<PAGE> 1
PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(5)
(To Prospectus dated June 18, 1997) Registration Statement (No.333-28283)
1,300,000 Shares
AMBASSADOR APARTMENTS, INC.
Common Stock
(Par Value $.01 Per Share)
This Prospectus Supplement relates to the offering and sale (the
"Offering") of 1,300,000 shares (the "Shares") of common stock, par value $.01
per share ("Common Stock"), of Ambassador Apartments, Inc. (the "Company"), of
which 865,500 shares will be sold to one or more institutional investors at a
purchase price of $22.625 per share, and 434,500 shares will be sold to one
or more investment accounts of ERE Rosen Real Estate Securities, L.L.C.
("ERE Rosen") at a price of $22.375 per share, resulting in an aggregate
purchase price for all of the Shares of $29,303,875. The Company has agreed
to pay a finders fee of $216,375 to ERE Rosen for its services as a finder in
connection with the Offering.
The Company intends to contribute the net proceeds of the Offering,
which are estimated to be approximately $29.0 million, to Ambassador
Apartments, L.P., a Delaware limited partnership, of which the Company is the
sole general partner and through which the Company conducts substantially all
of its activities. If the Offering closes on or before July 2, 1997, the
Company intends to use approximately $3.1 million of the net proceeds of the
Offering to repay indebtedness outstanding under the Credit Lyonnais Facility
(as defined below), approximately $20.7 million to repay the Acquisition
Advance (as defined below), and the balance of the net proceeds to repay a
portion of the other indebtedness outstanding under the Nomura Credit Facility
(as defined below). In the event that the closing of the Offering occurs after
July 2, 1997, the Company intends to use borrowings under the Credit Lyonnais
Facility to repay the Acquisition Advance, in which case the Company intends to
use approximately $25 million of the net proceeds of the Offering to repay
amounts then outstanding under the Credit Lyonnais Facility and the balance of
the net proceeds to repay a portion of the indebtedness then outstanding under
the Nomura Credit Facility.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "AAH." The Shares have been approved for listing on the NYSE,
subject to official notice of issuance. The closing sale price of the
Common Stock on the NYSE on June 26, 1997 was $24.375 per share.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus Supplement is June 27, 1997
<PAGE> 2
Recent Developments
On June 23, 1997, the Company entered into a new secured revolving
credit facility (as amended, the "Nomura Credit Facility"), expiring December
31, 1997 and providing for loans of up to $75 million based on the amount of
collateral pledged by the Company from time to time, in order to refinance the
Bank One Credit Facility (as defined below) and to provide interim financing
for multifamily apartment acquisitions.
On or about the date of this Prospectus Supplement, the Company expects
to use a special short-term advance of $20.7 million under the Nomura Credit
Facility (the "Acquisition Advance") as bridge financing for the acquisition of
two apartment communities, the Cedar Creek Apartments and the Park Colony
Apartments, for $7.2 million and $14.5 million, respectively. Cedar Creek
Apartments is a 392 unit apartment community in San Antonio, Texas, and Park
Colony Apartments is a 352 unit apartment community in Norcross, Georgia.
The Acquisition Advance is required to be repaid on July 2, 1997. The
Company is seeking to complete the Offering described herein in order to repay
the Acquisition Advance. There can be no assurance that the Company will be
able to complete the Offering or, if the Offering is completed, that
sufficient funds will be available to make the required payment on or before
July 2, 1997. In the event that the Acquisition Advance cannot be paid from
proceeds of the Offering, the Company intends to use borrowings under the
Credit Lyonnais Facility to repay the Acquisition Advance. In that event, the
Company intends to use approximately $25 million of the net proceeds of the
Offering to repay amounts then outstanding under the Credit Lyonnais Facility
and the remaining net proceeds would be used to repay a portion of the
indebtedness then outstanding under the Nomura Credit Facility.
In May 1997, the Company entered into a $25 million unsecured revolving
credit agreement, expiring May 22, 1998 (as amended, the "Credit Lyonnais
Facility"), with Credit Lyonnais New York Branch ("Credit Lyonnais").
Approximately $3.1 million is currently outstanding under the Credit Lyonnais
Facility. The Credit Lyonnais Facility initially provided for borrowings to be
used for working capital and general company purposes, to bear interest at a
rate of LIBOR (as defined in the Credit Lyonnais Facility) plus 2.25% and to be
repaid within 120 days after the date of borrowing. On June 27, 1997, the
Company entered into an amendment to the Credit Lyonnais Facility that
acknowledged the refinancing of the Bank One Credit Facility (as defined below)
with the Nomura Credit Facility, required that borrowings be repaid within 90
days after the date of borrowing rather than 120 days and shortened the
expiration date of the facility to December 31, 1997. As of the date of this
Prospectus Supplement, the Company has approximately $21.9 million of
availability for additional borrowings under the Credit Lyonnais Facility.
Prior to June 23, 1997 the Company had a $75 million secured credit
facility (the "Bank One Credit Facility") with Bank One, Arizona, NA ("Bank
One"), as agent for certain banks (the "Banks"), which facility was entered
into in June 1996. Funds advanced to the Company under the Bank One Credit
Facility were used to acquire various apartment communities during 1996.
With respect to the quarters ending September 30, 1996, December 31, 1996, and
March 31, 1997, the Company failed to comply with certain of the financial
covenants in the Bank One Credit Facility (the "Defaults"). The Company, Bank
One and the Banks entered into an Agreement dated March 31, 1997 and a Second
Agreement dated May 29, 1997 pursuant to which Bank One and the Banks agreed to
forbear from exercising their rights and remedies with respect to the Defaults
until June 30, 1997.
On June 20, 1997, the Company, Bank One and the Banks amended and
restated the Second Agreement (which had not previously become effective
because certain conditions precedent had not
S-2
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occurred) (the "Restated Second Agreement"). Pursuant to the Restated Second
Agreement, Bank One and the Banks agreed (a) effective as of June 1996, to waive
compliance with each of the covenants giving rise to the Defaults until July 15,
1997, and (b) to forbear from exercising any of their rights and remedies as a
result of the Defaults until July 15, 1997 unless the balance under the Bank One
Credit Facility had been paid prior to that date, which payment was made on June
23, 1997. Pursuant to the terms of the Restated Second Agreement, the Company
agreed not to draw any further amounts under the Bank One Credit Facility.
On June 23, 1997, the Company entered into the Nomura Credit Facility
with Nomura Asset Capital Corporation ("Nomura"). The Nomura Credit Facility
expires on December 31, 1997, bears interest at 1 month LIBOR (as defined in the
Nomura Credit Facility) plus 1.50% and has a maximum commitment of $75 million
based upon the amount of collateral pledged by the Company from time to time.
The Company entered into the Nomura Credit Facility in order to refinance the
Bank One Credit Facility and to provide interim financing for multifamily
apartment acquisitions. As of June 26, 1997, five properties were pledged as
collateral under the Nomura Credit Facility, and the amount available under the
Nomura Credit Facility was approximately $28.9 million (less amounts then
outstanding). The Company borrowed $27.3 million under the Nomura Credit
Facility on June 23, 1997 and used the proceeds to pay all of the Company's
$26.5 million outstanding indebtedness under the Bank One Credit Facility and
$800,000 of fees and expenses in connection with the Nomura Credit Facility.
Accordingly, approximately $2.6 million of additional borrowing was available
under the Nomura Credit Facility as of that date.
On June 26, 1997, the Company entered into an amendment to the Nomura
Credit Facility to permit the Company, notwithstanding the maximum
availability provisions described above, to borrow the Acquisition Advance of
$20.7 million to acquire the Cedar Creek Apartments and Park Colony Apartments.
The Acquisition Advance is intended to serve as short-term bridge financing and
is required to be repaid by July 2, 1997. However, a failure by the Company to
repay the Acquisition Advance when due would not become an Event of Default
until the expiration of a grace period ending on July 10, 1997. If the
Acquisition Advance is paid when due and the Cedar Creek Apartments and Park
Colony Apartments are pledged as collateral, the amount available for additional
borrowings under the Nomura Credit Facility is expected to be approximately $15
million.
The Company is seeking to refinance the Nomura Credit Facility,
which expires on December 31, 1997, with an alternative source of secured
credit on a long-term basis. In this regard, the Company has received several
term sheets and is currently in discussions with several capital providers with
respect to the provision of a secured credit facility for up to $100 million,
depending on the amount of collateral pledged by the Company from time to time.
However, a definitive agreement has not been entered into with respect to a
new secured credit facility and there can be no assurance that a new facility
will be entered into or as to the terms of any such facility.
Statements made herein about the Company's expected acquisition of the
Cedar Creek Apartments and the Park Colony Apartments about the Company's goal
of amending the Credit Lyonnais Facility and completing the Offering, and about
the Company's goal of refinancing the Nomura Credit Facility constitute
forward-looking information that by their nature are uncertain. The Company's
expectations and goals may not be fulfilled for the reasons stated herein or
for other reasons beyond the control of the Company.
S-3
<PAGE> 4
PROSPECTUS
AMBASSADOR APARTMENTS, INC.
Common Stock
(Par Value $.01 Per Share)
Ambassador Apartments, Inc. (the "Company") may offer from time to time up
to 2,500,000 shares of its Common Stock, par value $.01 per share ("Common
Stock"). The Common Stock may be offered in amounts, at prices and on terms to
be determined in light of market conditions at the time of sale and set forth
in a supplement accompanying this Prospectus (a "Prospectus Supplement"). The
number of shares, initial public offering price, the proceeds to the Company
and the names of the underwriters, if any, of the Common Stock will be set
forth in a Prospectus Supplement.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "AAH."
The Common Stock may be offered and sold directly by the Company to
investors, through agents designated from time to time by the Company or to
underwriters or dealers. The Company also may issue the Common Stock upon
conversion of outstanding convertible securities or upon the exercise of
outstanding warrants issued by the Company or an affiliate of the Company. If
any agents of the Company or any underwriters are involved in the sale of any
Common Stock in respect of which this Prospectus is being delivered, the names
of such agents or underwriters and any applicable commissions or discounts will
be set forth in a Prospectus Supplement. See "Plan of Distribution."
This Prospectus may not be used to consummate sales of the Common Stock
unless accompanied by a Prospectus Supplement.
-------------------
SEE "RISK FACTORS" AT PAGE 4 OF THIS PROSPECTUS FOR CERTAIN
RISK FACTORS RELATING TO AN INVESTMENT IN THE COMMON STOCK.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus is June 18, 1997
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Electronic reports, proxy statements and other information
filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval system are publicly available through the Commission's Web site
(http://www.sec.gov). In addition, the Common Stock is listed on the NYSE, and
similar information concerning the Company can be inspected and copied at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, NY
10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (including all amendments thereto, the "Registration Statement") with
respect to the securities offered hereby. As permitted by the rules and
regulations, this Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto, which may be examined without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20459, and copies of which may
be obtained from the Commission upon the payment of prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996;
(b) the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997;
(c) the Company's Current Reports on Form 8-K dated February 21,
1997, March 3, 1997 and June 23, 1997
(d) all other reports filed pursuant to Section 13(a) or 15(d) of
the Exchange Act since the end of the Company's fiscal year ended
December 31, 1996; and
(e) the description of the Common Stock contained in the
Company's Registration Statement on Form 8-A filed on December 8,
1995, and any amendments or reports filed for the purpose of
updating such description.
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All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the securities offered hereby shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the date of filing such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
A copy of any or all of the documents incorporated herein by reference
(other than exhibits, unless such exhibits are specifically incorporated by
reference in any such document) will be provided without charge to any person,
including a beneficial owner, to whom a copy of this Prospectus is delivered,
upon written or oral request. Requests for copies should be directed to
Ambassador Apartments, Inc., 77 West Wacker Drive, Suite 4040, Chicago,
Illinois 60601, Attention: Corporate Secretary (telephone: (312) 917-1600).
THE COMPANY
The Company was formed in Maryland on April 15, 1994, and is a
self-administered and self-managed real estate investment trust ("REIT")
engaged in the ownership and management of garden style apartment properties
leased primarily to middle income tenants. As of June 15, 1997, the Company
owned 50 apartment communities (the "Properties") with a total of 14,984 units
located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and Texas.
The Company conducts substantially all of its activities through Ambassador
Apartments, L.P., a Delaware limited partnership (the "Operating Partnership").
The Company is the sole general partner of the Operating Partnership and
as of June 15, 1997, owned approximately 91.1% of the outstanding common units
of partnership interest (the "Common Units") and 100% of the preferred units of
partnership interest (the "Class A Preferred Units") of the Operating
Partnership. Fee title to each of the Properties is held in a property
partnership (a "Property Partnership") in which the Operating Partnership or
another direct or indirect subsidiary of the Company is a general partner.
The Company's mission is to deliver long term growth in value and
increasing earnings for its stockholders by providing: (i) an organization
dedicated to excellence, (ii) affordable, quality housing for its residents,
(iii) respect and opportunity for its employees, and (iv) socially responsible
corporate behavior to its customers and the communities in which it invests.
The Company intends to meet this goal by increasing cash flow on a per share
basis and by increasing the value of the Company's portfolio of properties
while preserving and protecting the Company's assets. The Company believes it
can best achieve the foregoing by acquiring additional apartment properties
that meet its investment criteria, developing new apartment properties where
market conditions warrant, maximizing the cash flow through active property
management, and seeking tax-exempt bond financing to fund future acquisitions,
refinancings and new construction.
Management believes its overall portfolio size, management operations and
property concentrations in selected geographic markets provide economies of
scale regarding operating expenses, advertising, marketing and insurance.
Management also believes that a geographic distribution of properties in a
number of strategically selected markets helps insulate the overall portfolio's
economic returns from
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regional economic fluctuations. The Company will continue to focus on
acquisitions in its principal markets which represent metropolitan areas in
which the Company owns more than 1,000 apartments ("Principal Markets"). The
Company's Principal Markets currently include Phoenix and Tucson, Arizona;
Tampa/Saint Petersburg, Florida; and Austin, Houston and San Antonio, Texas.
Unless otherwise indicated or the context otherwise requires, all
references to the "Company" in this Prospectus include the Company and its
subsidiaries (including the Operating Partnership) and unconsolidated
investments in Property Partnerships.
The Company's principal executive offices are located at 77 West Wacker
Drive, Suite 4040, Chicago, Illinois 60601, and its telephone number is (312)
917-1600
RISK FACTORS
When used in this Prospectus, the word "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially, including, but not
limited to, those set forth below. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
In addition to the other information contained or incorporated by
reference in this Prospectus, prospective investors should carefully consider,
among other factors, the matters described below before purchasing any the
Common Stock offered hereby.
FINANCING RISKS
Inability to Pay Debt Service. The Company is 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. Substantially all of the Company's outstanding indebtedness,
including its tax-exempt bonds, credit facilities and reimbursement obligations
with respect to the credit enhancement for the variable rate tax-exempt bonds,
is secured directly or indirectly by mortgages affecting the Properties. If
the Company or the relevant Property Partnership, as applicable, is unable to
meet its obligations under any of these agreements, a loss could be sustained
as a result of foreclosure on the relevant Property by the mortgagee. Certain
debt is secured by multiple Properties; if a default occurs under the
applicable agreements, the lender would be entitled to exercise its remedies,
including foreclosure, under its mortgages encumbering the entire pool of
Properties securing the Company's obligations under these agreements.
Variable Rate Debt. A substantial portion of the Company's currently
outstanding indebtedness bears interest at rates that adjust based on
prevailing market interest rates. Although the Company has interest rate
protection agreements which hedge its exposure to increases in interest expense
for the majority of its variable rate debt, increases in the interest rates on
the variable rate debt would adversely affect the Company's results of
operations and financial condition and could reduce the amount of funds
available for distribution to stockholders.
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Inability to Renew Credit Enhancements. The Company's variable rate
long-term tax-exempt bonds are marketed based on credit enhancement provided by
unaffiliated third parties. In addition, the fixed-rate, tax-exempt debt of an
unconsolidated Property Partnership totaling $11.8 million is marketed based on
credit enhancement provided by an unaffiliated third party and has the benefit
of a standby credit enhancement commitment provided by another unaffiliated
third party. Generally, the credit enhancement on each issue of the Company's
variable rate, tax-exempt bonds is a collateral pledge guaranty issued by a
bond surety or a letter of credit issued by a bank, which secures the property
owner's obligation to pay interest on, and principal of, the bonds when due.
If the Company is unable to replace any credit enhancement when it expires, or
to remarket the applicable bonds without credit enhancement, the indebtedness
under such bonds could be accelerated, in which event lenders would be entitled
to foreclose under the mortgages securing such indebtedness. The interest cost
of the credit-enhanced debt will increase or the debt could be unmarketable
(with the resulting risk of acceleration and foreclosure) if the existing
credit enhancement is not replaced upon its expiration or if the credit rating
of a credit enhancement provider is lowered.
Refinancing Risks. Because the Company anticipates that only a small
portion of the Company's mortgage indebtedness will be repaid prior to maturity
and the Company may not have on hand funds sufficient to repay such
indebtedness at maturity, it may be necessary for the Company to refinance debt
through additional debt financing or equity offerings. 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 the Properties upon
disadvantageous terms, which might result in losses to the Company and might
adversely affect the Company's results of operations and financial condition
and could reduce the cash available for distribution. If prevailing interest
rates or other factors at the time of refinancing result in higher interest
rates on refinancings, the Company's interest expense would increase, which
would adversely affect the Company's results of operations and financial
condition and could reduce the cash available for distributions and its ability
to pay expected distributions to stockholders.
Recourse Debt. A portion of the Company's and its unconsolidated Property
Partnerships' currently outstanding indebtedness represents general recourse
obligations of the Operating Partnership, including guarantees of the repayment
of the Company's credit facilities and indemnification obligations to credit
enhancers of tax-exempt bonds, and future indebtedness may represent a general
recourse obligation of the Company. As recourse debt, this debt is a general
obligation of the Operating Partnership or the Company payable out of any
unencumbered assets of the Operating Partnership or the Company, and the
lender's recourse will not be limited solely to the collateral securing the
debt.
No Limitation on Debt. The Company has adopted a debt policy that
requires the Company to satisfy at least two of the three following criteria
with respect to the incurrance of additional debt: (i) a ratio of debt-to-total
market capitalization of less than 60%, (ii) the maintenance of a minimum debt
service coverage ratio of not less than 2.0 to 1.0, defined as consolidated net
operating income divided by the total cost of debt (total cost of debt being
defined as interest payments, recurring financing fees and scheduled principal
reductions), and (iii) a maximum combined loan to value ratio of 70% (value
being determined by applying a 9% capitalization rate to the Company's
property net operating income). The organizational documents of the Company
and the Operating Partnership do not limit the amount or percentage of
indebtedness they may incur. The Board of Directors of the Company (the "Board
of Directors") could change the current policies of the Company and the
Operating Partnership regarding indebtedness, without the vote of the
stockholders. If these policies are changed, the Company and the Operating
Partnership could become more highly leveraged, resulting in an increased risk
of default on the obligations of the Company and the Operating Partnership and
an increase in debt service requirements
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which could affect adversely the financial condition and results of operations
of the Company and, consequently, the Company's ability to make expected
distributions to stockholders.
Potential Limits on Income due to Resident Income Limitations and
Tax-Exempt Bond Compliance Requirements. 37 of the Company's 50 Properties are
subject to one or more restrictions regarding the income level or age of
residents of their apartments. These restrictions may include the requirement
that a percentage of the apartments of the affected Property must be held for
lease to very low, low or moderate income residents (typically, 20% of the
total number of apartments in each affected Property), the requirement that 70%
of the total number of apartments of the affected Property, in addition to
those which must be held for lease to very low, low or moderate income
residents, must be leased to individuals whose annual adjusted gross income
does not exceed a level set by the relevant local housing authority which
issued the bonds, as adjusted from time to time, and the requirement that 5% of
the total number of apartments of the affected Property must be leased or held
for lease to persons who are over 60 years of age (which may be the same
apartments that are held for lease or leased to very low, low or moderate
income persons). The Williamsburg Property also is subject to certain
restrictions on the total return which may be earned on equity invested in the
Property and is subject to the further restriction that the rental charge for
each apartment occupied (or held available for occupancy) by very low, low or
moderate income tenants must be at least 10% less than the average rental
charges for other comparable apartments at the Property. Although the Company
believes that it is in substantial compliance with each of these requirements,
such compliance may have the effect of limiting the Company's income from these
Properties in the event the requirements prevent a rental rate increase on
certain apartments in these Properties that the rental market would otherwise
bear. In particular, if market rental rates at a property increase more quickly
than the applicable income index because of inflation, low vacancy rates in a
market, or otherwise, rental rates charged to very low, low or moderate income
residents may not increase as quickly as the market rents. Moreover, failure
to comply with these requirements could result in termination of the credit
support for the bonds secured by the applicable Property and acceleration of
the underlying indebtedness.
CONFLICTS OF INTEREST
Ability of a Former Owner of the Properties to Influence Timing of Sale or
Refinancing of Such Properties to Affect Its Tax Consequences. Prior to the
exchange, if any, of its Common Units for Common Stock, The Prime Group, Inc.,
an Illinois corporation ("PGI"), which is the predecessor of the Company and a
limited partner of the Operating Partnership, may suffer different and more
adverse tax consequences than the stockholders of the Company upon the sale or
refinancing of the Properties owned at the time of the Company's initial public
offering in August 1994 (the 'Initial Offering"). Therefore, PGI and the
Company, as partners in the Operating Partnership, may have different
objectives regarding the appropriate pricing or the appropriate timing of any
sale or refinancing. Consequently, Michael W. Reschke, a director of the
Company who has an ownership interest in PGI, might not favor a sale or
refinancing of a Property, even though such sale or refinancing might otherwise
be financially advantageous to the Company.
Failure to Enforce Terms of Contribution and Other Agreements. Mr.
Reschke and David M. Glickman, Chairman of the Board of Directors and Chief
Executive Officer of the Company, have a conflict of interest with respect to
their obligations as directors and officers of the Company in enforcing the
terms of the contribution agreement among the Company and PGI, among others,
pursuant to which interests in certain of the Properties were contributed to
the Company in connection with its formation (the "Formation"), which provides
that until August 31, 1997, certain of the Common Units owned by them are
subject to dilution in the event of a breach of a representation or warranty in
such contribution
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agreement. Mr. Glickman, Debra A. Cafaro, the President of the Company, and
Adam D. Peterson, Executive Vice President and Chief Financial Officer of the
Company, also have a conflict of interest with respect to enforcing the
terms of the loan agreements they entered into with the Operating Partnership,
pursuant to which Mr. Glickman borrowed $1.0 million to pay taxes due in
connection with the transfer of 156,250 Common Units to him by PGI, Ms. Cafaro
borrowed $700,000 to purchase 32,990 Common Units, and Mr. Peterson borrowed
$250,000 to purchase 15,625 Common Units. Mr. Reschke also has a conflict of
interest with respect to enforcing the terms of the Amended and Restated
Agreement of Limited Partnership of, and exercising certain of the Company's
rights as the general partner of, the Williamsburg Property Partnership due to
the fact that the person who controls a 50% partnership interest in such
Property Partnership is an officer of PGI and has an equity interest in PGI.
Although all directors and officers of the Company, including those affiliated
with PGI, have a duty to the Company, failure to enforce such agreements might
disadvantage the Company. The Company's independent directors will be
responsible for enforcing the terms of these agreements with affiliates.
Certain officers and directors also have similar conflicts of interest in
connection with enforcing obligations under their employment agreements and
PGI's and Mr. Reschke's non-competition agreements with the Company.
Continued Ownership of Other Properties; Other Activities. PGI continues
to own and operate significant real property projects, although its only
potential multifamily residential properties in the United States (excluding
senior citizen housing and detached single family housing) are vacant land in
Huntley, Illinois which may be sold or used in the future for the development
of townhomes or apartments and approximately seven acres of land in Cincinnati,
Ohio, adjacent to a condominium project developed by PGI, which could be
rezoned to permit the development of up to 34 condominium units. The Huntley
property is part of a 2,600 acre parcel of land which is expected to be a
mixed-use development zoned to permit construction of single family,
multifamily, retail, commercial and industrial projects; Prime Retail, Inc., a
publicly traded REIT in which PGI holds a significant ownership interest and of
which Mr. Reschke is Chairman of the Board, owns and operates a factory outlet
center on a portion of this parcel. As a result of these interests, certain
conflicts of interest may arise between Mr. Reschke's duties and
responsibilities to the Company and his other interests. Noncompetition
agreements with PGI and Mr. Reschke prohibit them from engaging in the
multifamily residential business in the United States for so long as they and
certain of their affiliates own 5% or more of the Common Stock and interests in
the Operating Partnership exchangeable for shares of Common Stock except
through PGI's interest in the Company and except for the properties owned by
PGI described above or ownership of less than 5% of any class of securities
listed on a national securities exchange or the Nasdaq National Market.
However, there can be no assurance that these contracts or the Company's
policies with respect to conflicts of interest always will be successful in
eliminating the influence of such conflicts and, if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders.
RISKS OF EQUITY REAL ESTATE INVESTMENTS; ADVERSE IMPACT ON ABILITY TO MAKE
DISTRIBUTIONS; EFFECT ON VALUE OF PROPERTIES
Dependence on Particular Regions. The Properties are located throughout
the United States, with a substantial percentage of the total number of the
Company's apartments located in Arizona, Florida and Texas. The Company's
results of operations, financial condition, ability to make distributions to
stockholders and the value of the Capital Stock (as defined below) will be
dependent upon economic conditions and the demand for the rental of apartments
in those states and the individual markets therein in which the Properties are
located.
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
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expenses incurred in operating the properties. If the Company's properties do
not generate revenue sufficient to meet operating expenses, debt service, if
any, and capital expenditures, the Company's results of operations, financial
condition and ability to make distributions to its stockholders 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 the oversupply of apartments or a reduction in demand for
apartments, availability of "for purchase" housing, availability of single
family home mortgage loans, the attractiveness of the properties to tenants,
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 results of
operations and financial condition will also be adversely affected if a
significant number of tenants are unable to pay rent or if the apartments
cannot be rented on favorable terms. Certain significant expenditures
associated with each equity investment 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
income and value of an apartment property are affected by such factors, among
others, as changes in zoning, building, environmental, rent control and other
laws and regulations, changes in real property taxes and interest rates, the
availability of financing and acts of God (such as earthquakes and floods) and
other factors beyond the control of the Company. The Company is exposed to the
various types of litigation that may be brought against a property owner or
manager in the ordinary course of business.
Illiquidity of Real Estate. Equity real estate investments are relatively
illiquid and, therefore, will tend to restrict the Company's ability to vary
its portfolio of apartment 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 at such time might be
less than the Company's total investment in the Operating Partnership. In
addition, the Internal Revenue Code of 1986, as amended (the "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 Stock. See "Federal Income Tax Considerations."
Risks of Renovation, Development and Acquisitions. The Company has in the
past and may in the future renovate properties it acquires. In addition, the
Company may develop new apartment properties if it determines that such
development is warranted. In connection with any renovation or development
project, the Company will bear certain risks, including the risks of
construction delays or cost overruns that may increase project costs and could
make such project uneconomical, the risk that occupancy or rental rates at a
completed project will not be sufficient to enable the Company to pay operating
expenses or earn its targeted rate of return on its investment, and the risk of
incurrence of predevelopment costs in connection with projects that are not
pursued to completion. In case of an unsuccessful renovation or development
project, the Company's loss could exceed its investment in such project.
Renovation or development projects may be more highly leveraged than the
Company's portfolio as a whole, which may result in an increased risk of
default and loss of equity investment if the project does not have sufficient
cash flow to cover its debt service requirements. In addition, the Company
anticipates that any new development will be financed under lines of credit or
other forms of secured or unsecured construction financing that will result in
a risk that permanent financing for newly developed projects might not be
available or would be available only on disadvantageous terms. Furthermore, the
fact that the Company must distribute 95% of its REIT taxable income in order
to maintain its qualification as a REIT will limit the ability of the Company
to rely upon income from operations or cash flow from operations to finance new
development or acquisitions. As a result, if permanent debt or equity financing
were not available on acceptable terms to refinance new development or
acquisitions undertaken without permanent financing, further development
activities or acquisitions might be curtailed or cash available for
distribution might be adversely affected.
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The Company intends to actively continue to acquire multifamily
properties. 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, as well as
general investment risks associated with any new real estate investment.
Regulation. In addition to the restrictions imposed in connection with
the tax exempt bond financings, a number of Federal, state and local laws
exist, such as the Americans with Disabilities Act, which may require
modifications to existing buildings or restrict certain renovations by
requiring access to such buildings, and apartments in the buildings, by
disabled persons. 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 limit application of the Company's
investment strategy in certain instances or reduce overall returns on its
investments. The Company believes that all of its Properties are in substantial
compliance with laws currently in effect, and will review periodically its
apartment properties to determine continuing compliance with existing laws and
any additional laws that are hereafter promulgated.
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 the FHAA could result in the imposition
of fines or an award of damages to private litigants. The Company believes that
those Properties that are subject to the FHAA are in compliance with such law.
Competition. There are numerous real estate companies which compete with
the Company in seeking apartment properties for acquisition and development,
and for tenants to occupy such properties. The Company may be competing with
companies that have greater resources than the Company and whose officers and
directors or trustees have more experience than the Company's officers and
directors. In addition, the availability of single-family housing and other
forms of multifamily residential properties, such as manufactured housing
communities, provide alternatives to potential tenants of apartment properties.
These competitive factors could adversely affect the income generated by the
Properties and the Company's results of operations and financial condition.
ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company believes that it was organized and has operated so as to
qualify as a REIT under the Code and intends to operate to remain so qualified.
A REIT generally is not taxed at the corporate level on income it currently
distributes to stockholders so long as it distributes at least 95% of its REIT
taxable income. Although the Company believes that it was organized and has
operated in such a manner so as to qualify as a REIT, no assurance can be given
that the Company has so qualified or will be able to continue to qualify as a
REIT. Qualification as a REIT involves the application of highly technical and
complex Code provisions 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 qualify and to continue to qualify as a REIT. The complexity of
these provisions and of the applicable income tax regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets through a partnership. Moreover, no assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not change the tax laws with respect to qualification as a REIT
or the Federal income tax consequences of such qualification. See "Federal
Income Tax Considerations."
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If the Company fails to qualify as a REIT in any taxable year, the Company
would not be allowed a deduction for distributions to stockholders in computing
its taxable income, and such distributions would be subject to Federal income
tax at regular corporate rates. 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 funds of the
Company available for repayment of other obligations of the Company, for
investment or for distribution to stockholders 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 Code, and to the extent that distributions to stockholders
would have been made in anticipation of the Company's qualifying as a REIT, the
Company might be required to borrow funds or to liquidate certain of its assets
to pay the applicable corporate tax. Although the Company currently intends to
continue to operate in a manner designed to qualify as REIT, it is possible
that future economic, market, legal, tax or other considerations may cause the
Board of Directors with the consent of the holders of a majority of the Capital
Stock outstanding and entitled to vote thereon, to decide to revoke the REIT
election. See "Federal Income Tax Considerations."
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO STOCKHOLDERS COULD AFFECT REIT
STATUS; POTENTIAL REQUIREMENT TO BORROW
To continue to obtain the favorable tax treatment accorded to REITs under
the Code, the Company generally is required each year to distribute to its
stockholders 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 the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less
than the sum of 85% of its ordinary income plus 95% of its capital gain net
income for the calendar year, plus 100% of its undistributed income from prior
years.
The Company has made and intends to continue to make distributions to its
stockholders to comply with the distribution provisions of the Code and to
avoid Federal 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, and the Company's cash flow consists primarily of its share of
distributions from the Operating Partnership. 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 require the Company to borrow funds through the Operating
Partnership on a short-term or long-term basis to meet the distribution
requirements that are necessary to continue to qualify as a REIT. In such
circumstances, the Company might need to borrow funds to avoid adverse tax
consequences even if management believes that the then prevailing market
conditions generally are not favorable for such borrowings or that such
borrowings are not advisable in the absence of such tax considerations.
Distributions by the Operating Partnership are determined by the Company,
as the sole general partner, through the Board of Directors and are dependent
on a number of factors, including the amount of cash available for
distribution, the Operating Partnership's financial condition, any decision by
the Board of Directors to reinvest funds rather than to distribute such funds,
the Operating Partnership's capital expenditure requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. There is no assurance that
the Company will be able to continue to satisfy the annual distribution
requirement so as to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Annual Distribution
Requirements."
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CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIPS
The Company believes that the Operating Partnership, each of the Property
Partnerships and the other partnerships (other than the Operating Partnership)
in which the Company has a direct or indirect interest (together with the
Property Partnerships, the "Subsidiary Partnerships") are properly treated as
partnerships for Federal income tax purposes. If the Operating Partnership or
any Subsidiary Partnership were to fail to qualify as a partnership for Federal
income tax purposes, the Operating Partnership or the affected Subsidiary
Partnership would be taxable as a corporation, and the Company could cease to
qualify as a REIT for Federal income tax purposes. In addition, the Subsidiary
Partnerships that own property in Texas presently fall outside of the
jurisdiction of the Texas franchise tax, which currently only applies to
corporations and limited liability companies. If such a Subsidiary Partnership
is determined to be taxable as a corporation or the Texas franchise tax law is
amended to apply to partnerships, such Subsidiary Partnership would be subject
to Texas franchise tax. The imposition of a corporate tax or Texas franchise
tax on the Operating Partnership or any of the Subsidiary Partnerships could
reduce substantially the amount of cash available for distribution to the
Company. This reduction, together with a loss of REIT status of the Company,
if it occurs, would reduce substantially the amount of cash available to repay
the Company's obligations or for distribution to the Company's stockholders and
could adversely affect the Company's business, results of operations and
financial condition, its ability to make distributions to its stockholders and
the market value and marketability of the Common Stock. See "Federal Income
Tax Considerations--Tax Aspects of the Operating Partnership."
NECESSITY TO MAINTAIN OWNERSHIP LIMIT REQUIRED TO MAINTAIN REIT QUALIFICATION;
ANTI-TAKEOVER EFFECT
For the Company to maintain its qualification as a REIT, among other
requirements, not more than 50% in value of the outstanding Capital Stock may
be owned, actually or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (including certain tax-exempt entities,
other than, in general, qualified domestic pension funds) at any time during
the last half of any taxable year of the Company other than the first taxable
year for which the election to be taxed as a REIT has been made (the "five or
fewer" requirement). The Company's Amended and Restated Articles of
Incorporation, as amended (the "Charter"), contains certain restrictions on the
ownership and transfer of Capital Stock, described below, which are intended to
prevent concentration of stock 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, and the Company will not be able to prevent
such termination. For a description of the consequences of the Company's
failure to qualify as a REIT, see "--Adverse Tax Consequences of Failure to
Qualify as a REIT" and "Federal Income Tax Considerations--Failure to Qualify
as a REIT."
The Charter provides that no person may acquire or own (either actually or
constructively under the applicable attribution rules of the Code) (i) more
than 9.9% (by number or value, whichever is more restrictive) of the aggregate
of the outstanding shares of Common Stock and the outstanding shares of Excess
Stock (defined below) into which shares of Common Stock have been converted
(see below) or (ii) more than 9.9% (by value) of the outstanding shares of
Capital Stock (the "Ownership Limit"), subject to certain exceptions. In
addition, the Charter provides that no holder may own or acquire (either
actually or under the constructive ownership rules of the Code) shares of any
class of Capital Stock if such ownership or acquisition (i) would cause more
than 50% in value of the outstanding Capital Stock to be owned by five or fewer
individuals or (ii) would otherwise result in the Company's failing to qualify
as a REIT. See "Restrictions on Ownership and Transfer."
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The Charter provides that any attempted acquisition (actual or
constructive) of shares by a person who, as a result of such acquisition, would
violate one of the limitations described above will cause the shares
purportedly transferred to be automatically converted into shares of a
separate class of Capital Stock with no voting rights and no rights to
distributions ("Excess Stock") or, under certain circumstances, the transfer
resulting in such violation will be deemed void ab initio. In addition, the
Charter provides that violations of the ownership limitations which are the
result of certain other events (such as a purchase by the Company of shares of
outstanding Common Stock or Preferred Stock of the Company) generally will
result in an automatic repurchase by the Company of the shares the ownership of
which violates such limits. The Board of Directors may waive the Ownership
Limit with respect to a particular stockholder upon satisfaction of certain
conditions and if it is satisfied, based upon the advice of tax counsel or a
ruling from the IRS, that such ownership in excess of the Ownership Limit will
not jeopardize the Company's status as a REIT. See "Restrictions on Ownership
and Transfer" for information regarding the waiver of the Ownership Limit in
connection with the issuance of the Class A Preferred Stock and for additional
information regarding the aforementioned limits.
Limiting the ownership of more than 9.9% of the outstanding shares of
Capital Stock may (i) discourage a change of control of the Company, (ii) deter
tender offers for Capital Stock, which offers may be attractive to the
Company's stockholders, or (iii) limit the opportunity for stockholders to
receive a premium for their Capital Stock that might otherwise exist if an
investor attempted to assemble a block of Capital Stock in excess of the
Ownership Limit or to effect a change of control of the Company.
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER VOTE
Subject to the Company's fundamental investment policy to maintain its
qualification as a REIT, the Company's Board of Directors determines its
investment and financing policies, its growth strategy, and its debt,
capitalization, distribution and operating policies. Although the Board of
Directors has no present intention to revise or amend these strategies and
policies, the Board of Directors may do so at any time without a vote of the
Company's stockholders. Accordingly, stockholders will have no control over
changes in strategies and policies of the Company, and such changes may not
serve the interests of all stockholders and could adversely affect the
Company's financial condition or results of operations.
Risks Involved in Acquisitions Through Partnerships or Joint Ventures.
The Company has invested, and may continue to invest, in apartment communities
through partnerships or joint ventures instead of purchasing apartment
properties directly or through wholly-owned subsidiaries. Partnership or joint
venture investments may, under certain circumstances, involve risks not
otherwise present in a direct acquisition of properties. These include the risk
that the Company's co-venturer or partner in an investment might become
bankrupt; a co-venturer or partner might at any time have economic or business
interests or goals which are inconsistent with the business interests or
goals of the Company; and a co-venturer or partner might be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's policies or objectives. The Company's co-general
partner in the Property Partnership that owns the Brook Run Property also
provides standby credit enhancement for the tax-exempt bonds relating to that
Property and, so long as the standby credit enhancement is in place, will have
the authority in certain circumstances to approve modifications to the bonds
secured by such Property without the Company's approval. There is no limitation
in the Charter as to the amount of investment the Company may make in joint
ventures or partnerships.
Risks Involved in Investments in Securities Related to Real Estate. The
Company may pursue its investment objectives through the ownership of
securities of entities engaged in the ownership of real estate. Ownership of
such securities may not entitle the Company to control the ownership, operation
and
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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 results of operations, financial condition
and ability to make distributions to stockholders. Furthermore, if the Company
desires to control an issuer of securities, 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. See
"Federal Income Tax Considerations--Requirements for Qualification as a REIT."
The Company believes that it has and intends to continue to operate its
business in a manner that will not require the Company to register under the
Investment Company Act of 1940 and stockholders will therefore not have the
protection of that Act.
The Company may also invest in mortgages, 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, the Company's results of operations, financial condition and
ability to make required distributions to stockholders could be adversely
affected.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, in or emitting from such property. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. In addition, the presence
of hazardous or toxic substances, or the failure to properly remediate such
property, may result in personal injury or similar claims by private plaintiffs
and 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 substances. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is owned or operated by such person. 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. On
account of its ownership and operation of the Properties, the Company, the
Operating Partnership and the relevant Property Partnership potentially may be
liable for such costs.
UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood (where
appropriate and available), extended coverage and rental loss insurance with
respect to its Properties with policy specifications, limits and deductibles
customarily carried for similar properties. However, there are certain types of
extraordinary losses (such as from wars or earthquakes) which may be either
uninsurable or not economically insurable. Should an uninsured loss or a loss
in excess of insured limits occur at a Property, the Company could lose its
capital invested in the Property, as well as the anticipated future revenues
from the Property, while remaining obligated for any recourse mortgage
indebtedness or other financial obligations related to the Property. Any such
loss would adversely affect the Company's businesses, results of operations and
financial condition. 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
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non-recourse obligations. The Company's management believes that the Properties
are insured adequately and in accordance with prevailing real estate industry
standards for properties similar to the Properties.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE COMPANY
Certain provisions of the Charter and the Amended and Restated Bylaws of
the Company (the "Bylaws") may have the effect of discouraging a third party
from making an acquisition proposal for the Company and may thereby inhibit a
change in control of the Company under circumstances that could give the
holders of Capital Stock the opportunity to realize a premium over the
then-prevailing market prices of such Capital Stock. Such provisions include
the requirements regarding the staggered terms of the Board of Directors and
removal of directors set forth in the Charter and the advance notice
requirements for certain stockholder proposals set forth in the Bylaws. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws."
Ownership Limit. The Ownership Limit imposed by the Charter for the
purpose of preserving the Company's REIT qualification may also have the effect
of precluding an acquisition of control of the Company without the approval of
the Board of Directors. See "--Necessity to Maintain Ownership Limit Required
to Maintain REIT Qualification; Anti-Takeover Effect" and "Restrictions on
Ownership and Transfer."
Preferred Stock. The Charter permits the Board of Directors to issue up
to 20 million shares of Preferred Stock (of which 1,351,351 shares are
currently issued and outstanding) and to establish the preferences and rights
(including the right to vote and the right to convert into shares of any other
class of Capital Stock) of any such Preferred Stock issued. Thus, the Board of
Directors could authorize the issuance of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction in which stockholders of the Company might receive a premium for
their shares over the then-prevailing market price of such shares. See
"Description of Capital Stock--Additional Series of Preferred Stock."
Staggered Board. The Board of Directors has three classes of directors,
with terms expiring in successive years. Subject to any special provisions
applicable to directors elected by the holders of Preferred Stock, as the term
of each class expires, each director in that class will be elected for a term
of three years. The affirmative vote of two-thirds of the aggregate number of
votes then entitled to be cast generally in the election of directors is
required to remove a director.
Exemption from Maryland Business Combination Law and Maryland Control
Shares Acquisition. As permitted by the Maryland General Corporation Law
("MGCL"), the Charter contains a provision which provides for the exemption of
the Company from the application and effect of the Maryland Business
Combination Statute, which prohibits or restricts certain "business
combinations" between a Maryland corporation (such as the Company) and any
"interested person" (generally defined as any person who owns 10% or more of
the voting power of the entity's shares or any "affiliate" of any interested
stockholder). In addition, the Charter contains a provision which provides for
the exemption of all acquisitions of Capital Stock from the effect of the
Maryland control shares acquisition statute. There can be no assurance that
these Charter provisions will not be amended or eliminated at any point in the
future. The rescission of either of the foregoing exemptions in the Charter
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer. See "Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws--Business
Combinations."
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USE OF PROCEEDS
The Amended and Restated Agreement of Limited Partnership of the Operating
Partnership (the "Partnership Agreement") requires the Company to contribute to
the Operating Partnership, as an additional capital contribution, any net
proceeds from the issuance of Common Stock in exchange for additional Common
Units of the Operating Partnership. Except as otherwise provided in the
Prospectus Supplement relating to an offering of the Common Stock, the
Operating Partnership intends to use the net proceeds from the sale of the
Common Stock offered hereby for working capital and general company purposes,
which may include the repayment of indebtedness, the financing of capital
commitments and possible future acquisitions of apartment communities.
Proceeds from the sale of the Common Stock offered hereby may be temporarily
invested in interest-bearing accounts and short-term, interest-bearing
securities. Any specific allocation of the net proceeds of an offering of the
Common Stock to a specific purpose will be determined at the time of such
offering and will be set forth in the related Prospectus Supplement.
DESCRIPTION OF CAPITAL STOCK
The following summary of certain terms of the capital stock of the Company
and Maryland law does not purport to be complete and is subject to and
qualified in its entirety by reference to the Company's Charter and Bylaws,
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part, and Maryland law.
GENERAL
The Company's Charter provides that the Company may issue up to
100,000,000 shares of Common Stock, 20,000,000 shares of Preferred Stock, par
value $.01 per share ("Preferred Stock"), including 1,351,351 shares of Class A
Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Stock"),
and 120,000,000 shares of Excess Stock, par value $.01 per share ("Excess
Stock"), of which 100,000,000 is designated Excess Common Stock, into which
Common Stock may be converted to prevent a violation of the Ownership Limit,
and 20,000,000 is designated Excess Preferred Stock, into which Preferred Stock
may be converted to prevent a violation of the Ownership Limit, including
1,351,351 shares designated as Excess Class A Preferred Stock. The terms of
the Excess Stock are further described under "Restrictions on Ownership and
Transfer." The Common Stock, Preferred Stock and Excess Stock are herein
referred to as "Capital Stock." As of June 15, 1997, there were 9,182,180
shares of Common Stock and 1,351,351 shares of Class A Preferred Stock issued
and outstanding. As of June 15, 1997, the Company has reserved 2,197,000
shares of Common Stock for issuance upon exercise of options granted under the
Company's stock incentive plans, 1,351,351 shares of Common Stock for issuance
upon conversion of the Class A Preferred Stock, 925,006 shares of Common Stock
issuable upon exchange of outstanding partnership units of Jupiter-I, L.P.,
270,227 shares of Common Stock issuable upon exchange of outstanding
partnership units of Jupiter-II, L.P., 895,318 shares of Common Stock for
issuance upon exchange of outstanding Common Units and 450,000 shares of Common
Stock for issuance upon exchange of Common Units issuable if certain
performance criteria are met in full.
COMMON STOCK
All of the Common Stock offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of the Class A Preferred
Stock and any other shares or series of shares and to the provisions of the
Charter regarding any Preferred Stock and Excess Stock, holders of shares
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of Common Stock will be entitled to receive distributions on such shares if, as
and when authorized and declared by the Board of Directors out of assets
legally available therefor and to share ratably in the assets of the Company
legally available for distribution to the stockholders in the event of the
liquidation, dissolution or winding up of the Company after payment of, or
adequate provision for, all known debts and liabilities of the Company. The
Company has paid quarterly distributions since November 15, 1994, and intends
to continue to pay quarterly distributions.
The Company will not voluntarily terminate the Company's status as a REIT
without the affirmative vote or consent of the holders of at least a majority
of the shares of Common Stock and all other series or classes of Capital Stock
entitled to vote thereon and then outstanding, voting together as a single
class, given in person or by proxy, either in writing or at a meeting.
Subject to the provisions of the Charter regarding Excess Stock and any
special voting rights afforded to the holders of the Class A Preferred Stock or
any other class or series of Preferred Stock, each outstanding share of Common
Stock entitles the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors (other than any directors to
be elected solely by the vote of one or more classes or series of Preferred
Stock from time to time) and, except as otherwise required by law and except as
provided with respect to the Class A Preferred Stock or any other class or
series of shares, the holders of such shares will possess exclusive voting
power. There is no cumulative voting in the election of directors, which means
that the holders of a majority of the outstanding shares of Capital Stock
entitled to vote in the election of directors can elect all of the directors
then standing for election and the holders of the remaining shares will not be
able to elect any directors.
Holders of Common Stock have no conversion, sinking fund, redemption
rights or preemptive rights to subscribe for any securities of the Company.
Subject to the provisions of the Charter regarding Excess Stock, shares of
a particular class of issued Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference or
exchange rights.
Certain provisions in the Charter or Bylaws may have the effect of
inhibiting a change in control of the Company. See "Certain Provisions of
Maryland Law and of the Company's Charter and Bylaws" and "Restrictions on
Ownership and Transfer."
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
The Common Stock is listed on the NYSE under the symbol "AAH."
CLASS A PREFERRED STOCK
On August 16, 1996, the Company issued and sold to Five Arrows Realty
Securities L.L.C. ("Five Arrows") 1,351,351 shares of its Class A Preferred
Stock. The Class A Preferred Stock has a liquidation value of $18.50 per share
(the "Liquidation Value").
The Class A Preferred Stock provides for a cumulative annualized dividend
equal to $1.68, $1.73, $1.78, $1.84 and $1.89 in years one through five after
issuance, respectively, and thereafter equal to the greater of $1.68 and 105%
of the dividend paid by the Company on Common Stock. The Class A Preferred
Stock is convertible into Common Stock during the first year after issuance at
rate of 0.926
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shares of Common Stock for each share of Class A Preferred Stock and thereafter
or after a Change of Control (as defined below) at a rate of one share of
Common Stock for each share of Class A Preferred, in each case, subject to
certain anti-dilution adjustments. A "Change of Control" means (i) the
acquisition by any person or group of more than 25% of the aggregate voting
power of the Capital Stock (other than the Class A Preferred Stock and the
Common Stock issued upon conversion thereof) or of the Operating Partnership,
(ii) during a period of two consecutive years the members of the Board at the
beginning of such period (including any director elected with the approval of
such directors) do not constitute a majority of the Board (excluding any
directors elected by the holders of the Class A Preferred Stock), (iii) the
Company ceases to be the sole general partner of the Operating Partnership,
(iv) the Company or the Operating Partnership (A) consolidates or merges with
another entity and the Capital Stock is reclassified or exchanged for cash,
securities (unless the holders of the Capital Stock to be exchanged hold at
least 75% of the securities into which such exchange was made) or other
property or (B) transfers or leases all or substantially all of its assets to
another entity, or (v) the Company becomes a "Pension-held REIT" (as defined in
Section 856(h)(3)(D) of the Code) other than as a result of an act or an
unreasonable failure to act by the holders of the Class A Preferred Stock.
The Class A Preferred Stock is redeemable at the option of the Company at
any time following the fifth anniversary of the date of issuance at a price
equal to 106% of the Liquidation Value in the sixth year after issuance,
decreasing from year-to-year to 100% of the Liquidation Value in the fifteenth
year after issuance and thereafter, plus in each case accrued and unpaid
dividends. Upon a Change of Control, the holders of the Class A Preferred
Stock may require the Company to redeem such holders' shares of Class A
Preferred Stock at a price equal to 102% of the Liquidation Value plus accrued
and unpaid dividends. In addition, prior to the fifth anniversary of the date
of issuance of the Class A Preferred Stock, upon certain Changes in Control,
the Company may redeem the Class A Preferred Stock at a price equal to 108% of
the Liquidation Value plus accrued and unpaid dividends.
Except as limited by law, the holders of the Class A Preferred Stock shall
be entitled to vote or consent on all matters submitted to the holders of the
Common Stock together with the holders of the Common Stock as a single class.
For purposes of calculating the votes cast by the holders of the Class A
Preferred Stock when so voting or consenting, each share of Class A Preferred
Stock will entitle the holder thereof to one vote for each share of Common
Stock into which each share of Class A Preferred Stock is convertible.
For so long as Five Arrows and its affiliates are the holders of at least
675,675 shares of the Class A Preferred Stock or shares of Class A Preferred
Stock convertible into at least 5% of the Common Stock on a fully diluted basis
(the "Minimum Threshold"), the holders of the Class A Preferred Stock are
entitled to elect, voting separately as a single class, one director to the
Board of Directors and an additional director if the regular quarterly dividend
on the Common Stock is less than $.40 per share or the Company fails to achieve
certain specified operating targets for three consecutive quarters. If Five
Arrows and its affiliates are not the holders of at least the Minimum
Threshold, the holders of the Class A Preferred Stock are entitled to elect,
voting separately as a single class, a number of directors to the Board equal
to two minus the number of directors elected and serving pursuant to the
preceding sentence, if the Company fails to pay in full the quarterly dividend
in respect of the Class A Preferred Stock for three consecutive quarters.
In addition, so long as Five Arrows and its affiliates hold at least the
Minimum Threshold, the Company has agreed not to repurchase shares of its
Common Stock or the Class A Preferred Stock at a price greater than fair market
value, not to enter into certain transactions with its affiliates and to remain
primarily in the business of owning and managing multi-family properties as is
currently conducted. The
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Company has also agreed to designate one of the directors elected by the
holders of the Class A Preferred Stock to each committee of the Board of
Directors. If the Company breaches any of such covenants, a holder of Class A
Preferred Stock may require the Company to redeem such holders' shares of Class
A Preferred Stock at a price equal to the Liquidation Value plus accrued and
unpaid dividends.
ADDITIONAL SERIES OF PREFERRED STOCK
The Board of Directors has the authority to issue, in addition to the
1,351,351 issued shares of Class A Preferred Stock currently issued and
outstanding, up to 18,648,649 shares of Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders, subject to the rights of the holders of the
Class A Preferred Stock to consent to certain issues. Subject to the consent
rights of the holders of the Class A Preferred Stock, the Board of Directors
could authorize the issuance of Preferred Stock with terms and conditions which
could have the effect of discouraging a takeover or other transaction which the
holders of some, or a majority, of the Common Stock might believe to be in
their interests or in which holders or some, or a majority, of the Common Stock
might receive a premium for their shares over the market price of such shares
or that could have dividend, voting or other rights that could adversely affect
the interests of holders of Common Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Charter contains certain restrictions on the number of shares of
Capital Stock that stockholders may own. For the Company to qualify as a REIT
under the Code, for all years after the first taxable year in which it elects
to be taxed as such (i) not more than 50% in value of its issued and
outstanding Capital Stock may be owned, actually or constructively, by five or
fewer individuals (as defined in the Code) at any time during the last half of
a taxable year and (ii) the Capital Stock 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.
Subject to certain exceptions specified in the Charter, the Charter
provides that no holder may acquire or own, either actually or constructively
under the applicable attribution rules of the Code, (i) more than 9.9% (by
number or value, whichever is more restrictive) of the aggregate of the
outstanding shares of Common Stock and the outstanding shares of the Excess
Stock into which shares of Common Stock have been converted or (ii) more than
9.9% (by value) of the outstanding shares of Capital Stock (the "Ownership
Limit").
If, as a result of a purported acquisition or transfer (actual or
constructive) of Common Stock or Preferred Stock, any person would acquire,
either actually or constructively under the applicable attribution rules of the
Code, shares of Common Stock or Preferred Stock in excess of the Ownership
Limit, the Charter provides that such person (a "Prohibited Holder") will be
deemed to have exchanged the acquired shares that cause the Ownership Limit to
be exceeded for an equal number of shares of Excess Stock, which will be deemed
to be held by the Company as trustee of a trust for the exclusive benefit of
the person or persons to whom the shares can be transferred without violating
the Ownership Limit. The Charter provides that Excess Stock will not be
entitled to vote and will not be entitled to any dividends or distributions;
and that any dividend or distribution paid on shares of Common Stock or
Preferred Stock, as the case may be, prior to the discovery by the Company that
such shares have been exchanged for
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Excess Stock shall be repaid to the Company upon demand, and any dividend or
distribution declared but unpaid shall be rescinded. Unless the Company
exercises its right to purchase the Excess Stock (discussed below) within 15
days of the deemed receipt by the Company, as trustee, of Excess Stock, the
Charter provides that the Company shall designate a beneficiary of the trust in
which such Excess Stock is deemed to be held, which designation shall satisfy
the following conditions: (i) the shares of Excess Stock held in trust would
not be Excess Stock in the hands of such beneficiary and (ii) the consideration
received by the Prohibited Holder from such beneficiary does not exceed a price
(the "Limitation Price") that is equal to the lesser of (x) in the case of a
deemed exchange for Excess Stock resulting from a transfer, the price paid for
the shares in such transfer or, in the case of a deemed exchange for Excess
Stock resulting from some other event, the fair market value, on the date of
the deemed exchange, of the shares deemed exchanged, or (y) the fair market
value of the shares for which such Excess Stock will be deemed to be exchanged
on the date of the designation of the beneficiary (or, in the case of a
purchase by the Company (discussed below), on the date the Company accepts the
offer to sell). For these purposes, fair market value on a given date is
determined by reference to the average closing price for the five preceding
days. Upon any transfer of an interest in the trust, the Charter provides that
the corresponding shares of Excess Stock in the trust shall be automatically
exchanged for an equal number of shares of Common Stock or Preferred Stock, as
the case may be. Notwithstanding the above, the Charter provides that the
Company will have the right to purchase the Excess Stock for a period of 15
days at a price equal to the Limitation Price, payable 90 days after the deemed
receipt by the Company, as trustee of the Excess Stock. Under certain
circumstances, the Charter provides that the purported transfer or acquisition
which results in a violation of the Ownership Limit shall be null and void and
the purported transferee or acquiror will acquire no rights or economic
interests in the Capital Stock transferred or acquired.
In addition, the Charter provides that an automatic exchange of shares of
Common Stock or Preferred Stock for an equal number of shares of Excess Stock
will occur to prevent any violation of the Ownership Limit as the result of a
change in the relationship between two or more persons and the application of
certain constructive ownership rules of the Code. The Company will have a
right to purchase such Excess Stock or designate a beneficiary, as described
above.
The Charter provides that an automatic repurchase of shares by the Company
will occur to the extent necessary to prevent any violation of the Ownership
Limit as the result of events other than the actual or constructive acquisition
of Common Stock or Preferred Stock by the holder or changes in relationship
among holders of Common Stock or Preferred Stock, such as the purchase by the
Company of Common Stock or Preferred Stock. In the event of any such automatic
repurchase, the repurchase price of each share will be equal to the market
price on the date of the purported event that resulted in the repurchase. Any
dividend or other distribution paid to a holder of repurchased shares (prior to
the discovery by the Company that such shares have been automatically
repurchased by the Company as described above) will be required to be repaid to
the Company upon demand, and any dividend declared but unpaid shall be
rescinded.
In addition to the foregoing ownership limits, the Charter provides that
no holder may own, either directly or constructively under the applicable
attribution rules of the Code, any shares of any class of Capital Stock if such
ownership (i) would cause more than 50% in value of outstanding Capital Stock
to be owned, either directly or constructively under the applicable attribution
rules of the Code, by five or fewer individuals (as defined in the Code to
include certain tax-exempt entities, other than, in general, qualified domestic
pension funds), (ii) would result in Capital Stock being beneficially owned by
fewer than 100 persons (determined without reference to any rules of
attribution), or (iii) would otherwise result in the Company failing to qualify
as a REIT. The Charter further provides that acquisition or ownership (actual
or constructive) of Capital Stock in violation of these restrictions will
result in the shares, the
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acquisition or ownership of which violates these restrictions, to be converted
into Excess Stock or automatically repurchased by the Company, or the transfer
which results in a violation of these restrictions will be deemed void ab
initio, as described above.
The Board of Directors may, with a ruling from the Internal Revenue
Service ("IRS") or an opinion of counsel satisfactory to the Board, waive the
ownership restrictions with respect to a particular stockholder if such waiver
will not then or in the future jeopardize the Company's status as a REIT. In
connection with the issuance of the Class A Preferred Stock to Five Arrows, the
Board of Directors has exempted Five Arrows (and, subject to the satisfaction
of certain conditions, its successors in interest and transferees) from the
Ownership Limit.
If the Board of Directors shall at any time determine in good faith that a
person intends to acquire or own, has attempted to acquire or own, or may
acquire or own Capital Stock in violation of the above-described limits, the
Board of Directors shall take such action as it deems advisable to refuse to
give effect to, or to prevent, such ownership or acquisition, including but not
limited to causing the Company to repurchase stock, refusing to give effect to
such ownership or acquisition on the books of the Company, or instituting
proceedings to enjoin such ownership or acquisition.
The constructive ownership rules are complex and may cause Capital Stock
owned actually or constructively by a group of related individuals and/or
entitles to be constructively owned by one individual or entity. As a result,
the acquisition of less than 9.9% of the outstanding shares of Common Stock or
Preferred Stock (or the acquisition of an interest in an entity which owns
Common Stock or Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to constructively own
Capital Stock in excess of the limits described above, and thus subject such
stock to the Ownership Limit.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then the
intended transferee of any Excess Stock may be deemed, at the option of the
Company, to have acted as an agent on behalf of the Company in acquiring such
Excess Stock and to hold such Excess Stock on behalf of the Company.
All certificates representing shares of Capital Stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or regulations thereunder) of the issued and outstanding Common Stock or
Preferred Stock must file a written notice with the Company containing the
information specified in the Charter no later than January 30 of each
year. Furthermore, each stockholder shall upon demand be required to disclose
to the Company in writing such information as the Company may request in order
to determine the effect of such stockholder's direct, indirect and constructive
ownership of such Common Stock or Preferred Stock on the Company's status as a
REIT or to comply with the requirements of any taxing authority or governmental
agency.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Directors, and, consequently, stockholders may be unable to realize a premium
for their shares over the then prevailing market price, which premium is
customarily associated with such acquisitions.
The foregoing ownership limitations will not automatically be removed from
the Charter even if the REIT provisions of the Code are changed so as to no
longer contain any ownership concentration
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limitation or if the ownership concentration limitation is increased. Except
as otherwise described above, any change in the ownership limitations would
require an amendment to the Charter. Such an amendment to the Charter would
require the affirmative vote of holders owning not less than a majority of the
Common Stock then outstanding and entitled to vote thereon, together with any
Preferred Stock having such voting rights. In addition to preserving the
Company's status as a REIT, the ownership limitations may have the effect of
precluding an acquisition of control of the Company without the approval of the
Board of Directors or the stockholders.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
The Charter and Bylaws contain certain provisions which may have the
effect of discouraging a third party from making an acquisition proposal for
the Company and may thereby inhibit a change in control of the Company under
circumstances that could give the holders of Capital Stock the opportunity to
realize a premium over the then-prevailing market prices of the Capital Stock.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Directors.
The Company believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. The description set forth below is intended as a summary only and is
qualified in its entirety by reference to the Charter and Bylaws, the form of
each of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part, and Maryland law.
NUMBER OF DIRECTORS; FILLING VACANCIES; CLASSIFICATION OF THE BOARD OF
DIRECTORS
The Company's Bylaws provide that the number of directors of the Company
may be established by the Board of Directors but in no case shall be less than
three directors. Any vacancy may be filled by a majority of the remaining
directors at any regular meeting or at any special meeting called for that
purpose, or by the stockholders at a special meeting of stockholders called for
that purpose. Pursuant to the terms of the Charter, the Board of Directors is
divided into three classes of an approximately equal number of directors. The
terms of the classes expire in successive years. As the term of each class
expires, each director in that class will be elected for a term of three years
and until such director's successor is duly elected and qualifies. The Company
believes that classification of the Board of Directors will help to assure the
continuity and stability of the Company's business strategies and policies as
determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of shares of Common Stock will have no right to cumulative
voting for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of Capital Stock entitled
to vote in the election of directors will be able to elect all of the
successors of the class of directors whose term expires at that meeting.
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REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause and
only by the affirmative vote of at least two-thirds of the aggregate number of
votes then entitled to be cast generally in the election of directors.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange and, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate or an associate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate or an associate thereof are prohibited for five years after the
most recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the Board of Directors of such corporation and approved by the affirmative vote
of at least (i) 80% of the votes entitled to be cast by holders of outstanding
voting shares of the corporation and (ii) two-thirds of the votes entitled to
be cast by holders of outstanding voting shares of the corporation other than
shares held by the Interested Stockholder with whom the business combination is
to be effected, unless, among other things, the holders of shares of Capital
Stock receive a minimum price (as calculated pursuant to the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. The
Charter exempts from these provisions of Maryland law all business combinations
involving the Company. There can be no assurance that such Charter provision
will not be amended or eliminated at any point in the future.
CONTROL SHARES ACQUISITION STATUTE
The MGCL provides that "control shares" of a Maryland corporation which
are 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, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control shares" are voting
shares which, if aggregated with all other shares previously acquired by the
acquiror or in respect of which the acquiror is able to exercise or direct the
exercise of voting power, would entitle the acquiror to exercise voting power
in electing directors 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 of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control shares
acquisition" means the acquisition of, or the power to direct the exercise of
voting power of, control shares, subject to certain exceptions.
A person who has made or proposes to make a control shares acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders 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 corporation may
itself present the question at any stockholders meeting.
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If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, then, subject to certain conditions and limitations, the corporation
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 for the control shares, as of the date of the
last control shares acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control shares acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control shares acquisition.
The control shares acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Charter contains a provision exempting from the Maryland control
shares acquisition statute any and all acquisitions by any person of shares of
the Capital Stock otherwise permitted under the Charter. There can be no
assurance that such provision will not be amended or eliminated at any point in
the future.
If the Charter were amended to make the Company subject to the business
combination statute or the control shares acquisition statute, such amendment
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer.
AMENDMENT TO THE CHARTER
The Charter, with certain limited exceptions, may be amended by the
affirmative vote of the holders of not less than a majority of the aggregate
number of votes then entitled to be cast generally in the election of
directors. The provisions relating to classification of the Board of
Directors, removal of directors and amendment of the Charter may be amended
only by the affirmative vote of the holders of not less than two-thirds of the
aggregate number of votes then entitled to be cast generally in the election of
directors. The provisions relating to the application of the MGCL
regarding business combinations may be amended only by the unanimous vote with
respect to the shares entitled to be voted generally in the election of
directors. The provisions of the Charter relating to the Class A Preferred
Stock may not be amended without the consent of the holders of at least a
majority of the Class A Preferred Stock.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, the proposal of business to be considered by stockholders may be
made only in accordance with any of the following, and nominations of persons
for election to the Board of Directors may be made only in accordance with (ii)
or (iii): (i) pursuant to the Company's notice of the meeting, (ii) by or at
the direction of the Board of Directors, or (iii) by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws, and (b) with respect to special meetings of
stockholders, only the business specified in the Company's notice of meeting
may be brought before the meeting of stockholders, and nominations of persons
for election to the Board of Directors may be made only (i) by or at the
direction of the Board of Directors or (ii) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice provisions set
forth in the Charter or the Bylaws.
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These advance notice provisions may have the effect of precluding a contest for
the election of directors or the consideration of shareholder proposals if
the proper procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own
slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareholders.
PREFERRED STOCK
In addition to the 1,351,351 shares of Class A Preferred Stock currently
issued and outstanding, the Charter permits the Board of Directors to issue up
to 18,648,649 shares of Preferred Stock of the Company, par value $.01 per
share, and to establish the preferences and rights (including the right to vote
and the right to convert into shares of any other class of Capital Stock) of
any such Preferred Stock issued, subject to the rights of the holders of the
Class A Preferred Stock to consent to certain issues. Thus, subject to the
rights of the holders of the Class A Preferred Stock to consent to certain
issues, the Board of Directors could authorize the issuance of Preferred Stock
of the Company with terms and conditions which could have the effect of
discouraging a takeover or other transaction in which stockholders of the
Company might receive a premium for their shares over the then-prevailing
market price of such shares. See "Description of Capital Stock."
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations to the
Company is based on current law and does not purport to deal with all aspects
of taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT, AS WELL AS HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES IN
AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
The Company believes that it will operate in such a manner so as to meet
the Code requirements for qualification as a REIT. However, no assurance can
be given that such requirements will be met or that the Company will be so
qualified at any time.
The following summary is a discussion of the material Federal income tax
considerations associated with an investment in the Common Stock being sold in
the Offering. The summary should not be construed as tax advice. The
provisions governing treatment as a REIT are highly technical and complex, and
this summary is qualified in its entirety by the applicable Code provisions,
the rules and regulations promulgated thereunder and administrative and
judicial interpretations thereof. Moreover, this summary does not deal with
all tax aspects that might be relevant to a particular prospective stockholder
in light of his personal circumstances and it does not deal with particular
types of stockholders that are subject to special treatment under the Code,
such as tax-exempt organizations, insurance companies,
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financial institutions or broker-dealers, and (with the exception of the
general discussion below) foreign corporations and persons who are not citizens
or residents of the U.S.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In General. Under the Code, a trust, corporation or unincorporated
association meeting certain requirements (see "--Structural Requirements") may
elect to be treated as a REIT for purposes of federal income taxation. If a
valid election is made, then, subject to certain conditions, the Company's
income which is distributed to its stockholders will be taxed to such
stockholders without being subject to tax at the Company level. This
substantially eliminates the "double taxation" (taxation at both the corporate
and stockholder levels) that typically results from the use of corporate
investment vehicles. However, the Company will be taxed on any of its income
that is not distributed to the stockholders. (See "--Taxation of the
Company.") Once made, the election to be taxed as a REIT continues in effect
until voluntarily revoked or automatically terminated by the Company's failure
to qualify as a REIT for a taxable year. If the Company's election to be
treated as a REIT is terminated automatically or is voluntarily revoked, the
Company will not be eligible to elect such status until the fifth taxable year
after the first taxable year for which the Company's election was terminated.
However, in the event such election is terminated automatically, the
prohibition on a subsequent election to be taxed as a REIT is not applicable if
(i) the Company did not willfully fail to file a timely return with respect to
the termination taxable year, (ii) the inclusion of any incorrect information
in such return was not due to fraud with intent to evade tax, and (iii) the
Company establishes to the IRS's satisfaction that its failure to meet the
requirements was due to reasonable cause and not to willful neglect.
The Company made an election to be treated as a REIT commencing with its
taxable year ended December 31, 1994.
Structural Requirements. To be eligible to be taxed as a REIT, the
Company must satisfy certain structural and organizational requirements.
First, (i) the shares of Common Stock must be transferable, (ii) the shares of
Common Stock must be held by 100 or more persons during at least 335 days of a
taxable year of 12 months (or during a proportionate part of a taxable year of
less than 12 months) (the "100-person" requirement), and (iii) no more than 50%
of the value of the outstanding shares of Common Stock may be owned, directly
or indirectly, by five or fewer individuals at any time during the last half of
the Company's taxable year (the "five or fewer" requirement). The requirements
of (ii) and (iii) are not applicable to the first taxable year for which an
election to be treated as a REIT is made. The Company did not satisfy the
requirements in (ii) and (iii) prior to consummation of the Initial Offering.
However, the Company issued a sufficient number of shares of Common Stock to a
sufficient number of stockholders to allow the Company to satisfy the
"100-person" requirement and the Company expects, and intends to take all
necessary measures within its control to ensure, that the beneficial ownership
of the Company will at all times be held by 100 or more persons. In addition,
the Company's Charter contains certain restrictions on the ownership and
transfer of the Company's capital stock which are designed to help ensure that
the Company will be able to satisfy the "five or fewer" requirement. If the
Company were to fail to satisfy the "five or fewer" requirement, the Company's
status as a REIT would terminate, and the Company would not be able to prevent
such termination. See "--Failure to Qualify as a REIT" and "Restrictions on
Ownership and Transfer."
If a REIT owns a corporate subsidiary that is a "qualified REIT
subsidiary," that subsidiary is disregarded for Federal income tax purposes,
and all assets, liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT
itself. A "qualified REIT subsidiary" is a corporation all of the capital
stock of which has been owned by the REIT
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from the commencement of such corporation's existence. Any corporation
formed by the Company to act as general partner of partnerships formed to
invest in Properties will be a qualified REIT subsidiary and thus all of its
assets, liabilities and items of income, deduction and credit will be treated
as assets, liabilities and items of income, deduction and credit of the
Company.
Income Tests. In order to qualify and to continue to qualify as a REIT,
the Company must satisfy three income tests for each taxable year. First, at
least 75% of the Company's annual gross income (excluding annual gross income
from certain sales of property held primarily for sale) must be derived
directly or indirectly from investments relating to real property or mortgages
on real property or certain temporary investments. Second, at least 95% of the
Company's annual gross income (excluding gross income from certain sales of
property held primarily for sale) must be derived directly or indirectly from
any of the sources qualifying for the 75% test and from dividends, interest,
and gain from the sale or disposition of stock or securities. Third, subject
to certain exceptions in the year in which the Company is liquidated,
short-term gains from sales of stock or securities, gains from sales of
property (other than foreclosure property) held primarily for sale to customers
in the ordinary course of business and gains from the sale or other taxable
disposition of real property (including interests in real property and
mortgages on real property) held for less than four years (other than from
involuntary conversions and foreclosure property) must represent less than 30%
of the Company's annual gross income. For purposes of applying the 30% gross
income test, the holding period of the Properties and other assets acquired in
the Formation will be deemed to have commenced on the date of such acquisition.
In applying these tests, because the Company is a partner in the Operating
Partnership and is also a partner in certain of the Subsidiary Partnerships,
the Company will be treated as realizing its proportionate share of the income
and loss of these respective partnerships, as well as the character of such
income or loss, and other partnership items, as if the Company owned its
proportionate share of the assets owned by these partnerships directly.
Substantially all of the income received by the Company is expected to be
rental income. In order to qualify as "rents from real property" for purposes
of satisfying the 75% and 95% gross income tests, several conditions must
be satisfied. First, the amount of rent must not be based in whole or in part
on the income or profits of any person, although rents generally will qualify
if they are based on a fixed percentage of receipts or sales. Second, rents
received from a tenant will not qualify as "rents from real property" if the
Company or an owner of 10% or more of the Company, directly 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, the
portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, a 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 income. However, the "independent contractor" requirement does not
apply to the extent the services rendered by a REIT are customarily furnished
or rendered in connection with the rental of the real property (i.e., services
which are not considered rendered to the occupant of the property). The
Properties owned by the Operating Partnership and the Property Partnerships are
multifamily apartment projects and the Company has represented that (i) none of
the rents under the Properties' existing leases to tenants are based on the
income or profits of any person and (ii) the Company will take measures to
ensure that it will not in the future receive any rent based on the income or
profits of any person which would cause the Company to fail to satisfy the
gross income tests described above. In addition, the Company has represented
that it does not now and will not in the future knowingly (i) rent any property
to a Related Party Tenant; or (ii) receive rent attributable to personal
property which is leased, together with real property, when more than 15% of
the total rent is attributable to personal property, if such rental
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to a Related Party Tenant or the receipt of such rents attributable to personal
property would cause the Company to fail to satisfy the gross income tests
described above.
The Company, through the Operating Partnership and Subsidiary Partnerships
(which will not be independent contractors), will provide certain services with
respect to the Properties and may provide similar services for any newly
acquired properties. The Company believes that the services provided by the
Operating Partnership and Subsidiary Partnerships are usually or customarily
rendered in connection with the rental of space for occupancy only.
Consequently, the Company believes that the provision of such services will not
cause the rents received with respect to the Properties or any newly acquired
properties to fail to qualify as rents from real property for purposes of the
75% and 95% gross income tests. If, and to the extent that, any services
furnished or performed by the Company, either directly or through the Operating
Partnership or any Subsidiary Partnership, would cause the rents received from
the Properties or any newly acquired properties to fail to qualify as rents
from real property under the 75% and 95% gross income tests, the Company
intends to retain an independent contractor (from whom it will derive no
income) to furnish or perform such services or take such other actions so that
such gross income tests are satisfied.
The Operating Partnership has entered into property management agreements
with the owner of Brookdale Village Apartments, the owner of the Fairways
Property (an affiliate of PGI) and the unconsolidated Property Partnerships
pursuant to which the Operating Partnership will receive a management fee equal
to 5 percent of the gross revenues of the applicable property. Fees earned by
the Operating Partnership pursuant to the property management agreements do not
satisfy the requirements of the 75% and 95% gross income tests. If the
Company's share of the sum of the income attributable to such fees plus all
other income realized by the Company (whether directly or through its interest
in the Operating Partnership or the Property Partnerships) which does not
satisfy the requirements of the 75% and the 95% gross income tests
(collectively, "Non-Qualifying Income"), exceeds 5% of the Company's gross
income for any taxable year, the Company's status as a REIT would be
jeopardized. The Company has represented that the amount of Non-Qualifying
income will not exceed 5% of the Company's annual gross income for any taxable
year.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if the
Company's failure to meet such tests was due to reasonable cause and not to
willful neglect, the Company attached a schedule describing the nature and
amount of each item of its gross income to its income tax return, and any
incorrect information on the schedule was not supplied fraudulently with the
intent to evade tax. It is not possible to specify the circumstances under
which the Company may be entitled to the benefit of these relief provisions.
Even if these relief provisions apply, a 100% tax is imposed on the net income
attributable to the greater of the amount by which the Company failed the 75%
test or the 95% test. Failure to comply with the 30% gross income test is not
excusable; therefore, if the Company fails to meet the requirements of the 30%
gross income test, its status as a REIT automatically terminates regardless of
the reason for such failure.
Asset Tests. At the close of each quarter of its taxable year, the
Company also must satisfy two tests relating to the nature and diversification
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 the Operating Partnership, any qualified REIT
subsidiaries and any partnerships in which the Operating Partnership or a
qualified REIT subsidiary owns an interest), and (ii) stock or debt instruments
held for not more than one year purchased with the proceeds of a stock or
issuance of long-term (at least five years) debt of the Company), cash, cash
items and government securities. Second, no more than 25% of the Company's
total assets may be represented by securities other than those that
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can satisfy the 75% asset test described in the preceding sentence. Of the
investments included in the 25% asset class, the value of any one issuer's
securities (excluding shares in qualified REIT subsidiaries or another REIT and
excluding partnership interests) 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 (excluding securities of a
qualified REIT subsidiary or another REIT and excluding partnership interests).
The Company has formed qualified REIT subsidiaries.
Annual Distribution Requirements. In order to qualify as a REIT, the
Company must distribute to the holders of shares of Capital Stock an amount at
least equal to (A) the sum of 95% of (i) the Company's "real estate investment
trust taxable income" (computed without regard to the deduction for dividends
paid and excluding any net capital gain) plus (ii) the excess of the net
income, if any, from foreclosure property over the tax on such income, minus
(B) the excess of the sum of certain items of non-cash income (income
attributable to leveled stepped rents, original issue discount on purchase
money debt, or a like-kind exchange that is later determined to be taxable)
over 5% of the amount determined under clause (i) 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 (including any extensions) and if paid on or before the first regular
distribution payment after such declaration. The amount distributed must not
be preferential--i.e., each holder of shares of Capital Stock 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. Such distributions are taxable to holders of Capital Stock
(other than tax-exempt entities, as discussed below) in the year in which paid,
even though such distributions reduce the Company's taxable income for the year
in which declared. 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
"real estate investment trust taxable income," it will be subject to tax
thereon at regular corporate tax rates. Finally, as discussed below, the
Company may be subject to an excise tax if it fails to meet certain other
distribution requirements.
The Company has made, and intends to take measures within its control to
make, quarterly distributions to the holders of shares of Capital Stock in an
amount sufficient to satisfy the requirements of the annual distribution test.
In this regard, the Partnership Agreement authorizes the Company as general
partner to take such steps as are necessary to distribute to the partners of
the Operating Partnership an amount sufficient to permit the Company to meet
the annual distribution requirements. However, it is possible that the
Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement, or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company, or if the amount of
nondeductible expenses, such as principal amortization or capital expenditures
exceed the amount of noncash deductions, such as depreciation. In the event
that such timing differences occur, the Company may find it necessary to cause
the Operating Partnership to arrange for borrowings or liquidate some of its
investments in order to meet the annual distribution requirement, or attempt to
declare a consent dividend, which is a hypothetical distribution to holders of
shares of Capital Stock out of the earnings and profits of the Company. The
effect of such a consent dividend (which, in conjunction with dividends
actually paid, must not be preferential to those holders who agree to such
treatment) would be that such holders would be treated for federal income tax
purposes as if such amount had been paid to them in cash and they had then
immediately contributed such amount back to the Company as additional paid-in
capital. This would result in taxable income to those holders without the
receipt of any actual cash distribution but would also increase their tax basis
in their shares of Capital Stock by the amount of the taxable income
recognized.
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If the Company fails to meet the 95% distribution test due to an
adjustment to the Company's income by reason of a judicial decision or by
agreement with the IRS, the Company may pay a "deficiency dividend" to holders
of shares of Capital Stock in the taxable year of the adjustment, which
dividend would relate back to the year being adjusted. In such case, the
Company would also be required to pay interest plus a penalty to the IRS.
However, a deficiency dividend cannot be used to meet the 95% distribution test
if the failure to meet such test was due to the Company's failure to distribute
sufficient amounts to the holders of shares of Capital Stock.
In addition, if the IRS successfully challenged the Company's deduction of
all or a portion of the salary and bonus it pays to officers who are also
holders of shares of Capital Stock, such payments could be recharacterized as
dividend distributions to such employees in their capacity as stockholders. If
such distributions were viewed as preferential distributions they would not
count toward the 95% distribution test and may taint all distributions made by
the Company for such taxable year.
FAILURE TO QUALIFY AS A REIT
The Company's treatment as a REIT for Federal income tax purposes will be
terminated automatically if the Company fails to meet the requirements
described above and any available relief provisions do not apply. In such
event, the Company will be subject to tax (including any applicable minimum
tax) on its taxable income at regular corporate rates, and distributions to
holders of shares of Capital Stock will not be deductible by the Company. All
distributions to holders of shares of Common Stock will be taxable as ordinary
income to the extent of current and accumulated earnings and profits of the
Company and distributions in excess thereof will be treated first as a tax free
return of capital (to the extent of basis) and then as gain realized from the
sale of shares of Common Stock. Corporate stockholders will be eligible for
the dividends received deduction to the extent that distributions are made out
of earnings and profits. As noted above, the Company will not be eligible to
elect REIT status again until the beginning of the fifth taxable year after the
year during which the Company's qualification was terminated, unless the
Company meets certain relief requirements. Failure to qualify for even one
year could result in the Company incurring substantial indebtedness (to the
extent borrowings are feasible) or liquidating substantial investments in order
to pay the resulting corporate taxes.
TAXATION OF THE COMPANY
In General. For any taxable year in which the Company qualifies as a
REIT, it will generally not be subject to Federal income tax on that portion of
its REIT taxable income which is distributed to stockholders (except income or
gain with respect to foreclosure property, which will be taxed at the highest
corporate rate--currently 35%). If the Company were to fail to qualify as a
REIT, it would be taxed at rates applicable to corporations on all its income,
whether or not distributed to stockholders. Even if it qualifies as a REIT,
the Company will be taxed on the portion of its REIT taxable income which it
does not distribute to the stockholders, such as taxable income retained as
reserves.
100 Percent Tax. The Company will be subject to a 100% tax on (i) the
greater of the net income attributable to the amount by which it fails the 75%
income test or the 95% income test; and (ii) any net income derived from a
"prohibited transaction" (i.e., the sale of "dealer" property by the Company).
The imposition of any such tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Capital Stock.
A "dealer" is one who holds property primarily for sale to customers in
the ordinary course of its trade or business. The Company has been organized
to acquire, hold, operate and ultimately liquidate its
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interest in the Properties, and not to engage in the business of buying and
selling real property. Further, the Company has represented that it has
conducted, and intends to take all necessary measures within its control to
ensure that it will conduct, its activities and the activities of the Operating
Partnership and the Subsidiary Partnerships in a manner so as to minimize or
eliminate the risk of having the Company classified as a "dealer" for Federal
income tax purposes. However, because a determination of "dealer status" is
necessarily dependent upon facts which will occur in the future, Counsel cannot
render an opinion on this issue.
Tax on Net Income from Foreclosure Property. The Company will be subject
to a tax at the highest rate applicable to corporations (currently 35%) on any
"net income from foreclosure property." "Foreclosure property" is property
acquired by the Company as a result of a foreclosure proceeding or by otherwise
reducing such property to ownership by agreement or process of law. "Net
income from foreclosure property" is the gross income derived during the
taxable year from foreclosure property, less applicable deductions, but only to
the extent such income does not qualify under the 75% income test and 95%
income test. The Company does not expect to own any foreclosure property.
However, if it did own such property, because the Company does not expect to
hold foreclosure property for sale to customers and because substantially all
of the income derived by the Company from its Properties is expected to qualify
under the 75% income test and 95% income test, the Company does not expect that
it would be subject to this tax.
Alternative Minimum Tax. The Company will be subject to the minimum tax
on items of tax preference allocable to it. Code Section 59(d) authorizes the
Treasury to issue regulations allocating items of tax preference between a REIT
and its stockholders. Such regulations have not yet been issued; however, the
Company does not anticipate any significant items of tax preference.
Excise Tax. In addition to the tax on any undistributed income, the
Company would also be subject to a 4% excise tax on the amount if any by which
(i) the sum of 85% of its REIT taxable income, 95% of any net capital gain and
undistributed amounts (for purpose of avoiding this excise tax) from prior
years, exceeds (ii) the amount actually distributed by the Company to holders
of shares of Capital Stock during the calendar year (or declared as a dividend
during the calendar year, if distributed during the following January) as
ordinary income dividends. The imposition of any excise tax on the Company
would reduce the amount of cash available for distribution to holders of shares
of Capital The Company intends to take all necessary measures within its
control to avoid imposition of the excise tax.
Tax on Built-In Gain of Certain Assets. If a C corporation elects to be
taxed as a REIT, or if assets of a C corporation are transferred to a REIT in a
transaction in which the REIT has a carryover basis in the assets acquired,
such C corporation generally will be treated as if it sold all of its assets to
such REIT at their respective fair market values and liquidated immediately
thereafter, recognizing and paying tax on all gain. However, under such
circumstances, the REIT is permitted to make an election under which the C
corporation will not recognize gain and instead the REIT will be required to
recognize gain and pay any tax thereon only if it disposes of such assets
during the subsequent 10-year period. The Company intends to make the
appropriate election to obtain the above-described tax consequences. Thus, if
the Company acquires any asset from a C corporation as a result of a merger or
other nontaxable exchange, and the Company recognizes gain on the disposition
of such asset during the 10-year period following acquisition of the asset,
then such gain will be subject to tax at the highest regular corporate rate to
the extent the Built-In Gain (the excess of (a) the fair market value of such
asset as of the date of acquisition over (b) the Company's adjusted basis in
such asset as of such date) on the sale of such asset exceeds any Built-In Loss
arising from the disposition during the same taxable year of any other assets
acquired in the same transaction (here Built-In Loss equals the excess of (x)
the Company's adjusted basis
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in such other assets as of the date of acquisition over (y) the fair market
value of such other assets as of such date).
TAXATION OF HOLDERS OF COMMON STOCK
TAXABLE STOCKHOLDERS
Dividend Income. Distributions from the Company (other than distributions
designated as capital gains dividends) will be taxable to holders of shares of
Common Stock which are not tax-exempt entities as ordinary income to the extent
of the current or accumulated earnings and profits of the Company.
Distributions from the Company which are designated (by notice to shareholders
within 30 days after the close of the Company's tax year or with its annual
report) as capital gains dividends by the Company will be taxed as long-term
capital gains to taxable holders of shares of Common Stock to the extent that
they do not exceed the Company's actual net capital gain for the taxable year.
Holders of shares of Common Stock that are corporations may be required to
treat up to 20% of any such capital gains dividends as ordinary income. Such
distributions, whether characterized as ordinary income or as capital gain, are
not eligible for the 70% dividends received deduction for corporations.
Distributions from the Company to holders which are not designated as
capital gains dividends and which are in excess of the Company's current or
accumulated earnings and profits are treated as a return of capital to such
holders and reduce the tax basis of a holder's shares of Common Stock (but not
below zero). Any such distribution in excess of the tax basis is taxable to
any such holder that is not a tax-exempt entity as a gain realized from the
sale of the shares of Common Stock, taxable as described below.
The declaration by the Company of a consent dividend would result in
taxable income to consenting holders of shares of Common Stock (other than
tax-exempt entities) without any corresponding cash distributions. See
"--Requirements for Qualification as a REIT--Annual Distribution Requirements."
Portfolio Income. Dividends paid to holders of shares of Common Stock
will be treated as portfolio income. Such income therefore will not be subject
to reduction by losses from passive activities (i.e., any interest in a rental
activity or in a trade or business in which the holder does not materially
participate, such as certain interests held as a limited partner) of any holder
who is subject to the passive activity loss rules. Such distributions will,
however, be considered investment income, which may be offset by certain
investment expense deductions.
No Flow-Through of Losses. Holders of shares of Common Stock will not be
permitted to deduct any net operating losses or capital losses of the Company.
Sale of Shares. A holder of shares of Common Stock who sells shares will
recognize taxable gain or loss 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 shares. Gain or
loss recognized by a holder of shares of Common Stock who is not a dealer in
securities and whose shares have been held for more than one year will
generally be taxable as long-term capital gain or loss.
Back-up Withholding. Distributions from the Company will ordinarily not
be subject to withholding of Federal income taxes, except as discussed under
"--Foreign Stockholders." Withholding of income tax at a rate of 31% may be
required, however, by reason of a failure of a holder of shares of Common Stock
to supply the Company or its agent with the holder's taxpayer identification
number.
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Such "backup" withholding may also apply to a holder of shares of
Common Stock who is otherwise exempt from backup withholding (including a
nonresident alien of the United States and, generally, a foreign entity) if
such holder fails to properly document his status as an exempt recipient of
distributions. Each holder will therefore be asked to provide and certify his
correct taxpayer identification number or to certify that he is an exempt
recipient.
TAX-EXEMPT STOCKHOLDERS
Non-taxability of Dividend Income. In general, a holder of shares of
Common Stock which is a tax-exempt entity will not be subject to tax on
distributions from the Company. The IRS has ruled that amounts distributed as
dividends by a qualified REIT do not constitute unrelated business taxable
income ("UBTI") when received by certain tax-exempt entities. Thus,
distributions paid to a holder of shares of Common Stock which is a tax-exempt
entity and gain on the sale of shares of Common Stock by a tax-exempt entity
(other than those tax-exempt entities described below) will not be treated as
UBTI, even if the Company incurs indebtedness in connection with the
acquisition of real property (through its percentage ownership of the Operating
Partnership and the Subsidiary Partnerships) provided that the tax-exempt
entity has not financed the acquisition of its shares of Common Stock of the
Company.
For tax-exempt entities which are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans exempt from Federal income taxation under 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 UBTI generated by its investment in the Company. Such prospective
investors should consult their own tax advisors concerning these "set aside"
and reserve requirements.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in the
qualified trust, instead of treating the qualified trust as a single individual
(the "look through" exception). A qualified trust that holds more than 10% of
the shares of a REIT is required to treat a percentage of REIT dividends as
UBTI if the REIT incurs debt to acquire or improve real property. This rule
applies, however, only if (i) the qualification of the REIT depends upon the
application of the "look through" exception (described above) to the
restriction on REIT shareholdings by five or fewer individuals, including
qualified trusts (see "Restrictions on Transfer and Ownership of Shares"), and
(ii) the REIT is "predominantly held" by qualified trusts, i.e., if either (x)
a single qualified trust held more than 25% by value of the interests in the
REIT or (y) one or more qualified trusts, each owning more than 10% by value,
held in the aggregate more than 50% of the interests in the REIT. The
percentage of any dividend paid (or treated as paid) to such a qualified trust
that is treated as UBTI is equal to the amount of modified gross income (gross
income less directly-connected expenses) from the unrelated trade or business
of the REIT (treating the REIT as if it were a qualified trust), divided by the
total modified gross income of the REIT. A de minimis exception applies where
the percentage is less than 5%. Because the shares of Common Stock are widely
held, this new provision should not result in UBTI to any tax-exempt entity.
FOREIGN STOCKHOLDERS
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign estates
and foreign trusts (collectively, "Foreign Investors") are complex, and no
attempt will be made herein to provide more than a summary of such rules.
Prospective
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Foreign Investors should consult their own tax advisors to determine the
impact of Federal, state and local income tax laws on an investment in the
shares of Common Stock, including any reporting requirements, as well as the
tax treatment of such an investment under their home country laws.
Foreign Investors which are not engaged in the conduct of a business in
the United States and who purchase shares of Common Stock will generally not be
considered as engaged in the conduct of a trade or business in the United
States by reason of ownership of such shares. The taxation of distributions by
the Company to Foreign Investors will depend upon whether such distributions
are attributable to operating income or are attributable to sales or exchanges
by the Company of its United States Real Property Interests ("USRPI's").
USRPI's are generally direct interests in real property located in the United
States and interests in domestic corporations in which the fair market value of
its USRPI's exceeds a certain percentage.
The Company anticipates that a substantial portion of the distributions to
holders of shares of Common Stock will be attributable to rental receipts. To
the extent that such distributions do not exceed the current or accumulated
earnings and profits of the Company, they will be treated as dividends and will
be subject to a withholding tax equal to 30% of the gross amount of the
dividend, which tax will be withheld and remitted to the IRS by the Company.
Such 30% rate may be reduced by United States income tax treaties in effect
with the country of residence of the Foreign Investor; however, a Foreign
Investor must furnish a completed IRS Form 1001 to the Company to secure such a
reduction. Distributions in excess of the Company's earnings and profits will
be treated as a nontaxable return of capital to a Foreign Investor to the
extent of the basis of his shares of Common Stock, and any excess amount will
be treated as an amount received in exchange for his shares of Common Stock and
treated under the rules described below for the sale of Common Stock. The IRS
has issued proposed regulations which may impose additional reporting
Requirements on certain Foreign Investors in order to avoid being subject to
United States withholding tax.
Distributions which are attributable to net capital gains realized from
the disposition of USRPI's (i.e., the Properties) by the Company will be taxed
as though the Foreign Investors were engaged in a trade or business in the
United States and the distributions were gains effectively connected with such
trade or business. Thus, a Foreign Investor would be entitled to offset its
gross income by allowable deductions and would pay tax on the resulting taxable
income at the graduated rates applicable to United States citizens or
residents. For both individuals and corporations, current regulations provide
that the Company must withhold a tax equal to 35% of all dividends that could
be designated by the Company as capital gain dividends. To the extent that
such withholding exceeds the actual tax owed by the Foreign Investor, a Foreign
Investor 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 on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the
disposition of USRPI's. A domestic person (a "nominee") who holds shares of
Common Stock on behalf of a Foreign Investor will bear the burden of
withholding, provided that the Company has properly designated the appropriate
portion of a distribution as a capital gain dividend.
It is anticipated that the shares of Common Stock owned directly or
indirectly by Foreign Investors will be less than 50% in value of the shares of
Common Stock and therefore the Company will be a "domestically controlled
REIT". Accordingly, shares of Common Stock held by Foreign Investors in the
United States will not be considered USRPI's and gains on sales of such shares
will not be taxed to such Foreign Investors as long as the seller is not
otherwise considered to be engaged in a trade or business in the United States.
(The same rule applies to gains attributable to distributions in excess of the
Foreign
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Investor's cost for its shares, discussed above.) Similarly, a foreign
corporation not otherwise subject to U.S. tax which distributes shares of
Common Stock to its stockholders will not be taxed under this rule.
The IRS is authorized to impose annual reporting requirements on certain
United States and foreign persons directly holding USRPI's. The required
reports are in addition to any necessary income tax returns, and do not
displace existing reporting requirements imposed on Foreign Investors by the
Agricultural Foreign Investment Disclosure Act of 1978 and the International
Investment Survey Act of 1976. As of the date of this Prospectus, the IRS has
not exercised its authority to impose reporting under this provision.
Furthermore, because shares in a domestically controlled REIT do not constitute
a USRPI, such reporting requirements are not expected to apply to a Foreign
Investor in the Company. However, the Company is required to file an
information return with the IRS setting forth the name, address and taxpayer
identification number of the payee of distributions from the Company (whether
the payee is a nominee or is the actual beneficial owner).
STATEMENT OF STOCK OWNERSHIP
The Company is required by the Code to request annual written statements
from the record holders of designated percentages of its shares of Capital
Stock disclosing the actual owners of the shares of Capital Stock. The Company
must also maintain, within the Internal Revenue District in which it is
required to file its Federal income tax return, permanent records showing the
information it has received as to the actual ownership of such shares of
Capital Stock and a list of those persons failing or refusing to comply with
such request.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain Federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership and the Subsidiary Partnerships. The discussion does not cover
state or local tax laws or any Federal tax laws other than income tax laws.
Classification as a Partnership. All of the Company's real estate
investments will be made through partnerships, certain of which will hold
interests in other partnerships. In general, partnerships are "pass-through"
entities which are not subject to Federal income tax. Instead, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are subject to tax thereon, without
regard to whether the partners receive cash distributions from the partnership.
The Company will be entitled to include in its REIT taxable income its
distributive share of the income of any partnership (including the Operating
Partnership) in which it has an interest and to deduct its distributive share
of the losses of any partnership (including the Operating Partnership) in which
it has an interest only if each such partnership is classified for Federal
income tax purposes as a Partnership rather than as an association taxable as a
corporation.
The IRS has issued regulations that delete the old, very complex rules
regarding entity classification. These rules provide that a domestic
unincorporated association will be classified as a partnership for federal
income tax purposes unless it affirmatively elects to be taxable as a
corporation. The new regulations also provide that the IRS will respect an
entity's claimed classification for all periods prior to January 1, 1997 if:
(i) an unincorporated association was in existence on January 1, 1997; (ii) the
entity had a reasonable basis for its claimed classification; (iii) the entity
and each of its members recognized the federal tax consequences of any change
in the entity's classification within sixty months prior to January 1, 1997;
and (iv) neither the entity nor any member was notified in writing on or before
May 8, 1996 (the day the regulations were issued in proposed form) that the
classification of the
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association was under examination by the IRS. However, a "publicly traded
partnership" (i.e., a partnership in which interests are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof) will be treated as a corporation
unless at least 90 percent of the gross income of such partnership, for each
taxable year the partnership is a publicly traded partnership, consists of
"qualifying income." "Qualifying income" includes income from real property
rents, gain from the sale or other disposition of real property, interest and
dividends.
None of the partnerships in which the Company has an interest has
requested, nor does any of such partnerships intend to request, a ruling from
the IRS that it will be treated as a partnership for Federal income tax
purposes or that it had a reasonable basis for such classification prior to
January 1, 1997.
If for any reason any of the partnerships in which the Company has an
interest were taxable as a corporation rather than as a partnership for Federal
income tax purposes, the Company would not be able to satisfy the asset
requirements for REIT status. See "--Requirements for Qualification as a
REIT--Asset Tests." In addition, any change in the partnership status of such
entities for tax purposes might be treated as a taxable event in which case the
Company might incur a tax liability without any related cash distribution. See
"--Income Taxation of the Operating Partnership and Its Partners--Basis in
Operating Partnership Interest." Further, items of income and deduction of
such partnerships would not pass through to its partners (including the
Company), and such partners would be treated as stockholders for tax purposes.
The partnerships in which the Company has an interest would be required to pay
income tax at corporate tax rates on that net income, and distributions to its
partners would constitute dividends that would not be deductible in computing
the relevant entities' taxable income.
The IRS has issued regulations which authorize the Commissioner of
Internal Revenue to (i) recast a transaction involving the use of a partnership
to reflect the underlying economic arrangement under the partnership provisions
of the Code, or (ii) prevent the use of a partnership to circumvent the
intended purpose of a Code provision. High-level IRS and Treasury personnel
have publicly stated that these proposed regulations were not intended to be
applied to partnerships (such as the Operating Partnership) in which a REIT is
a general partner. However, there can be no assurance that partnerships such
as the Operating Partnership will forever be excluded from the scope of the
regulation. If the regulation were to be applied to the Operating Partnership,
the Operating Partnership could be ignored for tax purposes, with the result
that the limited partners of the Operating Partnership could be deemed to have
received Common Stock in the Company instead of Common Units in the Operating
Partnership.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
Operating Partnership Allocations. As noted above, the Company must
include in its REIT taxable income its distributive share of the income and
losses of any partnership in which it has any interest. Although the
provisions of a partnership agreement generally will determine the allocation
of income and losses among partners, such allocations will be disregarded for
tax purposes under Section 704(b) of the Code if they do not have "substantial
economic effect" or otherwise do not comply with the provisions of Section
704(b) of the Code and Treasury Regulations.
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 in respect of such item. The allocations of taxable income and
loss of partnerships in
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which the Company has an interest are intended to comply with the requirements
of Section 704(b) of the Code and Treasury Regulations.
Tax Allocations in Respect of Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for Federal
income tax purposes in a manner such that the contributing partner benefits
from, or is charged with, 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 generally is equal to the difference between
the fair market value of the contributed property and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference").
The Treasury Department has issued final regulations under Section 704(c)
of the Code which give partnerships great flexibility in ensuring that a
partner contributing property to a partnership receives the tax burdens and
benefits of any precontribution gain or loss attributable to the contributed
property. The regulations permit partnerships to use any "reasonable method"
of accounting for Book-Tax Differences. The regulations specifically describe
three reasonable methods, including (i) the "traditional method" under current
law, (ii) the traditional method with the use of "curative allocations" which
would permit distortions caused by a Book-Tax Difference to be rectified on an
annual basis and (iii) the "remedial allocation method" which is similar to the
traditional method with "curative allocations." The Company uses the "remedial
allocation method" to account for Book-Tax Differences in connection with the
Formation.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in each of the partnerships in which it has an interest generally (i) will be
equal to the amount of cash and the basis of any other property contributed to
such partnership by the Company, (ii) will be increased by (a) its allocable
share of such Partnership's income and (b) its allocable share of any
indebtedness of such partnership and (iii) will be reduced, but not below zero,
by the Company's allocable share of (a) such partnership's loss and (b) the
amount of cash and the fair market value of any property distributed to the
Company, and by constructive distributions resulting from a reduction in the
Company's share of indebtedness of such partnership.
If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss (or portion thereof) would not reduce the Company's adjusted tax
basis below zero. To the extent that distributions from a partnership to the
Company, or any decrease in the Company's share of the nonrecourse indebtedness
of a partnership (each such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions)
would constitute taxable income to the Company. Such distributions and
constructive distributions normally would be characterized as long-term capital
gain if the Company's interest in such partnership has been held for longer
than the long-term capital gain holding period (currently one year).
Depreciation Deductions Available to the Operating Partnership. Certain
assets owned by the Operating Partnership consist of property contributed to it
by its partners. In general, when property is contributed in a tax-free
transaction under Section 721 of the Code, the transferee-partnership is
treated in the same manner as the contributing partner for purposes of
computing depreciation. The effect of this rule is to continue the historic
basis, placed in service dates and depreciation methods with respect to
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property contributed to a partnership. This general rule would apply for any
properties the Operating Partnership would have acquired by reason of the
deemed termination for tax purposes of any of the Property Partnerships or to
the extent that the Operating Partnership received an adjustment under Section
743(b) of the Code by reason of the acquisition of any interests in a Property
Partnership that did not terminate for tax purposes.
As described above (see "--Tax Allocations in Respect of Contributed
Properties"), the Treasury Department has recently issued Regulations which
give partnerships flexibility in ensuring that a partner contributing property
to a partnership receives the tax benefits and burden and benefits of any
precontribution gain or loss attributable to the contributed property.
As described previously, the Company uses the "remedial allocation method"
to account for Book-Tax Differences in connection with the Formation. This
method will result in the Company being allocated greater depreciation
deductions than if the "traditional method" under current law were used. The
resulting lower taxable income and earnings and profits of the Company, as
determined for Federal income tax purposes, should increase the portion of
distributions by the Company which may be treated as a return of capital,
compared to the traditional method. See "--Requirements for Qualification as a
REIT--Annual Distribution Requirements." The Company may adopt a different
method to account for Book-Tax Differences for property contributed after the
Formation.
OTHER TAX CONSIDERATIONS
State and Local Taxes. The tax treatment of the Company and holders of
shares of Common Stock in states having taxing jurisdiction over them may
differ from the Federal income tax treatment. Accordingly, only a very limited
discussion of state taxation of the Company, the shares of Common Stock or the
holders of shares of Common Stock is provided herein, and no representation is
made as to the tax status of the Company, the shares of Common Stock or the
holders of shares of Common Stock in such states. However, holders of shares
of Common Stock should note that certain states impose a withholding obligation
on partnerships carrying on a trade or business in a state having partners who
are not resident in such state. The Partnership Agreement contains a provision
which permits the Operating Partnership to withhold a portion of a non-resident
partner's distribution (e.g., a distribution to the Company) and to pay such
withheld amount to the taxing state as agent for the non-resident partner.
Most (but not all) states follow the Code in their taxation of REITS. In such
states, the Company should generally not be liable for tax and should be able
to file a claim for refund and obtain any withheld amount from the taxing
state. However, due to the time value of money, the requirement of the
Operating Partnership to withhold on distributions to the Company will reduce
the yield on an investment in shares of Common Stock. Each holder of shares of
Common Stock should consult his own tax advisor as to the status of the shares
of Common Stock under the respective state tax laws applicable to him.
Possible Legislative or Other Actions Affecting Tax Consequences; Possible
Adverse Tax Legislation. Prospective stockholders should recognize that the
present tax treatment of an investment in the Company may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously made. The rules
dealing with Federal income taxation are constantly under legislative and
administrative review, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes.
Revisions in tax laws and interpretations thereof could adversely affect the
tax consequences of an investment in the Company.
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PLAN OF DISTRIBUTION
The Company may sell the Common Stock to one or more underwriters for
public offering and sale by them or may sell the Common Stock to investors
directly or through agents. Any such underwriter or agent involved in the
offer and sale of the Common Stock will be named in the related Prospectus
Supplement.
Underwriters may offer and sell the Common Stock at a fixed price or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may issue the
Common Stock upon conversion of outstanding convertible securities or upon the
exercise of outstanding warrants issued by the Company or by an affiliate of
the Company. The Company also may, from time to time, authorize underwriters
acting as the Company's agent to offer and sell the Common Stock upon terms and
conditions as are set forth in the related Prospectus Supplement. In
connection with the sale of the Common Stock, underwriters may be deemed to
have received compensation from the Company in the form of underwriting
discounts or commissions and may also receive commissions from the purchasers
of the Common Stock for whom they may act as agent. Underwriters may sell the
Common Stock to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions or commissions from the underwriters
and/or commissions from the purchasers of the Common Stock for whom they act as
agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Common Stock, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the related Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Common Stock may be deemed
to be underwriters, and any discounts, concessions and commissions received by
them and any profit realized by them on resale of the Common Stock may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act"). Underwriters, dealers and agents may
be entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including
liabilities under the Securities Act.
If so indicated in the related Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Common Stock from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate number of shares of Common Stock sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
related Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions, but in all cases will be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institutions of the Common Stock covered by its
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
if the Common Stock is being sold to underwriters, the Company shall have sold
to such underwriters the total number of shares of Common Stock less the number
of shares of Common Stock covered by Contracts.
Certain of the underwriters, dealers or agents and their associates may
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
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LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain
tax matters will be passed upon for the Company by Kirkland & Ellis, a
partnership including professional corporations, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Ambassador Apartments, Inc.
appearing in the Company's Annual Report (Form 10-K) for the year ended
December 31, 1996, the statements of revenue and certain expenses of Sun Lake
Apartments and Haverhill Commons Apartments for the year ended December 31,
1995, included in the Ambassador Apartments, Inc. Current Report on Form 8-K
dated February 21, 1997, and the statement of revenue and certain expenses of
Crossings of Bellevue Apartments for the year ended December 31, 1995, included
in the Ambassador Apartments, Inc. Current Report on Form 8-K dated March 3,
1997, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Arbors and Ocean Oaks Real Estate Limited
Partnership as of December 31, 1995 and 1994 and for the year ended December
31, 1995 and the period from inception (March 28, 1994) through December 31,
1994, included in the Ambassador Apartments, Inc. Current Report on Form 8-K
dated February 21, 1997, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus or a Prospectus Supplement in
connection with the offer made by this Prospectus or a Prospectus Supplement
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any agent, dealer or
underwriter. Neither the delivery of this Prospectus or a Prospectus
Supplement nor any sale made hereunder or thereunder shall under any
circumstances create an implication that there has been no change in the
affairs of the Company since the date hereof. This Prospectus and any
Prospectus Supplement do not constitute an offer or solicitation by anyone in
any state 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
AVAILABLE INFORMATION................................ 2
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE......................... 2
THE COMPANY.......................................... 3
RISK FACTORS......................................... 4
USE OF PROCEEDS...................................... 15
DESCRIPTION OF CAPITAL STOCK......................... 15
RESTRICTIONS ON OWNERSHIP
AND TRANSFER .................................... 18
CERTAIN PROVISIONS OF MARYLAND
LAW AND OF THE COMPANY'S
CHARTER AND BYLAWS .............................. 21
FEDERAL INCOME TAX
CONSIDERATIONS................................. 24
PLAN OF DISTRIBUTION................................. 38
LEGAL MATTERS........................................ 39
EXPERTS ............................................. 39
</TABLE>
AMBASSADOR APARTMENTS,
INC.
COMMON STOCK
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PROSPECTUS
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