate in or exercise control or management
power over the business and affairs of Smith L.P. Exceptions to this are
that:
- - we cannot take any action in contravention of Smith L.P.'s partnership
agreement without written consent of all the limited partners;
- - we cannot cause Smith L.P. to dispose of all or substantially all of
Smith L.P.'s assets without the consent of the holders of a majority of
the outstanding units, including units we own;
- - until December 31, 2013, we cannot cause or permit Smith L.P. to
dissolve if one or more of the original limited partners objects to such
dissolution; and
- - from January 1, 2014 through December 31, 2043, we cannot cause or
permit Smith L.P. to dissolve if original limited partners holding at
least 5% of the units object to such dissolution.
The limited partners cannot remove us as general partner.
The Board of Directors has exclusive control over our business and affairs.
The policies adopted by the Board of Directors generally may be altered or
eliminated without a vote of our shareholders. Accordingly, except for their
vote in the elections of directors, shareholders will have no control over
our ordinary business policies. The Board of Directors cannot change our
policy of maintaining our REIT status, however, without the approval of a
majority of our shareholders.
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FIDUCIARY DUTIES
Under Delaware law, we, as general partner of Smith L.P., are required to
exercise good faith and integrity in all of our dealings relating to
partnership affairs. Under the partnership agreement, however, we are under
no obligation to consider the tax consequences to, or separate interests of,
the limited partners in deciding whether to cause Smith L.P. to take any
actions. We are not liable for monetary damages for losses sustained,
liabilities incurred, or benefits not derived by the limited partners in
connection with such decisions, provided that we have acted in good faith.
Under Maryland law, the directors must perform their duties in good faith, in
a manner that they reasonably believe to be in our best interests and with
the care of an ordinarily prudent person in a like position. Our directors
who act in such a manner generally will not be liable to us for monetary
damages arising from their activities.
MANAGEMENT LIABILITY AND INDEMNIFICATION
We are liable for the obligations and debts of Smith L.P., unless limits as
to such liability are stated in the document or instrument evidencing the
obligation. Smith L.P. has indemnified us and any of our directors or
officers 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 specified actions relating to the operations
of Smith L.P. in which we or any such director or officer is involved. Smith
L.P. will not indemnify us or our directors or officers, however, if an act
was done in bad faith and was material to the lawsuit, any of us received an
improper personal benefit, or in the case of any criminal proceeding, any of
us had reasonable cause to believe an act we did was unlawful. Smith L.P.
may reimburse reasonable expenses incurred by an indemnitee in advance of the
final disposition of the proceeding if Smith L.P. receives an affirmation by
the indemnitee of his, her or its good faith belief that the standard of
conduct necessary for indemnification has been met and an undertaking by such
indemnitee to repay the amount if it is determined that such standard was not
met.
Our charter provides that the liability of our directors and officers to us
and to our shareholders for money damages is limited to the fullest extent
permitted under Maryland law. Our charter and state law provide broad
indemnification to directors and officers, whether serving us or, at our
request, any other entity, to the fullest extent permitted under Maryland
law.
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ANTITAKEOVER PROVISIONS
Except in limited circumstances as described below under "Voting Rights," we
have exclusive management power over the business and affairs of Smith L.P.
The limited partners cannot remove us as the general partner of Smith L.P.
We may prevent a limited partner from transferring an interest in Smith L.P.
or any rights as a limited partner except in certain limited circumstances.
We may exercise this right to deter, delay or hamper attempts by persons to
acquire a majority interest in Smith L.P.
Our charter and by-laws and Maryland corporate law contain provisions that
may delay or discourage an unsolicited proposal to acquire us or to remove
incumbent management. These provisions include, among others:
- - a staggered Board of Directors;
- - authorized capital stock that may be classified and issued as a variety
of equity securities in the discretion of the Board of Directors,
including securities having superior voting rights to the common stock;
- - restrictions on business combinations with persons who acquire more than
a certain percentage of common stock;
- - a requirement that directors may be removed only for cause and only by a
vote of at least 80% of the outstanding common stock; and
- - provisions designed to avoid concentration of share ownership in a
manner that would jeopardize our REIT status under the Internal Revenue
Code.
Our Board of Directors has also adopted a shareholder rights plan which has
certain antitakeover effects. If triggered, the shareholder rights plan would
cause substantial dilution to a person or group that sought to acquire us
without the approval of our Board of Directors.
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VOTING RIGHTS
Limited partners have voting rights only as to the dissolution of Smith L.P.,
the sale of all or substantially all of the assets of Smith L.P. and
amendments of the partnership agreement. Otherwise all decisions relating to
the operation and management of Smith L.P. are made by us. As of December 31,
1998, we owned approximately 57.9% of the units. As units are redeemed by
partners, or if we acquire additional units in exchange for the proceeds of
offerings of our securities, our percentage ownership of the units will
increase. If additional units are issued to third parties, our percentage
ownership of the units will decrease.
Holders of our common stock are entitled to vote on the election and removal
of directors and certain major corporate transactions, including most
amendments to our charter, any proposal for our merger or consolidation with
or into another entity or the sale or disposition of all or substantially all
of our assets. Holders of common stock have one vote per share. Our charter
permits the Board of Directors to classify and issue capital stock having
voting power that may differ from that of the common stock.
AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
We or any limited partner holding 25% or more of the units may propose to
amend the partnership agreement. Such proposal, in order to be effective,
must be approved by the written vote of holders of at least a majority in
interest of Smith L.P. In addition, we may, without the consent of the
limited partners, amend the partnership agreement as to ministerial matters.
Amendments to our charter must be approved by the Board of Directors and by
the vote of at least two-thirds of the votes entitled to be cast at a meeting
of shareholders. However, an amendment of the provisions relating to any of
the classification of the Board of Directors, the power to remove directors
and the share ownership limits designed to maintain our REIT status must be
approved by an 80% vote. An amendment relating to termination of our REIT
status requires a majority vote of the shareholders entitled to vote for such
a matter.
VOTE REQUIRED TO DISSOLVE SMITH L.P. OR THE COMPANY
Through December 31, 2013, we cannot elect to dissolve Smith L.P. if any
original limited partner who became a limited partner on June 30, 1994
holding units issued at such time objects to such dissolution. From January
1, 2014 through December 31, 2043, we cannot elect to dissolve Smith L.P. if
any original limited partner who became a limited partner on June 30, 1994
and who held at least 5% of the units on June 30, 1994 objects to such
dissolution. After January 1, 2044, we may dissolve Smith L.P. without the
consent of the limited partners.
Under Maryland law, the Board of Directors must obtain approval of holders of
at least two-thirds of the outstanding shares of common stock to dissolve us.
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VOTE REQUIRED TO SELL ASSETS
We cannot cause Smith L.P. to sell, exchange, transfer or otherwise dispose
of all or substantially all of Smith L.P.'s assets without the consent of
holders of a majority of the outstanding units, including units we hold. We
currently own a majority of the units and thus expect that we would control
the outcome of such a vote.
Under Maryland law, the Board of Directors is required to obtain approval of
the shareholders by the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter to sell all or substantially all of our
assets. No approval of the shareholders is required for the sale of less
than all or substantially all of our assets.
VOTE REQUIRED TO MERGE
We generally cannot cause Smith L.P. to merge or consolidate without the
consent of holders of a majority of the outstanding units, including units we
hold. We currently own a majority of the units and thus expect that we would
control the outcome of such a vote.
Under Maryland law, the Board of Directors is required to obtain approval of
the shareholders by the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter in order to merge or consolidate us.
LIABILITY OF INVESTORS
The liability of the limited partners for Smith L.P.'s debts and obligations
is generally limited to the amount of their investment in Smith L.P.,
together with an interest in any undistributed income, if any. Units, upon
issuance, will be fully paid and nonassessable.
Under Maryland law, shareholders are not personally liable for our debts or
obligations. Shares of common stock, upon issuance, will be fully paid and
nonassessable.
REVIEW OF INVESTOR LISTS
Limited partners, upon written demand with a statement of the purpose of such
demand and at the limited partner's expense, are entitled to obtain a current
list of the name and last known business, residence or mailing address of
each limited partner of Smith L.P.
Under Maryland law, a shareholder holding at least 5% of our outstanding
stock may upon written request inspect and copy during usual business hours
our shareholder list.
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THE FOLLOWING COMPARES CERTAIN OF THE INVESTMENT ATTRIBUTES AND
LEGAL RIGHTS ASSOCIATED WITH THE OWNERSHIP OF UNITS AND SHARES OF COMMON
STOCK.
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UNITS SHARES
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NATURE OF INVESTMENT
The units constitute equity interests entitling each limited partner to his
pro rata share of cash distributions made to the limited partners of Smith
L.P.
Shares of our common stock constitute equity interests in us. We are
entitled to receive our pro rata share of distributions made by Smith L.P.
with respect to the units, and each shareholder is entitled to a pro rata
share of any dividends or distributions paid with respect to the common
stock. The dividends payable to the shareholders are not fixed in amount and
are only paid if, when and as declared by the Board of Directors. In order
to qualify as a REIT, we must distribute at least 95% of our taxable income,
excluding capital gains, and any taxable income, including capital gains, not
distributed will be subject to corporate income tax.
LIQUIDITY
Units may be transferred by a limited partner only with our consent, which
consent may be withheld in our sole discretion. We will permit transfers of
units only in connection with gifts, bequests and transfers by a unitholder
to family members and certain other persons. Subject to certain conditions,
each unitholder has the right to elect to have the unitholder's units
redeemed by Smith L.P. Upon redemption, such unitholder will receive, at our
election, either shares of common stock or the cash equivalent in exchange
for such units.
Our common stock is freely transferable, subject to the ownership limit
contained in our charter. The common stock is listed on the NYSE, and a
public market for the common stock exists. The breadth and strength of this
secondary market will depend, among other things, upon the number of shares
outstanding, our financial results and prospects, the general interest in us
and in our real estate investments, and our dividend yield compared to that
of other debt and equity securities.
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UNITS SHARES
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TAXATION
Smith L.P. is not subject to federal income taxes. Instead, each holder of
units includes his allocable share of Smith L.P.'s taxable income or loss in
determining his individual federal income tax liability. The maximum
effective federal tax rate for individuals under current law is 39.6%.
Income and loss from Smith L.P. generally will be subject to the "passive
activity" limitations. Under the "passive activity" rules, income and loss
from Smith L.P. that is considered "passive income" generally can be offset
against income and loss from other investments that constitute "passive
activities," unless Smith L.P. is considered a "publicly traded partnership,"
in which case income and loss from Smith L.P. can be offset only against
other income and loss from Smith L.P.. Income of Smith L.P., however,
attributable to dividends from our property service businesses or interest
paid by the property service businesses will not qualify as passive income
and cannot be offset with losses and deductions from a "passive activity,"
including losses and deductions attributable to Smith L.P.'s multifamily
rental activities.
Cash distributions from Smith L.P. will not be taxable to a holder of units
except to the extent they exceed such holder's basis in his interest in Smith
L.P., which includes such holder's allocable share of Smith L.P.'s debt.
Each year, holders of units receive a Schedule K-1 tax form containing
detailed tax information for inclusion in preparing their federal income tax
returns.
Holders of units are required, in some cases, to file state income tax
returns and/or pay state income taxes in the states in which Smith L.P. owns
property, even if they are not residents of those states.
We have elected to be taxed as a REIT. So long as we qualify as a REIT, we
will be permitted to deduct dividends paid to our shareholders, which
effectively will reduce the "double taxation" that typically results when a
corporation earns income and distributes that income to its shareholders in
the form of dividends. Our property service businesses, however, will not
qualify as REITs and thus they will be subject to federal income tax on their
net income at normal corporate rates. The maximum effective tax rate for
corporations under current law is 35%.
Dividends we pay will be treated as "portfolio" income and cannot be offset
with losses from "passive activities."
Distributions we make to our taxable domestic shareholders out of current or
accumulated earnings and profits will be taken into account by them as
ordinary income. Distributions in excess of current or accumulated earnings
and profits that are not designated as capital gain dividends will be treated
as a non-taxable return of basis to the extent of a shareholder's adjusted
basis in its shares of common stock, with the excess taxed as capital gain.
Distributions that are designated as capital gain dividends generally will be
taxed as gains from the sale or exchange of a capital asset held for more
than one year, to the extent they do not exceed our actual net capital gain
for the taxable year. For our taxable years commencing on or after January
1, 1998, we may elect to require our shareholders to include our
undistributed net capital gains in their income. If we so elect,
shareholders would include their proportionate share of such gains in their
income and be deemed to have paid their share of the tax paid by us on such
gains.
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UNITS SHARES
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Each year, shareholders receive Form 1099 used by corporations to report
dividends paid to their shareholders.
Shareholders who are individuals generally will not be required to file state
income tax returns and/or pay state income taxes outside of their state of
residence with respect to our operations and distributions. We may be
required to pay state income taxes in certain states.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Charles E. Smith 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 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, 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 such change could apply retroactively
to transactions preceding the date of the change. Except as described below
in "--Requirements for Qualification--Income Tests," Charles E. Smith has not
received any rulings from the IRS concerning the tax treatment of Charles E.
Smith. 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.
TAXATION OF CHARLES E. SMITH
GENERAL. Charles E. Smith has elected to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code commencing with its
taxable year ending December 31, 1994. Charles E. Smith believes that it was
organized and has operated in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue Code and it
intends to continue to operate in such a manner. No assurance, however, can
be provided that Charles E. Smith has operated in a manner so as to qualify
as a REIT or that it will continue to operate in such a manner in the future.
Charles E. Smith's qualification and taxation as a REIT depend upon its
ability to meet 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 Charles E. Smith intends to operate so that it qualifies as
a REIT, given the highly complex nature of the rules governing REITs, the
ongoing importance of factual determinations, and the possibility of future
changes in the circumstances of Charles E. Smith, no assurance can be given
that the actual results of its operations for any taxable year has satisfied
or will satisfy the REIT requirements. Further, the anticipated
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income tax treatment described herein may be changed, perhaps retroactively,
by legislative, administrative or judicial action at any time. See
"--Failure to Qualify."
The following is a general summary of the 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
summary 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 Charles E. Smith qualifies for taxation as a REIT,
it generally will not be subject to federal corporate income taxes on net
income that it distributes currently to shareholders. This treatment
substantially eliminates the "double taxation" at the corporate and
shareholder levels that generally results from investment in a corporation.
However, Charles E. Smith will be subject to federal income tax on any income
that it does not distribute, In addition, in some circumstances, it will be
subject to federal income tax on certain types of income even though that
income is distributed. Moreover, the property services business subsidiaries
of Charles E. Smith do not qualify as REITs and are subject to federal
corporate income tax on their net income.
REQUIREMENTS FOR QUALIFICATION.
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 transfer 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 certain other tests, 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.
Charles E. Smith believes that it currently satisfies requirements (1)
through (6). In addition, Charles E. Smith's charter includes restrictions
regarding the transfer of its shares that are intended to assist Charles E.
Smith in continuing to satisfy the share ownership requirements described in
(5) and (6) above. See "Description of Capital Stock--Restrictions on
Transfer; Excess Stock on page 11." Moreover, if Charles E. Smith complies
with regulatory rules pursuant to which it is required to send annual letters
to holders of common stock requesting information regarding the actual
ownership of the common stock, and Charles E. Smith does not know, or
exercising reasonable diligence would not have known, whether it failed to
meet requirement (6) above, Charles E. Smith will be treated as having met
the requirement.
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GROSS INCOME TESTS. In order to maintain qualification as a REIT,
Charles E. Smith must satisfy two gross income requirements, which are
applied on an annual basis. First, at least 75% of Charles E. Smith's gross
income, excluding gross income from prohibited transactions, for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property or from certain types of temporary
investments. Investments relating to real property or mortgages on real
property include "rents from real property" and, in certain circumstances,
interest. Second, at least 95% of Charles E. Smith's gross income, excluding
gross income from prohibited transactions, for each taxable year must be
derived from sources that qualify for purposes of the 75% test, and from
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing.
In addition, for its taxable years ending on or before December 31,
1997, Charles E. Smith was required to derive less than 30% of the its gross
income, including gross income from prohibited transactions, from certain
sources. These sources include short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and
gain on the sale or other disposition of real property held for less than
four years, apart from involuntary conversions and sales of foreclosure
property.
Rents received by Charles E. Smith 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. Charles E. Smith believes that the portion of the
rents that it receives that fails to qualify as "rents from real property"
has not caused, and will not in the future cause, it to fail to comply with
the 75% and 95% gross income tests. Charles E. Smith's belief with respect
to this matter, however, is based upon the advice of counsel with respect to
certain technical issues regarding the determination of "rents from real
property" that are not definitively answered under federal tax law. There
can be no assurance that the IRS will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," Charles E. Smith generally must not operate or manage the property
or furnish or render services to tenants, other than through an "independent
contractor" from whom Charles E. Smith derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
are "usually or customarily rendered" in connection with the rental space for
occupancy only and are not otherwise considered "rendered to the occupant."
These services are referred to as permissible services. Smith L.P. itself
and the property service businesses, which are not independent contractors,
provide certain services with respect to the Charles E. Smith properties.
Charles E. Smith received rulings from the IRS that the provision of certain
of these services will not cause the rents received with respect to the
properties to fail to qualify as "rents from real property."
Charles E. Smith also received rulings from the IRS to the effect that
certain revenues will qualify as "rents from real property." These revenues
include the following:
- rents from corporate apartments,
- revenues from laundry equipment,
- certain parking revenues, and
- certain revenues related to the provision of telephone and cable
television services.
Based upon its experience in the multifamily and retail property rental
markets in which its properties are located, Charles E. Smith believes that
all services provided to tenants by Charles E. Smith, whether through Smith
L.P. or through the property services 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 that reasonably might be
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expected not to meet the "usual or customary" standard, it will arrange to
have such services provided by an independent contractor from which neither
Charles E. Smith nor Smith L.P. receives any income.
Rents received generally will qualify as rents from real property
notwithstanding the fact that Charles E. Smith provides services that are not
permissible services so long as the amount received for such services meets a
de minimis standard. The amount received for "impermissible services" with
respect to a property cannot exceed one percent of all amounts received,
directly or indirectly, by Charles E. Smith with respect to such property.
The amount that Charles E. Smith will be deemed to have received for
performing "impermissible services" will be the greater of the actual amount
so received or 150% of the direct cost to Charles E. Smith 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. Charles E. Smith believes, however,
that the aggregate amount of these fees and other non-qualifying income in
any taxable year will not cause it to exceed the limits on non-qualifying
income under the 75% and 95% gross income tests.
If Charles E. Smith fails to satisfy one or both of the 75% or the 95%
gross income tests for any taxable year, it may nevertheless qualify as a
REIT for the year if it is entitled to relief under the Internal Revenue
Code. It is not possible, however, to state whether in all circumstances it
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. At the close of each quarter of its taxable year, Charles
E. Smith must satisfy the following three tests relating to the nature of its
assets:
1. at least 75% of the value of its total assets must be represented
by "real estate assets," cash, cash items, and government
securities;
2. not more than 25% of its total assets may be represented by
securities, other than those in the 75% asset class; and
3. of the investments included in the 25% asset class, the value of
any one issuer's securities owned by Charles E. Smith may not
exceed 5% of the value of Charles E. Smith's total assets, and
Charles E. Smith 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 its ownership of units, Charles E.
Smith is considered to own its pro rata share of the assets of Smith L.P.,
including the securities of each of the property service businesses described
above. Smith L.P., however, does not own more than 10% of the voting
securities of any of the property service businesses. In addition, Charles
E. Smith believes that its share of the value of the securities of each of
the property service businesses does not exceed 5% of the total value of its
assets. There can be no assurance, however, that the IRS might not contend
either that the value of the securities of one or more of the property
service businesses exceeds the 5% value limitation, or that all or some of
the property service businesses shall be viewed as a single corporation for
purposes of the 5% value limitation and that the value of the securities of
that corporation exceeds
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the 5% limitation, or that the nonvoting stock of one or more of the property
service businesses should be considered "voting securities" for purposes of
the 10% limitation.
The 5% value requirement must be satisfied not only on the date Charles
E. Smith acquired securities of the property service businesses, but also
each time Charles E. Smith acquires additional securities of the property
service businesses. Accordingly, each time a unitholder exercises its right
to redeem units and Charles E. Smith's interest in Smith L.P. increases, the
requirement will have to be met. Although Charles E. Smith plans to take
steps to ensure that it satisfies the 5% value test for any quarter with
respect to which retesting is to occur, there can be no assurance that such
steps always will be successful or will not require a reduction in Smith
L.P.'s overall interest in the property service businesses.
The Clinton administration's budget proposal for fiscal year 1999
included a number of provisions affecting REITs. Although the proposal was
not enacted in 1998, the same or similar proposals may be made for fiscal
year 2000. One of the Clinton administration's proposals would have amended
the 10% voting securities limitation described above to preclude a REIT from
owning more than 10% of the VOTE OR VALUE of all classes of stock of any one
issuer, other than a qualified REIT subsidiary or another REIT. This
proposal, had it been enacted, would have materially impeded the ability of
Charles E. Smith to engage in new third-party management or similar
activities. It cannot be predicted whether, in what form, or with what
effective date, any future legislation affecting Charles E. Smith might be
enacted.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, Charles E.
Smith generally must distribute dividends to its shareholders in an amount at
least equal to--
(1) the sum of (a) 95% of its REIT taxable income, computed without
regard to the dividends paid deduction and its net capital gain, and (b) 95%
of its net income after tax, if any, from foreclosure property, MINUS
(2) the sum of certain items of noncash income.
Distributions must be made either during the taxable year to which they
relate or, if certain procedures are followed, during the subsequent taxable
year. Charles E. Smith will be subject to tax on amounts not distributed at
regular capital gains and ordinary income rates.
In addition, if Charles E. Smith fails to distribute during each
calendar year at least the sum of 85% of its ordinary income, 95% of its
capital gain net income and 100% of its undistributed income from prior
years, it will be subject to a 4% nondeductible excise tax on the excess of
this required amount over the sum of the amounts it actually distributes and
amounts retained with respect to which it pays federal income tax.
Charles E. Smith believes that it has made, and intends to continue to
make, timely distributions sufficient to satisfy the annual distribution
requirements. It is possible, however, that Charles E. Smith, from time to
time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement. In that event, Charles E. Smith may cause Smith
L.P. to arrange for short-term, or possibly long-term, borrowing to permit
the payments of required dividends.
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FAILURE TO QUALIFY. If Charles E. Smith fails to qualify for taxation
as a REIT in any taxable year and the relief provisions do not apply, Charles
E. Smith will be subject to tax, including any applicable alternative minimum
tax, on its taxable income at regular corporate rates. Unless entitled to
relief under specific statutory provisions, Charles E. Smith also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state
whether in all circumstances Charles E. Smith would be entitled to such
statutory relief.
TAX ASPECTS OF CHARLES E. SMITH'S INVESTMENTS IN SMITH L.P. AND PROPERTY
SERVICE BUSINESSES
GENERAL. All of Charles E. Smith's investments are through Smith L.P.
Smith L.P. holds substantially all the real estate properties through certain
subsidiary partnerships. This structure may involve special tax
considerations. These tax considerations include the following:
(a) the allocations of income and expense items of Smith L.P. and such
subsidiary partnerships, which could affect the computation of
taxable income of Charles E. Smith,
(b) the status of Smith L.P. and each such subsidiary partnership as
partnership (as opposed to an association taxable as a corporation)
for income tax purposes, and
(c) the taking of actions by Smith L.P. or any of such subsidiary
partnerships that could adversely affect Charles E. Smith's
qualification as a REIT.
Charles E. Smith believes 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
such subsidiary partnerships were treated as an association taxable as a
corporation, Charles E. Smith 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 Charles E. Smith to be allocated lower amounts of depreciation and
other deductions for tax purposes than would be allocated to Charles E. Smith
if no property had a book-tax difference. Similarly, the carryover basis of
contributed properties in the hands of Smith L.P. could cause Charles E.
Smith 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
Charles E. Smith as a result of such sale.
PROPERTY SERVICE BUSINESSES. A substantial portion of the amounts
used by Smith L.P. to fund distributions to partners, which in turn are used
by Charles E. Smith to fund distributions to
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holders of common stock, comes from the property service businesses, through
payments on notes issued by the property service businesses and dividends on
non-voting stock of the property service businesses held by 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. The property service businesses attempt to limit the amount of such
taxes. There can be no assurance, however, whether or the extent to which
measures taken to limit taxes will be successful. Moreover, even if those
measures are successful, future increases in the income of the property
service businesses inevitably will be subject to income tax. To the extent
that the property service businesses are required to pay federal, state and
local income taxes, the cash available for distribution to shareholders will
be reduced accordingly.
In addition, as described above, the value of the securities of each of
the property service businesses held by Smith L.P. cannot exceed 5% of the
value of Smith L.P.'s assets at a time when Charles E. Smith
acquires additional securities of a property service business. This includes
each instance in which a unitholder redeems its units. Also, Charles E.
Smith cannot own 10% or more of the voting securities of the property service
businesses. See "--Requirements for Qualification--Asset Tests." These
limitations may restrict the ability of the property service businesses to
increase the size of their respective businesses unless the value of the
assets of Smith L.P. is increasing at a commensurate rate. Moreover, they
prohibit Smith L.P. from exercising control over the property service
businesses.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As used herein, the term
"U.S. shareholder" means a holder of common stock who for United States
federal income tax purposes is--
(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
(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 Charles E. Smith qualifies as a REIT, distributions made to
its 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, the
earnings and profits of Charles E. Smith will be allocated first to shares of
preferred stock and second to shares of common stock. There can be no
assurance that Charles E. Smith will have sufficient earnings and profits to
cover any distributions on preferred stock.
To the extent they do not exceed Charles E. Smith's 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 Charles E. Smith may classify
portions of its designated capital gain dividend in the following categories:
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(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 Charles E. Smith's actual net
capital gain for the taxable year, distributions made by Charles E. Smith
that are properly designated as capital gain dividends will be taxable to
taxable corporate U.S. shareholders as long-term gain. This tax treatment
applies regardless of the period corporate shareholders have held their
stock. Such corporate U.S. shareholders, however, may be required to treat
up to 20% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a taxable U.S. shareholder to the extent that they do
not exceed the adjusted basis of 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.
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. Such gain or
loss will be capital gain or loss if the common stock has been held as a
capital asset. In the case of a taxable U.S. shareholder that is a
corporation, such capital gain or loss will be long-term capital gain or loss
if such common stock has been held for more than one year. Generally, in the
case of a taxable non-corporate U.S. shareholder, such capital gain or loss
will be taxed 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 Charles E. Smith, and to sales of interests in
"pass-through entities." To date, the IRS has not issued such regulations,
but if issued, such regulations could affect the taxation of gain and loss
realized on the disposition of common stock. Shareholders are urged to
consult with their own tax advisors with respect to the new rules contained
in the 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 of distributions from Charles E. Smith required to be
treated by such shareholder as long-term capital gain. For a taxable
non-corporate U.S. shareholder, the
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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.
Charles E. Smith may elect to require the holders of common stock to
include Charles E. Smith's undistributed net capital gains in their income.
If Charles E. Smith makes such an 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 Charles E. Smith on such undistributed
capital gains and thereby receive a credit or refund for such amount. A
holder of common stock will increase the basis in its common stock by the
difference between the amount of capital gain included in its income and the
amount of the tax it is deemed to have paid. The earnings and profits of
Charles E. Smith 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. Charles E. Smith does not expect
the distributions by Charles E. Smith 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
Charles E. Smith will constitute UBTI unless the organization is able to
properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in Charles E. Smith.
Such a prospective shareholder should consult its own tax advisors concerning
these "set aside" and reserve requirements.
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 summary 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 Charles E. Smith of U.S. real property interests and not designated by
Charles E. Smith as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or
accumulated earnings and profits of Charles E. Smith. 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 current and accumulated earnings and profits of
Charles E. Smith 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. To the extent
that such distributions exceed the adjusted basis of a foreign shareholder's
common stock, they will give rise to gain from the sale or exchange of its
common stock, the tax treatment of which is described below.
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As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that Charles E. Smith will be required to
withhold 10% of any distribution in excess of Charles E. Smith's current and
accumulated earnings and profits. Consequently, although Charles E. Smith
intends to withhold at a rate of 30% on the entire amount of any
distribution, or a lower applicable treaty rate, to the extent that Charles
E. Smith does not do so, any portion of a distribution not subject to
withholding at a rate of 30%, or a lower applicable treaty rate, will be
subject to withholding at a rate of 10%. However, the foreign shareholder
may seek a refund of such amounts from the IRS if it subsequently determined
that such distribution was, in fact, in excess of current or accumulated
earnings and profits of Charles E. Smith, and the amount withheld exceeded
the foreign shareholder's United States tax liability, if any, with respect
to the distribution.
For any year in which Charles E. Smith qualifies 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. Charles E. Smith is required by
applicable regulations to withhold 35% of any distribution that could be
designated by Charles E. Smith as a capital gain dividend. This amount is
creditable against the foreign shareholder's FIRPTA tax liability.
Although the law is not entirely clear on the matter, it appears
that amounts designated by Charles E. Smith pursuant to the Taxpayer Relief
Act as undistributed capital gains in respect of shares of common stock would
be treated with respect to foreign shareholders in the manner outlined in the
preceding paragraph. 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 paid by Charles E. Smith 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 paid by Charles E. Smith 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 Charles E. Smith is a
"domestically controlled REIT." Generally, a "domestically controlled REIT"
is a REIT in which at all times during a specified testing period less than
50% in value of its stock was held directly or indirectly by foreign persons.
Charles E. Smith believes that it currently is a "domestically controlled
REIT," and, therefore, the sale of common stock will not be subject to
taxation under FIRPTA. If 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 such 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
28
<PAGE>
(3) distributions attributable to gain from the sale or
exchange by Charles E. Smith of United States real property
interests.
As a general matter, backup withholding and information reporting
will not apply to a payment of the proceeds of a sale of common stock by or
through a foreign office of a foreign broker. Information reporting (but not
backup withholding) will apply, however, to a payment of the proceeds of a
sale of common stock by a foreign office of a broker that --
(a) is a United States person,
(b) derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United
States, or
(c) is a "controlled foreign corporation," generally, a foreign
corporation controlled by United States shareholders, for
United States tax purposes, unless the broker has documentary
evidence in its records that the holder is a 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. Charles E. Smith and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of
Charles E. Smith and its shareholders may not conform to the federal income
tax consequences discussed above. Consequently, prospective shareholders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in common stock.
In this regard, the District of Columbia imposes an unincorporated
business income tax, at an effective rate of 9.975% on the "District of
Columbia taxable income" of partnerships doing business in the District of
Columbia. Because certain Charles E. Smith properties are located in the
District of Columbia, the partnership owning these properties will be subject
to this tax. In effect, Charles E. Smith's 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
29
<PAGE>
to Charles E. Smith and, therefore, to its shareholders as dividends
will be reduced. Moreover, a shareholder of Charles E. Smith 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 Charles E.
Smith were to own and operate its assets directly, rather than through Smith
L.P. However, Charles E. Smith's ability to eliminate Smith L.P. and thus
own its assets directly is severely limited.
PLAN OF DISTRIBUTION
We may issue the shares of common stock covered by this prospectus
to certain parties who received units in exchange for our acquisition of
Tunlaw Park Apartments and Tunlaw Gardens, if they request redemption of
their units. A redeeming unitholder who receives any shares of common stock
covered by this prospectus will be entitled to sell such shares without
restriction in the open market or otherwise.
We will acquire one Unit from a redeeming unitholder in exchange
for each share of common stock that the we issue. Thus, with each redemption,
our interest in Smith L.P. will increase.
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:
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
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 as http://www.sec.gov.
30
<PAGE>
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.
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, 1997.
4. Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998 (as amended on Form 10-Q/A), June 30, 1998 and September 30,
1998 (as amended on Form 10-Q/A).
5. Current Reports on Form 8-K dated April 17, 1998 (as amended on
Form 8-K/A), July 1, 1998 and December 2, 1998.
You may request a copy of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are specifically
incorporated by reference into this prospectus), at no cost, by writing or
calling us at the following address
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Mr. Gregory Samay, Vice President and Treasurer
(703) 769-1020
You should rely on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of the common stock in any
state where the offer is not permitted.
EXPERTS
Our financial statements for the fiscal year ended December 31, 1997
and the related schedule incorporated by reference in this prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report dated
February 9, 1998 relating to such financial statements, and are included in
this prospectus in reliance upon the authority of Arthur Andersen LLP as
experts in giving such report.
31
<PAGE>
The consolidated balance sheets of McClurg Court Associates Limited
Partnership as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in partners' capital and cash flows for the
years then ended incorporated by reference in this prospectus and elsewhere
in the Registration Statement, have been audited by Altschuler, Melvoin and
Glasser LLP, independent public accountants, as indicated in their report
dated February 17, 1998 with respect thereto, and are included herein in
reliance upon the authority of Altschuler, Melvoin and Glasser LLP as experts
in giving such report.
LEGAL MATTERS
In connection with this prospectus, Hogan & Hartson L.L.P.,
Washington, D.C. has provided its opinion as to the validity of the issuance
of the common stock offered by this prospectus and the discussion of tax
matters in this prospectus.
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YOU SHOULD RELY ON THE INFORMATION INCORPORATED BY REFERENCE OR PROVIDED
IN THIS PROSPECTUS. WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THE COMMON STOCK IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE
DATE ON THE FRONT OF THIS DOCUMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................ 1
Risk Factors...................................... 3
Redemption of Units............................... 7
Federal Income Tax Considerations................. 19
Plan of Distribution.............................. 30
Where You Can Find More Information............... 30
Incorporation of Certain Documents by Reference... 31
Experts........................................... 31
Legal Matters..................................... 32
</TABLE>
[LOGO]
254,189 SHARES
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
COMMON STOCK
PROSPECTUS
JANUARY __, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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............................................. $ 2,162
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........................................................ $ 49,162
--------
--------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified
under Maryland law, the Charter of the Company, and the Partnership
Agreement against certain liabilities. The Charter requires the Company
to indemnify its directors and officers to the fullest extent permitted
from time to time by the laws of Maryland. The Company's Charter also
provides that, to the fullest extent permitted under Maryland law,
directors and officers of the Company will not be liable to the Company and
its shareholders for money damages.
Section 2-418 of the Maryland General Corporation Law generally
permits indemnification of any director made a party to any proceedings by
reason of service as a director unless it is established that (i) the act
or omission of such person was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; or (ii) such person actually received an improper
personal benefit in money property or services; or (iii) in the case of any
criminal proceeding, such person had reasonable cause to believe that
the act or omission was unlawful. The indemnity may include judgments,
penalties, fines, settlements and reasonable expenses actually incurred
by the director in connection with the proceeding; but, if the proceeding
is one by or in the right of the corporation, indemnification is not
permitted with respect to any proceeding in which the director has been
adjudged to be liable to the corporation, or if the proceeding is one
charging improper personal benefit to the director, whether or not
involving action in the director's official capacity, indemnification of
the director is not permitted if the director was adjudged to be liable on
the basis that personal benefit was improperly received. The termination
of any proceeding by conviction or upon a plea of nolo contendere or its
equivalent, or any entry of an order of probation prior to judgment,
creates a rebuttable presumption that the director did not meet the
requisite standard of conduct required for permitted indemnification.
The termination of any proceeding by judgment, order or settlement,
however, does not create a presumption that the director failed to meet the
requisite standard of conduct for permitted indemnification.
The Partnership Agreement also provides for indemnification of the
Company, or any director or officer of the Company, in its capacity as
general partner of 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
<TABLE>
<C> <S>
3.1a Amended and Restated Articles of Incorporation of the Company
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 Amended and Restated Bylaws of the Company
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
4.1h First Amended and Restated Agreement of Limited Partnership of
Smith L.P., as amended
4.2h Certificate of Limited Partnership of Smith L.P.
4.3i 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 Altschuler, Melvoin and Glasser LLP
24 Power of Attorney (included on signature page (II-4))
</TABLE>
- -----------
a Incorporated by reference to Exhibit 3.1 to the Company's
registration statement on Form S-11 (File No. 33-75288).
b Incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1997
(File No. 1-13174).
c Incorporated by reference to Exhibit 4.1 to the Company's current
report on Form 8-K dated October 3, 1997 (File No. 1-13174).
d Incorporated by reference to Exhibit 3.5 to the Company's
registration statement on Form S-3 (File No. 333-17053).
e Incorporated by reference to Exhibit 3.6 to the Company's
registration statement on Form S-3 (File No. 333-17053).
f Incorporated by reference to Exhibit 99.1 to the Company's current
report on Form 8-K dated December 2, 1998(File No. 1-13174).
g Incorporated by reference to Exhibit 3.2 to the Company's
registration statement on Form S-3 (File No. 33-93986).
h Incorporated by reference to the same titled and numbered exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-13174).
i Incorporated by reference to Exhibit 99.1 to the Company's 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;
(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.
II-2
<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the Securities being registered which remain unsold at
the termination of the offering.
The undersigned Registrant hereby further undertakes that, for
the purposes of determining any liability under the Securities Act of 1933,
each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this registration statement shall be deemed
to be a new registration statement relating to the Securities offered
herein, and the offering of such Securities at that time shall be deemed to
be the initial BONA FIDE offering thereof. The undersigned Registrant hereby
further undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
under Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 15 of this registration statement, or otherwise
(other than insurance), the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in such Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
Securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the County of Arlington, Commonwealth of
Virginia, on January 14, 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 January 14, 1999
Robert H. Smith Executive Officer, and Director
/s/ Robert P. Kogod
- -------------------------- Co-Chairman of the Board, Co-Chief January 14, 1999
Robert P. Kogod Executive Officer, and Director
/s/ Ernest A. Gerardi, Jr.
- -------------------------- President, Chief Operating Officer, January 14, 1999
Ernest A. Gerardi, Jr. and Director
/s/ Wesley D. Minami
- -------------------------- Senior Vice President and Chief Financial January 14, 1999
Wesley D. Minami Officer
/s/ Steven E. Gulley
- -------------------------- Controller, and Chief Accounting Officer January 14, 1999
Steven E. Gulley
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Fred J. Brinkman
- -------------------------- Director January 14, 1999
Fred J. Brinkman
/s/ Charles B. Gill
- -------------------------- Director January 14, 1999
Charles B. Gill
/s/ Mandell J. Ourisman
- -------------------------- Director January 14, 1999
Mandell J. Ourisman
/s/ Mallory Walker
- -------------------------- Director January 14, 1999
Mallory Walker
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
- ---------- ------------------- -------------
<C> <S> <C>
3.1a Amended and Restated Articles of Incorporation of the Company..................
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 Amended and Restated Bylaws of the Company.....................................
4.1h First Amended and Restated Agreement of Limited Partnership ...................
of Smith L.P., as amended......................................................
4.2h Certificate of Limited Partnership of Smith L.P................................
4.3i 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 Altschuler, Melvoin and Glasser LLP.................................
24 Power of Attorney (included on signature page (II-4))
</TABLE>
- ------------
a Incorporated by reference to Exhibit 3.1 to the Company's
registration statement on Form S-11 (File No. 33-75288).
b Incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1997
(File No. 1-13174).
c Incorporated by reference to Exhibit 4.1 to the Company's current
report on Form 8-K dated October 3, 1997 (File No. 1-13174).
d Incorporated by reference to Exhibit 3.5 to the Company's registration
statement on Form S-3 (File No. 333-17053).
e Incorporated by reference to Exhibit 3.6 to the Company's registration
statement on Form S-3 (File No. 333-17053).
f Incorporated by reference to Exhibit 99.1 to the Company's current
report on Form 8-K dated December 2, 1998(File No. 1-13174).
g Incorporated by reference to Exhibit 3.2 to the Company's registration
statement on Form S-3 (File No. 33-93986).
h Incorporated by reference to the same titled and numbered exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-13174).
i Incorporated by reference to Exhibit 99.1 to the Company's 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.]
January 14, 1999
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
Gentlemen:
We are acting as counsel to Charles E. Smith Residential
Realty, Inc., a Maryland corporation (the "Company"), in connection with its
registration statement on Form S-3 (the "Registration Statement") filed with
the Securities and Exchange Commission relating to the proposed issuance of
up to 254,189 shares of the Company's common stock, par value $.01 per share
(the "Shares"), which may be issued if and to the extent that the holders of
254,189 units of limited partnership interest (the "Units") in Charles E.
Smith Residential Realty L.P. (the "Operating Partnership") tender such Units
for redemption. This opinion letter is furnished to you at your request to
enable you to fulfill the requirements of Item 601(b)(5) of Regulation S-K,
17 C.F.R. Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of the opinion expressed in this letter, which
is set forth below (the "Opinion"), we have examined copies of the following
documents:
1. An executed copy of the Registration Statement.
2. The Amended and Restated Articles of Incorporation of
the Company, as certified by the Department of
Assessments and Taxation of the State of Maryland on
January 5, 1999 and by the Secretary of the Company
on the date hereof as then being complete, accurate
and in effect.
3. The Amended and Restated Bylaws of the Company, as
certified by the Secretary of the Company on the date
hereof as then being complete, accurate and in
effect.
<PAGE>
Board of Directors
January 14, 1999
Page 2
4. The Certificate of Limited Partnership of the
Operating Partnership, as amended, as certified by
the Secretary of the State of Delaware on January 5,
1999 and as certified by the Secretary of the
Company, as general partner of the Operating
Partnership, on the date hereof as being complete,
accurate and in effect.
5. The First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended,
as certified by the Secretary of the Company, as
general partner of the Operating Partnership, on the
date hereof as being complete, accurate and in effect
(the "Partnership Agreement").
6. Certain resolutions of the Board of Directors of the
Company adopted on July 21, 1998, as certified by the
Secretary of the Company on the date hereof as then
being complete, accurate and in effect, relating to
the issuance and sale of the Shares and arrangements
in connection therewith.
In our examination of the aforesaid certificates, documents
and agreements, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the accuracy and completeness of all
documents submitted to us, the authenticity of all original documents and the
conformity to authentic original documents of all documents submitted to us
as copies (including telecopies). We also have assumed the authenticity,
accuracy and completeness of the foregoing certifications (of public
officials and corporate officers) and statements of fact, on which we are
relying, and have made no independent investigations thereof. This opinion
letter is given, and all statements herein are made, in the context of the
foregoing.
This opinion letter is based as to matters of law solely on
applicable provisions of Maryland law. We express no opinion herein as to any
other laws, statutes, regulations or ordinances or as to compliance with the
securities (or "blue sky") laws or the real estate syndication laws of
Maryland.
Based upon, subject to and limited by the foregoing, we are
of the opinion that following (i) effectiveness of the Registration Statement
and (ii) issuance of the Shares, if and when issued and delivered in
accordance with the terms of the Partnership Agreement and the resolutions of
the Board of Directors of the Company authorizing the issuance of the Shares
upon redemption of the Units
<PAGE>
Board of Directors
January 14, 1999
Page 3
as contemplated thereby, the Shares will be validly issued, fully paid and
nonassessable under the laws of the State of Maryland.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion
letter has been prepared solely for your use in connection with the filing of
the Registration Statement on the date of this opinion letter and should not
be quoted in whole or in part or otherwise be referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as
Exhibit 5.1 to the Registration Statement and to the reference to this firm
under the caption "Legal 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>
January 14, 1999
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City
Arlington, VA 22202
Ladies and Gentlemen:
We have acted as counsel to Charles E. Smith Residential
Realty, Inc., a Maryland corporation (the "Company"), in connection with the
registration statement on Form S-3 (the "Registration Statement") and the
prospectus included therein (the "Prospectus") filed by the Company with the
Securities and Exchange Commission relating to the possible issuance by the
Company of up to 254,189 shares (the "Redemption Shares") of common stock,
par value $.01 per share, if and to the extent that, the Company elects to
issue such Redemption Shares to the holder of up to 254,189 units of Limited
Partnership interest ("Units") in Charles E. Smith Residential Realty L.P.
(the "Operating Partnership"), which Units were issued by the Operating
Partnership in connection with the acquisition of Tunlaw Gardens and a
majority interest in Tunlaw Park Apartments, each of which is a Washington,
D.C. apartment complex, upon the tender of such Units for redemption. In
connection with the Registration Statement, we have been asked to provide you
with our opinion on certain federal income tax matters. Capitalized terms
used in this letter and not otherwise defined herein have the meanings set
forth in the Registration Statement.
BASES FOR OPINION
The opinion set forth in this letter is based on relevant
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations thereunder (including proposed and temporary
Treasury Regulations), and interpretations of the foregoing as expressed in
court decisions, existing administrative rulings and practices of the Internal
Revenue Service (the "IRS") (including the private letter ruling issued by the
IRS) to the Company on June 8, 1994, as supplemented by the ruling letter dated
June 16, 1995, and the private letter ruling issued by the IRS to the Company on
August 27, 1997), and legislative history, all as of the date hereof. These
provisions and interpretations are subject
<PAGE>
Charles E. Smith Residential Realty, Inc.
January 14, 1999
Page 2
to changes, which may or may not be retroactive in effect, that might result in
material modifications of our opinion.
In rendering the following opinion, we have examined such
statutes, regulations, records, certificates and other documents as we have
considered necessary or appropriate as a basis for such opinion, including the
following: (1) the Registration Statement; (2) the First Amended and Restated
Agreement of Limited Partnership of the Operating Partnership, as amended as of
January 31, 1995, as certified by the Secretary of the Company on the date
hereof as being a true, correct and complete copy and as being in full force and
effect; (3) the Amended and Restated Articles of Incorporation of the Company
dated as of June 27, 1994, as certified by the Department of Assessments and
Taxation of the State of Maryland on January 5, 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; (4) the agreements of limited partnership of the
partnership subsidiaries of the Operating Partnership; (5) the articles of
organization and stock ownership records of the three operating companies
(collectively, the "Property Service Businesses") which provide property
services to the properties owned by the Operating Partnership and to other
multifamily, retail, and office properties; (6) the articles of incorporation of
the wholly-owned subsidiaries of the Company that serve as the general partners
of the various subsidiary financing partnerships (the "REIT Subs"); and (7)
other necessary documents. The opinion set forth in this letter also is premised
on certain written representations of the Company contained in a letter to us
dated as of the date hereof (the "Management Representation Letter").
We have made such factual and legal inquiries, including
examination of the documents set forth above, as we have deemed necessary or
appropriate for purposes of our opinion. For purposes of rendering our opinion,
however, we have not made an independent investigation or audit of the facts set
forth in the above referenced documents, including the Management Representation
Letter. We consequently have relied upon representations in the Management
Representation Letter that the information presented in such documents or
otherwise furnished to us accurately and completely describes all material facts
relevant to our opinion. 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
<PAGE>
Charles E. Smith Residential Realty, Inc.
January 14, 1999
Page 3
Company, there are no agreements or understandings between the Company or the
Operating Partnership, on the one hand, and the partnerships that own the voting
stock of the Property Services Businesses (the "Voting Stock Partnerships") or
their partners, on the other, that are inconsistent with the relevant Voting
Stock Partnership being considered to be both the record and beneficial owner of
more than 90% of the outstanding voting stock of the respective Property
Services Businesses; and (iii) the Company is a validly organized and duly
incorporated corporation under the laws of the State of Maryland, each of the
Property Services Businesses and each of the REIT Subs are validly organized and
duly incorporated corporations under the laws of the State of Delaware or 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.
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.
<PAGE>
Charles E. Smith Residential Realty, Inc.
January 14, 1999
Page 4
2. The discussions in the Prospectus under the headings "Federal Income
Tax Considerations" and "Redemption of Units--Tax Consequences of
Redemption," to the extent that they describe matters of federal income
tax law, are 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
Unitholder with respect to the acquisition, ownership, redemption or disposition
of its Units.
We assume no obligation to advise you of any changes in our
opinion subsequent to the delivery of this opinion letter. The Company's
qualification and taxation as a REIT depend upon the Company's ability to meet
on a continuing basis, through actual annual operating and other results, the
various requirements under the Code with regard to, among other things, the
sources of its gross income, the composition of its assets, the level of its
distributions to stockholders, and the diversity of its stock ownership. Hogan &
Hartson L.L.P. has relied upon representations of the Company with respect to
these matters and will not review the Company's compliance with these
requirements on a continuing basis. Accordingly, no assurance can be given that
the actual results of the Company's operations, the sources of its income, the
nature of its assets, the level of its distributions to stockholders and the
diversity of its stock ownership for any given taxable year will satisfy the
requirements under the Code for qualification and taxation as a REIT.
An opinion of counsel merely represents counsel's best
judgment with respect to the probable outcome on the merits and is not binding
on the IRS or the courts. There can be no assurance that positions contrary to
our opinion will not be taken by the IRS, or that a court considering the issue
would not hold contrary to such opinion. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
opinion expressed herein. Nevertheless, we undertake no responsibility to advise
you of any such changes.
<PAGE>
Charles E. Smith Residential Realty, Inc.
January 14, 1999
Page 5
We hereby consent to the filing of this opinion letter, which
has been prepared solely for your use in connection with the filing of the
Registration Statement, as Exhibit 8.1 to the Registration Statement and to the
use of the name of the firm therein. In giving the consent, we do not thereby
admit that we are an "expert" within the meaning of the Securities Act of 1933,
as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
Hogan & Hartson L.L.P.
<PAGE>
Exhibit 23.3
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 9, 1998
included in Charles E. Smith Residential Realty, Inc.'s previously filed Form
10-K for the year ended December 31, 1997 and to all references to our Firm
included in this registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Washington, D.C.
January 14, 1999
<PAGE>
Exhibit 23.4
[LETTERHEAD OF ALTSCHULER, MELVOIN AND GLASSER LLP]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this registration
statement of our report dated February 17, 1998, with respect to the
consolidated balance sheets of McClurg Court Associates Limited Partnership
as of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in partners' capital and cash flows for the years then ended,
which report is included in Charles E. Smith Residential Realty, Inc.'s
previously filed Form 8-K/A dated April 17, 1998, and to all references to
our Firm included in this registration statement.
ALTSCHULER, MELVOIN AND GLASSER LLP
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
January 14, 1999
