<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000
Registration No. 333-_____
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 54-1681655
(State of Incorporation) (I.R.S. Employer
Identification No.)
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Address, including zip code and telephone number,
including area code, of Registrant's principal executive offices)
------------------------
Ernest A. Gerardi, Jr.
President
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
(703) 920-8500
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: From time to time after this Registration Statement becomes effective,
as determined by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|.
------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE (1)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Shares Amount to be Aggregate Price Aggregate Amount of
to be Registered Registered Per Share (1) Offering Price (1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
per share (2) 54,161 $34.907 $1,890,598.03 $499.12
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) based on the average of the high and low
reported sales prices on the New York Stock Exchange on March 30, 2000.
(2) Includes associated rights to purchase Series D Junior Participating
Preferred Stock.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 6, 2000
[LOGO]
PROSPECTUS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
54,161 SHARES OF COMMON STOCK
This prospectus relates to 54,161 shares of common stock that we may
issue to the holders of 54,161 units of limited partnership interest of
Charles E. Smith Residential Realty L.P., or "Smith L.P.," upon tender of
these units for redemption. 32,258 of these units were issued on March 3,
1999, in exchange for the acquisition of a ground lease under an apartment
building known as the Crystal Square Apartments located in Arlington,
Virginia and the release of the obligation to make annual payments with
respect to an apartment building known as the Crystal Plaza Apartments
located in Arlington, Virginia. 21,903 of these units were issued on March
23, 1999, in exchange for membership interests in SPH Renaissance L.L.C., one
of the owners of an apartment complex known as The Renaissance Apartments
located in Falls Church, Virginia.
We are registering the issuance of the common stock to permit the holders to
sell without restriction in the open market or otherwise, but the registration
of the common stock does not necessarily mean that any holders will elect to
redeem their units. Also, we may elect to pay cash for the units tendered rather
than issue common stock. Although we will incur expenses in connection with the
registration of the 54,161 shares of common stock, we will not receive any cash
proceeds upon their issuance.
Our common stock is listed on the New York Stock Exchange under the trading
symbol "SRW."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 IN THIS PROSPECTUS
FOR FACTORS THAT ARE RELEVANT TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING
SPECIAL CONSIDERATIONS THAT APPLY TO REDEEMING UNITHOLDERS.
------------------------------
The information contained in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
relating to these securities has been declared effective by the Securities and
Exchange Commission. This prospectus is neither an offer to sell nor a
solicitation of an offer to buy these securities in any state where the offer or
sale is unlawful.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
APRIL __, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................................................................. 1
Forward-Looking Information.................................................... 1
The Company.................................................................... 1
Recent Developments............................................................ 2
Offered Shares ................................................................ 2
Important Risks in Owning Our Common Stock..................................... 2
Tax Status of the Company...................................................... 3
RISK FACTORS....................................................................... 4
A Unitholder Who Redeems Units for Common Stock May Have Adverse Tax Effects... 4
If a Unitholder Redeems Units, the Original Receipt of the Units May Be
Subject to Tax............................................................. 4
Differences Between an Investment in Shares of Common Stock and Units May
Affect Redeeming Unitholders............................................... 4
Some of Our Policies May Be Changed Without a Vote of Shareholders............. 4
Provisions of Our Charter Could Inhibit Changes of Control..................... 5
Our Ability to Issue Preferred Shares Could Inhibit Changes of Control......... 5
Maryland Law Limits Changes of Control......................................... 5
We Have Adopted a Shareholder Rights Plan Which Could Delay or Prevent a
Change of Control.......................................................... 5
We Have a Share Ownership Limit................................................ 6
The Large Number of Shares Available for Future Sale Could Adversely Affect
the Market Price of Our Common Stock....................................... 6
Changes in Market Conditions Could Adversely Affect the Market Price of Our
Common Stock............................................................... 6
Our Earnings and Cash Distributions Will Affect the Market Price of Our Common
Stock...................................................................... 6
Market Interest Rates and Low Trading Volume May Have an Effect on the Value
of Our Common Stock........................................................ 6
We Believe, but Cannot Guarantee, that We Qualify as a REIT.................... 7
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences....... 7
We May Need to Borrow Money to Qualify as a REIT............................... 7
We Are Subject To Some Taxes Even If We Qualify as a REIT...................... 7
Redeeming Unitholders Will Be Subject to the Operational Risks of Our Business. 8
REDEMPTION OF UNITS................................................................ 9
General........................................................................ 9
Tax Consequences of Redemption................................................. 9
Comparison of Ownership of Units and Common Stock.............................. 11
FEDERAL INCOME TAX CONSIDERATIONS.................................................. 21
General........................................................................ 21
Our Tax Treatment.............................................................. 21
Requirements for Qualification As a REIT....................................... 22
Tax Aspects of Our Investments in Smith L.P. and Property Service Businesses... 26
Taxation of Shareholders....................................................... 27
Other Tax Considerations....................................................... 32
PLAN OF DISTRIBUTION............................................................... 33
WHERE YOU CAN FIND MORE INFORMATION................................................ 33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 33
EXPERTS............................................................................ 34
LEGAL MATTERS...................................................................... 34
</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 March 1, 2000, we owned
approximately 65% of its outstanding common and preferred units. Smith L.P. and
its subsidiaries own all of our properties, property interests and business
assets.
As of March 1, 2000, we owned, through Smith L.P. and its subsidiaries, 52
operating multifamily apartment communities with a total of 25,151 units. 41 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 three in
the southeast Florida area. We also had approximately 951 units under
construction and we owned substantially all of the economic interest in one
property under construction totaling 226 units. In addition, we had partial
interests in three operating multifamily properties totaling 1,267 apartment
units and one property under construction totaling 630 apartment units. 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.
- --------------------------------------------------------------------------------
-1-
<PAGE>
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
OPERATING RESULTS
Smith L.P.'s total funds from operations or FFO was $32.3 million for the
fourth quarter of 1999, reflecting an increase of 16.6% over 1998. For the year
ended December 31, 1999, Smith L.P.'s FFO was $116.5 million, up 18.2% over
1998.
Smith L.P.'s total revenue from properties was $82.5 million for the fourth
quarter of 1999, reflecting an increase of 23.7% over 1998, and total rental
property revenue for the year ended December 31, 1999 was $301.2 million, an
increase of 20.5% over 1998.
Smith L.P.'s operating income from rental properties before depreciation for
the fourth quarter of 1999 was $50.4 million, up 25.1% over 1998, and for the
year ended December 31, 1999, Smith L.P.'s operating income was $182.3 million,
up 22.7% over 1998.
EXECUTIVE PROMOTIONS
On February 7, 2000, Robert H. Smith and Robert P. Kogod, Co-Chairmen and
Co-Chief Executive Officers, on behalf of our Board of Directors announced the
following executive promotions and changes:
- Robert H. Smith - Chairman of the Board of Directors
- Robert P. Kogod - Chairman of the Executive Committee of the Board of
Directors
- Ernest A. Gerardi, Jr. - President and Chief Executive Officer
- W.D. Minami - Executive Vice President and Chief Financial Officer
- John T. Gray - Executive Vice President, Residential Management
Also the following promotions were announced on March 29, 2000:
- Alfred G. Neely - President, Development
- John W. Guinee - Executive Vice President and Chief Investment Officer
OFFERED SHARES
This prospectus relates to 54,161 shares of common stock that we may
issue to the holders of 54,161 units of Smith L.P. upon tender of these units
for redemption. 32,258 of these units were issued on March 3, 1999, in
exchange for the acquisition of a ground lease under an apartment building
known as the Crystal Square Apartments located in Arlington, Virginia and the
release of the obligation to make annual payments with respect to an
apartment building known as the Crystal Plaza Apartments located in
Arlington, Virginia. 21,903 of these units were issued on March 23, 1999, in
exchange for membership interests in SPH Renaissance L.L.C., one of the
owners of an apartment complex known as The Renaissance Apartments located in
Falls Church, Virginia. For purposes of this prospectus the term "unitholder"
refers to holders of units issued as described in this paragraph.
On March 23, 2000, the unitholders who partially owned The Renaissance
Apartments, and on April 7, 2000, the unitholder who formerly owned the
ground lease in the Crystal Square Apartments and the landlord's interest in
an indenture of a lease relating to the Crystal Plaza Apartments, have become
or will become eligible to redeem their units for cash or, at our election,
shares of our common stock equal to the number of units being redeemed.
IMPORTANT RISKS IN OWNING OUR COMMON STOCK
Before you decide to redeem your Units, you should read the "Risk Factors"
section, which begins on page 4 of this prospectus.
- --------------------------------------------------------------------------------
-2-
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
-3-
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISK FACTORS.
A UNITHOLDER WHO REDEEMS UNITS MAY HAVE ADVERSE TAX EFFECTS. A unitholder
who redeems units will be treated for tax purposes as having sold the units. The
sale will be taxable and the unitholder will be treated as realizing an amount
equal to the sum of the value of the common stock or cash that the unitholder
receives plus the amount of Smith L.P. nonrecourse liabilities allocable to the
redeemed units. It is possible that the amount of gain the unitholder recognizes
could exceed the value of the common stock or cash that the unitholder receives.
It is even possible that the tax liability resulting from this gain could exceed
the value of the common stock or cash that the unitholder receives. See
"Redemption of Units--Tax Consequences of Redemption."
In addition, the unitholder's ability to sell common stock received upon
redemption in order to raise cash to pay the resulting tax liability may be
restricted due to our common stock's relatively low trading volume. As a result
of fluctuations in the stock price, the price a unitholder receives for the
shares may not equal the value of the units redeemed. See "--Market Interest
Rates and Low Trading Volume May Have an Effect on the Value of Our Common
Stock."
IF A UNITHOLDER REDEEMS UNITS, THE ORIGINAL RECEIPT OF THE UNITS MAY BE
SUBJECT TO TAX. If a unitholder redeems units, particularly within two years of
receiving them, there is a risk that the original receipt of the units may be
treated as a taxable sale under the "disguised sale" rules of the Internal
Revenue Code. Subject to several exceptions, the tax law generally provides that
a partner's contribution of property to a partnership and a simultaneous or
subsequent transfer of money or other consideration from the partnership to the
partner will be presumed to be a taxable sale. In particular, if money or other
consideration is transferred by a partnership to a partner within two years of
the partner's contribution of property, the transactions are presumed to be a
taxable sale of the contributed property unless the facts and circumstances
clearly establish that the transfers are not a sale. On the other hand, if two
years have passed between the original contribution of property and the transfer
of money or other consideration, the transactions will not be presumed to be a
taxable sale unless the facts and circumstances clearly establish that they
should be.
DIFFERENCES BETWEEN AN INVESTMENT IN SHARES OF COMMON STOCK AND UNITS MAY
AFFECT REDEEMING UNITHOLDERS. If a unitholder elects to redeem units, we will
determine whether the unitholder receives cash or shares of our common stock in
exchange for the units. Although an investment in shares of our common stock is
substantially similar to an investment in units in Smith L.P., there are some
differences between ownership of units and ownership of common stock. These
differences include form of organization, management structure, voting rights,
liquidity and federal income taxation. These differences, some of which may be
material to investors, are discussed in "Redemption of Units -- Comparison of
Ownership of Units and Common Stock."
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.
-4-
<PAGE>
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 65% of the common and preferred 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 March 1, 2000, 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.
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
-5-
<PAGE>
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 March 1, 2000, we had outstanding
approximately 20.8 million shares of common stock tradable without restriction
and had reserved for resale 15.6 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 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
-6-
<PAGE>
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. If they are not,
however, then these corporations would have to make the taxable REIT subsidiary
election because we hold more than 10% of the value of the securities of each of
them. At least two of our subsidiaries will make the taxable REIT subsidiary
election because they will 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 will need to change the tax status of one or more of
our subsidiaries to do so. For all of these reasons, we cannot guarantee that we
currently qualify or will be able to remain qualified as a REIT.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES. If
we fail to qualify as a REIT, we will be subject to federal income tax at
regular corporate rates. This additional tax would significantly reduce the cash
we would have available to distribute to our shareholders and could reduce
significantly the value of our common stock. In addition, if we fail to qualify
as a REIT, we may be disqualified from electing to be treated as a REIT for the
next four taxable years.
WE MAY NEED TO BORROW MONEY TO QUALIFY AS A REIT. To obtain the favorable
tax treatment associated with REITs, we currently are required each year to
distribute to our shareholders at least 95% 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
our net taxable income, excluding net capital gain. Differences in timing
between when we receive income and when we have to pay expenses could require us
to borrow money to meet this requirement. The impact of large expenses also
could have this effect. We might need to borrow money even if we believe that
market conditions are not favorable for 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
-7-
<PAGE>
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.
REDEEMING UNITHOLDERS WILL BE SUBJECT TO THE OPERATIONAL RISKS OF OUR
BUSINESS. An investment in our common stock will be subject to the various
operational risks of our business. These risks include the following:
- Our performance and ability to make distributions to our shareholders
are subject to risks associated with the real estate industry. In
particular --
- We are dependent on the Washington, D.C. metropolitan area market.
- We may be unable to renew leases or relet space as leases expire.
- New acquisitions may fail to perform as expected.
- Because real estate investments are illiquid and we are subject to
other restrictions, we may not be able to sell properties when
appropriate.
- Our properties may be subject to federal, state or local
regulations that could adversely affect distributions to our
shareholders.
- Environmental problems are possible and can be costly.
- Our properties in the District of Columbia are subject to special
tenants rights that may impede our sale of those properties.
- Some potential losses are not covered by insurance.
- Debt financing, financial covenants, the amount or percentage of our
debt and increases in interest rates could adversely affect our
economic performance for the following reasons, among others --
- Our charter does not limit the amount or percentage of debt that
we may incur and this amount or percentage of debt may limit our
ability to obtain additional financing.
- Our policy to limit debt may not ensure that we can incur and
continue to make expected distributions to shareholders.
- We may not be able to refinance our debt on favorable terms or
make large payments on debt when our debts become due.
- Rising interest rates could adversely affect our cash flow.
- Our reliance on the property service businesses, where we lack voting
control, may adversely affect our shareholders. These property services
businesses, which provide management, leasing, financing, insurance,
engineering and technical services, and tenant construction and
renovation services, are conducted by three operating companies in
which Smith L.P. has a 99% economic interest but does not own voting
stock.
-8-
<PAGE>
- 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.
REDEMPTION OF UNITS
GENERAL
Each unitholder may, subject to certain limitations, require that Smith L.P.
redeem units held by the unitholder. If we do not assume Smith L.P.'s obligation
to redeem the units, upon redemption the unitholder will receive cash from Smith
L.P. in an amount equal to the market value of the units to be redeemed. The
market value of a unit for this purpose will be equal to the average of the
closing trading price of a share of our common stock for the ten trading days
before the day on which the redemption notice was received by Smith L.P. The
partnership agreement of Smith L.P. provides that if that trading information is
not available, we can use another method to determine the value of the common
stock. The partnership agreement does not specify alternative valuation
methodologies.
We have the right, however, to assume directly and satisfy the redemption
right of a unitholder by issuing our common stock or cash in exchange for any
units tendered for redemption. We generally expect that we will elect to issue
shares of our common stock in exchange for units tendered for redemption rather
than paying cash, although we will make the determination whether to pay cash or
issue common stock at the time units are tendered for redemption. With each
redemption, our interest in Smith L.P. will increase. Upon redemption, the
unitholder will no longer be entitled to receive distributions with respect to
the units redeemed. If units are redeemed for common stock, the unitholder will
have rights as a shareholder from the time the common stock is acquired.
A unitholder must notify Smith L.P. and us of the unitholder's desire to
require Smith L.P. to redeem units by sending a notice in the form attached as
an exhibit to Smith L.P.'s partnership agreement, a copy of which we can provide
to you upon request. The unitholder must request the redemption of at least
1,000 units or all of the units held by such holder, if less. The redemption
generally will occur on the tenth business day after the notice is delivered by
the unitholder, except that no redemption or exchange can occur if the delivery
of common stock upon redemption would be prohibited under the provisions of our
charter designed to protect our REIT qualification or under applicable federal
or state securities laws.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes the material federal income tax
considerations that may be relevant to a unitholder who desires to have units
redeemed.
TAX TREATMENT OF A REDEMPTION OF UNITS. If we assume and perform Smith
L.P.'s redemption obligation, the redemption will be treated as a sale of units
by the unitholder at the time of the redemption. The sale will be fully taxable
to the unitholder in an amount equal to the sum of the cash or the value of the
common stock received in the exchange plus the amount of Smith L.P. nonrecourse
liabilities allocable to the redeemed units at the time of the redemption.
If we do not elect to assume the obligation to redeem units, Smith L.P. will
redeem the units for cash. If Smith L.P. redeems units for cash that we
contribute to Smith L.P. to effect the redemption, the redemption likely would
be treated for tax purposes as a sale of the units in a fully taxable
transaction, although the matter is not free from doubt. In that event, the
unitholder would be treated as realizing an amount equal to the sum of the cash
received in the exchange plus the
-9-
<PAGE>
amount of Smith L.P.'s nonrecourse liabilities allocable to the redeemed units
at the time of the redemption.
If Smith L.P. redeems units for cash that is not contributed by us to effect
the redemption, the tax consequences would depend on whether or not the
redemption is a redemption of all of a unitholder's units. If the redemption is
a redemption of all of a unitholder's units, the tax consequences would be the
same as described in the previous paragraph. If the redemption is a redemption
of less than all of a unitholder's units, the unitholder would not be permitted
to recognize any loss occurring on the transaction and would recognize taxable
gain only to the extent that the cash, plus the share of Smith L.P.'s
nonrecourse liabilities allocable to the redeemed units, exceeded the
unitholder's adjusted basis in all of the unitholder's units immediately before
the redemption.
TAX TREATMENT OF A SALE OF UNITS. If a unit redemption is treated as a sale
of the unit, the determination of gain or loss will be based on the difference
between the amount realized for tax purposes and the tax basis in the unit. See
"Basis of Units" below. The "amount realized" will be measured by the sum of the
cash and fair market value of common stock or other property received plus the
portion of Smith L.P.'s nonrecourse liabilities allocable to the unit sold. To
the extent that this amount exceeds the unitholder's tax basis in the unit, the
unitholder will recognize gain. It is possible that the amount of gain
recognized or even the tax liability resulting from the gain could exceed the
amount of cash and the value of common stock or any other property received upon
the redemption.
Except as described below, any gain recognized upon a sale or other
disposition of units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
attributable to a unitholder's share of "unrealized receivables" of Smith L.P.
exceeds the unitholder's basis attributable to those assets, the excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Smith L.P.'s income, any rights to payment for services
rendered or to be rendered. Unrealized receivables also include amounts that
would be subject to recapture as ordinary income if Smith L.P. had sold its
assets at their fair market value at the time of the transfer of a unit.
For individuals, trusts and estates, net capital gain from the sale of an
asset held 12 months or less is subject to tax at the applicable rate for
ordinary income. For these taxpayers, the maximum rate of tax on the net capital
gain from a sale or exchange of an asset held for more than 12 months generally
is 20%. An exception to the general 20% rule applies, however, to net capital
gains attributable to the sale of depreciable real property. Under the
exception, gain attributable to prior depreciation deductions not otherwise
recaptured as ordinary income under other depreciation recapture rules is
subject to a rate of tax of 25%. The Internal Revenue Code give the IRS the
authority to publish regulations regarding the application of the 25% exception
to sales of interests in pass-through entities, such as partnerships, to the
extent that the gain realized on the sale of the interest is attributable to
prior depreciation deductions by the partnership that have not otherwise been
recaptured as ordinary income. While there is some uncertainty regarding whether
the 25% exception would apply to sales of partnership interests before
regulations on this issue are finalized, the IRS has taken the position, for
which there appears to be some support in legislative history, that this
exception currently applies to sales of interests in partnerships that hold
depreciable real property, such as a redemption of units. Under this view, any
gain on the redemption of a unit held for more than 12 months would be treated
partly as gain from the sale of depreciable real property subject to a 25% tax
rate, partly as gain from the sale of a long-term capital asset subject to a 20%
tax rate, and to the extent the gain is attributable to unrealized receivables,
partly as ordinary income. Even in the event that the 25% exception does not
currently apply to sales of interests in partnerships that hold depreciable real
property, such as a redemption of units, the IRS has proposed regulations that,
if finalized, would apply the exception definitively to these transactions.
-10-
<PAGE>
BASIS OF UNITS. In general, a unitholder who received units in exchange for
a contribution of property had an initial tax basis in the units equal to the
unitholder's basis in the contributed property. A unitholder's initial basis
generally is increased by the unitholder's share of Smith L.P.'s taxable income
and increases in the unitholder's share of the liabilities of Smith L.P.,
including any increase in the unitholder's share of nonrecourse liabilities. A
unitholder's initial basis generally is decreased, but not below zero, by the
unitholder's share of Smith L.P.'s distributions, decreases in the unitholder's
share of liabilities of Smith L.P., including nonrecourse liabilities, the
unitholder's share of losses of Smith L.P., and the unitholder's share of
nondeductible expenditures of Smith L.P. that are not chargeable to capital.
POTENTIAL APPLICATION OF THE DISGUISED SALE RULES TO A REDEMPTION OF UNITS.
There is a risk that if a unit is redeemed, particularly if it is redeemed
within two years of when it was issued, the IRS might contend that the original
transaction pursuant to which the units were issued should be treated as a
"disguised sale" of property. Under the IRS's disguised sale rules, unless an
exception applies, a partner's contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration, including
the assumption of or taking subject to a liability, from the partnership to the
partner may be treated as a sale, in whole or in part, of the property by the
partner to the partnership. If money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property, the transactions are presumed to be a sale of the contributed property
unless the facts and circumstances clearly establish that the transfers do not
constitute a sale. If two years have passed between the transfer of money or
other consideration and the contribution of property, the transactions will not
be presumed to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON STOCK
An investment in our common stock is substantially equivalent economically
to an investment in units in Smith L.P. A holder of a share of common stock
receives the same distribution that a holder of a unit receives and shareholders
and unitholders generally share equally in the risks and rewards of ownership in
our enterprise. There are, however, some differences between ownership of units
and ownership of shares of common stock, some of which may be material to
investors.
The comparisons below are intended to assist unitholders in understanding
how their investment will be changed if their units are redeemed for common
stock.
- --------------------------------------------------------------------------------
SMITH L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHARLES E. SMITH RESIDENTIAL
REALTY, INC.
- -------------------------------------------------------------------------------
FORM OF ORGANIZATION AND ASSETS OWNED
-11-
<PAGE>
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Smith L.P. is a Delaware limited partnership. Smith L.P. owns interests,
directly and through subsidiaries, in our properties and, through subsidiaries,
conducts our management and leasing business. Smith L.P. is not permitted to
take any action which would adversely affect our REIT status.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
We are a Maryland corporation. We elected to be taxed as a REIT under the
Internal Revenue Code and intend to maintain our qualification as a REIT. Our
only significant asset is our interest in Smith L.P., which gives us an indirect
investment in the properties owned by Smith L.P. Under Smith L.P.'s partnership
agreement, we generally may not conduct any business other than in connection
with the ownership of interests in, and management of the business of, Smith
L.P.
ADDITIONAL EQUITY
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Smith L.P. is authorized to issue units and such other partnership interests,
including partnership interests of different series or classes that may be
senior to units, as we may determine. Smith L.P. may issue units and other
partnership interests, to us in exchange for the proceeds we raised in an
offering of our comparable shares. In addition, Smith L.P. will issue additional
units upon exercise of the options granted pursuant to our benefit plans.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Our Board of Directors may authorize the issuances from time to time of
additional equity securities of any class or series, or securities or rights
convertible into such equity securities, for such consideration as the Board of
Directors determines.
BORROWING POLICIES
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Smith L.P. has no restrictions on borrowings, and we are authorized to borrow
money on behalf of Smith L.P. Our Board of Directors has adopted a policy that
currently limits the debt-to-total market capitalization ratio of Smith L.P. to
60%, but the Board of Directors may alter this policy at any time.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Smith L.P.'s partnership agreement, we may not incur any debts except
those for which we may be liable as general partner of Smith L.P. and in other
limited circumstances. Therefore, all debt we incur will be through Smith L.P.
-12-
<PAGE>
MANAGEMENT CONTROL
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Generally, all management powers over the business and affairs of Smith L.P. are
vested in us as general partner of Smith L.P., and no limited partner of Smith
L.P. has any right to participate in or exercise control or management power
over the business and affairs of Smith L.P. Exceptions to this are that:
- we cannot take any action contrary to Smith L.P.'s Directors cannot
change our policy of maintaining our partnership agreement without
written consent of all REIT status, however, without the approval of a
the limited partners; majority of our shareholders.
- we cannot cause Smith L.P. to dispose of all or substantially all of
its assets without the consent of the holders of a majority of the
outstanding units, including units we own;
- until December 31, 2013, we cannot cause or permit Smith L.P. to
dissolve if one or more of the original limited partners objects to
such dissolution; and
- from January 1, 2014 through December 31, 2043, we cannot cause or
permit Smith L.P. to dissolve if original limited partners holding at
least 5% of the units object to such dissolution.
The limited partners cannot remove us as general partner.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
The Board of Directors has exclusive control over our business and affairs. The
policies adopted by the Board of Directors generally may be altered or
eliminated without a vote of our shareholders. Accordingly, except for their
vote in the elections of directors, shareholders will have no control over our
ordinary business policies. The Board of Directors cannot change our policy of
maintaining our REIT status, however, without the approval of a majority of our
shareholders.
FIDUCIARY DUTIES
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Under Delaware law, we, as general partner of Smith L.P., are required to
exercise good faith and integrity in all of our dealings relating to partnership
affairs. Under the partnership agreement, however, we are under no obligation to
consider the tax consequences to, or separate interests of, the limited partners
in deciding whether to cause Smith L.P. to take any actions. We are not liable
for monetary damages for losses sustained, liabilities incurred, or benefits not
derived by the limited partners in connection with such decisions, provided that
we have acted in good faith.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Maryland law, the directors must perform their duties in good faith, in a
manner that they reasonably believe to be in our best interests and with the
care of an ordinarily prudent person in a like position. Our directors who act
in such a manner generally will not be liable to us for monetary damages arising
from their activities.
-13-
<PAGE>
MANAGEMENT LIABILITY AND INDEMNIFICATION
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
We are liable for the obligations and debts of Smith L.P., unless limits as to
these liabilities are stated in the document or instrument evidencing the
obligation. Smith L.P. has indemnified us and any of our directors or officers
from and against all losses, claims, damages, liabilities, joint or several,
expenses including legal fees, fines, settlements and other amounts incurred in
connection with any specified actions relating to the operations of Smith L.P.
in which we or any such director or officer is involved. Smith L.P. will not
indemnify us or our directors or officers, however, if an act was done in bad
faith and was material to the lawsuit, any of us received an improper personal
benefit, or in the case of any criminal proceeding, any of us had reasonable
cause to believe an act we did was unlawful. Smith L.P. may reimburse reasonable
expenses incurred by an indemnitee in advance of the final disposition of the
proceeding if Smith L.P. receives an affirmation by the indemnitee of his, her
or its good faith belief that the standard of conduct necessary for
indemnification has been met and an undertaking by such indemnitee to repay the
amount if it is determined that such standard was not met.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Our charter provides that the liability of our directors and officers to us and
to our shareholders for money damages is limited to the fullest extent permitted
under Maryland law. Our charter and state law provide broad indemnification to
directors and officers, whether serving us or, at our request, any other entity,
to the fullest extent permitted under Maryland law.
-14-
<PAGE>
ANTITAKEOVER PROVISIONS
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Except in limited circumstances as described below under "Voting Rights," we
have exclusive management power over the business and affairs of Smith L.P. The
limited partners cannot remove us as the general partner of Smith L.P. We may
prevent a limited partner from transferring an interest in Smith L.P. or any
rights as a limited partner except in limited circumstances. We may exercise
this right to deter, delay or hamper attempts by persons to acquire a majority
interest in Smith L.P.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Our charter and by-laws and Maryland corporate law contain provisions that may
delay or discourage an unsolicited proposal to acquire us or to remove incumbent
management. These provisions include, among others:
- a staggered Board of Directors;
- authorized capital stock that may be classified and issued as a variety
of equity securities in the discretion of the Board of Directors,
including securities having superior voting rights to the common stock;
- restrictions on business combinations with persons who acquire more
than the percentage of common stock specified in our charter;
- a requirement that directors may be removed only for cause and only by
a vote of at least 80% of the outstanding common stock; and
- provisions designed to avoid concentration of share ownership in a
manner that would jeopardize our REIT status under the Internal Revenue
Code.
Our Board of Directors has also adopted a shareholder rights plan which has some
antitakeover effects. If triggered, the shareholder rights plan would cause
substantial dilution to a person or group that sought to acquire us without the
approval of our Board of Directors.
-15-
<PAGE>
VOTING RIGHTS
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Limited partners have voting rights only as to the dissolution of Smith L.P.,
the sale of all or substantially all of the assets of Smith L.P. and amendments
of the partnership agreement. Otherwise, we make all decisions relating to the
operation and management of Smith L.P. As of March 1, 2000, we owned
approximately 65% of the common and preferred units. As partners redeem units,
or if we acquire additional units in exchange for the proceeds of offerings of
our securities, our percentage ownership of the units will increase. If
additional units are issued to third parties, our percentage ownership of the
units will decrease.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Holders of our common stock are entitled to vote on the election and removal of
directors and certain major corporate transactions, including most amendments to
our charter, any proposal for our merger or consolidation with or into another
entity or the sale or disposition of all or substantially all of our assets.
Holders of common stock have one vote per share. Our charter permits the Board
of Directors to classify and issue capital stock having voting power that may
differ from that of the common stock.
AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
We or any limited partner holding 25% or more of the units may propose to amend
the partnership agreement. Such proposal, in order to be effective, must be
approved by the written vote of holders of at least a majority in interest of
Smith L.P. In addition, we may, without the consent of the limited partners,
amend the partnership agreement as to ministerial matters.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Amendments to our charter must be approved by the Board of Directors and by the
vote of at least two-thirds of the votes entitled to be cast at a meeting of
shareholders. However, an amendment of the provisions relating to any of the
classification of the Board of Directors, the power to remove directors and the
share ownership limits designed to maintain our REIT status must be approved by
an 80% vote. An amendment relating to termination of our REIT status requires a
majority vote of the shareholders entitled to vote for such a matter.
VOTE REQUIRED TO DISSOLVE SMITH L.P. OR THE COMPANY
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Through December 31, 2013, we cannot elect to dissolve Smith L.P. if any
original limited partner who became a limited partner on June 30, 1994 holding
units issued at such time objects to such dissolution. From January 1, 2014
through December 31, 2043, we cannot elect to dissolve Smith L.P. if any
original limited partner who became a limited partner on June 30, 1994 and who
held at least 5% of the units on June 30, 1994 objects to such dissolution.
After January 1, 2044, we may dissolve Smith L.P. without the consent of the
limited partners.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Maryland law, the Board of Directors must obtain approval of holders of at
least two-thirds of the outstanding shares of common stock to dissolve us.
-16-
<PAGE>
VOTE REQUIRED TO SELL ASSETS
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
We cannot cause Smith L.P. to sell, exchange, transfer or otherwise dispose of
all or substantially all of Smith L.P.'s assets without the consent of holders
of a majority of the outstanding units, including units we hold. We currently
own a majority of the units and thus expect that we would control the outcome of
such a vote.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Maryland law, the Board of Directors is required to obtain approval of the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter to sell all or substantially all of our assets. No
approval of the shareholders is required for the sale of less than all or
substantially all of our assets.
VOTE REQUIRED TO MERGE
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
We generally cannot cause Smith L.P. to merge or consolidate without the consent
of holders of a majority of the outstanding units, including units we hold. We
currently own a majority of the units and thus expect that we would control the
outcome of such a vote.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Maryland law, the Board of Directors is required to obtain approval of the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter in order to merge or consolidate us.
LIABILITY OF INVESTORS
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
The liability of the limited partners for Smith L.P.'s debts and obligations is
generally limited to the amount of their investment in Smith L.P., together with
an interest in any undistributed income, if any. Units, upon issuance, will be
fully paid and nonassessable.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Maryland law, shareholders are not personally liable for our debts or
obligations. Shares of common stock, upon issuance, will be fully paid and
nonassessable.
REVIEW OF INVESTOR LISTS
- --------------------------------------------------------------------------------
OPERATING PARTNERSHIP
- --------------------------------------------------------------------------------
Limited partners, upon written demand with a statement of the purpose of such
demand and at the limited partner's expense, are entitled to obtain a current
list of the name and last known business, residence or mailing address of each
limited partner of Smith L.P.
- --------------------------------------------------------------------------------
COMPANY
- --------------------------------------------------------------------------------
Under Maryland law, a shareholder holding at least 5% of our outstanding stock
may upon written request inspect and copy during usual business hours our
shareholder list.
-17-
<PAGE>
THE FOLLOWING COMPARES CERTAIN OF THE INVESTMENT ATTRIBUTES AND LEGAL RIGHTS
ASSOCIATED WITH THE OWNERSHIP OF UNITS AND SHARES OF COMMON STOCK.
NATURE OF INVESTMENT
- --------------------------------------------------------------------------------
UNITS
- --------------------------------------------------------------------------------
The units constitute equity interests entitling each limited partner to his
proportionate share of cash distributions made to the limited partners of Smith
L.P.
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
Shares of our common stock constitute equity interests in us. We are entitled to
receive our proportionate share of distributions made by Smith L.P. with respect
to the units, and each shareholder is entitled to a proportionate share of any
dividends or distributions paid with respect to the common stock. The dividends
payable to the shareholders are not fixed in amount and are only paid if, when
and as declared by the Board of Directors. In order to qualify as a REIT, we
must distribute at least 95% of our taxable income, excluding capital gains, and
any taxable income, including capital gains, not distributed will be subject to
corporate income tax.
LIQUIDITY
- --------------------------------------------------------------------------------
UNITS
- --------------------------------------------------------------------------------
Units may be transferred by a limited partner only with our consent, which
consent may be withheld in our sole discretion. We will permit transfers of
units only in connection with gifts, bequests and transfers by a unitholder to
family members and other persons. Subject to conditions, each unitholder has the
right to elect to have the unitholder's units redeemed by Smith L.P. Upon
redemption, such unitholder will receive, at our election, either shares of
common stock or the cash equivalent in exchange for such units.
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
Our common stock is freely transferable, subject to the ownership limit
contained in our charter. The common stock is listed on the NYSE, and a public
market for the common stock exists. The breadth and strength of this secondary
market will depend, among other things, upon the number of shares outstanding,
our financial results and prospects, the general interest in us and in our real
estate investments, and our dividend yield compared to that of other debt and
equity securities.
-18-
<PAGE>
TAXATION
- --------------------------------------------------------------------------------
UNITS
- --------------------------------------------------------------------------------
Smith L.P. is not subject to federal income taxes. Instead, each holder of units
includes his allocable share of Smith L.P.'s taxable income or loss in
determining his individual federal income tax liability. The maximum effective
federal tax rate for individuals under current law is 39.6%.
Income and loss from Smith L.P. generally will be subject to the "passive
activity" limitations. Under the "passive activity" rules, income and loss from
Smith L.P. that is considered "passive income" generally can be offset against
income and loss from other investments that constitute "passive activities,"
unless Smith L.P. is considered a "publicly traded partnership," in which case
income and loss from Smith L.P. can be offset only against other income and loss
from Smith L.P. Income of Smith L.P., however, attributable to dividends from
our property service businesses or interest paid by the property service
businesses will not qualify as passive income and cannot be offset with losses
and deductions from a "passive activity," including losses and deductions
attributable to Smith L.P.'s multifamily rental activities.
Cash distributions from Smith L.P. will not be taxable to a holder of units
except to the extent they exceed the holder's basis in his interest in Smith
L.P., which includes the holder's allocable share of Smith L.P.'s debt.
Each year, holders of units receive a Schedule K-1 tax form containing detailed
tax information for inclusion in preparing their federal income tax returns.
Holders of units are required, in some cases, to file state income tax returns
and/or pay state income taxes in the states in which Smith L.P. owns property,
even if they are not residents of those states.
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
We have elected to be taxed as a REIT. So long as we qualify as a REIT, we will
be permitted to deduct dividends paid to our shareholders, which effectively
will reduce the "double taxation" that typically results when a corporation
earns income and distributes that income to its shareholders in the form of
dividends. Our property service businesses, however, will not qualify as REITs
and thus they will be subject to federal income tax on their net income at
normal corporate rates. The maximum effective tax rate for corporations under
current law is 35%.
Dividends we pay will be treated as "portfolio" income and cannot be offset with
losses from "passive activities."
Distributions we make to our taxable domestic shareholders out of current or
accumulated earnings and profits will be taken into account by them as ordinary
income. Distributions in excess of current or accumulated earnings and profits
that are not designated as capital gain dividends will be treated as a
non-taxable return of basis to the extent of a shareholder's adjusted basis in
its shares of common stock, with the excess taxed as capital gain. Distributions
that are designated as capital gain dividends generally will be taxed as gains
from the sale or exchange of a capital asset held for more than one year, to the
extent they do not exceed our actual net capital gain for the taxable year. For
our taxable years commencing on or after January 1, 1998, we may elect to
require our shareholders to include our undistributed net capital gains in their
income. If we so elect, shareholders would include their proportionate share of
such gains in their income and be deemed to have paid their share of the tax
paid by us on such gains.
-19-
<PAGE>
- --------------------------------------------------------------------------------
UNITS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
Each year, shareholders receive Form 1099 used by corporations to report
dividends paid to their shareholders.
Shareholders who are individuals generally will not be required to file state
income tax returns and/or pay state income taxes outside of their state of
residence with respect to our operations and distributions. We may be required
to pay state income taxes in states where we are authorized to do business.
-20-
<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 have satisfied or will satisfy the REIT requirements.
Further, the anticipated income tax treatment described herein may be
changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. See "Requirements for Qualification as a REIT--Failure to
Qualify."
-21-
<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
-22-
<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
-23-
<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
amount. Specifically, so long as the amount received by us for all of the
impermissible services rendered at a specific property does not exceed one
percent of all of the amounts we receive, directly or indirectly, from that
property, then we can provide such services. The amount that we will be deemed
to have received for performing "impermissible services" will be the greater of
the actual amount received or 150% of the direct cost to us of providing those
services.
Smith L.P. may receive fees for the performance of property management and
other services with respect to properties in which Smith L.P. has a partial
interest. Only the portion of the management fee that corresponds to Smith
L.P.'s interest in such properties will qualify as "rents from real property."
The balance will not qualify. Smith L.P. also may receive certain other types of
non-qualifying income. This income includes, for example, certain expense
reimbursements, and dividends and interest from the property service businesses,
which qualify under the 95% gross income test but not under the 75% gross income
test. We believe, however, that the aggregate amount of these fees and other
non-qualifying income in any taxable year will not cause us to exceed the limits
on non-qualifying income under the 75% and 95% gross income tests.
If we fail to satisfy one or both of the 75% or the 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for the year if we
are entitled to relief under the Internal Revenue Code. We cannot state,
however, whether in all circumstances we would be entitled to this relief. Even
if this relief applied, a 100% tax would be imposed with respect to the "excess
net income" attributable to the failure to satisfy the 75% and 95% gross income
tests.
ASSET TESTS. In order to maintain qualification as a REIT, we are currently
subject to certain tests relating to the composition of our assets. As described
below, as a result of the Work Incentives Improvement Act, for our taxable years
commencing after December 31, 2000, the third test listed below will be
modified, and we also will become subject to a new asset test. 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. 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
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
-24-
<PAGE>
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 business 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.
Pursuant to a new asset test, for taxable years beginning after December 31,
2000, not more than 20% of the value of our total assets will be permitted to be
represented by securities of taxable REIT subsidiaries.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, we generally must
distribute dividends to our shareholders in an amount at least equal to --
1. the sum of (a) 95% (90% for taxable years beginning after December 31,
2000) of our REIT taxable income, computed without regard to the
dividends paid deduction and our net capital gain, and (b) 95% (90% for
taxable years beginning after December 31, 2000) of our net income
after tax, if any, from foreclosure property, MINUS
2. the sum of certain items of noncash income.
Distributions must be made either during the taxable year to which they relate
or, if specific procedures are followed, during the subsequent taxable year. We
will be subject to tax on amounts not distributed at regular capital gains and
ordinary income rates.
In addition, if we fail to distribute during each calendar year at least the
sum of 85% of our ordinary income, 95% of our capital gain net income and 100%
of our undistributed income from prior years, we will be subject to a 4%
nondeductible excise tax on the excess of this required amount
-25-
<PAGE>
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 these requirements. 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
a 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 the 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 partnerships (and not as associations taxable as
corporations). 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.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Smith L.P. was formed by way
of contributions of appreciated property, including several 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 the 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 allocation rules
of Section 704(c) of the Internal Revenue Code may not always entirely eliminate
the book-tax difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Consequently, the carryover basis of contributed
properties in the hands of Smith L.P. could cause us to be allocated lower
amounts of depreciation and other deductions for tax purposes than would be
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 be allocated taxable gain in the event of a sale
-26-
<PAGE>
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 is 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 significantly in their ability to deduct interest payments made to an
affiliated REIT. Accordingly, if a property service business 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
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.
-27-
<PAGE>
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.
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
-28-
<PAGE>
capital gain or loss if such common stock has been held for more than one year.
Generally, in the case of a taxable non-corporate U.S. shareholder, such capital
gain or loss will be taxed for dispositions occurring after December 31, 1997,
at a maximum rate of 20%, and for dispositions occurring after December 31,
2000, at a maximum rate of 18% if the common stock is acquired after December
31, 2000 and held for more than five years. The Taxpayer Relief Act of 1997
allows the IRS to issue regulations relating to how the act's new capital gain
rates will apply to sales of capital assets by "pass-through entities," which
include REITs such as us, and to sales of interests in "pass-through entities."
The IRS has proposed regulations under this authority, but as proposed, the
regulations do not apply to the taxation of gain and loss realized on the
disposition of common stock. However, the proposed regulations could be revised
to apply to the disposition of common stock, and additional regulations that
would apply to the disposition of common stock could be promulgated.
Shareholders are urged to consult with their own tax advisors with respect to
the rules contained in the Taxpayer Relief Act.
Loss upon a sale or exchange of common stock by a taxable U.S. shareholder
who has held the common stock for six months or less, after applying certain
holding period rules, will be treated as long-term capital loss to the extent
the distributions from us are required to be treated by the shareholder as
long-term capital gain. For a taxable non-corporate U.S. shareholder, the
long-term capital loss will be apportioned among the applicable long-term
capital gain groups to the extent that distributions received by such U.S.
shareholder were previously so treated.
We may elect to require the holders of common stock to include our
undistributed net capital gains in their income. If we make this election, the
holders of common stock will include in their income as long-term capital gains
their proportionate share of such undistributed capital gains. They will be
deemed to have paid their proportionate share of the tax paid by us on the
undistributed capital gains and receive in return a credit or refund for this
amount. A holder of common stock will increase the basis in its common stock by
the difference between the amount of capital gain included in its income and the
amount of the tax it is deemed to have paid. Our earnings and profits will be
adjusted appropriately.
Under certain circumstances, U.S. shareholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. We do not expect our distributions to a
shareholder that is a tax-exempt entity will constitute "unrelated business
taxable income" ("UBTI"), provided that the tax-exempt entity has not financed
the acquisition of its common stock with "acquisition indebtedness" within the
meaning of the Internal Revenue Code, and the common stock is not otherwise used
in an unrelated trade or business of the tax-exempt entity. For a tax-exempt
shareholder that is a social club, voluntary employee benefit association,
supplemental unemployment benefit trust, or qualified group legal services plan
exempt from federal income taxation under Internal Revenue Code Sections 501
(c)(7), (c)(9), (c)(17) or (c)(20), respectively, income from an investment in
us will constitute UBTI unless the organization is able to properly deduct
amounts set aside or placed in reserve so as to offset the income generated by
its investment in us. The prospective shareholder should consult its own tax
advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 provides that, effective for taxable years beginning in 1994, a portion of
the dividends paid by a "pension held REIT" shall be treated as UBTI as to any
trust which is described in Section 401(a) of the Internal Revenue Code, is tax
exempt under Section 501(a) of the Internal Revenue Code and holds more than
10%, by value, of the interests in the REIT. Tax-exempt pension funds that are
described in Section 401(a) of 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:
-29-
<PAGE>
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, 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
-30-
<PAGE>
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
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 --
-31-
<PAGE>
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 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.
-32-
<PAGE>
PLAN OF DISTRIBUTION
We may issue the shares of common stock covered by this prospectus to
parties who received units in exchange for a ground lease in the Crystal Square
Apartments located in Arlington, Virginia and the release of the obligation to
make annual payments with respect to an apartment building known as the
Crystal Plaza Apartments located in Arlington, Virginia and in exchange for
membership interests in SPH Renaissance L.L.C. if they request redemption of
their units. A redeeming unitholder (who is not otherwise one of our affiliates)
who receives any shares of common stock covered by this prospectus will be
entitled to sell such shares without restriction in the open market or
otherwise.
We will acquire one Unit from a redeeming unitholder in exchange for each
share of common stock that we issue. Thus, with each redemption, our interest in
Smith L.P. will increase.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement in
accordance with the rules and regulations of the SEC. For further information,
we refer you to the registration statement on Form S-3, including its exhibits.
Statements contained in this prospectus about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that such agreement or document be filed as an exhibit to
the registration statement, please see such agreement or document for a complete
description of these matters. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of each
document.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy materials that we have filed
with the SEC, including the registration statement, at the following SEC public
reference rooms:
450 Fifth Street. N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.
Our SEC filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our SEC filings are also available to the public on the SEC's Web Site 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.
-33-
<PAGE>
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, 1999.
You may request a copy of these filings (other than exhibits and schedules
to such filings, unless such exhibits or schedules are specifically incorporated
by reference into this prospectus), at no cost, by writing or calling us at the
following address:
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Mr. Gregory Samay, Vice President and Treasurer
(703) 769-1000
You should rely on the information incorporated by reference or provided in
this prospectus. We have authorized no one to provide you with different
information. We are not making an offer of the common stock in any state where
the offer is not permitted.
EXPERTS
Our financial statements for the fiscal year ended December 31, 1999 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 7, 2000 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.
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.
-34-
<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............................................................. 4
REDEMPTION OF UNITS...................................................... 9
FEDERAL INCOME TAX CONSIDERATIONS........................................ 21
PLAN OF DISTRIBUTION..................................................... 33
WHERE YOU CAN FIND MORE INFORMATION...................................... 33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 33
EXPERTS.................................................................. 34
LEGAL MATTERS............................................................ 34
</TABLE>
[LOGO]
54,161 SHARES
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
COMMON STOCK
PROSPECTUS
APRIL __, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth those expenses for distribution to be
incurred in connection with the issuance and distribution of the securities
being registered.
<TABLE>
<S> <C>
Registration Fee................................. $ 500
Printing and Duplicating Expenses................ 1,000
Legal Fees and Expenses.......................... 30,000
Accounting Fees and Expenses..................... 10,000
Blue Sky Fees and Expenses....................... 5,000
Miscellaneous.................................... 1,000
------
Total............................................ $47,500
------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our officers and directors are and will be indemnified under Maryland law,
our charter, and our partnership agreement of Smith L.P. against certain
liabilities. Our charter requires us to indemnify our directors and officers to
the fullest extent permitted from time to time by the laws of Maryland. Our
charter also provides that, to the fullest extent permitted under Maryland law,
our directors and officers will not be liable to us and our shareholders for
money damages.
Section 2-418 of the Maryland General Corporation Law generally permits
indemnification of any director made a party to any proceedings by reason of
service as a director unless it is established that (i) the act or omission of
such person was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty; or
(ii) such person actually received an improper personal benefit in money
property or services; or (iii) in the case of any criminal proceeding, such
person had reasonable cause to believe that the act or omission was unlawful.
The indemnity may include judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director in connection with the
proceeding; but, if the proceeding is one by or in the right of the corporation,
indemnification is not permitted with respect to any proceeding in which the
director has been adjudged to be liable to the corporation, or if the proceeding
is one charging improper personal benefit to the director, whether or not
involving action in the director's official capacity, indemnification of the
director is not permitted if the director was adjudged to be liable on the basis
that personal benefit was improperly received. The termination of any proceeding
by conviction or upon a plea of nolo contendere or its equivalent, or any entry
of an order of probation prior to judgment, creates a rebuttable presumption
that the director did not meet the requisite standard of conduct required for
permitted indemnification. The termination of any proceeding by judgment, order
or settlement, however, does not create a presumption that the director failed
to meet the requisite standard of conduct for permitted indemnification.
The partnership agreement also provides for indemnification of us, or any of
our directors or officers, in our capacity as general partner of Smith L.P.,
from and against all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees), fines, settlements and other amounts incurred
in connection with any actions relating to the operations of Smith L.P. as set
forth in the partnership agreement.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
3.1a Our Amended and Restated Articles of Incorporation
3.2b Articles Supplementary relating to Series A
Cumulative Convertible Redeemable Preferred Stock
3.3c Articles Supplementary relating to Series B
Cumulative Convertible Redeemable Preferred Stock
3.4c Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock
3.5d Articles Supplementary relating to Series C Cumulative Redeemable
Preferred Stock
3.6e Certificate of Correction relating to Series C Cumulative Redeemable
Preferred Stock
3.7f Articles Supplementary relating to Series D Junior Participating
Preferred Stock
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
3.8g Articles Supplementary relating to Series E, F and G Cumulative
Convertible Redeemable Preferred Stock
3.9h Articles Supplementary relating to Series H
Cumulative Convertible Redeemable Preferred Stock
3.10i Our Amended and Restated Bylaws
4.1j First Amended and Restated Agreement of Limited Partnership of
Smith L.P., as amended
4.2j Certificate of Limited Partnership of Smith L.P.
4.3k Rights Agreement
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of the Common
Stock
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
23.3 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page (II-4))
</TABLE>
- ----------
a Incorporated by reference to Exhibit 3.1 to our registration statement on
Form S-11 (File No. 33-75288).
b Incorporated by reference to Exhibit 3.1 to our quarterly report on Form
10-Q for the quarter ended June 30, 1997 (File No. 1-13174).
c Incorporated by reference to Exhibit 4.1 to our current report on Form 8-K
dated October 3, 1997 (File No. 1-13174).
d Incorporated by reference to Exhibit 3.5 to our registration statement on
Form S-3 (File No. 333-17053).
e Incorporated by reference to Exhibit 3.6 to our registration statement on
Form S-3 (File No. 333-17053).
f Incorporated by reference to Exhibit 99.1 to our current report on Form 8-K
dated December 2, 1998 (File No. 1-13174).
g Incorporated by reference to Exhibits 99.1, 99.2 and 99.3, respectively, to
our quarterly report on Form 10-Q for the quarter ended June 30, 1999 (File
No. 1-13174).
h Incorporated by reference to Exhibit 99.1 to our quarterly report on Form
10-Q for the quarter ended September 30, 1999 (File No. 1-13174).
i Incorporated by reference to Exhibit 3.2 to our registration statement on
Form S-3 (File No. 33-93986).
j Incorporated by reference to the same titled and numbered exhibit to our
Annual Report on Form 10-K for the year ended December 31, 1994 (File No.
1-13174).
k Incorporated by reference to Exhibit 99.1 to our current report on Form 8-K
dated December 2, 1998 (File No. 1-13174).
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in this registration statement;
II-2
<PAGE>
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered herein, and the
offering of such Securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby further undertakes that, for the purposes
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the Securities offered herein, and the offering of such Securities
at that time shall be deemed to be the initial BONA FIDE offering thereof. The
undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance under Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Arlington, Commonwealth of Virginia, on April 6,
2000.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ ERNEST A. GERARDI, JR.
------------------------------------------
Name: Ernest A. Gerardi, Jr.
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Ernest A. Gerardi, Jr. and Robert D.
Zimet, or either one of them, as true and lawful attorney-in-fact, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any amendments to this Registration Statement (including
post-effective amendments), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
NAME TITLE DATE
/s/ ROBERT H. SMITH Chairman of the Board and Director April 6, 2000
- -------------------------
Robert H. Smith
/s/ ERNEST A. GERARDI, JR. President, Chief Executive Officer, April 6, 2000
- ------------------------- and Director
Ernest A. Gerardi, Jr.
/s/ WESLEY D. MINAMI Executive Vice President and Chief April 6, 2000
- ------------------------- Financial Officer
Wesley D. Minami
/s/ STEVEN E. GULLEY Controller and Chief Accounting April 6, 2000
- ------------------------- Officer
Steven E. Gulley
/s/ CHARLES B. GILL Director April 6, 2000
- -------------------------
Charles B. Gill
II-4
<PAGE>
/s/ ROBERT P. KOGOD Director April 6, 2000
- -------------------------
Robert P. Kogod
/s/ R. MICHAEL MCCULLOUGH Director April 6, 2000
- -------------------------
R. Michael McCullough
/s/ MANDELL J. OURISMAN Director April 6, 2000
- -------------------------
Mandell J. Ourisman
/s/ L. RONALD SCHEMAN Director April 6, 2000
- -------------------------
L. Ronald Scheman
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
------ ------------------- -------------
<S> <C> <C>
3.1a Our Amended and Restated Articles of Incorporation ......................
3.2b Articles Supplementary relating to Series A Cumulative
Convertible Redeemable Preferred Stock ..................................
3.3c Articles Supplementary relating to Series B Cumulative
Convertible Redeemable Preferred Stock ..................................
3.4c Certificate of Correction relating to Series B Cumulative
Convertible Redeemable Preferred Stock...................................
3.5d Articles Supplementary relating to Series C Cumulative
Redeemable Preferred Stock ..............................................
3.6e Certificate of Correction relating to Series C Cumulative
Redeemable Preferred Stock ..............................................
3.7f Articles Supplementary relating to Series D Junior
Participating Preferred Stock ...........................................
3.8g Articles Supplementary relating to Series E, F and G Cumulative
Convertible Redeemable Preferred Stock ..................................
3.9h Articles Supplementary relating to Series H
Cumulative Convertible Redeemable Preferred Stock .......................
3.10i Our Amended and Restated Bylaws .........................................
4.1j First Amended and Restated Agreement of Limited Partnership of
Smith L.P., as amended ..................................................
4.2j Certificate of Limited Partnership of Smith L.P. ........................
4.3k Rights Agreement ........................................................
5.1 Opinion of Hogan & Hartson L.L.P. regarding legality of the Common
Stock ...................................................................
8.1 Opinion of Hogan & Hartson L.L.P. regarding certain tax matters .........
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1) .............
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1) .............
23.3 Consent of Arthur Andersen LLP ..........................................
24 Power of Attorney (included on signature page (II-4))
</TABLE>
- ----------
a Incorporated by reference to Exhibit 3.1 to our registration statement on
Form S-11 (File No. 33-75288).
b Incorporated by reference to Exhibit 3.1 to our quarterly report on Form
10-Q for the quarter ended June 30, 1997 (File No. 1-13174).
c Incorporated by reference to Exhibit 4.1 to our current report on Form 8-K
dated October 3, 1997 (File No. 1-13174).
d Incorporated by reference to Exhibit 3.5 to our registration statement on
Form S-3 (File No. 333-17053).
e Incorporated by reference to Exhibit 3.6 to our registration statement on
Form S-3 (File No. 333-17053).
f Incorporated by reference to Exhibit 99.1 to our current report on Form 8-K
dated December 2, 1998 (File No. 1-13174).
g Incorporated by reference to Exhibits 99.1, 99.2 and 99.3, respectively, to
our quarterly report on Form 10-Q for the quarter ended June 30, 1999 (File
No. 1-13174).
h Incorporated by reference to Exhibit 99.1 to our quarterly report on Form
10-Q for the quarter ended September 30, 1999 (File No. 1-13174).
i Incorporated by reference to Exhibit 3.2 to our registration statement on
Form S-3 (File No. 33-93986).
j Incorporated by reference to the same titled and numbered exhibit to our
Annual Report on Form 10-K for the year ended December 31, 1994 (File No.
1-13174).
k Incorporated by reference to Exhibit 99.1 to our current report on Form 8-K
dated December 2, 1998 (File No. 1-13174).
<PAGE>
Exhibit 5.1
[Letterhead of Hogan & Hartson L.L.P.]
April 6, 2000
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City, Arlington, Virginia 22202
Ladies and Gentlemen:
We are acting as counsel to Charles E. Smith Residential Realty, Inc.,
a Maryland corporation (the "Company"), in connection with its registration
statement on Form S-3 (the "Registration Statement") filed with the Securities
and Exchange Commission relating to the proposed issuance of up to 54,161 shares
of the Company's common stock, par value $.01 per share (together with the
Rights (as defined below), the "Shares"), and up to 54,161 associated preferred
stock purchase rights (the "Rights") to be issued pursuant to the Rights
Agreement (as defined below), which may be issued if and to the extent that the
holders of 54,161 units of limited partnership interest (the "Units") in Charles
E. Smith Residential Realty L.P. (the "Operating Partnership") tender such Units
for redemption. This opinion letter is furnished to you at your request to
enable you to fulfill the requirements of Item 601(b)(5) of Regulation S-K,
17 C.F.R. Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. An executed copy of the Contribution Agreement, dated as of March
16, 1999, by and between The Renaissance Apartments Limited
Partnership and the Operating Partnership.
3. An executed copy of the Asset Contribution Agreement, dated as of
March 3, 1999, by and between Commonwealth Atlantic Properties,
Inc. and the Operating Partnership.
4. The Amended and Restated Articles of Incorporation (the
"Articles") of the Company, as certified by the Department of
Assessments and Taxation of the State of Maryland on April 3,
2000 and by the Secretary of the Company on the date hereof as
being complete, accurate, and in effect.
<PAGE>
Board of Directors
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 2
5. The Bylaws of the Company, as certified by the Secretary of the
Company on the date hereof as being complete, accurate, and in
effect.
6. The Certificate of Limited Partnership of the Operating
Partnership, as amended, as certified by the Secretary of State of
the State of Delaware on March 31, 2000 and by the Secretary of
the Company, as general partner of the Operating Partnership, on
the date hereof as being complete, accurate, and in effect.
7. The First Amended and Restated Agreement of Limited Partnership of
the Operating Partnership, as amended, as certified by the
Secretary of the Company, as general partner of the Operating
Partnership, on the date hereof as being complete, accurate, and
in effect (the "Partnership Agreement").
8. An executed copy of the Rights Agreement (the "Rights Agreement"),
dated as of December 2, 1998, between the Company and First Union
National Bank, as rights agent (the "Rights Agent").
9. Resolutions of the Board of Directors of the Company adopted at a
meeting held on July 21, 1998, as certified by the Secretary of
the Company on the date hereof as being complete, accurate, and in
effect, relating to the issuance and sale of the Shares and
arrangements in connection therewith.
10. Resolutions of the Board of Directors of the Company adopted by
unanimous written consent on February 26, 1999, as certified by
the Secretary of the Company on the date hereof as being complete,
accurate, and in effect, relating to the issuance and sale of the
Shares and arrangements in connection therewith.
11. Resolutions of the Board of Directors of the Company adopted at a
meeting held on December 2, 1998, as certified by the Secretary of
the Company as of the date hereof as being complete, accurate and
in effect, authorizing, among other things, the distribution of
the Rights to holders of record of the Company's common stock, par
value $.01 per share, as of the close of business on December 14,
1998, the
<PAGE>
Board of Directors
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 3
appointment of First Union National Bank as Rights Agent, and the
listing of the Rights on the Exchange.
In our examination of the aforesaid certificates, documents and
agreements, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the accuracy and completeness of all documents
submitted to us, the authenticity of all original documents, and the conformity
to authentic original documents of all documents submitted to us as copies
(including telecopies). We have assumed that (i) the Rights Agent has all
requisite power and authority under all applicable laws, regulations and
governing documents to execute, deliver and perform its obligations under the
Rights Agreement, (ii) the Rights Agent has duly authorized, executed and
delivered the Rights Agreement, (iii) the Rights Agent is validly existing and
in good standing in all necessary jurisdictions, (iv) the Rights Agreement
constitutes a valid and binding obligation, enforceable against the Rights Agent
in accordance with its terms, (v) there has been no material mutual mistake of
fact or misunderstanding or fraud, duress or undue influence in connection with
the negotiation, execution or delivery of the Rights Agreement and (vi) the
Rights will be issued in accordance with the Rights Agreement. In addition, we
have assumed that the Shares will not be issued in violation of the ownership
limit contained in the Articles. This opinion letter is given, and all
statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
Maryland General Corporation Law, as amended. We express no opinion herein as to
any other laws, statutes, ordinances, rules, or regulations. As used herein, the
term "Maryland General Corporation Law, as amended" includes the statutory
provisions contained therein, all applicable provisions of the Maryland
Constitution and reported judicial decisions interpreting these laws.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) effectiveness of the Registration Statement and (ii)
issuance of the Shares, if and when issued and delivered in accordance with the
terms of the Partnership Agreement and the resolutions of the Board of Directors
of the Company authorizing the issuance of the Shares upon redemption of the
Units as contemplated thereby, the Shares will be validly issued, fully paid,
and nonassessable.
The opinion set forth above, insofar as it relates to the Rights, is
limited to the valid issuance of the Rights under Maryland law.
<PAGE>
Board of Directors
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 4
This opinion letter has been prepared for your use in connection with
the Registration Statement and speaks as of the date hereof. We assume no
obligation to advise you of any changes in the foregoing subsequent to the
delivery of this opinion letter.
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 8.1
[Letterhead of Hogan & Hartson L.L.P.]
April 6, 2000
Board of Directors
Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Crystal City
Arlington, VA 22202
Ladies and Gentlemen:
We have acted as counsel to Charles E. Smith Residential Realty,
Inc., a Maryland corporation (the "Company"), in connection with the
registration statement on Form S-3 (the "Registration Statement") and the
prospectus included therein (the "Prospectus") filed by the Company with the
Securities and Exchange Commission relating to the possible issuance by the
Company of up to 54,161 shares of the Company's common stock, par value $.01
per share (the "Redemption Shares"), if and to the extent that, the Company
elects to issue such Redemption Shares to the holders of up to 54,161 units
of Limited Partnership interests ("Units") in Charles E. Smith Residential
Realty L.P. (the "Operating Partnership"), 32,258 of which Units were issued
by the Operating Partnership in connection with the acquisition of a ground
lease under the Crystal Square Apartments, a residential property located in
Arlington, Virginia, and 21,903 of which Units were issued by the Operating
Partnership in exchange for membership interests in SPH Renaissance, L.L.C.,
one of the owners of an apartment complex known as The Renaissance Apartments
located in Falls Church, Virginia, upon the tender of such Units for
redemption. In connection with the Registration Statement, we have been asked
to provide you with our opinion on certain federal income tax matters.
Capitalized terms used in this letter and not otherwise defined herein have
the meanings set forth in the Registration Statement.
BASES FOR OPINION
The opinion set forth in this letter is based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, existing administrative rulings and practices of the Internal Revenue
Service (the "IRS")
<PAGE>
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 2
(including the private letter ruling issued by the IRS to the Company on June 8,
1994, as supplemented by the ruling letter dated June 16, 1995, and the private
letter ruling issued by the IRS to the Company on August 27, 1997), and
legislative history, all as of the date hereof. These provisions and
interpretations are subject to changes, which may or may not be retroactive in
effect, that might result in material modifications of our opinion.
In rendering the following opinion, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinion, including the following:
(1) the Registration Statement; (2) the First Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as amended as of January 31,
1995, as certified by the Secretary of the Company on the date hereof as being a
true, correct and complete copy and as being in full force and effect; (3) the
Amended and Restated Articles of Incorporation of the Company dated as of June
27, 1994, as certified by the Department of Assessments and Taxation of the
State of Maryland on April 3, 2000 and by the Secretary of the Company on the
date hereof as being a true, correct and complete copy and as being in full
force and effect; (4) the agreements of limited partnership of the
partnership subsidiaries of the Operating Partnership; (5) the articles of
organization and stock ownership records of the four operating companies
(Smith Realty Company, Smith Management Construction, Inc., Combustioneer
Corporation, and Consolidated Engineering Services, Inc.) which provide
property services to the properties owned by the Operating Partnership and to
other multifamily, retail, and office properties (collectively, the "Property
Service Businesses"); (6) the articles of incorporation of the wholly-owned
subsidiaries of the Company that serve as the general partners of the various
subsidiary financing partnerships (the "REIT Subs"); and (7) other necessary
documents. The opinion set forth in this letter also is premised on certain
written representations of the Company contained in a letter to us dated as
of the date hereof (the "Management Representation Letter"). Any variation or
difference in the facts from those set forth in the documents that we have
reviewed and upon which we have relied (including, in particular, those set
forth in the Management Representation Letter) may adversely affect the
conclusions stated herein.
We have made such factual and legal inquiries, including examination of
the documents set forth above, as we have deemed necessary or appropriate for
purposes of our opinion. For purposes of rendering our opinion, however, we have
not made an independent investigation or audit of the facts set forth in the
above referenced documents, including the Management Representation Letter. We
<PAGE>
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 3
consequently have relied upon representations in the Management Representation
Letter that the information presented in such documents or otherwise furnished
to us accurately and completely describes all material facts relevant to our
opinion. We are not aware, however, of any material facts or circumstances
inconsistent with the representations we have relied upon as described herein or
other assumptions set forth herein.
Moreover, we have assumed that (i) the Company, the Operating
Partnership, each of the REIT Subs, each of the partnership subsidiaries, and
each of the Property Services Businesses have been and will continue to be
operated in the manner described in the relevant partnership agreement, articles
(or certificate) of incorporation, or other organizational documents; (ii) as
represented by the Company, there are no agreements or understandings between
the Company or the Operating Partnership, on the one hand, and the partnerships
that own the voting stock of the Property Services Businesses (the "Voting Stock
Partnerships") or their partners, on the other, that are inconsistent with the
relevant Voting Stock Partnership being considered to be both the record and
beneficial owner of more than 90% of the outstanding voting stock of the
respective Property Services Businesses; and (iii) the Company is a validly
organized and duly incorporated corporation under the laws of the State of
Maryland, each of the Property Services Businesses and each of the REIT Subs are
validly organized and duly incorporated corporations under the laws of the State
of Delaware or the Commonwealth of Virginia (as applicable), and the Operating
Partnership and each of the subsidiary partners are duly organized and validly
existing partnerships under the applicable laws of the State of Delaware.
In our review, we have assumed that all of the representations and
statements set forth in the documents that we reviewed (including the Management
Representation Letter) are true and correct, and all of the obligations imposed
by any such documents on the parties thereto, including obligations imposed
under the Articles of Incorporation of the Company, have been and will continue
to be performed or satisfied in accordance with their terms. We also have
assumed the genuineness of all signatures, the proper execution of all
documents, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals from which any copies were made.
<PAGE>
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 4
OPINION
Based upon, subject to, and limited by the assumptions and
qualifications set forth herein, we are of the opinion as follows:
1. The Company was organized and has operated in conformity with the
requirements for qualification and taxation as a real estate investment
trust ("REIT") under the Code for its taxable years ending December 31,
1995, December 31, 1996, December 31, 1997, December 31, 1998, and
December 31, 1999, and the Company's current organization and method of
operation, as described in the Management Representation Letter, will
enable it to continue to meet the requirements for qualification and
taxation as a REIT.
2. The discussions in the Prospectus under the headings "Federal Income
Tax Considerations" and "Redemption of Units - Tax Consequences of
Redemption," to the extent that they describe provisions of federal
income tax law, are correct in all material respects.
Our opinion is limited to the opinions described above. Our opinion
does not, and is not intended to, address the tax consequences to any Unitholder
with respect to the acquisition, ownership, redemption, or disposition of its
Units.
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter. The Company's qualification
and taxation as a REIT depend upon the Company's ability to meet on a continuing
basis, through actual annual operating and other results, the various
requirements under the Code with regard to, among other things, the sources of
its gross income, the composition of its assets, the level of its distributions
to stockholders, and the diversity of its stock ownership. Hogan & Hartson
L.L.P. has relied upon representations of the Company with respect to these
matters and will not review the Company's compliance with these requirements on
a continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations, the sources of its income, the nature of
its assets, the level of its distributions to stockholders and the diversity of
its stock ownership for any given taxable year will satisfy the requirements
under the Code for qualification and taxation as a REIT.
<PAGE>
Charles E. Smith Residential Realty, Inc.
April 6, 2000
Page 5
An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the IRS or
the courts. There can be no assurance that positions contrary to our opinion
will not be taken by the IRS, or that a court considering the issue would not
hold contrary to such opinion. Furthermore, no assurance can be given that
future legislative, judicial or administrative changes, on either a prospective
or retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any such changes.
We hereby consent to the filing of this opinion letter as Exhibit 8.1
to the Registration Statement and to the use of the name of the firm therein. In
giving the consent, we do not thereby admit that we are an "expert" within the
meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
Hogan & Hartson L.L.P.
<PAGE>
EXHIBIT 23.3
[Letterhead of Arthur Andersen]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 7, 2000
included in Charles E. Smith Residential Realty, Inc.'s previously filed Form
10-K for the year ended December 31, 1999 and to all references to our Firm
included in this registration statement.
/s/ Arthur Andersen LLP
Vienna, Virginia
April 6, 2000
