Registration No. 333-48551
-----
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MAY 29, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------------
GROVE PROPERTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation or organization)
06-1391084
(I.R.S. Employer Identification No.)
598 ASYLUM AVENUE
HARTFORD, CONNECTICUT 06105
(860) 246-1126
(Address including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Joseph R. LaBrosse
Chief Financial Officer
Grove Property Trust
598 Asylum Avenue
Hartford, Connecticut 06105
(860) 246-1126
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Paul G. Hughes, Esq.
Cummings & Lockwood
Four Stamford Plaza
107 Elm Street, P.O. Box 120
Stamford, Connecticut 06904-0120
--------------------------------------
Approximate date of commencement of proposed sale to the public: as
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
<PAGE>
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. [ ]
---------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED MAY 29, 1998
PROSPECTUS
GROVE PROPERTY TRUST
598 ASYLUM AVENUE
HARTFORD, CONNECTICUT 06105
2,114,439 COMMON SHARES OF BENEFICIAL INTEREST
PAR VALUE $0.01 PER SHARE
Grove Property Trust (the "COMPANY") is a self-managed and
self-administered real estate investment trust (a "REIT") that is engaged in the
acquisition, repositioning, management and operation of mid-priced multifamily
and specialty retail properties in the Northeastern United States. As of March
15, 1998, the Company owned interests in a portfolio of 36 apartment communities
in Connecticut, Massachusetts and Rhode Island containing a total of 3,580
residential units and three community shopping centers in Massachusetts
containing an aggregate of approximately 100,000 rentable square feet.
This Prospectus relates to the possible issuance by the Company of up
to 2,114,439 shares (the "REDEMPTION SHARES") of its Common Shares of Beneficial
Interest, par value $.01 per share ("COMMON SHARES"), if, and to the extent
that, holders of up to 2,114,439 units of limited partnership interest ("COMMON
UNITS") in Grove Operating, L.P. (the "OPERATING PARTNERSHIP"), of which the
Company is the sole general partner and owns a controlling limited partner
interest, tender such Common Units for redemption. When Common Units are
tendered for redemption, the Company will determine whether to pay the
redemption price by issuing Redemption Shares or by paying cash. The Common
Units were issued in connection with the acquisition of properties by the
Company. The registration of the Redemption Shares does not necessarily mean
that any of such shares will be offered or sold by the holders thereof. See "The
Company" and "Registration Rights."
The Common Shares are listed on the American Stock Exchange (the
"AMEX") under the symbol "GVE." To ensure that the Company maintains its
qualification as a REIT, ownership by any person of more than 5% of the Common
Shares is restricted, with certain exceptions. See "Description of Shares of
Beneficial Interest."
The Company will not receive any cash proceeds from the issuance of the
Redemption Shares. The Company will acquire Common Units in the Operating
Partnership in exchange for any Redemption Shares that the Company may issue to
holders of Common Units pursuant to this Prospectus.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE COMMON
SHARES OFFERED HEREBY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 29, 1998.
The information in this Prospectus is not complete and may be changed. The
Company may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This Prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
Available Information.....................................................2
Incorporation of Certain Documents by Reference...........................3
The Company...............................................................4
Risk Factors..............................................................4
Description of Shares of Beneficial Interest..............................16
Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws......................................................20
Description of Common Units...............................................23
Comparison of Ownership of Common Units and Common Shares.................28
Redemption of Common Units................................................35
Tax Consequences of Redemption............................................36
Certain Federal Income Tax Considerations.................................37
Shares Available for Future Sale..........................................50
Plan of Distribution......................................................50
Legality..................................................................51
Experts...................................................................51
NO DEALER OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED IN
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER PERSON
DEEMED TO BE AN UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE REDEMPTION SHARES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). These reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at certain of its regional offices, the current addresses of
which are: New York Regional Office, 7 World Trade Center, New York, New York
10048; and Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a Web site
that contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission at the following
address: http://www.sec.gov. Since the Common Shares are also listed on the
American Stock Exchange, reports, proxy statements and other information
relating to the Company can also be inspected at the offices of the American
Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006.
-2-
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
3. The Company's Current Report on Form 8-K dated December 31, 1997, as
amended, and its Current Report on Form 8-K dated January 23, 1998, as amended;
and
4. The Company's Registration Statement on Form 8-A dated November 14,
1997.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this
Prospectus and prior to the filing of a post-effective amendment to the
Registration Statement of which this Prospectus is a part which indicates that
all securities offered have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
To the extent that independent auditors audit and report on financial
statements of the Company issued at future dates, and consent to the use of
their reports thereon, such financial statements shall also be incorporated by
reference into this Prospectus in reliance upon their reports and their
authority as experts in accounting and auditing.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any or all of the documents
incorporated by reference herein, other than exhibits to such documents. Written
requests should be addressed to: Sheila Daley, Grove Property Trust, 598 Asylum
Avenue, Hartford Connecticut 06105. Telephone requests may be directed to Ms.
Daley at (860) 246-1126, extension 143.
-3-
<PAGE>
THE COMPANY
The Company, which was formed in 1994, is a self-managed and
self-administered equity REIT organized under Maryland law. It is engaged,
through the Operating Partnership of which the Company is the sole General
Partner, in the business of acquiring, repositioning, managing and operating
mid-priced multifamily residential and specialty retail properties located in
the Northeastern region of the United States. As of March 15, 1998, the Company
has a controlling interest in 39 properties (the "PROPERTIES") consisting of 36
apartment communities containing a total of 3,580 residential units and three
retail properties containing an aggregate of approximately 100,000 rentable
square feet. Reference is made to the information incorporated herein for a more
complete description of the Company's business and its properties.
The Company's executive offices are located at 598 Asylum Avenue,
Hartford, Connecticut 06105, and its telephone number is (860) 246-1126.
RISK FACTORS
HOLDERS OF COMMON UNITS WHO MAY RECEIVE REDEMPTION SHARES UPON
REDEMPTION OF THEIR COMMON UNITS SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET
FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED HEREIN OR INCORPORATED
BY REFERENCE, BEFORE MAKING AN INVESTMENT IN THE REDEMPTION SHARES. CERTAIN
STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD
LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933 (THE "1933 ACT") AND SECTION 21E OF THE 1934 ACT. THESE STATEMENTS INCLUDE,
AMONG OTHER THINGS, STATEMENTS CONCERNING RESULTS OF OPERATIONS, CASH AVAILABLE
FOR DISTRIBUTIONS, REQUIRED CAPITAL EXPENDITURES, SOURCES OF GROWTH, ECONOMIC
CONDITIONS AND TRENDS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE
OPERATIONS. SUCH FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, DEPENDING ON A VARIETY OF
IMPORTANT FACTORS. IMPORTANT FACTORS THAT CONTRIBUTE TO SUCH RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO: (I) THOSE IDENTIFIED UNDER THIS
CAPTION; (II) CHANGES IN GENERAL BUSINESS AND ECONOMIC CONDITIONS; AND (III)
OTHER FACTORS WHICH MAY BE DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE COMMISSION.
SPECIAL CONSIDERATIONS APPLICABLE TO REDEEMING UNIT HOLDERS
TAX CONSEQUENCES OF REDEMPTION OF COMMON UNITS. The exercise by a
holder of Common Units of his or her right to require the redemption of his or
her Common Units will be treated for tax purposes as a sale of such Common Units
by the holder. Such a sale will be fully taxable to the redeeming Common Unit
holder and such redeeming Common Unit holder will be treated as realizing for
tax purposes an amount equal to the sum of the cash or the value of the
Redemption Shares received in the exchange plus the amount of the Operating
Partnership liabilities allocable to the redeemed Common Units at the time of
the redemption. It is possible that the amount of gain recognized or even the
tax liability resulting from such gain could exceed the amount of cash and the
value of other property (E.G., Redemption Shares) received upon such
disposition. See "Redemption of Common Units--Tax Consequences of Redemption."
In addition, the ability of the Common Unit holder to sell a substantial number
of Redemption Shares in order to raise cash to pay tax liabilities associated
with redemption of Common Units may be restricted due to the Company's
relatively low trading volume, and, as a result of fluctuations in the stock
price, the price the Common Unit holder receives for such shares may not equal
the value of his or her Common Units at the time of redemption. See "--Share
Price Volatility" below.
CHANGE IN INVESTMENT UPON REDEMPTION OF COMMON UNITS. If a Common Unit
holder exercises the right to require the redemption of his or her Common Units,
such Common Unit holder may receive cash or, if the Company so elects,
Redemption Shares. If the Common Unit holder receives cash, that holder will no
longer have any interest in the Company and will not benefit from any subsequent
increases in share price and will not receive any future distributions from the
Company (unless the Common Unit holder currently owns or acquires in the future
additional Common Shares or Common Units). If the
-4-
<PAGE>
Common Unit holder receives Redemption Shares, that holder will become a
stockholder of the Company rather than a holder of Common Units in the Operating
Partnership. See "Redemption of Common Units-- Comparison of Ownership of Common
Units and Common Shares."
ABSENCE OF APPRAISALS
In March 1997, 20 Properties owned by certain affiliates of the
Company's executive officers (the "EXECUTIVE OFFICERS") and Grove Property
Services Limited Partnership ("GPS"), the management company for such Properties
were contributed to the Operating Partnership in exchange for Common Units and
cash (collectively, the "MARCH ACQUISITIONS"), pursuant to a Contribution
Agreement (the "CONTRIBUTION AGREEMENT") between such affiliates, the Company
and the Operating Partnership. Such acquisitions were based primarily upon a
capitalization of pro forma net operating income, rather than an asset-by-asset
valuation based on historical cost or appraised current market value. A
valuation of these Properties and GPS based on appraisals or another method
would likely have resulted in a different valuation. There can be no assurance
that the percentage interests or the value thereof received by those
participating in the transactions, including the Executive Officers and their
affiliates, accurately reflected the value of the assets contributed to the
Operating Partnership. Since the March Acquisitions, the Company has acquired
five properties from affiliated parties and eight properties from unaffiliated
parties. The Company did not obtain appraisals with respect to these additional
properties, although approval was obtained from a majority of the Independent
Trust Managers (as defined below) for the transactions in which the additional
properties were acquired from affiliates of the Company. If the fair market
values of GPS and the properties acquired in and subsequent to the March
Acquisitions are materially different from the amounts paid by the Company, the
Company could have overpaid for GPS or such properties which could result in a
material and adverse effect on the financial performance of the Company and the
value of the Common Shares (including the Redemption Shares). In addition, the
sellers of such properties could in the future claim they were underpaid, which
claim, if successful, could result in a material and adverse effect on the
financial performance of the Company and the value of the Common Shares
(including the Redemption Shares).
REAL ESTATE INVESTMENT CONSIDERATIONS
GENERAL. Real property investments are subject to varying degrees of
risk. The financial returns available from equity investments in apartment
properties depend on the amount of revenue generated and expenses incurred in
operating the properties. If the properties do not generate revenue sufficient
to meet operating expenses, debt service, if any, and capital expenditures, the
Company's income and ability to make distributions to its shareholders will be
adversely affected. An apartment property's income and value may be adversely
affected by the national and regional economic climates, local real estate
conditions, such as an oversupply of apartments or a reduction in demand for
apartments, availability of "for purchase" housing, the attractiveness of the
properties to residents, competition from other apartment properties, the
ability of the owner to provide adequate maintenance and to obtain adequate
insurance and increased operating costs (including real estate taxes). The
Company's income will be adversely affected if a significant number of residents
are unable to pay rent or if the apartments cannot be rented on favorable terms.
Further, certain significant expenditures associated with equity investments in
real estate (such as mortgage payments, if any, real estate taxes and
maintenance costs) are generally not reduced when circumstances cause a
reduction in rental income. In addition, the net income to the Company from any
of the properties may be adversely affected by such factors, among others, as
changes in zoning, building, environmental, rent control and other laws and
regulations, population shifts, which may affect the demand for rental housing
in the Company's markets, changes in real property taxes and interest rates, the
availability of financing, weather and acts of God (such as earthquakes,
hurricanes and floods) and other factors beyond the control of the Company that
may significantly affect the Company's revenue and operating expenses. The
Company is also exposed to the various types of litigation that may be brought
against a property owner or manager.
-5-
<PAGE>
ILLIQUIDITY OF REAL ESTATE. Investments in real estate are relatively
illiquid and, therefore, will tend to restrict the Company's ability to vary its
portfolio of properties promptly in response to changes in economic or other
conditions. Consequently, if the Operating Partnership were to be liquidated,
the proceeds realized by the Company might be less than the Company's total
investment in the Operating Partnership. In addition, the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code"), places limits on the amount
of gross income the Company may realize from sales of real property assets held
for fewer than four years, which may affect the Company's ability to sell its
properties without adversely affecting returns to holders of Common Shares.
FUTURE PROPERTY ACQUISITIONS. In the normal course of its business, and
in the pursuit of its business and growth strategies, the Company frequently
evaluates potential acquisitions in the Northeast. The Company intends to
continue to acquire multifamily properties and, in certain circumstances, select
retail properties if attractive opportunities arise. In addition to general
investment risks associated with any new real estate investment, acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that judgments with respect to the costs of improvements to
bring an acquired property up to standards established for the market position
intended for that property will prove inaccurate. Properties acquired may have
characteristics or deficiencies unknown to the Company affecting their valuation
or revenue potential, and it is possible that their operating performance may
decline under the Company's management. No assurance can be given that the
Company will identify suitable acquisitions, complete acquisitions on terms
favorable to it or successfully integrate acquired properties into the Company's
portfolio. If financing is not available on acceptable terms for new
acquisitions or renovations, further acquisitions might be curtailed.
Furthermore, the fact that the Company must distribute 95% of its REIT taxable
income in order to maintain its qualification as a REIT under the Internal
Revenue Code will limit the ability of the Company to rely upon income from
operations or cash flow from operations to finance new acquisitions.
RISKS OF REPOSITIONING AND RENOVATION. The Company intends to
reposition or renovate certain of its properties and other properties it may
acquire in the future. In connection with any such project, the Company will
bear certain risks, including delays or cost overruns, that may increase project
costs and could make such projects uneconomical, and the risk that occupancy or
rental rates at a property once such a project has been completed will not be
sufficient to enable the Company to pay operating expenses or earn its
anticipated rate of return on its investment. In case of an unsuccessful
repositioning or renovation project, the Company's loss could exceed its
investment in such project. In cases where the Company owns less than the entire
interest in a property, the Company may nevertheless be required to bear the
entire cost of a repositioning or renovation project at such property.
RISKS RELATING TO DISTRIBUTIONS. The Company pays regular distributions
to its shareholders and has recently increased its annual distribution rate to
$0.68 per Common Share. The Company's determination to increase distributions
was based on expectations with respect to pro forma REIT taxable income and is
intended to ensure the Company's continuing ability to qualify for REIT status.
In particular, the Company is seeking to ensure its continuing compliance with
the requirement that it distribute annually at least 95% of its REIT taxable
income. Actual cash available for distribution could, however, be substantially
below the Company's expectations. In addition, the Company's ability to make
distributions will depend, in large part, on the performance of its properties,
including occupancy levels, expenditures with respect to the properties, the
amount of the Company's debt and the interest rates thereon and other costs
relating to its properties, as well as the absence of significant expenditures
relating to environmental or other regulatory matters. Most of these matters are
beyond the control of the Company and any significant difference between the
Company's expectations with respect to these matters and actual results could
have a material adverse effect on the Company and its ability to make or sustain
distributions.
COMPLIANCE WITH APPLICABLE LAWS. The Company's properties are subject
to various federal, state and local regulatory requirements, such as
requirements of the Americans with Disabilities Act (the "ADA") and state and
local fire and safety requirements. The ADA may require modifications to
existing buildings or restrict certain renovations by requiring access to such
buildings, and apartments in the
-6-
<PAGE>
buildings, by disabled persons. In addition, the Fair Housing Amendments Act of
1988 ("FHAA") requires apartment communities first occupied after March 13, 1990
to be accessible to the handicapped. Failure to comply with these laws could
result in the imposition of fines or an award of damages to private litigants.
Additional legislation may impose further burdens or restrictions on owners with
respect to access by disabled persons. The costs of compliance with such laws
may be substantial, and limits or restrictions on completion of certain
renovations may reduce overall returns on the Company's investments. Although
the Company believes that its properties are in substantial compliance with such
laws currently in effect, the Company may incur additional costs to comply with
such laws. Although the Company believes that such costs will not have a
material adverse effect on the Company, if required changes involve a greater
expenditure than the Company currently anticipates or if the changes must be
made on a more accelerated basis than it anticipates, the Company's cash flow
and ability to make expected distributions could be adversely affected.
COMPETITION. There are numerous real estate companies, including those
which operate in the markets in which the Company's properties are located,
which compete with the Company in seeking properties for acquisition, and for
tenants to occupy such properties. The Company may compete with companies that
have greater resources and whose officers and directors or trustees have more
experience than the Company's officers and Trust Managers. Further, the
availability of single-family housing and other forms of multifamily residential
properties, such as manufactured housing communities, provide alternatives to
residents and potential residents of apartment communities. The availability of
such alternatives and competition generated thereby could increase in the
future. These competitive factors could adversely affect the Company's financial
performance and results of operations.
EXPANSION INTO NEW GEOGRAPHIC MARKETS
The Company currently intends to seek to acquire properties in
geographic markets other than those markets in which its current properties are
located, including other states in the Northeast and Mid-Atlantic regions. Such
regions may include markets in which the Company has little or no experience in
the acquisition and management of multifamily or other properties. Any such new
geographic market may be substantially dissimilar to the markets in which the
Company currently owns and operates its properties, and management of the
Company may be unfamiliar with prevailing economic conditions, trends in real
estate and other factors in such markets, which may adversely affect the
Company's ability to acquire properties in such new geographic markets for
competitive purchase prices and to manage such properties effectively and
profitably thereafter. Payment of purchase prices for such properties in excess
of their fair market value or the Company's inability to manage such properties
so as to cause them to be profitable would have an adverse effect on the results
of operations of the Company.
DEPENDENCE ON LIMITED GEOGRAPHIC AREA
The Company's properties are located in Connecticut, Rhode Island and
Massachusetts and consist principally of multifamily residential communities. A
substantial percentage of the units in the Company's portfolio are located in
Connecticut. The Company's cash flow, ability to make distributions to its
shareholders and the value of the Common Shares are therefore particularly
dependent upon general business and economic conditions, such as employment
levels, average salaries, population and industrial growth and the demand for
rental apartments, in Connecticut and in the individual markets in which the
Company's properties are located. In recent years the values of residential
rental properties in the Northeastern United States have fluctuated as a result
of these and other factors. Changes in such factors in the Company's markets
could have a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITATION ON CONTROL OF PARTIALLY OWNED PROPERTIES
Eleven of the Company's properties are not entirely owned by the
Company, and the Company may hereafter acquire properties in which it will own
less than the entire interest. To the extent that other
-7-
<PAGE>
persons continue to have a minority interest in such properties, the Company may
have certain fiduciary responsibilities to such persons which it will need to
consider when making decisions that affect those properties (including decisions
regarding sale, refinancing and the timing and amount of distributions from such
properties). Potential conflicts and other problems which could adversely affect
the Company and its results of operations could arise as a consequence of these
ownership arrangements.
REAL ESTATE FINANCING RISKS
DEBT SERVICE OBLIGATIONS. The Company will be subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet required payments of principal and
interest. If the Company or an entity in which it invests were unable to meet
its debt service obligations under its mortgage loans, the lender could
foreclose on the relevant property, in which case the Company would lose the
property and its associated investment and revenue stream. All indebtedness of
the Company is secured by mortgages on certain of its properties. The
cross-collateralization of the mortgages on various of the Company's properties
reduces flexibility in selling individual properties.
VARIABLE RATE DEBT AND MATURITIES. The Company's debt includes both
fixed rate and variable rate debt with interest rates that adjust based upon
prevailing market interest rates. A substantial portion of the Company's debt
may bear interest at variable rates. The Company has received a commitment to
increase its available revolving credit under its revolving credit facility (the
"CREDIT FACILITY") to $50 million. The Credit Facility bears interest at
variable rates. An increase in interest rates could have a material adverse
effect on the Company's results of operations and on its ability to make
distributions on the Common Shares. If principal payments due at maturity cannot
be refinanced, extended or repaid with the proceeds of other capital raising
transactions, the Company may not be able to pay distributions at expected
levels and repay all such maturing debt. If the Company were unable to refinance
its indebtedness on acceptable terms, or at all, the Company might be forced to
dispose of one or more of its properties upon disadvantageous terms, which might
result in losses to the Company and might adversely affect the cash available
for distribution.
NO LIMITATION ON DEBT. The Company has followed a practice of limiting
its ratio of debt to total market capitalization (I.E., total debt of the
Company as a percentage of total market capitalization, defined as the sum of
the aggregate market value of the issued and outstanding Common Shares and
Common Units and the total debt of the Company) to less than 60%. The
organizational documents of the Company, however, do not limit the amount or
percentage of indebtedness that it may incur. Therefore, the Company may change
this practice regarding indebtedness without the vote of the holders of Common
Shares. If this practice is changed, the Company could become more highly
leveraged, resulting in an increased risk of default on the obligations of the
Company and an increase in debt service requirements which could adversely
affect the Company's financial condition and results of operations and,
consequently, the Company's ability to pay distributions on the Common Shares.
POTENTIAL CONFLICTS OF INTEREST
The Executive Officers or entities affiliated with the Executive
Officers have in the past been parties to transactions with the Company or its
affiliates. Of the Company's 39 properties, 31 properties were acquired by the
Company from entities affiliated with Executive Officers. The Company may in the
future explore the possibility of purchasing other properties from its
affiliates or affiliates of the Executive Officers. As a result, these persons
may have interests that conflict with those of the other shareholders of the
Company. In addition, there can be no assurance that the prices paid by the
Company in connection with such transactions accurately reflected or will
accurately reflect the fair market value of the subject properties. While the
Company has entered into non-competition agreements with each of the Executive
Officers and certain of their affiliates designed to minimize conflicts of
interest, and the Company's Third Amended and Restated Declaration of Trust
dated March 14, 1997, as amended by Articles Supplementary dated October 23,
1997 (the "CHARTER") includes a provision which requires the composition of the
Board of Trust Managers (the "BOARD") at all times to consist of a majority of
Independent Trust Managers (as
-8-
<PAGE>
defined in the Charter), there can be no assurance that the provisions of the
non-competition agreements or the Charter will be successful in eliminating the
impact of conflicts of interest between the Executive Officers and the Company.
Accordingly, the interests of the Company's shareholders may not have been, and
in the future may not be, reflected fully in all decisions made or actions taken
or to be taken by certain officers of the Company.
Because of substantial economic interests of the Executive Officers in
entities which are parties to the Contribution Agreement, there is a potential
for a conflict of interest with respect to the obligations of the Executive
Officers as executive officers of the Company in enforcing the terms of the
Contribution Agreement. The failure to enforce the material terms of the
Contribution Agreement, particularly the indemnification provisions and the
remedy provisions for breaches of representations and warranties, could result
in losses to the Company and could adversely affect the cash available for
distribution.
In addition, affiliates of the Executive Officers that have contributed
properties to the Company in the past, may have unrealized gain in their
interests in such properties. The sale of such properties by the Company could
cause adverse tax consequences to such Executive Officers or affiliates.
Although decisions regarding such dispositions must be made by the Board, a
majority of which is composed of Independent Trust Managers, the interests of
the Company and such Executive Officers and affiliates could be different in
connection with the disposition of such properties.
DEPENDENCE ON KEY PERSONNEL
The Company depends on the efforts of all of its Executive Officers.
While the Company believes that it could find replacements for these key
personnel, the loss of their services could have a material adverse effect on
the operations of the Company. Currently, the Company does not intend to secure
key-man life insurance for the Executive Officers.
ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company currently intends to continue operating so as to qualify as
a REIT under the Internal Revenue Code. A REIT generally is not taxed at the
corporate level on income it currently distributes to shareholders so long as it
distributes at least 95% of its REIT taxable income annually. The Company might
in the future no longer be able to operate in a manner allowing it to qualify as
a REIT. Qualification as a REIT involves the application of highly technical and
complex provisions of the Internal Revenue Code for which there are only limited
judicial or administrative interpretations. The determination of various factual
matters and circumstances not entirely within the Company's control may affect
its ability to continue to qualify as a REIT. The complexity of these provisions
and of the applicable income tax regulations is greater in the case of a REIT
that holds its assets through a partnership. In addition, legislation, new
regulations, administrative interpretations or court decisions may change tax
laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification.
If the Company fails to qualify as a REIT in any taxable year, the
Company will not be allowed a deduction for distributions to shareholders in
computing its taxable income. The Company would then be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at the applicable corporate rate. In addition, unless it were entitled to
relief under certain statutory provisions, the Company also would be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification is lost. This disqualification would reduce the
Company's cash available for investment or distribution to shareholders because
of the additional tax liability to the Company for the year or years involved.
If the Company were to fail to qualify as a REIT, it no longer would be subject
to the distribution requirements of the Internal Revenue Code, and, to the
extent that distributions to shareholders would have been made in anticipation
of the Company's qualifying as a REIT, the Company might be required to borrow
funds or to sell certain of its assets to pay the applicable corporate tax.
-9-
<PAGE>
Although the Company currently intends to operate in a manner allowing
it to qualify as a REIT, it is possible that future events may cause the Board,
without the approval of the shareholders, to decide to revoke the REIT election.
REQUIRED DISTRIBUTIONS; POTENTIAL REQUIREMENTS TO BORROW
To obtain the favorable tax treatment accorded to a REIT under the
Internal Revenue Code, the Company generally is required each year to distribute
to its shareholders at least 95% of its REIT taxable income. The Company will be
subject to income tax on any undistributed REIT taxable income and net capital
gain, and to a 4% nondeductible excise tax on (a) the amount by which certain
distributions paid by it for any calendar year are less than the sum of 85% of
its ordinary income and 95% of its capital gain net income for the calendar
year, plus (b) 100% of its undistributed income from prior years.
The Company intends to make distributions to its shareholders to comply
with the distribution provisions of the Internal Revenue Code thereby avoiding
income taxes and the nondeductible 4% excise tax. The Company's income consists
primarily of the Company's share of the income of the Operating Partnership. The
Company's cash flow consists primarily of its share of distributions from the
Operating Partnership. In turn, the Operating Partnership's income and cash flow
consists primarily of its share of the income and cash flow of the properties it
owns or controls. Differences in timing between the receipt of income and the
payment of expenses in arriving at taxable income (of the Company or the
Operating Partnership) and the effect of nondeductible capital expenditures, the
creation of reserves or required debt amortization payments could result in the
Company's not having enough cash to make the distributions it needs to make to
get the favorable tax treatment as a REIT. To make required distributions, the
Company might need to borrow money it would otherwise not borrow. The terms of
any such borrowing might be unfavorable to the Company. If the Company were
unable to obtain such borrowings, the Company could be disqualified from REIT
treatment.
Distributions by the Operating Partnership are determined by the
Company, as the sole general partner, and are dependent on a number of factors,
including the amount of cash available for distribution, the Operating
Partnership's financial condition and the financial condition of each property
in which the Company holds an interest, any decision by the Board to reinvest
funds rather than to distribute funds, the capital expenditure requirements
relating to the Company's properties, the annual distribution requirements under
the REIT provisions of the Internal Revenue Code and such other factors as the
Board deems relevant. The Company may not be able to continue to satisfy the
annual distribution requirement so as to qualify as a REIT.
For federal income tax purposes, distributions paid to holders of
Common Shares may consist of ordinary income, capital gains, nontaxable return
of capital or a combination thereof. The Company provides the holders of Common
Shares with an annual statement indicating the tax character of the
distributions.
LIMITS ON CHANGES IN CONTROL
Certain provisions of the Charter and the Bylaws of the Company and of
Maryland law which are described in the following paragraphs may have the effect
of (i) discouraging a change of control of the Company; (ii) deterring tender
offers for Common Shares, which offers may be attractive to the Company's
shareholders or (iii) limiting the opportunity for the Company's shareholders to
receive a premium for the Common Shares that might otherwise exist if an
investor attempted to assemble a block of Common Shares in excess of the
Ownership Limit (as defined below) or the Constructive Ownership Limit (as
defined below) or to effect a change of control of the Company.
OWNERSHIP LIMITS. For the Company to maintain its qualification as a
REIT, not more than 50% in value of the outstanding capital shares may be owned,
actually or constructively under the applicable rules of the Internal Revenue
Code, by five or fewer individuals (including certain tax-exempt entities,
-10-
<PAGE>
other than, in general, qualified domestic pension funds) at any time during the
last half of any taxable year of the Company (the "five or fewer" requirement).
The Company's Charter contains certain restrictions on the ownership and
transfer of its Common Shares and Preferred Shares (together, "EQUITY Shares"),
described below, which are intended to prevent concentration of share ownership.
These restrictions, however, may not ensure that the Company will be able to
satisfy the "five or fewer" requirement in all cases. If the Company fails to
satisfy such requirement, the Company's status as a REIT will terminate. See
"-Adverse Tax Consequences of Failure to Qualify as a REIT."
The Company's Charter prohibits any person from owning more than 5.0%
of the outstanding Equity Shares (subject to adjustment by the Board) (the
"OWNERSHIP LIMIT") or owning constructively (within the meaning of the Internal
Revenue Code) more than 9.8% of the number of outstanding Equity Shares (the
"CONSTRUCTIVE OWNERSHIP LIMIT"). In addition, the Company's Charter prohibits
the executive officers of the Company from owning in the aggregate more than 20%
of the outstanding Equity Shares (the "EXECUTIVE OFFICER OWNERSHIP LIMIT"),
subject to certain exceptions. Each percentage is based on the value or the
number of shares, whichever is more restrictive. In addition, no shareholder of
the Company may sell, transfer, assign, devise or otherwise dispose of Equity
Shares if such a disposition would result in (i) Equity Shares being owned by
fewer than 100 shareholders; (ii) the Company's being "closely held" within the
meaning of Section 856(h) of the Internal Revenue Code or (iii) the Company's
failing to qualify as a REIT. "OWNERSHIP LIMITS" in this Prospectus refers to
all of the Ownership Limit, the Constructive Ownership Limit and the Executive
Officer Ownership Limit.
Under the Company's Charter, any attempted transfer of shares by a
person, or other change in the capital structure of the Company, which would
violate one of the Ownership Limits, unless compliance with such limit has been
waived by the Board, will cause the shares in excess of such limit (the "EXCESS
Shares") to be transferred automatically to a special trust for the benefit of a
charitable beneficiary (a "SPECIAL TRUST"). If for any reason, the transfer to a
Special Trust is not automatically effective, the attempted transfer resulting
in violation will be deemed void AB INITIO. Upon any transfer that results in
Excess Shares, the Excess Shares will be deemed to have been transferred to the
trustee of a Special Trust and will be considered issued and outstanding shares.
The trustee of the Special Trust will be entitled to voting, dividend and other
distribution rights on such Excess Shares. Any dividend or other distribution
paid prior to the discovery by the Company that the Common and/or Preferred
Shares have Excess Shares must be repaid to the trustee of the Special Trust
upon demand.
The Board may waive the Ownership Limits with respect to a particular
shareholder if it is satisfied, based on the receipt of certain representations
and undertakings from the person seeking to own shares in excess of the
Ownership Limit, the Constructive Ownership Limit or the Executive Officer
Ownership Limit, that such ownership in excess of the Ownership Limit will not
jeopardize the Company's status as a REIT. Subject to certain limitations, the
Board may from time to time increase or decrease the Ownership Limit or the
Constructive Ownership Limit.
PREFERRED SHARES. The Company's Charter permits the Board to issue up
to 1,000 preferred shares of beneficial interest, par value $0.01 per share
("PREFERRED SHARES"), and to establish the preferences and rights (including the
right to vote and the right to convert into Common Shares) of any Preferred
Shares issued. Thus, the Board could authorize the issuance of Preferred Shares
with terms and conditions which discourage a takeover or other transaction in
which holders of some, or a majority, of the Common Shares might receive a
premium for their Common Shares over the then-prevailing market price of the
Common Shares.
STAGGERED BOARD. The Company's Board has three classes of Trust
Managers who serve for three-year terms, with the term of one class expiring in
each year. A Trust Manager may be removed only for cause (as defined in the
Charter) and only by the affirmative vote of the holders of at least two-thirds
of the Common Shares then outstanding and entitled to vote.
-11-
<PAGE>
MARYLAND BUSINESS COMBINATION LAW. Under the Maryland General
Corporation law (the "MGCL") certain "business combinations" (including certain
issuances of equity securities) between a Maryland REIT such as the Company and
any person who owns 10% or more of the voting power of the trust's shares (an
"INTERESTED SHAREHOLDER") or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Shareholder became an
Interested Shareholder. Thereafter, any such business combination must be
approved by a super-majority vote unless, among other conditions, the
shareholders of the REIT receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its shares.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws and
regulations, a current or previous owner or operator of real property may be
required to investigate and clean up hazardous or toxic substances or petroleum
products released on, under, in or emitting from such property and may be held
liable to a governmental entity or to third parties for property damage and for
investigation and clean-up costs incurred by such parties in connection with the
contamination. Such laws typically impose clean up responsibility and liability
without regard to whether the owner knew of or caused the presence of the
contaminants, and the liability under such laws has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for an
allocation of responsibility. The cost of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances or
the failure to remediate the contamination properly may adversely affect the
owner's ability to sell or rent such property or to borrow using such property
as collateral. Moreover, certain loan documents provide for recourse liability
in connection with the presence of hazardous or toxic materials. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with its
ownership and operation of its properties, the Company is potentially liable for
such costs.
Federal legislation requires owners and landlords of residential
housing constructed prior to 1978 to disclose to potential residents or
purchasers any known lead-paint hazards and will impose treble damages for
failure to give the required notice. The existence of lead-based paint in a
property may result in lead poisoning in children residing therein if chips or
particles of lead-based paint are ingested, and the Company may be held liable
under state laws for any injuries caused by ingestion of lead-based paint by
children living at the its apartment properties.
Independent environmental consultants have conducted Phase I (or an
update of a prior Phase I) or similar assessments of all of the Company's
properties. Phase I assessments evaluate the environmental condition of the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, a preliminary
investigation of the surveyed site and surrounding properties, and preparation
and issuance of a written report, but do not include soil sampling or subsurface
investigations.
Certain environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties may seek recovery
from owners or operators of real properties for personal injury suffered by
reason of asbestos-containing materials. Because of the ownership and operation
of its properties, the Company, the Operating Partnership and any partnership
holding an interest in any of the Company's properties are potentially liable
for such costs.
-12-
<PAGE>
Various environmental laws and regulations also control how certain of
the Company's activities can or must be conducted. Such requirements govern
maintenance activities, renovation projects and other worker operations
involving asbestos or lead-based paint. They also may govern air emissions,
wastewater discharges, waste management or similar activities related to
operation of the Company's properties. The Company could incur material costs in
complying with the requirements of these laws.
Various laws and regulations obligate owners and operators of
underground and aboveground storage tanks containing petroleum to meet certain
construction and operating standards. In addition, such tank owners and
operators are responsible for remediating any contamination caused by petroleum
released from such tanks. The Company does not believe it will incur material
costs relating to oil storage tanks at its properties. However, if there are
facts not known to the Company, the Company may need to make material
expenditures in the future.
The Company's environmental assessments of its properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on its business, assets or results of operations taken
as a whole, nor is the Company aware of any such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware.
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of Common Shares, or the perception that
such sales could occur, could adversely affect the prevailing market price for
the Common Shares. As of the date of this Prospectus, the Company has 8,453,829
Common Shares outstanding. Of these shares 6,666,379 shares are freely tradable
without restriction and 1,787,450 shares are held by "affiliates" (as defined in
Rule 144 under the Securities Act) and may be sold subject to the volume, manner
of sale and other restrictions of Rule 144. Any Redemption Shares issued to
persons other than affiliates of the Company will also be freely tradable. In
the event that any affiliate ceases to be an "affiliate" of the Company, shares
held by such holder will become freely tradable, subject to certain limitations.
The Operating Partnership, in connection with the March Acquisitions,
issued to persons other than the Company an aggregate of 2,114,439 Common Common
Units. The Operating Partnership subsequently issued an aggregate of 889,353
Common Units in acquisitions of other properties and will likely issue
additional Common Units in furtherance of the Company's objective of continuing
to acquire additional properties. Common Units may be redeemed for cash based on
their fair market value or, at the Company's option, for Common Shares on a
one-for-one basis (subject to certain anti-dilution adjustments). In certain
circumstances, the Company may not be able to exercise its option to satisfy
such redemption rights with Common Shares because of tax or securities law
limitations. An exercise of redemption rights in such circumstances could
adversely affect the Operating Partnership's liquidity because it would then be
required to satisfy such rights with cash. Pursuant to contractual arrangements,
holders of the Common Units issued in the acquisitions may not redeem their
Common Units for a period of one year after the closing of the acquisition
transaction in which such holder received such Common Units. In addition, an
aggregate of 1,114,974 Common Shares have been reserved for issuance pursuant to
the Company's 1994 Share Option Plan, the 1996 Share Incentive Plan and other
outstanding options and warrants.
No prediction can be made as to the effect, if any, that future sales
of Common Shares, including the Redemption Shares, or the availability of such
shares for future sale will have on the market price of the Common Shares.
The Board has the authority, without shareholder approval, to issue
additional Common Shares and other Equity Shares, or to cause the Operating
Partnership to issue additional Common Units or other classes of units of
interest in the Operating Partnership in any manner it deems appropriate,
including in exchange for property. Shareholders of the Company will have no
preemptive right to purchase shares or
-13-
<PAGE>
units issued in any such offerings, and any such offerings might cause
a dilution of the shareholders' investment in the Company.
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER APPROVAL
The Board will determine the Company's investment and financing
practices, its growth strategy, and its debt, capitalization, distribution and
operating practices. Although the Board has no present intention to revise or
amend these strategies and practices, the Board may do so at any time without a
vote of the Company's shareholders. Accordingly, the Company's shareholders will
have no control over changes in strategies and practices of the Company. Such
changes may not serve the interests of all the Company's shareholders and could
adversely affect the Company's financial condition or results of operations.
RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS. The Company has
and may in the future invest in apartment properties through partnerships
instead of purchasing apartment properties directly or through wholly-owned
subsidiaries. Partnerships may, under certain circumstances, involve risks not
otherwise present in a direct acquisition of properties. These include the risks
that the Company's partner: (i) might become bankrupt, (ii) might at any time
have economic or business interests or goals which are inconsistent with the
business interests or goals of the Company or (iii) might be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's practices or objectives. There is no limitation in the
Company's Charter as to the amount of investment the Company may make in
partnerships.
RISKS INVOLVED IN INVESTMENTS IN SECURITIES RELATED TO REAL ESTATE. The
Company has and may in the future pursue its investment objectives through the
ownership of securities or partnership interests of entities owning real estate.
Ownership of such securities or partnership interests may not entitle the
Company to control the ownership, operation or management of the underlying real
estate. In addition, the Company may have no ability to control the
distributions with respect to such securities, which may adversely affect the
Company's ability to make distributions on the Common Shares. Furthermore, if
the Company desires to control an issuer of securities or partnership interests,
it may be prevented from doing so by the limitations on percentage ownership and
gross income tests which must be satisfied by the Company in order for the
Company to qualify as a REIT. The Company intends to operate its business in a
manner that will not require the Company to register under the Investment
Company Act of 1940, and the Company's shareholders will therefore not have the
protection of that Act.
The Company may also invest in mortgages or mortgage-related securities
and may do so as a strategy for ultimately acquiring the underlying property. In
general, investments in mortgages include the risk that borrowers may not be
able to make debt service payments or pay principal when due, the risk that the
value of the mortgaged property may be less than the principal amount of the
mortgage note securing such property and the risk that interest rates payable on
the mortgages may be lower than the Company's cost of funds to acquire these
mortgages. In any of these events, cash available for distributions and the
Company's ability to make distributions on the Common Shares could be adversely
affected.
SHARE PRICE VOLATILITY
The price of the Common Shares may be subject to wide fluctuations in
response to quarterly variations in operating results or announcement of
acquisitions. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations which could adversely affect the market
price of the Common Shares. Further, the daily trading volumes of REIT's in
general and the Company's shares in particular may be lower than the trading
volumes of certain other industries. As a result, investors in the Company who
desire to liquidate substantial holdings at a particular time may find that they
are unable to dispose of their shares in the market without causing a
substantial decline in the market value of such shares. Furthermore, due to the
Company's limited trading volume in the past, investors in the
-14-
<PAGE>
Company may not have an extensive trading history to consider in connection with
making investment decisions.
UNINSURED LOSS
The Company carries comprehensive liability, fire, flood (where
required) and extended coverage and rental loss insurance on all of its
properties with policy specifications, limits and deductibles customarily
carried for similar properties. There are, however, certain types of losses
which may be either uninsurable or not economically insurable, such as those
resulting from earthquakes, floods, tidal waves, explosion of water pipes,
nuclear hazards, wars, civil disturbances and environmental matters. Should an
uninsured loss or a loss in excess of insured limits occur, the Company could
lose both its investment in and anticipated profits and cash flow from a
property while it would continue to be obligated on any mortgage indebtedness or
other financial obligations on such property. Any such loss would adversely
affect the Company and its financial condition and results of operations.
Moreover, as the general partner of the Operating Partnership, the Company
generally will be liable for any of the Operating Partnership's unsatisfied
obligations other than non-recourse obligations. Similarly, as the general
partner of other partnerships which hold certain of the Company's properties,
the Company generally will be liable for any unsatisfied obligations of such
partnerships other than non-recourse obligations.
OFFER AND SALE OF UNREGISTERED SECURITIES
In connection with the March Acquisitions and concurrent private
placement by the Company of Common Shares (together, the "CONSOLIDATION
Transactions") the Company offered and sold 3,333,333 Common Shares and the
Operating Partnership issued 2,114,439 Common Units. Upon consummation of
acquisition transactions which occurred after the Consolidation Transactions,
the Operating Partnership issued an additional 889,353 Common Common Units. The
offer and sale of such Common Shares and such Common Units were not registered
under the 1933 Act in reliance upon the exemption from registration under
Section 4(2) of the 1933 Act. If it were to be determined that the offer and
sale of the Common Shares and Common Units issued in the Consolidation
Transactions or other property acquisitions should have been registered under
the 1933 Act, the holders of such Common Shares and Common Units could be given
the right under federal securities laws to rescind their investment, or to
pursue other claims against the Company which could adversely affect the
financial condition of the Company or its ability to make expected distributions
to its shareholders. Although the Company believes that the offer and sale of
such Common Shares and Common Units was exempt from registration under Section
4(2) of the 1933 Act, the Company could be wrong.
-15-
<PAGE>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the Company's capital shares does not purport
to be complete, and is qualified in its entirety by reference to the pertinent
sections of the Company's Charter, a copy of which is available upon request
from the Company.
The Company is a REIT. Rights of shareholders are governed by the
Maryland Real Estate Investment Trust Act and related statutes (collectively,
the "MARYLAND REIT ACT"), the Charter and the Company's Bylaws.
GENERAL. The Charter provides that the Company may issue up to
14,000,000 shares of beneficial interest, consisting of 13,999,000 Common Shares
and 1,000 Preferred Shares. The Transfer Agent and Registrar for the Common
Shares is The First National Bank of Boston.
INDEMNIFICATION FOR, AND LIMITATION ON, LIABILITY. Both the Maryland
REIT Act and the Charter provide that no shareholder will be personally liable
for any obligation of the Company solely as a result of his, her or its status
as a shareholder of the Company. The Bylaws further provide that the Company
shall indemnify each shareholder against any claim or liability for which the
shareholder may become subject by reason of being or having been a shareholder,
and that the Company shall pay or reimburse each shareholder for all legal and
other expenses reasonably incurred in connection with any such claim or
liability. In addition, it is the Company's policy that shareholders assume no
personal liability for obligations entered into on behalf of the Company.
However, with respect to tort claims, contractual claims where shareholder
liability is not so negated, claims for taxes and certain statutory liability,
shareholders may, in some jurisdictions, be personally liable to the extent that
such claims are not satisfied by the Company. Inasmuch as the Company carries
public liability insurance which it believes will be adequate, any risk of
personal liability to shareholders is limited to a situation in which the
Company's assets plus its insurance coverage would be insufficient to satisfy
such claims against the shareholders.
Under the Charter and the Company's Bylaws, the Company has similar
indemnification obligations to the Company's Trust Managers and officers and to
persons who, at the request of the Company, serve or have served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, shareholder or trustee to the maximum
extent permitted by Maryland law as in effect from time to time unless (i) such
person's act or omission 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, (ii) such person actually received an improper benefit or
profit in money, property or services actually received or (iii) in the case of
a criminal proceeding, such person had reasonable cause to believe his or her
act or omission was unlawful. The Charter further provides that, to the maximum
extent permitted by Maryland law as in effect from time to time, no Trust
Manager or officer is liable to the Company or any shareholder of the Company
for money damages. Under the Maryland REIT Act, the provision of the Charter
limiting the liability of Trust Managers and officers is not applicable (a) to
the extent that it is proved that the Trust Manager or officer actually received
an improper benefit or profit in money, property or services, for the amount of
the benefit or profit in money, property or services actually received or (b) to
the extent that a judgment or other final adjudication adverse to the Trust
Manager or officer is entered in a proceeding based on a finding in the
proceeding that such Trust Manager's or officer's action or failure to act was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. Indemnification of any such person by the
Company may also be made in accordance with any indemnification agreement which
the Company may enter into with such person.
RIGHTS WITH RESPECT TO DIVIDENDS AND IN THE EVENT OF LIQUIDATION,
DISSOLUTION OR WINDING-UP. All issued and outstanding Common Shares are duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other shares or series of shares of beneficial interest (if any), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board out of assets legally available therefor, and to share
ratably in the assets of the Company legally available for
-16-
<PAGE>
distribution to its shareholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company.
VOTING RIGHTS. Each outstanding Common Share entitles the holder
thereof to one vote on all matters submitted to a vote of shareholders,
including the election of Trust Managers, and, except as otherwise required by
law or except as provided with respect to any other class or series of shares of
beneficial interest, the holders of Common Shares will possess exclusive voting
power. Shareholders have the right to vote only on the following matters: (a)
the election or removal of Trust Managers, (b) the amendment of the Charter, (c)
the voluntary dissolution or termination of the Company, (d) the reorganization
of the Company and (e) the merger or consolidation of the Company or the sale or
other disposition of all or substantially all of its assets. There is no
cumulative voting in the election of Trust Managers, which means that the
holders of a majority of the outstanding Common Shares can elect all of the
Trust Managers then standing for election, and the holders of the remaining
shares of beneficial interest, if any, will not be able to elect any Trust
Managers. A declaration of trust may permit the trust managers to amend the
declaration of trust by a two-thirds vote of the trust managers from time to
time to qualify as a REIT under the Internal Revenue Code or the Maryland REIT
Act without the affirmative vote or written consent of the shareholders. The
Charter permits such action by the Board.
The Company's Bylaws contain provisions requiring shareholders to
provide advance notice to the Company before presenting a nomination or bringing
any other business before an annual meeting of the Company's shareholders. The
Company must receive the notice not less than 60 nor more than 90 days before
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30 days
before or 60 days after such first anniversary, then the shareholder must
deliver the required notice not earlier than the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. The Company's Bylaws
further specify information which must be included in any such notice. If a
shareholder fails to comply with these procedures, any nomination or other
business which the shareholder proposes to bring before the annual meeting will
be considered not properly brought before the meeting.
OTHER RIGHTS. Under the Maryland REIT Act and the Charter, holders of
Common Shares have no conversion, sinking fund, redemption or preemptive rights
to subscribe for any securities of the Company. Subject to the provisions of the
Charter regarding Excess Shares, and to any future classification of Common
Shares (see "--Classification or Reclassification of Common Shares or Preferred
Shares" and "--Preferred Shares in General"), Common Shares have equal voting,
dividend, distribution, liquidation and other rights, and have no preference,
exchange or, except as expressly required by the Maryland REIT Act, appraisal
rights.
PREFERRED SHARES IN GENERAL. Preferred Shares may by issued from time
to time, in one or more series, as authorized by the Board. Prior to issuance of
shares of each series, the Board is required by the Maryland REIT Act and the
Charter to designate for each such series, subject to the provisions of the
Charter regarding Excess Shares, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, as are permitted by
Maryland law. The Board could authorize the issuance of Preferred Shares with
terms and conditions which could have the effect of discouraging a takeover or
other transaction which holders of some, or a majority, of the Common Shares
might believe to be in their best interests or in connection with which holders
of some, or a majority, of the Common Shares might receive a premium for their
Common Shares over the then market price of such Common Shares. As of the date
hereof, no Preferred Shares are outstanding.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED
SHARES. Subject to the express terms of any series of Preferred Shares or any
class of Common Shares then outstanding and to the provisions of the Charter
regarding Excess Shares, the Charter authorizes the Board to increase or
decrease the number of, alter the designation of or classify or reclassify any
unissued shares by setting or changing,
-17-
<PAGE>
in any one or more respects, from time to time before issuing the shares, the
terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption of any series or class of shares.
RESTRICTIONS ON TRANSFER. In order for the Company to qualify as a REIT
under the Internal Revenue Code, Equity Shares (I.E., Common Shares or Preferred
Shares) must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year. Also, not more than 50% of the value of the issued and outstanding
Equity Shares may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Internal Revenue Code to include certain entities such as
qualified private pension plans) during the last half of a taxable year or
during a proportionate part of a shorter taxable year.
Because the Company expects to continue to qualify as a REIT, the
Charter contains restrictions on the ownership and transfer of Equity Securities
which are intended to assist the Company in complying with these requirements.
The Charter provides that, subject to certain specified exceptions, (i) no
person or entity (other than executive officers of the Company) may beneficially
own more than 5.0%, or be deemed to own by virtue of the applicable constructive
ownership provisions of the Internal Revenue Code, more than 9.8% (by number or
value, whichever is more restrictive) of the outstanding Equity Shares (I.E.,
the Ownership Limit and the Constructive Ownership Limit, respectively) and no
executive officer of the Company may, nor may the executive officers in the
aggregate, own more than 20% of the outstanding Equity Shares (by number or
value, whichever is the more restrictive) (I.E., the Executive Officer Ownership
Limit). The constructive ownership rules of the Internal Revenue Code are
complex and may cause Equity Shares owned actually or constructively by a group
of related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition of less than 5.0% or 20% of
the Equity Shares (or the acquisition of an interest in an entity that owns,
actually or constructively, Equity Shares) by an individual or entity could
nevertheless cause that individual, or another individual or entity, to own
constructively in excess of 5.0%, 9.8% or 20% of the outstanding Equity Shares
and, thus, subject such Equity Shares to one or more of the Ownership Limits.
The Board may, but in no event is required to, waive the Ownership Limits with
respect to a particular shareholder if it determines that such ownership will
not jeopardize the Company's status as a REIT. As a condition to such waiver,
the Board may require undertakings or representations from the applicant with
respect to preserving the REIT status of the Company.
The Charter further provides that no person shall beneficially or
constructively own Equity Shares that would result in the Company's being
"closely held" under Section 856(h) of the Internal Revenue Code or otherwise
cause the Company to fail to qualify as a REIT (including, but not limited to,
ownership that would result in the Company's owning (actually or constructively)
an interest in a tenant that is described in Section 856(d)(2)(B) of the
Internal Revenue Code if the income derived by the Company (either directly or
through one or more partnerships) from such tenant would cause the Company to
fail to satisfy any of the gross income requirements of Section 856(c) of the
Internal Revenue Code) and (b) any person from transferring Equity Shares if
such transfer would result in Equity Shares being owned by fewer than 100
persons. Any person who acquires or attempts or intends to acquire Equity Shares
that will or may violate any of the foregoing restrictions on transferability
and ownership is required to give notice immediately to the Company and to
provide the Company with such other information as the Company may request in
order to determine the effect of such transfer on the Company's status as a
REIT. The foregoing restrictions on transferability and ownership will not apply
if the Board determines that it is no longer in the best interest of the Company
to attempt to quality, or to continue to qualify, as a REIT.
The Charter provides that, if any attempted transfer of Equity Shares
or any other event would otherwise result in any person's violating one of the
Ownership Limits or the Charter, then, unless the Board has waived compliance
with all of the applicable Ownership Limits, the shares in excess of the
applicable limit are automatically transferred by operation of law to a Special
Trust, the beneficiary of which will be a qualified charitable organization
selected by the Company (the "BENEFICIARY"). If for any reason the transfer to
the Special Trust is not effective, the attempted transfer resulting in such
violation
-18-
<PAGE>
will be void AB INITIO and of no force or effect with respect to the purported
transferee (the "PROHIBITED TRANSFEREE") as to that number of Equity Shares in
excess of any of the Ownership Limits, and the Prohibited Transferee shall
acquire no right or interest (or, in the case of any event other than a
purported transfer, the person or entity holding record title to any such Equity
Shares in excess of any of the Ownership Limits (the "PROHIBITED OWNER") shall
cease to own any right or interest) in such Equity Shares.
Any automatic transfer described in the preceding paragraph shall be
deemed to be effective as of the close of business on the business day prior to
the date of such violative transfer. Within 20 days of receiving notice from the
Company of the transfer of Equity Shares to the Special Trust, the trustee of
the Special Trust (who shall be designated by the Company and be unaffiliated
with the Company and any Prohibited Transferee or Prohibited Owner) (the
"SPECIAL TRUSTEE") will be required to sell such shares to a person or entity
who could own such shares without violating any of the Ownership Limits and
distribute to the Prohibited Transferee an amount equal to the lesser of the
price paid by the Prohibited Transferee for such Equity Shares or the net sales
proceeds received by the Special Trust for such Equity Shares.
In the case of any Equity Shares in excess of any of the Ownership
Limits resulting from an event other than a transfer, or from a transfer for no
consideration (such as a gift), the Special Trustee will be required to sell
such Equity Shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
Equity Shares as of the date of such event or the sale proceeds received by the
Special Trust for such Equity Shares. In either case, any proceeds in excess of
the amount distributable to the Prohibited Transferee or Prohibited Owner, as
applicable, will be distributed to the Beneficiary. Prior to a sale by the
Special Trust of any Equity Shares in excess of any of the Ownership Limits, the
Special Trustee will be entitled to receive, in trust for the Beneficiary, all
dividends and other distributions paid by the Company with respect to such
Equity Shares. Subject to Maryland law, effective as of the date that such
Equity Shares have been transferred to the Special Trust, the Special Trustee
shall have the authority (at the Special Trustee's sole discretion) (i) to
rescind as void any vote cast by a Prohibited Transferee prior to the discovery
by the Company that such Equity Shares have been transferred to the Special
Trust and (ii) to recast such vote in accordance with the desires of the Special
Trustee acting for the benefit of the Beneficiary. However, if the Company has
already taken irreversible action, then the Special Trustee shall not have the
authority to rescind and recast such vote. Any dividend or other distribution
paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery by
the Company that such shares had been automatically transferred to the Special
Trust as described above) will be required to be repaid to the Special Trustee
upon demand for distribution to the Beneficiary. In the event that the transfer
to the Special Trust as described above is not automatically effective (for any
reason) to prevent violation of any of the Ownership Limits, then the Charter
provides that the transfer of the Equity Shares will be void.
In addition, Equity Shares held in the Special Trust shall be deemed to
have been offered for sale to the Company or its designee, at a price per Equity
Share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Special Trust (or, in the case of a devise or
gift, the market price at the time of such devise or gift) and (ii) the market
price on the date the Company or its designee accepts such offer. The Company
shall have the right to accept such offer until the Special Trustee has sold the
Equity Shares held in the Special Trust. Upon such a sale to the Company, the
interest of the Beneficiary in the shares sold shall terminate, and the Special
Trustee shall distribute the net proceeds of the sale to the Prohibited
Transferee or Prohibited Owner, as the case may be, and any dividends or
distributions held by the Special Trustee with respect to such Equity Shares
shall thereupon be paid to the Beneficiary.
All certificates representing shares of beneficial interest will bear a
legend referring to the restrictions described above.
Each shareholder will, upon demand, be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of Equity Shares as the Board deems reasonably necessary
to comply with the provisions of the Internal Revenue Code applicable to a
-19-
<PAGE>
REIT. These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of Common
Shares might receive a premium for their Common Shares over the then prevailing
market price or which such holders might believe to be otherwise in their best
interest.
REPORTS. Shareholders will receive annual reports containing audited
financial statements with a report thereon by the Company's independent
certified public accountants and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the Charter
and Bylaws of the Company, as amended, which are filed as exhibits to or
incorporated by reference into the Registration Statement of which this
Prospectus is a part.
DURATION
Under the Charter, the Company has a perpetual term, subject to the
authority of the shareholders to terminate the Company's existence and liquidate
its assets and subject to termination pursuant to the Maryland REIT Act. See
"-Termination of the Company and REIT Status."
BOARD OF TRUST MANAGERS
The Charter provides that the number of Trust Managers of the Company
may be established by the Board, but may not be fewer than two nor more than
fifteen. It also provides that the Board must consist of a majority of
Independent Trust Managers at all times. The Company's Bylaws provide that any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the Trust Managers.
The Charter provides that at each annual meeting of shareholders, the
successors of the class of Trust Managers whose term expires at such meeting
shall be elected to hold office for a three-year term.
The Charter provides that a Trust Manager may be removed only for cause
(as defined in the Charter) and only by the affirmative vote of holders of not
less than two-thirds of the Equity Shares then outstanding and entitled to vote
in the election of Trust Managers.
MEETINGS OF SHAREHOLDERS
The Charter requires the Company to hold an annual meeting of
shareholders for the election of Trust Managers and the conduct of any other
proper business. Special meetings of shareholders may be called by the Company's
Secretary upon written request of the holders of shares entitled to cast not
less than 25% of all votes entitled to be cast at such meeting. Special meetings
of shareholders may also be called by the Chairman of the Board or the President
or by action of one-third of the Trust Managers.
PREFERRED SHARES
The Charter authorizes the Board to designate one or more series of
Preferred Shares and to determine, with respect to any series of Preferred
Shares, the number of shares constituting such series and the terms,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption.
-20-
<PAGE>
BUSINESS COMBINATIONS
Under the MGCL, as applicable to a Maryland REIT, certain "business
combinations" (including mergers, consolidations, share exchanges or, in certain
circumstances, asset transfers or issuances or reclassifications of equity
securities) between a Maryland REIT and any Interested Shareholder must be: (i)
recommended by the trustees of such trust and (ii) approved by the affirmative
vote of at least: (a) 80% of the votes entitled to be cast by holders of
outstanding voting shares of beneficial interest of the trust and (b) two-thirds
of the votes entitled to be cast by holders of outstanding voting shares of
beneficial interest other than shares held by the Interested Shareholder with
whom the business combination is to be effected, unless, among other conditions,
the trust's common shareholders receive a minimum price (as defined in the MGCL)
for their shares and the consideration is received in cash or in the same form
as previously paid by the Interested Shareholder for its shares. In addition, an
Interested Shareholder or any affiliate thereof may not engage in a "business
combination" with the trust for a period of five years following the most recent
date on which the Interested Shareholder becomes an Interested Shareholder.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by the board of trustees of the trust prior to the
time that the Interested Shareholder becomes an Interested Shareholder. An
amendment to a Maryland REIT's declaration of trust electing not to be subject
to the foregoing requirements must be approved by the affirmative vote of at
least 80% of the votes entitled to be cast by holders of outstanding voting
shares of beneficial interest of the trust, voting together as a single voting
group, including two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of beneficial interest other than shares of beneficial
interest held by Interested Shareholders. Any such amendment shall not be
effective until 18 months after the vote of shareholders and does not apply to
any business combination of the trust with an Interested Shareholder on the date
of the shareholder vote.
The business combination statute could have the effect of delaying,
deferring or preventing offers to acquire the Company, and of increasing the
difficulty of consummating any such offer.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to a Maryland REIT, provides that "control
shares" of a Maryland REIT acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter by shareholders, excluding shares owned by the
acquiror, by officers or by trustees who are employees of the trust in question.
"Control shares" are voting shares which, if aggregated with all other shares
previously acquired by such acquiror, would entitle the acquiror to exercise the
voting power in the election of trustees within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third; (ii) one-third or
more but less than a majority or (iii) a majority or more of all voting power.
Control shares do not include shares that the acquiring person is then entitled
to vote as a result of having previously obtained shareholder approval. A
"control share acquisition" means the acquisition of control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the trust's board of trustees to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares, except those for which voting rights
have previously been approved, for fair value determined without regard to the
absence of voting rights as of the date of the last control share acquisition by
the acquiror or of any meeting of shareholders at which the voting rights of
such shares are considered and not approved. If voting rights for control shares
are approved at a shareholders meeting and the acquiror becomes entitled to vote
a majority of the shares entitled to vote, all other shareholders may exercise
appraisal rights. The fair value of the shares as determined for purposes
-21-
<PAGE>
of such appraisal rights may not be less than the highest price per share paid
by the acquiror in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction, or to acquisitions approved or exempted by the declaration of trust
or bylaws of the trust.
The Company's Bylaws contain a provision exempting from the control
share provisions any and all acquisitions by any person of shares of the
Company. The Bylaws further provide that such provision may not be amended or
eliminated without the approval of at least a majority of the Common Shares.
AMENDMENT OF THE CHARTER
The Company's Charter may be amended by the shareholders, only by the
affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast on the matter. In addition, the Charter may be amended by
the Trust Managers, by a two-thirds vote, from time to time to enable the
Company to qualify as a REIT. The Charter provides that in the event that the
Board shall determine, with the advice of counsel, that any one or more of the
provisions of the Charter are in conflict with the Maryland REIT Act, the
Internal Revenue Code or other applicable Federal or state law, those provisions
shall be deemed never to have constituted a part of the Charter, even without
any amendment thereof.
TERMINATION OF THE COMPANY AND REIT STATUS
The Company's Charter permits the Board to revoke or otherwise
terminate the election that the Company be taxed as a REIT if the Board
determines that it is no longer in the best interest of the Company for it to
continue to qualify as a REIT. Pursuant to the Charter, the Company may be
dissolved or terminated by the affirmative vote of the holders of not less than
two-thirds of the votes entitled to be cast on the matter.
TRANSACTIONS BETWEEN THE COMPANY AND ITS TRUSTEES OR OFFICERS
The Company's Charter provides that any contract or transaction between
the Company and one or more Trust Managers or officers of the Company must be
approved by the Board, including approval by a majority of the Independent Trust
Managers.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Act permits a Maryland REIT to include in its
declaration of trust a provision limiting the liability of its trustees to the
trust and its shareholders for money damages except for liability resulting from
(i) actual receipt of an improper benefit or profit in money, property or
services or (ii) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The Charter of the Company
contains such a provision which eliminates such liability to the maximum extent
permitted by Maryland law.
The Company's Bylaws require it to indemnify (i) any present or former
Trust Manager, officer or shareholder (including among the foregoing, any
individual who, while a Trust Manager, officer or shareholder and at the express
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, shareholder, partner or trust manager) who has been
successful, on the merits or otherwise, in the defense of a proceeding to which
he was made a party by reason of such status, against reasonable expenses
incurred by him in connection with the proceeding; (ii) any present or former
Trust Manager against any claim or liability to which he may become subject by
reason of his status as such unless it is established that (a) his act or
omission was material to the matter giving rise to the proceeding and was
committed in
-22-
<PAGE>
bad faith or was the result of active and deliberate dishonesty; (b) he actually
received an improper personal benefit in money, property or services or (c) in
the case of a criminal proceeding, he had reasonable cause to believe that his
act or omission was unlawful and (iii) each shareholder or former shareholder
against any claim or liability to which he may become subject by reason of his
status as a shareholder or former shareholder. In addition, the Company's Bylaws
require it to pay or reimburse, in advance of final disposition of a proceeding,
reasonable expenses incurred by a present or former Trust Manager, officer or
shareholder made party to a proceeding by reason of his status as a Trust
Manager, officer or shareholder provided that, in the case of a Trust Manager or
officer, the Company shall have received (i) a written affirmation by the Trust
Manager or officer of his good faith belief that he has met the applicable
standard of conduct necessary for indemnification by the Company as authorized
by the Bylaws and (ii) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by the Company if it shall ultimately be determined
that the applicable standard of conduct was not met. The Company's Bylaws also
(i) permit the Company to provide indemnification and payment or reimbursement
of expenses to a present or former Trust Manager, officer or shareholder who
served a predecessor of the Company; (ii) provide that any indemnification or
payment or reimbursement of expenses permitted by the Bylaws shall be furnished
in accordance with the procedures provided for indemnification and payment or
reimbursement of expenses under Section 2-418 of the MGCL for directors of
Maryland corporations and (iii) permit the Company to provide such other and
further indemnification or payment or reimbursement of expenses as may be
permitted by the MGCL for directors of Maryland corporations.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland REIT, the Maryland REIT Act
requires that the Company hold, either directly or indirectly, at least 75% of
the value of its assets in real estate assets, mortgage or mortgage-related
securities, government securities, cash and cash equivalent items, including
high-grade short-term securities and receivables. The Maryland REIT Act also
prohibits using or applying land for farming, agriculture, horticulture or
similar purposes.
DESCRIPTION OF UNITS
The material terms of the Common Units, including a summary of certain
provisions of the Agreement of Limited Partnership of the Operating Partnership,
as amended (the "PARTNERSHIP AGREEMENT"), are set forth below. The following
description of the terms and provisions of the Common Units and certain other
matters does not purport to be complete and is subject to and qualified in its
entirety by reference to applicable provisions of Delaware law and the
Partnership Agreement. A copy of the Partnership Agreement is included as an
exhibit to the Registration Statement of which this Prospectus is a part. For a
comparison of the voting and other rights of holders of Common Units and the
Company's stockholders, see "Redemption of Common Units--Comparison of Ownership
of Common Units and Common Shares."
GENERAL
Holders of Common Units (other than the Company in its capacity as
general partner) hold limited partner interests in the Operating Partnership,
and all holders of Common Units (including the Company in its capacity as
general partner) are entitled to share in cash distributions from, and in the
profits and losses of, the Operating Partnership. The Company currently holds a
74% interest in the Operating Partnership. Although is the Company's intent that
the distributions on each Common Unit will equal the distributions on each
Common Share, each Common Unit may not receive distributions in the same amount
as paid on each share of Common Stock.
Holders of Common Units have the rights to which limited partners are
entitled under the Partnership Agreement and the Delaware Revised Uniform
Limited Partnership Act (the "DELAWARE
-23-
<PAGE>
PARTNERSHIP ACT"). The Common Units have not been registered pursuant to the
federal or state securities laws and have not been listed on any exchange or
quoted on any national market system.
PURPOSES, BUSINESS AND MANAGEMENT
The purpose of the Operating Partnership includes the conduct of any
business that may be conducted lawfully by a limited partnership formed under
the Delaware Partnership Act, except that the Partnership Agreement requires the
business of the Operating Partnership to be conducted in such a manner that will
permit the Company to be classified as a REIT under Section 856 of the Internal
Revenue Code, unless the Company ceases to qualify as a REIT for reasons other
than the conduct of the business of the Operating Partnership. Subject to the
foregoing limitation, the Operating Partnership may enter into partnerships,
joint ventures or similar arrangements and may own interests in any other
entity.
The Company, as general partner of the Operating Partnership, has the
exclusive power and authority to conduct the business of the Operating
Partnership subject to the consent of the limited partners in certain limited
circumstances discussed below. The Company may not be removed as general partner
of the Operating Partnership with or without cause except with the Company's
consent. No limited partner may take part in the operation, management or
control of the business of the Operating Partnership by virtue of being a holder
of Common Units.
ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
The Company may acquire assets directly and engage in activities
outside of the Operating Partnership, including activities competing directly or
indirectly with the Operating Partnership. Other persons (including officers,
directors, employees, agents and other affiliates of the Company) are not
prohibited under the Partnership Agreement from engaging in other business
activities and will not be required to present any business opportunities to the
Operating Partnership. However, the Company has entered into non-competition
agreements with each of its Executive Officers and certain of their affiliates.
The Company's Charter also provides that at least a majority of the Company's
Board must be Independent Trust Managers. See "Risk Factors -- Potential
Conflicts of Interest."
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for the quarterly distribution of
Available Cash, as determined in the manner provided in the Partnership
Agreement, to the Company and the limited partners in proportion to their
percentage interests in the Operating Partnership. "Available Cash" is generally
defined as net income plus depreciation and other noncash charges and minus
reserves, principal payments on debt and capital expenditures and other
adjustments. Neither the Company nor the limited partners are entitled to any
preferential or disproportionate distributions of Available Cash. The
Partnership Agreement generally provides for the allocation to the general
partner and the limited partners of items of Operating Partnership income and
loss in accordance with their representative percentage interests in the
Operating Partnership.
BORROWING BY THE PARTNERSHIP
The Company is authorized to cause the Operating Partnership to borrow
money and to issue and guarantee debt (other than from or to the Company) as it
deems necessary for the conduct of the activities of the Operating Partnership.
Notwithstanding the foregoing, if the Company borrows money, it may lend the net
proceeds of the loan to the Operating Partnership on comparable terms and
conditions, including principal amount, interest rate, repayment schedule and
costs and expenses. Such debt may be secured by mortgages, deeds of trust, liens
or encumbrances on properties of the Operating Partnership or its subsidiaries.
The Company also may cause the Operating Partnership to borrow money to enable
the
-24-
<PAGE>
Operating Partnership to make distributions in an amount sufficient to permit
the Company, so long as it qualifies as a REIT, to avoid the payment of any
Federal income tax.
REIMBURSEMENT OF COMPANY; TRANSACTIONS WITH THE GENERAL PARTNER AND ITS
AFFILIATES
The Company does not receive any compensation for its services as
general partner of the Operating Partnership. The Company, however, as a partner
in the Operating Partnership, has the same right to allocations and
distributions as other partners of the Operating Partnership. In addition, the
Operating Partnership will reimburse the Company for all expenses incurred by it
related to the operation of, or for the benefit of, the Operating Partnership.
In the event that certain expenses are incurred for the benefit of the Operating
Partnership and other entities (including the Company), such expenses are
allocated by the Company, as general partner of the Operating Partnership, to
the Operating Partnership and such other entities in a manner as the Company, as
general partner of the Operating Partnership, in its sole and absolute
discretion deems fair and reasonable. The Operating Partnership will reimburse
the Company for all expenses incurred by it relating to any other offering of
additional Common Units (in such case based on the percentage of the net
proceeds therefrom contributed to or otherwise made available to the Operating
Partnership).
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
The Company, as general partner of the Operating Partnership, is liable
for all general recourse obligations of the Operating Partnership to the extent
not paid by the Operating Partnership. The Company is not liable for the
nonrecourse obligations of the Operating Partnership.
The limited partners of the Operating Partnership are not required to
make additional contributions to the Operating Partnership. Assuming that a
limited partner does not take part in the control of the business of the
Operating Partnership and otherwise acts in conformity with the provisions of
the Partnership Agreement and the Delaware Partnership Act, the liability of the
limited partner for obligations of the Operating Partnership under the
Partnership Agreement and the Delaware Partnership Act is limited, subject to
certain limited exceptions, generally to the loss of the limited partner's
investment in the Operating Partnership represented by the limited partner's
Common Units. The Operating Partnership will operate in a manner the general
partner deems reasonable, necessary and appropriate to preserve the limited
liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that the Company, as
general partner of the Operating Partnership, will incur no liability to the
Operating Partnership or any limited partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the
Company acted in good faith. In addition, the Company is not responsible for any
misconduct or negligence on the part of its agents, provided the Company
appointed such agents in good faith. The Company may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and other
consultants and advisors, and any action it takes or omits to take in reliance
upon the opinion of such persons, as to matters that the Company reasonably
believes to be within their professional or expert competence, shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
The Partnership Agreement also provides for indemnification of the
Company, the directors and officers of the Company, and such other persons as
the Company may from time to time designate against any judgments, penalties,
fines, settlements and reasonable expenses actually incurred by such person in
connection with the proceeding unless it is established that: (1) the act or
omission of the indemnified person was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty; (2) the indemnified person actually received an improper
-25-
<PAGE>
personal benefit in money, property or services; or (3) in the case of any
criminal proceeding, the indemnified person had reasonable cause to believe that
the act or omission was unlawful.
SALES OF ASSETS
Under the Partnership Agreement, the Company generally has the
exclusive authority to determine whether, when and on what terms the assets of
the Operating Partnership will be sold. The Operating Partnership, however, is
prohibited under the Partnership Agreement and certain contractual agreements
from selling certain assets, except in certain limited circumstances.
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF THE GENERAL PARTNER'S INTEREST;
TERMINATION TRANSACTIONS
The Partnership Agreement provides that the limited partners may not
remove the Company as general partner of the Operating Partnership without the
Company's consent. The Company may not transfer any of its interests as general
or limited partner in the Operating Partnership except in connection with a
merger or sale of all or substantially all of its assets without the consent of
all the limited partners. The Company may not engage in any merger,
consolidation or combination with or into another person, sale of all or
substantially all of its assets or any reclassification, recapitalization or
change in its outstanding equity securities (each, a "TERMINATION TRANSACTION"),
unless the Termination Transaction is approved by the holders of at least 66
2/3% of the partnership interests outstanding (including any interests held by
the Company). In addition, the limited partners must receive, or have the right
to elect to receive, for each Common Unit cash, securities or other property
generally equal to the greatest amount of cash, securities or other property
paid to a holder of one Common Share in the Termination Transaction. The amount
payable in respect of each Common Unit will be appropriately adjusted for any
stock dividend, stock split and other similar changes in the Common Shares from
the date of issuance of the relevant Common Unit.
If the Termination Transaction involves a purchase, tender or exchange
offer and if the purchase, tender or exchange offer is accepted by the holders
of more than 33 1/3% of the Common Shares, the rights of holders of Common Units
will be different. In that circumstance, a holder of Common Units would have the
right to elect to receive the greatest amount of cash, securities or other
property which the holder would have received had he redeemed his Common Units
for Common Shares immediately prior to the expiration of the purchase, tender or
exchange offer and had thereupon accepted the offer.
In limited circumstances, the Company may merge or combine its assets
with another entity without the holders' of Common Units having the benefit of
the rights described in the preceding paragraphs. In general, these
circumstances involve transactions where the rights of the holders of Common
Units are not adversely affected by consummation of the transaction.
RESTRICTIONS ON TRANSFER OF COMMON UNITS BY LIMITED PARTNERS
After the first anniversary of the issuance of Common Units, holders of
Common Units may transfer, subject to certain limitations, the economic rights
associated with such Common Units without the consent of the general partner,
thereby eliminating the ability of the general partner to block, except in very
limited circumstances, such assignments. However, a transferee will not be
admitted to the Operating Partnership as a substituted limited partner without
the consent of the general partner. In addition, holders may dispose of their
Common Units by exercising their rights to have their Common Units redeemed for
cash or for Common Stock, at the option of the Company. See "Redemption of
Common Units" below.
-26-
<PAGE>
REDEMPTION OF COMMON UNITS
Subject to certain limitations, holders of Common Units may require
that the Operating Partnership redeem their Common Units at any time after the
first anniversary of the issuance of such Common Units. To exercise his right to
require redemption, a holder of Common Units would deliver a notice of
redemption to the Operating Partnership. Unless the Company elects to acquire
Common Units tendered for redemption by issuing Common Shares, the redeeming
Unit holder will receive cash in an amount equal to the fair market value of a
number of Common Shares equal to the number of Common Units to be redeemed. Such
number of Common Shares will be adjusted to take into account any stock
dividend, stock split and other similar changes in the Common Shares from the
date of issuance of the relevant Common Unit. For these purposes, "fair market
value" would be based on a 10 trading day average. See "Redemption of Common
Units."
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The Company is authorized, without the consent of the limited partners,
to cause the Operating Partnership to issue additional Common Units to itself,
to the limited partners or to other persons for such consideration and on such
terms and conditions as the Company deems appropriate. The Company as general
partner may, in its sole and absolute discretion, make a capital contribution to
the Operating Partnership in exchange for additional Common Units without a
corresponding issuance of Common Shares by the Company. In addition, the Company
may cause the Operating Partnership to issue to the Company additional
partnership interests in different series or classes, which may be senior to the
Common Units. Consideration for additional partnership interests may be cash,
property or other assets permitted by the Delaware Partnership Act. The Company
also will cause the Operating Partnership to issue additional Common Units upon
the exercise of the options granted pursuant to the Company's 1994 Stock Option
Plan or its 1996 Share Incentive Plan (collectively, the "STOCK PLANS"). If the
Company issues additional Common Shares (other than Common Shares issued
pursuant to its Stock Plans, issued in connection with redemptions of Common
Units or issued in connection with a dividend or distribution to its
shareholders generally), the Company must contribute the net proceeds of such
issuance to the Operating Partnership as a capital contribution. In exchange for
such capital contribution, the Company would receive a number of Common Units
equal to the number of Common Shares issued. No limited partner has preemptive,
preferential or similar rights with respect to additional capital contributions
to the Operating Partnership or the issuance or sale of any partnership
interests therein.
MEETINGS; VOTING
Meetings of the limited partners may be called only by the Company, on
its own motion, or upon written request of limited partners owning at least 25%
of the Common Units. Limited partners may vote either in person or by proxy at
meetings. Any action that is required or permitted to be taken by the limited
partners of the Operating Partnership may be taken either at a meeting of the
limited partners or without a meeting if consents in writing setting forth the
action so taken are signed by limited partners owning not less than the minimum
Common Units that would be necessary to authorize or take such action at a
meeting of the limited partners at which all limited partners entitled to vote
on such action were present. On matters in which limited partners are entitled
to vote, each limited partner (including the Company to the extent it holds
Common Units) will have a vote equal to the number of Common Units he or she
holds in the Operating Partnership. The Partnership Agreement does not provide
for annual meetings of the limited partners, and the Company does not anticipate
calling such meetings.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by the Company
or by any limited partners. Generally, the Partnership Agreement may be amended
with the approval of the Company, as general partner, and limited partners
(including the Company) holding a majority of the Common Units.
-27-
<PAGE>
Certain amendments that affect the fundamental rights of a limited partner
(E.G., the limited liability of a limited partner, or the right to receive any
distributions) must be approved by the Company and each limited partner that
would be adversely affected by such amendment. Notwithstanding the foregoing,
the Company, as general partner, has the power, without the consent of the
limited partners, to amend the Partnership Agreement in certain limited
circumstances. Certain provisions affecting the rights and duties of the Company
as general partner may not be amended without the approval of a majority of the
Common Units not held by the Company.
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2056, unless
sooner dissolved. The Operating Partnership will be dissolved prior to the
expiration of its term, and its affairs wound up upon the occurrence of the
earliest of: (1) the withdrawal of the Company as general partner without the
permitted transfer of the Company's interest to a successor general partner
(except in certain limited circumstances); (2) an election by the Company to
dissolve the Operating Partnership; (3) the entry of a decree of judicial
dissolution of the Operating Partnership pursuant to the provisions of the
Delaware Partnership Act; (4) the sale of all or substantially all of the assets
and properties of the Operating Partnership for cash or marketable securities;
(5) the incapacity of the general partner (which, in the case of the Company
would be the termination or bankruptcy of the Company); or (6) the redemption or
exchange of all Common Units (other than those owned by the Company) for Common
Shares. Upon dissolution, the Company, as general partner, or any liquidator
will proceed to liquidate the assets of the Operating Partnership and apply the
proceeds therefrom in the order of priority set forth in the Partnership
Agreement.
COMPARISON OF OWNERSHIP OF COMMON UNITS AND COMMON SHARES
The information below highlights a number of the significant
differences between the Operating Partnership and the Company relating to, among
other things, form of organization, permitted investments, policies and
restrictions, management structure, compensation and fees, investor rights and
federal income taxation, and compares certain legal rights associated with the
ownership of Common Units and Common Shares, respectively. These comparisons are
intended to assist holders of Common Units in understanding how their investment
will be changed if their Common Units are redeemed for Common Shares. This
discussion is summary in nature and does not constitute a complete discussion of
these matters, and holders of Common Units should carefully review the balance
of this Prospectus and the Registration Statement of which this Prospectus is a
part for additional important information about the Company. SEE ALSO
"Description of Shares of Beneficial Interest," "Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws" and "Description of Common Units."
OPERATING PARTNERSHIP COMPANY
FORM OF ORGANIZATION AND ASSETS OWNED
The Operating Partnership is organized The Company is a Maryland REIT. The
as a Delaware limited partnership. Company believes that it has
The Operating Partnership owns operated so as to qualify as a REIT
interests (directly or through under the Internal Revenue Code,
subsidiaries) in real properties. commencing with its taxable year
ended December 31, 1994, and
intends to continue to so operate.
The Company's interest in the
Operating Partnership gives the
Company an indirect investment in
the properties owned by the
Operating Partnership.
-28-
<PAGE>
OPERATING PARTNERSHIP COMPANY
LENGTH OF INVESTMENT
The Operating Partnership has a The Company has a perpetual term
stated term until December 31, 2056. and intends to continue its oper-
ations for an indefinite time
period.
PURPOSE AND PERMITTED INVESTMENTS
The Operating Partnership's purpose Under its Charter, the Company may
is to conduct any business that may engage in any lawful activity
be lawfully conducted by a limited permitted by the Maryland REIT Act.
partnership organized pursuant to
the Delaware Partnership Act,
provided that such business is to
be conducted in a manner that
permits the Company to be qualified
as a REIT unless the Company ceases
to qualify as REIT. The Operating
Partnership is authorized to
perform any and all acts for the
furtherance of the purposes and
business of the Operating
Partnership, provided that the
Operating Partnership may not take,
or refrain from taking, any action
which, in the judgment of the
general partner (i) could adversely
affect the ability of the general
partner to continue to qualify as a
REIT, (ii) could subject the
general partner to any additional
taxes under Section 857 or taxes
under Section 857 or Section 4981
of the Internal Revenue Code, or
(iii) could violate any law or
regulation of any governmental body
(unless such action, or inaction,
is specifically consented to by the
general partner).
ADDITIONAL EQUITY
The Operating Partnership is The Board of the Company may issue,
authorized to issue Common Units in its discretion, additional
and other partnership interests equity securities consisting of
(including partnership interests of Common Shares or Preferred Shares;
different series or classes that provided, that the total number of
may be senior to Common Units) as shares issued does not exceed the
determined by the Company as its authorized number of shares of
general partner, in its sole capital stock set forth in the
discretion. The Company, as general Company's Charter. The net proceeds
partner, now may, in its sole and of equity capital raised by the
absolute discretion, make a capital Company is required to be
contribution to the Operating contributed to the Operating
Partnership in exchange for Partnership.
additional Common Units without a
corresponding issuance of Common
Shares by the Company.
-29-
<PAGE>
OPERATING PARTNERSHIP COMPANY
BORROWING POLICIES
The Operating Partnership has no The Company is not restricted under
restrictions on borrowings, and the its Charter from incurring
Company as general partner has full borrowings. The Company, as general
power and authority to borrow money partner, is permitted by the
on behalf of the Operating Partnership Agreement to incur
Partnership. debts other than those for which it
may be liable as general partner of
the Operating Partnership.
Therefore, the Company is not
required to incur all of its
indebtedness through the Operating
Partnership. The Company has
adopted a policy that currently
limits total borrowings to less
than 60% of the total market
capitalization of the Company and
the Operating Partnership plus the
total debt of the Company. However,
this policy may be altered at any
time by the Company.
OTHER INVESTMENT RESTRICTIONS
Other than restrictions precluding Neither the Company's Charter nor
investments by the Operating its By-laws impose any restrictions
Partnership that would adversely upon the types of investments made
affect the qualification of the by the Company except that under
Company as a REIT, there are no the Charter, the Company is
restrictions upon the Operating prohibited from taking any action
Partnership's authority to enter that would terminate the Company's
into certain transactions, REIT status, unless the Board
including among others, making determines that it is no longer in
investments, lending Operating the best interests of the Company
Partnership funds, reinvesting the for it to continue to qualify as a
Operating Partnership's cash flow REIT.
and net sale or refinancing
proceeds.
MANAGEMENT CONTROL
All management powers over the The Company's Board has exclusive
business and affairs of the control over its business and
Operating Partnership are vested in affairs subject only to the
the general partner of the restrictions in the Charter, the
Operating Partnership, and no By-laws and the Partnership
limited partner of the Operating Agreement. The Company's Board is
Partnership has any right to classified into three classes of
participate in or exercise control directors. At each annual meeting
or management power over the of the shareholders, successors of
business and affairs of the the class of directors whose terms
Operating Partnership except for expire at that meeting will be
limited actions which can be taken elected. The policies adopted by
by the general partner only with the Company's Board may be altered
the consent of the limited or eliminated without a vote of the
partners. The general partner may stockholders. Shareholders of the
not be removed by the limited Company have the power to vote only
partners of the Operating on the following matters: (i) the
Partnership with or without cause election or removal of Trust
without the consent of the general Managers; (ii) the amendment of the
partner. Charter (other than amendments
which the Board determines are
needed for the Company to qualify
as a REIT which can be approved by
the Board without a shareholder
vote); (iii) the voluntary
dissolution or termination of the
Company; (iv) the reorganization of
the Company and (v) the merger or
consolidation of the Company or the
sale or other disposition of all or
substantially all of its assets.
Trust Managers may be removed only
"for cause" and only by the
affirmative vote of holders of not
less than two thirds of the Equity
Shares then outstanding and
entitled to vote in the election of
Trust Managers.
-30-
<PAGE>
OPERATING PARTNERSHIP COMPANY
FIDUCIARY DUTIES
Under Delaware law, the general Under the Company's Charter, to the
partner of the Operating maximum extent that Maryland
Partnership is accountable to the permits limitations of the
Operating Partnership as a liability of trustees and officers
fiduciary and, consequently, is of a REIT, no Trust Manager or
required to exercise good faith and officer of the Company is liable to
integrity in all of its dealings the Company or any shareholder of
with respect to partnership the Company for money damages.
affairs. However, under the
Partnership Agreement, the general
partner is under no obligation to
take into account the tax
consequences to any partner of any
action taken by it, and the general
partner is not liable for monetary
damages for losses sustained or
liabilities incurred by partners as
a result of errors of judgment or
of any act or omission, provided
that the general partner has acted
in good faith.
MANAGEMENT LIABILITY AND
INDEMNIFICATION
As a matter of Delaware law, the The Company's Charter and Bylaws
general partner has liability for provide for broad indemnification
the payment of the obligations and to the Company's Trust Managers,
debts of the Operating Partnership officers and certain other persons.
unless limitations upon such Exclusions from the indemnification
liability are stated in the obligations of the Company are
document or instrument evidencing similar to the exclusions from the
the obligation. Under the Operating Partnership's obligation
Partnership Agreement, the to indemnify.
Operating Partnership has agreed to
indemnify the general partner and
any director or officer of the
general partner from and against
all losses, claims, damages,
liabilities (joint or several)
expenses (including legal fees and
expenses), judgments, fines,
settlements and other amounts
incurred in connection with any
actions relating to the operations
of the Operating Partnership in
which the general partner or such
director or officer is involved,
unless: (1) the act was material to
the action and was either committed
in bad faith or was the result of
active and deliberate dishonesty;
(2) such party actually received an
improper personal benefit; or (3)
in the case of any criminal
proceeding, such party had
reasonable cause to believe the act
was unlawful. The reasonable
expenses incurred by an indemnitee
may be reimbursed by the Operating
Partnership in advance of the final
disposition of the proceeding if
certain conditions are met.
-31-
<PAGE>
OPERATING PARTNERSHIP COMPANY
ANTITAKEOVER PROVISIONS
Except in limited circumstances, The Charter and Bylaws of the
the general partner of the Company contain a number of
Operating Partnership has exclusive provisions that may have the effect
management power over the business of delaying or discouraging an
and affairs of the Operating unsolicited proposal for the
Partnership. The general partner acquisition of the Company or the
may not be removed by the limited removal of incumbent management.
partners with or without cause. These provisions include, among
Under the Partnership Agreement, a others: (1) a staggered board of
limited partner may transfer his or directors; (2) authorized Equity
her interest as a limited partner Shares that may be issued as
(subject to certain limited Preferred Stock in the discretion
exceptions set forth in the of the board of directors, with
Partnership Agreement), without superior voting rights to the
obtaining the approval of the Common Shares; (3) a requirement
general partner except that the that directors may be removed only
general partner may, in its sole for cause and only by a vote of
discretion, prevent the admission holders of at least two-thirds of
to the Operating Partnership of the Equity Shares then outstanding
substituted limited partners. The and entitled to vote in the
general partner may exercise this election of Trust Managers; and (4)
right of approval to deter, delay provisions designed to avoid
or hamper attempts by persons to concentration of share ownership in
acquire a controlling interest in a manner that would jeopardize the
the Operating Partnership. Company's status as a REIT under
the Internal Revenue Code (i.e.,
the Ownership Limits).
VOTING RIGHTS
Under the Partnership Agreement, The Company is managed and
the limited partners have voting controlled by its Board consisting
rights only as to the dissolution of three classes having staggered
of the Operating Partnership, the terms of office. Each class is to
sale of all or substantially all of be elected by the shareholders at
the assets or merger of the annual meetings of the Company. The
Operating Partnership, and holders of Common Shares have
amendments of the Partnership voting rights on only a limited
Agreement, as described more fully number of matters.
below. Otherwise, all decisions
relating to the operation and
management of the Operating
Partnership are made by the general
partner. The Company currently
holds a 74% interest in the
Operating Partnership. As Common
Units are redeemed by partners, the
Company's percentage ownership of
the Operating Partnership will
increase. If additional Common
Units are issued to third parties
(as may be the case in connection
with future acquisitions), the
Company's percentage ownership of
the Common Units will decrease.
The following is a comparison of
the voting rights of the limited
partners of the Operating
Partnership and the stockholders of
the Company as they relate to
certain major transactions:
-32-
<PAGE>
OPERATING PARTNERSHIP COMPANY
A. AMENDMENT OF THE PARTNERSHIP
AGREEMENT OR THE CHARTER
The Partnership Agreement may be Amendments to the Charter must be
amended through a proposal by the approved by the holders of at least
general partner or any limited two-thirds of the Equity Shares
partner holding 25% or more of the then outstanding and entitled to
Common Units. Such proposal, in vote (other than amendments which
order to be effective, must be the Board determines are needed for
approved by the general partner and the Company to qualify as a REIT
by the written vote of holders of which can be approved by the Board
at least a majority of the without a shareholder vote).
outstanding Common Units. Certain
amendments that affect the
fundamental rights of a limited
partner must be approved by each
affected limited partner. In
addition, the general partner may,
without the consent of the limited
partners, amend the Partnership
Agreement as to certain ministerial
matters.
B. VOTE REQUIRED TO SELL ASSETS OR
MERGE.
Under the Partnership Agreement, Under the Company's Charter,
the sale, exchange, transfer or shareholder approval is required
other disposition of all or for the merger or consolidation of
substantially all of the Operating the Company or the sale or other
Partnership's assets or merger or disposition of all or substantially
consolidation of the Operating all of the Company's assets. No
Partnership effectively requires approval of the shareholders is
the consent of the general partner required for the sale of less than
and holders of two-thirds of the all or substantially all of the
outstanding Common Units (including Company's assets.
Common Units held by the general
partner). The general partner of
the Operating Partnership has the
exclusive authority the sell
individual assets of the Operating
Partnership.
COMPENSATION, FEES AND
DISTRIBUTIONS
The general partner does not The directors and officers of the
receive any compensation for its Company receive compensation for
services as general partner of the their services.
Operating Partnership. As a partner
in the Operating Partnership,
however, the general partner has
the same right to allocations and
distributions as other partners of
the Operating Partnership. In
addition, the Operating Partnership
will reimburse the general partner
for all expenses incurred relating
to the ongoing operation of the
Company and any other offering of
additional partnership interests in
the Operating Partnership or
capital stock of the Company.
-33-
<PAGE>
OPERATING PARTNERSHIP COMPANY
LIABILITY OF INVESTORS
Under the Partnership Agreement and Under the Company's Charter, no
applicable state law, the liability shareholder is liable for any debt,
of the limited partners for the demand, claim, judgment or
Operating Partnership's debts and obligation of the Company by reason
obligations is generally limited to of being a shareholder of the
the amount of their investment in Company.
the Operating Partnership.
NATURE OF INVESTMENT
The Common Units constitute equity Common Shares constitute equity
interests entitling each limited interests in the Company. The
partner to his pro rata share of Company is entitled to receive its
cash distributions made to the pro rata share of distributions
limited partners of the Operating made by the Operating Partnership
Partnership. The Operating with respect to the Common Units,
Partnership generally intends to and the distributions made by the
retain and reinvest proceeds of the other direct subsidiaries of the
sale of property or excess Company. Each shareholder will be
refinancing proceeds in its entitled to his pro rata share of
business. any dividends or distributions paid
with respect to the Common Shares.
The dividends payable to the
shareholders are not fixed in
amount and are only paid if, when
and as declared by the Company's
Board. In order to qualify as a
REIT, the Company generally must
distribute at least 95% of its net
taxable income (excluding capital
gains), and any taxable income
(including capital gains) not
distributed will be subject to
corporate income tax.
LIQUIDITY
Limited partners may generally The Redemption Shares will be
transfer their Common Units without freely transferable by persons
the general partner's consent, other than affiliates of the
except that the general partner Company as registered securities
may, in its sole discretion, under the 1933 Act. The Common
prevent the admission to the Shares are listed on the AMEX. The
Operating Partnership of breadth and strength of this
substituted limited partners. Each secondary market will depend, among
limited partner has the right to other things, upon the number of
tender his or her Common Units for shares outstanding, the Company's
redemption by the Operating financial results and prospects,
Partnership after the first the general interest in the Company
anniversary of the date of issuance and other REIT's, and the Company's
of such Common Units. dividend yield compared to that of
other debt and equity securities.
-34-
<PAGE>
OPERATING PARTNERSHIP COMPANY
FEDERAL INCOME TAXATION
The Operating Partnership is not The Company has elected to be taxed
subject to federal income taxes. as a REIT. So long as it qualifies
Instead, each holder of Common as a REIT, the Company will be
Units includes its allocable share permitted to deduct distributions
of the Operating Partnership's paid to its shareholders, which
taxable income or loss in effectively will reduce the "double
determining its individual federal taxation" that typically results
income tax liability. when a corporation earns income and
distributes that income to its
shareholders in the form of
dividends. A qualified REIT,
however, is subject to federal
income tax on income that is not
distributed and also may be subject
to federal income and excise taxes
in certain circumstances.
Income and loss from the Operating Dividends paid by the Company will
Partnership generally is subject to be treated as "portfolio" income
the "passive activity" limitations. and cannot be offset with losses
Under the "passive activity" rules, from "passive activities."
income and loss from the Operating
Partnership that is considered
"passive income" generally can be
offset against income and loss from
other investments that constitute
"passive activities" (unless the
Operating Partnership is considered
a "publicly traded partnership," in
which case income and loss from the
Operating Partnership can only be
offset against other income and
loss from the Operating
Partnership).
Cash distributions from the Distributions made by the Company
Operating Partnership are not to its taxable domestic
taxable to a holder of Common Units stockholders out of current or
except to the extent they exceed accumulated earnings and profits
such holder's basis in its interest will be taken into account by them
in the Operating Partnership (which as ordinary income. Distributions
will include such holder's that are designated as capital gain
allocable share of the Operating dividends generally will be taxed
Partnership's nonrecourse debt). as long-term capital gain, subject
to certain limitations.
Distributions in excess of current
or accumulated earnings and profits
will be treated as a non-taxable
return of basis to the extent of a
stockholder's adjusted basis in its
Common Stock, with the excess taxed
as capital gain.
Each year, holders of Common Units Each year, shareholders will
will receive a Schedule K-1 tax receive Form 1099 used by
form containing detailed tax corporations to report dividends
information for inclusion in paid to their stockholders.
preparing federal income tax
returns.
Holders of Common Units are Shareholders who are individuals
required, in some cases, to file generally will not be required to
state income tax returns and/or pay file state income tax returns
state income taxes in the states in and/or pay state income taxes
which the Operating Partnership outside of their state of residence
owns property, even if they are not with respect to the Company's
residents of those states. operations and distributions. The
Company may be required to pay
state income taxes in certain
states.
-35-
<PAGE>
REDEMPTION OF COMMON UNITS
GENERAL
Each holder of Common Units may, subject to certain limitations,
require that the Operating Partnership redeem all or a portion of such holder's
Common Units at any time after the first anniversary of the date of issuance of
such Common Units, by delivering a notice to the general partner. Upon
redemption, such holder would have the right to receive in cash the fair market
value of a number of Common Shares (subject to certain anti-dilution
adjustments) equal to the number of the Common Units redeemed. Such amount would
be payable within 10 business days of receipt of the notice of redemption. The
fair market value of the Common Shares for this purpose will be equal to the
average of the closing trading price of the Common Shares (or substitute
information, if no such closing price is available) for the ten trading days
before the day on which the redemption notice was received by the Operating
Partnership.
If a holder of Common Units has delivered a notice of redemption, the
Company has the right in its sole discretion to elect to acquire some or all of
the Common Units covered by the notice of redemption. If the Company elects to
acquire the Common Units tendered for redemption, the holder of the Common Units
tendered would receive one Common Share (subject to certain anti-dilution
adjustments) for each Common Unit tendered. The Company must notify a holder of
Common Units requesting redemption prompt notice if the Company elects to
acquire such Common Units. After receiving a notice from the Company, the holder
of Common Units requesting redemption may withdraw the request for redemption.
The holder of Common Units requesting redemption will be responsible for any
state or local transfer taxes payable on the transfer of Common Units to the
Company in exchange for Common Shares.
The Company currently anticipates that it generally will elect to
assume directly and satisfy any redemption right exercised by a Unit holder
through the issuance of Common Shares (I.E., Redemption Shares) pursuant to this
Prospectus, whereupon the Company will acquire the Common Units being redeemed
and will become the owner of the Common Units. However, the determination
whether to pay cash or issue Common Shares upon redemption of Common Units will
be made by the Company at the time Common Units are tendered for redemption.
Such an acquisition of Common Units by the Company will be treated as a sale of
the Common Units to the Company for federal income tax purposes. See "Tax
Consequences of Redemption." Upon redemption, the right of the holder of such
Common Units to receive distributions with respect to the Common Units redeemed
will cease (but if such right is exchanged for Redemption Shares, the holder
will have rights as a shareholder of the Company from the time of its
acquisition of the Redemption Shares).
A holder of Common Units must notify the Company, as the general
partner of the Operating Partnership, of his or her desire to require the
Operating Partnership to redeem Common Units by sending a notice in the form
attached as an exhibit to the Partnership Agreement, a copy of which is
available from the Company. A Unit holder must request the redemption of at
least 500 Common Units (or all of the Common Units held by such holder, if
less). The redemption generally will occur on the tenth business day after the
notice is delivered by the Unit holder, except that no redemption can occur if
the delivery of Redemption Shares would be prohibited under the provisions of
the Company's Charter designed to protect the Company's qualification as a REIT.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes certain federal income tax
considerations that may be relevant to a holder of Common Units who exercises
his right to require the redemption of his Common Units.
TAX TREATMENT OF REDEMPTION OF COMMON UNITS. If the Company assumes and
performs the redemption obligation, the redemption will be treated by the
Company, the Operating Partnership and the redeeming holder as a sale of Common
Units by such holder to the Company at the time of such
-36-
<PAGE>
redemption. The right of a holder of Common Units to require the redemption of
Common Units is referred to as the "REDEMPTION RIGHT.") In that event, such sale
will be fully taxable to the redeeming Limited Partner and such redeeming holder
of Common Units and such holder will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the Common Shares received
in the exchange plus the amount of Operating Partnership nonrecourse liabilities
allocable to the redeemed Common Units at the time of the redemption. The
determination of the amount of gain or loss is discussed more fully below.
If the Company does not elect to assume the obligation to redeem Common
Units, the Operating Partnership will redeem such Common Units for cash. If the
Operating Partnership redeems Common Units for cash that the Company contributes
to the Operating Partnership to effect such redemption, the redemption likely
would be treated for tax purposes as a sale of such Common Units to the Company
in a fully taxable transaction, although the matter is not free from doubt. In
that event, the holder of Common Units redeemed would be treated as realizing an
amount equal to the sum of the cash received in the exchange plus the amount of
Operating Partnership nonrecourse liabilities allocable to the redeemed Common
Units at the time of the redemption. The determination of the amount of gain or
loss in the event of sale treatment is discussed more fully below.
If, instead, the Operating Partnership chooses to redeem Common Units
for cash that is not contributed by the Company to effect the redemption, the
tax consequences would be the same as described in the previous paragraph,
except that if the Operating Partnership redeems less than all of a limited
partner's Common Units, such limited partner 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 Operating Partnership nonrecourse
liabilities allocable to the redeemed Common Units, exceeded the limited
partner's adjusted basis in all of such limited partner's Common Units
immediately before the redemption.
TAX TREATMENT OF DISPOSITION OF COMMON UNITS BY LIMITED PARTNER
GENERALLY. If a Common Unit is redeemed in a manner that is treated as a sale of
the Common Unit, or a limited partner otherwise disposes of a Common Unit, the
determination of gain or loss from the sale or other disposition will be based
on the difference between the amount considered realized for tax purposes and
the tax basis in such Common Unit. See "--Basis of Common Units" below. Upon the
sale of a Common Unit, the "amount realized" will be measured by the sum of the
cash and fair market value of other property received (e.g., Redemption Shares)
plus the portion of the Operating Partnership's liabilities allocable to the
Common Unit sold. To the extent that the amount of cash or property received
plus the allocable share of the Operating Partnership's liabilities exceeds the
limited partner's basis for the Common Unit disposed of, such limited partner
will recognize gain. It is possible that the amount of gain recognized or even
the tax liability resulting from such gain could exceed the amount of cash and
the value of any other property (E.G., Redemption Shares) received upon such
disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Common Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a Common Unit attributable to a limited partner's share of
"unrealized receivables" of the Operating Partnership (as defined in Section 751
of the Internal Revenue Code) exceeds the basis attributable to those assets,
such excess will be treated as ordinary income. Unrealized receivables include,
to the extent not previously included in Operating Partnership 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 the Operating Partnership had sold its assets at their fair market
value at the time of the transfer of a Common Unit.
BASIS OF COMMON UNITS. In general, a limited partner who was deemed at
the time of an acquisition to have received his Common Units upon liquidation of
a partnership had an initial tax basis in his Common Units ("INITIAL BASIS")
equal to his basis in his partnership interest at the time of such liquidation.
Similarly, in general, a limited partner who contributed property in exchange
for his Common
-37-
<PAGE>
Units had an Initial Basis in the Common Units equal to his basis in the
contributed property. A Limited Partner's Initial Basis in his Common Units
generally is increased by (i) such limited partner's share of Operating
Partnership taxable income and (ii) increases in his share of liabilities of the
Operating Partnership (including any increase in his share of nonrecourse
liabilities). Generally, such partner's basis in his Common Units is decreased
(but not below zero) by (i) his share of Operating Partnership distributions,
(ii) decreases in his share of liabilities of the Operating Partnership
(including any decrease in his share of nonrecourse liabilities of the Operating
Partnership), (iii) his share of losses of the Operating Partnership and (iv)
his share of nondeductible expenditures of the Operating Partnership that are
not chargeable to capital.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Company is based on current law, is for general information only
and is not tax advice. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
subject to special treatment under the federal income tax laws, including
certain financial institutions, life insurance companies, dealers in securities
or currencies, shareholders holding Common Shares as part of a conversion
transaction, as part of a hedge or hedging transaction, or as a position in a
straddle for tax purposes, tax-exempt organizations (except to the extent
discussed under the heading "-Taxation of Tax-Exempt Shareholders") or foreign
corporations and persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "--Taxation of Non-U.S.
Shareholders"). In addition, the summary below does not consider the effect of
any foreign, state, local or other tax laws that may be applicable to
prospective shareholders. Cummings & Lockwood, tax counsel to the Company, is of
the opinion that such summary fairly and accurately summarizes the federal
income tax considerations that would be material to a holder of Common Shares.
EACH INVESTOR IS ADVISED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR
REGARDING THE SPECIAL TAX CONSEQUENCES TO SUCH INVESTOR OF THE OWNERSHIP AND
SALE OF THE COMMON SHARES INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company has made an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code commencing with its
taxable year ended December 31, 1994. The Company believes that, commencing with
such taxable year, it has been organized and operated in such a manner as to
qualify for taxation as a REIT under the Internal Revenue Code, and the Company
intends to continue to operate in such a manner, but no assurance can be given
that it will operate in such a manner so as to remain so qualified. The Company
has received an opinion from Cummings & Lockwood that the Company's organization
and method of operation are such that it has met the requirements for
qualification and taxation as a REIT for its taxable years ended December 31,
1994, 1995 and 1996, and that its current organization and method of operation
will allow it to continue to qualify as a REIT for 1997 and subsequent taxable
years. Such opinion is based on various assumptions and various factual
representations made by the Company. Such qualification will depend on the
Company's continuing ability to meet, through actual annual operating results,
distribution levels, and diversity of stock ownership, and the various
qualification tests imposed under the Internal Revenue Code. Cummings & Lockwood
will not review compliance with these tests on a continuing basis. No assurance
can be given that the Company will satisfy such tests on a continuing basis.
These sections of the Internal Revenue Code, and the corresponding
Treasury Regulations, are highly technical and complex. The following sets forth
the material aspects of the sections that govern the
-38-
<PAGE>
federal income tax treatment of a REIT and its shareholders. This summary is
qualified in its entirety by the applicable Internal Revenue Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (defined generally as property acquired by
the Company through foreclosure or otherwise after a default on a loan secured
by the property or a lease of the property) which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, with respect to any asset (a "BUILT-IN GAIN
ASSET") acquired by the Company from a corporation which is or has been a C
corporation (I.E., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the Built-In Gain Asset in the hands of
the Company is determined by reference to the basis of the asset in the hands of
the C corporation, if the Company recognizes gain on the disposition of such
asset during the ten-year period (the "RECOGNITION PERIOD") beginning on the
date on which such asset was acquired by the Company, then, to the extent of the
Built-In Gain (I.E., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
built-in gain assume that the Company will make an election pursuant to IRS
Notice 88-19 and that such treatment is not modified by certain revenue
proposals in the Administration's Fiscal Year 1998 Budget Proposal.
REQUIREMENTS FOR QUALIFICATION. The Internal Revenue Code defines a
REIT as a corporation, trust or association: (i) which is managed by one or more
trustees or directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the
Internal Revenue Code; (v) the beneficial ownership of which is held by 100 or
more persons; (vi) during the last half of each taxable year not more than 50%
in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals (as defined in the Internal Revenue Code to include
certain entities) and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Internal Revenue Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of twelve months, or during a proportionate part of a taxable year
of less than twelve months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made to be taxed as a REIT. For
purposes of conditions (v) and (vi), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a "look-through" exception in
the case of condition (vi).
-39-
<PAGE>
The Company believes that it has issued sufficient Common Shares with
sufficient diversity of ownership to allow it to satisfy conditions (v) and
(vi). In addition, the Company's Charter provides for restrictions regarding the
transfer and ownership of shares, which restrictions are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(v) and (vi) above. Such ownership and transfer restrictions are described in
"Description of Shares of Beneficial Interest-Restrictions on Transfer." These
restrictions may not ensure that the Company will, in all cases, be able to
satisfy the share ownership requirements described above. If the Company fails
to satisfy such share ownership requirements, the Company's status as a REIT
will terminate. However, commencing with the Company's 1998 taxable year, the
Taxpayer Relief Act of 1997 (the "1997 ACT") provides that if the Company
complies with the rules contained in the applicable Treasury Regulations
requiring the Company to ascertain the actual ownership of its shares but the
Company does not know, or would not have known through the exercise of
reasonable diligence, whether it failed to meet the requirement in condition
(vi) above, the Company will be treated as having met such share ownership
requirement. See "-Failure to Qualify."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company has a calendar taxable year.
OWNERSHIP OF A PARTNERSHIP INTEREST. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Internal Revenue Code, including satisfying the
gross income tests and the asset tests. Thus, the Company's proportionate share
of the assets and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any subsidiary partnerships) will
be treated as assets and items of income of the Company for purposes of applying
the requirements described herein. A summary of the rules governing the federal
income taxation of partnerships and their partners is provided below in "-Tax
Aspects of the Operating Partnership and Subsidiary Partnerships." The Company
has direct control of the Operating Partnership and intends to operate it
consistent with the requirements for qualification as a REIT.
INCOME TESTS. In order to maintain its qualification as a REIT, the
Company annually must satisfy three gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, subject to certain exceptions in the
year in which the Company is liquidated, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property) must
represent less than 30% of the Company's gross income (including gross income
from prohibited transactions) for each taxable year. For purposes of applying
the 30% gross income test, the holding period of properties acquired by the
Operating Partnership will be deemed to have commenced on the date of
acquisition. The 1997 Act repealed the 30% gross income test requirement
commencing with the Company's 1998 taxable year.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Internal Revenue Code provides
that rents received from a tenant will not qualify as "rents from real property"
in
-40-
<PAGE>
satisfying the gross income tests if the REIT, or an owner of 10% or more of the
REIT, actually or constructively owns 10% or more of such tenant (a "RELATED
PARTY TENANT"). Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, for rents
received to qualify as "rents from real property," the REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the REIT
derives no revenue, except that the REIT may directly perform services that are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant" of
the property. Further, under a DE MINIMIS exception provided by the 1997 Act,
the independent contractor requirement will not apply to customary services
provided by the Company, the annual value of which does not exceed 1% of the
gross income derived from the property with respect to which the services are
provided. For this purpose, such services may not be valued at less than 150% of
the Company's direct cost of providing the service. The Company does not and
will not: (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above); (ii) rent any property to
a Related Party Tenant (unless the Board determines in its discretion that the
rent received from such Related Party Tenant is not material and will not
jeopardize the Company's status as a REIT); (iii) derive rental income
attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than 15%
of the total rent received under the lease) or (iv) perform services considered
to be rendered to the occupant of the property, other than through an
independent contractor from whom the REIT derives no revenue, unless, beginning
in 1998, such services qualify under the 1% DE MINIMIS exception.
The Operating Partnership will receive fees in exchange for the
performance of certain third party property management activities. The Company's
proportionate share of these fees will be treated as income of the Company by
virtue of its status as a partner of the Operating Partnership as discussed
above. Such fees will not qualify under the 95% gross income test or the 75%
gross income test. The Company believes, however, that the aggregate amount of
this and other nonqualifying income in any taxable year will not exceed the
limit on nonqualifying income under the gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Internal
Revenue Code. These relief provisions will be generally available if the
Company's failure to meet such tests was due to reasonable cause and not due to
willful neglect and the Company attaches a schedule of the sources of its income
to its federal income tax return, and any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the benefit
of these relief provisions. For example, if the Company fails to satisfy the
gross income tests because nonqualifying income that the Company intentionally
incurs exceeds the limits on such income, the IRS could conclude that the
Company's failure to satisfy the tests was not due to reasonable cause. If these
relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company would not qualify as a REIT. As discussed
above in "-Taxation of the Company-General," even if these relief provisions
apply, a 100% tax would be imposed on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company failed the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income may also
have an adverse effect upon the Company's ability to satisfy the income tests
for qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership intends to hold its properties for investment
-41-
<PAGE>
with a view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating its properties and to make such occasional
sales of properties as are consistent with the Operating Partnership's
investment objectives.
ASSET TESTS. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets including (i) its allocable share of real estate assets held
by partnerships in which the Company owns a direct or indirect interest (such as
the Operating Partnership) and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) public debt offering of the Company, cash, cash items and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's debt and equity securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.
The Company anticipates that it will continue to satisfy these asset
tests.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including as a result of the
Company's increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests and
to take such other actions within 30 days after the close of any quarter as may
be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and by excluding the Company's net capital gain) and (b) 95% of the
excess of the net income, if any, from foreclosure property over the tax imposed
on such income, minus (ii) the excess of the sum of certain items of noncash
income (E.G., income attributable to leveled stepped rents, original issue
discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of "REIT taxable income" as described in
clause (i)(a) above. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. The amount distributed
must not be preferential-I.E., each holder of Common Shares must receive the
same distribution per share. A REIT may have more than one class of capital
stock, as long as distributions within each class are pro rata and
non-preferential. To the extent that the Company does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates. The Company has made and will
continue to make timely distributions sufficient to satisfy these annual
distribution requirements. In this regard, the Partnership Agreement authorizes
the Company, as general partner, to take such steps as may be necessary to cause
the Operating Partnership to distribute to its partners an amount sufficient to
permit the Company to meet these distribution requirements.
It is expected that the Company's REIT taxable income will be less than
its cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the
-42-
<PAGE>
inclusion of such income and deduction of such expenses in arriving at taxable
income of the Company. In the event that such timing differences occur, in order
to meet the distribution requirements, the Company may find it necessary to
arrange for short-term, or possibly long-term, borrowings to pay required
dividends.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement described above for a year by
paying "deficiency dividends" to shareholders in a later year, which may be
included in the Company's deduction for dividends paid for the earlier year.
Thus, the Company may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, the Company will be required to pay interest
based upon the amount of any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each
calendar year (or in the case of distributors with declaration and record dates
falling in the last three months of the calendar year, by the end of January
immediately following such year) at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year, and (iii) any undistributed taxable income from prior periods, the Company
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Any REIT taxable income and net capital
gain on which this excise tax is imposed for any year is treated as an amount
distributed during that year for purposes of calculating such tax.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would reduce the cash available for distribution by the Company to its
shareholders. In addition, if the Company fails to qualify as a REIT, all
distributions to shareholders will be taxable as ordinary income, to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS GENERALLY
As used herein, the term "U.S. SHAREHOLDER" means a holder of Common
Shares who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) is an estate, the income of which is
subject to United States federal income taxation regardless of its source or a
trust if (a) a U.S. Court can exercise primary supervision over the
administration of such trust and (b) one or more U.S. fiduciaries have the
authority to control all of the substantial decisions of such trust.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Shareholders that are corporations. Distributions
made by the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. Shareholders as gain from the sale or
exchange of a capital asset held for more than one year (to the extent that they
do not exceed the Company's actual net
-43-
<PAGE>
capital gain for the taxable year) without regard to the period for which a U.S.
Shareholder has held his Common Shares. It is not clear whether such gain will
be taxed as "long-term" capital gain or "mid-term" capital gain under the new
capital gains rates enacted by the 1997 Act. U.S. Shareholders that are
corporations may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income. To the extent that the Company makes
distributions (not designated as capital gain dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each U.S. Shareholder, reducing the
adjusted basis which such U.S. Shareholder has in his Common Shares for tax
purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Shareholder's adjusted basis in his shares
taxable as capital gain (such gain being taxed as long-term capital gain if the
shares have been held for more than eighteen months, mid-term capital gain if
the shares have been held for more than one year but not more than eighteen
months, or short-term capital gain if the shares have been held for one year or
less), provided that the shares have been held as a capital asset. Dividends
declared by the Company in October, November or December of any year and payable
to a shareholder of record on a specified date in any such month shall be
treated as both paid by the Company and received by the shareholder on December
31 of such year, provided that the dividend is actually paid by the Company on
or before January 31 of the following calendar year. Shareholders may not
include in their own income tax returns any net operating losses or capital
losses of the Company.
Distributions made by the Company and gain arising from the sale or
exchange by a U.S. Shareholder of Common Shares will not be treated as passive
activity income, and, as a result, U.S. Shareholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
the Company (to the extent they do not constitute a return of capital) generally
will be treated as investment income for purposes of computing the investment
income limitation. Gain arising from the sale or other disposition of Common
Shares, however, will not be treated as investment income under certain
circumstances.
The Company may elect to retain, rather than distribute as a capital
gain dividend, its net long-term capital gains. In such event, the Company would
pay tax on such retained net long-term capital gains. In addition, to the extent
so designated by the Company, a U.S. Shareholder generally would (i) include its
proportionate share of such undistributed capital gains in computing its capital
gains in its return for its taxable year in which the last day of the Company's
taxable year falls (subject to certain limitations as to the amount so
includable), (ii) be deemed to have paid the capital gains tax imposed on the
Company on the designated amounts included in such U.S. Shareholder's capital
gains, (iii) receive a credit or refund for such amount of tax deemed paid by
it, (iv) increase the adjusted basis of its Common Shares by the difference
between the amount of such includable gains and the tax deemed to have been paid
by it, and (v), in the case of a U.S. Shareholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the Internal Revenue
Service (the "IRS"). As noted above, the tax rate applicable to such capital
gains included by the U.S. Shareholder is not clear under the 1997 Act.
Upon any sale or other disposition of Common Shares, a U.S. Shareholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between (i) the amount of cash and the fair market value of
any property received on such sale or other disposition and (ii) the holder's
adjusted basis in such Common Shares for tax purposes. Such gain or loss will be
capital gain or loss if the shares have been held by the U.S. Shareholder as a
capital asset, and will be a mid-term capital gain if such shares are held more
than one year but not more than 18 months, or long-term gain or loss if such
shares have been held for more than 18 months. In general, any loss recognized
by a U.S. Shareholder upon the sale or other disposition of Common Shares that
have been held for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss, to the extent of capital
gain dividends received by such U.S. Shareholder from the Company which were
required to be treated as gain from the sale or exchange of a capital asset held
for more than one year.
-44-
<PAGE>
BACKUP WITHHOLDING. The Company will report to its U.S. Shareholders
and the IRS the amount of dividends paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. Shareholder that does not
provide the Company with his correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the shareholder's income tax liability. In addition,
the Company may be required to withhold a portion of capital gain distributions
to any shareholders who fail to certify their non-foreign status to the Company.
See "-Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income ("UBTI") when received
by a tax-exempt entity. Based on that ruling, provided that a tax-exempt
shareholder (except certain tax-exempt shareholders described below) has not
held its Common Shares as "debt financed property" within the meaning of the
Internal Revenue Code and such shares are not otherwise used in a trade or
business (and except as further discussed below in the case of a "pension held
REIT"), the dividend income from the Company will not be UBTI to a tax-exempt
shareholder. Similarly, income from the sale of Common Shares will not
constitute UBTI unless such tax-exempt shareholder has held such shares as "debt
financed property" within the meaning of the Internal Revenue Code or has used
the shares in a trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Internal
Revenue Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively,
income from an investment in the Company will constitute UBTI unless the
organization is able to properly deduct amounts set aside or placed in reserve
for certain purposes so as to offset the income generated by its investment in
the Company. Such prospective investors should consult their own tax advisors
concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by
a "pension held REIT" may be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Internal Revenue Code, (ii) is tax-exempt
under Section 501(a) of the Internal Revenue Code, and (iii) 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 (i) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code
provides that stock owned by qualified trusts shall be treated, for purposes of
the "not closely held" requirement, as owned by the beneficiaries of the trust
(rather than by the trust itself), and (ii) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT or
(b) 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 (i) the UBTI earned by the REIT (treating the
REIT as if it were a qualified trust and therefore subject to tax on UBTI) to
(ii) 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.
-45-
<PAGE>
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of the
ownership and disposition of stock by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "NON-U.S.
SHAREHOLDERS") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of United States federal income tax and does not address state, local or
foreign tax consequences that may be relevant to a Non-U.S. Shareholder in light
of its particular circumstances, including, for example, if the investment in
the Company is connected to the conduct by a Non-U.S. Shareholder of a U.S.
trade or business. In addition, this discussion is based on current law, which
is subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in Common Shares, including any reporting
requirements.
Distributions by the Company to a Non-U.S. Shareholder that are neither
attributable to gain from sales or exchanges by the Company of United States
real property interests nor designated by the Company as capital gains dividends
will be treated as dividends of ordinary income to the extent that they are made
out of current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to withholding of United States federal
income tax on a gross basis (that is, without allowance of deductions) at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty,
unless the dividends are treated as effectively connected with the conduct by
the Non-U.S. Shareholder of a United States trade or business. Dividends that
are effectively connected with such a trade or business will be subject to tax
on a net basis (that is, after allowance of deductions) at graduated rates, in
the same manner as domestic shareholders are taxed with respect to such
dividends and are generally not subject to withholding. Any such dividends
received by a Non-U.S. Shareholder that is a corporation may also be subject to
an additional branch profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Pursuant to Treasury Regulations currently in effect, dividends paid to
an address in a country outside the United States are generally presumed to be
paid to a resident of such country for purposes of determining the applicability
of withholding discussed above and the applicability of a tax treaty rate.
Commencing in 1999, however, a Non-U.S. Shareholder who wishes to claim the
benefit of an applicable treaty rate must satisfy certain certification and
other requirements. Under certain treaties, lower withholding rates generally
applicable to dividends do not apply to dividends from a REIT, such as the
Company. Certain certification and disclosure requirements must be satisfied to
be exempt from withholding under the "effectively connected" income exemption
discussed above.
Distributions in excess of current or accumulated earnings and profits
of the Company will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Shares, but
rather will reduce the adjusted basis of such stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's Common
Shares, they will give rise to gain from the sale or exchange of his stock, the
tax treatment of which is described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current or accumulated earnings and profits, the distribution will generally
be treated as a dividend for withholding purposes. However, amounts thus
withheld are generally refundable if it is subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of the Company. Under a "technical corrections" provision recently added
to the Internal Revenue Code by the Small Business Job Protection Act of 1996,
distributions in excess of earnings and profits may also be subject to a 10%
withholding under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA") withholding provisions.
Distributions to a Non-U.S. Shareholder that are designated by the
Company at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real
-46-
<PAGE>
property interest) generally will not be subject to United States federal income
taxation, unless (i) investment in the Common Shares is effectively connected
with the Non-U.S. Shareholder's United States trade or business, in which case
the Non-U.S. Shareholder will be subject to the same treatment as domestic
shareholders with respect to such gain (except that a shareholder that is a
foreign corporation may also be subject to the 30% branch profits tax, as
discussed above) or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
Distributions to a Non-U.S. Shareholder that are attributable to gain
from sales or exchanges by the Company of "United States real property
interests" under FIRPTA will cause the Non-U.S. Shareholder to be treated as
recognizing such gain as income effectively connected with a United States trade
or business. Non-U.S. Shareholders would thus generally be entitled to offset
its gross income by allowable deductions and would pay tax on the resulting
taxable income at the same rates applicable to domestic shareholders (subject to
a special alternative minimum tax in the case of nonresident alien individuals).
Also, such gain may be subject to a 30% branch profits tax in the hands of a
Non-U.S. Shareholder that is a corporation and is not entitled to treaty relief
or exemption, as discussed above. The Company is required to withhold 35% of any
distribution that is or could be designated as a capital gain dividend. That
amount is creditable against the Non-U.S. Shareholder's United States federal
income tax liability. To the extent that such withholding exceeds the actual tax
owed by the Non-U.S. Shareholder, the Non-U.S. Shareholder may claim a refund
from the IRS.
The Company or any nominee (E.G., a broker holding shares in street
name) may rely on a certificate of non-foreign status issued in accordance with
the FIRPTA regulations or on a Form W-9 to determine whether withholding is
required on gains realized from the disposition of United States real property
interests. A domestic person who holds Common Shares on behalf of a Non-U.S.
Shareholder will bear the burden of withholding, provided that the Company has
properly designated the appropriate portion of a distribution as a capital gain
dividend.
SALE OF COMMON SHARES. Gain recognized by a Non-U.S. Shareholder upon
the sale or exchange of Common Shares generally will not be subject to United
States taxation unless such shares constitute a "United States real property
interest" within the meaning of FIRPTA. The Common Shares will not constitute a
"United States real property interest" so long as the Company is a "domestically
controlled REIT." 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 is
held directly or indirectly by Non-U.S. Shareholders. The Company believes that
at December 31, 1996 it was a "domestically controlled REIT," and therefore that
the current sale of Common Shares will not be subject to taxation under FIRPTA.
However, because the Common Shares are publicly traded, no assurance can be
given that the Company will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of Common Shares
not otherwise subject to FIRPTA will be taxable to a Non-U.S. Shareholder if the
Non-U.S. Shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States. In such case, the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain. If the gain on the sale of Common Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax, possible withholding tax and a special alternative
minimum tax in the case of nonresident alien individuals).
If the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Shareholder of Common Shares would be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" unless the
shares are "regularly traded" (as defined by applicable Treasury Regulations) on
an established securities market (E.G., the AMEX) and the selling Non-U.S.
Shareholder did not hold more than 5% of the Common Shares at any time during
the shorter of (i) the period during which the taxpayer held such interest, or
(ii) the five-year
-47-
<PAGE>
period ending on the date of the disposition of such interest. If gain on the
sale or exchange of Common Shares were subject to taxation under FIRPTA, the
Non-U.S. Shareholder would be subject to regular United States income tax with
respect to such gain in the same manner as a U.S. Shareholder (subject to any
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the 30%
branch profits tax in the case of foreign corporations), and the purchaser of
the stock would be required to withhold and remit to the IRS 10% of the purchase
price. The 10% withholding tax will not apply if the shares are "regularly
traded" in an established securities market.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding
tax (which 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) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company 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 Shares 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 Shares by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States shareholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. 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 Shares is subject
to both backup withholding and information reporting unless the shareholder
certifies under penalty of perjury that the shareholder is a Non-U.S.
Shareholder, or otherwise establishes an exemption. A Non-U.S. Shareholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
NEW WITHHOLDING REGULATIONS. New Treasury Regulations have been issued
regarding the withholding and information reporting rules discussed above. In
general, the new Treasury Regulations do not alter the substantive withholding
and information reporting requirements but unify current certification
procedures and forms and clarify and modify reliance standards. They are
generally effective for payments made after December 31, 1998, subject to
certain transition rules. Shareholders should consult their tax advisors
regarding the new withholding regulations.
TAX ASPECTS OF OPERATING PARTNERSHIP AND SUBSIDIARY PARTNERSHIPS
GENERAL. Substantially all of the Company's investments will be held
indirectly through the Operating Partnership and (to some extent) the
partnerships controlled by the Operating Partnership (the "SUBSIDIARY
PARTNERSHIPS"). In general, partnerships are "pass-through" entities which are
not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. The Company
will include in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, the
Company will include its proportionate share of assets held by the Operating
Partnership (including Operating Partnership's share of assets held by the
Subsidiary Partnerships). See "-Taxation of the Company."
ENTITY CLASSIFICATION. The Company's interest in the Operating
Partnership involves special tax considerations, including the possibility of a
challenge by the IRS of the status of the Operating Partnership and the
Subsidiary Partnerships as partnerships (as opposed to associations taxable as
corporations) for
-48-
<PAGE>
federal income tax purposes. The Company has received an opinion of counsel that
the Operating Partnership and each Subsidiary Partnership qualified as a
partnership for federal income tax purposes and not as an association taxable as
a corporation or as a publicly traded partnership under Section 7704 of the
Internal Revenue Code for its taxable years ended before January 1, 1998. It is
unclear whether the Operating Partnership will be treated as a publicly traded
partnership under Section 7704 for 1998 and later years. Publicly traded
partnerships are treated as corporations, unless their income is primarily
passive. It is likely, but not certain, that the Operating Partnership will be
treated as a partnership and not a corporation for federal income tax purposes,
by reason of the nature of its income. Partners of publicly traded partnerships
that satisfy the passive income test of Section 7704(c) are subject to special
treatment under the passive loss rules of Section 469. The passive loss rules
apply separately to each publicly traded partnership in which a partner holds an
interest. This will preclude a partner from offsetting net income from passive
activities of one publicly traded partnership against losses from other passive
activities, including from other publicly traded partnerships. A partner's net
loss from a publicly traded partnership cannot be used to shelter net income
from passive activities, including from other publicly traded partnerships, but
must be suspended. Further, within a single publicly traded partnership, passive
activity losses cannot be used to offset any portfolio income of that
partnership.
The IRS recently finalized and published certain Treasury Regulations
(the "FINAL REGULATIONS") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"ELIGIBLE ENTITY") may elect to be taxed as a partnership for federal income tax
purposes. In addition, an Eligible Entity which did not exist, or did not claim
a classification, prior to the Effective Date (as defined below), will be
classified as a partnership for federal income tax purposes unless it elects
otherwise. The final Regulations apply for tax periods beginning on or after
January 1, 1997 (the "EFFECTIVE DATE"). Unless it elects otherwise, an Eligible
Entity in existence prior to the Effective Date will have the same
classification for federal income tax purposes that it claimed under the entity
classification Treasury Regulations in effect prior to the Effective Date, and
such classification should not be challenged by the IRS, so long as there exists
a reasonable basis in support of such claimed characterization under the rules
in effect under prior law. The Company believes that there is a reasonable basis
under prior law for treating the Operating Partnership and the Subsidiary
Partnerships as partnerships for federal income tax purposes. Accordingly,
although no absolute assurance can be given that the IRS will not challenge the
status of the Operating Partnership or any Subsidiary Partnership as a
partnership for federal income tax purposes, such challenge is unlikely. If such
challenge were sustained by a court, the Operating Partnership or a Subsidiary
Partnership could be treated as a corporation for federal income tax purposes
and subject to an entity-level tax on its income. In such a situation the
character of the Company's assets and items of gross income would change and
preclude the Company from satisfying the asset tests and possibly the income
tests (see "-Taxation of the Company-Income Tests" and "-Asset Tests"), and in
turn would prevent the Company from qualifying as a REIT. See "-Taxation of the
Company-Failure to Qualify" above for a discussion of the effect of the
Company's failure to meet such tests for a taxable year. In addition, a change
in the Operating Partnership's (or any Subsidiary Partnership's) status for tax
purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distributions.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will
generally determine the allocation of income and loss among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of Section 704(b) of the Internal Revenue Code and the Treasury
Regulations promulgated thereunder. Generally, Section 704(b) and the Treasury
Regulations promulgated thereunder require that partnership allocations respect
the economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of Section 704(b) of the Internal Revenue Code and the Treasury
Regulations promulgated thereunder.
-49-
<PAGE>
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section
704(c) of the Internal Revenue Code, income, gain, loss and deduction
attributable to appreciated or depreciated property (such as the Company's
properties) that is contributed to a partnership in exchange for an interest in
the partnership, must be allocated in a manner such that the contributing
partner is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of contributed property at the time of
contribution and the adjusted tax basis of such property at such time (a
"BOOK-TAX DIFFERENCE"). Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. The Operating Partnership was formed by way of
contributions of appreciated properties directly or indirectly, through
contributions of interests in the Subsidiary Partnerships. Consequently, the
Partnership Agreement of the Operating Partnership requires that such
allocations be made in a manner consistent with Section 704(c) of the Internal
Revenue Code.
Treasury Regulations under Section 704(c) of the Internal Revenue Code
provide partnerships with a choice of several methods of accounting for Book-Tax
Differences, including use of the "traditional method" or the election of
certain methods which would permit any distortions caused by a Book-Tax
Difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. The Operating Partnership and the
Company expect to use the traditional method without curative allocations for
accounting for Book-Tax Differences with respect to the properties initially
contributed to the Operating Partnership.
With respect to any property purchased by the Operating Partnership
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of Common Shares, or the perception that
such sales could occur, could adversely affect the prevailing market price for
the Common Shares. As of the date of this Prospectus, the Company has 8,453,829
Common Shares outstanding. Of these shares 6,666,379 shares are freely tradable
without restriction and 1,787,450 shares are held by "affiliates" (as defined in
Rule 144 under the Securities Act) and may be sold subject to the volume, manner
of sale and other restrictions of Rule 144. Any Redemption Shares issued to
persons other than affiliates of the Company will also be freely tradable. In
the event that any affiliate ceases to be an "affiliate" of the Company, shares
held by such holder will become freely tradable, subject to certain limitations.
The Operating Partnership, in connection with the March Acquisitions,
issued to persons other than the Company an aggregate of 2,114,439 Common Units.
The Operating Partnership subsequently issued an aggregate of 889,353 Common
Units in acquisitions of other properties and will likely issue additional
Common Units in furtherance of the Company's objective of continuing to acquire
additional properties. Common Units may be redeemed for cash based on their fair
market value or, at the Company's option, for Common Shares on a one-for-one
basis (subject to certain anti-dilution adjustments). In certain circumstances,
the Company may not be able to exercise its option to satisfy such redemption
rights with Common Shares because of tax or securities law limitations. An
exercise of redemption rights in such
-50-
<PAGE>
circumstances could adversely affect the Operating Partnership's liquidity
because it would then be required to satisfy such rights with cash. Pursuant to
contractual arrangements, holders of the Common Units issued in the acquisitions
may not redeem their Common Units for a period of one year after the closing of
the acquisition transaction in which such holder received such Common Units. In
addition, an aggregate of 1,114,974 Common Shares have been reserved for
issuance pursuant to the Company's 1994 Share Option Plan, the 1996 Share
Incentive Plan and other outstanding options and warrants.
No prediction can be made as to the effect, if any, that future sales
of Common Shares, including the Redemption Shares, or the availability of such
shares for future sale will have on the market price of the Common Shares.
The Board has the authority, without shareholder approval, to issue
additional Common Shares and other Equity Shares, or to cause the Operating
Partnership to issue additional Common Units or other classes of units of
interest in the Operating Partnership in any manner it deems appropriate,
including in exchange for property. Shareholders of the Company will have no
preemptive right to purchase shares or units issued in any such offerings, and
any such offerings might cause a dilution of the shareholders' investment in the
Company.
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by the Company of the
Redemption Shares if, and to the extent that, holders of Common Units tender
such Common Units for redemption. The Company has registered the Redemption
Shares for sale to provide the holders thereof (other than affiliates of the
Company) with freely tradable securities, but registration of such shares does
not necessarily mean that any of such shares will be offered or sold by the
holders thereof.
The Company will not receive any proceeds from the issuance of the
Redemption Shares. If the Company issues Redemption Shares to holders of Common
Units, the Company will acquire the Common Units which are subject to the
applicable notice of redemption. Consequently, with each issuance of Redemption
Shares, the Company's interest in the Operating Partnership will increase.
LEGALITY
Certain legal matters with respect to the Registration Statement of
which this Prospectus is a part have been passed upon for the Company by
Cummings & Lockwood, Stamford, Connecticut 06904-0120. The validity of the
Redemption Shares has been passed upon for the Company by Piper & Marbury
L.L.P., Baltimore, Maryland 21201-0489.
EXPERTS
The (i) consolidated financial statements and financial statement
schedule of Grove Property Trust as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997, appearing in Grove
Property Trust's Form 10-K for the year ended December 31, 1997, (ii) combined
statement of revenues and certain expenses of Ribbon Mill, Hilltop and Briar
Knoll for the year ended December 31, 1996, appearing in Grove Property Trust's
Current Report on Form 8-K, as amended, dated December 31, 1997, (iii) statement
of revenues and certain expenses of Village Arms for the period from April 22,
1997 to December 31, 1997, appearing in Grove Property Trust's Current Report on
Form 8-K, as amended, dated December 31, 1997 and (iv) statement of revenues and
certain expenses of Tanglewood Village Apartments for the year ended December
31, 1996, appearing in Grove Property Trust's Current Report on Form 8-K, as
amended, dated January 23, 1998 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon, dated February 27,
1998, January 8, 1998,
-51-
<PAGE>
January 14, 1998 and January 13, 1998, respectively, included therein and
incorporated herein by reference. Such consolidated financial statements and
financial statement schedule and statements of revenues and certain expenses are
incorporated herein by reference, in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
-52-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 16. Exhibits
Exhibit 4(a) Third Amended and Restated Declaration of Trust of the Company
dated March 14, 1997 as amended by Articles Supplementary dated
October 23, 1997 (incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997 (Commission File No. 1-13080))
Exhibit 4(b) Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Current Report on Form
8-K dated March 14, 1997 and filed March 31, 1997 (Commission
File No. 1-13080))
Exhibit 4(c) Form of Agreement of Limited Partnership of Grove Operating,
L.P., among the Company and the other partners named therein
(incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated February 13, 1997 (Commission
File No. 1-13080))
Exhibit 4(d) Amendment to the Agreement of Limited Partnership of Grove
Operating, L.P., among the Company and the other partners named
therein (incorporated by reference to Exhibit 4.3 to Amendment
No. 2 to the Company's Registration Statement on Form S-2 (No.
333-38183))
Exhibit 4(e) Revolving Credit Agreement dated March 26, 1997, among Grove
Operating, L.P., the Company, Rhode Island Hospital Trust Bank
National Bank (a Bank of Boston company) and Other Banks which
may become parties to the Agreement and Rhode Island Trust
National Bank, as Agent (incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1997 (Commission File No. 1-13080))
Exhibit 5 Opinion of Piper & Marbury L.L.P. (incorporated by reference to
Exhibit 5 to the Company's Registration Statement on Form S-3
(No. 333-48551))
Exhibit 8 Opinion of Cummings & Lockwood re: Tax Matters (incorporated by
reference to Exhibit 8 to the Company's Registration Statement on
Form S-3 (No. 333-48551))
Exhibit 23(a) Consent of Ernst & Young LLP
Exhibit 23(b) Consent of Piper & Marbury L.L.P. (included in Exhibit 5)
Exhibit 23(c) Consent of Cummings & Lockwood (included in Exhibit 8)
Exhibit 24 Power of Attorney (incorporated by reference to Exhibit 24 to the
Company's Registration Statement on Form S-3 (No. 333-48551))
II-1
<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
of the requirements for filing on Form S-3 and has duly caused this amendment to
its registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Hartford, State of Connecticut, on May
29, 1998.
GROVE PROPERTY TRUST
By /s/ DAMON D. NAVARRO
-------------------------------
Damon D. Navarro
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to this Registration Statement has been signed by the following
persons in the capacities shown on the 29th day of May, 1998.
Damon D. Navarro Trustee and Chairman of )
the Board and Chief )
Executive Officer )
(Principal executive )
officer) )
Joseph R. LaBrosse Trustee and Chief )
Financial Officer (Principal)
financial and accounting )
officer) )
Theodore R. Bigman Trustee ) By /s/ DAMON D. NAVARRO
J. Joseph Garrahy Trustee ) ----------------------
Harold V. Gorman Trustee ) Name: Damon D. Navarro
Edmund F. Navarro Trustee ) Attorney-in-fact
James F. Twaddell Trustee )
II-2
<PAGE>
Exhibit Index
Exhibit 4(a) Third Amended and Restated Declaration of Trust of the Company
dated March 14, 1997 as amended by Articles Supplementary dated
October 23, 1997 (incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997 (Commission File No. 1-13080))
Exhibit 4(b) Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Current Report on Form
8-K dated March 14, 1997 and filed March 31, 1997 (Commission
File No. 1-13080))
Exhibit 4(c) Form of Agreement of Limited Partnership of Grove Operating,
L.P., among the Company and the other partners named therein
(incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated February 13, 1997 (Commission
File No. 1-13080))
Exhibit 4(d) Amendment to the Agreement of Limited Partnership of Grove
Operating, L.P., among the Company and the other partners named
therein (incorporated by reference to Exhibit 4.3 to Amendment
No. 2 to the Company's Registration Statement on Form S-2 (No.
333-38183))
Exhibit 4(e) Revolving Credit Agreement dated March 26, 1997, among Grove
Operating, L.P., the Company, Rhode Island Hospital Trust Bank
National Bank (a Bank of Boston company) and Other Banks which
may become parties to the Agreement and Rhode Island Trust
National Bank, as Agent (incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1997 (Commission File No. 1-13080))
Exhibit 5 Opinion of Piper & Marbury L.L.P. (incorporated by reference to
Exhibit 5 to the Company's Registration Statement on Form S-3
(No. 333-48551))
Exhibit 8 Opinion of Cummings & Lockwood re: Tax Matters (incorporated by
reference to Exhibit 8 to the Company's Registration Statement on
Form S-3 (No. 333-48551))
Exhibit 23(a) Consent of Ernst & Young LLP
Exhibit 23(b) Consent of Piper & Marbury L.L.P. (included in Exhibit 5)
Exhibit 23(c) Consent of Cummings & Lockwood (included in Exhibit 8)
Exhibit 24 Power of Attorney (incorporated by reference to Exhibit 24 to the
Company's Registration Statement on Form S-3 (No. 333-48551))
Exhibit 23(a)
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3 No. 333-48551) and related Prospectus of
Grove Property Trust for the registration of 2,114,439 Common Shares of
Beneficial Interest and to the incorporation by reference therein of our reports
dated February 27, 1998, January 8, 1998, January 14, 1998 and January 13, 1998,
with respect to the (i) consolidated financial statements and financial
statement schedule of Grove Property Trust included in its Form 10-K for the
year ended December 31, 1997, (ii) combined statement of revenues and certain
expenses of Ribbon Mill, Hilltop and Briar Knoll for the year ended December 31,
1996, included in Grove Property Trust's Current Report on Form 8-K, as amended,
dated December 31, 1997, (iii) statement of revenues and certain expenses of
Village Arms for the period from April 22, 1997 to December 31, 1997, included
in Grove Property Trust's Current Report on Form 8-K, as amended, dated December
31, 1997 and (iv) statement of revenues and certain expenses of Tanglewood
Village Apartments for the year ended December 31, 1996, included in Grove
Property Trust's Current Report on Form 8-K, as amended, dated January 23, 1998,
respectively, all as filed with the Securities and Exchange Commission.
Ernst & Young LLP
New York, New York
May 22, 1998
