<PAGE>
[LOGO]
PROSPECTUS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
694,586 SHARES OF COMMON STOCK
The persons listed herein may offer and sell from time to
time up to 694,586 shares of our common stock under this
prospectus. We refer to these persons as the selling
shareholders. Our registration of the offered shares does not
mean that any of the selling shareholders will offer or sell
any of the offered shares. We will receive no proceeds of any
sales of the offered shares by the selling shareholders.
The selling shareholders may sell the offered shares in
public or private transactions, on or off the New York Stock
Exchange, at prevailing prices or at privately negotiated
prices. The selling shareholders may sell the offered shares
directly or through agents or broker-dealers acting as
principal or agent, or in a distribution by underwriters.
Our common stock is listed on the New York Stock Exchange
under the trading symbol "SRW."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 IN
THIS PROSPECTUS FOR FACTORS THAT ARE RELEVANT TO AN INVESTMENT
IN THE COMMON STOCK.
------------------------------
The information contained in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement relating to these securities
has been declared effective by the Securities and Exchange
Commission. This prospectus is neither an offer to sell nor a
solicitation of an offer to buy these securities in any state
where the offer or sale is unlawful.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
JANUARY 20, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY................................................................. 1
Forward-Looking Information.................................................... 1
The Company.................................................................... 1
The Offered Shares............................................................. 2
Important Risks in Owning Our Common Stock..................................... 2
Tax Status of the Company...................................................... 2
RISK FACTORS....................................................................... 3
Some of Our Policies May Be Changed Without a Vote of Shareholders............. 3
Provisions of Our Charter Could Inhibit Changes of Control..................... 3
Our Ability to Issue Preferred Shares Could Inhibit Changes of Control......... 3
Maryland Law Limits Changes of Control......................................... 3
We Have Adopted a Shareholder Rights Plan Which Could Delay or Prevent a
Change of Control.......................................................... 4
We Have a Share Ownership Limit................................................ 4
The Large Number of Shares Available for Future Sale Could Adversely Affect
the Market Price of Our Common Stock....................................... 4
Changes in Market Conditions Could Adversely Affect the Market Price of Our
Common Stock............................................................... 4
Our Earnings and Cash Distributions Will Affect the Market Price of Our Common
Stock...................................................................... 4
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.................... 5
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences....... 5
We May Need to Borrow Money to Qualify as a REIT............................... 6
We Are Subject To Some Taxes Even If We Qualify as a REIT...................... 6
Holders Will be Subject to the Operational Risks of Our Business............... 6
DESCRIPTION OF CAPITAL STOCK....................................................... 8
General Rights of Common Stock................................................. 8
Preferred Shares............................................................... 8
Classification and Removal of Board of Directors; Other Provisions............. 10
Special Statutory Requirements for Certain Transactions........................ 10
Restrictions on Transfer; Excess Stock......................................... 12
Transfer Agent and Registrar................................................... 13
REGISTRATION RIGHTS................................................................ 14
SELLING SHAREHOLDERS............................................................... 14
FEDERAL INCOME TAX CONSIDERATIONS.................................................. 15
General........................................................................ 15
Our Tax Treatment.............................................................. 15
Requirements for Qualification As a REIT....................................... 16
Tax Aspects of Our Investments in Smith L.P. and Property Service Businesses... 20
Taxation of Shareholders....................................................... 21
Other Tax Considerations....................................................... 26
PLAN OF DISTRIBUTION............................................................... 28
WHERE YOU CAN FIND MORE INFORMATION................................................ 30
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 30
EXPERTS............................................................................ 31
LEGAL MATTERS...................................................................... 31
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT
TO YOU. TO UNDERSTAND THIS COMMON STOCK OFFERING, YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND FEDERAL INCOME TAX
CONSIDERATIONS.
FORWARD-LOOKING INFORMATION
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. WHENEVER YOU SEE THE WORDS "BELIEVES," "ANTICIPATES," AND
"EXPECTS" AND SIMILAR WORDS INDICATING UNCERTAINTY, YOU SHOULD REMEMBER THAT THE
STATEMENTS ARE ASSUMPTIONS. THESE ASSUMPTIONS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL FINANCIAL RESULTS OR MANAGEMENT PLANS AND
OBJECTIVES TO DIFFER MATERIALLY FROM THOSE PROJECTED OR EXPRESSED IN THIS
PROSPECTUS. FOR EXAMPLE, SUCH DIFFERENCES MAY OCCUR BECAUSE OF CHANGES IN:
- - NATIONAL AND REGIONAL ECONOMIC CONDITIONS (ESPECIALLY IN MULTIFAMILY
PROPERTY OCCUPANCIES AND RENTAL GROWTH IN THE WASHINGTON, D.C.
METROPOLITAN AREA);
- - OUR ABILITY TO IDENTIFY AND SECURE ADDITIONAL PROPERTIES AND PROPERTY
LOCATIONS;
- - THE EFFECT OF PREVAILING MARKET INTEREST RATES AND THE PRICING OF OUR
COMMON STOCK;
- - THE ACCEPTANCE OF OUR FINANCING PLANS BY THE CAPITAL MARKETS; AND
- - OTHER RISKS WHICH MAY HAVE BEEN OR WILL BE DISCUSSED IN THIS PROSPECTUS
OR IN OUR OTHER FILINGS WITH THE SEC.
WE RECOMMEND THAT YOU CONSIDER CAREFULLY THE RISKS OF SUCH ASSUMPTIONS BEFORE
MAKING ANY INVESTMENT IN OUR COMMON STOCK.
WE ARE NOT OBLIGATED TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS IN THIS PROSPECTUS. WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
THE COMPANY
As a self-managed equity REIT, we acquire, develop, manage and operate
multifamily properties primarily in the Washington, D.C., Chicago, Boston, and
Southeastern Florida metropolitan areas. We are a fully integrated real estate
organization with in-house acquisition, development, financing, marketing,
property management and leasing expertise. Our primary strategy for growth is to
acquire, develop, own and manage high quality multifamily properties to generate
long-term income and increases in value.
We are the sole general partner of Smith L.P. As of November 30, 1999, we
owned approximately 59.8% of its outstanding common units. Smith L.P. and its
subsidiaries own all of our properties, property interests and business assets.
As of November 30, 1999, we owned all or a portion of 58 multifamily
apartment communities with a total of 25,169 units. 49 of the properties were
located in the Washington, D.C. metropolitan area, two in the Boston
metropolitan area, six in the Chicago metropolitan area and one in the Southeast
Florida area. We currently have approximately 1,800 units under construction and
approximately 1,200 additional units under construction which are subject to
pre-purchase agreements. We also manage approximately 2,800 additional apartment
units for other property owners. Besides our residential properties, we own two
retail centers in the Washington, D.C. metropolitan area with approximately
436,000 square feet of retail space.
Our principal executive offices are located at 2345 Crystal Drive,
Arlington, Virginia 22202 and our telephone number is (703) 920-8500.
<PAGE>
THE OFFERED SHARES
This prospectus relates to 694,586 shares of our common stock that may be
sold by the selling shareholders.
IMPORTANT RISKS IN OWNING OUR COMMON STOCK
Before you decide to invest in our common stock, you should read the "Risk
Factors" section, which begins on page 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 currently are required, among other things,
to distribute at least 95% of our taxable income, excluding any net capital
gain. For our taxable years beginning after December 31, 2000, this requirement
will be relaxed but we still will be required to distribute 90% of this amount.
Even if we qualify to be taxed as a REIT, we are subject to certain federal,
state and local taxes on our income and property and to federal income and
excise tax on the income we do not distribute. In addition, the operating
companies in which we own 99% non-voting interests are subject to federal, state
and local income taxes. See "Federal Income Tax Considerations" for a more
detailed explanation.
-2-
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS.
SOME OF OUR POLICIES MAY BE CHANGED WITHOUT A VOTE OF SHAREHOLDERS. Our
Board of Directors establishes many of our major policies, including those
relating to investment, financing, growth, acquisitions, development, debt
capitalization and distributions. Although the Board of Directors currently has
no intention to amend or revise these and other policies, it may do so from time
to time without a vote of our shareholders. In order to change our policy of
seeking to maintain our REIT qualification status, however, we must have the
approval of our shareholders. Changes in our policies may not fully serve the
interests of all shareholders.
PROVISIONS OF OUR CHARTER COULD INHIBIT CHANGES OF CONTROL. There are
provisions of our charter that may delay or otherwise limit the ability of
outside parties to acquire control of us or engage in some other transaction.
These charter provisions include three-year staggered terms for directors, the
authority of the Board of Directors to classify capital stock into one or more
series having special preferences without shareholder approval, and a 9.8% share
ownership limit. See "--We Have a Share Ownership Limit" below. These
limitations could prevent us from entering into a change of control transaction
or other transaction that could be in the best interests of our shareholders.
In addition, we cannot merge, consolidate or engage in any combination
with another person or sell all or substantially all of our assets unless the
transaction includes a merger of, or a sale of assets by, Smith L.P., which may
require approval of the holders of a majority of the units. We currently hold
approximately 59.8% of the common units in Smith L.P. This voting requirement
might limit the possibility for acquisition or change in control, even if a
change in control were in our shareholders' interest. In this regard, the
holders of units might incur different, and more adverse, tax consequences as a
result of an acquisition or change in control that could motivate them to oppose
a transaction that is in the shareholders' interest.
OUR ABILITY TO ISSUE PREFERRED SHARES COULD INHIBIT CHANGES OF CONTROL.
Our charter authorizes the Board of Directors to issue preferred shares and to
establish the preferences and rights of any preferred shares issued, including
the right to vote and the right to convert them into shares of common stock.
This power to issue preferred shares could have the effect of delaying or
preventing a change in control even if a change in control were in our
shareholders' interest. As of November 30, 1999, we had outstanding six series
of preferred shares. The preferred shares outstanding rank senior to the common
stock with respect to dividend rights and distributions upon liquidation,
dissolution and winding up. We are subject to the risks normally associated with
preferred equity financing, including the risk that our cash flow will be
insufficient to meet the required payments on the shares.
MARYLAND LAW LIMITS CHANGES OF CONTROL. Provisions of Maryland
corporate law prohibit "business combinations," including issuances of equity
securities, between a Maryland corporation and any person who owns 10% or more
of the voting power of the corporation's shares of capital stock, or an
"interested stockholder," unless the transaction is approved by 80% of the
corporation's outstanding voting shares. In addition, an interested stockholder
may not engage in a business combination for five years following the date he
became an interested stockholder. Except as described below, we are subject to
these provisions. As a result, a change in control or other transaction that may
provide our shareholders with a premium or which might otherwise be in their
best interests may be prevented or delayed.
-3-
<PAGE>
Our charter, as is permitted by Maryland corporate law, exempts any
business combination involving Messrs. Smith and Kogod and persons affiliated or
acting in concert with them. Consequently, Messrs. Smith and Kogod and their
affiliates are permitted to enter into business combinations with us without the
supermajority shareholder approval otherwise required by Maryland law.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN WHICH COULD DELAY OR PREVENT
A CHANGE OF CONTROL. Our rights plan provides, among other things, that if a
person or group attempts to acquire 15% or more of our common stock on terms not
approved by our Board of Directors, shareholders will be entitled to purchase
shares of our stock, subject to our charter's ownership limit. These purchase
rights would cause substantial dilution to a person or group that acquires or
attempts to acquire 15% or more of our common stock in this manner and, as a
result, could delay or prevent a change in control or other transaction that
could provide our shareholders with a premium over the then-prevailing market
price of their shares or which might otherwise be in their best interests.
WE HAVE A SHARE OWNERSHIP LIMIT. Primarily to assist us in maintaining
our REIT qualification, our charter limits ownership of the issued and
outstanding shares of capital stock by any single shareholder to 9.8% of our
outstanding capital stock. The attribution provisions of the federal tax laws
that are used in applying the ownership limit are complex. They may cause a
shareholder to be considered to own the stock of a number of related
shareholders. The ownership limit could inhibit changes of control.
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As of November 30, 1999, we had
outstanding approximately 20.7 million shares of common stock tradable without
restriction and had reserved for resale 15.7 million additional shares of common
stock for possible issuance upon redemption of units and 6.8 million shares for
possible issuance upon conversion of outstanding preferred stock. In addition,
we have reserved a number of shares available for possible issuance under our
employee benefit plans filed with the SEC. We may issue additional shares of
common stock and securities convertible into shares of common stock in the
future. We cannot predict the effect that future sales of shares of common
stock, or the perception that such sales could occur, will have on the market
prices of our shares.
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK. As with other publicly traded securities, the value of our
common stock depends on various market conditions, which may change from time to
time. Among the market conditions that may affect the value of our common stock
are:
- - the extent of institutional investor interest in us;
- - the reputation of REITs and residential REITs generally;
- - the attractiveness of our equity securities in comparison to other
equity securities, including equity securities issued by other real
estate companies; and
- - our financial condition and performance.
OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
COMMON STOCK. We believe that the market value of a REIT's equity securities is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, and is secondarily based
upon the real estate market value of the underlying assets. For that reason, our
shares may trade at prices that are higher or lower than the net asset value per
share. To the extent we retain operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our shares. In addition, we are subject to the risk that
-4-
<PAGE>
our cash flow will be insufficient to meet the required payments on our
preferred shares. Our failure to meet the market's expectations with regard to
future earnings and cash distributions would likely adversely affect the market
price of our shares.
MARKET INTEREST RATES AND LOW TRADING VOLUME MAY HAVE AN EFFECT ON THE
VALUE OF OUR COMMON STOCK. One of the factors that investors consider important
in deciding whether to buy or sell shares of a REIT is the distribution rate on
those shares, as a percentage of the price of the shares, relative to market
interest rates. If market interest rates increase, prospective purchasers of our
shares may expect a higher annual distribution rate. Higher interest rates would
not, however, result in more funds for us to distribute and, in fact, would
likely increase our borrowing costs and potentially decrease funds available for
distribution. This could cause the market price of our common stock to go down.
In addition, although our common stock is listed on the New York Stock Exchange,
the daily trading volume of our shares may be lower than the trading volume for
certain other industries. As a result, our investors who desire to liquidate
substantial holdings may find that they are unable to dispose of their shares in
the market without causing a substantial decline in the market value of the
shares.
WE BELIEVE, BUT CANNOT GUARANTEE, THAT WE QUALIFY AS A REIT. We believe
we qualify as a REIT and generally will not be subject to federal income tax on
net income that we distribute to our shareholders. However, our qualification as
a REIT involves the application of technical and complex tax rules. For
instance, if we own a company's securities, we cannot qualify as a REIT unless
the value of those securities does not exceed 5% of the total value of our
assets. We believe that we meet this requirement, but this belief is based on
our analysis of the value of each of the corporations that conduct our property
service businesses and on our conclusion that each of these corporations will be
respected as a separate corporation. Also, to qualify as a REIT, we cannot own
more than 10% of a company's voting securities. We also believe that we meet
this requirement, but this belief is based on our conclusion that the shares of
stock that we own in each of the property service businesses are not voting
securities. We cannot guarantee that the IRS will agree with us on these points.
Furthermore, for our taxable years beginning after December 31, 2000,
we will be precluded from owning more than 10% of the value of a company's
securities unless the company elects to be a taxable REIT subsidiary. The
securities of the property service businesses might be excepted from this rule,
but if they are not, then these corporations would have to make the taxable REIT
subsidiary election. We hold more than 10% of the value of the securities of
each of the property service businesses. At least two of our subsidiaries will
make the taxable REIT subsidiary election because they will otherwise not be
excepted from the 10% value test, but we have not yet made a determination as to
the others.
Moreover, our ability to qualify as a REIT may depend on facts and
circumstances that may not be within our control. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, it is
possible that new tax laws or new interpretations of existing tax laws will
affect both our ability to qualify as a REIT and the tax consequences of REIT
qualification. For example, the asset tests described above will be modified for
our taxable years beginning after December 31, 2000. We believe we will satisfy
the modified tests but we may need to change the tax status of one or more of
our subsidiaries to do so. For all of these reasons, we cannot guarantee that we
currently qualify or will be able to remain qualified as a REIT.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE
CONSEQUENCES. If we fail to qualify as a REIT, we will be subject to federal
income tax at regular corporate rates. This additional tax would significantly
reduce the cash we would have available to distribute to our shareholders and
could reduce significantly the value of our common stock. In addition, if we
fail to qualify as a REIT, we may be disqualified from electing to be treated as
a REIT for the next four taxable years.
-5-
<PAGE>
WE MAY NEED TO BORROW MONEY TO QUALIFY AS A REIT. To obtain the
favorable tax treatment associated with REITs, we currently are required each
year to distribute to our shareholders at least 95% (90% for years beginning
after December 31, 2000) of our net taxable income, excluding net capital gain.
For our taxable years beginning after December 31, 2000, this requirement will
be relaxed but we still will be required to distribute 90% of this amount.
Differences in timing between when we receive income and when we have to pay
expenses could require us to borrow money to meet this requirement. The impact
of large expenses also could have this effect. We might need to borrow money
even if we believe that market conditions are not favorable for borrowing.
WE ARE SUBJECT TO SOME TAXES EVEN IF WE QUALIFY AS A REIT. Even if we
qualify as a REIT, we are subject to some federal, state and local taxes on our
income and property. For example, we pay tax on certain types of income that we
do not distribute. Also, our income derived from properties located in the
District of Columbia is subject to local tax and our net income from some
prohibited transactions will be subject to a 100% tax. In addition, we derive
income from the property service businesses, whose income is subject to federal,
state and local income tax. It should be noted that the property service
businesses currently take steps to limit their tax liability. If any one of
these corporations is required to elect to be treated as a taxable REIT
subsidiary, its ability to limit its tax liability will be reduced.
HOLDERS WILL CONTINUE TO BE SUBJECT TO THE OPERATIONAL RISKS OF OUR
BUSINESS. An investment in our common stock 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.
- Because real estate investments are illiquid and we are
subject to other restrictions, we may not be able to sell
properties when appropriate.
- Our properties may be subject to federal, state or local
regulations that could adversely affect distributions to our
shareholders.
- Environmental problems are possible and can be costly.
- Our properties in the District of Columbia are subject to
special tenants rights that may impede our sale of those
properties.
- Some potential losses are not covered by insurance.
- - Debt financing, financial covenants, the amount or percentage of our
debt and increases in interest rates could adversely affect our
economic performance for the following reasons, among others--
- Our charter does not limit the amount or percentage of debt
that we may incur and this amount or percentage of debt may
limit our ability to obtain additional financing.
-6-
<PAGE>
- Our policy to limit debt may not ensure that we can incur and
continue to make expected distributions to shareholders.
- We may not be able to refinance our debt on favorable terms or
make large payments on debt when our debts become due.
- Rising interest rates could adversely affect our cash flow.
- - Our reliance on the property service businesses, where we lack voting
control, may adversely affect our shareholders. These property services
businesses, which provide management, leasing, financing, insurance,
engineering and technical services, and tenant construction and
renovation services, are conducted by three operating companies in
which Smith L.P. has a 99% economic interest but does not own voting
stock.
- - We are dependent on our key personnel with whom we do not have
employment agreements and for whom we do not have "key-person" life
insurance.
-7-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of November 30, 1999, our authorized capital stock was 145,000,000
shares. Those shares consisted of: (a) 80,000,000 shares of common stock, (b)
45,000,000 shares of excess stock, (c) 8,123,095 shares of classified preferred
stock, (d) 10,807,376 shares of undesignated preferred stock and (e) 1,069,529
shares which are not classified. Our charter gives the Board of Directors the
authority to issue, without a shareholder vote, shares of capital stock in one
or more series and to determine the rights of each series, including
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Such terms are fully described in the articles supplementary to the
charter adopted by the Board of Directors.
The following description of the terms and provisions of our shares of
capital stock and certain other matters is not complete. The description is
qualified by the applicable provisions of Maryland law and our charter, which is
on file with the SEC as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL RIGHTS OF COMMON STOCK
Each holder of common stock is entitled to one vote at shareholder
meetings for each share of common stock he owns. Neither our charter nor our
bylaws provide for cumulative voting for the election of directors. Subject to
the prior rights of any series of preferred stock that may be classified and
issued, holders of our common stock are entitled to receive, pro-rata, any
dividends declared by the Board of Directors out of legally available funds, and
are also entitled to share, pro-rata, in any other distributions to
shareholders. We pay quarterly dividends on our common stock and expect to
continue to do so. We depend upon distributions from Smith L.P. to fund our
dividends to shareholders.
Holders of common stock do not have any preemptive rights or other
rights to subscribe for additional shares.
PREFERRED SHARES
As of November 30, 1999, we have six series of preferred stock
outstanding. Each series of outstanding preferred stock ranks senior to the
common stock with respect to dividend rights and distributions upon our
liquidation, dissolution and winding up. The following are the principal terms
of each series of outstanding preferred stock:
- SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK:
There are 2,640,325 Series A Preferred Shares outstanding. The
Series A Preferred Shares have a liquidation preference of
$27.08 per share. Dividends on the Series A Preferred Shares
are cumulative from the date of original issue and are payable
quarterly at the greater of the rate declared on the common
stock or an annual rate of $2.02 per share. We cannot redeem
the Series A Preferred Shares prior to May 15, 2003. On or
after May 15, 2003, we, at our option, may redeem the Series A
Preferred Shares for cash at a price of $27.08 per share, plus
accrued and unpaid dividends. Under certain circumstances, we
may elect to redeem the Series A Preferred Shares with common
stock at the then market price of the common stock. A holder
of Series A Preferred Shares may convert the Series A
Preferred Shares into shares of common stock on a one-for-one
basis, subject to certain limitations.
- SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK: There are 500
Series C Preferred Shares outstanding. The Series C Preferred
Shares have a liquidation
-8-
<PAGE>
preference of $100,000 per share and an initial annual
dividend of $7,910 per share (7.91% of purchase price). If the
securities receive an investment grade rating, the dividend
will decrease to $7,660 per share. Dividends are cumulative
and are payable quarterly. We may redeem Series C Preferred
Shares after February 1, 2028, at the liquidation preference
plus accrued dividends.
- SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK:
There are 684,931 Series E Preferred Shares outstanding. The
Series E Preferred Shares have a liquidation preference of
$36.50 per share. Dividends on the Series E Preferred Shares
are cumulative from the date of original issue (July 13, 1999)
and are payable quarterly at the greater of the rate declared
on the common stock or an annual rate of $2.82875 per share
for the first year (beginning from the original issue date up
to and including the first anniversary of the original issue
date), $3.01125 for the second year after the original issue
date and $3.1025 for the third year after the original issue
date. We cannot redeem the Series E Preferred Shares prior to
July 13, 2002. On or after July 13, 2002, we, at our option,
may redeem the Series E Preferred Shares for cash at a price
of $36.50 per share, plus accrued and unpaid dividends. Under
certain circumstances, the Company may elect to make such
redemption with common stock at the then market price of the
common stock. A holder of Series E Preferred Shares may
convert the Series E Preferred Shares into shares of common
stock on a one-for-one basis, subject to certain limitations.
- SERIES F CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK:
There are 666,667 Series F Preferred Shares outstanding. The
Series F Preferred Shares have a liquidation preference of
$37.50 per share. Dividends on the Series F Preferred Shares
are cumulative from the date of original issue (October 1,
1999) and are payable quarterly at the greater of the rate
declared on the common stock or an annual rate of $2.90625 per
share for the first year (beginning from the original issue
date up to and including the first anniversary of the original
issue date), $3.09375 for the second year after the original
issue date and $3.1875 for the third year after the original
issue date. We cannot redeem the Series F Preferred Shares
prior to October 1, 2004. On or after October 1, 2004, we, at
our option, may redeem the Series F Preferred Shares for cash
at a price of $37.50 per share, plus accrued and unpaid
dividends. Under certain circumstances, the Company may elect
to make such redemption with common stock at the then market
price of the common stock. A holder of Series F Preferred
Shares may convert the Series F Preferred Shares into shares
of common stock on a one-for-one basis, subject to certain
limitations.
- SERIES G CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK:
There are 641,026 Series G Preferred Shares outstanding. The
Series G Preferred Shares have a liquidation preference of
$39.00 per share. Dividends on the Series G Preferred Shares
are cumulative from the date of original issue (November 5,
1999) and are payable quarterly at the greater of the rate
declared on the common stock or an annual rate of $3.0225 per
share for the first year (beginning from the original issue
date up to and including the first anniversary of the original
issue date), $3.2175 for the second year after the original
issue date and $3.315 for the third year after the original
issue date. We cannot redeem the Series G Preferred Shares
prior to November 5, 2005. On or after November 5, 2005, we,
at our option, may redeem the Series G Preferred Shares for
cash at a price of $39.00 per share, plus accrued and unpaid
dividends. Under certain circumstances, the Company may elect
to make such redemption with common stock at the then market
price of the common stock. A holder of Series G Preferred
Shares may convert the Series G Preferred Shares into shares
of common stock on a one-for-one basis, subject to certain
limitations.
-9-
<PAGE>
- SERIES H CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK:
There are 2,200,000 Series H Preferred Shares outstanding. The
Series H Preferred Shares have a liquidation preference of
$25.00 per share. Dividends on the Series H Preferred Shares
are cumulative from the date of original issue (September 13,
1999) and are payable quarterly at the greater of the rate
declared on the common stock or an annual rate of $2.03125 per
share. We cannot redeem the Series H Preferred Shares prior to
September 13, 2004. On or after September 13, 2004, we, at our
option, may redeem the Series H Preferred Shares for cash at a
price of $25.00 per share, plus accrued and unpaid dividends.
Under certain circumstances, the Company may elect to make
such redemption with common stock at the then market price of
the common stock. A holder of Series H Preferred Shares may
convert the Series H Preferred Shares into shares of common
stock at a conversion rate of approximately 0.65 shares of
common stock per Series H Preferred Share, subject to certain
limitations.
CLASSIFICATION AND REMOVAL OF BOARD OF DIRECTORS; OTHER PROVISIONS
Our charter divides the Board of Directors into three classes, with
each class to consist of an equal number of the directors or to the nearest
extent possible. The terms of office of one class of directors (3 directors)
will expire at the 2000 annual meeting of shareholders; the term of the second
class of directors (2 directors) will expire at the 2001 annual meeting of
shareholders; and the term of the third class of directors (3 directors) will
expire at the 2002 annual meeting of shareholders. At each annual meeting of
shareholders, the class of directors to be elected at such meeting will be
elected for a three year term, and the directors in the other two classes will
continue in office. Because holders of common stock have no right to cumulative
voting for the election of directors, at each annual meeting of shareholders,
the holders of a majority of the shares of common stock will be able to elect
all of the successors of the class of directors whose term expires at that
meeting.
Our charter also provides that, except for any directors who may be
elected by holders of a class or series of capital stock other than common
stock, directors may be removed only for cause and only by the affirmative vote
of shareholders holding at least 80% of all the votes entitled to be cast for
the election of directors. Vacancies on the Board of Directors may be filled by
the affirmative vote of the remaining directors and, in the case of a vacancy
resulting from the removal of a director, by the shareholders by a majority of
the votes entitled to be cast for the election of directors. A vote of
shareholders holding at least 80% of all the votes entitled to be cast thereon
is required to amend, alter, change, repeal or adopt any provisions inconsistent
with the foregoing classified board and director removal provisions. Under our
charter, the power to amend our bylaws is vested exclusively in the Board of
Directors, and the shareholders will not have any power to adopt, alter or
repeal the bylaws absent amendment to our charter. These provisions may make it
more difficult and time consuming to change majority control of our Board of
Directors and, thus, reduce our vulnerability to an unsolicited proposal for a
takeover or the removal of incumbent management.
Because the Board of Directors has the power to establish the
preferences and rights of additional series of capital stock without further
shareholder vote, the Board of Directors may give the holders of any series of
capital stock preferences, powers and rights, voting or otherwise, senior to
those of holders of common stock. The issuance of any such senior capital stock
could have the effect of delaying or preventing a change in control of the
Company.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
BUSINESS COMBINATION STATUTE. The MGCL establishes special requirements
with respect to "business combinations" between Maryland corporations and
"Interested Shareholders" unless exemptions are applicable. Among other things,
the law prohibits for a period of five years a merger
-10-
<PAGE>
and other specified or similar transactions between a Company and an Interested
Shareholder and requires a supermajority vote for such transactions after the
end of the five-year period.
"Interested Shareholders" are all persons owning beneficially, directly
or indirectly, more than 10% of the outstanding voting stock of the Maryland
corporation. "Business Combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to Interested Shareholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an Interested Shareholder
or its affiliates for a period of five years after the date on which the
shareholder first became an Interested Shareholder. Thereafter, the transaction
may not be consummated unless recommended by the board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66-2/3% of the votes entitled
to be cast by all holders of outstanding shares of voting stock other than the
Interested Shareholder. A Business Combination with an Interested Shareholder
that is approved by the board of directors of a Maryland corporation at any time
before an Interested Shareholder first becomes an Interested Shareholder is not
subject to the special voting requirements. An amendment to a Maryland
corporation's charter electing not to be subject to the foregoing requirements
must be approved by the affirmative vote of at least 80% of the votes entitled
to be cast by all holders of outstanding shares of voting stock and 66-2/3% of
the votes entitled to be cast by holders of outstanding shares of voting stock
who are not Interested Shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply to any Business
Combination of a corporation with a shareholder who was an Interested
Shareholder on the date of the shareholder vote.
As permitted by Maryland law, we have exempted from the Maryland
business corporation statute any Business Combination with Messrs. Smith or
Kogod, and all persons, firms and corporations affiliated with, or acting in
concert or as a group with, either of them, as well as any Business Combination
that involves the redemption of Units for shares of common stock.
CONTROL SHARE ACQUISITION STATUTE. Maryland law imposes limitations on
the voting rights in a "control share acquisition." The Maryland statute defines
a "control share acquisition" at the 20%, 33-1/3% and 50% acquisition levels,
and requires a 2/3 shareholder vote (excluding shares owned by the acquiring
person and certain members of management) to accord voting rights to stock
acquired in a control share acquisition. The statute also requires Maryland
corporations to hold a special meeting at the request of an actual or proposed
control share acquirer generally within 50 days after a request is made with the
submission of an "acquiring person statement," but only if the acquiring person
(a) posts a bond for the cost of a meeting and (b) submits a definitive
financing agreement to the extent that financing is not provided by the
acquiring person. In addition, unless the charter or by-laws provide otherwise,
the statute gives the Maryland corporation, within certain time limitations,
various redemption rights if there is a shareholder vote on the issue and the
grant of voting rights is not approved, or if an acquiring person statement is
not delivered to the target within 10 days following a control share
acquisition. Moreover, unless the charter or by-laws provide otherwise, the
statute provides that if, before a control share acquisition occurs, voting
rights are accorded to control shares that result in the acquiring person having
majority voting power, then minority shareholders have appraisal rights. An
acquisition of shares may be exempted from the control share statute, provided
that a charter or bylaw provision is adopted for such purpose prior to the
control share acquisition. Our charter provides that any acquisition of our
shares of capital stock that is not prohibited by the terms of the restrictions
on transfer described below under "--Restrictions on Transfer; Excess Stock" is
exempted from the provisions of the control share acquisition statute.
-11-
<PAGE>
RESTRICTIONS ON TRANSFER; EXCESS STOCK
OWNERSHIP LIMITS. Our charter restricts the number of shares of capital
stock that individual shareholders may own. For us to qualify as a REIT under
the Code, no more than 50% in value of our outstanding shares of capital stock
may be owned, directly or constructively under the applicable attribution rules
of the Code, by five or fewer individuals (which is defined in the Code to
include certain entities) during the last half of a taxable year. In addition,
the capital stock must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year or during a proportionate part of a shorter
taxable year (together with the restriction referred to in the preceding
sentence, the "Existing Holder Limit"). Our charter restricts certain
acquisitions of capital stock, including common stock, in order to comply with
these requirements. These restrictions are also intended to inhibit changes of
control of the Company.
Subject to certain exceptions specified in our charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% (the "Ownership Limit") in number or value of the issued and
outstanding shares of common stock. The Board of Directors in its discretion may
waive the Ownership Limit or the Existing Holder Limit with respect to a holder
that is an entity (but not an individual) if such holder's ownership will not
then or in the future jeopardize our status as a REIT.
Messrs. Smith and Kogod, members of their families and entities that
they control are subject to the Ownership Limit, and they also are subject to
certain additional special ownership limitations. Messrs. Smith and Kogod,
members of their families and entities that they control are prohibited from
acquiring additional shares of common stock (or rights to acquire shares), if,
as a result of, and giving effect to, such acquisition, any tenant would be
regarded as a related party tenant for purposes of Section 856(b)(2)(B) of the
Code (see "Federal Income Tax Considerations--Requirements for Qualification--
Gross Income Tests" on page 21) and we would be considered to receive more
than 0.5% of our gross annual revenue from Related Party Tenants.
Notwithstanding any of the foregoing ownership limits, no holder may
own or acquire, either directly or constructively under the applicable
attribution rules of the Code, any shares of any class of our stock if such
ownership or acquisition (1) would cause more than 50% in value our outstanding
stock to be owned, either directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain tax-exempt entities, other than, in general, qualified
domestic pension funds), (2) would result in our stock being beneficially owned
by less than 100 persons (determined without reference to any rules of
attribution), or (3) would otherwise result in our failing to qualify as a REIT.
If any shareholder purports to transfer shares to a person and either
the transfer would result in our failing to qualify as a REIT, or such transfer
would cause the transferee to hold shares in excess of the Ownership Limit or
Existing Holder Limit, the purported transfer will be null and void. In that
event, the intended transferee will acquire no rights or economic interest in
the shares, and the shareholder will be deemed to have transferred the shares of
common stock to us in exchange for shares of Excess Stock, which will be deemed
to be held by us as trustee of a trust for the exclusive benefit of the person
or persons to whom the shares can be transferred without violating the ownership
limit. In addition, if any person owns, either directly or constructively under
the applicable attribution rules of the Code, shares of capital stock in excess
of the applicable Ownership Limit, such person will be deemed to have exchanged
the shares of capital stock that cause the Ownership Limit to be exceeded for an
equal number of shares of Excess Stock, which will be deemed to be held by us as
trustee of a trust for the exclusive benefit of the person or persons to whom
the share can be transferred without violating the Ownership Limit.
A person who holds or transfers shares such that shares of capital
stock shall have been deemed to be exchanged for Excess Stock will not be
-12-
<PAGE>
entitled to vote the Excess Stock and will not be entitled to receive any
dividends or distributions (any dividend or distribution paid on shares of
capital stock prior to our discovery that such shares have been exchanged for
Excess Stock shall be repaid to us upon demand, and any dividend or distribution
declared but unpaid shall be rescinded). Such person shall have the right to
designate a transferee of such Excess Stock so long as consideration received
for designating such transferee does not exceed a price that is equal to the
lesser of (1) in the case of a deemed exchange for Excess Stock resulting from a
transfer, the price paid for the shares in such transfer or, in the case of a
deemed exchange for Excess Stock resulting from some other event, the fair
market value, on the date of the deemed exchange, of the shares deemed
exchanged, and (2) the fair market value of the shares for which such Excess
Stock will be deemed to be exchanged on the date of the designation of the
transferee. For these purposes, fair market value on a given date is determined
by reference to the average closing price for the five preceding days. The
shares of Excess Stock so transferred will automatically be deemed to be
exchanged for shares of capital stock. We may purchase Excess Stock for the
lesser of the price paid or the average closing price for the five days
immediately preceding such purchase. We may elect to redeem the Excess Stock for
Units.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then the
intended transferee of any Excess Stock may be deemed, at our option, to have
acted as an agent on our behalf in acquiring such Excess Stock and to hold such
Excess Stock on our behalf.
All certificates representing shares of common stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage
as required by the Code or regulations thereunder) in number or value of the
issued and outstanding shares of capital stock, including common stock, must
file a written notice with us containing the information specified in our
charter no later than January 31 of each year. In addition, each shareholder
shall be required upon demand to disclose to us in writing such information as
we may request in order to determine the effect of such shareholder's direct,
indirect and constructive ownership of such shares on our REIT status.
The foregoing ownership limitations also may have the effect of
preventing or hindering any attempt to acquire control of us without the consent
of our Board of Directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent, Registrar and Dividend Disbursing Agent for the
shares of common stock is First Union National Bank of North Carolina.
-13-
<PAGE>
REGISTRATION RIGHTS
We are a party to a registration rights agreement with John M. Forte
relating to the shares of common stock being registered hereunder. Once the SEC
declares that the registration statement (of which this prospectus is a part) is
effective, we are required under the registration rights agreement to use our
reasonable efforts to keep this registration statement continuously effective
until the date on which all of the shares of common stock issued to the selling
shareholders have been sold under this registration statement or Rule 144 of the
Securities Act or can be sold freely without restriction. The benefits of the
registration rights agreement lapse with respect to any shares that have been
sold pursuant to the agreement or otherwise transferred without legal
restriction on further transfer.
The registration rights agreement requires that we pay all registration
expenses relating to the common stock covered by this registration statement
(other than underwriting discounts, selling commissions, fees and disbursements
of counsel of the selling shareholders, and stock transfer taxes, if any). We
also have agreed to indemnify each holder of common stock covered by the
registration rights agreement, the trustees, directors, officers and employees
of each holder and any person who controls any holder and each underwriter, its
partners, officers, directors, employees and controlling persons, if any,
against certain losses, claims, damages and expenses arising under the
securities laws. In addition, each holder of common stock covered by the
registration rights agreement has agreed to indemnify us and the other selling
holders of such common stock, each of our respective trustees, directors and
officers (including each officer who signs the registration statement on our
behalf), and any person who controls us or any other selling holder against
certain other losses, claims, damages and expenses arising under the securities
laws with respect to written information furnished to us by such holder for use
in this registration statement or any prospectus included herein.
SELLING SHAREHOLDERS
We have issued 694,586 shares of common stock to John M. Forte and/or
his subsequent transferees. The selling shareholders may resell the offered
shares covered by this prospectus as provided under the Plan of Distribution
section of this prospectus or as described in an applicable prospectus
supplement.
The following table provides the name of each selling shareholder, the
number of offered shares of common stock owned by such selling shareholder
before any offering to which this prospectus relates and the number of offered
shares that may be offered by such selling shareholder. As used in this
prospectus, the term "selling shareholder" also includes permitted transferees,
assignees, donees, distributees, pledgees and/or successors in interest, and
subsequent transferees, assignees, donees, distributees, pledgees and successors
in interest (as permitted under the merger agreement) of any person identified
as a selling shareholder. Because the selling shareholders may sell all or some
of their offered shares, no estimate can be made of the number of offered shares
that will be sold by the selling shareholders or that will be owned by the
selling shareholders upon completion of the offering. There is no assurance that
the selling shareholders will sell any of the offered shares. The offered shares
represent 3.36% of the number of shares of common stock outstanding as of
November 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OFFERED
NAME HEREBY
- ---- --------------
<S> <C>
John M. Forte ............................... 694,586
</TABLE>
-14-
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of our common stock. The following
discussion is for general information only, is not exhaustive of all possible
tax considerations, and is not intended to be and should not be construed as tax
advice. For example, it does not include a detailed discussion of any state,
local or foreign tax considerations. Nor does it discuss all of the aspects of
federal income taxation that may be relevant to a prospective shareholder in
light of its particular circumstances or to certain types of shareholders who
are subject to special treatment under the federal income tax laws. For example,
the discussion does not discuss all of the aspects of federal income taxation
that may be relevant to insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the IRS, and court decisions. The reference to IRS interpretations and practices
includes IRS practices and policies as endorsed in private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that receives the
ruling. In each case, these sources are relied upon as they exist on the date of
this prospectus. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly change
current law or adversely affect existing interpretations of existing law. Any
change of this kind could apply retroactively to transactions preceding the date
of the change. Except as described below in "--Requirements for Qualification As
a REIT--Gross Income Tests," we have not received any rulings from the IRS
concerning our tax treatment. Therefore, no assurance can be provided that the
statements made in the following discussion, which do not bind the IRS or the
courts, will not be challenged by the IRS or will be sustained by a court if so
challenged.
EACH PROSPECTIVE HOLDER OF COMMON STOCK IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF ITS PERSONAL TAX SITUATION ON THE
ANTICIPATED TAX CONSEQUENCES OF THE OWNERSHIP AND SALE OF COMMON STOCK. THIS
INCLUDES THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
OWNERSHIP AND SALE OF COMMON STOCK, AND THE POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
OUR TAX TREATMENT
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code commencing with our taxable year ending December 31,
1994. We believe that our company is organized and has operated in conformity
with the requirements for qualification and taxation as a REIT under the
Internal Revenue Code and we intend to continue to operate as a REIT. We cannot
ensure, however, that we have operated in a manner so as to qualify as a REIT or
that we will continue to operate as a REIT in the future. Our qualification and
taxation as a REIT depend upon our ability to meet on a continuing basis the
various qualification tests imposed under the Internal Revenue Code. These tests
must be met on a continuing basis through actual annual operating results,
distribution levels and diversity of stock ownership. While we intend to operate
so that we qualify as a REIT, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in our circumstances, we cannot ensure that the
actual results of our operations for any taxable year (our company) have
satisfied or will satisfy the REIT requirements. Further, the anticipated income
tax treatment described herein may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. See "--Failure to
Qualify."
-15-
<PAGE>
The following is a general description of the Internal Revenue Code
provisions that govern the federal income tax treatment of a REIT and its
shareholders. These provisions are highly technical and complex. This
description is qualified in its entirety by the applicable Internal Revenue Code
provisions, regulations, and administrative and judicial interpretations
thereof, all of which are subject to change prospectively or retroactively.
In any year in which we qualify for taxation as a REIT, we generally
will not be subject to federal corporate income taxes on net income that we
distribute currently to shareholders. This treatment substantially eliminates
the "double taxation" at the corporate and shareholder levels that generally
results from investment in a corporation. However, we will be subject to federal
income tax on any income that we do not distribute. In addition, in some
circumstances, we will be subject to federal income tax on some types of income
even though that income is distributed. Moreover, our property service business
subsidiaries do not qualify as REITs and are subject to federal corporate income
tax on their net income.
REQUIREMENTS FOR QUALIFICATION AS A REIT.
ORGANIZATIONAL REQUIREMENTS. The Internal Revenue Code defines a REIT
as a corporation, trust or association--
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial
interest;
(3) that would be taxable as a domestic corporation, but for
Sections 856 through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue
Code;
(5) the beneficial ownership of which is held by 100 or more
persons;
(6) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities); and
(7) that meets other tests, as described below, regarding the
nature of its income and assets.
The Internal Revenue Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. We believe that we
currently satisfy requirements (1) through (6). In addition, our charter
includes restrictions regarding the transfer of our shares that are intended to
assist us in continuing to satisfy the share ownership requirements described in
(5) and (6) above. Moreover, if we comply with regulatory rules pursuant to
which we are required to send annual letters to holders of common stock
requesting information regarding the actual ownership of the common stock, and
we do not know, or exercising reasonable diligence would not have known, whether
we failed to meet requirement (6) above, we will be treated as having met the
requirement.
GROSS INCOME TESTS. In order to maintain qualification as a REIT, we
must satisfy two gross income requirements, which are applied on an annual
basis. First, at least 75% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property or from some types of temporary investments. Investments relating to
real property or mortgages on real property include "rents from real property"
and, in some circumstances, interest. Second, at
-16-
<PAGE>
least 95% of our gross income, excluding gross income from prohibited
transactions, for each taxable year must be derived from sources that qualify
for purposes of the 75% test, and from dividends, interest and gain from the
sale or disposition of stock or securities, or from any combination of the
foregoing.
Rents we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. These conditions relate to the identity of the
tenant, the computation of the rent payable, and the nature of the property
leased. We believe that the portion of the rents that we receive that fails to
qualify as "rents from real property" has not caused, and will not in the future
cause, us to fail to comply with the 75% and 95% gross income tests. Our belief
with respect to this matter, however, is based upon the advice of counsel with
respect to certain technical issues regarding the determination of "rents from
real property" that are not definitively answered under federal tax law. We
cannot ensure that the IRS will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," we generally must not operate or manage the property or furnish or
render services to tenants. There are two exceptions to this rule. First, we can
engage in these activities through an "independent contractor" from whom we
derive no revenue. Second, for taxable years beginning after December 31, 2000,
we will be able to engage in these activities through a "taxable REIT
subsidiary." A taxable REIT subsidiary is a corporation other than a REIT in
which a REIT directly or indirectly holds stock and that has made a joint
election with the REIT to be treated as a taxable REIT subsidiary. For a further
discussion of taxable REIT subsidiaries, see "--Asset Tests" below. In addition,
the rule restricting us from operating or managing properties or furnishing or
rendering services to tenants does not apply to the extent that the services we
render are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant." These services are referred to as permissible services.
Smith L.P. and the property service businesses provide certain services
with respect to our properties. The property service businesses are not
independent contractors. We have received rulings from the IRS that the
provision of some of the services provided by Smith L.P. and the property
service businesses will not cause the rents received with respect to the
properties to fail to qualify as "rents from real property." In addition, for
our taxable years beginning after December 31, 2000, if one or more of our
property service businesses elects to be treated as taxable REIT subsidiary,
they will be permitted to provide services to our tenants that we currently must
provide through an independent contractor. We should emphasize, though, that a
final decision has not been made regarding which, if any, property service
businesses will elect to be treated as taxable REIT subsidiaries.
We also have received rulings from the IRS to the effect that certain
revenues will qualify as "rents from real property." These revenues include the
following:
1. rents from corporate apartments,
2. revenues from laundry equipment,
3. certain parking revenues, and
4. certain revenues related to the provision of telephone and
cable television services.
Based upon our experience in the multifamily and retail property rental
markets in which our properties are located, we believe that all services
provided to tenants by us, whether through Smith L.P. or through the property
service businesses, should be considered permissible services, although there
can be no assurance that the IRS will not contend otherwise. In this regard, if
Smith L.P. contemplates providing services in the future that reasonably might
be expected not to meet the
-17-
<PAGE>
"usual or customary" standard, we will arrange to have such services provided by
an independent contractor from which we receive no income or, for taxable years
beginning after December 31, 2000, a taxable REIT subsidiary.
Even if we provide services that are not permissible services, rents
received generally will qualify as rents from real property so long as the
amount received for the "impermissible services" does not exceed a de minimis
level. Specifically, so long as the amount received by us for all of the
impermissible services rendered at a specific property does not exceed one
percent of all of the amounts we receive, directly or indirectly, from that
property, then we can provide such services. The amount that we will be deemed
to have received for performing "impermissible services" will be the greater of
the actual amount so received or 150% of the direct cost to us of providing
those services.
Smith L.P. may receive fees for the performance of property management
and other services with respect to properties in which Smith L.P. has a partial
interest. Only the portion of the management fee that corresponds to Smith
L.P.'s interest in such properties will qualify as "rents from real property."
The balance will not qualify. Smith L.P. also may receive certain other types of
non-qualifying income. This income includes, for example, certain expense
reimbursements, and dividends and interest from the property service businesses,
which qualify under the 95% gross income test but not under the 75% gross income
test. We believe, however, that the aggregate amount of these fees and other
non-qualifying income in any taxable year will not cause us to exceed the limits
on non-qualifying income under the 75% and 95% gross income tests.
If we fail to satisfy one or both of the 75% or the 95% gross income
tests for any taxable year, we may nevertheless qualify as a REIT for the year
if we are entitled to relief under the Internal Revenue Code. We cannot state,
however, whether in all circumstances we would be entitled to this relief. Even
if this relief applied, a 100% tax would be imposed with respect to the "excess
net income" attributable to the failure to satisfy the 75% and 95% gross income
tests.
ASSET TESTS. In order to maintain qualification as a REIT, we are
currently subject to certain tests relating to the composition of our assets. As
described below, as a result of the Work Incentives Improvement Act, for our
taxable years commencing after December 31, 2000, the third test listed below
will be modified and we will become subject to a new asset test as described
below. Currently, at the close of each quarter of our taxable year, we must
satisfy the following tests relating to the nature of our assets:
1. At least 75% of the value of our total assets must be
represented by "real estate assets," cash, cash items, and
government securities.
2. Not more than 25% of our total assets may be represented by
securities, other than those in the 75% asset class.
3. Of the investments included in the 25% asset class, the value
of any one issuer's securities we own may not exceed 5% of the
value of our total assets, and we may not own more than 10% of
any one issuer's outstanding voting securities.
Smith L.P. owns 100% of the nonvoting stock of each of the property
service businesses. In addition, Smith L.P. holds notes from each of the
property service businesses. By virtue of our ownership of units, we are
considered to own our proportionate share of the assets of Smith L.P., including
the securities of each of the property service businesses. Other than through
our ownership of units, we do not own any assets in the 25% asset class. We
believe that our share of the aggregate value of the securities of the property
service businesses together with all other assets that do not qualify for
purposes of the 75% test does not exceed 25% of the total value of our assets.
We cannot ensure, however, that the IRS will not contend that our share of the
aggregate value of these
-18-
<PAGE>
assets exceeds the 25% value limitation. In addition, we believe that the value
of our share of the securities of each of the property service businesses
individually does not exceed 5% of the total value of our assets. We cannot
ensure, however, that the IRS will not contend either that the value of the
securities of one or more of the property service businesses exceeds the 5%
value limitation, or that all or some of the property service businesses shall
be viewed as a single corporation for purposes of the 5% value limitation and
that the value of the securities of that corporation exceeds the 5% value
limitation.
Smith L.P. does not own more than 10% of the outstanding voting
securities of any of the property service businesses. Accordingly, we believe
that we meet the 10% voting securities test. We cannot ensure, however, that the
IRS will not contend that the nonvoting stock of one or more of the property
service businesses should be considered "voting securities" for purposes of the
10% voting securities test.
The 25% value test must be satisfied on the last day of each calendar
quarter in which we acquire any securities in the 25% asset class. The 5% value
test must be satisfied with respect to a property service business on the last
day of each calendar quarter in which we acquire securities of that business.
Accordingly, each time a unitholder exercises its right to redeem units and our
interest in Smith L.P. increases, the requirement will have to be met. Although
we plan to take steps to ensure that we satisfy the 25% and 5% value tests for
any quarter with respect to which retesting is to occur, we cannot ensure that
these steps always will be successful or will not require a reduction in Smith
L.P.'s overall interest in the property service businesses.
As a result of the Work Incentives Improvement Act, for taxable years
beginning after December 31, 2000, the 5% value test and the 10% voting security
test will be modified in two respects. First, the 10% voting securities test
will be expanded so that we also will be prohibited from owning more than 10% of
the value of the outstanding securities of any one issuer. Second, an exception
to these tests will be created so that we will be permitted to own securities of
a subsidiary that exceed the 5% value test and the new 10% vote or value test if
the subsidiary elects to be a taxable REIT subsidiary. We currently own more
than 10% of the total value of the outstanding securities of each property
service business. The expanded 10% vote or value test, however, will not apply
to a property service business unless it engages in a substantial new line of
business or acquires any substantial asset or we acquire any securities in the
property service businesses after July 12, 1999. At least two of the property
service businesses will make the taxable REIT subsidiary election, but a final
decision has not been made regarding which of the other property service
businesses, if any, will elect to be treated as taxable REIT subsidiaries. For
taxable years beginning after December 31, 2000, under a new asset test not more
than 20% of the value of our total assets will be permitted to be represented by
securities of taxable REIT subsidiaries.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, we generally
must distribute dividends to our shareholders in an amount at least equal to--
1. the sum of (a) 95% (90% for taxable years beginning after
December 31, 2000) of our REIT taxable income, computed
without regard to the dividends paid deduction and our net
capital gain, and (b) 95% (90% for taxable years beginning
after December 31, 2000) of our net income after tax, if any,
from foreclosure property, MINUS
2. the sum of certain items of noncash income.
Distributions must be made either during the taxable year to which they relate
or, if specific procedures are followed, during the subsequent taxable year. We
will be subject to tax on amounts not distributed at regular capital gains and
ordinary income rates.
-19-
<PAGE>
In addition, if we fail to distribute during each calendar year at
least the sum of 85% of our ordinary income, 95% of our capital gain net income
and 100% of our undistributed income from prior years, we will be subject to a
4% nondeductible excise tax on the excess of this required amount over the sum
of the amounts we actually distribute and amounts retained with respect to which
we pay federal income tax.
We believe that we have made, and intend to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements. It is
possible, however, that we, from time to time, may not have sufficient cash or
other liquid assets to meet the 95% (90% for taxable years beginning after
December 31, 2000) distribution requirement. In that event, we may cause Smith
L.P. to arrange for short-term, or possibly long-term, borrowing to permit the
payments of required dividends.
FAILURE TO QUALIFY. If we fail to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, we will be subject to tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Unless we are entitled to relief under specific
statutory provisions, we also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
We cannot state whether in all circumstances we would be entitled to this
statutory relief.
TAX ASPECTS OF OUR INVESTMENTS IN SMITH L.P. AND THE PROPERTY SERVICE BUSINESSES
GENERAL. All of our investments are through Smith L.P. Smith L.P. holds
substantially all the real estate properties through some of the subsidiary
partnerships. This structure may involve special tax considerations. These tax
considerations include the following:
1. the allocations of income and expense items of Smith L.P. and
those subsidiary partnerships, which could affect the
computation of our taxable income;
2. the status of Smith L.P. and each applicable subsidiary
partnership as partnership (as opposed to an association
taxable as a corporation) for income tax purposes; and
3. the taking of actions by Smith L.P. or any of those subsidiary
partnerships that could adversely affect our qualification as
a REIT.
We believe that Smith L.P. and each of the subsidiary partnerships will
be treated for tax purposes as a partnership (and not as an association taxable
as a corporation). If, however, Smith L.P. or any of the subsidiary partnerships
were treated as an association taxable as a corporation, we would fail to
qualify as a REIT for a number of reasons.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Smith L.P. was formed
by way of contributions of appreciated property, including certain of the
apartment properties, at the time of its formation. In addition, it has acquired
a number of properties by contribution since that time. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted basis of the contributing partner in the property, rather
than a basis equal to the fair market value of the property at the time of
contribution. This difference is referred to as a "book-tax difference."
Smith L.P.'s partnership agreement requires that all allocations of
partnership income, gain and loss be made in a manner consistent with Section
704(c) of the Internal Revenue Code and applicable regulations. Therefore,
allocations will tend to eliminate the book-tax differences with respect to the
contributed properties over the life of Smith L.P. However, the special
allocation rules of Section 704(c) of the Internal Revenue Code may not always
entirely eliminate the book-tax difference on an annual basis or with respect to
a specific taxable transaction such as a sale.
-20-
<PAGE>
Consequently, the carryover basis of contributed properties in the hands of
Smith L.P. could cause us to be allocated lower amounts of depreciation and
other deductions for tax purposes than would be allocated to us if no property
had a book-tax difference. Similarly, the carryover basis of contributed
properties in the hands of Smith L.P. could cause us to possibly to be allocated
taxable gain in the event of a sale of contributed properties in excess of the
economic or book income allocated to us as a result of such sale.
PROPERTY SERVICE BUSINESSES. A significant portion of the amounts used
by Smith L.P. to fund distributions to partners, which in turn are used by us to
fund distributions to holders of common stock, comes from the property service
businesses, through payments on notes issued by the property service businesses
and dividends on nonvoting stock of the property service businesses held by
Smith L.P. The property service businesses do not qualify as REITs and therefore
pay federal, state and local income taxes on their net income at normal
corporate rates. To the extent that they do so, the cash available for
distribution to shareholders will be reduced accordingly.
The property service businesses attempt to limit the amount of those
taxes. We cannot ensure, however, whether or the extent to which measures taken
to limit taxes will be successful. Even if those measures are successful, future
increases in the income of the property service businesses inevitably will be
subject to income tax. Moreover, as described above in "--Requirements for
Qualification As a REIT--Gross Income Tests" and "--Asset Tests," two or more of
the property service businesses will elect to be treated as a taxable REIT
subsidiary for years commencing after December 31, 2000. The property service
businesses that make this election will be restrained in their ability to limit
their tax liability for two reasons. First, taxable REIT subsidiaries will be
limited in their ability to deduct interest payments made to an affiliated REIT.
Accordingly, if a property service businesses elects to be treated as a taxable
REIT subsidiary, it will be limited significantly in its ability to deduct
interest payments on notes issued to Smith L.P. Second, if a taxable REIT
subsidiary pays an amount to a REIT that exceeds the amount that would be paid
in an arm's length transaction, the REIT generally will be subject to an excise
tax equal to 100% of the excess. This rule generally will apply to amounts paid
to Smith L.P. by the property service businesses that elect to be treated as
taxable REIT subsidiaries.
Our ownership of the securities of the property service businesses
currently is subject to certain asset tests. Although, these tests will change
for our taxable years beginning after December 31, 2000, they will continue to
restrict the ability of the property service businesses to increase the size of
their respective businesses unless the value of the assets of Smith L.P.
increase at a commensurate rate. In addition, Smith L.P. currently is prohibited
from exercising control over any of the property service businesses. For our
taxable years beginning after December 31, 2000, Smith L.P. will continue to be
prohibited from exercising control over each property service business that does
not elect to be treated as taxable REIT subsidiary. For a more detailed
discussion of the ownership limitations relating to our ownership of the
property service businesses, see "--Requirements for Qualification As a
REIT--Asset Tests," above.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As used herein, the term
"U.S. shareholder" means a holder of common stock who for United States federal
income tax purposes is--
1. a citizen or resident of the United States,
2. a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any
political subdivision of the United States,
3. an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or
-21-
<PAGE>
4. a trust whose administration is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust.
As long as we qualify as a REIT, distributions made to our taxable U.S.
shareholders out of current or accumulated earnings and profits, which are not
designated as capital gain dividends, will be taken into account by them as
ordinary income. Corporate shareholders will not be eligible for the dividends
received deduction with respect to these dividends. For purposes of determining
whether the distributions on shares of common stock are out of current or
accumulated earnings and profits, our earnings and profits will be allocated
first to shares of preferred stock and second to shares of common stock. We
cannot ensure that we will have sufficient earnings and profits to cover any
distributions on preferred stock or common stock.
To the extent they do not exceed our actual net capital gain for the
taxable year, distributions that are designated as capital gain dividends will
be taxed to taxable non-corporate U.S. shareholders as gains from the sale or
exchange of a capital asset held for more than one year. This tax treatment
applies regardless of the period non-corporate shareholders have held their
stock. Non-corporate U.S. shareholders include individuals, estates, and trusts.
On November 10, 1997, the IRS issued Notice 97-64, which provides generally that
we may classify portions of our designated capital gain dividend in the
following categories:
1. a 20% gain distribution, which would be taxable to taxable
non-corporate U.S. shareholders at a maximum rate of 20%,
2. an unrecaptured Section 1250 gain distribution, which would be
taxable to taxable non-corporate U.S. shareholders at a
maximum rate of 25%, or
3. a 28% gain distribution which would be taxable to taxable
non-corporate U.S. shareholders at a maximum rate of 28%.
In light of the IRS Restructuring and Reform Act of 1998, which
eliminates the 18-month holding period that was required to be met to take
advantage of the lowest capital gain tax rates, the IRS is expected to issue
clarifying guidance regarding the designation of REIT capital gain dividends.
Notice 97-64 provides that a REIT must determine the maximum amounts that it may
designate as 20% and 25% capital gain dividends by performing the computation
required by the Internal Revenue Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. Notice
97-64 further provides that designations made by the REIT only will be effective
to the extent that they comply with Revenue Ruling 89-81, which requires that
distributions made to different classes of shares be composed proportionately of
dividends of a particular type.
To the extent that they do not exceed our actual net capital gain for
the taxable year, distributions made by us that are properly designated as
capital gain dividends will be taxable to taxable corporate U.S. shareholders as
long-term capital gain. This tax treatment applies regardless of the period
corporate shareholders have held their stock. Those corporate U.S. shareholders,
however, may be required to treat up to 20% of certain capital gain dividends as
ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a taxable U.S. shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that distributions
exceed the adjusted basis of a taxable U.S. shareholder's common stock, they
will be included in income as capital gains, assuming the common stock is a
capital asset in the hands of the shareholder.
-22-
<PAGE>
In general, a taxable U.S. shareholder will realize gain or loss on the
disposition of common stock equal to the difference between the amount of cash
and the fair market value of any property received on such disposition and the
U.S. shareholder's adjusted basis of such common stock. This gain or loss will
be capital gain or loss if the common stock has been held as a capital asset. In
the case of a taxable U.S. shareholder that is a corporation, such capital gain
or loss will be long-term capital gain or loss if such common stock has been
held for more than one year. Generally, in the case of a taxable non-corporate
U.S. shareholder, such capital gain or loss will be taxed for dispositions
occurring after December 31, 1997, at a maximum rate of 20%, and for
dispositions occurring after December 31, 2000, at a maximum rate of 18% if the
common stock is acquired after December 31, 2000 and held for more than five
years. The Taxpayer Relief Act of 1997 allows the IRS to issue regulations
relating to how the act's new capital gain rates will apply to sales of capital
assets by "pass-through entities," which include REITs such as us, and to sales
of interests in "pass-through entities." The IRS has proposed regulations under
this authority, but as proposed, the regulations do not apply to the taxation of
gain and loss realized on the disposition of common stock. However, the proposed
regulations could be revised to apply to the disposition of common stock, and
additional regulations that would apply to the disposition of common stock could
be promulgated. Shareholders are urged to consult with their own tax advisors
with respect to the rules contained in the Taxpayer Relief Act.
Loss upon a sale or exchange of common stock by a taxable U.S.
shareholder who has held the common stock for six months or less, after applying
certain holding period rules, will be treated as long-term capital loss to the
extent the distributions from us are required to be treated by the shareholder
as long-term capital gain. For a taxable non-corporate U.S. shareholder, the
long-term capital loss will be apportioned among the applicable long-term
capital gain groups to the extent that distributions received by such U.S.
shareholder were previously so treated.
We may elect to require the holders of common stock to include our
undistributed net capital gains in their income. If we make this election, the
holders of common stock will include in their income as long-term capital gains
their proportionate share of such undistributed capital gains. They will be
deemed to have paid their proportionate share of the tax paid by us on the
undistributed capital gains and receive in return a credit or refund for this
amount. A holder of common stock will increase the basis in its common stock by
the difference between the amount of capital gain included in its income and the
amount of the tax it is deemed to have paid. Our earnings and profits will be
adjusted appropriately.
Under certain circumstances, U.S. shareholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. We do not expect our distributions
to a shareholder that is a tax-exempt entity will constitute "unrelated business
taxable income" ("UBTI"), provided that the tax-exempt entity has not financed
the acquisition of its common stock with "acquisition indebtedness" within the
meaning of the Internal Revenue Code, and the common stock is not otherwise used
in an unrelated trade or business of the tax-exempt entity. For a tax-exempt
shareholder that is a social club, voluntary employee benefit association,
supplemental unemployment benefit trust, or qualified group legal services plan
exempt from federal income taxation under Internal Revenue Code Sections 501
(c)(7), (c)(9), (c)(17) or (c)(20), respectively, income from an investment in
us will constitute UBTI unless the organization is able to properly deduct
amounts set aside or placed in reserve so as to offset the income generated by
its investment in us. The prospective shareholder should consult its own tax
advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation
Act of 1993 provides that, effective for taxable years beginning in 1994, a
portion of the dividends paid by a "pension held REIT" shall be treated as UBTI
as to any trust which is described in Section 401(a) of the
-23-
<PAGE>
Internal Revenue Code, is tax exempt under Section 501(a) of the Internal
Revenue Code and holds more than 10%, by value, of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Internal
Revenue Code are referred to below as "qualified trusts." A REIT is a "pension
held REIT" if it meets the following two tests:
1. it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Internal Revenue Code, added by the
1993 Act, provides that stock owned by qualified trusts shall
be treated, for purposes of determining whether the REIT is
closely held, as owned by the beneficiaries of the trust
rather than by the trust itself; and
2. either at least one such qualified trust holds more than 25%
by value, of the interests in the REIT, or one or more such
qualified trusts, each of which owns more than 10%, by value,
of the interests in the REIT, hold in the aggregate more than
50%, by value, of the interests in the REIT.
The percentage of any REIT dividend treated as UBTI is equal to the
ratio of the UBTI earned by the REIT, treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI, to the total gross income
of the REIT. A DE MINIMIS exception applies where the percentage is less than 5%
for any year. The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to satisfy the
"not closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. Based on the current estimated ownership of
our common and preferred stock and as a result of certain limitations on
transfer and ownership of common and preferred stock contained in the our
charter, we believe that we should not be classified as a "pension held REIT."
TAXATION OF FOREIGN SHAREHOLDERS. In the following paragraphs,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders will be referred to collectively as foreign
shareholders. The rules governing U.S. federal income taxation of foreign
shareholders are complex. No attempt will be made in the following paragraphs to
provide more than a limited description of these rules. Prospective foreign
shareholders should consult with their own tax advisors to determine the impact
of U.S. federal, state and local income tax laws with regard to an investment in
common stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by us of U.S. real property interests or are not designated by us as capital
gain dividends will be treated as dividends of ordinary income to the extent
that they are made out of our current or accumulated earnings and profits. These
distributions, ordinarily, will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces
that tax. Distributions in excess of our current and accumulated earnings and
profits will not be taxable to a foreign shareholder to the extent that they do
not exceed the adjusted basis of the shareholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a foreign shareholder's common stock,
they will give rise to tax liability if the foreign shareholder otherwise would
be subject to tax on any gain from the sale or disposition of his common stock
as described below.
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that we will be required to withhold 10% of
any distribution in excess of our current and accumulated earnings and profits.
Consequently, although we intend to withhold at a rate of 30% on the entire
amount of any distribution, or a lower applicable treaty rate, to the extent
that we do not do so, any portion of a distribution not subject to withholding
at a rate of 30%, or a lower applicable treaty rate, will be subject to
withholding at a rate of 10%. However, the foreign shareholder may seek a refund
of such amounts from the IRS if it subsequently determined that the distribution
was,
-24-
<PAGE>
in fact, in excess of our current or accumulated earnings and profits, and the
amount withheld exceeded our foreign shareholder's United States tax liability,
if any, with respect to the distribution.
Distributions to a foreign shareholder that are designated by us as a
capital gain dividend, other than those arising form the disposition of a U.S.
real property interest, generally should not be subject to U.S. federal income
taxation unless the investment in the common stock is effectively connected with
a U.S. trade or business or the foreign shareholder is a nonresident alien
individual who is present in the U.S. for 183 days or more during the taxable
year and has a tax home in the US. We will be required to withhold and remit to
the IRS 35% of any distributions to foreign shareholders that are designated as
capital gain dividends, or, if greater, 35% of a distribution that could have
been designated as a capital gain dividend.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges of U.S. real property interests
will be taxed to a foreign shareholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"), at the normal capital
gain rates applicable to U.S. shareholders, subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals. This tax treatment will apply whether or not the
distributions are designated as a capital gain dividend. Also, distributions
subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a
corporate foreign shareholder not entitled to treaty relief or exemption. We are
required by applicable regulations to withhold 35% of any distribution that we
could designate as a capital gain dividend. This amount is creditable against
the foreign shareholder's FIRPTA tax liability.
Although the law is not clear on the matter, it appears that amounts we
designate pursuant to the Taxpayer Relief Act as undistributed capital gains in
respect of shares of common stock generally should be treated with respect to
foreign shareholders in the same manner as actual distributions by us of capital
gain dividends. Under that approach, foreign shareholders would be able to
offset as a credit against the resulting United States federal income tax
liability their proportionate share of the tax we paid on such undistributed
capital gains. Also under that approach, foreign shareholders would be able to
receive from the IRS a refund to the extent their proportionate share of the tax
we paid exceeded their actual United States federal income tax liability.
Gain recognized by a foreign shareholder upon a sale of common stock
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT." Generally, a "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock was
held directly or indirectly by foreign persons. We believe that we currently are
a "domestically controlled REIT," and, therefore, the sale of common stock
generally will not be subject to taxation under FIRPTA. If gain on the sale of
common stock were to be subject to tax under FIRPTA, foreign shareholders would
be subject to the same treatment as U.S. shareholders with respect to this gain,
subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals. The purchaser of common stock
from a foreign shareholder would be required to withhold and remit to the IRS
10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding
tax generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements. Backup withholding tax and
information reporting will generally not apply to distributions paid to foreign
shareholders outside the United States that are treated as--
1. dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above,
2. capital gains dividends, or
-25-
<PAGE>
3. distributions attributable to gain from our sale or exchange
of United States real property interests.
As a general matter, backup withholding and information reporting will
not apply to a payment of the proceeds of a sale of common stock by or through a
foreign office of a foreign broker. Information reporting (but not backup
withholding) will apply, however, to a payment of the proceeds of a sale of
common stock by a foreign office of a broker that--
1. is a United States person,
2. derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, or
3. is a "controlled foreign corporation," generally, a foreign
corporation controlled by United States shareholders, for
United States tax purposes, unless the broker has documentary
evidence in its records that the holder is a foreign
shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the
proceeds of a sale of common stock is subject to both backup withholding and
information reporting unless the shareholder certifies under penalty of perjury
that the shareholder is a foreign shareholder, or otherwise establishes an
exemption. A foreign shareholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
The IRS has recently finalized regulations regarding the withholding
and information reporting rules discussed above. In general, these regulations
do not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. Pursuant to IRS Notice 98-16, these regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000 or the date of
expiration of the certificate under rules currently in effect (unless otherwise
invalidated due to changes in the circumstances of the person whose name is on
such certificate). A foreign shareholder should consult its own advisor
regarding the effect of these regulations.
OTHER TAX CONSIDERATIONS
STATE AND LOCAL TAXES; DISTRICT OF COLUMBIA UNINCORPORATED BUSINESS
TAX. Our company and our shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which we or they
transact business or reside. Our state and local tax treatment and that of our
shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
common stock.
In this regard, the District of Columbia imposes an unincorporated
business income tax, at an effective rate of 9.975% on the "District of Columbia
taxable income" of partnerships doing business in the District of Columbia.
Because some of our properties are located in the District of Columbia, the
partnership owning these properties will be subject to this tax. In effect, our
share of the "District of Columbia taxable income" attributable to properties
located in the District of Columbia will be subject to this tax. Smith L.P. and
its subsidiary partnerships will attempt to reduce the amount of income that is
considered "District of Columbia taxable income." However, it is likely that
some portion of the income attributable to properties located in the District of
Columbia will be subject to the District of Columbia tax. To the extent Smith
L.P. or a subsidiary partnership is required to pay this tax, the cash available
for distribution to us and, therefore, to our shareholders as dividends will be
reduced. Moreover, our shareholder will not receive a credit
-26-
<PAGE>
against its own state income tax liability for its share of any District of
Columbia unincorporated business income tax paid by Smith L.P. or a subsidiary
partnership. This tax would not apply if we were to own and operate our assets
directly, rather than through Smith L.P. However, our ability to eliminate Smith
L.P. and thus own its assets directly is severely limited.
-27-
<PAGE>
PLAN OF DISTRIBUTION
Any of the selling shareholders may from time to time, in one or more
transactions, sell all or a portion of the offered shares on the New York Stock
Exchange, in the over-the-counter market, on any other national securities
exchange on which the common stock is listed or traded, in negotiated
transactions, in underwritten transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The offering price of the offered shares from time to time will be determined by
the selling shareholders and, at the time of such determination, may be higher
or lower than the market price of the common stock on the New York Stock
Exchange. In connection with an underwritten offering, underwriters or agents
may receive compensation in the form of discounts, concessions or commissions
from a selling shareholder or from purchasers of the offered shares for whom
they may act as agents, and underwriters may sell the offered shares to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. The offered shares may be
sold directly or through broker-dealers acting as principal or agent, or
pursuant to a distribution by one or more underwriters on a firm commitment or
best-efforts basis. The methods by which the offered shares may be sold include:
- a block trade in which a broker-dealer will attempt to sell
the offered shares as agent but may position and resell a
portion of the block as principal to facilitate the
transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
- an exchange distribution in accordance with the rules of the
New York Stock Exchange;
- privately negotiated transactions; and
- underwritten transactions.
The selling shareholders and any underwriters, dealers or agents
participating in the distribution of the offered shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the offered shares by the selling shareholders and any commissions
received by any such broker-dealers may be deemed to be underwriting commissions
under the Securities Act.
When a selling shareholder elects to make a particular offer of the
offered shares, this prospectus and a prospectus supplement, if required, will
be distributed which will identify any underwriters, dealers or agents and any
discounts, commissions and other terms constituting compensation from such
selling shareholder and any other required information.
In order to comply with the securities laws of certain states, if
applicable, the offered shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the offered shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
We have agreed to pay all costs and expenses incurred in connection
with the registration under the Securities Act of the offered shares, including,
without limitation, all registration and filing fees, printing expenses and fees
and disbursements of our counsel and accountants. The selling shareholders will
pay any brokerage fees and commissions, fees and disbursements of legal counsel
for the selling shareholders and stock transfer and other taxes attributable to
the sale of the
-28-
<PAGE>
offered shares. Under agreements that may be entered into by us, underwriters,
dealers and agents who participate in the distribution of the offered shares,
and their respective directors, trustees, officers, partners, agents, employees
and affiliates, may be entitled to indemnification by us against specified
liabilities, including liabilities, losses, claims, damages and expenses and any
actions or proceedings arising under the securities laws in connection with this
offering, or to contribution with respect to payments which such underwriters,
dealers or agents may be required to make in respect thereof. We also have
agreed to indemnify each of the selling shareholders and each person who
controls (within the meaning of the Securities Act) such selling shareholder,
and their respective directors, trustees, officers, partners, agents, employees
and affiliates, against specified losses, claims, damages, liabilities and
expenses and any actions or proceedings arising under the securities laws in
connection with this offering. Each of the selling shareholders has agreed to
indemnify us, each person who controls us (within the meaning of the Securities
Act), underwriters, dealers and agents, and each of our and their directors,
trustees, officers, partners, agents, employees and affiliates, against
specified losses, claims, damages, liabilities and expenses arising and any
actions or proceedings under the securities laws in connection with this
offering with respect to written information furnished to us by such selling
shareholder; provided, however, that the indemnification obligation is several,
not joint, as to each selling shareholder.
-29-
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement in
accordance with the rules and regulations of the SEC. For further information,
we refer you to the registration statement on Form S-3, including its exhibits.
Statements contained in this prospectus about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that such agreement or document be filed as an exhibit to
the registration statement, please see such agreement or document for a complete
description of these matters. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of each
document.
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy materials that we have
filed with the SEC, including the registration statement, at the following SEC
public reference rooms:
<TABLE>
<S> <C> <C>
450 Fifth Street. N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms.
Our SEC filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our SEC filings are also available to the public on the SEC's Web Site
at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act.
1. Registration Statement on Form 8-A filed on August 16, 1994
registering our common stock under Section 12(b) of the
Exchange Act.
2. Registration Statement on Form 8-A filed on December 9, 1998
registering our rights under Section 12(b) of the Exchange Act.
3. Annual Report on Form 10-K for the year ended December 31, 1998
(amended on Form 10-K/A).
4. Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, the quarter ended June 30, 1999 and the quarter ended
September 30, 1999.
5. Current Reports on Form 8-K dated January 5, 1999 (amended on
Form 8-K/A), January 27, 1999, July 2, 1999 (amended on Form 8-K/A)
and September 8, 1999.
-30-
<PAGE>
You may request a copy of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are specifically
incorporated by reference into this prospectus), at no cost, by writing or
calling us at the following address
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Mr. Gregory Samay, Vice President and Treasurer
(703) 769-1000
You should rely on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of the common stock in any
state where the offer is not permitted.
EXPERTS
Our financial statements for the fiscal year ended December 31, 1998
and the related schedule incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report dated February
9, 1999 relating to such financial statements, and are included in this
prospectus in reliance upon the authority of Arthur Andersen LLP as experts in
giving such report.
The consolidated balance sheets of Countryside Residential Partners,
Ltd. as of December 31, 1998, and the related consolidated statements of income,
changes in partners' capital and cash flows incorporated by reference in this
prospectus and elsewhere in the registration statement, have been audited by
Klayman & Korman LLC, independent public accountants, as indicated in their
report dated February 1, 1999, and are included in this prospectus in reliance
upon the authority of Klayman & Korman LLC as experts in giving such report.
The balance sheet of Somerset Limited Partnership as of December 31,
1998, and the related statements of income, changes in partners' capital and
cash flows incorporated by reference in this prospectus and elsewhere in the
registration statement, have been audited by Klayman & Korman LLC, independent
public accountants, as indicated in their report dated February 3, 1999, and are
included in this prospectus in reliance upon the authority of Klayman & Korman
LLC as experts in giving such report.
The balance sheet of 2900 Van Ness Associates as of December 31, 1998,
and the related statements of operations, partners' capital and cash flows
incorporated by reference in this prospectus and elsewhere in the registration
statement, have been audited by Ernst & Young LLP, independent public
accountants, as indicated in their report dated May 25, 1999, and are included
in this prospectus in reliance upon the authority of Ernst & Young LLP as
experts in giving such report.
LEGAL MATTERS
In connection with this prospectus, Hogan & Hartson L.L.P., Washington,
D.C. has provided its opinion as to the validity of the issuance of the common
stock offered by this prospectus and the discussion of tax matters in this
prospectus.
-31-
<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
DESCRIPTION OF CAPITAL STOCK..................... 8
REGISTRATION RIGHTS.............................. 14
SELLING SHAREHOLDERS............................. 14
FEDERAL INCOME TAX CONSIDERATIONS................ 15
PLAN OF DISTRIBUTION............................. 28
WHERE YOU CAN FIND MORE INFORMATION.............. 30
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.. 30
EXPERTS.......................................... 31
LEGAL MATTERS.................................... 31
</TABLE>
-32-
<PAGE>
[GRAPHIC]
694,586 SHARES
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
COMMON STOCK
PROSPECTUS
JANUARY 20, 2000
-33-
