As filed with the Securities and Exchange Commission on March 17, 1997
Registration No. 333-15411
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. ONE
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
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CNL AMERICAN PROPERTIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
400 East South Street, Suite 500
Orlando, Florida 32801
Telephone: (407) 422-1574
(Address of principal executive offices)
JAMES M. SENEFF, JR.
Chief Executive Officer
400 East South Street, Suite 500
Orlando, Florida 32801
Telephone: (407) 422-1574
(Name and Address of Agent for Service)
COPIES TO:
THOMAS H. McCORMICK, ESQUIRE
EDMUND D. GRAFF, ESQUIRE
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
CNL AMERICAN PROPERTIES FUND, INC.
Shares of Common Stock
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs and Keogh and Pension Plans
(Minimum purchase may be higher in certain states)
CNL AMERICAN PROPERTIES FUND, INC. (the "Company") is a Maryland
corporation which operates for federal income tax purposes as a real estate
investment trust (a "REIT"). The Company may sell up to 27,500,000 Shares in
this offering for a maximum of $275,000,000. The Company invests in restaurant
properties (the "Properties") located across the United States to be leased on a
long-term, "triple-net" basis to operators of selected national and regional
fast-food, family-style, and casual dining restaurant chains (the "Restaurant
Chains"). As of March 6, 1997, the Company owned a portfolio of 110 Properties,
all of which were acquired with the proceeds of its initial public offering (the
"Initial Offering") which commenced in April 1995 and was completed on February
6, 1997, at which time this offering commenced. The Company is expected to have
a total portfolio of approximately 400 to 450 Properties, if the maximum number
of shares of common stock (the "Shares") of the Company is sold in this
offering. Under the Company's triple-net leases, the tenant is responsible for
property costs associated with ongoing operations, including repairs,
maintenance, property taxes, utilities, and insurance. In addition, the leases
are structured to require the tenant to pay base annual rent with (i) automatic
increases in the base rent and/or (ii) percentage rent based on certain
restaurant sales above a specified level. The Company also provides financing
(the "Mortgage Loans") on a limited basis for the purchase of buildings,
generally by tenants that lease the underlying land from the Company. To a
lesser extent, the Company offers furniture, fixture and equipment financing
("Secured Equipment Leases") to operators of Restaurant Chains. The Company is
not a mutual fund or other type of investment company within the meaning of the
Investment Company Act of 1940, and is not subject to regulation thereunder. The
Company is not affiliated with the United States Government.
There are significant risks associated with an investment in the Company (see
"Risk Factors"), including the following:
o The Company will rely on CNL Fund Advisors, Inc. (the "Advisor") with
respect to all investment decisions subject to approval by the Board of
Directors in certain circumstances. The experience of the Advisor and
Directors of the Company with mortgage financing and equipment leasing is
limited.
o The Advisor and its Affiliates are or will be engaged in other activities
that will result in potential conflicts of interest with the services that
the Advisor will provide to the Company.
o The Company owned, as of March 6, 1997, 110 Properties of the anticipated
total of 400 to 450 Properties, and investors therefore will not have the
opportunity to evaluate all of the Properties that the Company will
acquire.
o There is currently no public trading market for the Shares, and there is no
assurance that one will develop.
o If the Shares are not listed on a national securities exchange or
over-the-counter market ("Listing") by December 31, 2005, as to which there
can be no assurance, the Company will commence orderly sale of its assets
and the distribution of the proceeds. Listing does not assure liquidity.
o Market and economic conditions that the Company cannot control will have an
effect (either positive or negative) on the value of the Company's
investments and the amount of cash that the Company receives from tenants
and lessees.
o Prior to meeting certain conditions, the Company may incur debt, including
debt to make Distributions to stockholders in order to maintain its status
as a REIT, but will not encumber Properties.
THE COMPANY'S PRIMARY INVESTMENT OBJECTIVES are to preserve, protect,
and enhance the Company's assets while (i) making quarterly Distributions; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and Distributions) and providing protection against inflation
through automatic increases in base rent and receipt of percentage rent, and
obtaining fixed income through the receipt of payments from Mortgage Loans and
Secured Equipment Leases; (iii) continuing to qualify as a REIT for federal
income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment within three to eight years after commencement of
this offering, either in whole or in part, through (a) Listing, or (b) the
commencement of orderly sales of the Company's assets and distribution of the
proceeds thereof (outside the ordinary course of business and consistent with
its objective of qualifying as a REIT). There can be no assurance that these
investment objectives will be met.
This Prospectus describes an investment in the Shares of the Company.
The Company will use stockholders' funds to purchase additional Properties and
make additional Mortgage Loans. No stockholder may hold more than 9.8% of the
total Shares. Of the proceeds from the sale of Shares in this offering,
approximately 84% will be used to acquire Properties and make Mortgage Loans,
and approximately 9% will be paid in fees and expenses to Affiliates of the
Company for their services and as reimbursement for Offering Expenses incurred
on behalf of the Company; the balance will be used to pay other expenses of the
offering. The Company has registered an offering of 27,500,000 Shares, with the
sale of 23,000,000 of such Shares subject to approval by the stockholders of a
resolution to increase the number of authorized Shares of the Company. See
"Summary of the Articles of Incorporation and Bylaws -- Description of Capital
Stock." Of the 27,500,000 Shares offered hereby, 2,500,000 will be available
only to stockholders who elect to participate in the Company's reinvestment plan
(the "Reinvestment Plan") and who purchase Shares in this offering and receive a
copy of this Prospectus, or who purchased Shares in the Initial Offering of the
Company and who received a copy of the related prospectus. Any participation in
such plan by a person who becomes a stockholder otherwise than by participating
in this offering or the Initial Offering must be made pursuant to a solicitation
under a separate prospectus. See "Summary of Reinvestment Plan." Until such
time, if any, as the stockholders approve an increase in the number of
authorized Shares, this offering will be limited to 4,800,000 Shares. All
subscription funds for Shares will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A., which will
act as the escrow agent for this offering.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Price to Selling Proceeds to
Public Commissions(1) Partnership(2)
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Per Unit .......... $ 10.00 $ 0.75 $ 9.25
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Total Maximum ....... $275,000,000 $ 20,625,000 (3) $254,375,000 (3)
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(footnotes on following page)
CNL SECURITIES CORP.
March , 1997
<PAGE>
(1) CNL Securities Corp. (the "Managing Dealer ") will receive Selling
Commissions of 7.5% on sales of Shares, subject to reduction in certain
circumstances. The Managing Dealer, which is an Affiliate of the Company,
may engage other broker-dealers that are members of the National Association
of Securities Dealers, Inc. or other entities exempt from broker-dealer
registration (collectively, the "Soliciting Dealers ") to sell Shares and
reallow to them commissions of up to 7% with respect to Shares which they
sell. The amounts indicated for Selling Commissions assume that reduced
Selling Commissions are not paid in connection with the purchase of any
Shares and do not include a 0.5% marketing support and due diligence expense
reimbursement fee payable to the Managing Dealer, all or a portion of which
may be reallowed to certain Soliciting Dealers. Such amounts also do not
include a Soliciting Dealer Servicing Fee payable to the Managing Dealer by
the Company (see "Management Compensation "), all or a portion of which may
be reallowed to certain Soliciting Dealers. See "The Offering-- Plan of
Distribution" for a discussion of the circumstances under which reduced
Selling Commissions may be paid and a description of the marketing support
and due diligence expense reimbursement fee payable to the Managing Dealer.
(2) Before deducting (i) Offering Expenses of the Company estimated to be 3% of
gross offering proceeds computed at $10.00 per Share sold ( "Gross Proceeds
") on the sale of 27,500,000 Shares and (ii) the marketing support and due
diligence expense reimbursement fee. Offering Expenses exclude Selling
Commissions and the marketing support and due diligence reimbursement fee.
The Advisor will pay all Offering Expenses which exceed 3% of the Gross
Proceeds.
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE BUREAU OF
SECURITIES OF THE STATE OF NEW JERSEY HAS PASSED ON OR ENDORSED THE MERITS OF
THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN
ANY STATE IN WHICH SUCH OFFER OR SALE WOULD BE UNLAWFUL, AND NO SUBSCRIPTION
WILL BE ACCEPTED FROM ANY PERSON WHO DOES NOT MEET THE SUITABILITY STANDARDS SET
FORTH HEREIN. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL CREATE, UNDER ANY CIRCUMSTANCES, AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. IF, HOWEVER, ANY
MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED,
THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY, AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE
AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE
WHICH MAY FLOW FROM AN INVESTMENT IN THIS COMPANY IS PROHIBITED.
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<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF THE OFFERING............................................ 1
RISK FACTORS....................................................... 9
Investment Risks.............................................. 9
Possible Inability to Further Diversify Investments....... 9
Risk of Reliance on Management............................ 9
Risk of Reliance on Advisor............................... 9
Risk Associated with Leverage............................. 9
Conflicts of Interest..................................... 9
Risks Associated with Related Party Transactions.......... 10
Lack of Liquidity of Shares............................... 10
Risk Associated With Management of Joint Ventures......... 10
Lack of Control of Property Management.................... 10
Risks Associated With Mortgage Loans...................... 10
Risks Associated With Secured Equipment Leases............ 11
Binding Nature of Majority Stockholder Vote............... 11
Risks Relating to the Authority of the Board of
Directors.............................................. 11
Restrictions on Transfer Relating to REIT Status.......... 11
Limited Liability of Officers and Directors............... 11
Risks for Retirement Plan Stockholders.................... 11
Ability to Use of Leverage to Make Distributions.......... 11
Real Estate and Financing Risks .............................. 11
Risks Relating to an Unspecified Property Offering........ 11
Possible Delays in Investment............................. 12
Risks Associated With Acquiring Properties Under
Construction....................................................... 12
Risks of Joint Investment in Properties................... 12
Limitations on the Ability of the Company to Liquidate.... 13
Risks Relating to Tenant Purchase Rights.................. 13
Risks of Real Property Investments........................ 13
Adverse Trends in Restaurant Industry..................... 14
Risks Resulting From Competition.......................... 14
Possible Environmental Liabilities........................ 14
Risks Relating to Unspecified Secured Equipment Leases.... 15
Tax Risks .................................................... 15
Failure to Qualify as a REIT.............................. 15
Risks Relating to Leases of Properties.................... 15
Risks Relating to the Secured Equipment Leases............ 15
Risk of REIT Disqualification........................... 15
Risk Associated With Distribution Requirements............ 16
Restrictions on Maximum Share Ownership................... 16
Other Tax Liabilities..................................... 16
Changes in Tax Laws....................................... 16
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE ........................ 16
ESTIMATED USE OF PROCEEDS ......................................... 19
MANAGEMENT COMPENSATION ........................................... 20
CONFLICTS OF INTEREST ............................................. 25
Prior and Future Programs .................................... 25
Acquisition of Properties .................................... 26
Sales of Properties .......................................... 26
Joint Investment With An Affiliated Program .................. 26
Competition for Management Time .............................. 27
Compensation of the Advisor .................................. 27
Relationship with Managing Dealer ............................ 27
Legal Representation ......................................... 27
Certain Conflict Resolution Procedures ....................... 27
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<PAGE>
SUMMARY OF REINVESTMENT PLAN ...................................... 29
REDEMPTION OF SHARES ............................................. 32
BUSINESS .......................................................... 33
General ...................................................... 33
Completed Investments......................................... 35
Investment of Offering Proceeds............................... 37
Property Acquisitions......................................... 37
Pending Investments........................................... 48
Site Selection and Acquisition of Properties ................. 54
Standards for Investment in Properties ....................... 57
Description of Properties..................................... 57
Description of Property Leases ............................... 58
Joint Venture Arrangements ................................... 61
Mortgage Loans................................................ 63
Management Services .......................................... 63
Borrowing .................................................... 64
Sale of Properties, Mortgage Loans, and Secured Equipment
Leases..................................................... 65
Franchise Regulation ......................................... 65
Competition .................................................. 66
Regulation of Mortgage Loans and Secured Equipment Leases .... 66
SELECTED FINANCIAL DATA............................................ 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OF THE COMPANY ................................................ 68
MANAGEMENT......................................................... 72
General ...................................................... 72
Fiduciary Responsibility of the Board of Directors ........... 73
Directors and Executive Officers.............................. 74
Independent Directors ........................................ 76
Committees of the Board of Directors ......................... 76
Compensation of Directors and Executive Officers ............. 77
Management Compensation ...................................... 77
THE ADVISOR AND THE ADVISORY AGREEMENT ............................ 77
The Advisor .................................................. 77
The Advisory Agreement ....................................... 77
CERTAIN TRANSACTIONS............................................... 80
PRIOR PERFORMANCE INFORMATION ..................................... 81
INVESTMENT OBJECTIVES AND POLICIES ................................ 86
General ...................................................... 86
Certain Investment Limitations ............................... 87
DISTRIBUTION POLICY ............................................... 88
General ...................................................... 88
Distributions ................................................ 88
SUMMARY OF THE ARTICLES OF INCORPORATION AND BYLAWS ............... 89
General ...................................................... 89
Description of Capital Stock ................................. 90
Board of Directors ........................................... 91
Stockholder Meetings ......................................... 91
Advance Notice for Stockholder Nominations for
Directors and Proposals of New Business .................... 92
Amendments to the Articles of Incorporation .................. 92
Mergers, Combinations, and Sale of Assets .................... 92
Termination of the Company and REIT Status ................... 92
Restriction of Ownership ..................................... 92
Responsibility of Directors .................................. 93
Limitation of Liability and Indemnification .................. 94
Removal of Directors ......................................... 95
Inspection of Books and Records .............................. 95
Restrictions on "Roll-Up" Transactions ....................... 95
FEDERAL INCOME TAX CONSIDERATIONS ................................. 96
Introduction ................................................. 96
Taxation of the Company ...................................... 96
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<PAGE>
Taxation of Stockholders .................................... 101
State and Local Taxes ....................................... 104
Characterization of Property Leases ......................... 104
Characterization of Secured Equipment Leases ................ 105
Investment in Joint Ventures ................................ 106
REPORTS TO STOCKHOLDERS .......................................... 106
THE OFFERING ..................................................... 107
General ..................................................... 108
Plan of Distribution ........................................ 108
Subscription Procedures ..................................... 110
Escrow Arrangements ......................................... 112
ERISA Considerations ........................................ 112
Determination of Offering Price ............................. 114
SUPPLEMENTAL SALES MATERIAL ...................................... 114
LEGAL OPINIONS ................................................... 114
EXPERTS .......................................................... 114
ADDITIONAL INFORMATION ........................................... 115
DEFINITIONS ...................................................... 115
Form of Amended Reinvestment Plan .......................... Exhibit A
Financial Information ...................................... Exhibit B
Prior Performance Tables ................................... Exhibit C
Subscription Agreement ..................................... Exhibit D
Pro Forma Estimate of Taxable Income........................ Exhibit E
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<PAGE>
SUMMARY
THIS SECTION SUMMARIZES CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND IS INTENDED FOR QUICK REFERENCE ONLY. THIS IS NOT A COMPLETE
DESCRIPTION OF THE INVESTMENT. POTENTIAL STOCKHOLDERS MUST READ AND EVALUATE THE
FULL TEXT OF THIS PROSPECTUS AND ALL SUPPORTING DOCUMENTS ATTACHED AS EXHIBITS
HERETO IN ORDER TO EVALUATE AN INVESTMENT IN THE COMPANY. THE FOLLOWING SUMMARY
THEREFORE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THIS
PROSPECTUS AND THE SUPPORTING DOCUMENTS.
CNL AMERICAN PROPERTIES FUND, INC.
CNL American Properties Fund, Inc. (the "Company") is a Maryland
corporation which operates for federal income tax purposes as a real estate
investment trust (a "REIT"). The Company's address is 400 East South Street,
Suite 500, Orlando, Florida 32801, telephone (407) 422-1574 or toll free (800)
522-3863.
The Company was formed primarily to acquire properties (the
"Properties") to be leased on a long-term (generally, 15 to 20 years, plus
renewal options for an additional 10 to 20 years), "triple-net" basis, which
means that the tenant will be responsible for repairs, maintenance, property
taxes, utilities, and insurance. As of March 6, 1997, the Company owned a
portfolio of 110 Properties located across the United States and leased to
operators of selected national and regional fast-food, family-style and
casual-dining restaurant chains (the "Restaurant Chains"). The Company is
expected to have a total portfolio of approximately 400 to 450 Properties, if
the maximum number of Shares of Common Stock of the Company (the "Shares") is
sold in this offering. The Company structures the leases of its Properties to
provide for payment of base annual rent with (i) automatic increases in base
rent and/or (ii) percentage rent based on gross sales above a certain level. The
Company also offers financing for the purchase of buildings, generally by
tenants that lease the underlying land from the Company (the "Mortgage Loans").
Mortgage Loans are expected to constitute from 5% to 10% of the Company's total
investments if the maximum number of Shares is sold in this offering. Management
believes that the economic effects of the Mortgage Loans for the purchase of
buildings are similar to those of its leases (generally with full repayment in
15 to 20 years). To a lesser extent, the Company offers furniture, fixtures and
equipment ("Equipment") financing to operators of Restaurant Chains pursuant to
which the Company provides, through direct financing leases, the Equipment
(collectively, the "Secured Equipment Leases"). The Company has obtained a
$15,000,000 line of credit (the "Loan") to be used by the Company to fund
Secured Equipment Leases. The Board of Directors may determine to obtain
additional financing to be used by the Company to fund Secured Equipment Leases,
provided that the amount of such additional financing may not exceed 10% of
Gross Proceeds of this offering and gross proceeds of any subsequent offerings.
See "Business" for information regarding the Company's existing Properties, a
description of the types of Properties in which the Company invests, the
Property selection and acquisition processes, the nature of the Mortgage Loans
and Secured Equipment Leases and a description of the Loan.
Under the Company's Articles of Incorporation, the Company
automatically will terminate and dissolve on December 31, 2005 unless the Shares
of the Company, including the Shares offered hereby, are listed on a national
securities exchange or over-the-counter market ("Listing"), in which event the
Company automatically will become a perpetual life entity. If Listing does not
occur by December 31, 2005, the Company will undertake, outside the ordinary
course of business and consistent with its objective of qualifying as a REIT,
the orderly Sale of the Company's assets, the distribution of Net Sales Proceeds
of such Sales to stockholders and the limitation of its activities to those
related to its orderly liquidation, unless the stockholders owning a majority of
the Shares elect to amend the Articles of Incorporation to extend the duration
of the Company. See "Risk Factors -- Real Estate and Financing Risks" for a
complete discussion of risks relating to future disposition of the Company's
assets. Until such time, if any, as Listing occurs, the Company may not encumber
Properties, although it may incur debt. If Listing occurs (which is not
assured), then the Board of Directors may elect to cause the Company to encumber
any or all of the Company's Properties in connection with any borrowing. The
Board of Directors anticipates that such borrowing, in the aggregate, will not
exceed 50% of Real Estate Asset Value, although the maximum amount the Company
may borrow is 300% of Net Assets (an amount which the Company anticipates will
correspond to approximately 75% of Real Estate Asset Value). In general, Net
Assets are the Company's total assets (other than intangibles), calculated at
cost, less total liabilities. As a perpetual life entity following Listing, the
Company would not be required to dissolve and return capital to stockholders. If
Listing occurs, in order to liquidate their investment stockholders would have
to sell their Shares in the market on which the Shares are traded. Listing is no
assurance of liquidity. See "Risk Factors -- Investment Risks" for a discussion
of risks associated with the lack of liquidity of the Shares and with borrowing.
In addition, following Listing the Company intends to reinvest proceeds from
Sales of Properties rather than distribute such proceeds to stockholders.
<PAGE>
RISK FACTORS
The "Risk Factors" section discusses in detail the more important risks
associated with an investment in the Company, including risks associated with an
investment in a real estate investment trust such as the Company, risks
associated with an investment in real estate such as the Properties, risks
associated with the Mortgage Loans, risks associated with Secured Equipment
Leases, and tax risks. These risks include:
o Risks of reliance on CNL Fund Advisors, Inc. (the "Advisor"), a Florida
corporation organized to provide management, advisory and
administrative services, and the Board of Directors, which together
will have responsibility for the management of the Company and its
investments, subject to the ability of the stockholders to elect the
Directors.
o Risks relating to the fact that the services to be performed by the
Advisor and its Affiliates for the Company in connection with the
offering, the selection and acquisition of the Properties, the making
of Mortgage Loans and Secured Equipment Leases and the general
operation of the Company will result in conflicts of interest.
o Risks related to the fact that, as of March 6, 1997, the Company owned
110 Properties of the anticipated total of 400 to 450 Properties, and
stockholders will not have the opportunity to evaluate all of the
Properties that the Company will acquire.
o Risks that stockholders who must sell their Shares will not be able to
sell them quickly because it is not anticipated that there will be a
public market for the Shares in the near term, and there can be no
assurance that the Listing will occur.
o Market risks associated with investments in real estate, which means
that the amount of cash the Company will receive from tenants, lessees
or borrowers cannot be predicted.
o Risks that the Company, prior to meeting certain conditions, may incur
debt, including debt to make Distributions in order to maintain its
status as a REIT, but will not encumber Properties.
o Risks of defaults by tenants, lessees or borrowers resulting in
decreased income.
o Risks relating to the fact that the vote of stockholders owning at
least a majority but less than all of the Shares will bind all of the
stockholders as to matters such as the election of Directors and
amendment of the Company's governing documents.
o Risks that restrictions on ownership of more than 9.8% of the shares of
the Company's Common Stock (the "Common Stock") by any single
stockholder or certain related stockholders may have the effect of
inhibiting a change in control of the Company even if such a change is
in the interest of a majority of the stockholders.
o Risks that the Company may not qualify or remain qualified as a REIT
for federal income tax purposes, which could result in subjecting the
Company to federal income tax on its taxable income at regular
corporate rates and, in turn, thereby reducing the amount of funds
available for paying Distributions to stockholders.
ESTIMATED USE OF PROCEEDS
The Company is using the proceeds of the sale of the Shares to acquire
Properties, to make Mortgage Loans, generally in connection with such
acquisitions, and to pay expenses relating to the sale of the Shares. Management
of the Company and the Advisor have estimated an average purchase price of
$800,000 to $900,000 per Property based on their past experience in acquiring
similar properties and in light of current market conditions, although prices of
Properties may be lower or higher. Assuming the maximum of 27,500,000 Shares
($275,000,000) are sold, the Company will acquire approximately 260 to 300
additional Properties with the proceeds of this offering. See "Estimated Use of
Proceeds" and "Business -- General" for a more detailed description of the
anticipated use of offering proceeds. Secured Equipment Leases will be funded
solely from the proceeds of the Loan and the number of Secured Equipment Leases
will not depend on the amount raised in this offering.
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<PAGE>
CONFLICTS OF INTEREST
Certain officers and Directors of the Company who are also officers or
directors of the Advisor will experience conflicts of interest in their
management of the Company. These arise principally from their involvement in
other activities that will conflict with those of the Company and include
matters related to (i) allocation of new investments and management time and
services between the Company and various partnerships and other entities, (ii)
the timing and terms of the investment in or sale of a Property, Mortgage Loan
or Secured Equipment Lease, (iii) investments with Affiliates of the Advisor,
(iv) compensation of the Advisor, (v) the Company's relationship with the
Managing Dealer, which is an Affiliate of the Company and the Advisor, and (vi)
the fact that the Company's securities and tax counsel also serves as securities
and tax counsel for certain Affiliates of the Company, and that neither the
Company nor the stockholders will have separate counsel.
The Directors of the Company who are independent of the Advisor (the
"Independent Directors") are responsible for monitoring the activities of the
Advisor and must approve all of the Advisor's actions that involve a potential
conflict other than certain such actions specifically permitted by the Articles
of Incorporation. The "Conflicts of Interest" section discusses in more detail
the more significant of these potential conflicts of interest, as well as the
procedures that have been established to resolve a number of these potential
conflicts.
The Company has established certain conflict resolution procedures
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of restaurant
properties and secured equipment leases among certain affiliated entities. See
"Conflicts of Interest -- Certain Conflict Resolution Procedures."
MANAGEMENT
The Company has retained the Advisor, pursuant to an advisory
agreement, to handle the day-to-day operations of the Company, to select the
Company's real estate investments, and to administer its Secured Equipment Lease
program. The five members of the Board of Directors will oversee the management
of the Company. Three of the Directors of the Company are independent of the
Advisor and have responsibility for reviewing its performance. The Directors are
elected to the Board of Directors annually by the stockholders.
All of the officers and directors of the Advisor also are officers or
Directors of the Company. The Advisor will have responsibility for (i) selecting
the Properties that the Company will acquire, formulating and evaluating the
terms of each proposed acquisition, and arranging for the acquisition of the
Property by the Company, (ii) identifying potential lessees for the Properties
and potential borrowers for the Mortgage Loans, and formulating, evaluating, and
negotiating the terms of each lease of a Property and each Mortgage Loan, (iii)
locating and identifying potential lessees and formulating, evaluating, and
negotiating the terms of each Secured Equipment Lease, and (iv) negotiating the
terms of any borrowing. All of the foregoing actions are subject to approval by
the Board of Directors. The Advisor also will have the authority, subject to
approval by a majority of the Board of Directors, including a majority of the
Independent Directors, to select Properties for Sale in keeping with the
Company's investment objectives and based on an analysis of economic conditions
both nationally and in the vicinity of the Property being considered for Sale.
See "Management" and "The Advisor and the Advisory Agreement" for a
description of the business background of the individuals responsible for the
management of the Company and the Advisor, as well as for a description of the
services that the Advisor will provide.
MANAGEMENT COMPENSATION
The Advisor, the Managing Dealer, and other Affiliates of the Advisor
will receive compensation for services they will perform for the Company and
also will receive expense reimbursements from the Company for expenses they pay
on behalf of the Company. See "Management Compensation" for a complete
description. See also "Certain Transactions" for a description of compensation
paid to the Advisor, Managing Dealer and other Affiliates of the Company since
its inception. The following paragraphs summarize the more significant items of
compensation.
In connection with this offering, the Managing Dealer will receive
Selling Commissions of 7.5% (a maximum of $20,625,000 if 27,500,000 Shares are
sold), and a marketing support and due diligence expense reimbursement fee of
0.5% (a maximum of $1,375,000 if 27,500,000 Shares are sold), of the total
amount raised from the sale of Shares, computed at $10.00 per Share sold ("Gross
Proceeds"). The Managing Dealer in turn may reallow Selling Commissions of up to
7% on Shares sold, and all or a portion of the 0.5% marketing support and due
diligence expense reimbursement fee to certain Soliciting Dealers, who are not
Affiliates of the Company. In addition, the Company will incur a Soliciting
Dealer Servicing Fee in the amount of .20% of Invested Capital (as defined
below) (a maximum of $550,000 if 27,500,000 Shares are sold). The Soliciting
Dealer Servicing Fee will be payable on December 31 of each year, commencing on
December 31 of the year
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following the year in which the related offering terminates, and generally will
be payable to the Managing Dealer, which in turn may reallow all or a portion of
such fee to Soliciting Dealers whose clients held Shares on such date. In
general, the stockholders' investment in the Company ("Invested Capital") is the
number of Shares they own, multiplied by $10.00 per Share, reduced by the
portion of all prior Distributions received by stockholders from the Sale of one
or more Properties and by any amounts paid by the Company to repurchase Shares
pursuant to the redemption plan.
For identifying the Properties, structuring the terms of the
acquisition and leases of the Properties and structuring the terms of the
Mortgage Loans, the Advisor will receive Acquisition Fees equal to 4.5% of Gross
Proceeds (a maximum of $12,375,000 if 27,500,000 Shares are sold) from the sale
of Shares.
For managing the Properties and the Mortgage Loans, the Advisor will be
entitled to receive a monthly Asset Management Fee of one-twelfth of .60% of the
Company's Real Estate Asset Value (generally, the total amount invested in the
Properties, exclusive of Acquisition Fees and Acquisition Expenses) plus the
total outstanding amount of the Mortgage Loans as of the end of the preceding
month.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor will be entitled to receive from the
Company a one-time Secured Equipment Lease Servicing Fee of 2% of the purchase
price of the Equipment that is the subject of a Secured Equipment Lease.
Prior to Listing, the Advisor may receive a real estate disposition fee
of 3% of the gross sales price of one or more Properties for providing
substantial services in connection with the Sale, which will be deferred and
subordinated until the stockholders have received Distributions equal to the sum
of an aggregate, annual, cumulative, noncompounded 8% return on their Invested
Capital, excluding Distributions attributable to proceeds of the Sale of a
Property (the "Stockholders' 8% Return") plus 100% of the stockholders'
aggregate Invested Capital. Upon Listing, if the Advisor has accrued but not
been paid such real estate disposition fee, then for purposes of determining
whether the subordination conditions have been satisfied, stockholders will be
deemed to have received a Distribution in an amount equal to the total number of
Shares outstanding multiplied by the average closing price of the Shares over a
period of 30 days during which the Shares are traded, with such period beginning
180 days after Listing. See "The Advisor and The Advisory Agreement -- The
Advisory Agreement."
A deferred, subordinated share of Net Sales Proceeds will be paid to
the Advisor upon the Sale of one or more Properties or Secured Equipment Leases
in an amount equal to 10% of Net Sales Proceeds. This amount will be
subordinated and paid only after the stockholders have received Distributions
equal to the sum of 100% of the stockholders' aggregate Invested Capital, plus
the Stockholders' 8% Return.
Payment of certain fees is subject to conditions and restrictions or to
change under certain specified circumstances. The Advisor and its Affiliates
also may receive reimbursement for out-of-pocket expenses that they incur on
behalf of the Company, subject to certain expense limitations, and a
subordinated incentive fee if Listing occurs.
SUMMARY OF REINVESTMENT PLAN
The Company has established the Reinvestment Plan pursuant to which
stockholders may elect to have their cash Distributions from the Company
automatically reinvested in Shares. See "Summary of Reinvestment Plan," "Federal
Income Tax Considerations -- Taxation of Stockholders," and the form of
Reinvestment Plan accompanying this Prospectus as Exhibit A for more specific
information about the Reinvestment Plan. Expenses incurred in connection with
the Reinvestment Plan, including Selling Commissions and marketing support and
due diligence expense reimbursement fees, will be paid by the Company. A person
who becomes a stockholder otherwise than by participating in this offering or
the Initial Offering may purchase Shares through the Reinvestment Plan only
after receipt of a separate prospectus relating solely to the Reinvestment Plan.
BUSINESS
As of March 6, 1997, the Company owned 110 Properties. It is
anticipated that the Company will acquire a total of 400 to 450 Properties if
the maximum number of Shares is sold in this offering (including 260 to 300
Properties to be acquired with the proceeds of this offering and 30 to 40
additional Properties to be acquired with the proceeds of the Initial Offering).
A description of the types of Properties which the Company purchases and leases
to third parties appears in the section entitled "Business." The Company invests
in Properties of selected national and regional restaurant chains, primarily
fast-food, family-style, and casual dining chains, the most rapidly growing
segments of the restaurant industry in recent years. Management structures the
Company's investments to allow it to participate, to the maximum extent
possible,
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in any sales growth in these industry segments, as reflected in the Properties
that it owns. The Properties, which typically are freestanding and are located
across the United States, are leased on a "triple-net" basis to operators of the
Restaurant Chains selected by the Advisor and approved by the Board of
Directors. The Properties consist of both land and building, the land underlying
the building with the building owned by the tenant or a third party, or the
building only with the land owned by a third party.
The Company has undertaken to supplement this Prospectus during the
offering period to describe the acquisition of Properties at such time as the
Company believes that a reasonable probability exists that a Property will be
acquired by the Company. Based upon the experience of management of the Company
and the Advisor and the proposed acquisition methods, a reasonable probability
that the Company will acquire a Property normally will occur as of the date on
which (i) a commitment letter is executed by a proposed lessee, (ii) a
satisfactory credit underwriting for the proposed lessee has been completed, and
(iii) a satisfactory site inspection has been completed.
As of March 6, 1997, the Company had provided Mortgage Loans to the
tenants of the 35 Properties that are land only to purchase the buildings on
these Properties. It is expected that Mortgage Loans will constitute from 5% to
10% of the Company's total investments, if the maximum number of Shares is sold
in this offering. In general, the Company offers Mortgage Loans in circumstances
in which the Company owns the land underlying the building to be financed and
the borrower under the Mortgage Loan also enters into a long-term ground lease
for the underlying land. Management believes that this combined leasing and
financing structure provides the benefit of allowing the Company to receive the
return of its initial investment plus interest on each financed building, which
is generally a depreciating asset, while retaining the ownership of the
underlying land, which is generally an appreciating asset.
The Company plans to obtain short-term financing (the "Line of Credit")
in an amount up to $20,000,000, the proceeds of which will be used to acquire
Properties. Management believes that, during the offering period, the Line of
Credit will allow the Company to take advantage of investment opportunities that
might otherwise be lost if the Company was forced to delay making the
investments until it had raised a sufficient amount of offering proceeds. In
addition, management believes that the use of the Line of Credit will enable the
Company to reduce or eliminate the instances in which the Company will be
required to pay duplicate closing costs as a result of an Affiliate of the
Advisor purchasing Properties, pending receipt by the Company of sufficient
offering proceeds, in order to preserve the investment opportunity for the
Company, and the Company subsequently purchasing the Properties from the
Affiliate. The Line of Credit will be repaid from the proceeds of this offering.
No Properties will be encumbered in connection with the Line of Credit. The
Company is engaged in preliminary discussions with potential lenders but has not
yet obtained a commitment letter for the Line of Credit and may not be able to
obtain the Line of Credit on satisfactory terms.
As of March 6, 1997, the Company had entered into 12 Secured Equipment
Leases and in connection with these leases had received advances under the Loan
of approximately $5,149,000. The Secured Equipment Leases are funded solely from
the proceeds of the Loan. The Company structures Secured Equipment Leases so
that they will be treated as loans secured by personal property for federal
income tax purposes.
See "Business" for a description of the types of Properties in which
the Company invests, the Property selection and acquisition processes, the
Mortgage Loans, the Secured Equipment Leases, the proposed Line of Credit and
the Loan.
INVESTMENT OBJECTIVES AND POLICIES
The Company's primary investment objectives are:
o to preserve, protect, and enhance the Company's assets.
o to make quarterly Distributions.
o to obtain fixed income through the receipt of base rent, as
well as to increase the Company's income (and Distributions)
and provide protection against inflation through automatic
increases in base rent and receipt of percentage rent, and to
obtain fixed income through the receipt of payments on
Mortgage Loans and Secured Equipment Leases.
o to qualify and remain qualified as a REIT for federal income
tax purposes.
o to provide stockholders of the Company with liquidity of their
investment within three to eight years after commencement of
this offering, although liquidity cannot be assured thereby,
either through (i) Listing
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or (ii) outside the ordinary course of business and consistent
with its objective of qualifying as a REIT, the commencement
of orderly Sales of the Company's assets and distribution of
the proceeds thereof.
The Company intends to meet these objectives by following certain
investment policies discussed herein, as summarized on the preceding pages. See
"Business -- General," "Business -Site Selection and Acquisition of Properties,"
"Business -Description of Leases," and "Investment Objectives and Policies" for
a more complete description of the manner in which the structure of the
Company's business will facilitate the Company's ability to meet its investment
objectives. There can be no assurance that these objectives will be met. The
Company's investment objectives are subject to review by the Independent
Directors and may not be changed without the approval of stockholders owning a
majority of the shares of outstanding Common Stock.
DESCRIPTION OF SHARES
A stockholder's investment will be recorded on the books of the
Company. The Company will provide, upon the request of any stockholder wishing
to transfer his or her Shares, a transfer form to be completed and executed by
the stockholder and returned to the Company. The Company will not issue share
certificates other than to stockholders who make a written request to the
Company.
During any period in which the Company is not making a public offering
of Shares, any stockholder may request that the Company redeem for cash all or a
significant portion of such stockholder's Shares. The sole source of funds for
any such requested redemption will be the net proceeds available from the sale
of Shares pursuant to the Reinvestment Plan. There can be no assurance that such
net proceeds will be sufficient to permit the Company to redeem all such Shares
presented for redemption. See "Redemption of Shares."
An annual meeting of stockholders will be held each year for the
election of the Directors. Other business matters may be presented at the annual
meeting or at special stockholder meetings. Each Share is entitled to one vote
on each matter to be voted on by stockholders, including the election of the
Directors. Stockholders who do not vote with the majority of Shares entitled to
vote on questions presented nonetheless will be bound by the majority vote.
Stockholder approval is required under Maryland law and the Company's
Articles of Incorporation and Bylaws for certain types of transactions.
Generally, the Articles of Incorporation and Bylaws may be amended upon a
majority vote of stockholders. Stockholders holding a majority of the Shares
must approve a merger or a sale or other disposition of substantially all of the
Company's assets other than in the ordinary course of business. Stockholders
objecting to the terms of a merger, sale, or other disposition of substantially
all of the Company's assets have the right to petition a court for the appraisal
and payment of the fair value of their Shares in certain instances. The
affirmative vote of a majority of the Shares outstanding and entitled to vote is
required to approve the voluntary dissolution of the Company.
In order to facilitate compliance with certain restrictions imposed on
REITs by the Internal Revenue Code of 1986, as amended (the "Code"), the
Articles of Incorporation generally restrict direct or indirect ownership
(applying certain attribution rules) of more than 9.8% of the outstanding shares
of Common Stock by one Person, as defined in the Articles of Incorporation. See
"Summary of the Articles of Incorporation and Bylaws -Restriction on Ownership."
For a more complete description of the Shares and the capital structure
of the Company, please refer to the "Summary of the Articles of Incorporation
and Bylaws -- Description of Capital Stock" section of the Prospectus.
DISTRIBUTION POLICY
The following table reflects total Distributions and Distributions per
Share declared by the Company for each month since the Company commenced
operations.
Total Distributions
Month Distributions Per Share
June 1995 $ 15,148 $0.030000
July 1995 30,682 0.030000
August 1995 57,739 0.035000
September 1995 84,467 0.050000
October 1995 104,733 0.050000
November 1995 155,665 0.058300
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December 1995 190,184 0.058300
January 1996 225,354 0.058300
February 1996 255,649 0.058300
March 1996 287,805 0.058300
April 1996 323,721 0.058300
May 1996 368,155 0.058300
June 1996 407,803 0.058300
July 1996 458,586 0.059375
August 1996 517,960 0.059375
September 1996 559,599 0.059375
October 1996 615,914 0.059375
November 1996 683,907 0.059375
December 1996 731,569 0.059375
January 1997 827,967 0.059375
February 1997 884,794 0.059375
March 1997 980,571 0.060416
Consistent with the Company's objective of qualifying as a REIT, the
Company expects to continue to calculate and declare Distributions monthly
during the offering period, and quarterly thereafter, and make Distributions
quarterly. The Board of Directors, in its discretion, will determine the amount
of the Distributions made by the Company, which amount will depend primarily on
net cash from operations. The Company intends to increase Distributions in
accordance with increases in net cash from operations. Consistent with the
Company's objective of qualifying as a REIT, the Company expects to distribute
at least 95% of its real estate investment trust taxable income, although the
Board of Directors, in its discretion, may increase that percentage as it deems
appropriate. If the cash available to the Company is insufficient to make
Distributions, the Company may obtain the needed cash by borrowing funds,
issuing new securities, or selling assets. These methods of obtaining cash could
affect future Distributions by increasing operating costs or reducing income. In
such an event, it is possible that the Company could pay Distributions in excess
of its earnings and profits and, accordingly, that such Distributions could
constitute a return of capital for federal income tax purposes, although such
Distributions would not reduce stockholders' aggregate Invested Capital. For the
years ended December 31, 1996 and 1995, the Company declared and made
Distributions totalling $5,436,072 and $638,618, respectively (90.25% and
59.82%, respectively, of which were characterized as ordinary income and 9.75%
and 40.18%, respectively, as return of capital for federal income tax purposes).
Due to the fact that the Company had not acquired all of its Properties and was
still in its offering period as of December 31, 1996, the characterization of
Distributions for federal income tax purposes is not considered by management to
be necessarily representative of the characterization of Distributions in future
years.
PRIOR PERFORMANCE OF AFFILIATES
The "Prior Performance Information" section of this Prospectus contains
a narrative discussion of the public and private real estate limited
partnerships sponsored by Affiliates of the Company and of the Advisor during
the past ten years, including 18 public limited partnerships formed to invest in
restaurants leased on a "triple-net" basis to operators of national and regional
fast-food and family-style restaurant chains. As of December 31, 1996, these
partnerships, which purchase properties similar to those to be acquired by the
Company, had purchased 668 fast-food and family-style restaurant properties.
Based on an analysis of the operating results of the 86 real estate limited
partnerships in which principals of the Company have served, individually or
with others, as general partners, the Company believes that each of such
partnerships has met, or currently is in the process of meeting, its principal
investment objectives. Certain statistical data relating to the public limited
partnerships with investment objectives similar to those of the Company, and the
offerings of which were fully subscribed within the last five years, are
contained in Exhibit C--Prior Performance Tables.
TAX STATUS OF THE COMPANY
The Company has made the election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ending December 31, 1995. As a REIT for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. Under the
Code, REITs are subject to numerous organizational and operational requirements,
including a requirement that they distribute at least 95% of their taxable
income, as figured on an annual basis. If the Company fails to qualify for
taxation as a REIT in any taxable year, it will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates and will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following the year during
which qualification is lost. See "Risk Factors -- Tax Risks" and "Federal Income
Tax Considerations." Even if the Company qualifies as a REIT for federal
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income tax purposes, it may be subject to certain federal, state, and local
taxes on its income and property and to federal income and excise taxes on its
undistributed income. See "Federal Income Tax Considerations."
THE OFFERING
A maximum of 27,500,000 Shares ($275,000,000) in the Company are being
offered at a price of $10.00 per Share, with the sale of 23,000,000 of such
Shares subject to approval by the stockholders of a resolution to increase the
number of authorized shares of the Company. See "Summary of the Articles of
Incorporation and Bylaws - Description of Capital Stock." Of the Shares offered
hereby, 2,500,000 will be available only to stockholders purchasing Shares in
this offering who receive a copy of this Prospectus, or to stockholders who
purchased Shares in the initial public offering (the "Initial Offering") of the
Company and who received a copy of the related prospectus, and who elect to
participate in the Reinvestment Plan. Until such time, if any, as the
stockholders approve an increase in the number of authorized Shares, this
offering will be limited to 4,800,000 Shares, 100,000 of which will be available
only to stockholders purchasing pursuant to the Reinvestment Plan. Any
participation in such plan subsequent to this offering must be made pursuant to
solicitation under a separate prospectus. See "Summary of Reinvestment Plan."
The Shares are being offered by the Managing Dealer and other
broker-dealers that are members of the National Association of Securities
Dealers, Inc. or exempt from broker-dealer registration (the "Soliciting
Dealers") on a "best efforts" basis, which means that no one is guaranteeing
that any minimum number of Shares will be sold. Both the Company and the
Advisor are Affiliates of the Managing Dealer. See "The Offering -- Plan of
Distribution."
All subscription funds for Shares of the Company will be deposited in
an interest-bearing escrow account with SouthTrust Asset Management Company of
Florida, N.A. See "The Offering" for a description of the current status of the
offering.
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000), except for Iowa tax-exempt stockholders who must make a minimum
investment of 250 Shares ($2,500). For Minnesota stockholders only, IRAs and
qualified plans must make a minimum investment of 200 Shares ($2,000). In
addition, Nebraska, New York, and North Carolina stockholders must make a
minimum investment of 500 Shares ($5,000). Following an initial subscription for
at least the required minimum investment, any stockholder may make additional
purchases in increments of one Share. Maine stockholders, however, may not
purchase additional Shares in amounts less than the applicable minimum
investment except with respect to Shares purchased pursuant to the Reinvestment
Plan. See "The Offering -- General," "The Offering -- Subscription Procedures,"
and "Summary of Reinvestment Plan."
DEFINITIONS
This Prospectus includes simplified terms and definitions to make the
Prospectus easier to understand. These simplified terms and definitions do not
include all of the details of the terms, however, and stockholders therefore
should review the "Definitions" section for a more complete understanding.
RISK FACTORS
The purchase of Shares involves significant risks and therefore is
suitable only for persons who understand the possible consequences of an
investment in the Company and who are able to bear the risk of loss of their
investment. Prospective stockholders should consider the following risks in
addition to other information describing an investment in the Shares set forth
elsewhere in this Prospectus.
INVESTMENT RISKS
Possible Inability to Further Diversify Investments. There can be no
assurance that the stockholders will approve the increase in the number of
authorized Shares or that if such approval is given that the Company will sell
the maximum number of Shares. The potential ability of the Company to further
diversify its investments, both geographically and by type of restaurant
Properties purchased, will be limited by the amount of funds at its disposal.
Risk of Reliance on Management. Stockholders will be relying entirely
on the management ability of the Advisor and on the oversight of the Board of
Directors. Stockholders have no right or power to take part in the management of
the Company, except through the exercise of their stockholder voting rights.
Thus, no prospective stockholder should purchase
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any of the Shares offered hereby unless the prospective stockholder is willing
to entrust all aspects of the management of the Company to the Advisor and the
Board of Directors. See "Conflicts of Interests" for a discussion of the
potential for realization by the Advisor and its Affiliates of substantial
commissions, fees, compensation, and other income and for a discussion of
various other conflicts of interest.
Risk of Reliance on Advisor. The Advisor, with approval from the Board
of Directors, will be responsible for the daily management of the Company,
including all acquisitions, dispositions, and financings. The Advisor may be
terminated by the Board of Directors, with or without cause, but only subject to
payment and release from all guarantees and other obligations incurred in
connection with its role as Advisor. See "Management Compensation."
Risk Associated with Leverage. Other than the Loan, the Line of Credit
or to preserve its status as a REIT, the Company does not intend to borrow money
and until Listing occurs, the Company will not encumber Properties in connection
with any borrowing. At all times, the maximum amount the Company may borrow is
300% of the Company's Net Assets, although the Board of Directors anticipates
that the aggregate amount of any borrowing by the Company will not exceed 50% of
Real Estate Asset Value. The use of borrowing may present an element of risk in
the event that the cash flow from lease payments on its Properties and payments
on Secured Equipment Leases are insufficient to meet its debt obligations. In
addition, lenders to the Company may seek to impose restrictions on future
borrowings, Distributions and operating policies of the Company.
Conflicts of Interest. As discussed in detail in "Conflicts of
Interest," the Company will be subject to conflicts of interest arising out of
its relationship to the Advisor and its Affiliates. Such conflicts include
matters related to (i) allocation of new investments and management time and
services between the Company and various partnerships and other entities as to
which the officers and directors of the Advisor and the Directors and officers
of the Company have management responsibilities, (ii) the timing and terms of
the investment in or sale of a Property, Mortgage Loan or Secured Equipment
Lease of the Company, (iii) investments with Affiliates of the Advisor, (vii)
compensation to the Advisor, (v) the Company's relationship with the Managing
Dealer (which is an Affiliate of the Company and the Advisor), and (vi) the fact
that the Company's securities and tax counsel also serves as securities and tax
counsel for certain Affiliates of the Company and that neither the Company nor
the stockholders will have separate counsel. See "Conflicts of Interest."
Risks Associated with Related Party Transactions. The Advisor is an
Affiliate of the Company and has been and will be engaged to perform various
services for the Company and has and will receive fees and compensation for such
services. The timing and nature of fees and compensation to the Advisor could
create a conflict between the interests of the Advisor and those of
stockholders. See "Conflicts of Interest -- Compensation of the Advisor."
The Managing Dealer is an Affiliate of the Company and has provided
services and received fees in connection with the Initial Offering of the
Company and will provide services and receive fees in connection with this
offering. As a result, the Managing Dealer will not make an independent review
of the Company and the offering. See "Conflicts of Interest -Relationship with
Managing Dealer."
The Company may purchase Properties that have been developed,
constructed or renovated by an Affiliate of the Advisor or for which an
Affiliate of the Advisor has provided construction financing to a developer. The
purchase price of any such Property will include a fee paid to the Affiliate
and, as a result, the Advisor will have a conflict of interest between its own
interest and that of the Company. See "Business -- Site Selection and
Requisition of Properties -- Construction and Renovation."
For a description of the types and amounts of fees and other
compensation to be paid to Affiliates see "Management Compensation." For a
description of the types and amounts of fees previously paid to Affiliates of
the Company see "Exhibit B -- Financial Information -- Notes to Consolidated
Financial Statements." See also "Conflicts of Interest -- Certain Conflict
Resolution Procedures."
Lack of Liquidity of Shares. Stockholders may not be able to sell their
Shares promptly at a desired price; therefore, the Shares should be considered
as a long-term investment only. Currently there is no public market for the
Shares. The Board of Directors, with or without the consent of the stockholders,
may apply for Listing if the Board of Directors (including a majority of
Independent Directors) determines Listing to be in the best interests of the
stockholders. There can be no assurance, however, that the Company will apply
for Listing, that any such application will be made before the passage of a
significant period of time, that any application will be accepted or, even if
accepted, that a public trading market will develop. If Listing occurs, the
business of the Company may continue indefinitely without any specific time
limitation by which the Company must distribute Net Sales Proceeds to the
stockholders. In that case, the stockholders would be dependent upon the sale of
their Shares for the return of their investment in the Company. There can be no
assurance that the price a stockholder would receive in a sale on an exchange or
in the over-the-counter market will be
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representative of the value of the assets owned by the Company or that it will
equal or exceed the amount a stockholder paid for the Shares. In the event
Listing occurs, Shares may be sold only through the national securities exchange
or the over-the-counter market on which the Shares are listed.
Risk Associated With Management of Joint Ventures. The Independent
Directors of the Company must approve all Joint Venture or general partnership
arrangements to which the Company is a party. Subject to such approval, the
Company may enter into a Joint Venture with an unaffiliated party to purchase a
Property, and the Joint Venture or general partnership agreement relating to
that Joint Venture or partnership may provide that the Company will share
management control of the Joint Venture with the unaffiliated party. In the
event the Joint Venture or general partnership agreement provides that the
Company will have sole management control of the Joint Venture, such agreement
may be ineffective as to a third party who has no notice of the agreement, and
the Company therefore may be unable to control fully the activities of such
Joint Venture. In the event that the Company enters into a Joint Venture with
another program sponsored by an Affiliate, it is anticipated that the Company
will not have sole management control of the Joint Venture.
Lack of Control of Property Management. The Company uses "triple-net"
leases and, therefore, day-to-day management of the Properties will be the
responsibility of the tenants of the Properties. In general, the Company intends
to enter into leasing agreements only with tenants having substantial prior
experience in the restaurant industry, but there can be no assurance that the
Company will be able to make such arrangements because, as of March 6, 1997, the
Company had purchased only 110 Properties.
Risks Associated With Mortgage Loans. The experience of the Advisor and
Directors of the Company with mortgage financing is limited. In the event that a
borrower defaults on a Mortgage Loan, the Company may not be able to sell the
real property which it holds as security for the Mortgage Loan at a price that
would enable the Company to recover the balance of the Mortgage Loan. The
Mortgage Loans may also be subject to regulation by federal, state and local
authorities and subject to various laws and judicial and administrative
decisions. The Company may determine not to make Mortgage Loans in any
jurisdiction in which it believes the Company has not complied in all material
respects with applicable requirements.
Risks Associated With Secured Equipment Leases. The experience of the
Advisor and Directors of the Company with Equipment leasing is limited. In the
event that a lessee defaults on a Secured Equipment Lease, the Company may not
be able to sell the subject Equipment at a price that would enable the Company
to recover its costs associated with such Equipment. The Secured Equipment Lease
program may also be subject to regulation by federal, state and local
authorities and subject to various laws and judicial and administrative
decisions. The Company may determine not to operate the Secured Equipment Lease
program in any jurisdiction in which it believes the Company has not complied in
all material respects with applicable requirements. In addition, there are
certain federal income tax risks associated with the Secured Equipment Lease
program. See " -- Tax Risks."
Binding Nature of Majority Stockholder Vote. Stockholders may take
certain actions, including approving most amendments to the Articles of
Incorporation and Bylaws, by a vote of a majority of the Shares outstanding and
entitled to vote. All actions taken, if approved by the holders of the requisite
number of Shares, would be binding on all stockholders. Certain of these
provisions may discourage or make it more difficult for another party to acquire
control of the Company or to effect a change in the operation of the Company.
Risks Relating to the Authority of the Board of Directors. Under
certain circumstances, the Company may prevent the ownership, transfer, and/or
accumulation of Shares in order to protect the status of the Company as a REIT
or, as otherwise deemed by the Board of Directors, to be in the best interests
of the stockholders. See "Summary of the Articles of Incorporation and Bylaws --
Restriction of Ownership." The Board of Directors has the power to cause the
issuance of additional authorized Shares without obtaining stockholder approval.
Restrictions on Transfer Relating to REIT Status. The Articles of
Incorporation generally restrict direct or indirect ownership (applying certain
attribution rules) of more than 9.8% of the outstanding Common Stock or 9.8% of
any series of outstanding Preferred Stock by one Person (as defined in the
Articles of Incorporation). See "Summary of the Articles of Incorporation and
Bylaws -- Restriction of Ownership."
Limited Liability of Officers and Directors. The Articles of
Incorporation and Bylaws provide that an officer or Director's liability to the
Company, its stockholders, or third parties for monetary damages may be limited.
Generally, the Company is obligated under the Articles of Incorporation and the
Bylaws to indemnify its officers and Directors against certain liabilities
incurred in connection with their services in such capacities. The Company has
executed indemnification agreements with each officer and Director which will
indemnify the officer or Director for any such liabilities that he or she
incurs. Such indemnification agreements could limit the legal remedies available
to the Company and the stockholders
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against the Directors and Officers of the Company. See "Summary of the Articles
of Incorporation and Bylaws -- Limitation of Director and Officer Liability."
Risks for Retirement Plan Stockholders. The Company believes that the
assets of the Company will not be deemed, under ERISA, to be "plan assets" of
any Plan that invests in the Shares, although it has not requested an opinion of
Counsel to that effect. If the assets of the Company were deemed to be "plan
assets" under ERISA (i) it is not clear that the exemptions from the "prohibited
transaction" rules under ERISA would be available for the Company's
transactions, and (ii) the prudence standards of ERISA would apply to
investments made by the Company (and might not be met). ERISA makes plan
fiduciaries personally responsible for any losses resulting to the plan from any
breach of fiduciary duty and the Code imposes nondeductible excise taxes on
prohibited transactions.
Ability to Use Leverage to Make Distributions. The Company may incur
indebtedness if necessary to satisfy the requirement that the Company distribute
at least 95% of its real estate investment trust taxable income or otherwise, as
is necessary or advisable to assure that the Company maintains its qualification
as a REIT for federal income tax purposes. In such an event, it is possible that
the Company could make Distributions in excess of its earnings and profits and,
accordingly, that such Distributions could constitute a return of capital for
federal income tax purposes, although such Distributions would not reduce
stockholders' aggregate Invested Capital.
REAL ESTATE AND FINANCING RISKS
Risks Relating to an Unspecified Property Offering. The Company has
established certain criteria for evaluating Restaurant Chains, particular
Properties, and the operators of the Properties proposed for investment by the
Company. See "Business -- Standards for Investment" and "Business -General" for
a description of these criteria and the types of Properties in which the Company
intends to invest. Prospective investors have no information to assist them in
evaluating the merits of the 260 to 300 Properties expected to be acquired by
the Company with the proceeds of this offering or the 30 to 40 additional
Properties to be acquired with the proceeds of the Initial Offering. There is no
limit on the number of restaurant Properties of a particular Restaurant Chain
which the Company may acquire, although the Board of Directors currently does
not anticipate that the Company will invest more than 25% of its Gross Proceeds
in Properties of any one Restaurant Chain.
No assurance can be given that the Company will be successful in
obtaining suitable investments on financially attractive terms or that, if
investments are made, the objectives of the Company will be achieved. There also
can be no assurance that all of the Properties will operate profitably or that
defaults will not occur. See "Management" and "Prior Performance Information,"
however, for a description of the prior real estate experience of the Affiliates
of the Company and the Advisor.
Possible Delays in Investment. To the extent consistent with the
Company's objective of qualifying as a REIT, the offering proceeds may remain
uninvested for up to the later of two years from the initial date of this
Prospectus or one year after termination of the offering, although it is
expected that substantially all net offering proceeds will be invested prior to
the end of such period. See "Prior Performance Information" for a summary
description of the investment experience of Affiliates and the Advisor in prior
CNL programs, which is not necessarily indicative of the rate at which the
proceeds of this offering will be invested.
An extended offering period, the inability of the Advisor to find
suitable Properties, or the fact that a program formed by Affiliates of the
Advisor subsequent to the commencement of this offering currently is in the
process of acquiring fast-food and family-style restaurant properties to
substantially complete its acquisition program prior to the time that the
Company has funds available to invest in Properties may result in delays in
investment of Company funds in Properties and in the receipt of a return from
real property investments.
Revenues received by the Company pending investment in Properties or
making Mortgage Loans will be limited to the rates of return available on
short-term, highly liquid investments with appropriate safety of principal.
These rates of return, which affect the amount of cash available to make
Distributions to the stockholders, are expected to be lower than the Company
would receive under its Property leases or Mortgage Loans. Further, to the
extent consistent with the Company's objective of qualifying as a REIT, any
funds of the Company required to be invested in Properties and not so invested
or reserved for Company purposes within the later of two years from the initial
date of this Prospectus, or one year after the termination of this offering,
will be distributed pro rata to the then stockholders of the Company in
accordance with the Articles of Incorporation.
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Risks Associated With Acquiring Properties Under Construction. The
Company intends to acquire sites on which a particular restaurant to be owned by
the Company is to be built as well as existing restaurants (including
restaurants which require renovation). To the extent that the Company acquires
property on which improvements are to be constructed or completed or renovations
are to be made, the Company may be subject to certain risks in connection with
the developer's ability to control construction costs, and the timing of
completion of construction, or to build in conformity with plans,
specifications, and timetables. The Company's agreements with the developer will
provide certain safeguards designed to minimize these risks. Further, in the
event of a default by a developer, the Company generally will have the right to
require the tenant to repurchase the Property that is under development at a
pre-established price designed to reimburse the Company for all costs incurred
by the Company in connection with the acquisition and development of the
Property. There can be no assurance, however, that under such circumstances, the
tenant will have sufficient funds to fulfill its obligations. See "Business --
Site Selection and Acquisition Properties."
Risks of Joint Investment in Properties. In the event that the Company
enters into a Joint Venture with another program formed by Affiliates of the
Advisor, there will be a potential risk of impasse in certain joint venture
decisions since the approval of the Company and of each co-venturer is required
for certain decisions. In any Joint Venture with an affiliated program, however,
the Company will have the right to buy the other co-venturer's interest or to
sell its own interest on specified terms and conditions in the event of an
impasse regarding a Sale. Under such circumstances, it is possible that neither
party will have the funds necessary to consummate the transaction. See "Business
- -- Joint Venture Arrangements." In addition, the Company may experience
difficulty in locating a third party purchaser for its Joint Venture interest
and in obtaining a favorable sale price for such Joint Venture interest.
Investments in Joint Ventures may involve the risk that the Company's
co-venturer may have economic or business interests or goals which, at a
particular time, are inconsistent with the interests or goals of the Company,
that such co-venturer may be in a position to take action contrary to the
Company's instructions, requests, policies or objectives, or that such
co-venturer may experience financial difficulties. Among other things, actions
by a co-venturer might subject property owned by the Joint Venture to
liabilities in excess of those contemplated by the terms of the joint venture
agreement or to other adverse consequences.
Limitations on the Ability of the Company to Liquidate. For the first
three to eight years after commencement of this offering, the Company intends to
use any proceeds from the Sale of Properties or Mortgage Loans that are not
required to be distributed to stockholders in order to preserve the Company's
status as a REIT for federal income tax purposes to acquire additional
Properties, make additional Mortgage Loans and repay outstanding indebtedness on
the Line of Credit. The proceeds from the Sale of Secured Equipment Leases will
be used to fund additional Secured Equipment Leases, or to reduce the Company's
outstanding indebtedness on the Loan. If Listing occurs, the proceeds from Sales
may be reinvested in other Properties, Mortgage Loans, or Secured Equipment
Leases for an indefinite period of time. Unless Listing occurs within eight
years after commencement of the offering, the Company will undertake, to the
extent consistent with the Company's objective of qualifying as a REIT, the
orderly Sale of the Company's assets, the distribution of the Net Sales Proceeds
of such Sales to stockholders, and will engage only in activities related to its
orderly liquidation unless the stockholders elect otherwise. Neither the Advisor
nor the Board of Directors may be able to control the timing of Sales due to
market conditions, and there can be no assurance that the Company will be able
to sell its assets so as to return stockholders' aggregate Invested Capital, to
generate a profit for the stockholders, or to fully satisfy its debt
obligations. Invested Capital, in the aggregate, will be returned to
stockholders upon disposition of the Properties only if the Properties are sold
for more than their original purchase price, although return of capital, for
federal income tax purposes, is not necessarily limited to stockholder
distributions following Sales of Properties. See "Federal Income Tax
Considerations." In the event that a purchase money obligation is taken in
partial payment of the sales price of a Property, the proceeds of the Sale will
be realized over a period of years. Further, entering into Mortgage Loans with
terms of 15 to 20 years and Secured Equipment Leases with terms of seven years
may cause any intended liquidation of the Company to be delayed beyond the time
of disposition of the Properties and until such time as the Mortgage Loans and
Secured Equipment Leases expire or are sold.
Risks Relating to Tenant Purchase Rights. Certain tenants are expected
to have the right to purchase the Property from the Company, commencing a
specified number of years after the date of the lease, which may lessen the
ability of the Advisor and the Board of Directors to freely control the Sale of
the Property. The leases also generally provide the tenant with a right of first
refusal on any proposed sale provisions. See "Business -Description of Leases --
Right of Tenant to Purchase." A tenant will have no obligation to purchase the
restaurant it leases.
Risks of Real Property Investments. The value of leased Properties such
as those to be acquired by the Company, the ability of the tenants to pay rent
on a timely basis, and the amount of the rent, may be adversely affected by
certain changes in general or local economic or market conditions, increased
costs of energy or food products, increased costs and shortages of labor,
competitive factors, fuel shortages, quality of restaurant management, the
ability of a Restaurant Chain
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to fulfill any obligations to operators of its restaurants, limited alternative
uses for the building, changing consumer habits, condemnation or uninsured
losses, changing demographics, changing traffic patterns, inability to remodel
outmoded restaurants as required by the franchise or lease agreement, voluntary
termination by a tenant of its obligations under a lease, and other factors.
Neither the Company nor the Board of Directors can control these factors.
Each Property will have a single tenant, and tenants may lease more
than one Property. Events such as the default or financial failure of a tenant
therefore could cause one or more Properties to become vacant under certain
circumstances. Vacancies would reduce the cash receipts of the Company and, at
least until the Company is able to re-lease any such Properties, could decrease
their ultimate resale value. The value of the Company's Properties will depend
principally upon the value of the leases of the Properties. Minor defaults by a
tenant may continue for some time before the Advisor or Board of Directors
determines that it is in the interest of the Company to evict that tenant.
If a Property becomes vacant, the Company may be unable either to
re-lease the Property for the rent due under the prior lease or to re-lease the
Property without incurring additional expenditures relating to the Property. The
Company could experience delays in enforcing its rights against, and collecting
rents (and, under certain circumstances, real estate taxes and insurance costs)
due from, a defaulting tenant.
The Company will not be a party to any franchise agreement between a
Restaurant Chain and a tenant, and such agreement could therefore be modified or
canceled without notice to, or the prior consent of, the Company. In that event,
the tenant could be required to cease its operations at a Property, although the
tenant's obligation to pay rent to the Company would continue. Before operations
at the Property could resume, however, the Company would be required to locate a
new tenant acceptable to a Restaurant Chain.
The inability of tenants to make lease payments or of borrowers to make
Mortgage Loan payments as a result of any of these factors could result in a
decrease in the amount of cash available to make Distributions to the
stockholders.
If the Company, as lessor, incurs any liability which is not fully
covered by insurance, the Company would be liable for such amounts, and returns
to the stockholders could be reduced. See "Business -- Description of Leases -
Insurance, Taxes, Maintenance, and Repairs" for a description of the types of
insurance that the leases of the Properties will require the tenant to obtain.
Adverse Trends in Restaurant Industry. The Properties in which the
Company intends to invest are expected to be operated by Restaurant Chains
within the fast-food, family-style, or casual dining segments of the restaurant
industry, and the Company does not intend to invest in other segments of the
restaurant industry. The success of the future operations of fast-food,
family-style, and casual dining segments will depend largely on their ability to
adapt to dominant trends in the restaurant industry, including greater
competitive pressures, increased consolidation of the leading fast-food chains,
industry overbuilding, dependence on consumer spending and dining patterns and
changing demographics, the introduction of new concepts and menu items,
availability of labor, levels of food prices, and general economic conditions.
See "Business -- General" for a description of the size and nature of the
restaurant industry and current trends in the industry. The success of a
particular Restaurant Chain concept, the Restaurant Chain's ability to fulfill
any obligations to operators of its restaurants, and trends in the fast-food,
family-style, and casual dining segments of the restaurant industry will affect
the income that the Company derives from restaurants which are part of such
Restaurant Chain.
Risks Resulting From Competition. The Company will compete with other
entities, including Affiliates, for the acquisition of restaurant sites and
completed restaurants. See "Conflicts of Interest -- Prior and Future Programs."
In addition, the restaurant business is highly competitive, and it is
anticipated that any restaurant Property acquired by the Company will compete
with other restaurants in the vicinity. The extent to which the Company will be
entitled to receive rent, in the form of percentage rent, in excess of the base
rent (including automatic increases in the base rent) for the Properties will
depend in part on the ability of the tenants to compete successfully with other
restaurants in the vicinity. In addition, the Company will compete with other
financing sources for suitable tenants and properties.
Possible Environmental Liabilities. Under various federal and state
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up certain hazardous or
toxic substances, asbestos-containing materials, or petroleum product releases
at the property, and may be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
The presence of contamination or the failure to remediate contaminations may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral. The owner or operator of a site may be
liable under common law to third parties for damages and injuries resulting from
environmental contamination emanating from the site.
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All of the Properties will be acquired by the Company subject to
satisfactory Phase I environmental assessments or satisfactory Phase II
environmental assessments. A Phase I or Phase II environmental assessment may be
determined by the Board of Directors or the Advisor to be satisfactory if a
problem exists and has not been resolved at the time the Property is acquired
provided that the seller has agreed in writing to indemnify the Company. There
can be no assurance, however, that any seller will be able to pay under an
indemnity obtained by the Company. Further, no assurances can be given that all
environmental liabilities have been identified or that no prior owner, operator
or current occupant has created an environmental condition not known to the
Company. Moreover, no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Properties will not be affected by
tenants and occupants of the Properties, by the condition of land or operations
in the vicinity of the Properties (such as the presence of underground storage
tanks), or by third parties unrelated to the Company.
Risks Relating to Unspecified Secured Equipment Leases. Prospective
stockholders have no information to assist them in evaluating the merits of any
Secured Equipment Lease entered into after the date of this Prospectus. No
assurance can be given that the Company will be successful in identifying
additional operators or negotiating additional Secured Equipment Leases on
financially attractive terms or that lessees will fulfill their obligations
under Secured Equipment Leases.
TAX RISKS
Failure to Qualify as a REIT. The Company operates as a REIT for
federal income tax purposes. A qualified REIT generally is not taxed at the
corporate level on income it currently distributes to its stockholders, so long
as it distributes at least 95% of its real estate investment trust taxable
income. See "Federal Income Tax Considerations -- Taxation of the Company." The
Company expects to have qualified as a REIT in its taxable years ending through
December 31, 1996, but no assurance can be given that it did so qualify or that
it will continue to qualify in the future. In this regard, based on certain
representations and assumptions, the Company has received an opinion of tax
counsel to the Company ("Counsel") to the effect that the Company qualified as a
REIT for the taxable years ending through December 31, 1996, that the Company is
organized in conformity with the requirements for qualification as a REIT, and
that the Company's proposed method of operation will enable it to meet the
requirements for qualification as a REIT for federal income tax purposes.
Qualification as a REIT, however, involves the application of highly technical
and complex Code provisions as to which there are only limited judicial and
administrative interpretations. Certain facts and circumstances which may be
wholly or partially beyond the Company's control may affect its ability to
qualify on an ongoing basis as a REIT. In addition, no assurance can be given
that future legislation, new regulations, administrative interpretations or
court decisions will not significantly change the tax laws (or the application
thereof) with respect to qualification as a REIT for federal income tax purposes
or the federal income tax consequences of such qualification. The opinion of
Counsel is not binding on the Internal Revenue Service ("IRS") or the courts.
Risks Relating to Leases of Properties. Counsel is of the opinion,
based upon certain assumptions, that the leases of Properties where the Company
owns the underlying land constitute leases for federal income tax purposes.
However, with respect to the Properties where the Company does not own the
underlying land, Counsel is unable to render this opinion. If the lease of a
Property does not constitute a lease for federal income tax purposes, it would
be treated as a financing arrangement. In the opinion of Counsel, the income
derived from such a financing arrangement would satisfy the 75% and the 95%
gross income tests for REIT qualification because it would be considered to be
interest on an obligation secured by an interest in real property. Nevertheless,
the recharacterization of a lease in this fashion may have adverse tax
consequences for the Company, in particular that the Company would not be
entitled to claim depreciation deductions with respect to such Property
(although the Company would be entitled to treat part of the payments it would
receive under the arrangement as the repayment of principal). In such event, in
certain taxable years the Company's taxable income, and the corresponding
obligation to distribute 95% of such income, would be increased.
Risks Relating to the Secured Equipment Leases. In order to qualify as
a REIT for federal income tax purposes, not more than 25% of the Company's total
assets may be represented by personal property, or loans secured by personal
property on certain testing dates. In addition, loans secured by personal
property made to each borrower must represent less than 5% of the Company's
total assets on such testing dates. Counsel is of the opinion, based on certain
assumptions, that the Secured Equipment Leases will be treated as loans secured
by personal property for federal income tax purposes. The Company believes that
the value of the Secured Equipment Leases together with any personal property
owned by the Company, will in the aggregate represent less than 25% of the
Company's total assets and that the value of the Secured Equipment Leases
entered into with any particular lessee will represent less than 5% of the
Company's total assets. Counsel has relied on the representations of the Company
regarding such values in rendering its opinion as to the qualification of the
Company as a REIT. If the Company fails to satisfy the 25% test or the 5% test
either at the time of the offering or on any subsequent testing date, the
Company will fail to qualify (or cease to qualify, as the case may be) as a REIT
for federal income tax purposes. In addition, if, contrary to the opinion of
Counsel, the Secured Equipment Leases are not treated as
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loans, but are instead treated as leases for federal income tax purposes, income
from the Secured Equipment Leases will generally not satisfy either the 95% or
the 75% gross income tests for REIT qualification. See "Federal Income Tax
Considerations -- Taxation of the Company,"and "--Characterization of the
Secured Equipment Leases."
Risk of REIT Disqualification. If, in any taxable year, the Company
were to fail to qualify as a REIT for federal income tax purposes, it would not
be allowed a deduction for dividends to stockholders in computing taxable income
and would be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition,
unless entitled to relief under certain statutory provisions, the Company would
be disqualified from treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which REIT qualification is lost.
The additional tax liability resulting from the failure to so qualify would
significantly reduce the amount of funds available to make Distributions to
stockholders. Distributions to stockholders generally would be taxable as
ordinary income to the extent of current and accumulated earnings and profits
and, subject to certain limitations, would be eligible for the corporate
dividends received deduction. Although the Company intends to operate in a
manner designed to permit it to qualify as a REIT for federal income tax
purposes, it is possible that future economic, market, legal, tax, or other
events or circumstances could cause it to fail to so qualify. See "Federal
Income Tax Considerations -- Taxation of the Company."
Risk Associated With Distribution Requirements. The Company may be
required, under certain circumstances, to accrue as income for tax purposes
interest, rent and other items treated as earned for tax purposes but not yet
received. In addition, the Company may be required not to accrue as expenses for
tax purposes certain items which actually have been paid or certain of the
Company's deductions might be disallowed by the Service. In any such event, the
Company could have taxable income in excess of cash available for distribution.
If the Company has taxable income in excess of cash available for distribution,
the Company could be required to borrow funds or liquidate investments on
unfavorable terms in order to meet the distribution requirement applicable to a
REIT. See "Federal Income Tax Considerations -Taxation of the Company --
Distribution Requirements."
Restrictions on Maximum Share Ownership. In order for the Company to
qualify as a REIT, no more than 50% of the value of the outstanding equity
securities may be owned, directly or indirectly (applying certain attribution
rules), by five or fewer individuals (or certain entities) at any time during
the last half of the Company's taxable year. To ensure that the Company will not
fail to qualify as a REIT under this test, the Company's Articles of
Incorporation include certain provisions restricting the accumulation of Shares.
These restrictions may (i) discourage a change of control of the Company; (ii)
deter individuals and entities from making tender offers for Shares, which
offers may be attractive to stockholders; or (iii) limit the opportunity for
stockholders to receive a premium for their Shares in the event a stockholder is
making purchases of Shares in order to acquire a block of Shares.
Other Tax Liabilities. Even if the Company qualifies as a REIT for
federal income tax purposes, it may be subject to certain federal, state and
local taxes on its income and property. See "Federal Income Tax Considerations
- -- State and Local Taxes."
Changes in Tax Laws. The discussions of the federal income tax aspects
of the offering are based on current law, including the Code, the Regulations
issued thereunder, certain administrative interpretations thereof, and court
decisions. Consequently, future events that modify or otherwise affect those
provisions may result in treatment for federal income tax purposes of the
Company and the stockholders that is materially and adversely different from
that described in this Prospectus, both for taxable years arising before and
after such events. There is no assurance that future legislation and
administrative interpretations will not be retroactive in effect.
SUITABILITY STANDARDS AND HOW TO SUBSCRIBE
SUITABILITY STANDARDS
The Shares offered hereby are suitable only as a long-term investment
for persons of adequate financial means who have no need for liquidity in this
investment. Initially, there is not expected to be any public market for the
Shares, which means that it may be difficult to sell Shares. See "Summary of the
Articles of Incorporation and Bylaws -- Restrictions on Ownership" for a
description of the transfer requirements. As a result, the Company has
established suitability standards which require investors to have either (i) a
net worth (exclusive of home, furnishings, and personal automobiles) of at least
$45,000 and an annual gross income of at least $45,000, or (ii) a net worth
(exclusive of home, furnishings, and personal automobiles) of at least $150,000.
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Iowa, Maine, Massachusetts, Missouri, New Hampshire, North Carolina,
Ohio, Pennsylvania and Tennessee have established suitability standards
different from those established by the Company, and Shares will be sold only to
investors in those states who meet the special suitability standards set forth
below.
IOWA, MASSACHUSETTS, MISSOURI, NORTH CAROLINA AND TENNESSEE -- The
investor has either (i) a net worth (exclusive of home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (ii) a net worth (exclusive of home, furnishings, and personal
automobiles) of at least $225,000.
MAINE -- The investor has either (i) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least $50,000 and an annual gross
income of at least $50,000, or (ii) a net worth (exclusive of home, furnishings,
and personal automobiles) of at least $200,000.
NEW HAMPSHIRE -- The investor has either (i) a net worth (exclusive of
home, furnishings, and personal automobiles) of at least $125,000 and an annual
gross income of at least $50,000, or (ii) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least $250,000.
OHIO -- The investor's investment in the Shares shall not exceed 10% of
the investor's net worth (exclusive of home, furnishings, and personal
automobiles).
PENNSYLVANIA -- The investor has (i) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least ten times the investor's
investment in the Company, and (ii) either (a) a net worth (exclusive of home,
furnishings, and personal automobiles) of at least $45,000 and an annual gross
income of at least $45,000, or (b) a net worth (exclusive of home, furnishings,
and personal automobiles) of at least $150,000.
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
In addition, under the laws of certain states, investors may transfer
their Shares only to persons who meet similar standards, and the Company may
require certain assurances that such standards are met. Investors should read
carefully the requirements in connection with resales of Shares as set forth in
the Articles of Incorporation and as summarized under "Summary of the Articles
of Incorporation and Bylaws -- Restrictions of Ownership."
In purchasing Shares, custodians or trustees of employee pension
benefit plans or IRAs may be subject to the fiduciary duties imposed by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other applicable
laws and to the prohibited transaction rules prescribed by ERISA and related
provisions of the Code. See "Federal Income Tax Considerations -- Retirement
Plan Stockholders." In addition, prior to purchasing Shares, the trustee or
custodian of an employee pension benefit plan or an IRA should determine that
such an investment would be permissible under the governing instruments of such
plan or account and applicable law. For information regarding "unrelated
business taxable income," see "Federal Income Tax Considerations -- Taxation of
Stockholders -- Tax-Exempt Stockholders."
In order to insure adherence to the suitability standards described
above, requisite suitability standards must be met, as set forth in the
Subscription Agreement in one of the forms attached hereto as Exhibit D. In
addition, Soliciting Dealers who sell Shares have the responsibility to make
every reasonable effort to determine that the purchase of Shares is a suitable
and appropriate investment for an investor. In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. See "The Offering
- -Subscription Procedures." Executed Subscription Agreements will be maintained
in the Company's records for six years.
HOW TO SUBSCRIBE
An investor who meets the suitability standards described above may
subscribe for Shares by completing and executing the Subscription Agreement and
delivering it to a Soliciting Dealer, together with a check for the full
purchase price of the Shares subscribed for, payable to "SouthTrust Asset
Management Company of Florida, N.A., Escrow Agent." See "The Offering
- -Subscription Procedures." Certain Soliciting Dealers who have "net capital," as
defined in the applicable federal securities regulations, of $250,000 or more
may instruct their customers to make their checks for Shares subscribed for
payable directly to the Soliciting Dealer. Care should be taken to ensure that
the Subscription Agreement is filled out correctly and completely. Partnerships,
individual fiduciaries signing on behalf of trusts, estates, and in other
capacities, and persons signing on behalf of corporations and corporate trustees
may be required to obtain additional
-16-
<PAGE>
documents from Soliciting Dealers. Any subscription may be rejected by the
Company in whole or in part, regardless of whether the subscriber meets the
minimum suitability standards.
Certain Soliciting Dealers may permit investors who meet the
suitability standards described above to subscribe for Shares by telephonic
order to the Soliciting Dealer. This procedure may not be available in certain
states. See "The Offering -Subscription Procedures" and "The Offering -- Plan of
Distribution."
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000), except for Iowa tax-exempt investors who must make a minimum
investment of 250 Shares ($2,500). For Minnesota investors only, IRAs and
qualified plans must make a minimum investment of 200 Shares ($2,000). In
addition, Nebraska, New York, and North Carolina investors must make a minimum
investment of 500 Shares ($5,000). Following an initial subscription for at
least the required minimum investment, any investor may make additional
purchases in increments of one Share. Maine investors, however, may not make
additional purchases in amounts less than the applicable minimum investment
except with respect to Shares purchased pursuant to the Reinvestment Plan. See
"The Offering -- General," "The Offering -- Subscription Procedures," and
"Summary of Reinvestment Plan."
-17-
<PAGE>
ESTIMATED USE OF PROCEEDS
The table set forth below summarizes certain information relating to
the anticipated use of offering proceeds by the Company, assuming that 4,800,000
Shares and 27,500,000 Shares are sold (1,424,306 Shares had been sold as of
March 6, 1997). This offering is limited to 4,800,000 Shares until such time, if
any, as the stockholders approve an increase in the number of authorized Shares.
See "Summary of Articles of Incorporation and Bylaws - Description of Capital
Stock." The Company estimates that 84% of Gross Proceeds will be available for
the purchase of Properties and the making of Mortgage Loans, and approximately
9% of Gross Proceeds will be paid in fees and expenses to Affiliates of the
Company for their services and as reimbursement for Offering Expenses incurred
on behalf of the Company. While the estimated use of proceeds set forth in the
table below is believed to be reasonable, this table should be viewed only as an
estimate of the use of proceeds that may be achieved.
<TABLE>
<CAPTION>
Maximum of 4,800,000 Shares Maximum of 27,500,000 Shares
--------------------------- ----------------------------
without stockholder approval(1) with stockholder approval(2)
------------------------------- ----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C>
GROSS PROCEEDS TO THE COMPANY (3)......................... $48,000,000 100.0% $275,000,000 100.0%
Less:
Selling Commissions to CNL
Securities Corp. (3)................................ 3,600,000 7.5% 20,625,000 7.5%
Marketing Support and Due Diligence
Expense Reimbursement Fee to
CNL Securities Corp. (3)............................ 240,000 0.5% 1,375,000 0.5%
Offering Expenses (4).................................. 1,440,000 3.0% 8,250,000 3.0%
----------- ------ ------------
NET PROCEEDS TO THE COMPANY............................... 42,720,000 89.0% 244,750,000 89.0%
Less:
Acquisition Fees to the Advisor (5).................... 2,160,000 4.5% 12,375,000 4.5%
Acquisition Expenses (6)............................... 240,000 0.5% 1,375,000 0.5%
Initial Working Capital Reserve........................ (7) (7)
--------- ------ ------------ -------
CASH PAYMENT FOR PURCHASE OF PROPERTIES
AND THE MAKING OF MORTGAGE LOANS
BY THE COMPANY (8)..................................... $40,320,000 84.0% $231,000,000 84.0%
=========== ====== ============ ======
</TABLE>
- --------------------------------------------
FOOTNOTES:
(1) Includes 100,000 Shares that may be sold only pursuant to the Reinvestment
Plan.
(2) Offering proceeds will exceed $48,000,000 only if the stockholders approve
an increase in the number of authorized Shares. Includes 2,500,000 Shares
that may be sold only pursuant to the Reinvestment Plan.
(3) Gross Proceeds of the offering are calculated as if all Shares are sold at
$10.00 per Share and do not take into account any reduction in Selling
Commissions. See "The Offering-- Plan of Distribution" for a description
of the circumstances under which Selling Commissions may be reduced,
including commission discounts available for purchases by registered
representatives or principals of the Managing Dealer or Soliciting Dealers,
certain Directors and officers and certain investment advisers. Selling
Commissions are calculated assuming that reduced commissions are not paid
in connection with the purchase of any Shares. The Shares are being offered
to the public through CNL Securities Corp., which will receive Selling
Commissions of 7.5% on all sales of Shares and will act as Managing Dealer.
The Managing Dealer is an Affiliate of the Advisor. Other broker-dealers
may be engaged as Soliciting Dealers to sell Shares and reallowed Selling
Commissions of up to 7% with respect to Shares which they sell. In
addition, all or a portion of the marketing support and due diligence
expense reimbursement fee may be reallowed to certain Soliciting Dealers
for expenses incurred by them in selling the Shares, including
reimbursement for bona fide expenses incurred in connection with due
diligence activities. See "The Offering -- Plan of Distribution" for a more
complete description of this fee.
(4) Offering Expenses include legal, accounting, printing, escrow, filing,
registration, qualification, and other expenses of the organization of the
Company and the offering of the Shares, but exclude Selling Commissions and
the marketing support and due diligence expense reimbursement fee. The
Advisor will pay all Offering Expenses which exceed 3% of Gross Proceeds.
(5) Acquisition Fees include all fees and commissions paid by the Company to
any person or entity in connection with the purchase, development or
construction of any Property or investing in any Mortgage Loan, including
to Affiliates or nonaffiliates. Acquisition Fees do not include Acquisition
Expenses.
(6) Represents Acquisition Expenses that are neither reimbursed to the Company
nor included in the purchase price of the Properties, and on which rent is
not received, but does not include certain expenses associated with
Property acquisitions that are part of the purchase price of the
Properties, that are included in the basis of the Properties, and on which
rent is received. Acquisition Expenses include any and all expenses
incurred by the Company, the Advisor, or any Affiliate of the Advisor in
connection with the selection or acquisition of any Property or the making
of any Mortgage Loan, whether or not acquired or made, including, without
limitation, legal fees and expenses, travel and communication expenses,
costs of appraisals, nonrefundable option payments on property not
acquired, accounting fees and expenses, taxes, and title insurance, but
exclude Acquisition Fees. The expenses that are attributable to the seller
of the Properties and part of the purchase price of the Properties is
anticipated to range between 1% and 2% of Gross Proceeds.
(7) Because leases will be on a "triple-net" basis, it is not anticipated that
a permanent reserve for maintenance and repairs will be established.
However, to the extent that the Company has insufficient funds for such
purposes, the Advisor may contribute to the Company an aggregate amount of
up to 1% of the net offering proceeds available to the Company for
maintenance and repairs. The Advisor also may, but is not required to,
establish reserves from offering proceeds, operating funds, and the
available proceeds of any Sales.
(8) Offering proceeds designated for investment in Properties or the making of
Mortgage Loans temporarily may be invested in short-term, highly liquid
investments with appropriate safety of principal.
-18-
<PAGE>
MANAGEMENT COMPENSATION
The table below summarizes the types, recipients, methods of
computation, and estimated amounts of all compensation, fees, and distributions
to be paid directly or indirectly by the Company to the Advisor and its
Affiliates, exclusive of any distributions to which the Advisor or its
Affiliates may be entitled by reason of their purchase and ownership of Shares.
See "The Advisor and the Advisory Agreement." For information concerning
compensation and fees paid to the Advisor and its Affiliates since the date of
inception of the Company, see"Certain Transactions." For information concerning
compensation to the Directors, see "Management."
A maximum of 27,500,000 Shares ($275,000,000) may be sold, subject to
approval by the stockholders of an increase in the number of authorized Shares.
See "Summary of Articles of Incorporation and Bylaws -Description of Capital
Stock." This amount includes 2,500,000 Shares that may be sold only pursuant to
the Reinvestment Plan. If the stockholders do not approve an increase in the
number of authorized Shares, a maximum of 4,800,000 shares may be sold. This
amount includes 100,000 shares that may be sold only pursuant to the
Reinvestment Plan.
The following arrangements for compensation and fees to the Advisor and
its Affiliates were not determined by arm's-length negotiations. See "Conflicts
of Interest." There is no item of compensation and no fee that can be paid to
the Advisor or its Affiliates under more than one category.
-19-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Offering Stage
- ---------------------------------------------------------------------------------------------------------------------------------
Selling Commissions to Managing Dealer Selling Commissions of 7.5% per Share on $20,625,000 if
and Soliciting Dealers all Shares sold, subject to reduction 27,500,000 Shares
under certain circumstances as described are sold; $3,600,000
in ``The Offering Plan of if 4,800,000 if 4,800,000 Shares
Distribution.'' Soliciting Dealers may are sold.
be reallowed Selling Commissions of up to
7% with respect to Shares they sell.
- ---------------------------------------------------------------------------------------------------------------------------------
Marketing support and due diligence expense Expense allowance of 0.5% of Gross $1,375,000 if
reimbursement fee to Managing Dealer and Proceeds to the Managing Dealer, all or a 27,500,000 Shares are
Soliciting Dealers portion of which may be reallowed to are sold; $240,000
Soliciting Dealers. The Managing Dealer if 4,800,000 Shares
will pay all sums attributable to bona are sold.
fide due diligence expenses from this
expense fee.
- ---------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Advisor and its Actual expenses incurred, except that the Amount is not
Affiliates for Offering Expenses Advisor will pay all such expenses in determinable at this
excess of 3% of Gross Proceeds. time but will not
exceed 3% of Gross
Proceeds, $8,250,000
if 27,500,000 Shares
are sold; $1,440,000
if 4,800,000 Shares
are sold.
- ---------------------------------------------------------------------------------------------------------------------------------
Acquisition Stage
- ---------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee to the Advisor 4.5% of Gross Proceeds payable to the $12,375,000 if
Advisor as Acquisition Fees. 27,500,000 Shares
are sold; $2,160,000
if 4,800,000 Shares
are sold.
Other Acquisition Fees to Affiliates Any fees paid to Affiliates of the Amount is not
of the Advisor Advisor in connection with the financing, determinable at this
development, construction or renovation time.
of a Property. Payment of such fees will
be subject to approval by the Board of
Directors, including a majority of the
Independent Directors, not otherwise
interested in the transaction.
- ---------------------------------------------------------------------------------------------------------------------------------
Reimbursement of Acquisition Expenses Reimbursement to the Advisor and its Acquisition
to the Advisor and its Affiliates Affiliates for expenses actually Expenses, which are
incurred. based on a number of
factors, including
the purchase price
of the Properties,
are not determinable
at this time.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
The total of all Acquisition Fees and any
Acquisition Expenses payable to the
Advisor and its Affiliates shall be
reasonable and shall not exceed an amount
equal to 6% of the Real Estate Asset
Value of a Property, or in the case of a
Mortgage Loan, 6% of the funds advanced,
unless a majority of the Board of
Directors, including a majority of the
Independent Directors not otherwise
interested in the transaction, approves
fees in excess of this limit subject to a
determination that the transaction is
commercially competitive, fair and
reasonable to the Company. Acquisition
Fees shall be reduced to the extent that,
and if necessary to limit, the total
compensation paid to all persons involved
in the acquisition of any Property to the
amount customarily charged in arms-length
transactions by other persons or entities
rendering similar services as an ongoing
public activity in the same geographical
location and for comparable types of
Properties, and to the extent that other
acquisition fees, finder's fees, real
estate commissions, or other similar fees
or commissions are paid by any person in
connection with the transaction.
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operational Stage
- ---------------------------------------------------------------------------------------------------------------------------------
Asset Management Fee to the Advisor A monthly Asset Management Fee in an Amount is not
amount equal to one-twelfth of .60% of determinable at this
the Company's Real Estate Asset Value and time. The amount of
the outstanding principal amount of the the Asset Management
Mortgage Loans as of the end of the Fee will depend
preceding month. Specifically, Real upon, among other
Estate Asset Value equals the amount things, the cost of
invested in the Properties wholly owned the Properties and
by the Company, determined on the basis the amount invested
of cost, plus, in the case of Properties in Mortgage Loans.
owned by any Joint Venture or partnership
in which the Company is a co-venturer or
partner, the portion of the cost of such
Properties paid by the Company, exclusive
of Acquisition Fees and Expenses. The
Asset Management Fee, which will not
exceed fees which are competitive for
similar services in the same geographic
area, may or may not be taken, in whole
or in part as to any year, in the sole
discretion of the Advisor. All or any
portion of the Asset Management Fee not
taken as to any fiscal year shall be
deferred without interest and may be
taken in such other fiscal year as the
Advisor shall determine.
- ---------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Advisor and Operating Expenses (which, in general, Amount is not
Affiliates for operating expenses are those expenses relating to determinable at this
administration of the Company on an time.
ongoing basis) will be reimbursed by the
Company. To the extent that Operating
Expenses payable or reimbursable by the
Company, in any four consecutive fiscal
quarters (the ``Expense Year''), exceed
(the ``Excess Amount'') the greater of 2%
of Average Invested Assets or 25% of Net
Income (the ``2%/25% Guidelines'') and
the Independent Directors determine that
the Excess Amount was justified based on
unusual nonrecurring factors which they
deem sufficient, the Excess Amount may be
carried over and included in Operating
Expenses in subsequent Expense Years, and
reimbursed to the Advisor in one or more
of such years, but only to the extent
such reimbursement would not cause the
Company's Operating Expenses to exceed
the 2%/25% Guidelines in any Expense
Year. Within 60 days after the end of
any fiscal quarter of the Company for
which total Operating Expenses (for the
Expense Year) exceed the 2%/25%
Guidelines and the Independent Directors
determine that the Excess Amount was
justified, there shall be sent to the
stockholders a written disclosure of such
fact, together with an explanation of
the factors the Independent Directors
considered in determining that such
Excess Amount was justified. In the
event the Independent Directors do not
determine that such Excess Amount was
justified, the Advisor shall reimburse
the Company at the end of the Expense
Year the amount by which the total
Operating Expenses paid or incurred by
the Company exceed the limitations herein
provided.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Soliciting Dealer Servicing Fee An annual fee of .20% of Invested Capital Amount is not
to Managing Dealer on December 31 of each year, commencing determinable at this
on December 31 of the year following the time. Until such
year in which the related offering time as assets are
terminates, generally payable to the sold, the estimated
Managing Dealer, which in turn may amounts payable to
reallow all or a portion of such fee to the Managing Dealer
Soliciting Dealers whose clients hold for each of the
Shares on such date. In general, years following the
Invested Capital is the amount of cash year of termination
paid by the stockholders to the Company of the offering are
for their Shares, reduced by certain expected to be
prior Distributions to the stockholders $550,000 if
from the Sale of one or more Properties, 27,500,000 Shares
Mortgage Loans or Secured Equipment are sold; $96,000 if
Leases. The Soliciting Dealer Servicing 4,800,000 Shares are
Fee will terminate as of the beginning of sold. The maximum
any year in which the Company is total amount payable
liquidated or in which Listing occurs, to the Managing
provided, however, that any previously Dealer through
accrued but unpaid portion of the December 31, 2005 is
Soliciting Dealer Servicing Fee may be $3,300,000 if
paid in such year or any subsequent year. 27,500,000 Shares
Accordingly, the Soliciting Dealer are sold; $576,000
Servicing Fee will not be paid after if 4,800,000 Shares
December 31, 2005. are sold.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Deferred, subordinated real estate A deferred, subordinated real estate Amount is not
disposition fee payable to the Advisor from disposition fee, payable upon Sale of one determinable at this
a Sale or Sales of a Property not in or more Properties, in an amount equal to time. The amount of
liquidation of the Company the lesser of (i) one-half of a this fee, if it
Competitive Real Estate Commission, or becomes payable,
(ii) 3% of the sales price of such will depend upon the
Property or Properties. Payment of such price at which
fee shall be made only if the Advisor Properties are sold.
provides a substantial amount of services
in connection with the Sale of a Property
or Properties and shall be subordinated
to receipt by the stockholders of
Distributions equal to the sum of (i)
their aggregate Stockholders' 8% Return
and (ii) their aggregate Invested
Capital. If, at the time of a Sale,
payment of the disposition fee is
deferred because the subordination
conditions have not been satisfied, then
the disposition fee shall be paid at such
later time as the subordination
conditions are satisfied. Upon Listing,
if the Advisor has accrued but not been
paid such real estate disposition fee,
then for purposes of determining whether
the subordination conditions have been
satisfied, stockholders will be deemed to
have received a Distribution in the
amount equal to the product of the total
number of Shares outstanding and the
average closing price of the Shares over
a period, beginning 180 days after
Listing, of 30 days during which the
Shares are traded.
- ---------------------------------------------------------------------------------------------------------------------------------
Subordinated Incentive Fee At such time, if any, as Listing occurs, Amount is not
payable to the Advisor at the Advisor shall be paid the determinable at this
such time, if any, as Listing Subordinated Incentive Fee in an amount time.
occurs equal to 10% of the amount by which (i)
the market value of the Company (as
defined below) plus the total
Distributions made to stockholders from
the Company's inception until the date of
Listing exceeds (ii) the sum of (A) 100%
of Invested Capital and (B) the total
Distributions required to be made to the
stockholders in order to pay the Stock-
holders' 8% Return from inception through
the date the market value is determined.
For purposes of calculating the
Subordinated Incentive Fee, the market
value of the Company shall be the average
closing price or average of bid and asked
price, as the case may be, over a period
of 30 days during which the Shares are
traded with such period beginning 180
days after Listing. The Subordinated
Incentive Fee will be reduced by the
amount of any prior payment to the
Advisor of a deferred, subordinated share
of Net Sales Proceeds from Sales of
assets of the Company.
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated share of net Sales A deferred, subordinated share equal to Amount is not
Proceeds from a Sale or Sales of a Property 10% of Net Sales Proceeds from Sales of a determinable at this
or Secured Equipment Lease not in Property or Secured Equipment Lease time.
liquidation of the Company payable to the remaining after receipt by the
Advisor stockholders of Distributions equal to
the sum of (i) the Stockholders' 8%
Return and (ii) 100% of Invested Capital.
Following Listing, no share of Net Sales
Proceeds will be paid to the Advisor.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Secured Equipment Lease Servicing A fee paid to the Advisor out of the Amount is not
Fee to the Advisor proceeds of the Loan for negotiating determinable at this
Secured Equipment Leases and supervising time.
the Secured Equipment Lease program equal
to 2% of the purchase price of the
Equipment subject to each Secured
Equipment Lease and paid upon entering
into such lease. No other fees will be
payable in connection with the Secured
Equipment Lease program.
- ---------------------------------------------------------------------------------------------------------------------------------
Reimbursement to the Advisor and Affiliates Repayment by the Company of actual Amount is not
for Secured Equipment Lease servicing expenses incurred. determinable at this time.
expenses
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Type of
Compensation Estimated
and Recipient Method of Computation Maximum Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Liquidation Stage
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated real estate A deferred, subordinated real estate Amount is not
disposition fee payable to the Advisor disposition fee, payable upon Sale of one determinable at this
from a Sale or Sales in liquidation or more Properties, in an amount equal to time. The amount of
of the Company the lesser of (i) one-half of a this fee, if it
Competitive Real Estate Commission, or becomes payable,
(ii) 3% of the sales price of such will depend upon the
Property or Properties. Payment of such price at which
fee shall be made only if the Advisor Properties are sold.
provides a substantial amount of services
in connection with the Sale of a Property
or Properties and shall be subordinated
to receipt by the stockholders of
Distributions equal to the sum of (i)
their aggregate Stockholders' 8% Return
and (ii) their aggregate Invested
Capital. If, at the time of a Sale,
payment of the disposition fee is
deferred because the subordination
conditions have not been satisfied, then
the disposition fee shall be paid at such
later time as the subordination
conditions are satisfied.
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred, subordinated share of net Sales A deferred, subordinated share equal to Amount is not
Proceeds from a Sale or Sales of a Property 10% of Net Sales Proceeds from Sales of a determinable at this time.
or Secured Equipment Lease in liquidation Property or Secured Equipment Lease
of the Company payable to the Advisor remaining payable after receipt by the
stockholders of Distributions equal to
the sum of (i) the Stockholders' 8%
Return and (ii) 100% of Invested Capital.
Following Listing, no share of Net Sales
Proceeds will be paid to the Advisor.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest arising
out of its relationship to the Advisor and its Affiliates, as described below.
The following chart indicates the relationship between the Advisor and
those Affiliates that will provide services to the Company.
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------- -------------------------------
| CNL AMERICAN PROPERTIES | | |
| FUND, INC. | | CNL Group, Inc. |
| (the Company) | | |
- ----------------------------- -------------------------------
| |
| |
| |
(Advisory Agreement) | 100%
| |
| |
| --------------------------------
| | |
-------------------------------- --------------------------------
| CNL FUND ADVISORS, INC. | | CNL Securities Corp. |
| (Advisor to Company) | | (Managing Dealer) |
-------------------------------- --------------------------------
</TABLE>
PRIOR AND FUTURE PROGRAMS
Affiliates of the Advisor have organized over 100 other real estate
investments, currently have other real estate holdings, and in the future expect
to form, offer interests in, and manage other real estate programs in addition
to the Company, and make additional real estate investments. Some of these
(including 18 public partnerships) involve and will involve Affiliates of the
Advisor in the ownership, operation, leasing, and management of fast-food,
family-style and casual dining, including restaurants that may be suitable for
the Company.
Certain of these affiliated public or private real estate programs
invest or may invest solely in fast-food, casual dining, and family-style
restaurants, may purchase properties concurrently with the Company and may lease
fast-food, casual dining, and family-style restaurant properties to operators
who also lease or operate certain of the Company's Properties. These properties,
if located in the vicinity of, or adjacent to, Properties acquired by the
Company may affect the Properties' gross revenues. Additionally, such other
programs may offer mortgage or equipment financing to the same or similar
entities as those targeted by the Company, thereby affecting the Company's
Mortgage Loan and Secured Equipment Lease programs. Such conflicts between the
Company and affiliated programs may affect the value of the Company's
investments as well as its Net Income. The Company believes that the Advisor has
established guidelines to minimize such conflicts. See "Certain Conflict
Resolution Procedures" below.
An Affiliate of the Advisor currently is purchasing properties for a
private program that was organized to purchase, lease and/or finance fast-food
and family-style restaurant facilities, including furniture, fixtures, equipment
and start-up costs associated therewith. Such program generally will purchase
restaurant properties or an interest therein only when furniture, fixtures,
equipment and start-up costs also will be supplied by the program. It is not
expected that the financing offered by such program will be segregable and,
therefore, the program will not compete with the Company for lessees. If the
equipment arrangement offered by such program becomes segregable, a conflict
could arise between such program and the Company for lessees.
-27-
<PAGE>
ACQUISITION OF PROPERTIES
Affiliates of the Advisor regularly have opportunities to acquire
restaurant properties of a type suitable for acquisition by the Company as a
result of their existing relationships and past experience with various
fast-food, family-style and casual dining restaurant chains and their
franchisees. See "Business -General." A purchaser who wishes to acquire one or
more of these properties must do so within a relatively short period of time,
occasionally at a time when the Company (due to insufficient funds, for example)
may be unable to make the acquisition.
In an effort to address these situations and preserve the acquisition
opportunities for the Company (and other entities with which the Advisor or its
Affiliates are affiliated), Affiliates of the Advisor maintain lines of credit
which enable them to acquire restaurant properties on an interim basis.
Typically, no more than ten to 15 restaurant properties are temporarily owned by
Affiliates of the Advisor on this interim basis at any particular time. These
restaurant properties generally will be purchased from Affiliates of the
Advisor, at their cost, by one or more existing or future public or private
programs formed by Affiliates of the Advisor.
The Advisor could experience potential conflicts of interest in
connection with the negotiation of the purchase price and other terms of the
acquisition of a Property, as well as the terms of the lease of a Property, due
to its relationship with its Affiliates and the ongoing business relationship of
its Affiliates with operators of Restaurant Chains.
The Advisor or its Affiliates also may be subject to potential
conflicts of interest at such time as the Company wishes to acquire a property,
make a mortgage loan or enter into a secured equipment lease that also would be
a suitable investment for an Affiliate of CNL. Affiliates of the Advisor serve
as Directors of the Company and, in this capacity, have a fiduciary obligation
to act in the best interest of the stockholders of the Company and, as general
partners or directors of CNL Affiliates, to act in the best interests of the
stockholders in other programs with investments that may be similar to those of
the Company and will use their best efforts to assure that the Company will be
treated as favorably as any such other program. See "Management -- Fiduciary
Responsibility of the Board of Directors." In addition, the Company has
developed procedures to resolve potential conflicts of interest in the
allocation of properties between the Company and certain of its Affiliates. See
"Certain Conflict Resolution Procedures" below. The Company will supplement this
Prospectus during the offering period to disclose the acquisition of a Property
at such time as the Advisor believes that a reasonable probability exists that
the Company will acquire the Property, including an acquisition from the Advisor
or its Affiliates. Based upon the experience of management of the Company and
the Advisor and the proposed acquisition methods, a reasonable probability that
the Company will acquire a Property normally will occur as of the date on which
(i) a commitment letter is executed by a proposed lessee, (ii) a satisfactory
credit underwriting for the proposed lessee has been completed and (iii) a
satisfactory site inspection has been completed.
SALES OF PROPERTIES
A conflict also could arise in connection with the Advisor's
determination as to whether or not to sell a Property, since the interests of
the Advisor and the stockholders may differ as a result of their distinct
financial and tax positions and the compensation to which the Advisor or its
Affiliates may be entitled upon the Sale of a Property. See "Compensation of the
Advisor," below for a description of these compensation arrangements. In order
to resolve this potential conflict, the Board of Directors will be required to
approve each Sale of a Property. In the unlikely event that the Company and
another CNL program attempted to sell similar properties at the same time, a
conflict could arise since the two programs potentially could compete with each
other for a suitable purchaser. In order to resolve this potential conflict, the
Advisor has agreed not to approve the sale of any of the Company's Properties
contemporaneously with the sale of a property owned by another CNL program if
the two properties are part of the same Restaurant Chain and are within a
three-mile radius of each other, unless the Advisor and the principals of the
other CNL program are able to locate a suitable purchaser for each property.
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
The Company may invest in Joint Ventures with another program sponsored
by the Advisor or its Affiliates if a majority of the Directors, including a
majority of the Independent Directors, not otherwise interested in the
transaction, determine that the investment in the Joint Venture is fair and
reasonable to the Company and on substantially the same terms and conditions as
those to be received by the co-venturer or co-venturers.
COMPETITION FOR MANAGEMENT TIME
The officers and directors of the Advisor and the officers and
Directors of the Company currently are engaged, and in the future will engage,
in the management of other business entities and properties and in other
business activities. They
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will devote only as much of their time to the business of the Company as they,
in their judgment, determine is reasonably required, which will be substantially
less than their full time. These officers and Directors of the Company and
officers and directors of the Advisor may experience conflicts of interest in
allocating management time, services, and functions among the Company and the
various entities, investor programs (public or private), and any other business
ventures in which any of them are or may become involved.
COMPENSATION OF THE ADVISOR
The Advisor has been and will be engaged to perform various services
for the Company and has and will receive fees and compensation for such
services. None of the agreements for such services were the result of
arm's-length negotiations. All such agreements, including the Advisory
Agreement, require approval by a majority of the Board of Directors, including a
majority of the Independent Directors, not otherwise interested in such
transactions, as being fair and reasonable to the Company and on terms and
conditions no less favorable than those which could be obtained from
unaffiliated entities. The timing and nature of fees and compensation to the
Advisor could create a conflict between the interests of the Advisor and those
of the stockholders. A transaction involving the purchase, lease, and sale of
any Property, or the entering into or sale of a Mortgage Loan or a Secured
Equipment Lease by the Company may result in the immediate realization by the
Advisor and its Affiliates of substantial commissions, fees, compensation, and
other income. Although the Advisory Agreement authorizes the Advisor to take
primary responsibility for all decisions relating to any such transaction, the
Board of Directors must approve all of the Company's acquisitions and Sales of
Properties and the entering into and Sales of Mortgage Loans or Secured
Equipment Leases. Potential conflicts may arise in connection with the
determination by the Advisor on behalf of the Company of whether to hold or sell
a Property, Mortgage Loan, or Secured Equipment Lease as such determination
could impact the timing and amount of fees payable to the Advisor. See "The
Advisor and the Advisory Agreement."
RELATIONSHIP WITH MANAGING DEALER
The Managing Dealer is CNL Securities Corp., an Affiliate of the
Company. Certain of the officers and Directors of the Company are also officers,
directors, and registered principals of the Managing Dealer. This relationship
may create conflicts in connection with the fulfillment by the Managing Dealer
of its due diligence obligations under the federal securities laws. Although the
Managing Dealer will examine the information in the Prospectus for accuracy and
completeness, the Managing Dealer is an Affiliate of the Company and will not
make an independent review of the Company and the offering. Accordingly, the
investors do not have the benefit of such independent review. Certain of the
Soliciting Dealers have made, or are expected to make, their own independent due
diligence investigations. The Managing Dealer is not prohibited from acting in
any capacity in connection with the offer and sale of securities offered by
entities that may have some or all investment objectives similar to those of the
Company and is expected to participate in other offerings sponsored by one or
more of the officers or Directors of the Company.
LEGAL REPRESENTATION
Shaw, Pittman, Potts & Trowbridge, which serves as securities and tax
counsel to the Company in this offering, also serves as securities and tax
counsel for certain of its Affiliates, including other real estate programs, in
connection with other matters. In addition, certain members of the firm of Shaw,
Pittman, Potts & Trowbridge have invested as limited partners in prior programs
sponsored by Affiliates of the Advisor in aggregate amounts which do not exceed
one percent of the amounts sold by any of these programs, and members of the
firm also may invest in the Company. Neither the Company nor the stockholders
will have separate counsel. In the event any controversy arises following the
termination of this offering in which the interests of the Company appear to be
in conflict with those of the Advisor or its Affiliates, other counsel may be
retained for one or both parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of
interest, the Articles of Incorporation contain a number of restrictions
relating to (i) transactions between the Company and the Advisor or its
Affiliates, (ii) certain future offerings, and (iii) allocation of restaurant
properties, mortgage loans and secured equipment leases among certain affiliated
entities. These restrictions include the following:
1. No goods or services will be provided by the Advisor or its
Affiliates to the Company except for transactions in which the Advisor or its
Affiliates provide goods or services to the Company in accordance with the
Articles of Incorporation which provides that a majority of the Directors
(including a majority of the Independent Directors) not otherwise interested in
such transactions must approve such transactions as fair and reasonable to the
Company and on terms
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and conditions not less favorable to the Company than those available from
unaffiliated third parties and not less favorable than those available from the
Advisor or its Affiliates in transactions with unaffiliated third parties.
2. The Company will not purchase or lease Properties in which the
Advisor or its Affiliates has an interest without the determination, by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction, that such transaction is
competitive and commercially reasonable to the Company and at a price to the
Company no greater than the cost of the asset to the Advisor or its Affiliate
unless there is substantial justification for any amount that exceeds such cost
and such excess amount is determined to be reasonable. In no event shall the
Company acquire any such asset at an amount in excess of its appraised value.
The Company will not sell or lease Properties to the Advisor or its Affiliates
unless a majority of the Directors (including a majority of the Independent
Directors) not interested in the transaction determine the transaction is fair
and reasonable to the Company.
3. The Company will not make any loans to Affiliates. The Advisor and
its Affiliates will not make loans to the Company, or to Joint Ventures in which
the Company is a co-venturer, for the purchase of Properties. Any loans to the
Company by the Advisor or its Affiliates for other purposes must be approved by
a majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair, competitive, and
commercially reasonable, and no less favorable to the Company than comparable
loans between unaffiliated parties. It is anticipated that the Advisor or its
Affiliates shall be entitled to reimbursement, at cost, for actual expenses
incurred by the Advisor or its Affiliates on behalf of the Company or Joint
Ventures in which the Company is a co-venturer, subject to the 2%/25% Guidelines
(2% of Average Invested Assets or 25% of Net Income) described under "The
Advisor and the Advisory Agreement -- The Advisory Agreement."
4. Until completion of this offering, the Advisor and its Affiliates
will not offer or sell interests in any subsequently formed public program that
has investment objectives and structure similar to those of the Company and that
intends to (i) invest, on a cash and/or leveraged basis, in a diversified
portfolio of restaurant properties (either existing properties or properties
upon which restaurants are to be constructed) to be leased on a "triple-net"
basis to operators of national and regional fast-food, family-style, and casual
dining Restaurant Chains, and (ii) offer Secured Equipment Leases. The Advisor
and its Affiliates also will not purchase property or offer a mortgage loan or
secured equipment lease for any such subsequently formed public program that has
investment objectives and structure similar to the Company and that intends to
invest on a cash and/or leveraged basis primarily in a diversified portfolio of
restaurant properties (either existing properties or properties upon which
restaurants are to be constructed) to be leased on a "triple-net" basis to
operators of national and regional fast-food, family-style, and casual dining
Restaurant Chains until substantially all (generally, 80%) of the funds
available for investment (Net Offering Proceeds) by the Company have been
invested or committed to investment. (For purposes of the preceding sentence
only, funds are deemed to have been committed to investment to the extent
written agreements in principle or letters of understanding are executed and in
effect at any time, whether or not any such investment is consummated, and also
to the extent any funds have been reserved to make contingent payments in
connection with any Property, whether or not any such payments are made.)
Affiliates of the Advisor are currently purchasing restaurant facilities,
including furniture, fixtures and equipment, and incurring related costs for
public and private programs, which have investment objectives that are not
identical, and a structure not similar to, those of the Company, but which make
investments that include "triple-net" leases of fast-food, family-style, and
casual dining restaurant properties. The Advisor or its Affiliates currently and
in the future may offer interests in one or more public or private programs
organized to purchase and lease fast-food, family-style, and casual dining
restaurants on a "triple-net" basis.
5. The Board of Directors and the Advisor have agreed that, in the
event that an investment opportunity becomes available which is suitable for
both the Company and a public or private entity with which the Advisor or its
Affiliates are affiliated, for which both entities have sufficient uninvested
funds, then the entity which has had the longest period of time elapse since it
was offered an investment opportunity will first be offered the investment
opportunity. An investment opportunity will not be considered suitable for a
program if the requirements of Item 4 above could not be satisfied if the
program were to make the investment. In determining whether or not an investment
opportunity is suitable for more than one program, the Board of Directors and
the Advisor will examine such factors, among others, as the cash requirements of
each program, the effect of the acquisition both on diversification of each
program's investments by types of restaurants and geographic area, and on
diversification of the tenants of its properties (which also may affect the need
for one of the programs to prepare or produce audited financial statements for a
property or a tenant), the anticipated cash flow of each program, the size of
the investment, the amount of funds available to each program, and the length of
time such funds have been available for investment.
If a subsequent
development, such as a delay in the closing of a property or a delay in the
construction of a property, causes any such investment, in the opinion of the
Advisor, to be more appropriate for an entity other than the entity which
committed to make the investment, however, the Advisor has the right to agree
that the other entity affiliated with the Advisor or its Affiliates may make the
investment. The Advisor and certain other Affiliates of the Company are
affiliated with CNL Income Fund XVIII, Ltd., a public program, and CNL Income &
Growth Fund VIII, Ltd., a private program, offerings of securities for both of
which are ongoing. As of March 6, 1997, CNL Income Fund XVIII, Ltd. and
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CNL Income & Growth Fund VIII, Ltd. had approximately $4,100,000 and $4,448,000,
respectively, available for investment. In the future, other public and private
programs affiliated with the Advisor and other Affiliates of the Company are
expected to engage in offerings of securities and have offering proceeds
available for investment.
6. With respect to Shares owned by the Advisor, the Directors, or any
Affiliate, neither the Advisor, nor the Directors may vote or consent on matters
submitted to the stockholders regarding the removal of the Advisor, Directors,
or any Affiliate or any transaction between the Company and any of them. In
determining the requisite percentage in interest of Shares necessary to approve
a matter on which the Advisor, Directors, and any Affiliate may not vote or
consent, any Shares owned by any of them shall not be included.
SUMMARY OF REINVESTMENT PLAN
The Company has adopted the Reinvestment Plan pursuant to which
stockholders may elect to have the full amount of their cash Distributions from
the Company reinvested in additional Shares of the Company. Each prospective
investor who wishes to participate in the Reinvestment Plan should consult with
such investor's Soliciting Dealer as to the Soliciting Dealer's position
regarding participation in the Reinvestment Plan. The following discussion
summarizes the principal terms of the Reinvestment Plan. The Reinvestment Plan
is attached hereto as Exhibit A.
GENERAL
An independent agent (the "Reinvestment Agent"), which currently is MMS
Escrow and Transfer Agency, Inc., will act on behalf of the participants in the
Reinvestment Plan (the "Participants"). For any period during which the Company
is making a public offering of Shares, the Reinvestment Agent will invest all
Distributions attributable to Shares owned by Participants in Shares of the
Company at the public offering price per Share, which during the term of this
offering is $10.00 per Share. If no public offering is ongoing, and until
Listing, the price per Share will be determined by (i) quarterly appraisal
updates performed by the Company based on a review of the existing appraisal and
lease of each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii) a review
of the outstanding Mortgage Loans and Secured Equipment Leases focusing on a
determination of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each Mortgage Loan and
Secured Equipment Lease. The capitalization rate used by the Company and, as a
result, the price per Share paid by Participants in the Reinvestment Plan prior
to Listing will be determined by the Advisor in its sole discretion. The factors
that the Advisor will use to determine the capitalization rate include (i) its
experience in selecting, acquiring and managing restaurant properties similar to
the Properties; (ii) an examination of the conditions in the market; and (iii)
capitalization rates in use by private appraisers, to the extent that the
Advisor deems such factors appropriate, as well as any other factors that the
Advisor deems relevant or appropriate in making its determination. The Company's
internal accountants then convert the most recent quarterly balance sheet of the
Company from a "GAAP" balance sheet to a "fair market value" balance sheet.
Based on the "fair market value" balance sheet, the internal accountants then
assume a sale of the Company's assets and the liquidation of the Company in
accordance with its constitutive documents and applicable law and compute the
appropriate method of distributing the cash available after payment of
reasonable liquidation expenses, including closing costs typically associated
with the sale of assets and shared by the buyer and seller, and the creation of
reasonable reserves to provide for the payment of any contingent liabilities.
All Shares available for purchase under the Reinvestment Plan either are
registered pursuant to this Prospectus or will be registered under the
Securities Act of 1933 through a separate prospectus relating solely to the
Reinvestment Plan. Until this offering has terminated, Shares will be available
for purchase out of the additional 2,500,000 Shares registered with the
Securities and Exchange Commission (the "Commission") in connection with this
offering, provided, that until such time, if any, as the stockholders approve an
increase in the number of authorized Shares, 100,000 Shares will be available
for purchase. See "The Offering -- Plan of Distribution" and "Summary of the
Articles of Incorporation and Bylaws -- Description of Capital Stock." After the
offering has terminated, Shares will be available from any additional Shares
which the Company elects to register with the Commission for the Reinvestment
Plan.
Stockholders who have received a copy of this Prospectus and
participate in this offering can elect to participate in and purchase Shares
through the Reinvestment Plan at any time and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in this offering may
purchase Shares through the Reinvestment Plan only after receipt of a separate
prospectus relating solely to the Reinvestment Plan.
After the termination of the offering, the price per Share purchased
pursuant to the Reinvestment Plan shall be the fair market value of the Shares
based on quarterly appraisal updates of the Company's assets until such time, if
any, as Listing
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occurs. Upon Listing, the Shares to be acquired for the Reinvestment Plan may be
acquired either through such market or directly from the Company pursuant to a
registration statement relating to the Reinvestment Plan, in either case at a
per-Share price equal to the then-prevailing market price on the national
securities exchange or over-the-counter market on which the Shares are listed at
the date of purchase. The Company is unable to predict the effect which such a
proposed listing would have on the price of the Shares acquired through the
Reinvestment Plan.
INVESTMENT OF DISTRIBUTIONS
Distributions will be used by the Reinvestment Agent, promptly
following the payment date with respect to such Distributions, to purchase
Shares on behalf of the Participants from the Company. All such Distributions
shall be invested in Shares within 30 days after such payment date. Any
Distributions not so invested will be returned to Participants.
At this time, Participants will not have the option to make voluntary
contributions to the Reinvestment Plan to purchase Shares in excess of the
amount of Shares that can be purchased with their Distributions. The Board of
Directors reserves the right, however, to amend the Reinvestment Plan in the
future to permit voluntary contributions to the Reinvestment Plan by
Participants, to the extent consistent with the Company's objective of
qualifying as a REIT.
PARTICIPANT ACCOUNTS, FEES, AND ALLOCATION OF SHARES
For each Participant, the Reinvestment Agent will maintain a record
which shall reflect for each fiscal quarter the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Company shall be
responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such Distributions will be paid to
the Company to defray certain costs relating to the Reinvestment Plan. The
administrative charge for each fiscal quarter will be the lesser of 5% of the
amount reinvested for the Participant or $2.50, with a minimum charge of $0.50.
The maximum annual charge is $10.00.
The Reinvestment Agent will use the aggregate amount of Distributions
to all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants exceeds
the amount required to purchase all Shares then available for purchase, the
Reinvestment Agent will purchase all available Shares and will return all
remaining Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among the
Participants based on the portion of the aggregate Distributions received by the
Reinvestment Agent on behalf of each Participant, as reflected in the records
maintained by the Reinvestment Agent. The ownership of the Shares purchased
pursuant to the Reinvestment Plan shall be reflected on the books of the
Company.
Subject to the provisions of the Articles of Incorporation relating to
certain restrictions on and the effective dates of transfer, Shares acquired
pursuant to the Reinvestment Plan will entitle the Participant to the same
rights and to be treated in the same manner as those purchased by the
Participants in the offering. Accordingly, the Company will pay the Managing
Dealer Selling Commissions of 7.5% (subject to reduction under the circumstances
provided under "The Offering -- Plan of Distribution"), a marketing support and
due diligence fee of .5%, and Acquisition Fees of 4.5% of the purchase price of
the Shares sold pursuant to the Reinvestment Plan until the termination of the
offering. Thereafter, Acquisition Fees will be paid by the Company only in the
event that proceeds of the sale of Shares are used to acquire Properties. As a
result, aggregate fees payable to Affiliates of the Company will total between
8.0% and 12.5% of the proceeds of reinvested Distributions, up to 7.5% of which
may be reallowed to Soliciting Dealers.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
REPORTS TO PARTICIPANTS
Within 60 days after the end of each fiscal quarter, the Reinvestment
Agent will mail to each Participant a statement of account describing, as to
such Participant, the Distributions reinvested during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge paid by the Company on behalf of each
Participant (see "Participant Accounts, Fees, and Allocation of Shares" above),
and the total number of Shares purchased on behalf of the Participant pursuant
to the Reinvestment Plan. Until such time, if any, as Listing occurs, the
statement of account also will report the most recent fair market value of the
Shares, determined as described above. See "General" above.
Tax information for income earned on Shares under the Reinvestment Plan
for the calendar year will be sent to each participant by the Company or the
Reinvestment Agent.
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ELECTION TO PARTICIPATE OR TERMINATE PARTICIPATION
Stockholders of the Company who purchase Shares in this offering may
become Participants in the Reinvestment Plan by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any other stockholder who receives a copy of this Prospectus or a
separate prospectus relating solely to the Reinvestment Plan and who has not
previously elected to participate in the Reinvestment Plan may so elect at any
time by written notice to the Board of Directors of such stockholder's desire to
participate in the Reinvestment Plan. Participation in the Reinvestment Plan
will commence with the next Distribution made after receipt of the Participant's
notice, provided it is received at least ten days prior to the record date for
such Distribution. Subject to the preceding sentence, the election to
participate in the Reinvestment Plan will apply to all Distributions
attributable to the fiscal quarter in which the stockholder made such written
election to participate in the Reinvestment Plan and to all fiscal quarters
thereafter, whether made (i) upon subscription or subsequently for stockholders
who participate in this offering, or (ii) upon receipt of a separate prospectus
relating solely to the Reinvestment Plan for stockholders who do not participate
in this offering. Participants will be able to terminate their participation in
the Reinvestment Plan at any time without penalty by delivering ten days'
written notice to the Board of Directors.
A Participant who chooses to terminate participation in the
Reinvestment Plan must terminate his or her entire participation in the
Reinvestment Plan and will not be allowed to terminate in part. If a Participant
terminates his or her participation the Reinvestment Agent will send him or her
a check in payment for any fractional Shares in his or her account based on the
then market price of the Shares and the record books of the Company will be
revised to reflect the ownership of records of his or her whole Shares. There
are no fees associated with a Participant's terminating his or her interest in
the Reinvestment Plan. A Participant in the Reinvestment Plan who terminates his
or her interest in the Reinvestment Plan will be allowed to participate in the
Reinvestment Plan again by notifying the Reinvestment Agent and completing any
required forms.
The Board of Directors reserves the right to prohibit Qualified Plans
from participating in the Reinvestment Plan if such participation would cause
the underlying assets of the Company to constitute "plan assets" of Qualified
Plans. See "The Offering -- ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
Stockholders subject to federal taxation who elect to participate in
the Reinvestment Plan will incur a tax liability for Distributions allocated to
them even though they have elected not to receive their Distributions in cash
but rather to have their Distributions held pursuant to the Reinvestment Plan.
Specifically, stockholders will be treated as if they have received the
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. A stockholder designating a Distribution for
reinvestment will be taxed on the amount of such Distribution as ordinary income
to the extent such Distribution is from current or accumulated earnings and
profits, unless the Company has designated all or a portion of the Distribution
as a capital gain dividend. In such case, such designated portion of the
Distribution will be taxed as long-term capital gain.
AMENDMENTS AND TERMINATION
The Company reserves the right to renew, extend, or amend any aspect of
the Reinvestment Plan without the consent of stockholders, provided that notice
of the amendment is sent to Participants at least 30 days prior to the effective
date thereof. The Company also reserves the right to terminate the Reinvestment
Plan for any reason at any time by ten days' prior written notice of termination
to all Participants.
REDEMPTION OF SHARES
After the termination of the offering and prior to such time, if any,
as Listing occurs, any stockholder who purchases Shares in this offering or
otherwise from the Company or who has held Shares for not less than one year
(other than the Advisor) may present all or any portion equal to at least 25% of
such stockholder's Shares to the Company for redemption at any time, in
accordance with the procedures outlined herein. At such time, the Company may,
at its option, subject to the conditions described below, redeem such Shares
presented for redemption for cash to the extent it has sufficient net proceeds
("Reinvestment Proceeds") from the sale of Shares under the Reinvestment Plan.
There is no assurance that there will be Reinvestment Proceeds available for
redemption and, accordingly, a stockholder's Shares may not be redeemed. The
full amount of Reinvestment Proceeds attributable to any quarter will be used to
redeem Shares presented for redemption during such quarter. If the full amount
of Reinvestment Proceeds available for any given quarter exceeds the amount
necessary for
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such redemptions, the remaining amount shall be held for subsequent redemptions
unless such amount is sufficient to acquire an additional Property (directly or
through a Joint Venture). In that event, the Company may use all or a portion of
such amount to acquire one or more additional Properties, or to make one or more
additional Mortgage Loans, provided that the Company (or, if applicable, the
Joint Venture) enters into a binding contract to purchase such Property or
Properties, or enter into such Mortgage Loan or Mortgage Loans, prior to payment
of the next Distribution and the Company's receipt of requests for redemption of
Shares. If the full amount of Reinvestment Proceeds for any given quarter is
insufficient to fund all of the requested redemptions, the Company will redeem
the Shares presented for redemption in order of receipt.
A stockholder (other than a resident of Nebraska) who wishes to have
his or her Shares redeemed must mail or deliver a written request on a form
provided by the Company and executed by the stockholder, its trustee or
authorized agent, to the Company. Nebraska stockholders must deliver the same
type of request to a broker-dealer registered in Nebraska and must have his or
her Shares redeemed through such broker-dealer, who will communicate directly
with the Company. Within 30 days following the Company's receipt of the
stockholder's request, the Company will forward to such stockholder the
documents necessary to effect the redemption, including any signature guarantee
the Company may require. The Company will effect such redemption for the
calendar quarter provided that the Company receives the properly completed
redemption documents relating to the Shares to be redeemed from the stockholder
at least one calendar month prior to the last day of the current calendar
quarter and has sufficient Reinvestment Proceeds to redeem such Shares. The
effective date of any redemption will be the last date during a quarter during
which the Company receives the properly completed redemption documents. As a
result, the Company anticipates that, assuming sufficient Reinvestment Proceeds,
the effective date of redemptions will be no later than thirty days after the
quarterly determination of the availability of Reinvestment Proceeds.
Upon the Company's receipt of notice for redemption of Shares, the
redemption price will be on such other terms as the Reinvestment Agent shall
determine. It is not anticipated that there will be a market for the Shares
before Listing occurs (although liquidity is not assured thereby). The
redemption plan will terminate, and the Company no longer shall accept Shares
for redemption, if and when Listing occurs. See "Risk Factors -Investment Risks
- -- Lack of Liquidity of Shares." Accordingly, in determining the "market price"
of the Shares for this purpose, it is expected that the purchase price for
Shares purchased from stockholders will be determined by reference to the
following factors, as well as any others deemed relevant or appropriate by the
Reinvestment Agent: (i) the price at which Shares have been purchased from
stockholders, either pursuant to the Reinvestment Plan or outside of the
Reinvestment Plan (to the extent the Company has information regarding the
prices paid for Shares purchased outside the Reinvestment Plan), (ii) the annual
statement of Share valuation provided to certain stockholders (see "Reports to
Stockholders"), and (iii) the price at which stockholders are willing to sell
their Shares. Shares purchased during any particular period of time therefore
may be purchased at varying prices. The Board of Directors will announce any
price adjustment and the time period of its effectiveness as part of its regular
communications with stockholders. Any Shares acquired pursuant to a redemption
will be retired and no longer available for issuance by the Company.
A stockholder may present fewer than all his or her Shares to the
Company for redemption, provided, however, that (i) the minimum number of Shares
which must be presented for redemption shall be at least 25% of his or her
Shares, and (ii) if such stockholder retains any Shares, he or she must retain
at least 250 Shares (100 Shares for an IRA, Keogh Plan or pension plan).
The Directors, in their sole discretion, may amend or suspend the
redemption plan at any time they determine that such amendment or suspension is
in the best interest of the Company. The Directors may suspend the redemption of
Shares if (i) they determine, in their sole discretion, that such redemption
impairs the capital or the operations of the Company; (ii) they determine, in
their sole discretion, that an emergency makes such redemption not reasonably
practical; (iii) any governmental or regulatory agency with jurisdiction over
the Company so demands for the protection of the stockholders; (iv) they
determine, in their sole discretion, that such redemption would be unlawful; or
(v) they determine, in their sole discretion, that such redemption, when
considered with all other redemptions, sales, assignments, transfers and
exchanges of Shares in the Company, could cause direct or indirect ownership of
Shares of the Company to become concentrated to an extent which would prevent
the Company from qualifying as a REIT under the Code. For a discussion of the
tax treatment of such redemptions, see "Federal Income Tax Considerations --
Taxation of Stockholders."
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<PAGE>
BUSINESS
GENERAL
The Company purchases existing fast-food, family-style, and casual
dining restaurant Properties, including land and buildings, as well as
Properties upon which such restaurants are to be constructed, the land
underlying the restaurant building with the building owned by the tenant or a
third party, and the building only with the land owned by a third party. The
Company also provides financing (the "Mortgage Loans") for the purchase of
buildings, generally by tenants that lease the underlying land from the Company.
To a lesser extent, the Company offers furniture, fixture and equipment
("Equipment") financing to operators of Restaurant Chains pursuant to which the
Company will finance, through direct financing leases, the Equipment
(collectively, the "Secured Equipment Leases.")
As of March 6, 1997, the Company owned 110 Properties. It is
anticipated that the Company will acquire a total of 400 to 450 Properties if
the maximum number of Shares is sold in this offering (including 260 to 300
Properties to be acquired with the proceeds of this offering and 30 to 40
additional Properties to be acquired with the proceeds of the initial offering).
The Properties, which typically are freestanding and are located across
the United States, are leased on a "triple-net" basis to operators of the
Restaurant Chains selected by the Advisor and approved by the Board of
Directors. Each Property acquisition and Mortgage Loan commitment by the Company
is subject to the approval of the Board of Directors. Properties purchased by
the Company are leased under arrangements requiring base annual rent equal to a
specified percentage of the Company's cost of purchasing a particular Property,
with automatic rent increases, and/or percentage rent based on gross sales. See
"Description of Leases -- Computation of Lease Payments," below.
The Company invests in Properties of selected Restaurant Chains that
are national and regional restaurant chains, primarily fast-food, family-style,
and casual dining chains. Fast-food restaurants feature quality food and quick
service, which often includes drive-through service, and offer a variety of menu
items such as hamburgers, steaks, seafood, chili, pizza, pasta dishes, chicken,
hot and cold sandwiches, and salads. Family-style restaurants feature services
that generally are associated with full-service restaurants, such as full table
service and cooked-to-order food, but at more moderate prices. The casual dining
(or dinner house) concept features a variety of popular contemporary foods, full
table service, moderate prices, and surroundings that are appealing to families.
The casual dining segment of the restaurant industry, like the family-style
segment, features services that generally are associated with the full-service
restaurant category. According to forecasts appearing in the January 1, 1997
issue of Restaurants and Institutions, it is projected that the casual dining
segment of full-service restaurants sales will experience 3.8% real growth in
sales this year, with sales predicted to reach $49 billion. The top 15 casual
dining chains by sales have a total of 2,977 restaurants throughout the United
States.
The restaurant industry is one of the largest industries in the United
States in volume of sales and number of employees (more than 9 million persons)
and includes fast-food outlets, cafeterias, lunchrooms, convenience stores,
family-style restaurants, casual dining facilities, full-service restaurants,
and contract and industrial feeders. By the year 2000, food service sales are
expected to exceed $392 billion. Industry publications project that restaurant
industry sales will increase from $173.7 billion in 1985 to $320 billion in
1997. Restaurant industry sales for 1996 are projected to be $307.6 billion. In
1996, nominal growth, which is comprised of real growth and inflationary growth,
was 4.6% and is estimated to be 4.2% in 1997. Real growth of the restaurant
industry in 1996 was 1.7%, and industry analysts currently estimate that the
restaurant industry will achieve 1.4% real growth in 1997 ; however, according
to the National Restaurant Association, fast-food restaurants should outpace the
industry average for real growth, with a projected 2.5% increase over 1996.
Sales in this segment of the restaurant industry are projected to be $103.5
billion for 1997.
The Company invests in the fast-food, family-style, and casual dining
segments of the restaurant industry, the most rapidly growing segments in recent
years. According to the National Restaurant Association, 51% of adults eat at a
quick-service restaurant and 42% of adults patronize a moderately-priced family
restaurant at least once each week. In addition, the National Restaurant
Association indicates that Americans spend approximately 43 cents of every food
dollar on dining away from home. Surveys published in Restaurant Business
indicate that families with children choose quick-service restaurants four out
of every five times they dine out. Additionally, according to The Wall Street
Journal (May 11, 1992), the average American spends $19,791 on fast-food in a
lifetime. Further, according to Nation's Restaurant News, the 100 largest
restaurant chains are posting an average of 7.2% growth in their systemwide
sales figures for 1995. Casual-theme dining concepts are among the chains
showing the strongest growth. In 1995, the sandwich segment experienced sales
growth of 6.98% over 1994 figures, and, the casual dining segment experienced
systemwide sales growth in 1995 of 12.99%, compared to 14.6% in 1994. Management
believes that the Company will have the opportunity to participate in this
growth through the ownership of Properties leased to operators of the Restaurant
Chains.
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<PAGE>
The fast-food, family-style and casual dining segments of the
restaurant industry have demonstrated their ability to adapt to changes in
consumer preferences, such as health and dietary issues, decreases in the
disposable income of consumers and environmental awareness, through various
innovative techniques, including special value pricing and promotions, increased
advertising, menu changes featuring low-calorie, low-cholesterol menu items, and
new packaging and energy conservation techniques.
The table set forth below provides information with respect to certain
Restaurant Chains in which the Company and Affiliates of the Company (consisting
of a listed public REIT, 18 public partnerships and 8 private partnerships) have
invested, as of September 30, 1996:
Aggregate
Dollars Invested by Percentage of Number of
Name Company Affiliates Dollars Invested Prior Programs
Golden Corral $119,305,000 16.8% 25
Burger King 96,468,000 13.6% 24
Denny's 90,327,000 12.7% 20
Jack in the Box 67,501,000 9.5% 14
Hardee's 58,599,000 8.2% 13
Long John Silver's 33,517,000 4.7% 12
Shoney's 32,029,000 4.5% 6
Wendy's 28,705,000 4.0% 15
TGI Friday's 21,508,000 3.0% 8
Checkers 21,263,000 3.0% 7
Perkins 16,311,000 2.3% 9
Boston Market 16,164,000 2.3% 3
Pizza Hut 13,916,000 2.0% 8
KFC 13,642,000 1.9% 10
Popeyes 9,990,000 1.4% 8
Taco Bell 6,428,000 0.9% 5
Arby's 4,765,000 0.7% 5
Ponderosa 3,210,000 0.5% 3
Management structures the Company's investments to allow it to
participate, to the maximum extent possible, in any sales growth in these
industry segments, as reflected in the Properties that it owns. The Company
therefore generally structures its leases with percentage rent requirements
which are based on gross sales of the particular restaurant. Gross sales may
increase even absent real growth because increases in the restaurant's costs
typically are passed on to the consumers through increased prices, and increased
prices are reflected in gross sales. In an effort to provide regular cash flow
to the Company, the Company generally structures its leases to provide a minimum
level of rent, with automatic increases in the minimum rent, which is payable
regardless of the amount of gross sales at a particular Property. The Company
also endeavors to maximize growth and minimize risks associated with ownership
and leasing of real estate that operates in these industry segments through
careful selection and screening of its tenants (as described in "Standards for
Investment" below) in order to reduce risks of default; monitoring statistics
relating to restaurant chains and continuing to develop relationships in the
industry in order to reduce certain risks associated with investment in real
estate; and acquisition of properties which will not be encumbered prior to
Listing. See "Standards for Investment" below for a description of the standards
which the Board of Directors employs in selecting Restaurant Chains and
particular restaurant Properties within a Restaurant Chain for investment.
Management acquires Properties in part with a view to diversification
among Restaurant Chains and the geographic location of the Properties. There are
no restrictions on the geographic area or areas within the United States in
which Properties acquired by the Company may be located.
Management believes that freestanding, "triple-net" leased restaurant
properties of the type in which the Company invests are attractive to tenants
because freestanding properties typically offer high visibility to passing
traffic, ease of access from a busy thoroughfare, tenant control over the site
to set hours of operation and maintenance standards and distinctive building
designs conductive to customer name recognition.
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<PAGE>
COMPLETED INVESTMENTS
As of March 6, 1997, the Company had invested or committed for
investment approximately $111,100,000 of the net proceeds from the Initial
Offering in 110 Properties (68 Properties which consist of land and building, 35
Properties which consist of land only and seven Properties which consist of
building only), in Mortgage Loans to the tenants of the 35 Properties consisting
of land only and to pay related Acquisition Fees and Acquisition Expense. See
"Certain Transactions." All of the Properties are owned directly by the Company,
except for one Property which is owned through a joint venture arrangement. All
of the Properties were acquired since the Company commenced operations on June
1, 1995 and have leases expiring from 12 to 20 years after the date on which
each lease commenced.
The following tables set forth the number of Properties by Restaurant
Chain and by state owned by the Company as of March 6, 1997:
Restaurant Number of Properties
---------- --------------------
Applebee's 2
Arby's 2
Black-eyed Pea 1
Boston Market 14
Burger King 8
Denny's 5
Golden Corral 16
Jack in the Box 16
Kenny Rogers Roasters 1
Pizza Hut 35
Ryan's Family Steak House 1
Shoney's 1
TGI Friday's 4
Wendy's 4
----
Total 110
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<PAGE>
State Number of Properties
----- --------------------
California 13
Connecticut 2
Delaware 1
Florida 5
Georgia 1
Idaho 1
Illinois 4
Indiana 3
Iowa 1
Kentucky 2
Michigan 5
Minnesota 2
Missouri 4
Nebraska 1
Nevada 1
New Jersey 2
New Mexico 1
Ohio 27
Oklahoma 1
Oregon 1
Tennessee 6
Texas 16
Washington 1
West Virginia 9
------
Total 110
INVESTMENT OF OFFERING PROCEEDS
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the use of the proceeds of this offering to acquire
Properties at such time as the Board of Directors believes that a reasonable
probability exists that any such Property will be acquired by the Company. Based
upon the experience and acquisition methods of the Affiliates of the Company and
the Advisor this normally will occur, with regard to acquisition of Properties,
as of the date on which (i) a commitment letter is executed by a proposed
lessee, (ii) a satisfactory credit underwriting for the proposed lessee has been
completed, and (iii) a satisfactory site inspection has been completed. The
initial disclosure of any proposed acquisition, however, cannot be relied upon
as an assurance that the Company ultimately will consummate such proposed
acquisition or that the information provided concerning the proposed acquisition
will not change between the date of such supplement and the actual purchase or
extension of financing.
Acquisition of a restaurant Property generally involves an investment
in land and building of approximately $400,000 to $1,250,000, although higher or
lower figures for individual Properties are possible. The Company estimates that
it will acquire 260 to 300 additional Properties, based on an estimated average
purchase price of $800,000 to $900,000 per Property, if the maximum of
27,500,000 Shares is sold. Management has estimated the average purchase price
of a Property based on its past experience in acquiring similar properties and
in light of current market conditions. In certain cases, the Company may become
a co-venturer in a Joint Venture that will own the Property. In each such case,
the Company's cost to purchase an interest in such Property will be less than
the total purchase price and the Company therefore will be able to acquire
interests in a greater number of Properties. Management estimates that
approximately 30% to 50% of the Company's investment in a Property generally is
for the cost of land, and 50% to 70% generally is for the cost of the building.
See "Joint Venture Arrangements" below and "Risk Factors -- Investment Risks
- -Possible Inability to Further Diversify Investments."
Although management cannot estimate the number of additional Mortgage
Loans that may be entered into, management currently expects to invest
approximately 5% to 10% of Gross Proceeds of this offering, assuming the maximum
of 27,500,000 Shares is sold, in Mortgage Loans.
Additional Secured Equipment Leases will be funded with the proceeds of
the Loan. No portion of Gross Proceeds of this offering will be used to fund
Secured Equipment Leases. Although management cannot estimate the number of
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<PAGE>
additional Secured Equipment Leases that may be entered into, it expects to
limit to $15,000,000 the amount used to fund Secured Equipment Leases, including
the approximately $5,149,000 advanced under the Loan as of March 6, 1997. The
Board of Directors may determine to obtain additional financing to be used by
the Company to fund Secured Equipment Leases, provided that the amount of such
additional financing may not exceed 10% of Gross Proceeds of this offering and
gross proceeds of any subsequent offering. Management has undertaken, consistent
with its objective of qualifying as a REIT for federal income tax purposes, to
ensure that the total value of all Secured Equipment Leases will not exceed 25%
of the Company's total assets, and that Secured Equipment Leases to a single
lessee, in the aggregate, will not exceed 5% of total assets.
PROPERTY ACQUISITIONS
Between January 1, 1997 and March 6, 1997, the Company acquired 16
Properties (14 of which are under construction and consist of land and building
and two Properties which consist of land building). The Properties are ten Jack
in the Box Properties (one in each of Las Vegas, Nevada; Humble and Houston,
Texas; Moscow, Idaho; Kent, Washington; and Los Angeles, Hollister, Kingsburg,
Murrieta and Palmdale, California), a Shoney's Property (in Indian Harbour
Beach, Florida), two Burger King Properties (in Kent, Ohio; and Chattanooga,
Tennessee), two Golden Corral Properties (one in each of Winchester and
Hopkinsville, Kentucky) and a Denny's Property (in Tampa, Florida).
The Burger King Property in Kent, Ohio, and the Golden Corral Property
in Hopkinsville, Kentucky, were acquired from Affiliates of the Company. The
Affiliates had purchased and temporarily held title to these Properties in order
to facilitate their acquisition by the Company. The Properties were acquired by
the Company for an aggregate purchase price of $1,768,185, representing the cost
of the Properties to the Affiliates (including carrying costs) due to the fact
that these amounts were less than each Property's appraised value.
In connection with the purchase of these 16 Properties, the Company, as
lessor entered into long-term lease agreements with unaffiliated lessees. The
general terms of the lease agreements are described in "Business -Description of
Property Leases." For the Properties that are to be constructed or renovated,
the Company has entered into development and indemnification and put agreements
with the lessees. The general terms of these agreements are described in
"Business - Site Selection and Acquisition of Properties - Construction and
Renovation."
The purchase prices for the Burger King Property in Chattanooga,
Tennessee, and the Golden Corral Property in Hopkinsville, Kentucky, include
development fees of $100,000 and $29,379, respectively, to an Affiliate of the
Advisor for services provided in connection with the development of the
Properties. The Company considers development fees, to the extent that they are
paid to Affiliates, to be Acquisition Fees. Such development fees must be
approved by a majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transactions, subject to a
determination that such transactions are fair and reasonable to the Company and
on terms and conditions not less favorable to the Company than those available
from unaffiliated third parties and not less favorable than those available from
the Advisor or its Affiliates in transactions with unaffiliated third parties.
See "Management Compensation" and "Business - Site Selection and Acquisition of
Properties."
The following table sets forth the location of the 16 Properties
consisting of land and building, acquired by the Company, from January 1, 1997
through March 6, 1997, a description of the competition, and a summary of the
principal terms of the acquisition and lease of each Property.
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<PAGE>
PROPERTY ACQUISITIONS
From January 1, 1997 through March 6, 1997
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Jack in the Box (7) $1,397,771 01/07/97 01/2015; four
(the "Los Angeles Property") (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Los Angeles Property is located at the
northwest corner of the intersection of
Wilshire Boulevard and Sycamore Avenue, in
Los Angeles, Los Angeles County,
California, in an area of mixed retail,
commercial, and residential development.
Other fast-food and family-style
restaurants located in proximity to the Los
Angeles Property include several
McDonald's, a KFC, several Burger Kings, a
Numero Uno Pizza, a Subway Sandwich Shop,
an El Pollo Loco, a Denny's, a Pizza Hut, a
Taco Bell, and several local restaurants.
Jack in the Box (7) $1,248,333 01/07/97 01/2015; four
(the "Las Vegas Property") (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Las Vegas Property is located at the
northeast corner of the intersection of
Sunset Road and Pecos Road, in Las Vegas,
Clark County, Nevada, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Las Vegas Property include an Arby's, a
Burger King, a KFC, two Del Tacos, a
McDonald's, a Subway Sandwich Shop, an
Olive Garden, an Outback Steakhouse, two
Taco Bells, a Wendy's, a Dairy Queen, and
several local restaurants.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Jack in the Box (7) $143,272 (6); for each lease year, None
(the "Los Angeles Property") increases by 8% after (i) 5% of annual
Restaurant to be constructed the fifth lease year gross sales minus
and after every five (ii) the minimum
The Los Angeles Property is located at the years thereafter annual rent for such
northwest corner of the intersection of during the lease term lease year (5)
Wilshire Boulevard and Sycamore Avenue, in
Los Angeles, Los Angeles County,
California, in an area of mixed retail,
commercial, and residential development.
Other fast-food and family-style
restaurants located in proximity to the Los
Angeles Property include several
McDonald's, a KFC, several Burger Kings, a
Numero Uno Pizza, a Subway Sandwich Shop,
an El Pollo Loco, a Denny's, a Pizza Hut, a
Taco Bell, and several local restaurants.
Jack in the Box (7) $127,954 (6); for each lease year, None
(the "Las Vegas Property") increases by 8% after (i) 5% of annual
Restaurant to be constructed the fifth lease year gross sales minus
and after every five (ii) the minimum
The Las Vegas Property is located at the years thereafter annual rent for such
northeast corner of the intersection of during the lease term lease year (5)
Sunset Road and Pecos Road, in Las Vegas,
Clark County, Nevada, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Las Vegas Property include an Arby's, a
Burger King, a KFC, two Del Tacos, a
McDonald's, a Subway Sandwich Shop, an
Olive Garden, an Outback Steakhouse, two
Taco Bells, a Wendy's, a Dairy Queen, and
several local restaurants.
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Jack in the Box (7) $910,814 01/22/97 01/2015; four
(the "Moscow Property") (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Moscow Property is located on the north
side of West Pullman Road and the south
side of A Street in Moscow, Latah County,
Idaho, in an area of mixed retail,
commercial, and residential development.
Other fast-food and family-style
restaurants located in proximity to the
Moscow Property include an Arby's, a
McDonald's, and several local restaurants.
Jack in the Box (7) $1,259,871 01/22/97 01/2015; four
(the "Kent "1 Property") (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Kent #1 Property is located at the
southeast corner of the intersection of
Southeast 272nd Street and Southeast 168th
Place, in Kent, King County, Washington, in
an area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Kent #1 Property include a
KFC/Taco Bell, a Dairy Queen, an Arby's, a
Burger King, and a local restaurant.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Jack in the Box (7) $93,358 (6); increases for each lease year, at any time after
(the "Moscow Property") by 8% after the fifth (i) 5% of annual the seventh lease
Restaurant to be constructed lease year and after gross sales minus year
every five years (ii) the minimum
The Moscow Property is located on the north thereafter during the annual rent for such
side of West Pullman Road and the south lease term lease year (5)
side of A Street in Moscow, Latah County,
Idaho, in an area of mixed retail,
commercial, and residential development.
Other fast-food and family-style
restaurants located in proximity to the
Moscow Property include an Arby's, a
McDonald's, and several local restaurants.
Jack in the Box (7) $129,137 (6); for each lease year, at any time after
(the "Kent "1 Property") increases by 8% after (i) 5% of annual the seventh lease
Restaurant to be constructed the fifth lease year gross sales minus year
and after every five (ii) the minimum
The Kent #1 Property is located at the years thereafter annual rent for such
southeast corner of the intersection of during the lease term lease year (5)
Southeast 272nd Street and Southeast 168th
Place, in Kent, King County, Washington, in
an area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Kent #1 Property include a
KFC/Taco Bell, a Dairy Queen, an Arby's, a
Burger King, and a local restaurant.
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Jack in the Box (7) $1,061,819 01/22/97 01/2015; four
(the "Hollister Property") (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Hollister Property is located at the
northeast corner of the intersection of
McCray Street and Meridian Street, in
Hollister, San Benito County, California,
in an area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Hollister Property include
a Burger King, a McDonald's, and a local
restaurant.
Jack in the Box (7) $1,001,073 01/22/97 01/2015; four
(the "Kingsburg Property") (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Kingsburg Property is located at the
southwest quadrant of the intersection of
Sierra Street and Sixth Street, in
Kingsburg, Fresno County, California, in an
area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Kingsburg Property include
a McDonald's, a Taco Bell, a Denny's, a
Burger King, a Subway Sandwich Shop, and
several local restaurants.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Jack in the Box (7) $108,836 (6); for each lease year, at any time after
(the "Hollister Property") increases by 8% after (i) 5% of annual the seventh lease
Restaurant to be constructed the fifth lease year gross sales minus year
and after every five (ii) the minimum
The Hollister Property is located at the years thereafter annual rent for such
northeast corner of the intersection of during the lease term lease year (5)
McCray Street and Meridian Street, in
Hollister, San Benito County, California,
in an area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Hollister Property include
a Burger King, a McDonald's, and a local
restaurant.
Jack in the Box (7) $102,610 (6); for each lease year, at any time after
(the "Kingsburg Property") increases by 8% after (i) 5% of annual the seventh lease
Restaurant to be constructed the fifth lease year gross sales minus year
and after every five (ii) the minimum
The Kingsburg Property is located at the years thereafter annual rent for such
southwest quadrant of the intersection of during the lease term lease year (5)
Sierra Street and Sixth Street, in
Kingsburg, Fresno County, California, in an
area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Kingsburg Property include
a McDonald's, a Taco Bell, a Denny's, a
Burger King, a Subway Sandwich Shop, and
several local restaurants.
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Shoney's $563,040 01/24/97 01/2017; two
(the "Indian Harbour Beach Property") (excluding five-year renewal
Restaurant to be constructed closing and options
development
The Indian Harbour Beach Property is costs) (3)
located within the northeast quadrant of
South Patrick Drive and Eau Gallie
Boulevard, in Indian Harbour Beach, Brevard
County, Florida, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Indian Harbour Beach Property include a
Wendy's, a Krystal, a Miami Subs, a
McDonald's, an Italian Oven, a Friendly's,
and several local restaurants.
Jack in the Box (7) $952,485 01/31/97 01/2015; four
(the ``Murrieta Property'') (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Murrieta Property is located within the
southeast quadrant of Madison Avenue and
Kalmia Street, in Murrieta, Riverside
County, California, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Murrieta Property include a KFC and a
McDonald's.
Jack in the Box (7) $296,034 02/03/97 02/2015; four
(the ``Humble Property'') (excluding five-year renewal
Restaurant to be constructed closing and options
development
The Humble Property is located on the north costs) (3)
side of Beltway 8 east of Old Humble Road,
in Houston, Harris County, Texas, in an
area of mixed retail, commercial, and
residential development.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Shoney's 11% of Total Cost (4); for each lease year, at any time after
(the "Indian Harbour Beach Property") increases by 10% after 6% of the amount by the seventh lease
Restaurant to be constructed the fifth lease year which annual gross year
and after every five sales exceed
The Indian Harbour Beach Property is years thereafter $1,500,000, but are
located within the northeast quadrant of during the lease term less than or equal to
South Patrick Drive and Eau Gallie $1,750,000, plus 4%
Boulevard, in Indian Harbour Beach, Brevard of the amount by
County, Florida, in an area of mixed which annual gross
retail, commercial, and residential sales exceed
development. Other fast-food and family- $1,750,000
style restaurants located in proximity to
the Indian Harbour Beach Property include a
Wendy's, a Krystal, a Miami Subs, a
McDonald's, an Italian Oven, a Friendly's,
and several local restaurants.
Jack in the Box (7) $97,630 (6); increases for each lease year, at any time after
(the ``Murrieta Property'') by 8% after the fifth (i) 5% of annual the seventh lease
Restaurant to be constructed lease year and after gross sales minus year
every five years (ii) the minimum
The Murrieta Property is located within the thereafter during the annual rent for such
southeast quadrant of Madison Avenue and lease term lease year (5)
Kalmia Street, in Murrieta, Riverside
County, California, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Murrieta Property include a KFC and a
McDonald's.
Jack in the Box (7) 10.75% of Total Cost for each lease year, None
(the ``Humble Property'') (4); increases by 8% (i) 5% of annual
Restaurant to be constructed after the fifth lease gross sales minus
year and after every (ii) the minimum
The Humble Property is located on the north five years thereafter annual rent for such
side of Beltway 8 east of Old Humble Road, during the lease term lease year (5)
in Houston, Harris County, Texas, in an
area of mixed retail, commercial, and
residential development.
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Golden Corral $302,363 02/03/97 02/2012; four
(the ``Winchester Property'') (excluding five-year renewal
Restaurant to be constructed closing and options
development
The Winchester Property is located on the costs) (3)
west side of the Winchester Bypass, in
Winchester, Clark County, Kentucky, in an
area of mixed, retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Winchester Property
include a Sonic Drive-In, a Papa John's,
and several local restaurants.
Burger King $872,861 02/03/97 02/2017; four
(the ``Kent #2 Property'') (excluding five-year renewal
Existing restaurant closing options
costs)
The Kent #2 Property is located on the east
side of South Water Street, in Kent,
Portage County, Ohio, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Kent #2 Property include a Wendy's, a
Papa John's, two McDonald's, a Dairy Queen,
and a local restaurant.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Golden Corral 10.75% of Total Cost for each lease year, during the first
(the ``Winchester Property'') (4) 5% of the amount by through seventh
Restaurant to be constructed which annual gross lease years and
sales exceed the tenth through
The Winchester Property is located on the $2,161,048 (5) fifteenth lease
west side of the Winchester Bypass, in years only
Winchester, Clark County, Kentucky, in an
area of mixed, retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Winchester Property
include a Sonic Drive-In, a Papa John's,
and several local restaurants.
Burger King $89,688; increases by for each lease year, during the
(the ``Kent #2 Property'') 5% after the fifth (i) 6% of annual eighth, ninth,
Existing restaurant lease year and by 10% gross sales minus tenth, eleventh
after the tenth lease (ii) the minimum and twelfth lease
The Kent #2 Property is located on the east year and after every annual rent for such years only
side of South Water Street, in Kent, five years thereafter lease year
Portage County, Ohio, in an area of mixed during the lease term
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Kent #2 Property include a Wendy's, a
Papa John's, two McDonald's, a Dairy Queen,
and a local restaurant.
</TABLE>
-44-
<PAGE>
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Burger King $791,984 02/10/97 02/2017; two
(the ``Chattanooga Property'') (excluding five-year renewal
Restaurant to be renovated closing and options
development
The Chattanooga Property is located on the costs) (3)
southwest corner of Hamilton Place
Boulevard and Bams Drive, in Chattanooga,
Hamilton County, Tennessee, in an area of
mixed retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Chattanooga Property include a
Krystal's, an Arby's, a Taco Bell, an Olive
Garden, a Wendy's, a McDonald's, and
several local restaurants.
Denny's $1,038,037 02/11/97 02/2017; two
(the ``Tampa Property'') (excluding five-year renewal
Restaurant to be renovated closing options
costs) (3)(6)
The Tampa Property is located at the
southeast quadrant of the intersection of
U.S. Highway 301 and Interstate 4, in
Tampa, Hillsborough County, Florida, in an
area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Tampa Property include a
Waffle House and a Subway Sandwich Shop.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Burger King 11% of Total Cost (4) for each lease year, None
(the ``Chattanooga Property'') (i) 8.5% of annual
Restaurant to be renovated gross sales minus
(ii) the minimum
The Chattanooga Property is located on the annual rent for such
southwest corner of Hamilton Place lease year
Boulevard and Bams Drive, in Chattanooga,
Hamilton County, Tennessee, in an area of
mixed retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Chattanooga Property include a
Krystal's, an Arby's, a Taco Bell, an Olive
Garden, a Wendy's, a McDonald's, and
several local restaurants.
Denny's $110,291 (6); for each lease year, during the
(the ``Tampa Property'') increases by 11% after (i) 5% of annual eighth, tenth,
Restaurant to be renovated the fifth lease year gross sales minus and twelfth lease
and after every five (ii) the minimum years only
The Tampa Property is located at the years thereafter annual rent for such
southeast quadrant of the intersection of during the lease term lease year
U.S. Highway 301 and Interstate 4, in
Tampa, Hillsborough County, Florida, in an
area of mixed retail, commercial, and
residential development. Other fast-food
and family-style restaurants located in
proximity to the Tampa Property include a
Waffle House and a Subway Sandwich Shop.
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
Lease Expira-
Purchase Date tion and
Property Location and Competition Price (1) Acquired Renewal Options
- --------------------------------- --------- -------- ---------------
<S> <C>
Jack in the Box (7) $1,125,244 02/11/97 02/2015; four
(the ``Palmdale Property'') (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Palmdale Property is located at the
southeast corner of Avenue P and Antelope
Valley Freeway 14, in Palmdale, Los Angeles
County, California, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Palmdale Property include a McDonald's,
a Taco Bell, an Applebee's, a Boston
Market, a Chili's, and several local
restaurants.
Jack in the Box (7) $861,735 02/11/97 02/2015; four
(the ``Houston #3 Property'') (excluding five-year renewal
Restaurant to be constructed closing options
costs) (3)(6)
The Houston #3 Property is located on the
northwest corner of Airport Boulevard and
Ruthby Street, in Houston, Harris County,
Texas, in an area of mixed retail,
commercial, and residential development.
Golden Corral $895,324 02/19/97 09/2016; two
(the ``Hopkinsville Property'') (excluding five-year renewal
Existing restaurant closing options
costs)
The Hopkinsville Property is located on the
west side of Clinic Drive within the
quadrant formed by nearby Pennyrile Parkway
and U.S. Route 41A, in Hopkinsville,
Christian County, Kentucky, in an area of
mixed retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Hopkinsville Property include several
local restaurants.
</TABLE>
<TABLE>
<CAPTION>
Minimum Option
Property Location and Competition Annual Rent (2) Percentage Rent To Purchase
- --------------------------------- --------------- --------------- -----------
<S> <C>
Jack in the Box (7) $115,337 (6); for each lease year, at any time after
(the ``Palmdale Property'') increases by 8% after (i) 5% of annual the seventh lease
Restaurant to be constructed the fifth lease year gross sales minus year
and after every five (ii) the minimum
The Palmdale Property is located at the years thereafter annual rent for such
southeast corner of Avenue P and Antelope during the lease term lease year (5)
Valley Freeway 14, in Palmdale, Los Angeles
County, California, in an area of mixed
retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Palmdale Property include a McDonald's,
a Taco Bell, an Applebee's, a Boston
Market, a Chili's, and several local
restaurants.
Jack in the Box (7) $88,328 (6); increases for each lease year, at any time after
(the ``Houston #3 Property'') by 8% after the fifth (i) 5% of annual the seventh lease
Restaurant to be constructed lease year and after gross sales minus year
every five years (ii) the minimum
The Houston #3 Property is located on the thereafter during the annual rent for such
northwest corner of Airport Boulevard and lease term lease year (5)
Ruthby Street, in Houston, Harris County,
Texas, in an area of mixed retail,
commercial, and residential development.
Golden Corral $141,912; increases by for each lease year, at any time after
(the ``Hopkinsville Property'') 12% after the fifth (i) 6% of annual the seventh lease
Existing restaurant lease year and after gross sales minus year
every five years (ii) the minimum
The Hopkinsville Property is located on the thereafter during the annual rent for such
west side of Clinic Drive within the lease term lease year
quadrant formed by nearby Pennyrile Parkway
and U.S. Route 41A, in Hopkinsville,
Christian County, Kentucky, in an area of
mixed retail, commercial, and residential
development. Other fast-food and family-
style restaurants located in proximity to
the Hopkinsville Property include several
local restaurants.
</TABLE>
-46-
<PAGE>
FOOTNOTES:
(1) The estimated federal income tax basis of the depreciable portion (the
building portion) of each of the Properties acquired, and for
construction Properties, once the buildings are constructed, is set
forth below:
Property Federal Tax Basis
-------- -----------------
Los Angeles Property $567,000
Las Vegas Property 592,000
Moscow Property 744,000
Kent #1 Property 596,000
Hollister Property 586,000
Kingsburg Property 642,000
Indian Harbour Beach Property 474,000
Murrieta Property 617,000
Humble Property 627,000
Winchester Property 910,000
Kent #2 Property 686,000
Chattanooga Property 473,000
Tampa Property 695,000
Palmdale Property 559,000
Houston #3 Property 543,000
Hopkinsville Property 880,000
(2) Minimum annual rent for each of the Properties became payable on the
effective date of the lease, except as indicated below. For the Humble
Property, minimum annual rent will become due and payable on the
earlier of (i) 180 days after execution of the lease or (ii) the date
the restaurant opens for business to the public. For the Winchester
Property, minimum annual rent will become due and payable on the
earlier of (i) the date the certificate of occupancy for the restaurant
is issued, (ii) the date the restaurant opens for business to the
public or (iii) 180 days after execution of the lease. For the
Chattanooga Property, minimum annual rent will become due and payable
on the possession date, which is June 24, 1997 (the ``Possession
Date''). During the period commencing with the effective date of the
lease to the date minimum annual rent becomes payable for the Humble
Property, as described above, the tenant shall pay monthly ``interim
rent'' equal to 10.75% per annum of the amount funded by the Company in
connection with the purchase and construction of the Property. During
the period commencing with the effective date of the lease to the date
minimum annual rent becomes payable for the Winchester Property, as
described above, ``interim rent'' equal to ten percent per annum of the
amount funded by the Company in connection with the purchase and
construction of the Property shall accrue and shall be payable in a
single lump sum on the date minimum annual rent becomes payable for
this Property.
(3) The development agreements for the Properties which are to be
constructed or renovated, provide that construction or renovation must
be completed no later than the dates set forth below. The maximum cost
to the Company, (including the purchase price of the land (if
applicable), development costs (if applicable), and closing and
acquisition costs) is not expected to, but may, exceed the amounts set
forth below:
-47-
<PAGE>
<TABLE>
<CAPTION>
Property Estimated Maximum Cost Estimated Final Completion Date
-------- ---------------------- -------------------------------
<S> <C>
Los Angeles Property $1,397,771 July 6, 1997
Las Vegas Property 1,248,333 July 6, 1997
Moscow Property 910,814 July 21, 1997
Kent #1 Property 1,259,871 July 21, 1997
Hollister Property 1,061,819 July 21, 1997
Kingsburg Property 1,001,073 July 21, 1997
Indian Harbour Beach Property 676,041 July 23, 1997
Murrieta Property 952,485 July 30, 1997
Humble Property 912,409 August 2, 1997
Winchester Property 1,272,678 August 2, 1997
Chattanooga Property 1,202,224 June 24, 1997
Tampa Property 1,038,037 August 10, 1997
Palmdale Property 1,125,244 August 10, 1997
Houston #3 Property 861,735 August 10, 1997
</TABLE>
(4) The ``Total Cost'' is equal to the sum of (i) the purchase price of the
Property, (ii) closing costs, and (iii) actual development costs
incurred under the development agreement.
(5) Percentage rent shall be calculated on a calendar year basis (January 1
to December 31).
(6) The Company paid for all construction or renovation costs in advance at
closing; therefore, minimum annual rent was determined on the date
acquired and is not expected to change.
(7) The lessee of the Los Angeles, Las Vegas, Moscow, Kent #1, Hollister,
Kingsburg, Murrieta, Humble, Palmdale and Houston #3 Properties is the
same unaffiliated lessee.
-48-
PENDING INVESTMENTS
As of March 6, 1997, the Company had initial commitments to acquire 26
properties, including 12 properties consisting of land and building, five
properties consisting of building only and nine properties consisting of land
only. The acquisition of each of these properties is subject to the fulfillment
of certain conditions, including, but not limited to, a satisfactory
environmental survey and property appraisal. There can be no assurance that any
or all of the conditions will be satisfied or, if satisfied, that one or more of
these properties will be acquired by the Company. If acquired, the leases of
all 26 of these properties are expected to be entered into on substantially the
same terms described in ``Business - Description of Property Leases,'' except as
described below.
In connection with the nine Pizza Hut properties consisting of land
only, the Company anticipates acquiring the land and leasing it to the tenant,
Castle Hill, pursuant to a master lease agreement for these nine properties.
The tenant is expected to own the buildings for these nine properties. In
connection therewith, the Company anticipates providing mortgage financing to
the tenant which will be collateralized by the building improvements. If the
mortgage note is executed, it is expected to be executed under substantially the
same terms described in ``Business - Mortgage Loans.''
In addition, the Company has an initial commitment to provide mortgage
financing for two additional Pizza Hut properties in Weirton, West Virginia, and
Wintersville, Ohio, which will be collateralized by the building improvements.
The Company does not expect to own the land for these two properties. If the
mortgage note is executed, it is expected to be executed under substantially the
same terms described in ``Business - Mortgage Loans.''
In connection with the Black-eyed Pea properties in Bedford, Dallas and
Fort Worth, Texas; Oklahoma City, Oklahoma; and Scottsdale, Arizona, the Company
anticipates owning only the buildings and not the underlying land. However, the
Company anticipates entering into landlord estoppel agreements with the
landlords of the land and collateral assignments of the ground leases with the
lessees in order to provide the Company with certain rights with respect to the
land on which the buildings are located.
Set forth below are summarized terms expected to apply to the leases
for each of the properties. More detailed information relating to a property
and its related lease will be provided at such time, if any, as the property is
acquired.
-49-
<TABLE>
<CAPTION>
Lease Term and
Property Renewal Options Minimum Annual Rent
- -------- --------------- -------------------
<S> <C>
Bennigan's 15 years; three five-year renewal 10.375% of the Company's total
Arvada, CO options cost to purchase the property;
Existing restaurant increases by 10% after the
fifth lease year and after
every five years thereafter
during the lease term
Black-eyed Pea (3) 16 years 12.83% of the Company's total
Bedford, TX cost to purchase the building
Existing restaurant
Black-eyed Pea (3) 19 years 12.12% of the Company's total
Dallas, TX cost to purchase the building
Existing restaurant
Black-eyed Pea (3) 14 years 13.59% of the Company's total
Fort Worth, TX cost to purchase the building
Existing restaurant
Black-eyed Pea (3) 15 years 13.24% of the Company's total
Oklahoma City, OK cost to purchase the building
Existing restaurant
Black-eyed Pea (3) 14 years 13.66% of Total Cost (1)
Scottsdale, AZ
Restaurant to be renovated
Burger King 20 years; two five-year renewal 11% of Total Cost (1)
Ooltewah, TN options
Restaurant to be constructed
Golden Corral 15 years; four five-year renewal 10.75% of Total Cost (1)
Jacksonville, FL options
Restaurant to be constructed
</TABLE>
<TABLE>
<CAPTION>
Property Percentage Rent Options to Purchase
- -------- --------------- -------------------
<S> <C>
Bennigan's for each lease year, (i) 6% at any time after lease
Arvada, CO of annual gross sales minus year five
Existing restaurant (ii) the minimum annual rent
for such lease year
Black-eyed Pea (3) None (6)
Bedford, TX
Existing restaurant
Black-eyed Pea (3) None (6)
Dallas, TX
Existing restaurant
Black-eyed Pea (3) None (6)
Fort Worth, TX
Existing restaurant
Black-eyed Pea (3) None (6)
Oklahoma City, OK
Existing restaurant
Black-eyed Pea (3) None (6)
Scottsdale, AZ
Restaurant to be renovated
Burger King for each lease year, (i) 8.5% None
Ooltewah, TN of annual gross sales minus
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
Golden Corral for each lease year, 5% of during the first through
Jacksonville, FL the amount by which annual seventh lease years and the
Restaurant to be constructed gross sales exceed a to be tenth through fifteenth
determined breakpoint lease years only
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
Lease Term and
Property Renewal Options Minimum Annual Rent
- -------- --------------- -------------------
<S> <C>
IHOP 20 years; three five-year renewal 10.125% of the Company's total
Fairfax, VA options cost to purchase the property;
Existing restaurant increases by 10% after the
fifth lease year and after
every five years thereafter
during the lease term
IHOP 20 years; three five-year renewal 10.125% of the Company's total
Hollywood, CA options cost to purchase the property;
Existing restaurant increases by 10% after the
fifth lease year and after
every five years thereafter
during the lease term
IHOP 20 years; three five-year renewal 10.125% of the Company's total
Leesburg, VA options cost to purchase the property;
Existing restaurant increases by 10% after the
fifth lease year and after
every five years thereafter
during the lease term
Jack in the Box 18 years; four five-year renewal 10.25% of Total Cost (1);
Bacliff, TX options increases by 8% after the fifth
Restaurant to be constructed lease year and after every five
years thereafter during the
lease term
Jack in the Box 18 years; four five-year renewal 10.25% of Total Cost (1);
Enunclaw, WA options increases by 8% after the fifth
Restaurant to be constructed lease year and after every five
years thereafter during the
lease term
Jack in the Box 18 years; four five-year renewal 10.25% of Total Cost (1);
Fresno, CA options increases by 8% after the fifth
Restaurant to be constructed lease year and after every five
years thereafter during the
lease term
</TABLE>
<TABLE>
<CAPTION>
Property Percentage Rent Options to Purchase
- -------- --------------- -------------------
<S> <C>
IHOP for each lease year, (i) 4% during the eleventh lease
Fairfax, VA of annual gross sales minus year and at the end of the
Existing restaurant (ii) the minimum annual rent initial lease term
for such lease year
IHOP for each lease year, (i) 4% during the eleventh lease
Hollywood, CA of annual gross sales minus year and at the end of the
Existing restaurant (ii) the minimum annual rent initial lease term
for such lease year
IHOP for each lease year, (i) 4% during the eleventh lease
Leesburg, VA of annual gross sales minus year and at the end of the
Existing restaurant (ii) the minimum annual rent initial lease term
for such lease year
Jack in the Box for each lease year, (i) 5% at any time after the
Bacliff, TX of annual gross sales minus seventh lease year (2)
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
Jack in the Box for each lease year, (i) 5% at any time after the
Enunclaw, WA of annual gross sales minus seventh lease year (2)
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
Jack in the Box for each lease year, (i) 5% at any time after the
Fresno, CA of annual gross sales minus seventh lease year (2)
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
</TABLE>
-51-
<PAGE>
<TABLE>
<CAPTION>
Lease Term and
Property Renewal Options Minimum Annual Rent
- -------- --------------- -------------------
<S> <C>
Jack in the Box 18 years; four five-year renewal 10.25% of Total Cost (1);
Houston, TX (#4) options increases by 8% after the fifth
Restaurant to be constructed lease year and after every five
years thereafter during the
lease term
Jack in the Box 18 years; four five-year renewal 10.25% of Total Cost (1);
Oxnard, CA options increases by 8% after the fifth
Restaurant to be constructed lease year and after every five
years thereafter during the
lease term
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Bolivar, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Carrolton, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Dover, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Millersburg, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
New Philadelphia, OH options cost to purchase the land;
Land only increases by 10% after the fifth
and tenth lease years and 12%
after the fifteenth lease year
</TABLE>
<TABLE>
<CAPTION>
Property Percentage Rent Options to Purchase
- -------- --------------- -------------------
<S> <C>
Jack in the Box for each lease year, (i) 5% at any time after the
Houston, TX (#4) of annual gross sales minus seventh lease year (2)
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
Jack in the Box for each lease year, (i) 5% at any time after the
Oxnard, CA of annual gross sales minus seventh lease year (2)
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
Pizza Hut (4)(5) None at any time after the
Bolivar, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
Carrolton, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
Dover, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
Millersburg, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
New Philadelphia, OH seventh lease year
Land only
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
Lease Term and
Property Renewal Options Minimum Annual Rent
- -------- --------------- -------------------
<S> <C>
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
New Philadelphia-West, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Steubenville, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Uhrichsville, OH options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Pizza Hut (4)(5) 20 years; two ten-year renewal 10.50% of the Company's total
Wellsburg, WV options cost to purchase the land;
Land only increases by 10% after the
fifth and tenth lease years and
12% after the fifteenth lease
year
Shoney's 20 years; two five-year renewal 11% of Total Cost; increases by
Phoenix, AZ options 10% after the fifth lease year
Restaurant to be constructed and after every five years
thereafter during the lease
term (1)
</TABLE>
<TABLE>
<CAPTION>
Property Percentage Rent Options to Purchase
- -------- --------------- -------------------
<S> <C>
Pizza Hut (4)(5) None at any time after the
New Philadelphia-West, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
Steubenville, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
Uhrichsville, OH seventh lease year
Land only
Pizza Hut (4)(5) None at any time after the
Wellsburg, WV seventh lease year
Land only
Shoney's for each lease year, (i) 6% at any time after the
Phoenix, AZ of annual gross sales minus seventh lease year
Restaurant to be constructed (ii) the minimum annual rent
for such lease year
</TABLE>
FOOTNOTES:
(1) The ``Total Cost'' is equal to the sum of (i) the purchase price of the
property, (ii) closing costs, and (iii) actual development costs
incurred under the development agreement.
(2) In the event the Company purchases the property directly from the
lessee, the lessee will have no option to purchase the property.
(3) The Company anticipates owning the building only for this property. The
Company will not own the underlying land; although, the Company
anticipates entering into a landlord estoppel agreement with the
landlord of the land and a collateral assignment of the ground lease
with the lessee in order to provide the Company with certain rights
with respect to the land on which the building is located.
(4) The lease relating to this property is a land lease only. The Company
anticipates entering into a master mortgage note receivable
collateralized by the Bolivar, Carrolton, Dover, Millersburg, New
Philadelphia, New Philadelphia-West, Steubenville and Uhrichsville,
Ohio, and Wellsburg, West Virginia building improvements.
-53-
<PAGE>
(5) The Company anticipates entering into a master lease agreement for the
Bolivar, Carrolton, Dover, Millersburg, New Philadelphia, New
Philadelphia-West, Steubenville and Uhrichsville, Ohio, and Wellsburg,
West Virginia properties.
(6) The Company anticipates conveying the building to the tenant at the end
of the lease term for $1.
-54-
<PAGE>
SITE SELECTION AND ACQUISITION OF PROPERTIES
General. The Restaurant Chains selected by the Advisor, and as approved
by the Board of Directors, have full-time staffs engaged in site selection and
evaluation. All new sites must be approved by the Restaurant Chains. The
Restaurant Chains generally conduct or require the submission of studies which
typically include such factors as traffic patterns, population trends,
commercial and industrial development, office and institutional development,
residential development, per capita or household median income, per capita or
household median age, and other factors. The Restaurant Chains also review and
approve all proposed tenants and restaurant sites. The Restaurant Chains or the
operators generally make their site evaluations and analyses, as well as
financial information regarding proposed tenants, available to the Company.
The Board of Directors, on behalf of the Company, elects to purchase
and lease Properties based principally on an examination and evaluation by the
Advisor of the potential value of the site, the financial condition and business
history of the proposed tenant, the demographics of the area in which the
restaurant Property is located or to be located, the proposed purchase price and
proposed lease terms, geographic and market diversification, and potential sales
expected to be generated by the restaurant. In addition, the potential tenant
must meet at least the minimum standards established by a Restaurant Chain for
its operators. The Advisor also performs an independent break-even analysis of
the potential profitability of a restaurant property using historical data and
other data developed by the Company and provided by the Restaurant Chains.
Although the Restaurant Chains that are selected by the Advisor approve
each tenant and each Property, the Board of Directors exercise(s) its own
judgment as to, and will be solely responsible for, the ultimate selection of
both tenants and Properties. Therefore, some of the properties approved by a
Restaurant Chain may not be purchased by the Company.
In each Property acquisition, the Advisor negotiates the lease
agreement with the tenant. In certain instances, the Advisor may negotiate an
assignment of an existing lease, in which case the terms of the lease may vary
substantially from the Company's standard lease terms, if the Board of
Directors, based on the recommendation of the Advisor, determines that the terms
of an acquisition and lease of a Property, taken as a whole, are favorable to
the Company. It is expected that the structure of the long-term "triple-net"
lease agreements, which provide for monthly rental payments and automatic
increases in base rent at specified times during the lease terms, plus a
percentage of gross restaurant sales, will increase the value of the Properties
and provide an inflation hedge. See "Description of Leases" below for a
discussion of the terms of the Company's leases. In connection with a Property
acquisition, in the event the tenant does not enter into a Secured Equipment
Lease with the Company, the tenant provides at its own expense all Equipment
(such as deep fryers, grills, refrigerators, and freezers) necessary to operate
the Company's Property as a restaurant. Generally, a tenant either pays cash or
obtains a loan from a third party to purchase such items. If the tenant obtains
such a loan, the tenant will own this personal property subject to the tenant's
obligations under its loan. In the experience of the Affiliates of the Company
and the Advisor, there may be rare circumstances in which a tenant defaults
under such a loan, in which event the lender may attempt to remove the personal
property from the building, resulting in the Property becoming inoperable as a
restaurant until new Equipment can be purchased and installed. In order to
prevent repossession of this personal property by the lender, and only on an
interim basis in order to preserve the value of a Property, the Company may
elect (but only to the extent consistent with the Company's objective of
qualifying as a REIT) to use Company reserves to purchase this personal property
from the lender, generally at a discount for the remaining unpaid balance under
the tenant's loan. The Company then would expect, consistent with the Company's
objective of qualifying as a REIT, to resell the personal property to a new
tenant in connection with the transfer of the lease to that tenant.
Some lease agreements provide the tenant with the opportunity to
purchase the Property under certain conditions, generally either at a price not
less than fair market value (determined by appraisal or otherwise) or through a
right of first refusal to purchase the Property. In either case, the lease
agreements provide that the tenant may exercise these rights only to the extent
consistent with the Company's objective of qualifying as a REIT. See "Sale of
Properties, Mortgage Loans, and Secured Equipment Leases" below and "Federal
Income Tax Considerations -- Characterization of Leases."
The purchase of each Property is supported by an appraisal of the real
estate prepared by an independent appraiser. The Advisor, however, relies on its
own independent analysis and not on such appraisals in determining whether or
not to recommend the Company to acquire a particular Property. The purchase
price of each such Property, plus any Acquisition Fees paid by the Company in
connection with such purchase, may not exceed the Property's appraised value.
(In connection with the acquisition of a Property which is to be constructed or
renovated, the comparison of the purchase price and the appraised value of such
Property ordinarily will be based on the "when constructed" price and value of
such Property.) It should be noted that appraisals are estimates of value and
should not be relied upon as measures of true worth or realizable value. Each
appraisal will be maintained in the Company's records for at least five years
and will be available for inspection and duplication by any stockholder.
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The titles to Properties purchased by the Company will be insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the Properties are located.
Construction and Renovation. In some cases, construction or renovation
is required after the purchase contract has been entered into, but before the
total purchase price has been paid. In connection with the acquisition of
Properties that are to be constructed or renovated and as to which the Company
will own both the land and the building or building only, the Company generally
enters into a development agreement with the tenant pursuant to which the
Company advances funds to the tenant to meet construction or renovation costs as
they are incurred. The tenant acts as the project developer, enters into all
construction contracts, and arranges for and coordinates all aspects of the
construction or renovation of the restaurant improvements. The tenant is
responsible for the construction or renovation of the restaurant improvements,
although it may employ co-developers or sub-agents in fulfilling its
responsibilities under the development agreement. All general contractors
performing work in connection with such restaurant improvements must provide a
payment and performance bond or other satisfactory form of guarantee of
performance. All construction and renovation must be performed or supervised by
persons or entities acceptable to the Advisor and the Board of Directors. The
Company is obligated, as construction or renovation costs are incurred, to make
the remaining payments due as part of the purchase price for the Properties,
provided that the construction or renovation conforms to definitive plans,
specifications, and costs approved by the Advisor and the Board of Directors and
embodied in the construction contract.
Under the terms of the development agreement, the Company generally
advances its funds on a monthly basis to meet construction draw requests of the
tenant. The Company, in general, only advances its funds to meet the tenant's
draw requests upon receipt of an inspection report and a certification of draw
requests from an inspecting architect or engineer suitable to the Company, and
the Company may retain a portion of any advance until satisfactory completion of
the project. The certification must be supported by color photographs showing
the construction work completed as of the date of inspection. The total amount
of the funds advanced to the tenant (including the purchase price of the land
plus closing costs and certain other costs) generally does not exceed the
maximum amount specified in the development agreement. Such maximum amount is
based on the Company's estimate of the costs of such construction or renovation.
In certain cases in which the Company intends to purchase a Property
upon completion of construction or renovation of that Property, the Company
permits the proposed tenant to arrange for a bank or another lender to provide
construction financing to the tenant. In such cases, the lender may seek
assurance from the Company that it has sufficient funds to pay to the tenant the
full purchase price of the Property upon completion of the construction or
renovation. In the event that the Company segregates funds as assurance to the
lender of its ability to purchase the Property, the funds will remain the
property of the Company, and the lender will have no rights with respect to such
funds upon any default by the tenant under the development agreement or under
the loan agreement with such lender, or if the closing of the purchase of the
Property by the Company does not occur for any reason.
Under the development agreement, the tenant generally is obligated to
complete the construction or renovation of the restaurant improvements within
120 to 150 days from the date of the development agreement. If the construction
or renovation is not completed within that time and the tenant fails to remedy
this default within 10 days after notice from the Company, the Company has the
option to grant the tenant additional time to complete the construction, to take
over construction or renovation of the restaurant improvements, or to terminate
the development agreement and require the tenant to purchase the Property at a
price equal to the sum of (i) the Company's purchase price of the land,
including all fees, costs, and expenses paid by the Company in connection with
its purchase of the land, (ii) all fees, costs, and expenses disbursed by the
Company pursuant to the development agreement for construction of the restaurant
improvements, and (iii) the Company's "construction financing costs." The
"construction financing costs" of the Company is an amount equal to a return, at
the annual percentage rate used in calculating the minimum annual rent under the
lease, on all Company payments and disbursements described in clauses (i) and
(ii) above.
The Company also generally enters into an indemnification and put
agreement (the "Indemnity Agreement") with the tenant and any guarantor of the
obligations of the tenant under the lease in connection with the acquisition of
Properties to be constructed or renovated. The Indemnity Agreement will provide
for certain additional rights to the Company unless certain conditions are met.
In general, these conditions are (i) the tenant's acquisition of all permits,
approvals, and consents necessary to permit commencement of construction or
renovation of the restaurant within a specified period of time after the date of
the Indemnity Agreement (normally, 60 days), or (ii) the completion of
construction or renovation of the restaurant as evidenced by the issuance of a
certificate of occupancy, within a specified period of time (generally, 120 to
150 days) after the date of the Indemnity Agreement. If such conditions are not
met, the Company has the right to grant the tenant additional time to satisfy
the conditions or to require the tenant to purchase the Property from the
Company at a purchase price equal to the total amount disbursed by the Company
in connection with the acquisition and construction or renovation of the
Property (including closing costs), plus an amount equal to the return described
in item (iii) of the preceding paragraph. Failure of the tenant to purchase the
Property from the Company upon demand by the Company under the circumstances
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specified above entitles the Company to declare the tenant in default under the
lease and to declare each guarantor in default under any guarantee of the
tenant's obligations to the Company.
In certain situations where construction or renovation is required for
a restaurant Property, the Company will pay a negotiated maximum amount upon
completion of construction or renovation rather than providing financing to the
tenant, with such amount to be based on the tenant's actual costs of such
construction or renovation.
Affiliates of the Company also may provide construction financing to
the developer of a Property. In addition, the Company may purchase from an
Affiliate of the Company a Property that has been developed, constructed or
renovated by the Affiliate. Any fees paid to Affiliates of the Company in
connection with the financing, construction or renovation of a Property acquired
by the Company will be considered Acquisition Fees and will be subject to
approval by a majority of the Board of Directors, including a majority of the
Independent Directors, not otherwise interested in the transaction. See
"Management Compensation" and "Conflicts of Interest -- Certain Conflict
Resolution Procedures." Any such fees will be included in the cost of the
Property and, therefore, will be included in the calculation of base rent.
In all situations where construction or renovation of a restaurant
Property is required, the Company also has the right to review the tenant's
books, records, and agreements during and following completion of construction
to verify actual costs.
Interim Acquisitions. The Affiliates of the Company and the Advisor
regularly have opportunities to acquire restaurant properties of a type suitable
for acquisition by the Company as a result of their existing relationships and
past experience with various Restaurant Chains and restaurant operators. See
"General" above. These acquisitions often must be made within a relatively short
period of time, occasionally at a time when the Company may be unable to make
the acquisition. In an effort to address these situations and preserve the
acquisition opportunities of the Company (and other entities with which the
Company is affiliated), the Advisor and its Affiliates maintain lines of credit
which enable them to acquire these restaurant properties on an interim basis and
temporarily own them for the purpose of facilitating their acquisition by the
Company (or other entities with which the Company is affiliated). At such time
as a Property acquired on an interim basis is determined to be suitable for
acquisition by the Company, the interim owner of the Property will sell its
interest in the Property to the Company at a price equal to the lesser of its
cost (which includes carrying costs and, in instances in which an Affiliate of
the Company has provided real estate brokerage services in connection with the
initial purchase of the Property, indirectly includes fees paid to an Affiliate
of the Company) to purchase such interest in the Property or the Property's
appraised value, provided that a majority of Directors, including a majority of
the Independent Directors, determine that the acquisition is fair and reasonable
to the Company. See "Conflicts of Interest -Certain Conflict Resolution
Procedures." Appraisals of Properties acquired from such interim owners will be
obtained in all cases.
Acquisition Services. Acquisition services performed by the Advisor
include, but are not limited to, site selection and/or approval; review and
selection of tenants and negotiation of lease agreements and related documents;
monitoring Property acquisitions; and the processing of all final documents
and/or procedures to complete the acquisition of Properties and the commencement
of tenant occupancy and lease payments.
The Company will pay the Advisor an Acquisition Fee not to exceed 4.5%
of the Gross Proceeds from the sale of Shares. See "Management Compensation."
The total of all Acquisition Fees (including Development/Construction Management
Fees to Affiliates and Construction Financing Fees to Affiliates described in
"Management Compensation" and any other Acquisition Fees to Affiliates or
nonaffiliates, but excluding development/management fees paid to any person or
entity not affiliated with the Advisor in connection with the actual development
and construction of any Property) and Acquisition Expenses shall be reasonable
and shall not exceed an amount equal to 6% of the Real Estate Asset Value of a
Property, or in the case of a Mortgage Loan, 6% of the funds advanced, unless a
majority of the Board of Directors, including a majority of the Independent
Directors, not otherwise interested in the transaction approves fees in excess
of these limits subject to a determination that the transaction is commercially
competitive, fair and reasonable to the Company. The total of all Acquisition
Fees payable to all persons or entities will not exceed the compensation
customarily charged in arm's-length transactions by others rendering similar
services as an ongoing activity in the same geographical location and for
comparable property.
The Advisor engages counsel to perform legal services, and such counsel
also may provide legal services to the Company in connection with the
acquisition of Properties. The legal fees payable to such counsel by the Company
will not exceed those generally charged for similar services.
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STANDARDS FOR INVESTMENT IN PROPERTIES
Selection of Restaurant Chains. The selection of Restaurant Chains by
the Advisor, as approved by the Board of Directors, is based on an evaluation of
the operations of restaurants in the Restaurant Chain, the number of restaurants
operated throughout the Restaurant Chain's system, the relationship of average
restaurant gross sales to the average capital costs of a restaurant, the
Restaurant Chain's relative competitive position among the same type of
restaurants offering similar types of food, name recognition, and market
penetration. The Restaurant Chains may not be affiliated with the Advisor, the
Company or an Affiliate.
Selection of Properties and Tenants. In making investments in
Properties, the Advisor considers relevant real property and financial factors,
including the condition, use, and location of the Property, income-producing
capacity, the prospects for long-term appreciation, the relative success of the
Restaurant Chain in the geographic area in which the Property is located, and
the management capability and financial condition of the tenant. The Company
obtains an independent appraisal for each Property it purchases. In selecting
tenants, the Advisor will consider the prior experience of the tenant in the
restaurant industry, the net worth of the tenant, past operating results of
other restaurants currently or previously operated by the tenant, and the
tenant's prior experience in managing restaurants within a particular Restaurant
Chain.
In selecting specific Properties within a particular Restaurant Chain
and in selecting lessees for the Company's Properties, the Advisor, as approved
by the Board of Directors, applies the following minimum standards.
1. Each Property will be in what the Advisor believes is a prime
business location.
2. Base (or minimum) annual rent will provide a specified minimum
return on the Company's cost of purchasing and, if applicable, developing the
Property, and the lease typically also will provide for automatic increases in
base rent at specified times during the lease term and for payment of percentage
rent based on gross restaurant sales.
3. The initial lease term typically will be at least 15 to 20 years.
4. The Company will reserve the right to approve or reject any tenant
and restaurant site selected by a Restaurant Chain.
5. In evaluating prospective tenants, the Company will examine, among
other factors, the tenant's ranking in its market segment, trends in per store
sales, overall changes in consumer preferences, and the tenant's ability to
adapt to changes in market and competitive conditions, the tenant's historical
financial performance, and its current financial condition.
6. In general, the Company will not acquire a Property, if, as a
result, more than 25% of its Gross Proceeds would be invested in Properties of a
single Restaurant Chain or if more than 30% of its Gross Proceeds would be
invested in Properties in a single state.
DESCRIPTION OF PROPERTIES
The 110 Properties owned by the Company as of March 6, 1997 conform
generally to the following specifications of size, cost, and type of land and
buildings and based on these Properties and on past experience and knowledge of
the fast-food, family-style, and casual dining restaurant industry, the Advisor
expects that the Properties purchased by the Company with the remaining proceeds
of the Initial Offering and with the proceeds of this offering will also conform
generally to the following specifications. These specifications may vary
substantially if the Company invests in any full-service restaurant Properties.
Land. Lot sizes generally range from 25,000 to 60,000 square feet
depending upon building size and local demographic factors. Restaurants located
on land within shopping centers will be freestanding and may be located on
smaller parcels if sufficient common parking is available. Restaurant sites
purchased by the Company are in locations zoned for commercial use which have
been reviewed for traffic patterns and volume of traffic. There is substantial
competition for quality sites; accordingly, land costs may be high and generally
range from $150,000 to $500,000, although the cost of the land for particular
Properties may be higher or lower in some cases.
Buildings. Either before or after construction or renovation, the
restaurant Properties acquired by the Company are one of a Restaurant Chain's
approved designs. Prior to purchase of all restaurant Properties, other than
those purchased
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prior to completion of construction, the Company receives a copy of the
certificate of occupancy issued by the local building inspector or other
governmental authority which permits the use of the Property as a restaurant,
and receives a certificate from the Restaurant Chain to the effect that (i) the
Property is operational and (ii) the Property and the tenant are in compliance
with all of the Restaurant Chain's requirements, including, but not limited to,
building plans and specifications approved by the Restaurant Chain. The Company
also receives a certificate of occupancy for each restaurant for which
construction has not been completed at the time of purchase, prior to the
Company's payment of the final installment of the purchase price for the
restaurant Property.
The restaurant buildings generally are rectangular and constructed from
various combinations of stucco, steel, wood, brick, and tile. Building sizes
generally range from 2,500 to 6,000 square feet, with the larger restaurants
having greater seating and equipment areas. Building and site preparation costs
vary depending upon the size of the building and the site and the area in which
the restaurant Property is located. It is estimated that building and site
preparation costs generally range from $250,000 to $750,000 for each restaurant
Property.
Generally, Properties acquired by the Company consist of both land and
building, although in a number of cases the Company may acquire only the land
underlying the restaurant building with the building owned by the tenant or a
third party, and also may acquire the building only with the land owned by a
third party. In general, the Properties are freestanding and surrounded by paved
parking areas. Buildings are suitable for conversion to various uses, although
modifications will be required prior to use for other than restaurant
operations.
A tenant generally is required by the lease agreement to make such
capital expenditures as may be reasonably necessary to refurbish restaurant
buildings, premises, signs, and equipment so as to comply with the tenant's
obligations under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are paid by the tenant
during the term of the lease.
DESCRIPTION OF PROPERTY LEASES
The terms and conditions of any lease entered into by the Company with
regard to a restaurant Property may vary from those described below. The Advisor
in all cases uses its best efforts to obtain terms at least as favorable as
those described below. If the Board of Directors determines, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
Property, taken as a whole, are favorable to the Company, the Board of Directors
may, in its sole discretion, cause the Company to enter into leases with terms
which are substantially different than the terms described below, but only to
the extent consistent with the Company's objective of qualifying as a REIT. In
making such determination, the Advisor considers such factors as the type and
location of the restaurant, the creditworthiness of the tenant, the purchase
price of the Property, the prior performance of the tenant, and the prior
business experience of management of the Company and the Company's Affiliates
with a Restaurant Chain or restaurant operator.
General. In general, the leases are "triple-net" leases, which means
that the tenants are required to pay for all repairs, maintenance, property
taxes, utilities, and insurance. The tenants also are required to pay for
special assessments, sales and use taxes, and the cost of any renovations
permitted under the leases. The Company will be the lessor under each lease
except in certain circumstances in which it may be a party to a Joint Venture
which will own the Property. In those cases, the Joint Venture, rather than the
Company, will be the lessor, and all references in this section to the Company
as lessor therefore should be read accordingly. See "Joint Venture Arrangements"
below.
Term of Leases. Properties are generally leased on a "triple-net" basis
for an initial term of either 15 or 20 years with up to five, five-year renewal
options. The minimum rental payment under the renewal option generally is
greater than that due for the final lease year of the initial term of the lease.
Upon termination of the lease, the tenant will surrender possession of the
Property to the Company, together with any improvements made to the Property
during the term of the lease, except that for Properties in which the Company
owns only the land underlying the building, the tenant may in certain cases
retain ownership of the building.
Computation of Lease Payments. During the initial term of the lease,
the tenant pays the Company, as lessor, minimum annual rent equal to a specified
percentage of the Company's cost of purchasing the Property. Typically, the
leases provide for automatic increases in the minimum annual rent at
predetermined intervals during the term of the lease. In the case of Properties
that are to be constructed or renovated pursuant to a development agreement, the
Company's costs of purchasing the Property include the purchase price of the
land, including all fees, costs, and expenses paid by the Company in connection
with its purchase of the land, and all fees, costs, and expenses disbursed by
the Company for construction of restaurant improvements. See "Site Selection and
Acquisition of Properties -- Construction and Renovation" above.
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In addition to minimum annual rent, the tenant pays the Company
"percentage rent." Percentage rent is computed as a percentage of the restaurant
gross sales at a particular Property. The leases generally provide that
percentage rent will commence in the first lease year in which gross sales
exceed a specified amount. Certain leases, however, provide that percentage rent
is to be paid quarterly beginning at the end of the first two years of the lease
and each succeeding quarter thereafter to the extent the restaurant gross sales
in that quarter exceed the average quarterly gross sales during the first two
lease years. The leases also generally provide that the tenant will receive a
credit against percentage rent for the amount of the escalations in the minimum
annual rent due under the lease. Gross sales include sales of all products and
services of the restaurant, excluding sales taxes, tips paid to serving people,
and sales from vending machines.
In the case of Properties in which the Company owns only the building,
the Company will structure its leases to have recovered its investment in the
building by the expiration of the lease.
Assignment and Sublease. In general, leases may not be assigned or
subleased without the Company's prior written consent (which may not be
unreasonably withheld) except to a tenant's corporate franchisor, corporate
affiliate or subsidiary, a successor by merger or acquisition, or, in certain
cases, another franchisee, if such assignee or subtenant agrees to operate the
same type of restaurant on the premises, but only to the extent consistent with
the Company's objective of qualifying as a REIT. The leases set forth certain
factors (such as the financial condition of the proposed tenant or subtenant)
that are deemed to be a reasonable basis for the Company's refusal to consent to
an assignment or sublease. In addition, the Company may refuse to permit any
assignment or sublease that would jeopardize the Company's continued
qualification as a REIT. The original tenant generally will remain fully liable,
however, for the performance of all tenant obligations under the lease following
any such assignment or sublease unless the Company agrees in writing to release
the original tenant from its lease obligations.
Alterations to Premises. A tenant generally has the right, without the
prior consent of the Company and at the tenant's own expense, to make certain
immaterial structural modifications to the restaurant building and improvements
(with a cost of up to $10,000) or, with the Company's prior written consent and
at the tenant's own expense, to make material structural modifications that may
include demolishing and rebuilding the restaurant. Under certain leases, the
tenant, at its own expense, may make any type of alterations to the leased
premises without the Company's consent but must provide the Company with plans
of any proposed structural modifications at least 30 days before construction of
the alterations commences. Certain leases may require the tenant to post a
payment and performance bond for any structural alterations with a cost in
excess of a certain amount.
Right of Tenant to Purchase. Generally, if the Company wishes at any
time to sell a Property pursuant to a bona fide offer from a third party, the
tenant of that Property has the right to purchase the Property for the same
price, and on the same terms and conditions, as contained in the offer. In
certain cases, the tenant also has a right to purchase the Property seven to 20
years after commencement of the lease at a purchase price equal to the greater
of (i) the Property's appraised value at the time of the tenant's purchase, or
(ii) a specified amount, generally equal to the Company's purchase price of the
Property, plus a predetermined percentage (generally, 15% to 20%) of such
purchase price.
Substitution of Properties. Under certain leases, the tenant, at its
own expense, is entitled to operate another form of approved restaurant on the
Property as long as such approved restaurant has an operating history which
reflects an ability to generate gross sales and potential sales growth equal to
or greater than that experienced by the tenant in operating the original
restaurant.
In addition, certain leases provide the tenant with the right, to the
extent consistent with the Company's objective of qualifying as a REIT, to offer
the substitution of another national or regional fast-food, family-style, or
casual dining restaurant property selected by the tenant in the event that (i)
the Property that is the subject of the lease is not producing percentage rent
pursuant to the terms of the lease, and (ii) the tenant determines that the
Property has become uneconomic (other than as a result of an insured casualty
loss or condemnation) for the tenant's continued use and occupancy in its
business operation and the tenant's board of directors has determined to close
and discontinue use of the Property. The tenant's determination that a Property
has become uneconomic is to be made in good faith based on the tenant's
reasonable business judgment after comparing the results of operations of the
Property to the results of operations at the majority of other properties then
operated by the tenant. If either of these events occurs, the tenant will have
the right to offer the Company the opportunity to exchange the Property for
another national or regional fast-food, family-style, or casual dining
restaurant property (the "Substituted Property") with a total cost for land and
improvements thereon (including overhead, construction interest, and other
related charges) equal to or greater than the cost of the Property to the
Company.
Generally, the Company will have 30 days following receipt of the
tenant's offer for exchange of the Property to accept or reject such offer. In
the event that the Company requests an appraisal of the Substituted Property, it
will have at least ten days following receipt of the appraisal to accept or
reject the offer. If the Company accepts such offer, (i) the
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Substituted Property will be exchanged for the Property in a transaction
designed and intended to qualify as a "like-kind exchange" within the meaning of
section 1031 of the Code with respect to the Company and (ii) the lease of the
Property will be amended to (a) provide for minimum rent in an amount equal to
the sum determined by multiplying the cost of the Substituted Property by the
Property lease rate and (b) provide for the number of five-year lease renewal
options sufficient to permit the tenant, at its option, to continue its
occupancy of the Substituted Property for up to 35 years from the date on which
the exchange is made. The Company will pay the tenant the excess, if any, of the
cost of the Substituted Property over the cost of the Property. If the
substitution does not take place within a specified period of time after the
tenant makes the offer to exchange the Property for the Substituted Property,
either party thereafter will have the right not to proceed with the
substitution. If the Company rejects the Substituted Property offered by the
tenant, the tenant is generally required to offer at least three additional
alternative properties for the Company's acceptance or rejection. If the Company
rejects all Substituted Properties offered to it pursuant to the lease, or
otherwise fails or refuses to consummate a substitution for any reason other
than the tenant's failure to fulfill the conditions precedent to the exchange,
then the tenant will be entitled to terminate the lease on the date scheduled
for such exchange by purchasing the Property from the Company for a price equal
to the then-fair market value of the Property.
Neither the tenant nor any of its subsidiaries, licensees,
concessionaires, or sublicensees or any other affiliate will be permitted to use
the original Property as a restaurant of the same type and style for at least
one year after the closing of the original Property. In addition, in the event
the tenant or any of its affiliates sells the Property within twelve months
after the Company acquires the Substituted Property, the Company will receive,
to the extent consistent with its objective of qualifying as a REIT, from the
proceeds of the sale the amount by which the selling price exceeds the cost of
the Property to the Company.
Special Conditions. Certain leases provide that the lessee is not
permitted to own or operate, directly or indirectly, another Property of the
same or similar type as the leased Property that is or will be located within a
specified distance of the leased Property.
Insurance, Taxes, Maintenance, and Repairs. All of the leases require
that the tenant pay all taxes and assessments, maintenance, repair, utility, and
insurance costs applicable to the real estate and permanent improvements.
Tenants will be required to maintain all Properties in good order and repair.
Tenants generally are required, under the terms of the leases, to
maintain, for the benefit of the Company and the tenant, casualty insurance in
an amount not less than the full replacement value of the building and other
permanent improvements (or a percent of such value in the case of certain
leases, but in no case less than 90%), as well as liability insurance, generally
in an amount not less than $2,000,000 for each location and event. All tenants,
other than those tenants with a substantial net worth, generally also will be
required to obtain "rental value" or "business interruption" insurance to cover
losses due to the occurrence of an insured event for a specified period,
generally six to twelve months. In general, no lease is entered into unless, in
the opinion of the Advisor, as approved by the Board of Directors, the insurance
required by the lease adequately insures the Property.
The tenants generally will be required to maintain the Property and
repair any damage to the Property, except damage occurring during the last 24 to
48 months of the lease term (as extended), which in the opinion of the tenant
renders the Property unsuitable for occupancy, in which case the tenant will
have the right instead to pay the insurance proceeds to the Company and
terminate the lease.
The tenants generally are required to repair the Property in the event
that less than a material portion of the Property (for example, more than 20% of
the building or more than 40% of the land) is taken for public or quasi-public
use. The Company's leases generally provide that, in the event of any
condemnation of the Property that does not give rise to an option to terminate
the lease or in the event of any condemnation which does give rise to an option
to terminate the lease and the tenant elects not to terminate, the Company will
remit to the tenant the award from such condemnation and the tenant will be
required to repair and restore the Property. To the extent that the award
exceeds the estimated costs of restoring or repairing the Property, the tenant
is required to deposit such excess amount with the Company. Until a specified
time (generally, ten days) after the tenant has restored the premises and all
improvements thereon to the same condition as existed immediately prior to such
condemnation insofar as is reasonably possible, a "just and proportionate"
amount of the minimum annual rent will be abated from the date of such
condemnation. In addition, the minimum annual rent will be reduced in proportion
to the reduction in the then rental value of the premises or the fair market
value of the premises after the condemnation in comparison with the rental value
or fair market value prior to such condemnation.
Events of Default. The leases generally provide that the following
events, among others, will constitute a default under the lease: (i) the
insolvency or bankruptcy of the tenant, provided that the tenant may have the
right, under certain circumstances, to cure such default, (ii) the failure of
the tenant to make timely payment of rent or other charges due and
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payable under the lease, if such failure continues for a specified period of
time (generally, five to 30 days) after notice from the Company of such failure,
(iii) the failure of the tenant to comply with any of its other obligations
under the lease (for example, the discontinuance of operations of the leased
Property) if such failure continues for a specified period of time (generally,
ten to 45 days), (iv) a default under or termination of the franchise agreement
between the tenant and its franchisor, (v) in cases where the Company enters
into a development agreement relating to the construction or renovation of a
restaurant, a default under the development agreement or the Indemnity Agreement
or the failure to establish the minimum annual rent at the end of the
development period, and (vi) in cases where the Company has entered into other
leases with the same tenant, a default under such lease.
Upon default by the tenant, the Company generally will have the right
under the lease and under most state laws to evict the tenant, re-lease the
Property to others, and hold the tenant responsible for any deficiency in the
minimum lease payments. Similarly, if the Company determined not to re-lease the
Property, it could sell the Property. (Unless required to do so by the lease or
its investment objectives, however, the Company does not intend to sell any
Property prior to five to ten years after the commencement of the lease on such
Property. See "Right of Tenant to Purchase" above.) In the event that a lease
requires the tenant to make a security deposit (which it is anticipated normally
would be equal to two months' base rent), the Company will have the right under
the lease to apply the security deposit, upon default by the tenant, towards any
payments due from the defaulting tenant. In general, the tenant will remain
liable for all amounts due under the lease to the extent not paid from a
security deposit or by a new tenant.
In the event that a tenant defaults under a lease with the Company, the
Company either will attempt to locate a replacement restaurant operator
acceptable to the Restaurant Chain involved or will discontinue operation of the
restaurant. In lieu of obtaining a replacement restaurant operator, some
Restaurant Chains may have the option and may elect to operate the restaurants
themselves. The Company will have no obligation to operate the restaurants, and
no Restaurant Chain will be obligated to permit the Company or a replacement
restaurant operator to operate the restaurants.
JOINT VENTURE ARRANGEMENTS
The Company may enter into a Joint Venture to own and operate a
Property with various unaffiliated persons or entities or with another program
formed by the principals of the Company or the Advisor or their Affiliates, if a
majority of the Directors, including a majority of the Independent Directors,
not otherwise interested in the transaction determine that the investment in the
Joint Venture is fair and reasonable to the Company and on substantially the
same terms and conditions as those to be received by the co-venturer or
co-venturers. The Company may take more or less than a 50% interest in any Joint
Venture, subject to obtaining the requisite approval of the Directors. See "Risk
Factors -- Real Estate and Financing Risks -- Risks of Joint Investment in
Properties."
Under the terms of each Joint Venture agreement, the Company and each
joint venture partner will be jointly and severally liable for all debts,
obligations, and other liabilities of the Joint Venture, and the Company and
each joint venture partner will have the power to bind each other with any
actions they take within the scope of the Joint Venture's business. In addition,
it is expected that the Advisor or its Affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by the Advisor or its
Affiliates on behalf of the Company. Joint Ventures entered into to purchase and
hold a Property for investment generally will have an initial term of 15 to 20
years (generally the same term as the initial term of the lease for the Property
in which the Joint Venture invests), and, after the expiration of the initial
term, will continue in existence from year to year unless terminated at the
option of either joint venturer or unless terminated by an event of dissolution.
Events of dissolution will include the bankruptcy, insolvency, or termination of
any co-venturer, sale of the Property owned by the Joint Venture, mutual
agreement of the Company and its joint venture partner to dissolve the Joint
Venture, and the expiration of the term of the Joint Venture. The Joint Venture
agreement typically will restrict each venturer's ability to sell, transfer, or
assign its joint venture interest without first offering it for sale to its
co-venturer. In addition, in any Joint Venture with another program sponsored by
the Advisor or its Affiliates, where such arrangements are entered into for the
purpose of purchasing and holding Properties for investment, in the event that
one party desires to sell the Property and the other party does not desire to
sell, either party will have the right to trigger dissolution of the Joint
Venture by sending a notice to the other party. The notice will establish the
price and terms for the sale or purchase of the other party's interest in the
Joint Venture to the other party. The Joint Venture agreement will grant the
receiving party the right to elect either to purchase the other party's interest
on the terms set forth in the notice or to sell its own interest on such terms.
The following paragraphs describe the allocations and distributions
under the expected terms of the joint venture agreement for any Joint Venture in
which the Company and its co-venturer each have a 50% ownership interest. In any
other case, the allocations and distributions are expected to be similar to
those described below, except that allocations and distributions which are
described below as being made 50% to each co-venturer will instead be made in
proportion to each co-venturer's respective ownership interest.
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Under the terms of each joint venture agreement, operating profits and
losses generally will be allocated 50% to each co-venturer. Profits from the
sale or other disposition of Joint Venture property first will be allocated to
any co-venturers with negative capital account balances in proportion to such
balances until such capital accounts equal zero, and thereafter 50% to each
co-venturer. Similarly, losses from the sale or other disposition of Joint
Venture property first will be allocated to joint venture partners with positive
capital account balances in proportion to such balances until such capital
accounts equal zero, and thereafter 50% to each co-venturer. Notwithstanding any
other provisions in the Joint Venture agreement, income, gain, loss, and
deductions with respect to any contributed property will be shared in a manner
which takes into account the variation between the basis of such property and
its fair market value at the time of contribution in accordance with section
704(c) of the Code.
Net cash flow from operations of the Joint Venture will be distributed
50% to each joint venture partner. Any liquidation proceeds, after paying joint
venture debts and liabilities and funding reserves for contingent liabilities,
will be distributed first to the joint venture partners with positive capital
account balances in proportion to such balances until such balances equal zero,
and thereafter 50% to each joint venture partner.
In order that the allocations of Joint Venture income, gain, loss, and
deduction provided in Joint Venture agreements may be respected for federal
income tax purposes, it is expected that any Joint Venture agreement (i) will
contain a "qualified income offset" provision, (ii) will prohibit allocations of
loss or deductions to the extent such allocation would cause or increase an
"Adjusted Capital Account Deficit," and (iii) will require (a) that capital
accounts be maintained for each joint venture partner in a manner which complies
with Treasury Regulation ss.1.704-1(b)(2)(iv) and (b) that distributions of
proceeds from the liquidation of a partner's interest in the Joint Venture
(whether or not in connection with the liquidation of the Joint Venture) be made
in accordance with the partner's positive capital account balance. See "Federal
Income Tax Considerations -- Investment in Joint Ventures."
Prior to entering into any Joint Venture arrangement with any
unaffiliated co-venturer (or the principals of any unaffiliated co-venturer),
the Company will confirm that such person or entity has demonstrated to the
satisfaction of the Company that requisite financial qualifications are met.
MORTGAGE LOANS
The Company provides Mortgage Loans to operators of the Restaurant
Chains, or their affiliates, to enable them to acquire the building and
improvements on real property. Generally in these cases, the Company acquires
the underlying land and enters into a long-term ground lease for the Property
with the borrower as the tenant. The Mortgage Loan is secured by the building
and improvements on the land. Management believes that the criteria for
investing in the Mortgage Loans are substantially the same as those involved in
the Company's investments in Properties consisting of buildings only; therefore,
the Company uses the same underwriting criteria as described above in "Business
Standards for Investment in Properties."
Generally, management believes the economic effects of these
transactions are substantially the same as those of the leases. The borrower is
responsible for all of the expenses of owning the building and improvements, as
with the "triple-net" leases, including expenses for insurance and repairs and
maintenance. The Mortgage Loans are fully amortizing loans, generally over a
period of 15 to 20 years (the same term as the initial term of the Property
leases), with payments of principal and interest due monthly. In addition, the
interest rates charged under the terms of the Mortgage Loans are fixed over the
term of the loan and generally are comparable to, or slightly lower than, lease
rates charged to tenants for the Properties.
Management also believes that the combined leasing and financing
structure provides the benefit of allowing the Company to receive, on a fixed
income basis, the return of its initial investment in each financed building,
which is generally a depreciating asset, plus interest. At the same time, the
Company retains ownership of the underlying land, which is generally an
appreciating asset, thus providing an opportunity for a capital gain on the sale
of the land. In such cases, in which the borrower is also the tenant under a
Property lease for the underlying land, if the borrower does not elect to
exercise its purchase option to acquire the Property under the terms of the
lease, the building and improvements on the Property will revert to the Company
at the end of term of the lease, including any renewal periods. If the borrower
does elect to exercise its purchase option as the tenant of the underlying land,
the Company will generally have the option of selling the Property at the
greater of fair market value or cost plus a specified percentage.
The Company will not make or invest in Mortgage Loans unless an
appraisal is obtained concerning the property that secures the Mortgage Loan.
Mortgage indebtedness on any property shall not exceed such property's appraised
value. In cases in which the majority of the Independent Directors so determine,
and in all cases in which the Mortgage Loan involves the Advisor, Directors, or
Affiliates, such appraisal must be obtained from an independent expert
concerning the underlying property. Such appraisal shall be maintained in the
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Company's records for at least five years, and shall be available for inspection
and duplication by any stockholder. In addition to the appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained.
In addition, the Company will not make or invest in Mortgage Loans on
any one property if the aggregate amount of all mortgage loans outstanding on
the property, including the loans of the Company, would exceed an amount equal
to 85% of the appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other underwriting
criteria. For purposes of this limitation, the aggregate amount of all mortgage
loans outstanding on the property, including the loans of the Company, shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the loan.
Further, the Company will not make or invest in any Mortgage Loans that
are subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or their Affiliates.
MANAGEMENT SERVICES
The Advisor provides management services relating to the Company, the
Properties, the Mortgage Loans, and the Secured Equipment Lease program pursuant
to an Advisory Agreement between it and the Company. Under this agreement, the
Advisor will be responsible for assisting the Company in negotiating leases,
Mortgage Loans, and Secured Equipment Leases, collecting rental, Mortgage Loan
and Secured Equipment Lease payments, inspecting the Properties and the tenants'
books and records, and responding to tenant inquiries and notices. The Advisor
also provides information to the Company about the status of the leases, the
Properties, the Mortgage Loans, the Loan and the Secured Equipment Leases. In
exchange for these services, the Advisor will be entitled to receive certain
fees from the Company. For supervision of the Properties, the Advisor receives
the Asset Management Fee, which, generally, is payable monthly in an amount
equal to one-twelfth of .60% of Real Estate Asset Value as of the end of the
preceding month. For supervision of the Mortgage Loans, the Advisor will receive
the Mortgage Management Fee, which is payable monthly in an amount equal to
one-twelfth of .60% of the total principal amount of the Mortgage Loans as of
the end of the preceding month. For negotiating Secured Equipment Leases and
supervising the Secured Equipment Lease program, the Advisor receives, upon
entering into each lease, a Secured Equipment Lease Servicing Fee, payable out
of the proceeds of the Loan, equal to 2% of the purchase price of the Equipment
subject to each Secured Equipment Lease. See "Management Compensation."
BORROWING
The Company plans to obtain a Line of Credit in an amount up to
$20,000,000, the proceeds of which will be used to acquire Properties. The Line
of Credit will provide short-term financing which the Company anticipates will
be repaid using additional offering proceeds or refinanced on a long-term basis.
The Company will not encumber Properties in connection with the Line of Credit.
The Company has engaged in preliminary discussions with potential lenders but
has not yet received a commitment for the Line of Credit and there is no
assurance that the Company will obtain the Line of Credit on satisfactory terms.
Management believes that during the offering period the Line of Credit,
if obtained, will allow the Company to make investments in Properties that the
Company otherwise would be forced to delay until it raised a sufficient amount
of proceeds from the sale of Shares to allow the Company to make the
investments. By eliminating this delay the Company will also eliminate the risk
that these investments will no longer be available, or the terms of the
investment will be less favorable, when the Company has raised sufficient
offering proceeds. Alternatively, Affiliates of the Advisor could make such
investments, pending receipt by the Company of sufficient offering proceeds, in
order to preserve the investment opportunities for the Company. However,
Properties acquired by the Company in this manner would be subject to closing
costs both on the original purchase by the Affiliate and on the subsequent
purchase by the Company, which would increase the amount of expenses associated
with the acquisition of Properties and reduce the amount of offering proceeds
available for investment in income-producing assets. Management believes that
the use of Line of Credit by the Company will enable the Company to reduce or
eliminate the instances in which the Company will be required to pay duplicate
closing costs.
On March 5, 1996, the Company entered into a line of credit and
security agreement with a bank to be used by the Company to offer Secured
Equipment Leases. The Loan provides that the Company will be able to receive
advances of up to $15,000,000 until March 4, 1998. Generally, advances under the
Loan will be fully amortizing term loans repayable in terms equal to the
duration of the Secured Equipment Leases, but in no event greater than 72
months. In addition, advances for short-term needs (to acquire equipment to be
leased under Secured Equipment Leases) may be requested in an aggregate amount
which does not exceed the Revolving Sublimit (defined in the Loan as $1,000,000)
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and such advances may be repaid and readvanced; provided, however, that advances
made pursuant to the Revolving Sublimit shall be converted to term loans the
earlier of (i) the end of each 60 day period following the closing date (defined
in the Loan as March 5, 1996), or (ii) when the aggregate amount outstanding
equals or exceeds $1,000,000. Interest on advances made pursuant
to the Revolving Sublimit shall be paid monthly in arrears. In addition,
principal amounts under advances pursuant to the Revolving Sublimit, if not
sooner paid or converted into term loans, shall be paid, together with any
unpaid interest relating to such advances, to the bank on March 5, 1998.
Generally, all advances under the Loan will bear interest at either (i) a rate
per annum equal to 215 basis points above the Reserve Adjusted LIBOR Rate (as
defined in the Loan) or (ii) a rate per annum equal to the bank's prime rate,
whichever the Company selects at the time advances are made. As a condition of
obtaining the Loan, the Company agreed to grant to the bank a first security
interest in the Secured Equipment Leases. In the past, the Company generally has
entered into agreements to effectively convert the interest rate for the advance
from a variable to a fixed rate. In connection with the Loan, the Company
incurred a commitment fee, legal fees and closing costs of approximately $53,500
relating to the Loan. As of March 6, 1997, approximately $5,203,000 had been
advanced under the Loan to fund the Secured Equipment Leases, the commitment
fee, legal fees and closing costs related to the Loan. The Board of Directors
may determine to obtain additional financing to be used by the Company to fund
Secured Equipment Leases, provided that the amount of such additional financing
may not exceed 10% of Gross Proceeds of this offering and gross proceeds of any
subsequent offering.
The Company, or Joint Venture in which the Company becomes a joint
venturer, will initially acquire Properties without borrowing. The Board of
Directors does not anticipate that the Company will borrow funds, other than the
Loan, the Line of Credit or for the purpose of preserving its status as a REIT.
For example, the Company may borrow to the extent necessary to permit the
Company to make Distributions required in order to enable the Company to qualify
as a REIT for federal income tax purposes; however, the Company will not borrow
for the purpose of returning capital to the stockholders unless necessary to
eliminate corporate-level tax to the Company. Until Listing occurs, the Company
will not encumber Properties in connection with any borrowing. If Listing
occurs, however, the Board of Directors may elect to cause the Company to borrow
funds in connection with the purchase of additional Properties or for other
Company purposes and to encumber any or all of the Company's Properties in
connection with any such borrowing. The aggregate borrowing of the Company,
secured and unsecured, shall be reasonable in relation to Net Assets of the
Company and shall be reviewed by the Board of Directors at least quarterly. The
Board of Directors anticipates that the aggregate amount of any borrowing will
not exceed 50% of Real Estate Asset Value, although the maximum amount of
borrowing in relation to Net Assets, in the absence of a satisfactory showing
that a higher level of borrowing is appropriate, shall not exceed 300% of Net
Assets (an amount which the Company anticipates will correspond to approximately
75% of Real Estate Asset Value). Any excess in borrowing over such 300% level
shall occur only with approval by a majority of the Independent Directors and
will be disclosed and explained to stockholders in the first quarterly report of
the Company prepared after such approval occurs.
SALE OF PROPERTIES, MORTGAGE LOANS, AND SECURED EQUIPMENT LEASES
For the first three to eight years after the commencement of this
offering, the Company intends, to the extent consistent with the Company's
objective of qualifying as a REIT, to reinvest in additional Properties or
Mortgage Loans any proceeds of the Sale of a Property or a Mortgage Loan that
are not required to be distributed to stockholders in order to preserve the
Company's REIT status for federal income tax purposes. Similarly, and to the
extent consistent with REIT qualification, the Company plans to use the proceeds
of the Sale of a Secured Equipment Lease to fund additional Secured Equipment
Leases, or to reduce its outstanding indebtedness on the Loan. At or prior to
the end of such eight-year period, the Company intends to provide stockholders
of the Company with liquidity of their investment, either in whole or in part,
through Listing (although liquidity cannot be assured thereby) or by commencing
orderly sales of the Company's assets. If Listing occurs, the Company intends to
reinvest in additional Properties, Mortgage Loans, and Secured Equipment Leases
any Net Sales Proceeds not required to be distributed to stockholders in order
to preserve the Company's status as a REIT. If Listing does not occur within ten
years after the commencement of the offering, the Company thereafter will
undertake the orderly liquidation of the Company and the Sale of the Company's
assets and will distribute any Net Sales Proceeds to stockholders. In addition,
the Company will not sell any assets if such Sale would not be consistent with
the Company's objective of qualifying as a REIT.
In deciding the precise timing and terms of Property Sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. See "Business -- Description
of Leases -- Right of Tenant to Purchase." The Company will have no obligation
to sell all or any portion of a Property at any particular time, except as may
be required under property or joint venture purchase options granted to certain
tenants. In connection with Sales of Properties by the Company, purchase money
obligations may be taken by the Company as part payment of the sales price. The
terms of payment will be affected by custom in the area in which the Property is
located and by prevailing economic conditions. When a purchase money obligation
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is accepted in lieu of cash upon the Sale of a Property, the Company will
continue to have a mortgage on the Property and the proceeds of the Sale will be
realized over a period of years rather than at closing of the Sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the Sale of the
Property occurs, or (ii) the Company undertakes an orderly Sale of its assets.
FRANCHISE REGULATION
Many states regulate the franchise or license relationship between a
tenant/franchisee and a Restaurant Chain. The Company will not be an Affiliate
of any Restaurant Chain, and is not currently aware of any states in which the
relationship between the Company as lessor and the tenant will be subjected to
those regulations, but it will comply with such regulations in the future, if so
required. Restaurant Chains which franchise their operations are subject to
regulation by the Federal Trade Commission.
COMPETITION
The fast-food, family-style, and casual dining restaurant business is
characterized by intense competition. The operators of the restaurants located
on the Properties will compete with independently owned restaurants, restaurants
which are part of local or regional chains, and restaurants in other well-known
national chains, including those offering different types of food and service.
Many successful fast-food, family-style, and casual dining restaurants
are located in "eating islands," which are areas to which people tend to return
frequently and within which they can diversify their eating habits, because in
many cases local competition may enhance the restaurant's success instead of
detracting from it. Fast-food, family-style, and casual dining restaurants
frequently experience better operating results when there are other restaurants
in the same area.
The Company will be in competition with other persons and entities both
to locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders, and sale/leaseback companies for suitable Properties,
tenants, and Equipment tenants.
REGULATION OF MORTGAGE LOANS AND SECURED EQUIPMENT LEASES
The Mortgage Loans and Secured Equipment Lease program may be subject
to regulation by federal, state and local authorities and subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession, claims handling procedures and other trade practices. In addition,
certain states may have enacted legislation requiring the licensing of mortgage
bankers or other lenders and these requirements may affect the Company's ability
to effectuate its Mortgage Loans and Secured Equipment Lease program.
Commencement of operations into these or other jurisdictions may be dependent
upon a finding of financial responsibility, character and fitness of the
Company. The Company may determine not to make Mortgage Loans or operate Secured
Equipment Lease program in any jurisdiction in which it believes the Company has
not complied in all material respects with applicable requirements.
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SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements included in Exhibit B to this Prospectus.
<TABLE>
<CAPTION>
May 2,
1994 (Date
of Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
---------- ----------- ------------
<S> <C>
Revenues $6,206,684 $ 659,131 $ -
Net earnings 4,745,962 368,779 -
Cash distributions declared (1) 5,436,072 638,618 -
Funds from operations (2) 5,257,040 469,097 -
Earnings per Share 0.59 0.19 -
Cash distributions declared per Share 0.71 0.34 -
Weighted average number of Shares
outstanding (3) 8,071,670 1,898,350 -
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C>
Total assets $134,825,048 $ 33,603,084 $ 929,585
Total equity 122,867,427 31,980,648 200,000
</TABLE>
(1) Approximately 11 percent and 40 percent of cash distributions
($0.06 and $0.14 per Share) for the nine months ended September
30, 1996 and the year ended December 31, 1995, respectively,
represents a return of capital in accordance with generally
accepted accounting principles ("GAAP"). Cash distributions
treated as a return of capital on a GAAP basis represent the
amount of cash distributions in excess of accumulated net earnings
on a GAAP basis. The Company has not treated such amount as a
return of capital for purposes of calculating the stockholders'
Invested Capital and the Stockholders' 8% Return, as described in
the Prospectus.
(2) Funds from operations ( "FFO "), based on the revised definition
adopted by the Board of Governors of NAREIT and as used herein,
means net earnings determined in accordance with generally
accepted accounting principles ( "GAAP "), excluding gains or
losses from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures.
FFO was developed by NAREIT as a relative measure of performance
and liquidity of an equity REIT in order to recognize that
income-producing real estate historically has not depreciated on
the basis determined under GAAP. However, FFO (i) does not
represent cash generated from operating activities determined in
accordance with GAAP (which, unlike FFO, generally reflects all
cash effects of transactions and other events that enter into the
determination of net earnings), (ii) is not necessarily indicative
of cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net earnings determined in
accordance with GAAP as an indication of the Company's operating
performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or the
Company's ability to make distributions. Accordingly, the Company
believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO
should be considered in conjunction with the Company's net
earnings and cash flows as reported in the accompanying
consolidated financial statements and notes thereto.
(3) The weighted average number of Shares outstanding is based upon
the period the Company was operational.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY
INTRODUCTION
The Company is a Maryland corporation that was organized on May 2,
1994, to acquire Properties, directly or indirectly through Joint Venture or
co-tenancy arrangements, to be leased on a long-term, "triple-net" basis to
operators of certain Restaurant Chains. In addition, the Company may provide
Mortgage Loans for the purchase of buildings, generally by borrowers that lease
the underlying land from the Company. To a lesser extent, the Company may offer
Secured Equipment Leases to operators of Restaurant Chains.
LIQUIDITY AND CAPITAL RESOURCES
The Company was formed in May 1994, at which time the Company received
initial capital contributions of $200,000 for 20,000 shares of common stock from
the Advisor. In April 1995, the Company commenced the Initial Offering of its
shares of common stock, the net proceeds of which are used to invest in
Properties and Mortgage Loans. The Company also registered 1,500,000 shares
($15,000,000) to be available for stockholders who elect to participate in the
Company's Reinvestment Plan. As of December 31, 1996, the Company had received
subscription proceeds of $139,247,149 (13,924,715 shares) from the Initial
Offering, including $591,765 (59,177 shares) through the Reinvestment Plan.
As of December 31, 1996, net proceeds to the Company from its Initial
Offering of Shares and capital contributions from the Advisor, after deduction
of Selling Commissions, Marketing Support and Due Diligence Expense
Reimbursement Fees and Offering Expenses, totalled $123,807,376. Approximately
$93,000,000 of such amount had been used to invest, or committed for investment,
in 94 Properties (nine of which were under construction as of December 31,
1996), in providing mortgage financing of $12,847,000 and to pay acquisition
fees to the Advisor totalling $6,266,122 and certain acquisition expenses as of
December 31, 1996. The Company acquired 13 of the 94 Properties from Affiliates,
for purchase prices totalling approximately $9,230,000. The Affiliates had
purchased and temporarily held title to these Properties in order to facilitate
the acquisition of the Properties by the Company. Each Property was acquired at
a cost no greater than the lesser of the cost of the Property to the Affiliate
(including carrying costs) or the Property's appraised value.
In connection with the nine Properties under construction at December
31, 1996, the Company has entered into various development agreements with
tenants which provide terms and specifications for the construction of buildings
the tenants have agreed to lease . The agreements provide a maximum amount of
development costs (including the purchase price of the land and closing costs)
to be paid by the Company. The aggregate maximum development costs the Company
had agreed to pay was approximately $11,749,700, of which approximately
$7,495,200 in land and other costs had been incurred as of December 31, 1996.
The buildings under construction as of December 31, 1996, are expected to be
operational by August 1997. In connection with the purchase of each Property,
the Company, as lessor, entered into a long-term, triple-net lease agreement.
Following completion of its Initial Offering on February 6, 1997, the
Company commenced this offering of up to 27,500,000 Shares. Of the 27,500,000
Shares being offered, 2,500,000 are available only to stockholders purchasing
through the Reinvestment Plan. Until such time, if any, that the stockholders
approve an increase in the number of authorized shares of common stock of the
Company, this offering will be limited to 4,800,000 Shares. The Board of
Directors will submit for a vote of the stockholders at a meeting to be held on
April 4, 1997, a resolution to increase the number of authorized shares of
common stock of the Company from 20,000,000 to 75,000,000. Net proceeds from
this offering will also be invested in Properties and Mortgage Loans. The
Company is expected to have a total portfolio of approximates 400 to 450
Properties if the maximum number of Shares are sold. Management believes that
the increase in the amount of assets of the Company that will result from this
offering will increase the diversification of the Company's assets and the
likelihood of listing the Company's shares of common stock on a national
securities exchange or over-the-counter market, although there is no assurance
that listing will occur.
As of March 6, 1997, the Company had received aggregate subscription
proceeds of $14,243,060 (1,424,306 Shares). Net proceeds to the Company, after
deduction of Selling Commissions, Marketing Support and Due Diligence Expense
Reimbursement Fees and Offering Expenses, totalled approximately $12,600,000. As
of March 6, 1997, $640,938 of such amount had been incurred in Acquisition Fees
to the Advisor and the balance was available for investment in Properties and
Mortgage Loans.
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As of the completion of its Initial Offering, the Company had received
subscription proceeds of $150,591,765 (15,059,177 shares), including $591,765
(59,177 shares) issued pursuant to the Reinvestment Plan and after deduction of
selling commissions, marketing support and due diligence expense reimbursement
fees and offering expenses, net proceeds to the Company from its Initial
Offering totalled approximately $134,000,000. As of March 6, 1997, the Company
had invested or committed for investment approximately $111,100,000 of net
proceeds from the Initial Offering in 110 Properties, in providing mortgage
financing to the tenants of the 35 Properties consisting of land only through
Mortgage Loans, and in paying acquisition fees to the Advisor totalling
$6,776,629 and certain acquisition expenses, leaving approximately $22,900,000
in net offering proceeds from the Initial Offering available for investment in
Properties and Mortgage Loans. The Company expects to use such amount and Net
Offering Proceeds from this offering to purchase additional Properties, to fund
construction costs relating to the Properties under construction, and to make
Mortgage Loans.
The number of Properties to be acquired and Mortgage Loans to be
entered into will depend upon the amount of Net Offering Proceeds available to
the Company. The Company presently is negotiating to acquire additional
Properties, but as of March 6, 1997, had not acquired any such Properties.
The Company plans to obtain short-term financing (the "Line of Credit")
in an amount up to $20,000,000, the proceeds of which will be used to acquire
Properties. Management believes that, during the offering period, the Line of
Credit will allow the Company to take advantage of investment opportunities that
might otherwise be lost if the Company was forced to delay making the
investments until it had raised a sufficient amount of offering proceeds. In
addition, management believes that the use of the Line of Credit will enable the
Company to reduce or eliminate the instances in which the Company will be
required to pay duplicate closing costs as a result of an affiliate of the
Advisor purchasing Properties, pending receipt by the Company of sufficient
offering proceeds, in order to preserve the investment opportunity for the
Company, and the Company subsequently purchasing the Properties from the
affiliate. The Line of Credit will be repaid from the proceeds of the Company's
offerings. No Properties will be encumbered in connection with the Line of
Credit. The Company is engaged in preliminary discussions with potential lenders
but has not yet obtained a commitment letter for the Line of Credit and may not
be able to obtain the Line of Credit on satisfactory terms.
In March 1996, the Company entered into the Loan with a bank, the
proceeds of which are used by the Company to offer Secured Equipment Leases. The
Loan provides that the Company will be able to receive advances limited to
$15,000,000 until March 4, 1998. Generally, advances under the Loan will be
fully amortizing term loans repayable in terms equal to the duration of the
Secured Equipment Leases, but in no event greater than 72 months. Generally, all
advances under the Loan will bear interest at either (i) a rate per annum equal
to 215 basis points above the Reserve Adjusted LIBOR Rate (as defined in the
Loan) or (ii) a rate per annum equal to the bank's prime rate, whichever the
Company selects at the time advances are made. As a condition of obtaining the
Loan, the Company agreed to grant to the bank a first security interest in the
Secured Equipment Leases. In connection with the Loan, the Company incurred a
commitment fee, legal fees and closing costs of $53,533 relating to the Loan.
During 1996, the Company entered into interest rate swap agreements
with a commercial bank to reduce the impact of changes in interest rates on its
floating rate long-term debt. These agreements effectively change the Company's
interest rate exposure on notional amounts totalling approximately $2,110,000 of
the outstanding floating rate notes to fixed rates ranging from 8.75% to nine
percent per annum. The notional amounts of the interest rate swap agreements
amortize over the period of the agreements which approximate the term of the
related notes. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreements. However,
the Company does not anticipate nonperformance by the counterparty.
As of December 31, 1996, the Company had obtained advances totalling
$3,666,896 under the Loan, the proceeds of which were used to fund nine Secured
Equipment Leases (including three partially funded Secured Equipment Leases as
of December 31, 1996) and to pay loan costs. As of March 6, 1997, the Company
had entered into a total of 12 Secured Equipment Leases and in connection
therewith had received advances under the Loan, including amounts to fund loan
costs, totalling $5,203,000. The Company intends to limit the amount of Secured
Equipment Leases it enters into to $15,000,000 available under the Loan. The
Board of Directors may determine to obtain additional financing to be used by
the Company to fund Secured Equipment Leases, provided that the amount of such
additional financing may not exceed 10% of Gross Proceeds of this offering and
gross proceeds of any subsequent offering.
Properties are and will be leased on a triple-net basis, meaning that
tenants are generally required to pay all repairs and maintenance, property
taxes, insurance and utilities. Rental payments under the leases are expected to
exceed the Company's operating expenses. For these reasons, no short-term or
long-term liquidity problems currently are anticipated by management.
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Until Properties are acquired, or Mortgage Loans are entered into, net
offering proceeds are held in short-term, highly liquid investments which
management believes to have appropriate safety of principal. This investment
strategy provides high liquidity in order to facilitate the Company's use of
these funds to acquire Properties at such time as Properties suitable for
acquisition are located or to fund Mortgage Loans. At December 31, 1996, the
Company had $42,450,088 invested in such short-term investments as compared to
$11,508,445 at December 31, 1995. The increase in the amount invested in
short-term investments reflects subscription proceeds derived from the sale of
shares through the Initial Offering during the year ended December 31, 1996.
These funds will be used primarily to purchase and develop or renovate
Properties (directly or indirectly through joint venture arrangements), to make
Mortgage Loans, to pay offering and acquisition costs, to pay Distributions to
stockholders, to meet Company expenses and, in management's discretion, to
create cash reserves.
During the years ended December 31, 1996 and 1995, and the period May
2, 1994 (date of inception) through December 31, 1994, Affiliates of the Company
incurred on behalf of the Company $804,617, $2,084,145 and $461,866,
respectively, for certain offering expenses in connection with its Initial
Offering. In addition, during the years ended December 31, 1996 and 1995,
Affiliates of the Company incurred on behalf of the Company $206,103 and
$131,629 for certain acquisition expenses and $243,402 and $54,234 for certain
operating expenses. As of December 31, 1996, the Company owed the Advisor and
its Affiliates $997,084 for such amounts, unpaid fees, and accounting and
administrative expenses . The Advisor has agreed to pay or reimburse to the
Company all Offering Expenses in excess of three percent of gross offering
proceeds.
During the years ended December 31, 1996 and 1995, the Company
generated cash from operations (which includes cash received from tenants and
interest and other income received, less cash paid for operating expenses) of
$5,482,540 and $498,459, respectively. Based on current and anticipated future
cash from operations, the Company declared Distributions to the stockholders of
$5,436,072 and $638,618 during 1996 and 1995, respectively. On January 1, 1997,
February 1, 1997, and March 1, 1997, the Company declared Distributions to its
stockholders totalling $827,967, $884,794 and $980,571, respectively, payable in
March 1997. For the years ended December 31, 1996 and 1995, 90.25% and 59.82%,
respectively, of the Distributions received by stockholders were considered to
be ordinary income and 9.75% and 40.18%, respectively, were considered a return
of capital for federal income tax purposes. However, no amounts distributed or
to be distributed to the stockholders as of March 6, 1997, are required to be or
have been treated by the Company as a return of capital for purposes of
calculating the stockholders' return on their Invested Capital.
Management believes that the Properties are adequately covered by
insurance. In addition, the Advisor has obtained contingent liability and
property coverage for the Company. This insurance policy is intended to reduce
the Company's exposure in the unlikely event a tenant's insurance policy lapses
or is insufficient to cover a claim relating to the Property. The Company's
investment strategy of acquiring Properties for cash and leasing them under
triple-net leases to operators who meet specified financial standards is
expected to minimize the Company's Operating Expenses. During the operational
stage, management believes that the leases will continued to generate cash flow
in excess of Operating Expenses. Since the leases are expected generally to have
an initial term of 15 to 20 years, with two or more five-year renewal options,
and provide for specified percentage rent in addition to the annual base rent
and, in certain cases, increases in the base rent at specified times during the
terms of the leases, it is anticipated that rental income will increase over
time.
Due to the fact that the Properties are leased on a long-term,
triple-net basis, management does not believe that working capital reserves will
be necessary at this time. Management has the right to cause the Company to
maintain reserves if, in their discretion, they determine such reserves are
required to meet the Company's working capital needs.
Management expects that the cash generated from operations will be
adequate to pay Operating Expenses.
RESULTS OF OPERATIONS
No significant operations commenced until the Company received the
minimum offering proceeds of $1,500,000 on June 1, 1995.
As of December 31, 1996, the Company and its consolidated joint
venture, CNL/Corral South Joint Venture, had purchased and entered into
long-term, triple-net leases for 94 Properties. The leases provide for minimum
base annual rental payments (payable in monthly installments) ranging from
approximately $61,700 to $467,500. In addition, certain leases provide for
percentage rent based on sales in excess of a specified amount. The majority of
the leases also provide that, commencing in generally the sixth lease year, the
annual base rent required under the terms of the leases will increase. In
connection therewith, the Company earned a total of $4,357,298 and $539,776 , in
rental income from operating leases , earned income from the direct financing
leases and contingent rental income from 85 Properties and six Secured Equipment
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Leases in 1996 and from 16 Properties in 1995, respectively. Because the Company
did not commence significant operations until it received the minimum offering
proceeds from its Initial Offering on June 1, 1995, and has not yet acquired all
of its Properties, revenues for the year ended December 31, 1996, represent only
a portion of revenues which the Company is expected to earn in future years as
the Company acquires additional Properties and the construction Properties
acquired during 1996 become operational.
During 1996, the Company entered into three Mortgage Loans in the
principal sum of $12,847,000, collateralized by mortgages on the buildings
relating to 35 Pizza Hut Properties. The Mortgage Loans bear interest at a rate
of 10.75% per annum and are being collected in 240 equal monthly installments
totalling $130,427. In connection therewith, the Company earned $1,069,349 in
interest income relating to such Mortgage Loans during 1996.
During 1996, two of the Company's lessees and borrowers, or groups of
affiliated lessees and borrowers, Castle Hill Holdings V, L.L.C. , Castle Hill
Holdings VI, L.L.C. and Castle Hill Holdings VII, L.L.C. (hereinafter referred
to as Castle Hill), and Golden Corral Corporation, each contributed more than
ten percent of the Company's total rental and interest income relating to its
Properties, Mortgage Loans and Secured Equipment Leases. Castle Hill is the
lessee under leases relating to the land portion of 35 restaurants and is the
borrower on Mortgage Loans relating to the buildings on such Properties. Golden
Corral Corporation is the lessee under leases relating to seven restaurants. In
addition, three Restaurant Chains, Pizza Hut, Golden Corral Family Steakhouse
and Boston Market, each accounted for more than ten percent of the Company's
total rental and interest income relating to its Properties, Mortgage Loans and
Secured Equipment Leases in 1996. Because the Company has not yet completed its
investment in Properties and Mortgage Loans, it is not possible to determine
which lessees, borrowers or Restaurant Chains will contribute more than ten
percent of the Company's rental and interest income during 1997 and subsequent
years. In the event that certain lessees, borrowers or Restaurant Chains
contribute more than ten percent of the Company's total rental and interest
income in future years, any failure of such lessees, borrowers or Restaurants
Chains could materially affect the Company's income.
During the years ended December 31, 1996 and 1995, the Company also
earned $780,037 and $119,355, respectively, in interest income from investments
in money market accounts or other short-term, highly liquid investments and
other income. Interest income from investing in money market accounts or other
short-term, highly liquid investments is expected to increase as the Company
invests subscription proceeds received in the future in highly liquid
investments pending investment in Properties and Mortgage Loans. However, as net
offering proceeds are invested in Properties and used to make Mortgage Loans,
interest income from investments in money market accounts or other short-term,
highly liquid investments is expected to decrease.
Operating expenses, including depreciation and amortization expense,
were $1,430,795 and $290,276 for the years ended December 31, 1996 and 1995,
respectively. Operating expenses increased during the year ended December 31,
1996, as compared to the year ended December 31, 1995, primarily as a result of
the fact that the Company did not commence operations until June 1, 1995.
General and administrative expenses as a percentage of total revenues is
expected to decrease as the Company acquires additional Properties, invests in
Mortgage Loans, and the Properties under construction become operational.
However, asset management fees and depreciation and amortization expense are
expected to increase as the Company invests in additional Properties and
Mortgage Loans.
The Company has made an election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a real estate
investment trust ("REIT") under the Code beginning with its taxable year ended
December 31, 1995. As a REIT, for federal income tax purposes, the Company
generally will not be subject to federal income tax on income that it
distributes to its stockholders. If the Company fails to qualify as a REIT in
any taxable year, it will be subject to federal income tax on its taxable income
at regular corporate rates and will not be permitted to qualify for treatment as
a REIT for federal income tax purposes for four years following the year during
which qualification is lost. Such an event could materially affect the Company's
income. However, the Company believes that it is organized and operates in such
a manner as to qualify for treatment as a REIT for the years ended December 31,
1996 and 1995. In addition, the Company intends to continue to operate the
Company so as to remain qualified as a REIT for federal income tax purposes.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. The statement requires that an
entity review long-lived assets and certain identifiable intangibles, to be held
and used, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Adoption of this
standard had no material effect on the Company's financial position or results
of operations.
All of the Company's leases as of December 31, 1996, are triple-net
leases and contain provisions that management believes will mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
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lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Company's Properties. Inflation and changing prices, however, also may have an
adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
This information contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include the following: changes in general economic conditions,
changes in local real estate conditions, continued availability of proceeds from
this offering, the ability of the Company to locate suitable tenants for its
Properties and borrowers for its Mortgage Loans, and the ability of tenants and
borrowers to make payments under their respective leases or Mortgage Loans.
MANAGEMENT
GENERAL
The Company will operate under the direction of the Board of Directors,
the members of which are accountable to the Company as fiduciaries. As required
by applicable regulations, a majority of the Independent Directors and a
majority of the Directors have reviewed and ratified the Articles of
Incorporation and have adopted the Bylaws.
The Company currently has five Directors; it may have no fewer than
three Directors and no more than 15. Directors will be elected annually, and
each Director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a Director may be elected to office. Although the
number of Directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent Director.
Any Director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of at least a majority of
all the Shares outstanding and entitled to vote at a meeting called for this
purpose. The notice of such meeting shall indicate that the purpose, or one of
the purposes, of such meeting is to determine if a Director shall be removed.
FIDUCIARY RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors will be responsible for the management and
control of the affairs of the Company; however, the Board of Directors will
retain the Advisor to manage the Company's day-to-day affairs and the
acquisition and disposition of investments, subject to the supervision of the
Board of Directors.
The Directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of the
Company as their duties require. The Board of Directors will meet quarterly in
person or by telephone, or more frequently if necessary. It is not expected that
the Directors will be required to devote a substantial portion of their time to
discharge their duties as directors. Consequently, in the exercise of their
fiduciary responsibilities, the Directors will rely heavily on the Advisor. In
this regard, the Advisor, in addition to the Directors, will have a fiduciary
duty to the Company.
The Directors will monitor the administrative procedures, investment
operations, and performance of the Company and the Advisor to assure that such
policies are in the best interest of the stockholders and are fulfilled. Until
modified by the Directors, the Company will follow the policies on investments
set forth in this Prospectus. See "Investment Objectives and Policies."
The Independent Directors are responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the total fees and expenses of the Company are reasonable in
light of the Company's investment performance, Net Assets, Net Income, and the
fees and expenses of other comparable unaffiliated real estate investment
trusts. This determination shall be reflected in the minutes of the meetings of
the Board of Directors. For purposes of this determination, Net Assets are the
Company's total assets (other than intangibles), calculated at cost before
deducting depreciation or other non-cash reserves, less total liabilities, and
computed at least quarterly on a basis consistently applied. Such determination
will be reflected in the minutes of the meetings of the Board of Directors. In
addition, a majority of the Independent Directors and a majority of Directors
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not otherwise interested in the transaction must approve each transaction with
the Advisor or its Affiliates. The Board of Directors also will be responsible
for reviewing and evaluating the performance of the Advisor before entering into
or renewing an advisory agreement. The Independent Directors shall determine
from time to time and at least annually that compensation to be paid to the
Advisor is reasonable in relation to the nature and quality of services to be
performed and shall supervise the performance of the Advisor and the
compensation paid to it by the Company to determine that the provisions of the
Advisory Agreement are being carried out. Specifically, the Independent
Directors will consider factors such as the amount of the fee paid to the
Advisor in relation to the size, composition and performance of the Company's
investments, the success of the Advisor in generating appropriate investment
opportunities, rates charged to other comparable REITs and other investors by
advisors performing similar services, additional revenues realized by the
Advisor and its Affiliates through their relationship with the Company, whether
paid by the Company or by others with whom the Company does business, the
quality and extent of service and advice furnished by the Advisor, the
performance of the investment portfolio of the Company and the quality of the
portfolio of the Company relative to the investments generated by the Advisor
for its own account. Such review and evaluation will be reflected in the minutes
of the meetings of the Board of Directors. The Board of Directors shall
determine that any successor Advisor possesses sufficient qualifications to (i)
perform the advisory function for the Company and (ii) justify the compensation
provided for in its contract with the Company.
The liability of the officers and Directors while serving in such
capacity is limited in accordance with the Articles of Incorporation and
applicable law. See "Summary of the Articles of Incorporation and Bylaws --
Limitation of Director and Officer Liability."
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are listed below:
Name Age Position with the Company
---- --- -------------------------
James M. Seneff, Jr. 50 Director, Chairman of the Board,
and Chief Executive Officer
Robert A. Bourne 49 Director and President
G. Richard Hostetter 57 Independent Director
J. Joseph Kruse 64 Independent Director
Richard C. Huseman 58 Independent Director
John T. Walker 38 Chief Operating Officer and
Executive Vice President
Jeanne A. Wall 38 Executive Vice President
Steven D. Shackelford 33 Chief Financial Officer
Lynn E. Rose 48 Secretary and Treasurer
James M. Seneff, Jr. Director, Chairman of the Board, and Chief
Executive Officer. Mr. Seneff currently holds the position of Chairman of the
Board, Chief Executive Officer and director of CNL Fund Advisors, Inc., the
advisor to the Company. Mr. Seneff also serves as Chairman of the Board, Chief
Executive Officer and a director of CNL American Realty Fund, Inc. and CNL Real
Estate Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Group, Inc.,
a diversified real estate company, and has served as its Chairman of the Board
of Directors, director, and Chief Executive Officer since its formation in 1980.
CNL Group, Inc. is the parent company of CNL Securities Corp., which is acting
as the Managing Dealer in this offering, CNL Investment Company , CNL Fund
Advisors, Inc. and CNL Real Estate Advisors, Inc. Mr. Seneff has been Chief
Executive Officer, a director and registered principal of CNL Securities Corp.
since its formation in 1979. Mr. Seneff also has held the position of President
and a director of CNL Management Company, a registered investment advisor, since
its formation in 1976, has served as Chief Executive Officer and Chairman of the
Board of CNL Investment Company, and Chief Executive Officer and Chairman of the
Board of Commercial Net Lease Realty, Inc. since 1992, has served as Chief
Executive Officer and Chairman of the Board of CNL Realty Advisors, Inc. since
its inception in 1991, and has held the position of Chief Executive Officer and
a director of CNL Institutional Advisors, Inc., a registered investment advisor,
since its inception in 1990. Mr. Seneff previously served on the Florida State
Commission on Ethics and is a former member and past Chairman of the State of
Florida Investment Advisory Council, which recommends to the Florida Board of
Administration investments for various Florida employee retirement funds. The
Florida Board of Administration, Florida's principal investment advisory and
money management agency, oversees the investment of more than $40 billion of
retirement funds. Since 1971, Mr. Seneff has been active in the acquisition,
development, and management of real estate projects and, directly or through an
affiliated entity, has served as a general partner or joint venturer in over 100
real estate ventures involved in the financing, acquisition, construction, and
rental of restaurants, office buildings, apartment complexes, hotels, and other
real estate. Included in these real estate ventures are approximately 65
privately offered real estate limited partnerships with investment objectives
similar to one or more of the Company's investment objectives, in which Mr.
Seneff, directly or through an affiliated entity, serves or has served as a
general partner. Mr. Seneff received his degree in Business Administration from
Florida State University in 1968.
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Robert A. Bourne. Director and President. Mr. Bourne currently holds
the position of President and director of CNL Fund Advisors, Inc., the advisor
to the Company. Mr. Bourne also serves as President and a director of CNL
American Realty Fund, Inc. and CNL Real Estate Advisors, Inc. Mr. Bourne is
President and Treasurer of CNL Group, Inc., President, a director, and a
registered principal of CNL Securities Corp. (the Managing Dealer of this
offering), President and a director of CNL Investment Company, and President,
Chief Investment Officer and a director of CNL Institutional Advisors, Inc., a
registered investment advisor. Mr. Bourne also has served as President and a
director from July 1992 to February 1996, and has served as Vice Chairman of the
Board of Directors, Secretary and Treasurer since February 1996, of Commercial
Net Lease Realty, Inc. In addition, Mr. Bourne served as President of CNL Realty
Advisors, Inc. from 1991 to February 1996, and has served as a director of CNL
Realty Advisors, Inc. since 1991, and as Treasurer and Vice Chairman since
February 1996. Upon graduation from Florida State University in 1970, where he
received a B.A. in Accounting, with honors, Mr. Bourne worked as a certified
public accountant and, from September 1971 through December 1978 was employed by
Coopers & Lybrand, Certified Public Accountants, where he held the position of
tax manager beginning in 1975. From January 1979 until June 1982, Mr. Bourne was
a partner in the accounting firm of Cross & Bourne and from July 1982 through
January 1987 he was a partner in the accounting firm of Bourne & Rose, P.A.,
Certified Public Accountants. Mr. Bourne, who joined CNL Securities Corp. in
1979, has participated as a general partner or joint venturer in over 100 real
estate ventures involved in the financing, acquisition, construction, and rental
of restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 64 privately
offered real estate limited partnerships with investment objectives similar to
one or more of those of the Company's investment objectives, in which Mr.
Bourne, directly or through an affiliated entity, serves or has served as a
general partner.
G. Richard Hostetter, Esq. Independent Director. Mr. Hostetter also
serves as a director of CNL American Realty Fund, Inc. Mr. Hostetter was
associated with the law firm of Miller and Martin from 1966 through 1989, the
last ten years of such association as a senior partner. As a lawyer, he served
for more than 20 years as counsel for various corporate real estate groups,
fast-food companies and public companies, including The Krystal Company,
resulting in his extensive participation in transactions involving the sale,
lease, and sale/leaseback of approximately 250 restaurant units. Mr. Hostetter
graduated from the University of Georgia and received his J.D. from Emory Law
School in 1966. He is licensed to practice law in Tennessee and Georgia. From
1989 to date, Mr. Hostetter has served as President and General Counsel of
Mills, Ragland & Hostetter, Inc., the corporate general partner of MRH, L.P., a
holding company involved in corporate acquisitions, in which he also is a
general and limited partner.
J. Joseph Kruse. Independent Director. Mr. Kruse also serves as a
director of CNL American Realty Fund, Inc. From 1993 to the present, Mr. Kruse
has been President and Chief Executive Officer of Kruse & Co., Inc., a merchant
banking company engaged in real estate. Formerly, Mr. Kruse was a Senior Vice
President with Textron, Inc. for twenty years, and then served as Senior Vice
President at G. William Miller & Co., a firm founded by the former Chairman of
the Federal Reserve Board and the Treasury Secretary. Mr. Kruse was responsible
for evaluations of commercial real estate and retail shopping mall projects and
continues to serve of counsel to the firm. Mr. Kruse received a Bachelors of
Science in Education degree from the University of Florida in 1957 and a Masters
of Science in Administration in 1958 from Florida State University. He also
graduated from the Advanced Management Program of the Harvard Graduate School of
Business.
Richard C. Huseman. Independent Director. Mr. Huseman also serves as
a director of CNL American Realty Fund, Inc. Mr. Huseman is presently a
professor in the College of Business Administration, and from 1990 through 1995,
served as the Dean of the College of Business Administration of the University
of Central Florida. He has served as a consultant in the area of managerial
strategies to a number of Fortune 500 corporations, including IBM, AT&T, and 3M,
as well as to several branches of the U.S. government, including the U.S.
Department of Health and Human Services, the U.S. Department of Justice, and the
Internal Revenue Service. Mr. Huseman received a B.A. from Greenville College
in 1961 and an M.A. and a Ph.D. from the University of Illinois in 1963 and
1965, respectively.
John T. Walker. Chief Operating Officer and Executive Vice President.
Mr. Walker joined CNL Group, Inc. in September 1994, as Senior Vice President,
responsible for Research and Development. He currently serves as the Chief
Operating Officer and Executive Vice President of CNL Fund Advisors, Inc., the
advisor to the Company. Mr. Walker is also Executive Vice President of CNL
American Realty Fund, Inc. and CNL Real Estate Advisors, Inc. From May 1992 to
May 1994, he was Executive Vice President for Finance and Administration and
Chief Financial Officer of Z Music, Inc., a cable television network which was
subsequently acquired by Gaylord Entertainment, where he was responsible for
overall financial and administrative management and planning. From January 1990
through April 1992, Mr. Walker was Chief Financial Officer of the First Baptist
Church in Orlando, Florida. From April 1984 through December 1989, he was a
partner in the accounting firm of Chastang, Ferrell & Walker, P.A., where he was
the partner in charge of audit and consulting services, and from 1981 to 1984,
Mr. Walker was a Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker
is a Cum Laude graduate of Wake Forest University with a B.S. in Accountancy and
is a certified public accountant.
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Jeanne A. Wall. Executive Vice President. Ms. Wall serves as
Executive Vice President of CNL Fund Advisors, Inc., the advisor to the Company.
Ms. Wall is also Executive Vice President of CNL American Realty Fund, Inc. and
CNL Real Estate Advisors, Inc. Ms. Wall has served as Chief Operating Officer
of CNL Investment Company and of CNL Securities Corp. since November 1994 and
previously served as Executive Vice President of CNL Investment Company since
January 1991. In 1984, Ms. Wall joined CNL Securities Corp. as its Partnership
Administrator. In 1985, Ms. Wall became Vice President of CNL Securities Corp.
and, in 1987, she became a Senior Vice President of CNL Securities Corp. In this
capacity, Ms. Wall serves as national marketing sales director and oversees the
national marketing plan for the CNL investment programs. In addition, Ms. Wall
oversees partnership administration and investor services for programs offered
through participating brokers. Ms. Wall also has served as Senior Vice
President of CNL Institutional Advisors, Inc., a registered investment advisor,
from 1990 to 1993, as Vice President of CNL Realty Advisors, Inc. since its
inception in 1991; and as Vice President of Commercial Net Lease Realty, Inc.
since 1992. Ms. Wall holds a B.A. in Business Administration from Linfield
College and is a registered principal of CNL Securities Corp. Ms. Wall currently
serves as a trustee on the Board of the Investment Program Association and on
the Direct Participation Program committee for the National Association of
Securities Dealers.
Steven D. Shackelford. Chief Financial Officer. Mr. Shackelford joined
CNL Group, Inc. in September 1996. He currently serves as the Chief Financial
Officer of CNL Fund Advisors, Inc., the advisor to the Company. From March 1995
to July 1996, he was a senior manager in the national office of Price Waterhouse
where he was responsible for advising foreign clients seeking to raise capital
and a public listing in the United States. From August 1992 to March 1995, he
served as a manager in the Price Waterhouse, Paris, France office serving
several multinational clients. Mr. Shackelford was an audit staff and senior
from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr.
Shackelford received a B.A. in Accounting, with honors, and a Masters of
Business Administration from Florida State University and is a certified public
accountant.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose is also Secretary and
Treasurer of CNL American Realty Fund, Inc. Ms. Rose serves as Secretary,
Treasurer and a director of CNL Fund Advisors, Inc., the advisor to the Company,
and CNL Real Estate Advisors, Inc. Ms. Rose, a certified public accountant, has
served as Secretary of CNL Group, Inc. since 1987, as Chief Financial Officer
of CNL Group, Inc. since December 1993, and served as Controller of CNL Group,
Inc. from 1987 until December 1993. In addition, Ms. Rose has served as Chief
Financial Officer and Secretary of CNL Securities Corp. since July 1994. She
has served as Chief Operating Officer, Vice President and Secretary of CNL
Corporate Services, Inc. since November 1994. Ms. Rose also has served as Chief
Financial Officer and Secretary of CNL Institutional Advisors, Inc. since its
inception in 1990, as Secretary and a director of CNL Realty Advisors, Inc.
since its inception in 1991, and as a Treasurer of CNL Realty Advisors, Inc.
from 1991 to February 1996. In addition, Ms. Rose served as Secretary and
Treasurer of Commercial Net Lease Realty, Inc. from 1992 to February 1996. Ms
Rose also currently serves as Secretary for approximately 50 additional
corporations. Ms. Rose oversees the management information services,
administration, legal compliance, accounting, tenant compliance, and reporting
for over 250 corporations, partnerships and joint ventures. Prior to joining
CNL, Ms. Rose was a partner with Robert A. Bourne in the accounting firm of
Bourne & Rose, P.A., Certified Public Accountants. Ms. Rose holds a B.A. in
Sociology from the University of Central Florida. She was licensed as a
certified public accountant in 1979.
INDEPENDENT DIRECTORS
Under the Articles of Incorporation, a majority of the Board of
Directors must consist of Independent Directors, except for a period of 90 days
after the death, removal or resignation of an Independent Director. The
Independent Directors shall nominate replacements for vacancies amongst the
Independent Director positions. An Independent Director may not, directly or
indirectly (including through a member of his immediately family), own any
interest in, be employed by, have any present business or professional
relationship with, serve as an officer or director of the Advisor or its
Affiliates, or serve as a director of more than three REITs organized by the
Advisor or its Affiliates. Except to carry out the responsibilities of a
Director, an Independent Director may not perform material services for the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee, the members of which are
selected by the full Board of Directors each year. The Audit Committee makes
recommendations to the Board of Directors in accordance with those of the
independent accountants of the Company. The Board of Directors shall review with
such accounting firm the scope of the audit and the results of the audit upon
its completion.
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At such time, if any, as the Shares are listed on a national securities
exchange or over-the-counter market, the Company will form a Compensation
Committee, the members of which will be selected by the full Board of Directors
each year.
At least a majority of the members of each committee of the Company's
Board of Directors must be Independent Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each Director is entitled to receive $6,000 annually for serving on the
Board of Directors, as well as fees of $750 per meeting attended ($375 for each
telephonic meeting in which the Director participates), including committee
meetings. No executive officer or Director of the Company has received a bonus
from the Company. The Company will not pay any compensation to the officers and
Directors of the Company who also serve as officers and directors of the
Advisor.
MANAGEMENT COMPENSATION
For a description of the types, recipients, methods of computation, and
estimated amounts of all compensation, fees, and distributions to be paid
directly or indirectly by the Company to the Advisor, Managing Dealer, and their
Affiliates, see "Management Compensation."
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Fund Advisors, Inc. is a Florida corporation organized in March,
1994 to provide management, advisory and administrative services. The Company
entered into the Advisory Agreement with the Advisor effective April 19, 1996.
CNL Fund Advisors, Inc., as Advisor, has a fiduciary responsibility to the
Company and the stockholders.
The directors and officers of the Advisor are as follows:
James M. Seneff, Jr. ................... Chairman of the Board, Chief
Executive Officer, and Director
Robert A. Bourne ....................... President and Director
John T. Walker ......................... Chief Operating Officer and Executive
Vice President
Steven D. Shackelford................... Chief Financial Officer
Lynn E. Rose ........................... Secretary, Treasurer and Director
Jeanne A. Wall ......................... Executive Vice President
The Advisor employs personnel, in addition to the directors and
executive officers listed above, who have extensive experience in selecting and
managing restaurant properties similar to the Properties.
The Advisor currently owns 20,000 Shares. The Advisor may not sell
these Shares while the Advisory Agreement is in effect, although the Advisor may
transfer such Shares to Affiliates. Neither the Advisor, a Director, or any
Affiliate may vote or consent on matters submitted to the stockholders regarding
removal of, or any transaction between the Company and the Advisor, Directors,
or an Affiliate. In determining the requisite percentage in interest of Shares
necessary to approve a matter on which the Advisor, Directors, and any Affiliate
may not vote or consent, any Shares owned by any of them will not be included.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Board of
Directors, manages the Company's Properties and Mortgage Loans, administers the
Company's Secured Equipment Lease program and renders other services as the
Board of Directors deems appropriate. The Advisor is subject to the supervision
of the Company's Board of Directors and has only such functions as are delegated
to it.
The Company will reimburse the Advisor for all of the costs it incurs
in connection with the services it provides to the Company, including, but not
limited to: (i) Offering Expenses, which are defined to include expenses
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attributable to preparing the documents relating to this offering, the formation
and organization of the Company, qualification of the Shares for sale in the
states, escrow arrangements, filing fees and expenses attributable to selling
the Shares, (ii) Selling Commissions, advertising expenses, expense
reimbursements, and legal and accounting fees, (iii) the actual cost of goods
and materials used by the Company and obtained from entities not affiliated with
the Advisor, including brokerage fees paid in connection with the purchase and
sale of securities, (iv) administrative services (including personnel costs;
provided, however that no reimbursement shall be made for costs of personnel to
the extent that such personnel perform services in transactions for which the
Advisor receives a separate fee), (v) Acquisition Expenses, which are defined to
include expenses related to the selection and acquisition of Properties, at the
lesser of actual cost or 90% of the competitive rate charged by unaffiliated
persons providing similar goods and services in the same geographic location,
and (vi) expenses related to negotiating and servicing the Mortgage Loans and
Secured Equipment Leases.
The Company shall not reimburse the Advisor at the end of any fiscal
quarter Operating Expenses that, in the four consecutive fiscal quarters then
ended (the "Expense Year") exceed (the "Excess Amount") the greater of 2% of
Average Invested Assets or 25% of Net Income (the "2%/25% Guidelines") for such
year. Any Excess Amount paid to the Advisor during a fiscal quarter shall be
repaid to the Company. If there is an Excess Amount in any Expense Year and the
Independent Directors determine that such excess was justified, based on unusual
and nonrecurring factors which they deem sufficient, the Excess Amount may be
carried over and included in Operating Expenses in subsequent Expense Years, and
reimbursed to the Advisor in one or more of such years, provided that Operating
Expenses in any Expense Year, including any Excess Amount to be paid to the
Advisor, shall not exceed the 2%/25% Guidelines. Within 60 days after the end of
any fiscal quarter of the Company for which total Operating Expenses for the
Expense Year exceed the 2%/25% Guidelines, there shall be sent to the
stockholders a written disclosure of such fact, together with an explanation of
the factors the Independent Directors considered in determining that such excess
expenses were justified. Such determination shall be reflected in the minutes of
the meetings of the Board of Directors. In the event the Independent Directors
do not determine that such Excess Amount was justified, the Advisor shall
reimburse the Company at the end of the Expense Year the amount by which the
total Operating Expenses paid or incurred by the Company exceed the limitations
herein provided.
The Company will not reimburse the Advisor or its Affiliates for
services for which the Advisor or its Affiliates are entitled to compensation in
the form of a separate fee.
Pursuant to the Advisory Agreement, the Advisor is entitled to receive
certain fees and reimbursements, as listed in "Management -- Management
Compensation." The Subordinated Incentive Fee payable to the Advisor under
certain circumstances if Listing occurs may be paid, at the option of the
Company, in cash, in Shares, by delivery of a promissory note payable to the
Advisor, or by any combination thereof. In the event the Subordinated Incentive
Fee is paid to the Advisor following Listing, no Performance Fee, as described
below, will be paid to the Advisor under the Advisory Agreement nor will any
additional share of Net Sales Proceeds be paid to the Advisor. The total of all
Acquisition Fees and any Acquisition Expenses payable to the Advisor and its
Affiliates shall be reasonable and shall not exceed an amount equal to 6% of the
Real Estate Asset Value of a Property, or in the case of a Mortgage Loan, 6% of
the funds advanced, unless a majority of the Board of Directors, including a
majority of the Independent Directors not otherwise interested in the
transaction, approves fees in excess of this limit subject to a determination
that the transaction is commercially competitive, fair and reasonable to the
Company. The Acquisition Fees payable in connection with the selection or
acquisition of any Property shall be reduced to the extent that, and if
necessary to limit, the total compensation paid to all persons involved in the
acquisition of such Property to the amount customarily charged in arm's-length
transactions by other persons or entities rendering similar services as an
ongoing public activity in the same geographical location and for comparable
types of Properties, and to the extent that other acquisition fees, finder's
fees, real estate commissions, or other similar fees or commissions are paid by
any person in connection with the transaction.
If the Advisor or a CNL Affiliate performs services that are outside of
the scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed to by the Advisor and the Independent Directors of the
Company.
Further, if Listing occurs, the Company automatically will become a
perpetual life entity. At such time, the Company and the Advisor will negotiate
in good faith a fee structure appropriate for an entity with a perpetual life,
subject to approval by a majority of the Independent Directors. In negotiating a
new fee structure, the Independent Directors shall consider all of the factors
they deem relevant. These are expected to include, but will not necessarily be
limited to: (i) the amount of the advisory fee in relation to the asset value,
composition, and profitability of the Company's portfolio; (ii) the success of
the Advisor in generating opportunities that meet the investment objectives of
the Company; (iii) the rates charged to other REITs and to investors other than
REITs by advisors that perform the same or similar services; (iv) additional
revenues realized by the Advisor and its Affiliates through their relationship
with the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether paid by
the Company or by others with whom the
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Company does business; (v) the quality and extent of service and advice
furnished by the Advisor; (vi) the performance of the investment portfolio of
the Company, including income, conservation or appreciation of capital, and
number and frequency of problem investments; and (vii) the quality of the
Property, Mortgage Loan, and Secured Equipment Lease portfolio of the Company in
relationship to the investments generated by the Advisor for its own account.
The Board of Directors, including a majority of the Independent Directors, may
not approve a new fee structure that, in its judgment, is more favorable to the
Advisor than the current fee structure.
The Advisory Agreement, which was entered into by the Company with the
unanimous approval of the Board of Directors, including the Independent
Directors, expires one year after the date of execution, on April 19, 1997,
subject to successive one-year renewals upon mutual consent of the parties. In
the event that a new Advisor is retained, the previous Advisor will cooperate
with the Company and the Directors in effecting an orderly transition of the
advisory functions. The Board of Directors (including a majority of the
Independent Directors) shall approve a successor Advisor only upon a
determination that the Advisor possesses sufficient qualifications to perform
the advisory functions for the Company and that the compensation to be received
by the new Advisor pursuant to the new Advisory Agreement is justified.
The Advisory Agreement may be terminated without cause or penalty by
either party, or by the mutual consent of the parties (by a majority of the
Independent Directors of the Company or a majority of the directors of the
Advisor, as the case may be), upon 60 days' prior written notice. At that time,
the Advisor shall be entitled to receive the Performance Fee if performance
standards satisfactory to a majority of the Board of Directors, including a
majority of the Independent Directors, when compared to (a) the performance of
the Advisor in comparison with its performance for other entities, and (b) the
performance of other advisors for similar entities, have been met. If Listing
has not occurred, the Performance Fee, if any, shall equal 10% of the amount, if
any, by which (i) the appraised value of the Properties and Secured Equipment
Leases on the date of termination of the Advisory Agreement (the "Termination
Date"), less the amount of all indebtedness secured by Properties and Secured
Equipment Leases, plus the total Distributions made to stockholders from the
Company's inception through the Termination Date, exceeds (ii) Invested Capital
plus an amount equal to the Stockholders' 8% Return from inception through the
Termination Date. The Advisor shall be entitled to receive all accrued but
unpaid compensation and expense reimbursements in cash within 30 days of the
Termination Date. All other amounts payable to the Advisor in the event of a
termination shall be evidenced by a promissory note and shall be payable from
time to time. The Performance Fee shall be paid in 12 equal quarterly
installments without interest on the unpaid balance, provided, however, that no
payment will be made in any quarter in which such payment would jeopardize the
Company's REIT status, in which case any such payment or payments will be
delayed until the next quarter in which payment would not jeopardize REIT
status. Notwithstanding the preceding sentence, any amounts which may be deemed
payable at the date the obligation to pay the Performance Fee is incurred which
relate to the appreciation of the Company's Properties shall be an amount which
provides compensation to the terminated Advisor only for that portion of the
holding period for the respective Properties during which such terminated
Advisor provided services to the Company. If Listing occurs, the Performance
Fee, if any, payable thereafter will be as negotiated between the Company and
the Advisor. The Advisor shall not be entitled to payment of the Performance Fee
in the event the Advisory Agreement is terminated because of failure of the
Company and the Advisor to establish a fee structure appropriate for a
perpetual-life entity at such time, if any, as the Shares become listed on a
national securities exchange or over-the-counter market. The Performance Fee, to
the extent payable at the time of Listing, will not be paid in the event that
the Subordinated Incentive Fee is paid.
The Advisor has the right to assign the Advisory Agreement to an
Affiliate subject to approval by the Independent Directors of the Company. The
Company has the right to assign the Advisory Agreement to any successor to all
of its assets, rights, and obligations.
The Advisor will not be liable to the Company or its stockholders or
others, except by reason of acts constituting bad faith, fraud, misconduct, or
negligence, and will not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendation given by it.
The Company has agreed to indemnify the Advisor with respect to acts or
omissions of the Advisor undertaken in good faith, in accordance with the
foregoing standards and pursuant to the authority set forth in the Advisory
Agreement. Any indemnification made to the Advisor may be made only out of the
net assets of the Company and not from stockholders.
CERTAIN TRANSACTIONS
The Managing Dealer is entitled to receive Selling Commissions
amounting to 7.5% of the total amount raised from the sale of Shares of common
stock for services in connection with the offering of Shares, a substantial
portion of which has been or will be paid as commissions to other
broker-dealers. For the years ended December 31, 1996 and 1995, in connection
with its Initial Offering , the Company incurred $7,559,474 and $2,884,062,
respectively, of such fees, of which approximately $7,059,000 and $2,682,000,
respectively, was paid by the Managing Dealer as commissions to other
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broker-dealers. In addition, during the period January 1, 1997 through
February 6, 1997, the Company incurred $850,846 in such fees in connection
with its Initial Offering , and during the period February 7, 1997 through
March 6, 1997, the Company incurred $1,068,230 in such fees in connection with
this offering, the majority of which has been or will be paid as commissions to
other broker-dealers.
In addition, the Managing Dealer is entitled to receive a Marketing
Support and Due Diligence Expense Reimbursement Fee equal to 0.5% of the total
amount raised from the sale of Shares, a portion of which may be reallowed to
other broker-dealers. For the years ended December 31, 1996 and 1995, in
connection with its Initial Offering, the Company incurred $503,965 and
$192,271, respectively, of such fees, substantially all of which were reallowed
to other broker-dealers and from which all bona fide due diligence expenses were
paid. In addition, during the period January 1, 1997 through February 6, 1997,
the Company incurred $56,723 in such fees in connection with its Initial
Offering , and during the period February 7, 1997 through March 6, 1997, the
Company incurred $71,215 in such fees in connection with this offering,
substantially all of which were reallowed to other broker-dealers and from which
all bona fide due diligence expenses were paid.
The Advisor is entitled to receive Acquisition Fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of the total amount raised from the sale of Shares. For the years ended
December 31, 1996 and 1995, in connection with amounts received from the Initial
Offering, the Company incurred $4,535,685 and $1,730,437, respectively, of such
fees. For the period January 1, 1997 through February 6, 1997, the Company
incurred an additional $510,508 in such fees in connection with the Initial
Offering, and for the period February 7, 1997 through March 6, 1997, the Company
incurred $640,938 in such fees in connection with this offering.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor is entitled to receive from the Company a
one-time Secured Equipment Lease Servicing Fee of two percent of the purchase
price of the equipment that is the subject of a secured equipment lease . For
the year ended December 31, 1996, the Company incurred $70,070 in such fees. In
addition, during the period January 1, 1997 through March 6, 1997, the Company
incurred $32,623 in such fees.
The Company and the Advisor have entered into an Advisory Agreement
pursuant to which the Advisor will receive a monthly asset management fee of
one-twelfth of 0.60% of the Company's Real Estate Asset Value, plus one-twelfth
of 0.60% of the total principal amount of the Company's Mortgage Loans as of the
end of the preceding month. The management fee, which will not exceed fees which
are competitive for similar services in the same geographic area, may or may not
be taken, in whole or in part as to any year, in the sole discretion of the
Advisor. All or any portion of the management fee not taken as to any fiscal
year shall be deferred without interest and may be taken in such other fiscal
year as the Advisor shall determine. For the years ended December 31, 1996 and
1995, the Company incurred $278,902 and $27,950, respectively, of such fees,
$27,702 and $4,872, respectively, of which has been capitalized as part of the
cost of the buildings for Properties that have been or are being constructed.
The Advisor and its Affiliates provide accounting and administrative
services to the Company (including accounting and administrative services in
connection with the offering of Shares) on a day-to-day basis. For the years
ended December 31, 1996 and 1995, the Company incurred a total of $1,103,828 and
$782,690, respectively, for these services, $769,225 and $714,674, respectively,
of such costs representing stock issuance costs and $334,603 and $68,016,
respectively, representing general operating and administrative expenses,
including costs related to preparing and distributing reports required by the
Securities and Exchange Commission.
During 1996, the Company acquired four Properties from Affiliates for
an aggregate purchase price of approximately $2,609,800 and, in 1995, the
Company acquired nine Properties from Affiliates for an aggregate purchase price
of approximately $6,621,000. In addition, during the period January 1, 1997
through March 6, 1997, the Company acquired two Properties from an Affiliate for
an aggregate purchase price of approximately $1,768,000. The Affiliates had
purchased and temporarily held title to these Properties in order to facilitate
the acquisition of the Properties by the Company. Each Property was acquired at
a cost no greater than the lesser of the cost of the Property to the Affiliate
(including carrying costs) or the Property's appraised value.
In connection with the acquisition of three Properties in 1996 and two
Properties during the period January 1, 1997 through March 6, 1997, that were
constructed or renovated by Affiliates, the Company incurred
development/construction management fees totalling $159,350 and $129,379,
respectively. Such fees were included in the purchase price of Properties. No
such amounts were incurred in 1995.
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The Advisor, the Managing Dealer and the Affiliates from which the
Company acquired Properties are wholly owned subsidiaries of CNL Group, Inc., of
which James M. Seneff, Jr., Chairman of the Board and Chief Executive Officer of
the Company, and his spouse are the sole stockholders.
All of these fees were paid in accordance with the provisions of the
Company's Articles of Incorporation.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. INVESTORS IN THE COMPANY SHOULD NOT ASSUME THAT THEY
WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN
SUCH PRIOR REAL ESTATE PROGRAMS. INVESTORS WHO PURCHASE SHARES IN THE COMPANY
WILL NOT THEREBY ACQUIRE ANY OWNERSHIP INTEREST IN ANY PARTNERSHIPS TO WHICH THE
FOLLOWING INFORMATION RELATES.
Two Directors of the Company, Robert A. Bourne and James M. Seneff,
Jr., individually or with others have served as general partners of 84 and 85
real estate limited partnerships, respectively, including the 18 publicly
offered CNL Income Fund partnerships, which purchased properties similar to
those to be acquired by the Company, listed in the table below. None of these
limited partnerships has been audited by the IRS. Of course, there is no
guarantee that the Company will not be audited. Based on an analysis of the
operating results of the prior partnerships, the general partners of these
partnerships believe that each of such partnerships has met or is meeting its
principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and, in the case of
two funds, casual dining restaurant properties similar to those that the Company
intends to acquire and have investment objectives similar to those of the
Company. As of December 31, 1996, these 18 partnerships had raised a total of
$588,421,815 from a total of 47,854 investors, and had invested in 668 fast-food
or family-style restaurant properties.
As of December 31, 1996, 17 of the 18 CNL public partnerships had
completed their offerings. As indicated in Exhibit C, the eight public
partnerships, the offerings which were fully subscribed between October 1991 and
September 1996, had made annualized cash distributions to limited partners in
amounts equal to from 4.5% to 9.1% of invested capital as of June 30, 1996. As
of June 30, 1996, an average of approximately .54% (ranging from zero to 2.4%)
of the cumulative cash distributions to limited partners from these partnerships
constituted cash distributions that exceeded accumulated net income on a GAAP
basis, primarily as the result of depreciation deductions. Accumulated net
income includes deductions for depreciation and amortization expense and income
from certain non-cash items. The partnerships do not treat these amounts, which
are presented as a "return of capital on a GAAP basis" in Table III of the Prior
Performance Tables included in Exhibit C, as a return of capital for any other
purpose. Certain additional information relating to the offerings and investment
history of the 18 public partnerships is set forth below.
<TABLE>
<CAPTION>
Date 90% of Net
Number of Proceeds Fully
Maximum Limited Invested or
Name of Offering Partnership Committed to
Partnership Amount (1) Date Closed Units Sold Investment (2)
- ----------- ---------- ----------- ---------- --------------
<S> <C>
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 Units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 Units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 Units)
</TABLE>
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<TABLE>
<CAPTION>
Date 90% of Net
Number of Proceeds Fully
Maximum Limited Invested or
Name of Offering Partnership Committed to
Partnership Amount (1) Date Closed Units Sold Investment (2)
- ----------- ---------- ----------- ---------- --------------
<S> <C>
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 Units)
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 Units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (70,000 Units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 Units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 Units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 Units)
CNL $40,000,000 March 18, 1992 4,000,000 June 1992
Income (4,000,000 Units)
Fund X, Ltd.
CNL Income $40,000,000 September 28, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 Units)
CNL $45,000,000 March 15, 1993 4,500,000 July 1993
Income (4,500,000 Units)
Fund XII, Ltd.
CNL Income $40,000,000 August 26, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 Units)
CNL Income $45,000,000 February 22, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 Units)
CNL Income $40,000,000 September 1, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 Units)
CNL $45,000,000 June 12, 1995 4,500,000 August 1995
Income Fund XVI, Ltd. (4,500,000 Units)
CNL Income $30,000,000 September 19, 1996 3,000,000 (3)
Fund XVII, Ltd. (3,000,000 Units)
CNL Income $35,000,000 (4) (4) (4)
Fund XVIII, Ltd. (3,500,000 Units)
</TABLE>
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<PAGE>
- ------------------------------------
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size of
the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income
Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income Fund XII, Ltd.,
CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd, and CNL Income Fund
XVIII, Ltd.
(2) For a description of the property acquisitions by these limited
partnerships during the last ten years, see the table set forth on the
following page.
(3) As of December 31, 1996, CNL Income Fund XVII, Ltd. had purchased 24
properties for approximately $23,753,600, representing an investment of 90%
of net proceeds received.
(4) As of December 31, 1996, CNL Income Fund XVIII, Ltd., which is offering a
maximum of 3,500,000 limited partnership units ($35,000,000), had received
subscriptions totalling $8,421,815 (842,182 units). As of such date, CNL
Income Fund XVIII, Ltd. had purchased two properties.
As of December 31, 1996, Mr. Seneff and Mr. Bourne, directly or through
affiliated entities, also had served as joint general partners of 65 nonpublic
real estate limited partnerships. The offerings of 63 of these 65 nonpublic
limited partnerships had terminated as of December 31, 1996. These 63
partnerships raised a total of $164,419,266 from approximately 4,111 investors,
and purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 200 projects as of December 31, 1996. These
200 projects consist of 19 apartment projects (comprising 11% of the total
amount raised by all 63 partnerships), 13 office buildings (comprising 5% of the
total amount raised by all 63 partnerships), 154 fast-food or family-style
restaurant property and business investments (comprising 69% of the total amount
raised by all 63 partnerships), one condominium development (comprising .5% of
the total amount raised by all 63 partnerships), four hotels/motels (comprising
5% of the total amount raised by all 63 partnerships), seven commercial/retail
properties (comprising 9% of the total amount raised by all 63 partnerships),
and two tracts of undeveloped land (comprising .5% of the total amount raised by
all 63 partnerships). The offering of the two remaining nonpublic limited
partnerships (offerings aggregating $16,550,000) had raised $4,675,000 from 95
investors (approximately 58.6% of the total offering amount) as of December 31,
1996.
Mr. Bourne also has served, without Mr. Seneff, as a general partner of
one additional nonpublic real estate limited partnership program which raised a
total of $600,000 from 13 investors and purchased, through participation in a
limited partnership, one apartment building located in Georgia with a purchase
price of $1,712,000.
Mr. Seneff also has served, without Mr. Bourne, as a general partner of
two additional nonpublic real estate limited partnerships which raised a total
of $240,000 from 12 investors and purchased two office buildings with an
aggregate purchase price of $928,390. Both of the office buildings are located
in Florida.
Of the 83 real estate limited partnerships whose offerings had closed
as of December 31, 1996 (including 17 CNL Income Fund limited partnerships) in
which Mr. Seneff and/or Mr. Bourne serve or have served as general partners in
the past ten years, 35 invested in restaurant properties leased on a
"triple-net" basis, including six which also invested in franchised restaurant
businesses (accounting for approximately 93% of the total amount raised by all
83 real estate limited partnerships).
The following table sets forth summary information, as of December 31,
1996 regarding property acquisitions during the ten preceding years by the 17
limited partnerships that, either individually or through a joint venture or
partnership arrangement, acquired restaurant properties and that have investment
objectives similar to those of the Company.
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Partnership Property Location Financing Program
- ----------- -------- -------- --------- -------
<S> <C>
CNL Income 20 fast-food or AL, AZ, CA, FL, All cash Public
Fund, Ltd. family-style GA, LA, MD, OK,
restaurtants TX, VA
CNL Income 43 fast-food or AL, AZ, CO, FL, All cash Public
Fund II, Ltd. family-style GA, IL, IN, LA, MI,
restaurants MN, MO, NC, NM,
OH, TX, WY
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Partnership Property Location Financing Program
- ----------- -------- -------- --------- -------
<S> <C>
CNL Income 32 fast-food or AZ, CA, FL, GA, All cash Public
Fund III, Ltd. family-style IA, IL, IN, KS, KY,
restaurants MD, MI, MN, MO,
NE, OK, TX
CNL Income 44 fast-food or AL, DC, FL, GA, All cash Public
Fund IV, Ltd. family-style IL, IN, KS, MA,
restaurants MD, MI, MS, NC,
OH, PA, TN, TX,
VA
CNL Income 30 fast-food or FL, GA, IL, IN, MI, All cash Public
Fund V, Ltd. family-style NH, NY, OH, SC,
restaurants TN, TX, UT, WA
CNL Income 46 fast-food or AR, AZ, FL, IN, All cash Public
Fund VI, Ltd. family-style MA, MI, MN, NC,
restaurants NE, NM, NY, OH,
OK, PA, TN, TX,
VA, WY
CNL Income 46 fast-food or AZ, CO, FL, GA, All cash Public
Fund VII, Ltd. family-style IN, LA, MI, MN,
OH, SC, TN, TX,
UT, WA
CNL Income 40 fast-food or AZ, FL, IN, LA All cash Public
Fund VIII, Ltd. family-style MI, MN, NC, NY,
restaurants OH, TN, TX, VA
CNL Income 41 fast-food or AL, FL, GA, IL, IN, All cash Public
Fund IX, Ltd. family-style LA, MI, MN, MS,
restaurants NC, NH, NY, OH,
SC, TN, TX
CNL Income 49 fast-food or AL, CA, CO, FL, All cash Public
Fund X, Ltd. family-style ID, IL, LA, MI,
restaurants MO, MT, NC, NH,
NM, NY, OH, PA,
SC, TN, TX
CNL Income 39 fast-food or AL, AZ, CA, CO, All cash Public
Fund XI, Ltd. family-style CT, FL, KS, LA,
restaurants MA, MI, MS, NC,
NH, NM, OH, OK,
PA, SC, TX, VA,
WA
CNL Income 49 fast-food or AL, AZ, CA, FL, All cash Public
Fund XII, Ltd. family-style GA, LA, MO, MS,
restaurants NC, NM, OH, SC,
TN, TX, WA
CNL Income 48 fast-food or AL, AR, AZ, CA All cash Public
Fund XIII, Ltd. family-style CO, FL, GA, IN,
restaurants KS, LA, MD, NC,
OH, PA, SC, TN,
TX, VA
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Partnership Property Location Financing Program
- ----------- -------- -------- --------- -------
<S> <C>
CNL Income 61 fast-food or AL, AZ, CO, FL, All cash Public
Fund XIV, Ltd. family-style GA, KS, LA, MN,
restaurants MO, MS, NC, NJ,
NV, OH, SC, TN,
TX, VA
CNL Income 53 fast-food or CA, FL, GA, KS, All cash Public
Fund XV, Ltd. family-style KY, MN, MO, MS,
restaurants NC, NJ, NM, OH,
OK, PA, SC, TN,
TX, VA
CNL Income 44 fast-food or AZ, CA, CO, DC, All cash Public
Fund XVI, Ltd. family-style FL, GA, ID, IN, KS,
restaurants MN, MO, NC, NM,
NV, OH, TN, TX,
UT, WI
CNL Income 24 fast-food, CA, FL, GA, IL, IN, All cash Public
Fund XVII, Ltd. family-style or MI, NC, NV, OH,
casual dining SC, TN, TX
restaurants
CNL Income 2 fast-food, NC, TX All cash Public
Fund XVIII, Ltd. family-style or
casual dining
restaurants
</TABLE>
A more detailed description of the acquisitions by real estate limited
partnerships sponsored by Messrs. Bourne and Seneff is set forth in prior
performance Table VI, included in Part II of the registration statement filed
with the Securities and Exchange Commission for this offering. A copy of Table
VI is available to stockholders from the Company upon request, free of charge.
In addition, upon request to the Company, the Company will provide, without
charge, a copy of the most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission for CNL Income Fund, Ltd., CNL Income Fund
II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund
V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund VII, Ltd., CNL Income Fund
VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X, Ltd., CNL Income Fund
XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII, Ltd., CNL Income Fund
XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI, Ltd., CNL Income Fund
XVII, Ltd., and CNL Income Fund XVIII, Ltd., as well as a copy, for a reasonable
fee, of the exhibits filed with such reports.
In order to provide potential purchasers of Shares in the Company with
information to enable them to evaluate the prior experience of the Messrs.
Seneff and Bourne as general partners of real estate limited partnerships,
including those set forth in the foregoing table, certain financial and other
information concerning those limited partnerships with investment objectives
similar to one or more of the Company's investment objectives in which Messrs.
Seneff and Bourne are general partners is provided in the Prior Performance
Tables included as Exhibit C. Information about the previous public
partnerships, the offerings of which were fully subscribed between October 1991
and September 1996, is included therein. Potential stockholders are encouraged
to examine the Prior Performance Tables attached as Exhibit C (in Table III),
which include information as to the operating results of these prior
partnerships, for more detailed information concerning the experience of Messrs.
Seneff and Bourne.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making quarterly Distributions; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and Distributions) and providing protection against inflation
through automatic increases in base rent and receipt of percentage rent, and
obtaining fixed income through the receipt of payments on Mortgage Loans and
Secured Equipment Leases; (iii) qualifying and remaining qualified as a REIT for
federal income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment, either in whole or in part, within three to eight
years after commencement of this offering, through (a) the Listing of the Shares
of the Company, or, (b) if Listing does not occur by December 31, 2005, the
commencement of orderly Sales of the Company's assets, outside the ordinary
course of business and consistent with its objective of qualifying as a REIT,
and distribution of the proceeds thereof. The sheltering from tax of income from
other sources is not an objective of the Company. If the Company is successful
in achieving its investment and operating objectives, the stockholders (other
than tax-exempt entities) are likely to recognize taxable income in each year.
While there is no order of priority intended in the listing of the Company's
objectives, stockholders should realize that the ability of the Company to meet
these objectives may be severely handicapped by any lack of diversification of
the Company's investments and the terms of the leases.
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<PAGE>
The Company intends to meet its objectives through its investment
policies of (i) purchasing carefully selected, well-located Properties and
leasing them on a "triple-net" basis (which means that the tenant will be
responsible for paying the cost of all repairs, maintenance, property taxes, and
insurance) to operators of Restaurant Chains under leases requiring the tenant
to pay both base annual rental (including automatic increases in base rent) and
percentage rent based on gross restaurant sales, and (ii) offering Mortgage
Loans and Secured Equipment Leases to operators of Restaurant Chains.
In accordance with its investment policies, the Company intends to
invest its assets in Properties whose tenants are franchisors or franchisees of
one of the Restaurant Chains to be selected by the Company, based upon
recommendations by the Advisor. Although there is no limit on the number of
restaurants of a particular Restaurant Chain which the Company may acquire, the
Company currently does not expect to invest more than 25% of the Gross Proceeds
in Properties of any one Restaurant Chain or to invest more than 30% of the
Gross Proceeds in Properties located in any one state. Potential Mortgage Loan
borrowers and Secured Equipment Lease lessees will similarly be operators of
Restaurant Chains selected by the Company, following the Advisor's
recommendations. The Company has undertaken, consistent with its objective of
qualifying as a REIT for federal income tax purposes, to ensure that the value
of all Secured Equipment Leases, in the aggregate, will not exceed 25% of the
Company's total assets, while Secured Equipment Leases to any single lessee, in
the aggregate, will not exceed 5% of the Company's total assets. It is intended
that investments will be made in Properties, Mortgage Loans, and Secured
Equipment Leases in various locations in an attempt to achieve diversification
and thereby minimize the effect of changes in local economic conditions and
certain other risks. The extent of such diversification, however, depends in
part upon the amount raised in the offering. See "Estimated Use of Proceeds" and
"Risk Factors -- Investment Risks -- Possible Lack of Diversification." For a
more complete description of the manner in which the structure of the Company's
business, including its investment policies, will facilitate the Company's
ability to meet its investment objectives, See "Business."
The investment objectives of the Company may not be changed without the
approval of stockholders owning a majority of the shares of outstanding Common
Stock. The Bylaws of the Company require the Independent Directors to review the
Company's investment policies at least annually to determine that the policies
are in the best interests of the stockholders. The determination shall be set
forth in the minutes of the Board of Directors along with the basis for such
determination. The Directors (including a majority of the Independent Directors)
have the right, without a stockholder vote, to alter the Company's investment
policies but only to the extent consistent with the Company's investment
objectives and investment limitations. See "Certain Investment Limitations,"
below.
CERTAIN INVESTMENT LIMITATIONS
In addition to other investment restrictions imposed by the Directors
from time to time, consistent with the Company's objective of qualifying as a
REIT, the Articles of Incorporation or the Bylaws provide for the following
limitations on the Company's investments.
1. Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property under construction, under contract for development or planned for
development within one year.
2. The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate futures,
when used solely for hedging purposes.
3. The Company shall not invest in or make mortgage loans unless an
appraisal is obtained concerning the underlying property. Mortgage indebtedness
on any property shall not exceed such property's appraised value. In cases in
which the majority of Independent Directors so determine, and in all cases in
which the mortgage loan involves the Advisor, Directors, or Affiliates, such
appraisal must be obtained from an independent expert concerning the underlying
property. Such appraisal shall be maintained in the Company's records for at
least five years, and shall be available for inspection and duplication by any
stockholder. In addition to the appraisal, a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or condition
of the title must be obtained. The Company may not invest in real estate
contracts of sale otherwise known as land sale contracts.
4. The Company may not make or invest in mortgage loans, including
construction loans, on any one Property if the aggregate amount of all mortgage
loans outstanding on the Property, including the loans of the Company, would
exceed an amount equal to 85% of the appraised value of the Property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the Property, including
the loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged property),
the current payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds 5% per annum of
the principal balance of the loan.
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<PAGE>
5. The Company may not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Directors, or their Affiliates.
6. The Company will not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not otherwise
interested in such transaction approve the transaction as being fair,
competitive, and commercially reasonable and determine that the transaction will
not jeopardize the Company's ability to qualify and remain qualified as a REIT.
Investments in entities affiliated with the Advisor, a Director, the Company, or
Affiliates thereof are subject to the restrictions on joint venture investments.
In addition, the Company shall not invest in any security of any entity holding
investments or engage in activities prohibited by the Company's Articles of
Incorporation.
7. The Company will not issue (i) equity securities redeemable solely
at the option of the holder (except that stockholders may offer their Shares to
the Company as described under "Redemption of Shares,"; (ii) debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year), as adjusted for known charges, is sufficient to service that
higher level of debt properly; (iii) Shares on a deferred payment basis or under
similar arrangements; (iv) non-voting or assessable securities; or (v) options,
warrants, or similar evidences of a right to buy its securities (collectively,
"Options") unless (1) issued to all of its stockholders ratably, (2) as part of
a financing arrangement, or (3) as part of a stock option plan available to
Directors, officers, or employees of the Company or the Advisor. Options may not
be issued to the Advisor, Directors or any Affiliate thereof except on the same
terms as such Options are sold to the general public. Options may be issued to
persons other than the Advisor, Directors or any Affiliate thereof but not at
exercise prices less than the fair market value of the underlying securities on
the date of grant and not for consideration that in the judgment of the
Independent Directors has a market value less than the value of such Option on
the date of grant. Options issuable to the Advisor, Directors or any Affiliate
thereof shall not exceed 10% of the outstanding Shares on the date of grant.
8. A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If a
majority of the Independent Directors determine, or if the Property is acquired
from the Advisor, a Director, or Affiliates thereof, such fair market value
shall be determined by a qualified independent real estate appraiser selected by
the Independent Directors.
9. The Company will not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
10. The Company will not invest in any foreign currency or bullion or
engage in short sales.
11. The Company will not issue senior securities except notes to banks
and other lenders and preferred shares.
12. The Company will not make loans to the Advisor, Directors or their
Affiliates.
13. The Company will not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
14. The Company will not make any investment that the Company believes
will be inconsistent with its objective of qualifying as a REIT.
The foregoing limitations may not be modified or eliminated without the
approval of a majority of the shares of outstanding Common Stock.
DISTRIBUTION POLICY
GENERAL
In order to qualify as a REIT for federal income tax purposes, among
other things, the Company must make distributions each taxable year (not
including any return of capital for federal income tax purposes) equal to at
least 95% of its real estate investment trust taxable income, although the Board
of Directors, in its discretion, may increase that percentage as it deems
appropriate. See "Federal Income Tax Considerations -Taxation of the Company --
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<PAGE>
Distribution Requirements." The declaration of Distributions is within the
discretion of the Board of Directors and depends upon the Company's
distributable funds, current and projected cash requirements, tax considerations
and other factors.
DISTRIBUTIONS
The following table reflects the total Distributions and Distributions
per Share declared by the Company for each month since the Company commenced
operations.
Total Distributions
Month Distributions Per Share
- ----- ------------- -------------
June 1995 $ 15,148 $0.030000
July 1995 30,682 0.030000
August 1995 57,739 0.035000
September 1995 84,467 0.050000
October 1995 104,733 0.050000
November 1995 155,665 0.058300
December 1995 190,184 0.058300
January 1996 225,354 0.058300
February 1996 255,649 0.058300
March 1996 287,805 0.058300
April 1996 323,721 0.058300
May 1996 368,155 0.058300
June 1996 407,803 0.058300
July 1996 458,586 0.059375
August 1996 517,960 0.059375
September 1996 559,599 0.059375
October 1996 615,914 0.059375
November 1996 683,907 0.059375
December 1996 731,569 0.059375
January 1997 827,967 0.059375
February 1997 884,794 0.059375
March 1997 980,571 0.060416
The Company intends to make regular Distributions to stockholders. The
payment of Distributions commenced in July 1995. Distributions will be made to
those stockholders who are stockholders as of the record date selected by the
Directors. Distributions will be declared monthly and paid on a quarterly basis
during the offering period and declared and paid quarterly thereafter. The
Company is required to distribute annually at least 95% of its real estate
investment trust taxable income to maintain its objective of qualifying as a
REIT. Generally, income distributed will not be taxable to the Company under
federal income tax laws if the Company complies with the provisions relating to
qualification as a REIT. If the cash available to the Company is insufficient to
pay such Distributions, the Company may obtain the necessary funds by borrowing,
issuing new securities, or selling assets. These methods of obtaining funds
could affect future Distributions by increasing operating costs. To the extent
that Distributions to stockholders exceed earnings and profits, such amounts
constitute a return capital for federal income tax purposes, although such
Distributions will not reduce stockholders' aggregate Invested Capital. For the
years ended December 31, 1996 and 1995, the Company declared and made
Distributions totalling $5,436,072 and $638,618, respectively, of which 90.25%
and 59.82%, respectively, of such amounts were characterized as ordinary income
and 9.75% and 40.18%, respectively, were characterized as return of capital for
federal income tax purposes. However, no amounts distributed to stockholders as
of March 6, 1997, are required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return on their
Invested Capital. Due to the fact that the Company had not acquired all of its
Properties and was still in its offering period as of December 31, 1996 and
1995, the characterization of Distributions for federal income tax purposes is
not necessarily considered by management to be representative of the
characterization of Distributions in future years. Distributions in kind shall
not be permitted, except for distributions of readily marketable securities;
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in accordance with
the terms of the Articles of Incorporation; or distributions of in-kind property
as long as the Directors (i) advise each stockholder of the risks associated
with direct ownership of the property; (ii) offer each stockholder the election
of receiving in-kind property distributions; and (iii) distribute in-kind
property only to those stockholders who accept the Directors' offer.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
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<PAGE>
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the obligation of the Directors
to cause the Company to qualify and remain qualified as a REIT for federal
income tax purposes. The Company intends to increase Distributions in accordance
with increases in net cash from operations.
SUMMARY OF THE
ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Company is organized as a corporation under the laws of the State
of Maryland. As a Maryland corporation, the Company is governed by the Maryland
General Corporation Law. Maryland corporate law deals with a variety of matters
regarding Maryland corporations, including liabilities of the Company,
stockholders, directors, and officers, the amendment of the Articles of
Incorporation, and mergers of a Maryland corporation with other entities. Since
many matters are not addressed by Maryland corporate law, it is customary for a
Maryland corporation to address these matters through provisions in its Articles
of Incorporation.
The Articles of Incorporation and the Bylaws of the Company contain
certain provisions that could make it more difficult to acquire control of the
Company by means of a tender offer, a proxy contest, or otherwise. 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 its Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and facilitate negotiations which may result in improvement of the
terms of an initial offer.
The Articles of Incorporation also permit Listing by the Board of
Directors after completion or termination of the offering.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized a total of 46,000,000 shares of capital
stock, consisting of 20,000,000 shares of Common Stock, $.01 par value per
share, 3,000,000 shares of Preferred Stock ("Preferred Stock"), and 23,000,000
additional shares of excess stock ("Excess Shares"), $.01 par value per share.
Of the 23,000,000 Excess Shares, 20,000,000 are issuable in exchange for Common
Stock and 3,000,000 are issuable in exchange for Preferred Stock as described
below at "-- Restriction of Ownership." As of March 6, 1997, the Company had
16,503,483 shares of Common Stock outstanding (including 20,000 issued to the
Advisor prior to the commencement of this offering and 59,177 Shares issued
pursuant to the Reinvestment Plan) and no Preferred Stock or Excess Shares
outstanding.
The Board of Directors has approved a resolution to amend the Articles
of Incorporation to increase the number of authorized shares of Common Stock
from 20,000,000 to 75,000,000 with a corresponding increase in the number of
authorized Excess Shares from 23,000,000 to 78, 000,000. Pursuant to the
Articles of Incorporation, this amendment must be approved by the affirmative
vote of the holders of not less than a majority of the shares of Common Stock
outstanding and entitled to vote thereon. The Board of Directors will submit
this matter to a vote of the stockholders at the annual meeting to be held on
April 4, 1997. In the event that the increase in the number of authorized shares
is not approved by the stockholders, this offering will be limited to up to
4,800,000 Shares. In the event that the increase in the number of authorized
shares is approved by the stockholders, this offering will be increased to up to
27,500,000 Shares. See "The Offering." In addition, if the increase in the
number of authorized shares is approved by the stockholders, the Board of
Directors may determine to engage in future offerings of Common Stock of up to
the number of unissued authorized shares of Common Stock available following the
termination of this offering.
The Company will not issue share certificates except to stockholders
who make a written request to the Company. Each stockholder's investment will be
recorded on the books of the Company, and information concerning the
restrictions and rights attributable to Shares (whether in connection with an
initial issuance or a transfer) will be sent to the stockholder receiving Shares
in connection with an issuance or transfer. A stockholder wishing to transfer
his or her Shares will be required to send only an executed form to the Company,
and the Company will provide the required form upon a stockholder's request. The
executed form and any other required documentation must be received by the
Company at least one calendar month prior to the last date of the current
quarter. Subject to restrictions in the Articles of Incorporation, transfers of
Shares shall be effective, and the transferee of the Shares will be recognized
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as the holder of such Shares as of the first day of the following quarter on
which the Company receives properly executed documentation. Stockholders who are
residents of New York may not transfer fewer than 250 shares at any time.
Stockholders have no preemptive rights to purchase or subscribe for
securities that the Company may issue subsequently. Each Share is entitled to
one vote per Share, and Shares do not have cumulative voting rights. The
stockholders are entitled to Distributions in such amounts as may be declared by
the Board of Directors from time to time out of funds legally available for such
payments and, in the event of liquidation, to share ratably in any assets of the
Company remaining after payment in full of all creditors.
All of the Shares offered hereby will be fully paid and nonassessable
when issued.
The Articles of Incorporation authorize the Board of Directors to
designate and issue from time to time one or more classes or series of Preferred
Shares without stockholder approval. The Board of Directors may determine the
relative rights, preferences, and privileges of each class or series of
Preferred Stock so issued. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
it may afford the holders of any series or class of Preferred Stock preferences,
powers, and rights senior to the rights of holders of Common Stock; however, the
voting rights for each share of Preferred Stock shall not exceed voting rights
which bear the same relationship to the voting rights of the Shares as the
consideration paid to the Company for each share of Preferred Stock bears to the
book value of the Shares on the date that such Preferred Stock is issued. The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company. The Board of Directors has no present plans to
issue any Preferred Stock.
Similarly, the voting rights per share of equity securities of the
Company (other than the publicly held equity securities of the Company) sold in
a private offering shall not exceed the voting rights which bear the same
relationship to the voting rights of the publicly held equity securities as the
consideration paid to the Company for each privately offered Company share bears
to the book value of each outstanding publicly held equity security. The Board
of Directors currently has no plans to offer equity securities of the Company in
a private offering.
For a description of the characteristics of the Excess Shares, which
differ from Common Stock and Preferred Stock in a number of respects, including
voting and economic rights, see "Restriction of Ownership," below.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Directors of
the Company cannot be less than three nor more than 15. A majority of the Board
of Directors will be Independent Directors. See "Management -- Independent
Directors." Each Director, other than a Director elected to fill the unexpired
term of another Director, will be elected at each annual meeting or at any
special meeting of the stockholders called for that purpose, by a majority of
the shares of Common Stock outstanding and entitled to vote. Independent
Directors will nominate replacements for vacancies among the Independent
Directors. Under the Articles of Incorporation, the term of office for each
Director will be one year, expiring each annual meeting of stockholders;
however, nothing in the Articles of Incorporation prohibits a director from
being reelected by the stockholders. The Directors may not (a) amend the
Articles of Incorporation, except for amendments which do not adversely affect
the rights, preferences and privileges of stockholders; (b) sell all or
substantially all of the Company's assets other than in the ordinary course of
business or in connection with liquidation and dissolution; (c) cause the merger
or other reorganization of the Company; or (d) dissolve or liquidate the
Company, other than before the initial investment in property. The Directors may
establish such committees as they deem appropriate (provided that the majority
of the members of each committee are Independent Directors).
STOCKHOLDER MEETINGS
An annual meeting will be held for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting,
and will be held not less than 30 days after delivery of the annual report.
Under the Company's Bylaws, a special meeting of stockholders may be called by
the chief executive officer, a majority of the Directors, or a majority of the
Independent Directors. Special meetings of the stockholders also shall be called
by an officer of the Company upon the written request of stockholders holding in
the aggregate not less than 10% of the outstanding Common Stock entitled to vote
at such meeting. Upon receipt of such a written request, either in person or by
mail, stating the purpose or purposes of the meeting, the Company shall provide
all stockholders, within ten days of receipt of the written request, written
notice, either in person or by mail, of a meeting and its purpose. Such meeting
will be held not less than fifteen nor more than sixty days after distribution
of the notice, at a time and place specified in the request, or if none is
specified, at a time and place convenient to stockholders.
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At any meeting of stockholders, each stockholder is entitled to one
vote per share of Common Stock owned of record on the applicable record date. In
general, the presence in person or by proxy of a majority of the shares of
Common Stock shall constitute a quorum, and the vote of the holders of a
majority of the shares of Common Stock present in person or by proxy will be
binding on all the stockholders of the Company.
ADVANCE NOTICE FOR STOCKHOLDER NOMINATIONS FOR
DIRECTORS AND PROPOSALS OF NEW BUSINESS
The Bylaws of the Company require notice at least 60 days and not more
than 90 days before the anniversary of the prior annual meeting of stockholders
in order for a stockholder to (a) nominate a Director, or (b) propose new
business other than pursuant to the notice of the meeting or by or on behalf of
the Directors. The Bylaws contain a similar notice requirement in connection
with nominations for Directors at a special meeting of stockholders called for
the purpose of electing one or more Directors. Accordingly, failure to comply
with the notice provisions will make stockholders unable to nominate Directors
or propose new business.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Pursuant to the Company's Articles of Incorporation, the Directors can
amend the Articles of Incorporation by a two-thirds majority from time to time
if necessary in order to qualify initially or in order to continue to qualify as
a REIT. Except as set forth above, the Articles of Incorporation may be amended
only by the affirmative vote of a majority, and, in some cases a two-thirds
majority, of the shares of Common Stock outstanding and entitled to vote. The
stockholders may vote to amend the Articles of Incorporation, terminate or
dissolve the Company or remove one or more Directors without necessity for
concurrence by the Board of Directors.
MERGERS, COMBINATIONS, AND SALE OF ASSETS
A merger, combination, sale, or other disposition of all or
substantially all of the Company's assets other than in the ordinary course of
business must be approved by the Directors and a majority of the shares of
Common Stock outstanding and entitled to vote. In addition, any such transaction
involving an Affiliate of the Company or the Advisor also must be approved by a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction as fair and reasonable to the
Company and on terms and conditions not less favorable to the Company than those
available from unaffiliated third parties.
TERMINATION OF THE COMPANY AND REIT STATUS
The Articles of Incorporation provide for the voluntary termination and
dissolution of the Company by the affirmative vote of a majority of the shares
of Common Stock outstanding and entitled to vote at a meeting called for that
purpose. In addition, the Articles of Incorporation permit the stockholders to
terminate the status of the Company as a REIT under the Code only by the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote.
Under the Articles of Incorporation, the Company automatically will
terminate and dissolve on December 31, 2005, unless Listing occurs, in which
event the Company automatically will become a perpetual life entity.
RESTRICTION OF OWNERSHIP
To qualify as a REIT under the Code (i) not more than 50% of the value
of the REIT's outstanding stock may be owned, directly or indirectly (applying
certain attribution rules), by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year, (ii) the
REIT's stock must be beneficially owned (without reference to any attribution
rules) 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; and (iii)
certain other requirements must be satisfied. See "Federal Income Tax
Considerations -- Taxation of the Company."
To ensure that the Company satisfies these requirements, the Articles
of Incorporation restrict the direct or indirect ownership (applying certain
attribution rules) of shares of Common Stock and Preferred Stock by any Person
(as defined in the Articles of Incorporation) to no more than 9.8% of the
outstanding shares of such Common Stock or 9.8% of any series of Preferred
Shares (the "Ownership Limit"). However, the Articles of Incorporation provide
that this Ownership Limit may be modified, either entirely or with respect to
one or more Persons, by a vote of a majority of the Directors, if such
modification does not jeopardize the Company's status as a REIT. As a condition
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of such modification, the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the status of the Company as a REIT.
It is the responsibility of each Person (as defined in the Articles of
Incorporation) owning (or deemed to own) more than 5% of the outstanding shares
of Common Stock or any series of outstanding Preferred Stock to give the Company
written notice of such ownership. In addition, to the extent deemed necessary by
the Directors, the Company can demand that each stockholder disclose to the
Company in writing all information regarding the Beneficial and Constructive
Ownership (as such terms are defined in the Articles of Incorporation) of the
Common Stock and Preferred Stock.
If the ownership, transfer or acquisition of shares of Common or
Preferred Stock, or change in capital structure of the Company or other event or
transaction would result in (i) any Person owning (applying certain attribution
rules) Common Stock or Preferred Stock in excess of the Ownership Limit, (ii)
fewer than 100 Persons owning the Common Stock and Preferred Stock, (iii) the
Company being "closely held" within the meaning of section 856(h) of the Code,
or (iv) the Company failing any of the gross income requirements of section
856(c) of the Code or otherwise failing to qualify as a REIT, then the
ownership, transfer, or acquisition, or change in capital structure or other
event or transaction that would have such effect will be void as to the
purported transferee or owner, and the purported transferee or owner will not
have or acquire any rights to the Common Stock and/or Preferred Stock, as the
case may be, to the extent required to avoid such a result. Common Stock or
Preferred Stock owned, transferred or proposed to be transferred in excess of
the Ownership Limit or which would otherwise jeopardize the Company's status as
a REIT will automatically be converted to Excess Shares. A holder of Excess
Shares is not entitled to Distributions, voting rights, and other benefits with
respect to such shares except for the right to payment of the purchase price for
the shares (or, in the case of a devise or gift or similar event which results
in the issuance of Excess Shares, the fair market value at the time of such
devise or gift or event) and the right to certain distributions upon
liquidation. Any Distribution paid to a proposed transferee or holder of Excess
Shares shall be repaid to the Company upon demand. Excess Shares shall be
subject to repurchase by the Company at its election. The purchase price of any
Excess Shares shall be equal to the lesser of (a) the price paid in such
purported transaction (or, in the case of a devise or gift or similar event
resulting in the issuance of Excess Shares, the fair market value at the time of
such devise or gift or event), or (b) the fair market value of such Shares on
the date on which the Company or its designee determines to exercise its
repurchase right. If the foregoing transfer restrictions are determined to be
void or invalid by virtue of any legal decision, statute, rule or regulation,
then the purported transferee of any Excess Shares may be deemed, at the option
of the Company, to have acted as an agent on behalf of the Company in acquiring
such Excess Shares and to hold such Excess Shares on behalf of the Company.
For purposes of the Articles of Incorporation, the term "Person" shall
mean an individual, corporation, partnership, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity, or a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include (i) CNL Fund Advisors, Inc.,
during the period ending on December 31, 1995, or (ii) an underwriter which
participated in a public offering of Shares for a period of sixty (60) days
following the purchase by such underwriter of Shares therein, provided that the
foregoing exclusions shall apply only if the ownership of such Shares by CNL
Fund Advisors, Inc. or an underwriter would not cause the Company to fail to
qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(a) of the code or otherwise cause the Company to fail to qualify as
a REIT.
RESPONSIBILITY OF DIRECTORS
Directors serve in a fiduciary capacity and shall have a fiduciary duty
to the stockholders of the Company, which duty shall include a duty to supervise
the relationship of the Company with the Advisor. See "Management -- Fiduciary
Responsibilities of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to Maryland corporate law and the Company's Articles of
Incorporation, the Company is required to indemnify and hold harmless a present
or former Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the "Indemnitee")
against any or all losses or liabilities reasonably incurred by the Indemnitee
in connection with or by reason of any act or omission performed or omitted to
be performed on behalf of the Company while a Director, officer, Advisor,
Affiliate, employee, or agent and in such capacity, provided, that the
Indemnitee has determined, in good faith, that the act or omission which caused
the loss or liability was in the best interests of the Company. The Company will
not indemnify or hold harmless the Indemnitee if: (i) the loss or liability was
the result of negligence or misconduct, or if the Indemnitee is an Independent
Director, the loss or liability was the result of gross negligence or willful
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misconduct, (ii) the act or omission was material to the loss or liability and
was committed in bad faith or was the result of active or deliberate dishonesty,
(iii) the Indemnitee actually received an improper personal benefit in money,
property, or services, (iv) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful, or (v) in a proceeding by or in the right of the Company, the
Indemnitee shall have been adjudged to be liable to the Company. In addition,
the Company will not provide indemnification for any loss or liability arising
from an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular Indemnitee; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular Indemnitee; or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities laws.
Pursuant to its Articles of Incorporation, the Company is required to pay or
reimburse reasonable expenses incurred by a present or former Director, officer,
Advisor or Affiliate and may pay or reimburse reasonable expenses incurred by
any other Indemnitee in advance of final disposition of a proceeding if the
following are satisfied: (i) the Indemnitee was made a party to the proceeding
by reasons of his or her service as a Director, officer, Advisor, Affiliate,
employee or agent of the Company, (ii) the Indemnitee provides the Company with
written affirmation of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the Company as authorized
by the Articles of Incorporation, (iii) the Indemnitee provides the Company with
a written agreement to repay the amount paid or reimbursed by the Company,
together with the applicable legal rate of interest thereon, if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct, and (iv) the legal proceeding was initiated by a third party who is not
a stockholder or, if by a stockholder of the Company acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement.
The Company's Articles of Incorporation further provide that any
indemnification, payment, or reimbursement of the expenses permitted by the
Articles of Incorporation will be furnished in accordance with the procedures in
Section 2-418 of the Maryland General Corporation Law.
Any indemnification may be paid only out of Net Assets of the Company,
and no portion may be recoverable from the stockholders.
There are certain defenses under Maryland law available to the
Directors, officers and the Advisor in the event of a stockholder action against
them. One such defense is the "business judgment rule." A Director, officer or
the Advisor can argue that he or she performed the action giving rise to the
stockholder's action in good faith and in a manner he or she reasonably believed
to be in the best interests of the Company, and with such care as an ordinarily
prudent person in a like position would have used under similar circumstances.
The Directors, officers and the Advisor are also entitled to rely on
information, opinions, reports or records prepared by experts (including
accountants, consultants, counsel, etc.) who were selected with reasonable care.
However, the Directors, officers and the Advisor may not invoke the business
judgment rule to further limit the rights of the stockholders to access records
as provided in the Articles of Incorporation.
The Company has entered into indemnification agreements with each of
the Company's officers and Directors. The indemnification agreements require,
among other things, that the Company indemnify its officers and Directors to the
fullest extent permitted by law, and advance to the officers and Directors all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. In accordance with this agreement, the Company
must indemnify and advance all expenses reasonably incurred by officers and
Directors seeking to enforce their rights under the indemnification agreements.
The Company also must cover officers and Directors under the Company's
directors' and officers' liability insurance. Although these indemnification
agreements offer substantially the same scope of coverage afforded by the
indemnification provisions in the Articles of Incorporation and the Bylaws, it
provides greater assurance to Directors and officers that indemnification will
be available because these contracts cannot be modified unilaterally by the
Board of Directors or by the stockholders.
REMOVAL OF DIRECTORS
Under the Articles of Incorporation, a Director may resign or be
removed with or without cause by the affirmative vote of a majority of the
capital stock of the Company outstanding and entitled to vote.
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INSPECTION OF BOOKS AND RECORDS
The Advisor will keep, or cause to be kept, on behalf of the Company,
full and true books of account on an accrual basis of accounting, in accordance
with generally accepted accounting principles. All of such books of account,
together with all other records of the Company, including a copy of the Articles
of Incorporation and any amendments thereto, will at all times be maintained at
the principal office of the Company, and will be open to inspection,
examination, and, for a reasonable charge, duplication upon reasonable notice
and during normal business hours by a stockholder or his agent.
As a part of its books and records, the Company will maintain at its
principal office an alphabetical list of names of stockholders, along with their
addresses and telephone numbers and the number of Shares held by each
stockholder. Such list shall be updated at least quarterly and shall be
available for inspection at the Company's home office by a stockholder or his or
her designated agent upon such stockholder's request. Such list also shall be
mailed to any stockholder requesting the list within 10 days of a request. The
Company may require the stockholder requesting the stockholder list to represent
that he or she will not make any commercial distribution of such list or the
information disclosed through such inspection. The Company may impose a
reasonable charge for expenses incurred in reproducing such list. The list may
not be sold or used for commercial purposes.
RESTRICTIONS ON "ROLL-UP" TRANSACTIONS
In connection with a proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all Properties
shall be obtained from an Independent Expert. In order to qualify as an
Independent Expert for this purpose(s), the person or entity shall have no
material current or prior business or personal relationship with the Advisor or
Directors and shall be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company. The Properties shall be appraised on a consistent basis, and the
appraisal shall be based on the evaluation of all relevant information and shall
indicate the value of the Properties as of a date immediately prior to the
announcement of the proposed Roll-Up Transaction. The appraisal shall assume an
orderly liquidation of Properties over a 12-month period. The terms of the
engagement of such Independent Expert shall clearly state that the engagement is
for the benefit of the Company and the stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to stockholders in connection with a
proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction
which has not been approved by at least two-thirds of the stockholders, the
person sponsoring the Roll-Up Transaction shall offer to stockholders who vote
against the proposal the choice of:
(i) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(A) remaining stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(B) receiving cash in an amount equal to the stockholder's pro
rata share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(i) which would result in the stockholders having democracy rights in
the Roll-Up Entity that are less than those provided in the Company's Articles
of Incorporation, Sections 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 and described
elsewhere in this Prospectus, including rights with respect to the election and
removal of Directors, annual reports, annual and special meetings, amendment of
the Articles of Incorporation, and dissolution of the Company. (See "Description
of Capital Stock" and "Stockholder Meetings," above);
(ii) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity), or which would limit the ability
of an investor to exercise the voting rights of its securities of the Roll-Up
Entity on the basis of the number of shares held by that investor;
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(iii) in which investor's rights to access of records of the Roll-Up
Entity will be less than those provided in Sections 8.4 and 8.5 of the Company's
Articles of Incorporation and described in "Inspection of Books and Records,"
above; or
(iv) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
consequences of the ownership of Shares of the Company, prepared by Shaw,
Pittman, Potts & Trowbridge, as Counsel. This discussion is based upon the laws,
regulations, and reported judicial and administrative rulings and decisions in
effect as of the date of this Prospectus, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the federal income or other tax
consequences applicable to all investors in light of their particular investment
or other circumstances, or to all categories of investors, some of whom may be
subject to special rules (including, for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). No ruling on the federal, state or local tax considerations relevant to
the operation of the Company, or to the purchase, ownership or disposition of
the Shares, has been requested from the Internal Revenue Service (the "IRS" or
the "Service") or other tax authority. Counsel has rendered certain opinions
discussed herein and believes that if the Service were to challenge the
conclusions of Counsel, such conclusions should prevail in court. However,
opinions of counsel are not binding on the Service or on the courts, and no
assurance can be given that the conclusions reached by Counsel would be
sustained in court. Prospective investors should consult their own tax advisors
in determining the federal, state, local, foreign and other tax consequences to
them of the purchase, ownership and disposition of the Shares of the Company,
the tax treatment of a REIT and the effect of potential changes in applicable
tax laws.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT for federal
income tax purposes, as defined in Sections 856 through 860 of the Code,
commencing with its taxable year ending December 31, 1995. The Company believes
that it is organized and will operate in such a manner as to qualify as a REIT,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT. The provisions of the Code pertaining to REITs are
highly technical and complex. Accordingly, this summary is qualified in its
entirety by the applicable Code sections, rules and regulations issued
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is currently
distributed to holders of Shares. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income tax in the following circumstances. First, the Company will be
taxed at regular corporate rates on any undistributed real estate investment
trust taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the alternative minimum tax
on its items of tax preference. Third, if the Company has net income from
foreclosure property, it will be subject to tax on such income at the highest
corporate rate. Foreclosure property generally means real property (and any
personal property incident to such real property) which is acquired as a result
of a default either on a lease of such property or on indebtedness which such
property secured and with respect to which an appropriate election is made.
Fourth, if the Company has net income derived from prohibited transactions, such
income will be subject to a 100% tax. A prohibited transaction generally
includes a sale or other disposition of property (other than foreclosure
property) that is held primarily for sale to customers in the ordinary course of
business. Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the net income attributable to the
greater of the amount by which the Company fails the 75% or 95% test. Sixth, if,
during each calendar year, the Company fails to distribute at least the sum of
(i) 85% of its real estate investment trust ordinary income for such year; (ii)
95% of its real estate investment trust capital gain net income for such year;
and (iii) any undistributed taxable income from prior periods, the Company will
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed.
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If the Company fails to qualify as a REIT for any taxable year and
certain relief provisions do not apply, the Company will be subject to federal
income tax (including alternative minimum tax) as an ordinary corporation on its
taxable income at regular corporate rates without any deduction or adjustment
for distributions to holders of Shares. To the extent that the Company would, as
a consequence, be subject to tax liability for any such taxable year, the amount
of cash available for satisfaction of its liabilities and for distribution to
holders of Shares would be reduced. Distributions made to holders of Shares
generally would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and, subject to certain limitations, would be
eligible for the corporate dividends received deduction, but there can be no
assurance that any such Distributions would be made. The Company would not be
eligible to elect REIT status for the four taxable years after the taxable year
it failed to qualify as a REIT, unless its failure to qualify was due to
reasonable cause and not willful neglect and certain other requirements were
satisfied.
Opinion of Counsel. Based upon representations made by officers of the
Company with respect to relevant factual matters, upon the existing Code
provisions, rules and regulations promulgated thereunder and reported
administrative and judicial interpretations thereof, upon Counsel's independent
review of such documents as Counsel deemed relevant in the circumstances and
upon the assumption that the Company will operate in the manner described in
this Prospectus, Counsel has advised the Company that, in its opinion, the
Company qualified as a REIT under the Code for the taxable years ending through
December 31, 1996, the Company is organized in conformity with the requirements
for qualification as a REIT, and the Company's proposed method of operation will
enable it to meet the requirements for qualification as a REIT. It must be
emphasized, however, that the Company's ability to qualify and remain qualified
as a REIT is dependent upon actual operating results and future actions by and
events involving the Company and others, and no assurance can be given that the
actual results of the Company's operations and future actions and events will
enable the Company to satisfy in any given year the requirements for
qualification and taxation as a REIT.
Requirements for Qualification as a REIT. As discussed more fully
below, the Code defines a REIT as a corporation, trust or association (i) which
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company; (v) the beneficial ownership of which is
held (without reference to any rules of attribution) by 100 or more persons;
(vi) which is not closely held as defined in section 856(h) of the Code; and
(vii) which meets certain other tests regarding the nature of its assets and
income and the amount of its distributions.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests described below. Thus, the Company's proportionate share of the
assets, liabilities and items of income of any Joint Venture, as described in
"Business -- Joint Venture Arrangements," will be treated as assets, liabilities
and items of income of the Company for purposes of applying the asset and gross
income tests described herein.
Ownership Tests. The ownership requirements for qualification as a REIT
are that (i) during the last half of each taxable year not more than 50% in
value of the REIT's outstanding shares may be owned, directly or indirectly
(applying certain attribution rules), by five or fewer individuals (or certain
entities as defined in the Code) and (ii) there must be at least 100
stockholders (without reference to any attribution rules) on at least 335 days
of such 12-month taxable year (or a proportionate number of days of a short
taxable year). These two requirements do not apply to the first taxable year for
which an election is made to be treated as a REIT. In order to meet these
requirements for subsequent taxable years, or to otherwise obtain, maintain, or
reestablish REIT status, the Articles of Incorporation generally prohibit any
person or entity from actually, constructively or beneficially acquiring or
owning (applying certain attribution rules) more than 9.8% of the outstanding
Common Stock or 9.8% of any series of outstanding Preferred Stock. Among other
provisions, the Articles of Incorporation empower the Board of Directors to
redeem, at its option, a sufficient number of Shares to bring the ownership of
Shares of the Company in conformity with these requirements or to assure
continued conformity with such requirements.
Under the Articles of Incorporation, each holder of Shares is required,
upon demand, to disclose to the Board of Directors in writing such information
with respect to actual, constructive or beneficial ownership of Shares of the
Company as the Board of Directors deems necessary to comply with provisions of
the Code applicable to the Company or the provisions of the Articles of
Incorporation, or the requirements of any other appropriate taxing authority.
Certain Treasury regulations govern the method by which the Company is required
to demonstrate compliance with these stock ownership requirements and the
failure to satisfy such regulations could cause the Company to fail to qualify
as a REIT. The Company has represented that it expects to meet these stock
ownership requirements for each taxable year and it will be able to demonstrate
its compliance with these requirements.
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Asset Tests. At the end of each quarter of a REIT's taxable year, at
least 75% of the value of its total assets must consist of "real estate assets,"
cash and cash items (including receivables) and certain government securities.
The balance of a REIT's assets generally may be invested without restriction,
except that holdings of securities not within the 75% class of assets generally
must not, with respect to any issuer, exceed 5% of the value of the REIT's
assets or 10% of the issuer's outstanding voting securities. The term "real
estate assets" includes real property, interests in real property, leaseholds of
land or improvements thereon, and mortgages on the foregoing and any property
attributable to the temporary investment of new capital (but only if such
property is stock or a debt instrument and only for the one-year period
beginning on the date the REIT receives such capital). When a mortgage is
secured by both real property and other property, it is considered to constitute
a mortgage on real property to the extent of the fair market value of the real
property when the REIT is committed to make the loan (or, in the case of a
construction loan, the reasonably estimated cost of construction). Initially,
the bulk of the Company's assets will be real property. However, the Company
will also hold the Secured Equipment Leases. Counsel is of the opinion, based on
certain assumptions, that the Secured Equipment Leases will be treated as loans
secured by personal property for federal income tax purposes. See "Federal
Income Tax Considerations -Characterization of the Secured Equipment Leases."
Therefore, the Secured Equipment Leases will not qualify as "real estate
assets." However, the Company has represented that at the end of each quarter
the value of the Secured Equipment Leases, together with any personal property
owned by the Company, has in the aggregate represented and will represent less
than 25% of the Company's total assets and that the value of the Secured
Equipment Leases entered into with any particular tenant has represented and
will represent less than 5% of the Company's total assets. No independent
appraisals will be acquired to support this representation, and Counsel, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on the conclusions of the Company and its senior management as to the
relative values of its assets. There can be no assurance however, that the IRS
may not contend that either (i) the value of the Secured Equipment Leases
entered into with any particular tenant represents more than 5% of the Company's
total assets, or (ii) the value of the Secured Equipment Leases, together with
any personal property owned by the Company, exceeds 25% of the Company's total
assets.
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures. If a Joint Venture were classified, for
federal income tax purposes, as an association taxable as a corporation rather
than as a partnership, the Company's ownership of a 10% or greater interest in
the Joint Venture would cause the Company to fail to meet the requirement that
it not own 10% or more of an issuer's voting securities. However, Counsel is of
the opinion, based on certain assumptions, that any Joint Ventures will
constitute partnerships for federal income tax purposes. See "Federal Income Tax
Considerations -- Investment in Joint Ventures."
Income Tests. A REIT also must meet three separate tests with respect
to its sources of gross income for each taxable year.
(a) The 75 Percent and 95 Percent Tests. In general, at least 75% of a
REIT's gross income for each taxable year must be from "rents from real
property," interest on obligations secured by mortgages on real property, gains
from the sale or other disposition of real property and certain other sources,
including "qualified temporary investment income." For these purposes,
"qualified temporary investment income" means any income (i) attributable to a
stock or debt instrument purchased with the proceeds received by the REIT in
exchange for stock (or certificates of beneficial interest) in such REIT (other
than amounts received pursuant to a dividend reinvestment plan) or in a public
offering of debt obligations with a maturity of at least five years and (ii)
received or accrued during the one-year period beginning on the date the REIT
receives such capital. In addition, a REIT must derive at least 95% of its gross
income for each taxable year from any combination of the items of income which
qualify under the 75% test, from dividends and interest, and from gains from the
sale, exchange or other disposition of certain stock and securities.
Initially, the bulk of the Company's income will be derived from rents
with respect to the Properties. Rents from Properties received by the Company
qualify as "rents from real property" in satisfying these two tests only if
several conditions are met. First, the rent must not be based in whole or in
part, directly or indirectly, on the income or profits of any person. An amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or a
direct or indirect owner of 10% or more of the REIT owns, directly or
constructively, 10% or more of such tenant (a "Related Party Tenant"). Third, if
rent attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents to qualify as "rents from real
property," 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 revenue, except that a REIT
may directly perform services which are "usually or customarily rendered" in
connection with the rental of space for occupancy, other than services which are
considered to be rendered to the occupant of the property.
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The Company has represented that it will not (i) charge rent for any
Property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above); (ii) charge rent that will be
attributable to personal property in an amount greater than 15% of the total
rent received under the applicable lease; (iii) directly perform services
considered to be rendered to the occupant of a Property or which are not usually
or customarily furnished or rendered in connection with the rental of real
property; or (iv) enter into any lease with a Related Party Tenant.
Specifically, the Company expects that virtually all of its income will be
derived from leases of the type described in "Business -- Description of
Leases," and it does not expect such leases to generate income that would not
qualify as rents from real property for purposes of the 75% and 95% income
tests.
In addition, the Company will be paid interest on the Mortgage Loans.
All interest income qualifies under the 95% gross income test. If a Mortgage
Loan is secured by both real property and other property, all the interest on it
will qualify under the 75% gross income test if the amount of the loan did not
exceed the fair market value of the real property at the time of the loan
commitment. The Company anticipates this will always be the case.
The Company will also receive payments under the terms of the Secured
Equipment Leases. Although the Secured Equipment Leases will be structured as
leases, Counsel is of the opinion that, subject to certain assumptions, they
will be treated as loans secured by personal property for federal income tax
purposes. See "Federal Income Tax Considerations -Characterization of the
Secured Equipment Leases." If the Secured Equipment Leases are treated as loans
secured by personal property for federal income tax purposes then, the portion
of the payments under the terms of the Secured Equipment Leases that represent
interest, rather than a return of capital for federal income tax purposes, will
not satisfy the 75% gross income test (although it will satisfy the 95% gross
income test). The Company believes, however, that the aggregate amount of such
non-qualifying income will not cause the Company to exceed the limits on
non-qualifying income under the 75% gross income test.
If, contrary to the opinion of Counsel, the Secured Equipment Leases
are treated as true leases, rather than as loans secured by personal property
for federal income tax purposes, the payments under the terms of the Secured
Equipment Leases would be treated as rents from personal property. Rents from
personal property will satisfy either the 75% or 95% gross income tests if they
are received in connection with a lease of real property and the rent
attributable to the personal property does not exceed 15% of the total rent
received from the tenant in connection with the lease. However, if rents
attributable to personal property exceed 15% of the total rent received from a
particular tenant, then the portion of the total rent attributable to personal
property will not satisfy either the 75% or 95% gross income tests.
If, notwithstanding the above, the Company fails to satisfy one or both
of the 75% or 95% tests for any taxable year, it may still qualify as a REIT if
(i) such failure is due to reasonable cause and not willful neglect; (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year; and (iii) the reporting of any incorrect
information is not due to fraud with intent to evade tax. However, even if these
three requirements are met and the Company is not disqualified as a REIT, a
penalty tax would be imposed by reference to the amount by which the Company
failed the 75% or 95% test (whichever amount is greater).
(b) The 30 Percent Test. In addition to the 75% and 95% tests for each
taxable year, a REIT must derive less than 30% of its gross income from the sale
or other disposition of (i) real property held for less than four years (other
than foreclosure property or property involuntarily or compulsorily converted
through destruction, condemnation or similar events); (ii) stock or securities
held for less than one year; and (iii) property sold or otherwise disposed of in
a prohibited transaction. The Company has represented that it does not expect
that it will recognize gross income of a type, in an amount or at a time which
would cause it to fail the 30% test. As noted above, the Company plans, if
Listing does not occur within ten years after the commencement of this offering,
to commence with the orderly Sale of its Properties and distribute the proceeds
thereof. In the event of such a Sale of Properties, it is possible that income
derived from the Sale could be treated as income from prohibited transactions
and taken into account in applying the 30% gross income test. The Company
believes that at the time any of the Properties are sold none of the Properties
will be primarily held for sale to customers and that any sale of the Properties
will not be in the ordinary course of business. However, whether property is
held primarily for sale to customers in the ordinary course of business depends
on the facts and circumstances in effect from time to time, including those
related to a particular property. In addition, no assurance can be given that
the Company can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
(c) The Impact of Default Under the Secured Equipment Leases. In
applying the gross income tests to the Company, it is necessary to consider the
impact that a default under one or more of the Secured Equipment Leases would
have on the Company's ability to satisfy such tests. A default under one or more
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of the Secured Equipment Leases would result in the Company directly holding the
Equipment securing such leases for federal income tax purposes. In the event of
a default, the Company may choose to either lease or sell such Equipment.
However, any income resulting from a rental or sale of Equipment not
incidental to the rental or sale of real property would not qualify under the
75% and 95% gross income tests, and any income from a sale of such assets would
count as gain from the sale of assets for purposes of the 30% gross income test.
In addition, in certain circumstances, income derived from a sale or other
disposition of Equipment could be considered "net income from prohibited
transactions," subject to a 100% tax. The Company does not, however, anticipate
that its income from the rental or sale of Equipment would be material in any
taxable year.
Distribution Requirements. A REIT must distribute to its stockholders
for each taxable year ordinary income dividends in an amount equal to at least
(a) 95% of the sum of (i) its "real estate investment trust taxable income"
(before deduction of dividends paid and excluding any net capital gains) and
(ii) the excess of net income from foreclosure property over the tax on such
income, minus (b) certain excess non-cash income. Real estate investment trust
taxable income generally is the taxable income of a REIT computed as if it were
an ordinary corporation, with certain adjustments. Distributions must be made in
the taxable year to which they relate or, if declared before the timely filing
of the REIT's tax return for such year and paid not later than the first regular
dividend payment after such declaration, in the following taxable year.
The Company has represented that it intends to make Distributions to
stockholders that will be sufficient to meet the 95% distribution requirement.
Under some circumstances, however, it is possible that the Company may not have
sufficient funds from its operations to make cash Distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, the Company might be
required to continue to accrue rent for some period of time under federal income
tax principles even though the Company would not currently be receiving the
corresponding amounts of cash. Similarly, under federal income tax principles,
the Company might not be entitled to deduct certain expenses at the time those
expenses are incurred. In either case, the Company's cash available for making
Distributions might not be sufficient to satisfy the 95% distribution
requirement. If the cash available to the Company is insufficient, the Company
might raise cash in order to make the Distributions by borrowing funds, issuing
new securities or selling assets. If the Company ultimately were unable to
satisfy the 95% distribution requirement, it would fail to qualify as a REIT
and, as a result, would be subject to federal income tax as an ordinary
corporation without any deduction or adjustment for dividends paid to holders of
the Shares. If the Company fails to satisfy the 95% distribution requirement, as
a result of an adjustment to its tax returns by the Service, under certain
circumstances, it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend will be included in the Company's deductions for
dividends paid for the taxable year affected by such adjustment. However, the
deduction for a deficiency dividend will be denied, if any part of the
adjustment resulting in the deficiency is attributable to fraud with intent to
evade tax or to willful failure to timely file an income tax return.
TAXATION OF STOCKHOLDERS
Taxable Domestic Stockholders. For any taxable year in which the
Company qualifies as a REIT for federal income tax purposes, Distributions made
by the Company to its stockholders that are United States persons (generally,
any person other than a nonresident alien individual, a foreign trust or estate
or a foreign partnership or corporation) generally will be taxed as ordinary
income. Amounts received by such United States persons that are properly
designated as capital gain dividends by the Company generally will be taxed as
long-term capital gain, without regard to the period for which such person has
held its Shares, to the extent that they do not exceed the Company's actual net
capital gain for the taxable year. Corporate stockholders may be required to
treat up to 20% of certain capital gains dividends as ordinary income. Such
ordinary income and capital gain are not eligible for the dividends received
deduction allowed to corporations. Distributions to such United States persons
in excess of the Company's current or accumulated earnings and profits will be
considered first a tax-free return of capital for federal income tax purposes,
reducing the tax basis of each stockholder's Shares, and then, to the extent the
Distribution exceeds each stockholder's basis, a gain realized from the sale of
Shares. The Company will notify each stockholder as to the portions of each
Distribution which, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. Any Distribution that is (i)
declared by the Company in October, November or December of any calendar year
and payable to stockholders of record on a specified date in such months and
(ii) actually paid by the Company in January of the following year, shall be
deemed to have been received by each stockholder on December 31 of such calendar
year and, as a result, will be includable in gross income of the stockholder for
the taxable year which includes such December 31. Stockholders who elect to
participate in the Reinvestment Plan will be treated as if they received a cash
Distribution from the Company and then applied such Distribution to purchase
Shares in the Reinvestment Plan. Stockholders may not deduct on their income tax
returns any net operating or net capital losses of the Company.
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Upon the sale or other disposition of the Company's Shares, a
stockholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
adjusted basis of the Shares involved in the transaction. Such gain or loss will
be long-term capital gain or loss if, at the time of sale or other disposition,
the Shares involved have been held for more than one year. In addition, if a
stockholder receives a capital gain dividend with respect to Shares which he has
held for six months or less at the time of sale or other disposition, any loss
recognized by the stockholder will be treated as long-term capital loss to the
extent of the amount of the capital gain dividend that was treated as long-term
capital gain.
Generally, the redemption of Shares by the Company will result in
recognition of ordinary income by the stockholder unless the stockholder
completely terminates or substantially reduces his or her interest in the
Company. A redemption of Shares for cash will be treated as a distribution that
is taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits at the time of the redemption under Section 302 of the Code
unless the redemption (a) results in a "complete termination" of the
stockholder's interest in the Company under Section 302(b)(3) of the Code, (b)
is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder under Section 302(b)(1) of the Code.
Under Code Section 302(b)(2) a redemption is considered "substantially
disproportionate" if the percentage of the voting stock of the corporation owned
by a stockholder immediately after the redemption is less than eighty percent of
the percentage of the voting stock of the corporation owned by such stockholder
immediately before the redemption. In determining whether the redemption is not
treated as a dividend, Shares considered to be owned by a stockholder by reason
of certain constructive ownership rules set forth in Section 318 of the Code, as
well as Shares actually owned, must generally be taken into account. A
distribution to a stockholder will be "not essentially equivalent to a dividend"
if its results in a "meaningful reduction" in the stockholder's interest in the
Company. The Service has published a ruling indicating that a redemption which
results in a reduction in the proportionate interest in a corporation (taking
into account the Section 318 constructive ownership rules) of a stockholder
whose relative stock interest is minimal (an interest of less than 1% should
satisfy this requirement) and who exercises no control over the corporation's
affairs should be treated as being "not essentially equivalent to a dividend."
If the redemption is not treated as a dividend, the redemption of the
Shares for cash will result in taxable gain or loss equal to the difference
between the amount of cash received and the stockholder's tax basis in the
Shares redeemed. Such gain or loss would be capital gain or loss if the Shares
were held as a capital asset and would be long-term capital gain or loss if the
holding period for the Shares exceeds one year.
The Company will report to its U.S. stockholders and the Service the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A stockholder that does not
provide the Company with a correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid to the Service as
backup withholding will be creditable against the stockholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain dividends to any stockholders who fail to certify their non-foreign
status to the Company. See "Foreign Stockholders" below.
The state and local income tax treatment of the Company and its
stockholders may not conform to the federal income tax treatment described
above. As a result, stockholders should consult their own tax advisors for an
explanation of how other state and local tax laws would affect their investment
in Shares.
Tax-Exempt Stockholders. Dividends paid by the Company to a stockholder
that is a tax-exempt entity generally will not constitute "unrelated business
taxable income" ("UBTI") as defined in Section 512(a) of the Code, provided that
the tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of Section 524(c) of the Code and
the Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Notwithstanding the foregoing, qualified trusts that hold more than 10%
(by value) of the shares of certain REITs may be required to treat a certain
percentage of such REIT's distributions as UBTI. This requirement will apply
only if (i) treating qualified trusts holding REIT shares as individuals would
result in a determination that the REIT is "closely held" within the meaning of
Section 856(h)(1) of the Code and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held if either (i) a single qualified
trust holds more than 25% by value of the REIT interests or (ii) one or more
qualified trusts, each owning more than 10% by value of the REIT interests, hold
in the aggregate more than 50% of the REIT interests. The percentage of any REIT
dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the
REIT (treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (b) the total gross income (less certain associated expenses) of
the REIT. A de minimis exception applies where the ratio set forth in the
preceding sentence is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The restrictions on ownership of Shares in the
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Articles of Incorporation will prevent application of the provisions treating a
portion of REIT distributions as UBTI to tax-exempt entities purchasing Shares
in the Company, absent a waiver of the restrictions by the Board of Directors.
See "Summary of the Articles of Incorporation and Bylaws -- Restriction of
Ownership."
Assuming that there is no waiver of the restrictions on ownership of
Shares in the Articles of Incorporation and that a tax-exempt stockholder does
not finance the acquisition of its Shares with "acquisition indebtedness" within
the meaning of Section 524(c) of the Code or otherwise use its Shares in an
unrelated trade or business, in the opinion of Counsel the distributions of the
Company with respect to such tax-exempt stockholder will not constitute UBTI.
The tax discussion of distributions by qualified retirement plans,
IRAs, Keogh plans and other tax-exempt entities is beyond the scope of this
discussion, and such entities should consult their tax adviser regarding such
questions.
Foreign Stockholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
participants and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. The following discussion assumes that the income
from investment in the Shares will not be effectively connected with the
Non-U.S. Stockholders' conduct of a United States trade or business. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local laws with regard to an investment in
Shares, including any reporting requirements. Non-U.S. Stockholders will be
admitted as stockholders with the approval of the Advisor.
Dividends that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as ordinary income to the
extent that they are made out of current and accumulated earnings and profits of
the Company. Such dividends ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the dividend, unless an applicable tax
treaty reduces or eliminates that tax. The Company expects to withhold U.S.
income tax at the rate of 30% on the gross amount of any such dividends paid to
a Non-U.S. Stockholder unless (i) a lower treaty rate applies and the Non-U.S.
Stockholder has filed the required IRS Form 1001 with the Company or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the
dividend is effectively connected income. Dividends in excess of the Company's
current and accumulated earnings and profits will not be taxable to a
stockholder to the extent that such dividends paid do not exceed the adjusted
basis of the stockholder's Shares, but rather will reduce the adjusted basis of
such Shares. To the extent that dividends in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Stockholders'
Shares, such dividends will give rise to tax liability if the Non-U.S.
Stockholder would otherwise be subject to tax on any gain from the sale or
disposition of the Shares, as described below. If it cannot be determined at the
time a dividend is paid whether or not such dividend will be in excess of
current and accumulated earnings and profits, the dividends will be subject to
withholding at the rate of 30%. However, a Non-U.S. Stockholder may seek a
refund of such amounts from the IRS if it is subsequently determined that such
dividend was, in fact, in excess of the Company's current and accumulated
earnings and profits.
For any year in which the Company qualifies as a REIT, dividends that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, dividends attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Stockholder as if
such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a foreign corporate stockholder not entitled to treaty exemption. The
Company is required by applicable Treasury Regulations to withhold 35% of any
distribution that could be designated by the Company as a capital gain dividend.
This amount is creditable against the Non-U.S. Stockholders' FIRPTA tax
liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and in such case the sale of Shares
would not be subject to taxation under FIRPTA. However, gain not subject to
FIRPTA nonetheless will be taxable to a Non-U.S. Stockholder if (i) investment
in the Shares is treated as "effectively connected" with the Non-U.S.
Stockholders' U.S. trade or business, in which case the Non-U.S. Stockholder
will be subject to the same treatment as U.S. Stockholders with respect to such
gain or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was
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present in the United States for 183 days or more during the taxable year and
either the individual has a "tax home" in the United States or the gain is
attributable to an office or other fixed place of business maintained by the
individual in the United States, in which case the nonresident alien individual
will be subject to a 30% tax on capital gains from sales of Shares. If the gain
on the sale of Shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as U.S. Stockholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals),
and the purchaser of the Shares would be required to withhold and remit to the
Service 10% of the purchase price.
STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local
taxes in various states and localities in which it or they transact business,
own property, or reside. The tax treatment of the Company and the shareholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Stock of the Company.
CHARACTERIZATION OF PROPERTY LEASES
The Company will purchase both new and existing Properties and lease
them to franchisees or corporate franchisors pursuant to leases of the type
described in "Business -- Description of Property Leases." The ability of the
Company to claim certain tax benefits associated with ownership of the
Properties, such as depreciation, depends on a determination that the lease
transactions engaged in by the Company are true leases, under which the Company
is the owner of the leased Property for federal income tax purposes, rather than
a conditional sale of the Property or a financing transaction. A determination
by the Service that the Company is not the owner of the Properties for federal
income tax purposes may have adverse consequences to the Company, such as the
denying of the Company's depreciation deductions. Moreover, a denial of the
Company's depreciation deductions could result in a determination that the
Company's Distributions to stockholders were insufficient to satisfy the 95%
distribution requirement for qualification as a REIT. However, as discussed
above, if the Company has sufficient cash, it may be able to remedy any past
failure to satisfy the distribution requirements by paying a "deficiency
dividend" (plus a penalty and interest). See "Distribution Requirements," above.
Furthermore, in the event that the Company were determined not to be the owner
of a particular Property, in the opinion of Counsel the income that the Company
would receive pursuant to the recharacterized lease would constitute interest
qualifying under the 95% and 75% gross income tests by reason of being interest
on an obligation secured by a mortgage on an interest in real property, because
the legal ownership structure of such Property will have the effect of making
the building serve as collateral for the debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous cases. The courts have not identified
any one factor as being determinative of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and pronouncements of
the Service with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have made it clear that the
characterization of leases for tax purposes is a question which must be decided
on the basis of a weighing of many factors, and courts have reached different
conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases anticipated to be entered
into by the Company suggest the Company might not be the owner of the
Properties, such as the fact that such leases are "triple-net" leases, a
substantial number of other characteristics indicate the bona fide nature of
such leases and that the Company will be the owner of the Properties. For
example, under the types of leases described in "Business -Description of
Leases," the Company will bear the risk of substantial loss in the value of the
Properties, since the Company will acquire its interests in the Properties with
an equity investment, rather than with nonrecourse indebtedness. Further, the
Company, rather than the tenant, will benefit from any appreciation in the
Properties, since the Company will have the right at any time to sell or
transfer its Properties, subject to the tenant's right to purchase the property
at a price not less than the Property's fair market value (determined by
appraisal or otherwise).
Other factors that are consistent with the ownership of the Properties
by the Company are (i) the tenants are liable for repairs and to return the
Properties in reasonably good condition; (ii) insurance proceeds generally are
to be used to restore the Properties and, to the extent not so used, belong to
the Company; (iii) the tenants agree to subordinate their interests in the
Properties to the lien of any first mortgage upon delivery of a nondisturbance
agreement and agree to attorn to the purchaser upon any foreclosure sale; and
(iv) based on the Company's representation that the Properties can reasonably be
expected to have at the end of their lease terms (generally a maximum of 30 to
40 years) a fair market value of at least 20% of the Company's cost and a
remaining useful life of at least 20% of their useful lives at the beginning of
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the leases, the Company has not relinquished the Properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. Moreover, the Company will not be primarily dependent upon tax benefits in
order to realize a reasonable return on its investments.
Concerning the Properties for which the Company owns the buildings and
the underlying land, on the basis of the foregoing, assuming (i) the Company
leases the Properties on substantially the same terms and conditions described
in "Business -Description of Leases," and (ii) as is represented by the Company,
the residual value of the Properties remaining after the end of their lease
terms (including all renewal periods) may reasonably be expected to be at least
20% of the Company's cost of such Properties, and the remaining useful lives of
the Properties after the end of their lease terms (including all renewal
periods) may reasonably be expected to be at least 20% of the Properties' useful
lives at the beginning of their lease terms, it is the opinion of Counsel that
the Company will be treated as the owner of the Properties for federal income
tax purposes and will be entitled to claim depreciation and other tax benefits
associated with such ownership. In the case of the Properties for which the
Company does not own the underlying land, Counsel cannot opine that such
transactions will be characterized as leases.
CHARACTERIZATION OF SECURED EQUIPMENT LEASES
The Company will purchase Equipment and lease it to franchisees or
corporate franchisors pursuant to leases of the type described in "Business --
General." The ability of the Company to qualify as a REIT depends on a
determination that the Secured Equipment Leases are financing arrangements,
under which the lessees acquire ownership of the Equipment for federal income
tax purposes. If the Secured Equipment Leases are instead treated as true
leases, the Company may be unable to satisfy the income tests for REIT
qualification. See "Federal Income Tax Considerations -- Taxation of the Company
- -- Income Tests."
While certain characteristics of the Secured Equipment Leases to be
entered into by the Company suggest that the Company retains ownership of the
Equipment, such as the fact that the Secured Equipment Leases are structured as
leases, with the Company retaining title to the Equipment, a substantial number
of other characteristics indicate that the Secured Equipment Leases are
financing arrangements and that the lessees are the owners of the Equipment for
federal income tax purposes. For example, under the types of Secured Equipment
Leases described in "Business -- General," the lease term will equal or exceed
the useful life of the Equipment, and the lessee will have the option to
purchase the Equipment at the end of the lease term for a nominal sum. Moreover,
under the terms of the Secured Equipment Leases, the Company and the lessees
will each agree to treat the Secured Equipment Leases as loans secured by
personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the Secured Equipment
Leases are made on substantially the same terms and conditions described in
"Business -- General," and (ii) as represented by the Company, each of the
Secured Equipment Leases will have a term that equals or exceeds the useful life
of the Equipment subject to the lease, it is the opinion of Counsel that the
Company will not be treated as the owner of the Equipment that is subject to the
Secured Equipment Leases for federal income tax purposes and that the Company
will be able to treat the Secured Equipment Leases as loans secured by personal
property. Counsel's opinion that the Company will be organized in conformity
with the requirements for qualification as a REIT is based, in part, on the
assumption that each of the Secured Equipment Leases will conform to the
conditions outlined in clauses (i) and (ii) of the preceding sentence.
INVESTMENT IN JOINT VENTURES
As indicated in "Business -- Joint Venture Arrangements," the Company
may participate in Joint Ventures which own and lease Properties. Assuming that
the Joint Ventures have the characteristics described in "Business -- Joint
Venture Arrangements," and are operated in the same manner that the Company
operates with respect to Properties that it owns directly, it is the opinion of
Counsel that (i) the Joint Ventures will be treated as partnerships, as defined
in Sections 7701(a)(2) and 761(a) of the Code and not as associations taxable as
corporations, and that the Company will be subject to tax as a partner pursuant
to Sections 701-761 of the Code and (ii) all material allocations to the Company
of income, gain, loss and deduction as provided in the Joint Venture agreements
and as discussed in the Prospectus will be respected under Section 704(b) of the
Code. The Company has represented that it will not become a participant in any
Joint Venture unless the Company has first obtained advice of Counsel that the
Joint Venture will constitute a partnership for federal income tax purposes and
that the allocations to the Company contained in the Joint Venture agreement
will be respected.
If, contrary to the opinion of Counsel, a Joint Venture were to be
treated as an association taxable as a corporation, the Company would be treated
as a stockholder for tax purposes and would not be treated as owning a pro rata
share of the Joint Venture's assets. In addition, the items of income and
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deduction of the Joint Venture would not pass through to the Company. Instead,
the Joint Venture would be required to pay income tax at regular corporate tax
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Joint Venture's taxable
income. Moreover, a determination that a Joint Venture is taxable as a
corporation could cause the Company to fail to satisfy the asset tests for
qualification as a REIT. See "Asset Tests" and "Income Tests," above.
REPORTS TO STOCKHOLDERS
The Company will furnish each stockholder with its audited annual
report within 120 days following the close of each fiscal year. These annual
reports will contain the following: (i) financial statements, including a
balance sheet, statement of operations, statement of stockholders' equity, and
statement of cash flows, prepared in accordance with generally accepted
accounting principals which are audited and reported on by independent certified
public accountants; (ii) the ratio of the costs of raising capital during the
period to the capital raised; (iii) the aggregate amount of advisory fees and
the aggregate amount of other fees paid to the Advisor and any Affiliate of the
Advisor by the Company and including fees or charges paid to the Advisor and any
Affiliate of the Advisor by third parties doing business with the Company; (iv)
the Operating Expenses of the Company, stated as a percentage of the Average
Invested Assets (the average of the aggregate book value of the assets of the
Company, for a specified period, invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during such period) and as a percentage
of its Net Income; (v) a report from the Independent Directors that the policies
being followed by the Company are in the best interest of its stockholders and
the basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors and circumstances surrounding any and all transactions
involving the Company, Directors, Advisor and any Affiliate thereof occurring in
the year for which the annual report is made, and the Independent Directors
shall be specifically charged with a duty to examine and comment in the report
on the fairness of such transactions; and (vii) Distributions to the
stockholders for the period, identifying the source of such Distributions and if
such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Distributions (with
the statement as to the source of Distributions to be sent to stockholders not
later than 60 days after the end of the fiscal year in which the distribution
was made).
Within 75 days following the close of each Company fiscal year, each
stockholder that is a Qualified Plan will be furnished with an annual statement
of Share valuation to enable it to file annual reports required by ERISA as they
relate to its investment in the Company. The statement will report an estimated
value of each Share, prior to the termination of the offering, of $10 per Share
and, after the termination of the offering, based on (i) appraisal updates
performed by the Company based on a review of the existing appraisal and lease
of each Property, focusing on a re-examination of the capitalization rate
applied to the rental stream to be derived from that Property; and (ii) a review
of the outstanding Mortgage Loans and Secured Equipment Leases focusing on a
determination of present value by a re-examination of the capitalization rate
applied to the stream of payments due under the terms of each Mortgage Loan and
Secured Equipment Lease. The Company may elect to deliver such reports to all
stockholders. Stockholders will not be forwarded copies of appraisals or
updates. In providing such reports to stockholders, neither the Company nor its
Affiliates thereby make any warranty, guarantee, or representation that (i) the
stockholders or the Company, upon liquidation, will actually realize the
estimated value per Share, or (ii) the stockholders will realize the estimated
net asset value if they attempt to sell their Shares.
If the Company is required by the Securities Exchange Act of 1934, as
amended, to file quarterly reports with the Securities and Exchange Commission
on Form 10-Q, stockholders will be furnished with a summary of the information
contained in each such report within 60 days after the end of each fiscal
quarter. Such summary information generally will include a balance sheet, a
quarterly statement of income, and a statement of cash flows, and any other
pertinent information regarding the Company and its activities during the
quarter. Stockholders also may receive a copy of any Form 10-Q upon request to
the Company. If the Company is not subject to this filing requirement,
stockholders will be furnished with a semi-annual report within 60 days after
each six-month period containing information similar to that contained in the
quarterly report but applicable to such six-month period.
Stockholders and their duly authorized representatives are entitled to
inspect and copy, at their expense, the books and records of the Company at all
times during regular business hours, upon reasonable prior notice to the
Company, at the location where such reports are kept by the Company.
Stockholders, upon request and at their expense, may obtain full information
regarding the financial condition of the Company, a copy of the Company's
federal, state, and local income tax returns for each fiscal year of the
Company, and, subject to certain confidentiality requirements, a list containing
the name, address, and Shares held by each stockholder.
The fiscal year of the Company will be the calendar year.
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The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the stockholders within 30 days
following the end of each fiscal year of the Company. A specific reconciliation
between GAAP and income tax information will not be provided to the
stockholders; however, such reconciling information will be available in the
office of the Company for inspection and review by any interested stockholder.
THE OFFERING
Following the completion of its Initial Offering on February 6, 1997,
the Company commenced this offering of up to 27,500,000 Shares. As of March 6,
1997, the Company had received aggregate subscription proceeds of $14,243,060
(1,424,306 Shares) from 649 stockholders. Net proceeds to the Company after
deduction of Selling Commissions, Marketing Support and Due Diligence Expense
Reimbursement Fees and Offering Expenses totalled approximately $12,600,000. As
of March 6, 1997, $640,938 of such amount had been incurred in Acquisition Fees
to the Advisor and the balance was available for investment in Properties and
Mortgage Loans.
As of the completion of its Initial Offering, the Company had received
subscription proceeds of $150,591,765 (15,059,177 shares), including $591,765
(59,177 shares) issued pursuant to the Reinvestment Plan and after deduction of
selling commissions, marketing support and due diligence expense reimbursement
fees and offering expenses, net proceeds to the Company from its Initial
Offering totalled approximately $134,000,000. As of March 6, 1997, the Company
had invested or committed for investment approximately $111,200,000 of net
proceeds from the Initial Offering in 110 Properties, in providing mortgage
financing to the tenants of the 35 Properties consisting of land only through
Mortgage Loans, and in paying acquisition fees to the Advisor totalling
$6,776,629 and certain acquisition expenses, leaving approximately $22,900,000
in net offering proceeds from the Initial Offering available for investment in
Properties and Mortgage Loans. The Company expects to use such amount and Net
Offering Proceeds from this offering to purchase additional Properties, to fund
construction costs relating to the Properties under construction, and to make
Mortgage Loans.
GENERAL
A maximum of 27,500,000 Shares ($275,000,000) are being offered at a
purchase price of $10.00 per Share, with the sale of 23,000,000 of such Shares
subject to approval by the stockholders of a resolution to increase the number
of authorized Shares of the Company. See "Summary of the Articles of
Incorporation and Bylaws -- Description of Capital Stock." Of the 27,500,000
Shares offered hereby, 2,500,000 Shares ($25,000,000) will be available only to
stockholders who elect to participate in the Reinvestment Plan and who purchase
Shares in this offering and receive a copy of this Prospectus, or who purchased
Shares in the Initial Offering of the Company and received a copy of the related
prospectus. Until such time, if any, as the stockholders approve an increase in
the number of authorized Shares, this offering will be limited to 4,800,000
Shares ($48,000,000), 100,000 Shares ($1,000,000) of which will be available
only to stockholders purchasing pursuant to the Reinvestment Plan. Any
participation in such plan by a person who becomes a stockholder otherwise than
by participating in this offering will require solicitation under a separate
prospectus. See "Summary of Reinvestment Plan."
A minimum investment of 250 Shares ($2,500) is required. IRAs, Keogh
plans, and pension plans must make a minimum investment of at least 100 Shares
($1,000), except for Iowa tax-exempt investors who must make a minimum
investment of 250 Shares ($2,500). For Minnesota investors only, IRAs and
qualified plans must make a minimum investment of 200 Shares ($2,000). In
addition, Nebraska, New York, and North Carolina investors must make a minimum
investment of 500 Shares ($5,000). Any investor who makes the required minimum
investment may purchase additional Shares in increments of one Share. Maine
investors, however, may not purchase additional Shares in amounts less than the
applicable minimum investment except at the time of the initial subscription or
with respect to Shares purchased pursuant to the Reinvestment Plan. See "The
Offering -General," "The Offering -- Subscription Procedures," and "Summary of
Reinvestment Plan."
PLAN OF DISTRIBUTION
The Shares are being offered to the public on a "best efforts" basis
(which means that no one is guaranteeing that any minimum amount will be sold)
through the Soliciting Dealers, who are members of the National Association of
Securities Dealers, Inc. (the "NASD") or investment advisers exempt from
broker-dealer registration, and the Managing Dealer. The Soliciting Dealers will
use their best efforts during the offering period to find eligible persons who
desire to subscribe for the purchase of Shares from the Company. Both James M.
Seneff, Jr. and Robert A. Bourne are Affiliates and licensed principals of the
Managing Dealer, and the Advisor is an Affiliate of the Managing Dealer.
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Prior to a subscriber's admission to the Company as a stockholder,
funds paid by such subscriber will be deposited in an interest-bearing escrow
account with SouthTrust Asset Management Company of Florida, N.A. The Company,
within 30 days after the date a subscriber is admitted to the Company, will pay
to such subscriber the interest (generally calculated on a daily basis) actually
earned on the funds of those subscribers whose funds have been held in escrow by
such bank for at least 20 days. Stockholders otherwise are not entitled to
interest earned on Company funds or to receive interest on their Invested
Capital. See "Escrow Arrangements" below.
Subject to the provisions for reduced Selling Commissions described
below, the Company will pay the Managing Dealer an aggregate of 7.5% of the
Gross Proceeds as Selling Commissions. The Managing Dealer shall reallow fees of
up to 7% to the Soliciting Dealers with respect to Shares sold by them. In
addition, the Company will pay the Managing Dealer, as an expense allowance, a
marketing support and due diligence expense reimbursement fee equal to 0.5% of
Gross Proceeds. The Managing Dealer, in its sole discretion, may reallow to any
Soliciting Dealer all or any portion of this fee based on such factors as the
number of Shares sold by such Soliciting Dealer, the assistance, if any, of such
Soliciting Dealer in marketing the offering, and bona fide due diligence
expenses incurred. Stockholders who elect to participate in the Reinvestment
Plan will be charged Selling Commissions and the marketing support and due
diligence fee on Shares purchased for their accounts on the same basis as
investors who purchase Shares in the offering. See "Summary of Reinvestment
Plan."
A registered principal or representative of the Managing Dealer or a
Soliciting Dealer, employees, officers, and Directors of the Company, or
employees, officers, and directors of the Advisor, any of their Affiliates and
any Plan established exclusively for the benefit of such persons or entities may
purchase Shares net of 7% commissions, at a per Share purchase price of $9.30.
Clients of an investment adviser registered under the Investment Advisers Act of
1940, as amended, who have been advised by such adviser on an ongoing basis
regarding investments other than in the Company, and who are not being charged
by such adviser or its Affiliates, through the payment of commissions or
otherwise, for the advice rendered by such adviser in connection with the
purchase of the Shares, may purchase the Shares net of 7% commissions. In
addition, Soliciting Dealers that have a contractual arrangement with their
clients for the payment of fees which is consistent with accepting Selling
Commissions, in their sole discretion, may elect not to accept any Selling
Commissions offered by the Company for Shares that they sell. In that event,
such Shares shall be sold to the investor net of all Selling Commissions, at a
per Share purchase price of $9.30. In connection with the purchases of certain
minimum numbers of Shares, the amount of Selling Commissions otherwise payable
to the Managing Dealer or a Soliciting Dealer shall be reduced in accordance
with the following schedule:
<TABLE>
<CAPTION>
Dollar Amount Reallowed Commissions on Sales Per Share
of Shares Purchase Price ----------------------------------------
Purchased Per Share Percent Dollar Amount
------------- -------------- ------- -------------
<S> <C>
$10 -- $249,990 $10.00 7.0% $0.70
$250,000 -- $499,990 $9.90 6.0% $0.60
$500,000 -- $999,990 $9.70 4.0% $0.40
$1,000,000 -- $1,499,990 $9.60 3.0% $0.30
$1,500,000 or more $9.50 2.0% $0.20
</TABLE>
Subscriptions may be combined for the purpose of determining the volume
discounts in the case of subscriptions made by any "purchaser," provided all
such Shares are purchased through the same Soliciting Dealer or through the
Managing Dealer. The volume discount will be prorated among the separate
subscribers considered to be a single "purchaser." Shares purchased pursuant to
the Reinvestment Plan on behalf of a Participant in the Reinvestment Plan will
not be combined with other subscriptions for Shares by the investor in
determining the volume discount to which such investor may be entitled. See
"Summary of Reinvestment Plan." Further subscriptions for Shares will not be
combined for purposes of the volume discount in the case of subscriptions by any
"purchaser" who subscribes for additional Shares subsequent to the purchaser's
initial purchase of Shares.
Any request to combine more than one subscription must be made in
writing in a form satisfactory to the Company and must set forth the basis for
such request. Any such request will be subject to verification by the Managing
Dealer that all of such subscriptions were made by a single "purchaser." If a
"purchaser" does not reduce the per Share purchase price, the excess purchase
price over the discounted purchase price will be returned to the actual separate
subscribers for Shares.
For purposes of such volume discounts, "purchaser" includes (i) an
individual, his or her spouse, and their children under the age of 21, who
purchase the Shares for his or her or their own accounts, and all pension or
trust funds established by each such individual; (ii) a corporation,
partnership, association, joint-stock company, trust fund, or any organized
group of persons, whether incorporated or not (provided that the entities
described in this clause (ii) must have been in existence for at least six
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months before purchasing the Shares and must have formed such group for a
purpose other than to purchase the Shares at a discount); (iii) an employee's
trust, pension, profit-sharing, or other employee benefit plan qualified under
Section 401 of the Code; and (iv) all pension, trust, or other funds maintained
by a given bank. In addition, the Company, in its sole discretion, may aggregate
and combine separate subscriptions for Shares received during the offering
period from (i) the Managing Dealer or the same Soliciting Dealer, (ii)
investors whose accounts are managed by a single investment adviser registered
under the Investment Advisers Act of 1940, (iii) investors over whose accounts a
designated bank, insurance company, trust company, or other entity exercises
discretionary investment responsibility, or (iv) a single corporation,
partnership, trust association, or other organized group of persons, whether
incorporated or not, and whether such subscriptions are by or for the benefit of
such corporation, partnership, trust association, or group. Except as provided
in this paragraph, subscriptions will not be cumulated, combined, or aggregated.
Any reduction in commissions will reduce the effective purchase price
per Share to the investor involved but will not alter the net proceeds payable
to the Company as a result of such sale. All investors will be deemed to have
contributed the same amount per Share to the Company whether or not the investor
receives a discount. Accordingly, for purposes of Distributions, investors who
pay reduced commissions will receive higher returns on their investments in the
Company as compared to investors who do not pay reduced commissions.
In connection with the sale of Shares, certain registered principals or
representatives of the Managing Dealer may perform wholesaling functions for
which they will receive compensation payable by the Managing Dealer in an
aggregate amount not in excess of one percent of Gross Proceeds. The first 0.5%
of Gross Proceeds of any such fee will be paid from the 7.5% of Gross Proceeds
payable to the Managing Dealer as Selling Commissions. In addition, the Advisor
and its Affiliates, including the Managing Dealer and its registered principals
or representatives, may incur due diligence fees and other expenses, including
expenses related to sales seminars and wholesaling activities, a portion of
which may be paid by the Company.
The Company or its Affiliates also may provide incentive items for
registered representatives of the Managing Dealer and the Soliciting Dealers,
which in no event shall exceed an aggregate of $100 per annum per participating
salesperson. In the event other incentives are provided to registered
representatives of the Managing Dealer or the Soliciting Dealers, they will be
paid only in cash, and such payments will be made only to the Managing Dealer or
the Soliciting Dealers rather than to their registered representatives. Any such
sales incentive program must first have been submitted for review by the NASD,
and must comply with Rule 2710(c)(6)(B)(xii). Costs incurred in connection with
such sales incentive programs, if any, will be considered underwriting
compensation. See "Estimated Use of Proceeds."
The Company will also reimburse the Managing Dealer and the Soliciting
Dealers for bona fide due diligence expenses and certain expenses incurred in
connection with the offering.
The total amount of underwriting compensation, including commissions
and reimbursement of expenses, paid in connection with the offering will not
exceed 10.5% of Gross Proceeds.
The Managing Dealer and the Soliciting Dealers severally will indemnify
the Company and its officers and Directors, the Advisor and its officers and
directors and their Affiliates, against certain liabilities, including
liabilities under the Securities Act of 1933.
SUBSCRIPTION PROCEDURES
Procedures Applicable to All Subscriptions. In order to purchase
Shares, the subscriber must complete and execute the Subscription Agreement. Any
subscription for Shares must be accompanied by cash or check payable to
"SouthTrust Asset Management Company of Florida, N.A., Escrow Agent" or to the
Company, in the amount of $10.00 per Share. See "Escrow Arrangements" below.
Certain Soliciting Dealers who have "net capital," as defined in the applicable
federal securities regulations, of $250,000 or more may instruct their customers
to make their checks for Shares for which they have subscribed payable directly
to the Soliciting Dealer. In such case, the Soliciting Dealer will issue a check
made payable to the order of the Escrow Agent for the aggregate amount of the
subscription proceeds.
Each subscription will be accepted or rejected by the Company within 30
days after its receipt, and no sale of Shares shall be completed until at least
five business days after the date on which the subscriber receives a copy of
this Prospectus. If a subscription is rejected, the funds will be returned to
the subscriber within ten business days after the date of such rejection,
without interest and without deduction. A form of the Subscription Agreement is
set forth as Exhibit D to this Prospectus. The subscription price of each Share
is payable in full upon execution of the Subscription Agreement. A subscriber
whose subscription is accepted shall be sent a confirmation of his or her
purchase.
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The Advisor and each Soliciting Dealer who sells Shares on behalf of
the Company have the responsibility to make every reasonable effort to determine
that the purchase of Shares is appropriate for an investor and that the
requisite suitability standards are met. See "Suitability Standards and How to
Subscribe -- Suitability Standards," In making this determination, the
Soliciting Dealers will rely on relevant information provided by the investor,
including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Each investor should be aware
that determining suitability is the responsibility of the Soliciting Dealer.
The Advisor and each Soliciting Dealer shall maintain records of the
information used to determine that an investment in the Shares is suitable and
appropriate for an investor. The Advisor and each Soliciting Dealer shall
maintain these records for at least six years.
Subscribers will be admitted as stockholders not later than the last
day of the calendar month following acceptance of their subscriptions.
Procedures Applicable to Non-Telephonic Orders. Each Soliciting Dealer
receiving a subscriber's check made payable solely to the bank escrow agent
(where, pursuant to such Soliciting Dealer's internal supervisory procedures,
internal supervisory review must be conducted at the same location at which
subscription documents and checks are received from subscribers), will deliver
such checks to the Managing Dealer no later than the close of business of the
first business day after receipt of the subscription documents by the Soliciting
Dealer except that, in any case in which the Soliciting Dealer maintains a
branch office, and, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, the branch office shall transmit the subscription documents and check
to the Soliciting Dealer conducting such internal supervisory review by the
close of business on the first business day following their receipt by the
branch office and the Soliciting Dealer shall review the subscription documents
and subscriber's check to ensure their proper execution and form and, if they
are acceptable, transmit the check to the Managing Dealer by the close of
business on the first business day after the check is received by the Soliciting
Dealer. The Managing Dealer will transmit the check to the Escrow Agent by no
later than the close of business on the first business day after the check is
received from the Soliciting Dealer.
Procedures Applicable to Telephonic Orders. Certain Soliciting Dealers
may permit investors to subscribe for Shares by telephonic order to the
Soliciting Dealer. There are no additional fees associated with telephonic
orders. Subscribers who wish to subscribe for Shares by telephonic order to the
Soliciting Dealer may complete the telephonic order either by delivering a check
in the amount necessary to purchase the Shares to be covered by the subscription
agreement to the Soliciting Dealer or by authorizing the Soliciting Dealer to
pay the purchase price for the Shares to be covered by the subscription
agreement from funds available in an account maintained by the Soliciting Dealer
on behalf of the subscriber. A subscriber must specifically authorize the
registered representative and branch manager to execute the subscription
agreement on behalf of the subscriber and must already have made or agreed to
make payment for the Shares covered by the subscription agreement.
To the extent that customers of any Soliciting Dealer wish to subscribe
and pay for Shares with funds held by or to be deposited with those firms, then
such firms shall, subject to Rule 15c2-4 promulgated under the Securities
Exchange Act of 1934, either (i) upon receipt of an executed subscription
agreement or direction to execute a subscription agreement on behalf of a
customer, to forward the offering price for the Shares covered by the
subscription agreement on or before the close of business of the first business
day following receipt or execution of a subscription agreement by such firms to
the Managing Dealer (except that, in any case in which the Soliciting Dealer
maintains a branch office, and, pursuant to a Soliciting Dealer's internal
supervisory procedures, final internal supervisory review is conducted at a
different location, the branch office shall transmit the subscription documents
and subscriber's check to the Soliciting Dealer conducting such internal
supervisory review by the close of business on the first business day following
their receipt by the branch office and the Soliciting Dealer shall review the
subscription documents and subscriber's check to ensure their proper execution
and form and, if they are acceptable, transmit the check to the Managing Dealer
by the close of business on the first business day after the check is received
by the Soliciting Dealer), or (ii) to solicit indications of interest in which
event (a) such Soliciting Dealers must subsequently contact the customer
indicating interest to confirm the interest and give instructions to execute and
return a subscription agreement or to receive authorization to execute the
subscription agreement on the customer's behalf, (b) such Soliciting Dealers
must mail acknowledgments of receipt of orders to each customer confirming
interest on the business day following such confirmation, (c) such Soliciting
Dealers must debit accounts of such customers on the fifth business day (the
"debit date") following receipt of the confirmation referred to in (a), and (d)
such Soliciting Dealers must forward funds to the Managing Dealer in accordance
with the procedures and on the schedule set forth in clause (i) of this
sentence. If the procedure in (ii) is adopted, subscribers' funds are not
required to be in their accounts until the debit date. The Managing Dealer will
transmit the check to the Escrow Agent by no later than the close of business on
the first business day after the check is received from the Soliciting Dealer.
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Investors, however, who are residents of Florida, Iowa, Maine,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Ohio, Oregon, South Dakota, Tennessee, or Washington must
complete and sign the Subscription Agreement in order to subscribe for Shares
and, therefore, may not subscribe for Shares by telephone. Representatives of
Soliciting Dealers who accept telephonic orders will execute the Subscription
Agreement on behalf of investors who place such orders. All investors who
telephonically subscribe for Shares will receive, with confirmation of their
subscription, a second copy of the Prospectus.
Residents of California, Oklahoma, and Texas who telephonically
subscribe for Shares will have the right to rescind such subscriptions within
ten days from receipt of the confirmation. Such investors who do not rescind
their subscriptions within such ten-day period shall be deemed to have assented
to all of the terms and conditions of the Subscription Agreement.
Additional Subscription Procedures. Investors who have questions or who
wish to place orders for Shares by telephone or to participate in the
Reinvestment Plan should contact their Soliciting Dealer. Certain Soliciting
Dealers do not permit telephonic subscriptions or participation in the
Reinvestment Plan. See "Summary of Reinvestment Plan." The form of Subscription
Agreement for certain Soliciting Dealers who do not permit telephonic
subscriptions or participation in the Reinvestment Plan differs slightly from
the form attached hereto as Exhibit D, primarily in that it will eliminate one
or both of these options.
Investors who wish to establish an IRA for the purpose of investing
solely in Shares may do so by completing, in addition to the Subscription
Agreement, the special IRA account form attached hereto as a part of Exhibit D
appointing Franklin Bank, N.A., an unaffiliated bank, to act as their IRA
custodian. The custodian will not have the authority to vote any of the Shares
held in an IRA except in accordance with written instructions from the
beneficiary of the IRA, although it will hold the Shares on behalf of the
beneficiary and make distributions and, at the direction and in the discretion
of the beneficiary, investments in Shares or in other securities issued by
Affiliates of the Advisor. The custodian will not have authority at any time to
make investments through any such IRA on behalf of the beneficiary if the
investments do not constitute Shares or other securities issued by Affiliates of
the Advisor. The investors will not be required to pay any initial or annual
fees in connection with any such IRA. The fees for establishing and maintaining
all such IRAs will be paid by the Advisor initially and annually up to an
aggregate amount of $5,000, and by the Company above such amount.
ESCROW ARRANGEMENTS
Subscription proceeds will be received in trust and deposited in a
separate account with SouthTrust Asset Management Company of Florida, N.A. (the
"Bank").
The Escrow Agreement between the Company and the Bank provides that
escrowed funds will be invested by the Bank in an interest-bearing account with
the power of investment in short-term, highly liquid securities issued or
guaranteed by the U.S. Government, other investments permitted under Rule 15c2-4
of the Securities Exchange Act of 1934, as amended, or, in other short-term,
highly liquid investments with appropriate safety of principal. Such
subscription funds will be released periodically (at least once per month) upon
admission of stockholders to the Company.
The interest, if any, earned on subscription proceeds will be payable
only to those subscribers whose funds have been held in escrow by the Bank for
at least 20 days. Stockholders will not otherwise be entitled to interest earned
on Company funds or to receive interest on their Invested Capital.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances.
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A
TAX-QUALIFIED RETIREMENT PLAN, AN IRA, OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN
THAT IS EXEMPT FROM ERISA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF ERISA, THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE
SHARES BY SUCH PLAN OR IRA.
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Fiduciary Duties and Prohibited Transactions. A fiduciary of a pension,
profit-sharing, retirement or other employee benefit plan subject to ERISA (an
"ERISA Plan") should consider the fiduciary standards under ERISA in the context
of the ERISA Plan's particular circumstances before authorizing an investment of
any portion of the ERISA Plan's assets in the Common Stock. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the
investment is in accordance with the documents and instruments governing the
ERISA Plan as required by Section 404(a)(1)(D) of ERISA; (iii) whether the
investment is prudent under Section 404(a)(1)(B) of ERISA; and (iv) whether the
investment is solely in the interests of the ERISA Plan participants and
beneficiaries and for the exclusive purpose of providing benefits to the ERISA
Plan participants and beneficiaries and defraying reasonable administrative
expenses of the ERISA Plan as required by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA, or certain other plans (collectively, a "Plan") and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA and "disqualified persons" within the meaning of the Code).
Thus, a Plan fiduciary or person making an investment decision for a Plan also
should consider whether the acquisition or the continued holding of the Shares
might constitute or give rise to a direct or indirect prohibited transaction.
Plan Assets. The prohibited transaction rules of ERISA and the Code
apply to transactions with a Plan and also to transactions with the "plan
assets" of the Plan. The "plan assets" of a Plan include the Plan's interest in
an entity in which the Plan invests and, in certain circumstances, the assets of
the entity in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the offering occurred). The Shares
are being sold in an offering registered under the Securities Act of 1933, as
amended, and will be registered within the relevant time period under Section
12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. However, a class of securities
will not fail to be "widely held" solely because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company expects the Shares to be
"widely held" upon completion of the offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not affect, alone or in combination, the finding that such securities are freely
transferable. The Company believes that the restrictions imposed under the
Articles of Incorporation on the transfer of the Common Stock are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Stock to be "freely
transferable." See "Summary of the Articles of Incorporation and Bylaws --
Restriction on Ownership." The DOL Regulation only establishes a presumption in
favor of a finding of free transferability and, therefore, no assurance can be
given that the Department of Labor and the U.S. Treasury Department would not
reach a contrary conclusion with respect to the Common Stock.
Assuming that the Shares will be "widely held" and "freely
transferable," the Company believes that the Shares will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any Plan that invests in the Shares.
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DETERMINATION OF OFFERING PRICE
The offering price per Share was determined by the Company based upon
the estimated costs of investing in the Properties and the Mortgage Loans, the
fees to be paid to the Advisor and its Affiliates, as well as fees to third
parties, and the expenses of this offering.
SUPPLEMENTAL SALES MATERIAL
Shares are being offered only through this Prospectus. In addition to
this Prospectus, the Company may use certain sales materials in connection with
this offering, although only when accompanied or preceded by the delivery of
this Prospectus. No sales material may be used unless it has first been approved
in writing by the Company. As of the date of this Prospectus, it is anticipated
that the following sales material will be authorized for use by the Company in
connection with this offering: (i) a brochure entitled CNL American Properties
Fund, Inc.; (ii) a fact sheet describing the general features of the Company;
(iii) a cover letter transmitting the Prospectus; (iv) a summary description of
the offering; (v) a slide presentation; (vi) broker updates; (vii) an audio
cassette presentation; (viii) a video presentation; (ix) an electronic media
presentation (x) a cd-rom presentation; (xi) a script for telephonic marketing;
(xii) seminar advertisements and invitations; and (xiii) certain third-party
articles. All such materials will be used only by registered broker-dealers
which are members of the NASD. The Company also may respond to specific
questions from Soliciting Dealers and prospective investors. Additional
materials relating to the offering may be made available to Soliciting Dealers
for their internal use.
LEGAL OPINIONS
The legality of the Shares being offered hereby has been passed upon
for the Company by Shaw, Pittman, Potts & Trowbridge.
Statements made under "Risk Factors -- Federal Income Tax Risks" and "Federal
Income Tax Considerations" have been reviewed by Shaw, Pittman, Potts &
Trowbridge, who have given their opinion that such statements as to matters of
law are correct in all material respects. Shaw, Pittman, Potts & Trowbridge
serves as securities and tax counsel to the Company and to the Advisor and
certain of their Affiliates. Shaw, Pittman, Potts & Trowbridge will not review
any sticker supplement to the Prospectus or amendment to the registration
statement. Certain members of the firm have invested in prior programs sponsored
by the Affiliates of the Company in aggregate amounts which do not exceed one
percent of the amounts sold by any such program, and members of the firm also
may invest in the Company.
EXPERTS
The audited consolidated financial statements (including the financial
statement schedule) of the Company, as of December 31, 1996 and 1995 , and for
the years ended December 31, 1996 and 1995, and for the period May 2, 1994 (date
of inception) through December 31, 1994, included in this Prospectus, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company with the Commission, may 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, Seven
World Trade Center, 13th Floor, New York, New York 10048 and Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material also can be obtained form the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site located at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company has filed with the Commission a registration statement (the
"Registration Statement") (of which this Prospectus is a part) on Form S-11
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Shares. This Prospectus does not contain all of the information
set forth in the Registration Statement, including the exhibits and schedules
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thereto, certain parts of which are omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any document are necessarily summaries of such documents, and in
each instance reference is made to the copy of such documents filed with the
Commission, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Shares,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed or incorporated as a part thereof which may be obtained form the
Commission at its principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission.
DEFINITIONS
"Acquisition Expenses" shall mean any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property or the making of any Mortgage Loan,
whether or not acquired, including, without limitation, legal fees and expenses,
travel and communication expenses, costs of appraisals, nonrefundable option
payments on property not acquired, accounting fees and expenses, and title
insurance.
"Acquisition Fees" shall mean any and all fees and commissions,
exclusive of Acquisition Expenses, paid by any person or entity to any other
person or entity (including any fees or commissions paid by or to any Affiliate
of the Company or the Advisor) in connection with making or investing in
mortgage loans or the purchase, development or construction of a Property,
including, without limitation, real estate commissions, acquisition fees,
finder's fees, selection fees, development fees, construction fees, nonrecurring
management fees, consulting fees, loan fees, points, or any other fees or
commissions of a similar nature. Excluded shall be development fees and
construction fees paid to any person or entity not affiliated with the Advisor
in connection with the actual development and construction of any Property.
"Advisor" shall mean CNL Fund Advisors, Inc., a Florida corporation,
any successor advisor to the Company, or any person or entity to which CNL Fund
Advisors, Inc. or any successor advisors subcontracts substantially all of its
functions.
"Advisory Agreement" shall mean the Advisory Agreement between the
Company and the Advisor, pursuant to which the Advisor will act as the advisor
to the Company and provide specified services to the Company.
"Affiliate" shall mean (i) any person or entity directly or indirectly
through one or more intermediaries controlling, controlled by, or under common
control with another person or entity; (ii) any person or entity directly or
indirectly owning, controlling, or holding with power to vote ten percent (10%)
or more of the outstanding voting securities of another person or entity; (iii)
any officer, director, partner, or trustee of such person or entity; (iv) any
person ten percent (10%) or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held, with power to vote, by such
other person; and (v) if such other person or entity is an officer, director,
partner, or trustee of a person or entity, the person or entity for which such
person or entity acts in any such capacity.
"Articles of Incorporation" shall mean the Articles of Incorporation,
as the same may be amended from time to time, of the Company.
"Asset Management Fee" shall mean the fee payable to the Advisor for
day-to-day professional management services in connection with the Company and
its Properties pursuant to the Advisory Agreement.
"Average Invested Assets" shall mean, for a specified period, the
average of the aggregate book value of the assets of the Company invested,
directly or indirectly, in Properties and loans secured by real estate before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Bank" shall mean SouthTrust Asset Management Company of Florida, N.A.,
escrow agent for the offering.
"Board of Directors" shall mean the Directors of the Company.
"Bylaws" shall mean the bylaws of the Company.
"CNL" shall mean CNL Group, Inc., the parent company of the Advisor and
the Managing Dealer.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
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"Common Stock" shall mean the common stock, par value $.01 per share,
of the Company.
"Competitive Real Estate Commission" shall mean a real estate or
brokerage commission for the purchase or sale of property which is reasonable,
customary, and competitive in light of the size, type, and location of the
property. The total of all real estate commissions paid by the Company to all
persons and entities (including the subordinated real estate disposition fee
payable to the Advisor) in connection with any Sale of one or more of the
Company's Properties shall not exceed the lesser of (i) a Competitive Real
Estate Commission or (ii) six percent of the gross sales price of the Property
or Properties.
"Counsel" shall mean tax counsel to the Company.
"Director" shall mean a member of the Board of Directors of the
Company.
"Distributions" shall mean any distributions of money or other property
by the Company to owners of Shares, including distributions that may constitute
a return of capital for federal income tax purposes.
"Equipment" shall mean the furniture, fixtures and equipment used at
Restaurant Chains.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Plan" shall mean a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"Excess Shares" shall mean the excess shares exchanged for shares of
Common Stock or Preferred Stock, as the case may be, transferred or proposed to
be transferred in excess of the Ownership Limit or which would otherwise
jeopardize the Company's status as a REIT under the Code.
"Front-End Fees" shall mean fees and expenses paid by any person or
entity to any person or entity for any services rendered in connection with the
organization of the Company and the acquisition of Properties, including Selling
Commissions, marketing support and due diligence expense reimbursement fees,
Offering Expenses, Acquisition Expenses, Acquisition Fees, and any other similar
fees, however designated. During the term of the Company, Front-End Fees shall
not exceed 20% of Gross Proceeds.
"Gross Proceeds" shall mean the aggregate purchase price of all Shares
sold for the account of the Company through the offering, without deduction for
Selling Commissions, volume discounts, the marketing support and due diligence
expense reimbursement fee or Organization and Offering Expenses. For the purpose
of computing Gross Proceeds, the purchase price of any Share for which reduced
Selling Commissions are paid to the Managing Dealer or a Soliciting Dealer
(where net proceeds to the Company are not reduced) shall be deemed to be
$10.00.
"Initial Offering" means the initial public offering of the Company
which commenced in April 1995 and terminated on February 6, 1997, at which time
this offering commenced.
"Independent Director" shall mean a Director who is not and within the
last two years has not been directly or indirectly associated with the Advisor
by virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) the performance of services,
other than as a Director, for the Company, (v) service as a director or trustee
of more than three real estate investment trusts advised by the Advisor, or (vi)
maintenance of a material business or professional relationship with the Advisor
or any of its Affiliates. An indirect relationship shall include circumstances
in which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law or sons- or daughters-in-law, or brothers- or sisters-in-law is
or has been associated with the Advisor, any of its affiliates, or the Company.
A business or professional relationship is considered material if the gross
revenue derived by the Director from the Advisor and Affiliates exceeds 5% of
either the Company's annual gross revenue during either of the last two years or
the Director's net worth on a fair market value basis.
"Independent Expert" shall mean a person or entity with no material
current or prior business or personal relationship with the Advisor or the
Directors and who is engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by the
Company.
"Invested Capital" shall mean the amount calculated by multiplying the
total number of Shares purchased by stockholders by the issue price, reduced by
the portion of any Dividend that is attributable to Net Sales Proceeds and by
any amounts paid by the Company to repurchase Shares pursuant to the plan for
redemption of Shares.
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"Investment in Properties" shall mean the amount of the Net Offering
Proceeds actually paid or allocated by the Company, either directly or through
joint venture arrangements or other partnerships, to the purchase, development,
construction, or improvement (including working capital reserves of up to five
percent of the Net Offering Proceeds) of Properties, and other cash payments
such as interest and taxes, but excluding Front-End Fees.
"IRA" shall mean an Individual Retirement Account.
"IRS" shall mean the Internal Revenue Service.
"Joint Ventures" shall mean the joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which are
established to acquire Properties.
"Leverage" shall mean the aggregate amount of indebtedness of the
Company for money borrowed (including purchase money mortgage loans) outstanding
at any time, both secured and unsecured.
"Line of Credit" shall mean the short-term financing in an amount up to
$20,000,000, the proceeds of which will be used to acquire Properties and make
Mortgage Loans and which will be repaid using the proceeds of this Offering.
"Listing" shall mean the listing of the Shares of the Company on a
national securities exchange or over-the-counter market.
"Loan" shall mean a line of credit, the maximum principal amount of
which is $15,000,000 and the proceeds of which are used to fund Secured
Equipment Leases.
"Managing Dealer" shall mean CNL Securities Corp., an Affiliate of the
Advisor, or such other person or entity selected by the Board of Directors to
act as the managing dealer for the offering. CNL Securities Corp. is a member
of the National Association of Securities Dealers, Inc.
"Mortgage Loans" shall mean notes or other evidences of indebtedness or
obligations which are secured or collateralized by building or other
improvements in real property.
"Mortgage Management Fee" shall mean the fee payable to the Advisor for
the day-to-day professional management services in connection with the Company
and its Mortgage Loans.
"Net Assets" shall mean the total assets of the Company (other than
intangibles) at cost before deducting depreciation or other non-cash reserves
less total liabilities, calculated quarterly by the Company, on a basis
consistently applied.
"Net Income" shall mean for any period, the total revenues applicable
to such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses (as defined herein) shall exclude the gain from the
sale of the Company's assets.
"Net Offering Proceeds" shall mean Gross Proceeds less (i) Selling
Commissions, (ii) Offering Expenses, and (iii) the marketing support and due
diligence expense reimbursement fee.
"Net Sales Proceeds" shall mean, in the case of a transaction described
in clause (i)(A) of the definition of Sale, the proceeds of any such transaction
less the amount of all real estate commissions and closing costs paid by the
Company. In the case of a transaction described in clause (i)(B) of such
definition, Net Sales Proceeds means the proceeds of any such transaction less
the amount of any legal and other selling expenses incurred in connection with
such transaction. In the case of a transaction described in clause (i)(C) of
such definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the definition
of Sale, Net Sales Proceeds means the proceeds of such transaction or series of
transactions less all amounts generated thereby and reinvested in one or more
Properties within 180 days thereafter and less the amount of any real estate
commissions, closing costs, and legal and other selling expenses incurred by or
allocated to the Company in connection with such transaction or series of
transactions. Net Sales Proceeds shall also include, in the case of any lease of
a Property consisting of a building only or any Secured Equipment Lease, any
amounts from tenants or lessees that the Company determines, in its discretion,
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to be economically equivalent to proceeds of a Sale. Net Sales Proceeds shall
not include any reserves established by the Company in its sole discretion.
"Operating Expenses" shall include all costs and expenses incurred by
the Company, as determined under generally accepted accounting principles, which
in any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) the Soliciting Dealer Servicing Fee, (c) the
Asset Management Fee, (d) the Performance Fee, and (e) the Subordinated
Incentive Fee, but excluding (i) the expenses of raising capital such as
Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing,
registration, and other fees, printing and other such expenses, and tax incurred
in connection with the issuance, distribution, transfer, registration, and
Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash
expenditures such as depreciation, amortization, and bad debt reserves, (v) the
Advisor's subordinated 10% share of Net Sales Proceeds, (vi) the Secured
Equipment Lease Servicing Fee, and (vii) Acquisition Fees and Acquisition
Expenses, real estate commissions on the sale of property and other expenses
connected with the acquisition and ownership of real estate interests, mortgage
loans, or other property (such as the costs of foreclosure, insurance premiums,
legal services, maintenance, repair, and improvement of property).
"Offering Expenses" shall mean any and all costs and expenses, other
than Selling Commissions, the 0.5% marketing support and due diligence expense
reimbursement fee, and the Soliciting Dealer Servicing Fee incurred by the
Company, the Advisor or any Affiliate of either in connection with the
qualification and registration of the Company and the marketing and distribution
of Shares, including, without limitation, the following: legal, accounting, and
escrow fees; printing, amending, supplementing, mailing, and distributing costs;
filing, registration, and qualification fees and taxes; telegraph and telephone
costs; and all advertising and marketing expenses, including the costs related
to investor and broker-dealer sales meetings. The Offering Expenses paid by the
Company in connection with the offering, together with all Selling Commissions,
the 0.5% marketing support and due diligence reimbursement fee, and the
Soliciting Dealer Servicing Fee incurred by the Company will not exceed fifteen
percent (15%) of the proceeds raised in connection with this offering.
"Ownership Limit" shall mean, with respect to shares of Common Stock
and Preferred Stock, the percent limitation placed on the ownership of Common
Stock and Preferred Stock by any one Person (as defined in the Articles of
Incorporation). As of the initial date of this Prospectus, the Ownership Limit
is 9.8% of the outstanding Common Stock and 9.8% of the outstanding Preferred
Stock.
"Participants" shall mean those stockholders who elect to participate
in the Reinvestment Plan.
"Performance Fee" shall mean the fee payable to the Advisor under
certain circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
"Plan" shall mean ERISA Plans, IRAs, Keogh plans, stock bonus plans,
and certain other plans.
"Preferred Stock" shall mean any class or series of preferred stock of
the Company that may be issued in accordance with the terms of the Articles of
Incorporation and applicable law.
"Properties" shall mean (i) the real properties, including the
buildings located thereon (ii) the real properties only, or (iii) the buildings
only, which are acquired by the Company, either directly or through joint
venture arrangements or other partnerships.
"Prospectus" shall mean the final prospectus included in the Company's
Registration Statement filed with the Securities and Exchange Commission,
pursuant to which the Company will offer Shares to the public, as the same may
be amended or supplemented from time to time after the effective date of such
Registration Statement.
"Qualified Plans" shall mean qualified pension, profit-sharing, and
stock bonus plans, including Keogh plans and IRAs.
"Real Estate Asset Value" shall mean the amount actually paid or
allocated to the purchase, development, construction or improvement of a
Property, exclusive of Acquisition Fees and Acquisition Expenses.
"Reinvestment Agent" or "Agent" shall mean the independent agent, which
currently is MMS Escrow and Transfer Agency, Inc., for Participants in the
Reinvestment Plan.
"Reinvestment Plan" shall mean the Amended Reinvestment Plan, in the
form attached hereto as Exhibit A.
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<PAGE>
"Reinvestment Proceeds" shall mean net proceeds available from the sale
of Shares under the Reinvestment Plan to redeem Shares or, under certain
circumstances, to purchase additional Properties.
"REIT" shall mean real estate investment trust, as defined pursuant to
Sections 856 through 860 of the Code.
"Related Party Tenant" shall mean a related party tenant, as defined
pursuant to Section 856(d)(2)(B) of the Code.
"Restaurant Chains" shall mean the national and regional restaurant
chains, primarily fast-food, family-style, and casual dining chains, to be
selected by the Advisor who themselves or their franchisees will either (i)
lease the Properties purchased by the Company, (ii) become borrowers under
Mortgage Loans, or (iii) become lessees of Secured Equipment Leases.
"Roll-Up Entity" shall mean a partnership, real estate investment
trust, corporation, trust, or similar entity that would be created or would
survive after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean a transaction involving the
acquisition, merger, conversion, or consolidation, directly or indirectly, of
the Company and the issuance of securities of a Roll-Up Entity. Such term does
not include: (i) a transaction involving securities of the Company that have
been listed on a national securities exchange or the National Association of
Securities Dealers Automated Quotation National Market System for at least 12
months; or (ii) a transaction involving the conversion to corporate, trust, or
association form of only the Company if, as a consequence of the transaction,
there will be no significant adverse change in stockholder voting rights, the
term of existence of the Company, compensation to the Advisor, or the investment
objectives of the Company.
"Sale" (i) shall mean any transaction or series of transactions
whereby: (A) the Company sells, grants, transfers, conveys, or relinquishes its
ownership of any Property or portion thereof, including the lease of any
Property consisting of the building only, and including any event with respect
to any Property which gives rise to a significant amount of insurance proceeds
or condemnation awards; (B) the Company sells, grants, transfers, conveys, or
relinquishes its ownership of all or substantially all of the interest of the
Company in any Joint Venture in which it is a co-venturer or partner; (C) any
Joint Venture in which the Company as a co-venturer or partner sells, grants,
transfers, conveys, or relinquishes its ownership of any Property or portion
thereof, including any event with respect to any Property which gives rise to
insurance claims or condemnation awards or, (D) the Company sells, grants,
conveys or relinquishes its interest in any Mortgage Loan or Secured Equipment
Lease or portion thereof, including any event with respect to any Mortgage Loan
or Secured Equipment Lease which gives rise to a significant amount of insurance
proceeds or similar awards, but (ii) shall not include any transaction or series
of transactions specified in clause (i)(A), (i)(B), (i)(C) or (i)(D) above in
which the proceeds of such transaction or series of transactions are reinvested
in one or more Properties, Mortgage Loans, or Secured Equipment Leases within
180 days thereafter.
"Secured Equipment Leases" shall mean the Equipment financing made
available by the Company to operators of Restaurant Chains pursuant to which the
Company will finance, through direct financing leases, the Equipment.
"Secured Equipment Lease Servicing Fee" shall mean the fee payable to
the Advisor by the Company out of the proceeds of the Loan for negotiating
Secured Equipment Leases and supervising the Secured Equipment Lease program
equal to 2% of the purchase price of the Equipment subject to each Secured
Equipment Lease and paid upon entering into such lease.
"Selling Commissions" shall mean any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares as described in the Prospectus, including, without limitation,
commissions payable to CNL Securities Corp.
"Shares" shall mean the shares of Common Stock of the Company,
including the up to 27,500,000 shares to be sold in the offering.
"Soliciting Dealer Servicing Fee" shall mean an annual fee of .20% of
Invested Capital on December 31 of each year following the year in which the
related offering terminates, payable to the Managing Dealer, which in turn may
reallow all or a portion of such fee to the Soliciting Dealers whose clients
hold Shares on such date.
"Soliciting Dealers" shall mean those broker-dealers that are members
of the National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
-115-
<PAGE>
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants, and underwriters whose only compensation
is for professional services. A Person may also be deemed a Sponsor of the
Company by:
a. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either
alone or in conjunction with one or more other Persons;
b. receiving a material participation in the Company in
connection with the founding or organizing of the business of
the Company, in consideration of services or property, or both
services and property;
c. having a substantial number of relationships and contacts with
the Company;
d. possessing significant rights to control Company properties;
e. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which
was not negotiated at arms length with the Company.
"Stockholders' 8% Return," as of each date, shall mean an aggregate
amount equal to an 8% cumulative, noncompounded, annual return on Invested
Capital.
"Subscription Agreement" shall mean the Subscription Agreement, in one
of the forms attached hereto as Exhibit D.
"Subordinated Incentive Fee" shall mean the fee payable to the Advisor
under certain circumstances if the Shares are listed on a national securities
exchange or over-the-counter market.
"Termination Date" shall mean the date of termination of the Advisory
Agreement.
"Unimproved Real Property" shall mean Property in which the Company has
an equity interest that is not acquired for the purpose of producing rental or
other operating income, that has no development or construction in process and
for which no development or construction is planned, in good faith, to commence
within one year.
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<PAGE>
EXHIBIT A
FORM OF AMENDED
REINVESTMENT PLAN
<PAGE>
FORM OF AMENDED
REINVESTMENT PLAN
CNL AMERICAN PROPERTIES FUND, INC., a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation, adopted a Reinvestment
Plan (the "Reinvestment Plan") on the terms and conditions set forth below.
1. Reinvestment of Distributions. MMS Escrow and Transfer Agency, Inc.,
the agent (the "Reinvestment Agent") for participants (the "Participants") in
the Reinvestment Plan, will receive all cash distributions made by the Company
with respect to shares of common stock of the Company (the "Shares") owned by
each Participant (collectively, the "Distributions"). The Reinvestment Agent
will apply such Distributions as follows:
(a) For any period during which the Company is making a public
offering of Shares, the Reinvestment Agent will invest Distributions in
Shares acquired from the managing dealer or participating brokers for
the offering at the public offering price per Share. During such
period, commissions and the marketing support and due diligence fee
equal to 0.5% of the total amount raised from sale of the Shares will
be reallowed to the broker who made the initial sale of Shares to the
Participant at the same rate as for initial purchases.
(b) If no public offering of Shares is ongoing, the Reinvestment
Agent will purchase Shares from any additional shares which the Company
elects to register with the Securities and Exchange Commission (the
"SEC") for the Reinvestment Plan, at a per Share price equal to the
fair market value of the Shares determined by (i) quarterly appraisal
updates performed by the Company based on a review of the existing
appraisal and lease of each Property, focusing on a re-examination of
the capitalization rate applied to the rental stream to be derived from
that Property; and (ii) a review of the outstanding Mortgage Loans and
Secured Equipment Leases focusing on a determination of present value
by a re-examination of the capitalization rate applied to the stream of
payments due under the terms of each Mortgage Loan and Secured
Equipment Lease. The capitalization rate used by the Company and, as a
result, the price per Share paid by Participants in the Reinvestment
Plan prior to Listing will be determined by the Advisor in its sole
discretion. The factors that the Advisor will use to determine the
capitalization rate include (i) its experience in selecting, acquiring
and managing properties similar to the Properties; (ii) an examination
of the conditions in the market; and (iii) capitalization rates in use
by private appraisers, to the extent that the Advisor deems such
factors appropriate, as well as any other factors that the Advisor
deems relevant or appropriate in making its determination. The
Company's internal accountants will then convert the most recent
quarterly balance sheet of the Company from a "GAAP" balance sheet to a
"fair market value" balance sheet. Based on the "fair market value"
balance sheet, the internal accountants will then assume a sale of the
Company's assets and the liquidation of the Company in accordance with
its constitutive documents and applicable law and compute the
appropriate method of distributing the cash available after payment of
reasonable liquidation expenses, including closing costs typically
associated with the sale of assets and shared by the buyer and seller,
and the creation of reasonable reserves to provide for the payment of
any contingent liabilities. Upon listing of the Shares on a national
securities exchange or over-the-counter market, the Reinvestment Agent
may purchase Shares either through such market or directly from the
Company pursuant to a registration statement relating to the
Reinvestment Plan, in either case at a per Share price equal to the
then-prevailing market price on the national securities exchange or
over-the-counter market on which the Shares are listed at the date of
purchase by the Reinvestment Agent.
(c) For each Participant, the Reinvestment Agent will maintain a
record which shall reflect for each fiscal quarter the Distributions
received by the Reinvestment Agent on behalf of such Participant. The
Reinvestment Agent will use the aggregate amount of Distributions to
all Participants for each fiscal quarter to purchase Shares for the
Participants. If the aggregate amount of Distributions to Participants
exceeds the amount required to purchase all Shares then available for
purchase, the Reinvestment Agent will
A-1
<PAGE>
purchase all available Shares and will return all remaining
Distributions to the Participants within 30 days after the date such
Distributions are made. The purchased Shares will be allocated among
the Participants based on the portion of the aggregate Distributions
received by the Reinvestment Agent on behalf of each Participant, as
reflected in the records maintained by the Reinvestment Agent. The
ownership of the Shares purchased pursuant to the Reinvestment Plan
shall be reflected on the books of the Company.
(d) Distributions shall be invested by the Reinvestment Agent in
Shares promptly following the payment date with respect to such
Distributions to the extent Shares are available. If sufficient Shares
are not available, Distributions shall be invested on behalf of the
Participants in one or more interest-bearing accounts in Franklin Bank,
N.A., Southfield, Michigan, or in another commercial bank approved by
the Company which is located in the continental United States and has
assets of at least $100,000,000, until Shares are available for
purchase, provided that any Distributions that have not been invested
in Shares within 30 days after such Distributions are made by the
Company shall be returned to Participants.
(e) The allocation of Shares among Participants may result in the
ownership of fractional Shares, computed to four decimal places.
(f) Distributions attributable to Shares purchased on behalf of
the Participants pursuant to the Reinvestment Plan will be reinvested
in additional Shares in accordance with the terms hereof.
(g) No certificates will be issued to a Participant for Shares
purchased on behalf of the Participant pursuant to the Reinvestment
Plan. Participants in the Reinvestment Plan will receive statements of
account in accordance with Paragraph 7 below.
2. Election to Participate. Any stockholder who participates in a
public offering of Shares and who has received a copy of the related final
prospectus included in the Company's registration statement filed with the SEC
may elect to participate in and purchase Shares through the Reinvestment Plan at
any time by written notice to the Company and would not need to receive a
separate prospectus relating solely to the Reinvestment Plan. A person who
becomes a stockholder otherwise than by participating in a public offering of
Shares may purchase Shares through the Reinvestment Plan only after receipt of a
separate prospectus relating solely to the Reinvestment Plan. Participation in
the Reinvestment Plan will commence with the next Distribution made after
receipt of the Participant's notice, provided it is received more than ten days
prior to the last day of the fiscal month or quarter, as the case may be, to
which such Distribution relates. Subject to the preceding sentence, regardless
of the date of such election, a shareholder will become a Participant in the
Reinvestment Plan effective on the first day of the fiscal month (prior to
termination of the offering of Shares) or fiscal quarter (after termination of
the offering of Shares) following such election, and the election will apply to
all Distributions attributable to the fiscal quarter or month (as the case may
be) in which the shareholder makes such written election to participate in the
Reinvestment Plan and to all fiscal quarters or months thereafter.
3. Distribution of Funds. In making purchases for Participants'
accounts, the Reinvestment Agent may commingle Distributions attributable to
Shares owned by Participants in the Reinvestment Plan.
4. Proxy Solicitation. The Reinvestment Agent will distribute to
Participants proxy solicitation material received by it from the Company which
is attributable to Shares held in the Reinvestment Plan. The Reinvestment Agent
will vote any Shares that it holds for the account of a Participant in
accordance with the Participant's written instructions. If a Participant gives a
proxy to person(s) representing the Company covering Shares registered in the
Participant's name, such proxy will be deemed to be an instruction to the
Reinvestment Agent to vote the full Shares in the Participant's account in like
manner. If a Participant does not direct the Reinvestment Agent as to how the
Shares should be voted and does not give a proxy to person(s) representing the
Company covering these Shares, the Reinvestment Agent will not vote said Shares.
5. Absence of Liability. Neither the Company nor the Reinvestment
Agent shall have any responsibility or liability as to the value of the
Company's Shares, any change in the value of the Shares acquired for the
Participant's account, or the rate of return earned on, or the value of, the
interest-bearing accounts, in which Distributions are invested. Neither the
Company nor the Reinvestment Agent shall be liable for any act done in
A-2
<PAGE>
good faith, or for any good faith omission to act, including, without
limitation, any claims of liability (a) arising out of the failure to terminate
a Participant's participation in the Reinvestment Plan upon such Participant's
death prior to receipt of notice in writing of such death and the expiration of
15 days from the date of receipt of such notice and (b) with respect to the time
and the prices at which Shares are purchased for a Participant. Notwithstanding
the foregoing, liability under the federal securities laws cannot be waived.
Similarly, the Company and the Reinvestment Agent have been advised that in the
opinion of certain state securities commissioners, indemnification is also
considered contrary to public policy and therefore unenforceable.
6. Suitability.
(a) Within 60 days prior to the end of each fiscal year, CNL
Securities Corp. ("CSC"), will mail to each Participant a participation
agreement (the "Participation Agreement"), in which the Participant
will be required to represent that there has been no material change in
the Participant's financial condition and confirm that the
representations made by the Participant in the Subscription Agreement
(a form of which shall be attached to the Participation Agreement) are
true and correct as of the date of the Participation Agreement, except
as noted in the Participation Agreement or the attached form of
Subscription Agreement.
(b) Each Participant will be required to return the executed
Participation Agreement to CSC within 30 days after receipt. In the
event that a Participant fails to respond to CSC or return the
completed Participation Agreement on or before the fifteenth (15th) day
after the beginning of the fiscal year following receipt of the
Participation Agreement, the Participant's Distribution for the first
fiscal quarter of that year will be sent directly to the Participant
and no Shares will be purchased on behalf of the Participant for that
fiscal quarter and, subject to (c) below, any fiscal quarters
thereafter, until CSC receives an executed Participation Agreement from
the Participant.
(c) If a Participant fails to return the executed Participation
Agreement to CSC prior to the end of the second fiscal quarter for any
year of the Participant's participation in the Reinvestment Plan, the
Participant's participation in the Reinvestment Plan shall be
terminated in accordance with Paragraph 11 below.
(d) Each Participant shall notify CSC in the event that, at any
time during his participation in the Reinvestment Plan, there is any
material change in the Participant's financial condition or inaccuracy
of any representation under the Subscription Agreement.
(e) For purposes of this Paragraph 6, a material change shall
include any anticipated or actual decrease in net worth or annual gross
income or any other change in circumstances that would cause the
Participant to fail to meet the suitability standards set forth in the
Company's Prospectus.
7. Reports to Participants. Within 60 days after the end of each fiscal
quarter, the Reinvestment Agent will mail to each Participant a statement of
account describing, as to such Participant, the Distributions received during
the quarter, the number of Shares purchased during the quarter, the per Share
purchase price for such Shares, the total administrative charge to such
Participant, and the total Shares purchased on behalf of the Participant
pursuant to the Reinvestment Plan. Each statement shall also advise the
Participant that, in accordance with Paragraph 6(d) hereof, he is required to
notify CSC in the event that there is any material change in his financial
condition or if any representation under the Subscription Agreement becomes
inaccurate.
8. Administrative Charges, Commissions, and Plan Expenses. The Company
shall be responsible for all administrative changes and expenses charged by the
Reinvestment Agent. The administrative charge for each Participant for each
fiscal quarter shall be the lesser of 5% of the amount reinvested for the
Participant or $2.50, with a minimum charge of $.50. Any interest earned on
Distributions will be paid to the Company to defray costs relating to the
Reinvestment Plan. Additionally, in connection with any Shares purchased from
the Company both prior to and after the termination of a public offering of the
Shares, the Company will pay to CSC selling commissions of 7.5%, a marketing
support and due diligence expense reimbursement fee of .5%, and, in the event
that proceeds of the sale of Shares pursuant to the Reinvestment Plan are used
to acquire Properties or to invest in
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<PAGE>
Mortgage Loans, will pay to CNL Fund Advisors, Inc. acquisition fees of 4.5% of
the purchase price of the Shares sold pursuant to the Reinvestment Plan.
9. No Drawing. No Participant shall have any right to draw checks
or drafts against his account or give instructions to the Company or the
Reinvestment Agent except as expressly provided herein.
10. Taxes. Taxable Participants may incur a tax liability for
Distributions made with respect to such Participant's Shares, even though they
have elected not to receive their Distributions in cash but rather to have their
Distributions held in their account under the Reinvestment Plan.
11. Termination.
(a) A Participant may terminate his participation in the
Reinvestment Plan at any time by written notice to the Company. To be
effective for any Distribution, such notice must be received by the
Company at least ten business days prior to the last day of the fiscal
month or quarter to which such Distribution relates.
(b) The Company or the Reinvestment Agent may terminate a
Participant's individual participation in the Reinvestment Plan, and
the Company may terminate the Reinvestment Plan itself at any time by
ten days' prior written notice mailed to a Participant, or to all
Participants, as the case may be, at the address or addresses shown on
their account or such more recent address as a Participant may furnish
to the Company in writing.
(c) After termination of the Reinvestment Plan or termination of
a Participant's participation in the Reinvestment Plan, the
Reinvestment Agent will send to each Participant (i) a statement of
account in accordance with Paragraph 7 hereof, and (ii) a check for (a)
the amount of any Distributions in the Participant's account that have
not been reinvested in Shares, and (b) the value of any fractional
Shares standing to the credit of a Participant's account based on the
market price of the Shares. The record books of the Company will be
revised to reflect the ownership of record of the Participant's full
Shares and any future Distributions made after the effective date of
the termination will be sent directly to the former Participant.
12. Notice. Any notice or other communication required or permitted to
be given by any provision of this Reinvestment Plan shall be in writing and
addressed to Investor Services Department, CNL Securities Corp., 400 East South
Street, Suite 500, Orlando, Florida 32801, if to the Company, or to 1845
Maxwell, Suite 101, Troy, Michigan 48084-4510, if to the Reinvestment Agent, or
such other addresses as may be specified by written notice to all Participants.
Notices to a Participant may be given by letter addressed to the Participant at
the Participant's last address of record with the Company. Each Participant
shall notify the Company promptly in writing of any change of address.
13. Amendment. The terms and conditions of this Reinvestment Plan may
be amended or supplemented by an agreement between the Reinvestment Agent and
the Company at any time, including but not limited to an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his last address of record; provided, that any such amendment
must be approved by a majority of the Independent Directors of the Company. Such
amendment or supplement shall be deemed conclusively accepted by each
Participant except those Participants from whom the Company receives written
notice of termination prior to the effective date thereof.
14. Governing Law. THIS REINVESTMENT PLAN AND A PARTICIPANT'S
ELECTION TO PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF FLORIDA.
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<PAGE>
EXHIBIT B
FINANCIAL INFORMATION
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
INDEX TO UPDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Pro Forma Consolidated Financial Information (unaudited):
Pro Forma Consolidated Balance Sheet as of December 31, 1996 B-2
Pro Forma Consolidated Statement of Earnings for the year ended December 31, 1996 B-3
Notes to Pro Forma Consolidated Financial Statements for the year ended
December 31, 1996 B-4
Audited Consolidated Financial Statements:
Report of Independent Accountants B-7
Consolidated Balance Sheets as of December 31, 1996 and 1995 B-8
Consolidated Statements of Earnings for the years ended December 31, 1996 and
1995 and the period May 2, 1994 (date of inception) through December 31, 1994 B-9
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1996 and 1995 and the period May 2, 1994 (date of inception)
through December 31, 1994 B-10
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995 and the period May 2, 1994 (date of inception) through December 31, 1994 B-11
Notes to Consolidated Financial Statements for the years ended December 31,
1996 and 1995 and the period May 2, 1994 (date of inception) through December 31, 1994 B-13
Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996 B-31
Notes to Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996 B-39
Schedule IV - Mortgage Loans on Real Estate as of December 31, 1996 B-41
</TABLE>
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Consolidated Balance Sheet of the Company gives
effect to (i) property acquisition transactions from inception through December
31, 1996, including the receipt of $139,247,150 in gross offering proceeds from
the sale of 13,924,715 shares of common stock pursuant to a Form S-11 under the
Securities Act of 1933, as amended, effective March 29, 1995, and the
application of such proceeds to purchase 94 properties (including 51 properties
which consist of land and building, one property through a joint venture
arrangement which consists of land and building, seven properties which consist
of building only and 35 properties consisting of land only), nine of which were
under construction at December 31, 1996, to provide mortgage financing to the
lessees of the 35 properties consisting of land only, and to pay organizational
and offering expenses, acquisition fees and miscellaneous acquisition expenses,
(ii) the receipt of $25,587,675 in gross offering proceeds from the sale of
2,558,768 additional shares of common stock during the period January 1, 1997
through March 6, 1997, and (iii) the application of such funds and $4,926,309 of
cash and cash equivalents at December 31, 1996, to purchase 16 additional
properties acquired during the period January 1, 1997 through March 6, 1997 (14
of which are under construction and consist of land and building and two
properties which consist of land and building), to pay additional costs for the
nine properties under construction at December 31, 1996, and to pay offering
expenses, acquisition fees and miscellaneous acquisition expenses, all as
reflected in the pro forma adjustments described in the related notes. The Pro
Forma Consolidated Balance Sheet as of December 31, 1996, includes the
transactions described in (i) above from its historical consolidated balance
sheet, adjusted to give effect to the transactions in (ii) and (iii) above, as
if they had occurred on December 31, 1996.
The Pro Forma Consolidated Statement of Earnings for the year ended
December 31, 1996, includes the historical operating results of the properties
described in (i) above from the dates of their acquisitions plus operating
results for the four of the properties that were acquired by the Company during
the period January 1, 1996 through March 6, 1997, and had a previous rental
history prior to the Company's acquisition of such properties, from (A) the
later of (1) the date the property became operational as a rental property by
the previous owner or (2) January 1, 1996, to (B) the earlier of (1) the date
the property was acquired by the Company or (2) the end of the pro forma period
presented. No pro forma adjustments have been made to the Pro Forma Consolidated
Statement of Earnings for the remaining properties acquired by the Company
during the period January 1, 1996 through March 6, 1997, due to the fact that
these properties did not have a previous rental history.
This pro forma consolidated financial information is presented for
informational purposes only and does not purport to be indicative of the
Company's financial results or condition if the various events and transactions
reflected therein had occurred on the dates, or been in effect during the
periods, indicated. This pro forma consolidated financial information should not
be viewed as predictive of the Company's financial results or conditions in the
future.
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma
ASSETS Historical Adjustments Pro Forma
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<S> <C>
Land and buildings on operating
leases, less accumulated
depreciation $ 60,243,146 $ 16,513,997 (a) $ 76,757,143
Net investment in direct
financing leases (b) 15,186,686 5,331,775 (a) 20,518,461
Cash and cash equivalents 42,450,088 (4,926,309)(a) 37,523,779
Receivables 160,675 160,675
Mortgage notes receivable 13,389,607 13,389,607
Organization costs, less
accumulated amortization 13,682 13,682
Loan costs, less accumulated
amortization 32,499 32,499
Accrued rental income 422,076 422,076
Other assets 2,926,589 40,643 (a)
(466,405)(b) 2,500,827
------------ ------------ ------------
$134,825,048 $ 16,493,701 $151,318,749
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable $ 3,521,816 $ 3,521,816
Accrued interest payable 13,164 13,164
Accrued construction costs payable 6,587,573 $ (6,587,573)(a) -
Accounts payable and other accrued
expenses 79,817 79,817
Due to related parties 997,084 997,084
Rents paid in advance 118,900 118,900
Deferred rental income 335,849 7,018 (a) 342,867
Other payables 15,117 15,117
------------ ------------ ------------
Total liabilities 11,669,320 (6,580,555) 5,088,765
------------ ------------ ------------
Minority interest 288,301 288,301
------------ ------------ ------------
Stockholders' equity:
Preferred stock, without par
value. Authorized and unissued
3,000,000 shares - -
Excess shares, $.01 par value per
share. Authorized and unissued
23,000,000 shares - -
Common stock, $.01 par value per
share. Authorized 20,000,000
shares; issued and outstanding
13,944,715 shares; issued and
outstanding, as adjusted,
16,503,483 shares 139,447 25,588 (a) 165,035
Capital in excess of par value 123,687,929 23,515,073 (a)
(466,405)(b) 146,736,597
Accumulated distributions in
excess of net earnings (959,949) (959,949)
------------ ------------ ------------
122,867,427 23,074,256 145,941,683
------------ ------------ ------------
$134,825,048 $ 16,493,701 $151,318,749
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
B-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------ ------------- -----------
<S> <C>
Revenues:
Rental income from
operating leases $3,717,886 $ 60,938 (1) $3,778,824
Earned income from
direct financing leases (2) 625,492 34,282 (1) 659,774
Contingent rental income 13,920 13,920
Interest income from
mortgage notes receivable 1,069,349 1,069,349
Other interest and income 780,037 (24,348)(3) 755,689
---------- ---------- ----------
6,206,684 70,872 6,277,556
---------- ---------- ----------
Expenses:
General operating and
administrative 542,564 542,564
Professional services 58,976 58,976
Asset and mortgage management
fees to related party 251,200 5,444 (4) 256,644
State and other taxes 56,184 1,218 (5) 57,402
Depreciation and amortization 521,871 6,537 (6) 528,408
---------- ---------- ----------
1,430,795 13,199 1,443,994
---------- ---------- ----------
Earnings Before Minority
Interest in Income of
Consolidated Joint Venture 4,775,889 57,673 4,833,562
Minority Interest in Income of
Consolidated Joint Venture (29,927) (29,927)
---------- ---------- ----------
Net Earnings $4,745,962 $ 57,673 $4,803,635
========== ========== ==========
Earnings Per Share of
Common Stock (7) $ .59 $ 0.60
========== ==========
Weighted Average Number of
Shares of Common Stock
Outstanding (7) 8,071,670 8,071,670
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
B-3
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
Pro Forma Consolidated Balance Sheet:
(a) Represents gross proceeds of $25,587,675 from the issuance of 2,558,768
shares of common stock during the period January 1, 1997 through March
6, 1997, the receipt of $7,018 of rental income during construction
(capitalized as deferred rental income) and $4,926,309 of cash and cash
equivalents used (i) to acquire 16 properties for $16,755,931, of which
the properties consist of land and building, (ii) to fund estimated
construction costs of $10,566,612 ($6,587,573 of which was accrued as
construction costs payable at December 31, 1996) relating to nine
wholly-owned properties under construction at December 31, 1996, (iii)
to pay acquisition fees of $1,151,445 ($1,110,802 of which was
allocated to properties and $40,643 of which was classified as other
assets and will be allocated to future properties) and to pay selling
commissions and offering expenses (stock issuance costs) of $2,047,014,
which have been netted against capital in excess of par value.
The pro forma adjustments to land and buildings on operating leases and
net investment in direct financing leases as a result of the above
transactions were as follows:
<TABLE>
<CAPTION>
Estimated
purchase price
(including con-
struction and Acquisition
closing costs) fees
and additional allocated
construction costs to property Total
------------------ ----------- -----------
<S> <C>
Jack in the Box in Las Vegas, NV $ 1,247,333 $ 66,822 $ 1,314,155
Jack in the Box in Los Angeles, CA 1,396,771 74,827 1,471,598
Jack in the Box in Moscow, ID 909,814 48,740 958,554
Jack in the Box in Kent, WA 1,258,871 67,439 1,326,310
Jack in the Box in Hollister, CA 1,060,819 56,830 1,117,649
Jack in the Box in Kingsburg, CA 1,000,073 53,575 1,053,648
Shoney's in Indian Harbour
Beach, FL 642,870 34,440 677,310
Jack in the Box in Murietta, CA 951,485 50,973 1,002,458
Jack in the Box in Humble, TX 882,362 47,270 929,632
Golden Corral in Winchester, KY 1,150,645 61,640 1,212,285
Burger King in Kent, OH 872,861 46,761 919,622
Burger King in Chattanooga, TN 1,110,330 59,482 1,169,812
Denny's in Tampa, FL 1,033,787 55,381 1,089,168
Jack in the Box in Palmdale, CA 1,124,244 60,228 1,184,472
Jack in the Box in Houston, TX 860,735 46,110 906,845
Golden Corral in Hopkinsville, KY 1,252,931 67,121 1,320,052
Nine wholly owned properties
under construction at
December 31, 1996 3,979,039 213,163 4,192,202
----------- ----------- -----------
$20,734,970 $ 1,110,802 $21,845,772
=========== =========== ===========
Adjustment classified
as follows:
Land and buildings on
operating leases $16,513,997
Net investment in
direct financing
leases 5,331,775
-----------
$21,845,772
===========
</TABLE>
(b) Represents reclassification of deferred stock issuance costs totalling
$466,405 at December 31, 1996, to stock issuance costs which have been
netted against capital in excess of par value.
B-4
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1996
Pro Forma Consolidated Balance Sheet - Continued:
(c) In accordance with generally accepted accounting principles, leases in
which the present value of future minimum lease payments equals or
exceeds 90 percent of the value of the related properties are treated
as direct financing leases rather than as land and buildings. The
categorization of the leases has no effect on rental revenues received.
Pro Forma Consolidated Statement of Earnings:
(1) Represents rental income from operating leases and earned income from
direct financing leases for four of the properties acquired during the
period January 1, 1996 through March 6, 1997, which had a previous
rental history prior to the acquisition of the property by the Company
(the "Pro Forma Properties"), for the period commencing (A) the later
of (i) the date the Pro Forma Property became operational as a rental
property by the previous owner or (ii) January 1, 1996, to (B) the
earlier of (i) the date the Pro Forma Property was acquired by the
Company or (ii) the end of the pro forma period presented. Each of the
four Pro Forma Properties was acquired from an affiliate who had
purchased and temporarily held title to the property. The
noncancellable leases for the Pro Forma Properties in place during the
period the affiliate owned the properties were assigned to the Company
at the time the Company acquired the properties. The following presents
the actual date the Pro Forma Properties were acquired or placed in
service by the Company as compared to the date the Pro Forma Properties
were treated as becoming operational as a rental property for purposes
of the Pro Forma Consolidated Statement of Earnings.
Date Pro Forma
Date Placed Property Became
in Service Operational as
By the Company Rental Property
-------------- ---------------
Denny's in Grand Rapids, MI March 1996 January 1996
Denny's in McKinney, TX June 1996 January 1996
Boston Market in Merced, CA October 1996 July 1996
Boston Market in
St. Joseph, MO December 1996 June 1996
In accordance with generally accepted accounting principles, lease
revenue from leases accounted for under the operating method is
recognized over the terms of the leases. For operating leases providing
escalating guaranteed minimum rents, income is reported on a
straight-line basis over the terms of the leases. For leases accounted
for as direct financing leases, future minimum lease payments are
recorded as a receivable. The difference between the receivable and the
estimated residual values less the cost of the properties is recorded
as unearned income. The unearned income is amortized over the lease
terms to provide a constant rate of return. Accordingly, pro forma
rental income from operating leases and earned income from direct
financing leases does not necessarily represent rental payments that
would have been received if the properties had been operational for the
full pro forma period.
B-5
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1996
Pro Forma Consolidated Statement of Earnings - Continued:
Generally, the leases provide for the payment of percentage rent in
addition to base rental income. However, due to the fact that no
percentage rent was due under the leases for the Pro Forma Properties
during the portion of 1996 that the previous owners held the
properties, no pro forma adjustment was made for percentage rental
income for the year ended December 31, 1996.
(2) See Note (c) under "Pro Forma Consolidated Balance Sheet" above for a
description of direct financing leases.
(3) Represents adjustment to interest income due to the decrease in the
amount of cash available for investment in interest bearing accounts
during the periods commencing (A) on the later of (i) the dates the Pro
Forma Properties became operational as rental properties by the
previous owners or (ii) January 1, 1996, through (B) the earlier of (i)
the actual dates of acquisition by the Company or the end of the pro
forma period presented, as described in Note (1) above. The estimated
pro forma adjustment is based upon the fact that interest income on
interest bearing accounts was earned at a rate of approximately four
percent per annum by the Company during the year ended December 31,
1996.
(4) Represents incremental increase in asset management fees relating to
the Pro Forma Properties for the period commencing (A) on the later of
(i) the date the Pro Forma Properties became operational as rental
properties by the previous owners or (ii) January 1, 1996 through (B)
the earlier of (i) the date the Pro Forma Properties were acquired by
the Company or (ii) the end of the pro forma period presented, as
described in Note (1) above. Asset management fees are equal to 0.60%
of the Company's Real Estate Asset Value (estimated to be approximately
$2,723,000 for the Pro Forma Properties for the year ended December 31,
1996), as defined in the Company's prospectus.
(5) Represents adjustment to state tax expense due to the incremental
increase in rental revenues of Pro Forma Properties. Estimated pro
forma state tax expense was calculated based on an analysis of state
laws of the various states in which the Company has acquired the Pro
Forma Properties. The estimated pro forma state taxes consist primarily
of income and franchise taxes ranging from zero to approximately two
percent of the Company's pro forma rental income of each Pro Forma
Property. Due to the fact that the Company's leases are triple net, the
Company has not included any amounts for real estate taxes in the pro
forma statement of earnings.
(6) Represents incremental increase in depreciation expense of the building
portions of the Pro Forma Properties accounted for as operating leases
using the straight-line method over an estimated useful life of 30
years.
(7) Historical earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding during the year
ended December 31, 1996.
B-6
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL American Properties Fund, Inc.
We have audited the accompanying consolidated balance sheets of CNL American
Properties Fund, Inc. (a Maryland corporation) and its subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996 and for the period May 2, 1994 (date of inception)
through December 31, 1994 and the related financial statement schedules. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CNL American
Properties Fund, Inc. and its subsidiary as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996 and for the period May 2,
1994 (date of inception) through December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole present fairly, in all material respects,
the information required to be included therein.
/s/COOPERS & LYBRAND L.L.P.
Orlando, Florida
January 22, 1997
B-7
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
------------ ------------
<S> <C>
Land and buildings on operating leases,
less accumulated depreciation $ 60,243,146 $ 19,723,726
Net investment in direct financing leases 15,186,686 1,373,882
Cash and cash equivalents 42,450,088 11,508,445
Receivables 160,675 113,613
Mortgage notes receivable 13,389,607 -
Organization costs, less accumulated
amortization of $6,318 and $2,318 13,682 17,682
Loan costs, less accumulated amortization
of $22,034 at December 31, 1996 32,499 -
Accrued rental income 422,076 39,142
Other assets 2,926,589 826,594
------------ ------------
$134,825,048 $ 33,603,084
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 3,521,816 $ -
Accrued interest payable 13,164 -
Accrued construction costs payable 6,587,573 1,058,825
Accounts payable and other accrued expenses 79,817 79,904
Due to related parties 997,084 248,584
Rents paid in advance 118,900 25,351
Deferred rental income 335,849 -
Other payables 15,117 9,696
------------ ------------
Total liabilities 11,669,320 1,422,360
------------ ------------
Minority interest 288,301 200,076
------------ ------------
Commitments (Note 12)
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000
shares - -
Excess shares, $.01 par value per share.
Authorized and unissued 23,000,000
shares - -
Common stock, $.01 par value per share.
Authorized 20,000,000 shares, issued
and outstanding 13,944,715 and 3,865,416,
respectively 139,447 38,654
Capital in excess of par value 123,687,929 32,211,833
Accumulated distributions in excess of
net earnings (959,949) (269,839)
------------ ------------
Total stockholders' equity 122,867,427 31,980,648
------------ ------------
$134,825,048 $ 33,603,084
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
B-8
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
<TABLE>
<CAPTION>
May 2, 1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
---------- ---------- ------------
<S> <C>
Revenues:
Rental income from operating
leases $3,717,886 $ 498,817 $ -
Earned income from direct
financing leases 625,492 28,935 -
Contingent rental income 13,920 12,024 -
Interest income from
mortgage notes receivable 1,069,349 - -
Other interest and income 780,037 119,355 -
---------- ---------- ---------
6,206,684 659,131 -
---------- ---------- ---------
Expenses:
General operating and
administrative 542,564 134,759 -
Professional services 58,976 8,119 -
Asset and mortgage manage-
ment fees to related party 251,200 23,078 -
State taxes 56,184 20,189 -
Depreciation and amorti-
zation 521,871 104,131 -
---------- ---------- ---------
1,430,795 290,276 -
---------- ---------- ---------
Earnings Before Minority
Interest in Income of
Consolidated Joint Venture 4,775,889 368,855 -
Minority Interest in Income of
Consolidated Joint Venture (29,927) (76) -
---------- ---------- ---------
Net Earnings $4,745,962 $ 368,779 $ -
========== ========== =========
Earnings Per Share of Common
Stock $ .59 $ .19 $ -
========== ========== =========
Weighted Average Number of
Shares of Common Stock
Outstanding 8,071,670 1,898,350 -
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-9
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Years Ended December 31, 1996 and 1995 and the
Period May 2, 1994 (Date of Inception) through
December 31, 1994
<TABLE>
<CAPTION>
Common stock Accumulated
----------------------- Capital in distributions
Number Par excess of in excess of
of shares value par value net earnings Total
---------- ---------- ----------- ------------- ------------
<S> <C>
Balance at May 2, 1994 - $ - $ - $ - $ -
Sale of common stock to
CNL Fund Advisors, Inc. 20,000 200 199,800 - 200,000
---------- -------- ------------ ----------- ------------
Balance at December 31,
1994 20,000 200 199,800 - 200,000
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 3,845,416 38,454 38,415,704 - 38,454,158
Stock issuance costs - - (6,403,671) - (6,403,671)
Net earnings - - - 368,779 368,779
Distributions declared
($.31 per share) - - - (638,618) (638,618)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1995 3,865,416 38,654 32,211,833 (269,839) 31,980,648
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 10,079,299 100,793 100,692,198 - 100,792,991
Stock issuance costs - - (9,216,102) - (9,216,102)
Net earnings - - - 4,745,962 4,745,962
Distributions declared
($.71 per share) - - - (5,436,072) (5,436,072)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1996 13,944,715 $139,447 $123,687,929 $ (959,949) $122,867,427
========== ======== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
B-10
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
May 2, 1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants $ 4,543,506 $ 492,488 $ -
Cash paid for expenses (928,001) (113,384) -
Interest received 1,867,035 119,355 -
------------ ------------ -----------
Net cash provided by operating activities 5,482,540 498,459 -
------------ ------------ -----------
Cash Flows From Investing Activities:
Additions to land and buildings on operating
leases (36,104,148) (18,835,969) -
Increase in net investment in direct financing
leases (13,372,621) (1,364,960) -
Investment in mortgage notes receivable (13,547,264) - -
Collections on mortgage notes receivable 133,850 - -
Increase in other assets (1,103,896) (628,142) -
------------ ------------ -----------
Net cash used in investing activities (63,994,079) (20,829,071) -
------------ ------------ -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition, organization,
deferred offering and stock issuance costs
paid by related parties on behalf of the
Company (939,798) (2,500,056) (199,036)
Proceeds of borrowing on line of credit 3,666,896 - -
Payment on line of credit (145,080) - -
Payment of loan costs (54,533) - -
Contribution from minority interest of
consolidated joint venture 97,419 200,000 -
Sale of common stock to CNL Fund Advisors, Inc. - - 200,000
Subscriptions received from stockholders 100,792,991 38,454,158 -
Distributions to minority interest (39,121) - -
Distributions to stockholders (5,439,404) (635,286) -
Payment of stock issuance costs (8,486,188) (3,680,704) (19)
------------ ------------ ------------
Net cash provided by financing activities 89,453,182 31,838,112 945
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 30,941,643 11,507,500 945
Cash and Cash Equivalents at Beginning of Period 11,508,445 945 -
------------ ------------ -----------
Cash and Cash Equivalents at End of Period $ 42,450,088 $ 11,508,445 $ 945
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
B-11
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
-------------------------------------------------
<TABLE>
<CAPTION>
May 2, 1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
------------ ------------ -----------
<S> <C>
Reconciliation of Net Earnings to Net Cash Provided
by Operating Activities:
Net earnings $ 4,745,962 $ 368,779 $ -
------------ ------------ -----------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 511,078 100,318 -
Amortization 69,886 3,813 -
Increase in receivables (160,984) (44,749) -
Decrease in net investment in direct
financing leases 259,740 1,078 -
Increase in accrued rental income (382,934) (39,142) -
Increase in other assets (4,293) (8,090) -
Increase in accrued interest payable 13,164 - -
Increase (decrease) in accounts payable and
other accrued expenses (2,896) 38,461 -
Increase (decrease) in due to related parties,
excluding reimbursement of acquisition,
organization, deferred offering and stock
issuance costs paid on behalf of the Company (30,929) 42,868 -
Increase in rents paid in advance 93,549 25,351 -
Increase in deferred rental income 335,849 - -
Increase in other payables 5,421 9,696 -
Increase in minority interest 29,927 76 -
------------ ------------ -----------
Total adjustments 736,578 129,680 -
------------ ------------ -----------
Net Cash Provided by Operating Activities $ 5,482,540 $ 498,459 $ -
============ ============ ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition, organization, deferred offering
and stock issuance costs on behalf of the Company as follows:
Acquisition costs $ 206,103 $ 131,629 $ -
Organization costs - 20,000 -
Deferred offering costs 466,405 - 461,866
Stock issuance costs 338,212 2,084,145 -
------------ ------------ -----------
$ 1,010,720 $ 2,235,774 $ 461,866
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
B-12
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund, Inc. (the
"Company") was organized in Maryland on May 2, 1994. Effective December
6, 1994, the Company changed its name to CNL Investment Fund, Inc. and
effective February 1, 1995, the Company changed its name to CNL
American Properties Fund, Inc. The Company was organized primarily for
the purpose of acquiring, directly or indirectly through joint venture
or co-tenancy arrangements, restaurant properties ("Properties") to be
leased on a long-term, triple-net basis to operators of certain
national and regional fast-food, family-style and casual dining
restaurant chains. The Company may provide financing ("Mortgage Loans")
for the purchase of buildings, generally by tenants that lease the
underlying land from the Company. To a lesser extent, the Company may
offer furniture, fixtures and equipment financing ("Secured Equipment
Leases") to operators of restaurant chains.
The Company was a development stage enterprise from May 2, 1994 through
June 1, 1995. Since operations had not begun, activities through June
1, 1995, were devoted to organization of the Company.
Principles of Consolidation - The Company accounts for its 85.47%
interest in CNL/Corral South Joint Venture using the consolidation
method. Minority interest represents the minority joint venture
partner's proportionate share of the equity in the Company's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
Real Estate and Lease Accounting - The Company records the acquisition
of land, buildings and equipment at cost, including acquisition and
closing costs. In addition, interest costs incurred during construction
are capitalized in accordance with accounting standards. Land and
buildings are leased to unrelated third parties on a triple-net basis,
whereby the tenant is generally responsible for all operating expenses
relating to the Property, including property taxes, insurance,
maintenance and repairs. In addition, the Company leases equipment
subject to Secured Equipment Leases. The
B-13
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
leases are accounted for using either the direct financing or
the operating method. Such methods are described below:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset) (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Company's net
investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals (including rental payments, if
any, required during the construction of a Property) vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the lease
term commencing on the date the Property is placed in service.
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date. In contrast, deferred
rental income represents the aggregate amount of scheduled
rental payments to date (including rental payments due during
construction and prior to the Property being placed in
service) in excess of income recognized on a straight-line
basis over the lease term commencing on the date the Property
is placed in service.
When the Properties or equipment are sold, the related cost and
accumulated depreciation for operating leases and the net investment
for direct financing leases, plus any accrued rental income or deferred
rental income, will be removed from the accounts and gains or losses
from sales will be reflected in income. Management reviews its
Properties for impairment
B-14
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations.
Management determines whether an impairment in value has occurred by
comparing the estimated future undiscounted cash flows, including the
residual value of the Property, with the carrying cost of the
individual Property. If an impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the assets
exceeds its fair market value.
Mortgage Loans - The Company accounts for loan origination fees and
costs incurred in connection with Mortgage Loans in accordance with
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases." This statement requires the
deferral of loan origination fees and the capitalization of direct loan
costs. The costs capitalized, net of the fees deferred, are amortized
to interest income as an adjustment of yield over the life of the
loans. The unpaid principal and accrued interest on the Mortgage Loans,
plus the unamortized balance of such fees and costs are included in
mortgage notes receivable (see Note 6).
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks, money market funds (some of which are
backed by government securities) and certificates of deposit. Cash
equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks, money market funds and certificates of deposit may
exceed federally insured levels; however, the Company has not
experienced any losses in such accounts. The Company limits investment
of temporary cash investments to financial institutions with high
credit standing; therefore, management believes it is not exposed to
any significant credit risk on cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
B-15
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
Loan Costs - Loan costs incurred in connection with the Company's
$15,000,000 line of credit for equipment financing have been
capitalized and are being amortized over the term of the loan
commitment using the straight-line method.
Income or expense associated with interest rate swap agreements related
to equipment financing is recognized on the accrual basis as earned or
incurred through an adjustment to interest expense.
Income Taxes - The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes
on amounts distributed to stockholders, providing it distributes at
least 95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the accompanying consolidated
financial statements. Notwithstanding the Company's qualification for
taxation as a REIT, the Company is subject to certain state taxes on
its income and property.
Earnings Per Share - Earnings per share are calculated based upon the
weighted average number of shares of common stock outstanding during
the period the Company was operational.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
New Accounting Standard - Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The statement requires that an entity review
long-lived assets and certain identifiable intangibles, to be held and
used, for impairment whenever events or changes in circumstances
indicate that the
B-16
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
carrying amount of the asset may not be recoverable. Adoption of this
standard had no material effect on the Company's financial position or
results of operations.
2. Public Offering:
The Company has a currently effective registration statement on Form
S-11 with the Securities and Exchange Commission for the sale of
15,000,000 shares ($150,000,000) of common stock. In addition, the
Company has registered an additional 1,500,000 shares ($15,000,000)
which is available only to stockholders who elect to participate in the
Company's reinvestment plan. The Company has adopted a reinvestment
plan pursuant to which stockholders may elect to have the full amount
of their cash distributions from the Company reinvested in additional
shares of common stock of the Company. As of December 31, 1996, the
Company had received subscription proceeds of $139,247,149 (13,924,715
shares), including $591,765 (59,177 shares) through the reinvestment
plan.
In addition, on November 1, 1996, the Company filed a registration
statement with the Securities and Exchange Commission in connection
with the proposed sale by the Company of up to 27,500,000 additional
shares ($275,000,000) of common stock in a public offering (the
"Subsequent Offering") expected to commence immediately following the
termination of the Company's current $150,000,000 offering. Until such
time, if any, as the stockholders approve an increase in the number of
authorized shares of common stock of the Company, the Subsequent
Offering will be limited to 4,800,000 shares ($48,000,000). The Board
of Directors expects to submit, for a vote of the stockholders at a
meeting expected to be held in April 1997, a resolution to increase the
number of authorized shares of common stock of the Company from
20,000,000 to 75,000,000.
3. Leases:
The Company leases its land, buildings and equipment subject to Secured
Equipment Leases to operators of national and regional fast-food,
family-style and casual dining restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The leases relating to 82 of the
Company's
B-17
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
3. Leases - Continued:
Properties have been classified as operating leases (including the
leases relating to nine Properties under construction as of December
31, 1996) and the leases relating to 12 Properties and six Secured
Equipment Leases have been classified as direct financing leases. For
the leases classified as direct financing leases, the building portions
of the leases are accounted for as direct financing leases while the
land portions of four of these leases are accounted for as operating
leases. Substantially all Property leases have initial terms of 15 to
20 years (expiring between 2007 and 2016) and provide for minimum
rentals. In addition, all of the Property leases provide for contingent
rentals and/or scheduled rent increases over the terms of the leases.
Each tenant also pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries
insurance coverage for public liability, property damage, fire and
extended coverage. The lease options for the Property leases generally
allow tenants to renew the leases for two to four successive five-year
periods subject to the same terms and conditions as the initial lease.
Most leases also allow the tenant to purchase the Property at the
greater of the Company's purchase price plus a specified percentage of
such purchase price or fair market value after a specified portion of
the lease has elapsed.
The Secured Equipment Leases placed in service as of December 31, 1996,
provide for minimum rentals payable monthly and have lease terms
ranging from five to seven years. The Secured Equipment Leases
generally include an option for the lessee to acquire the equipment at
the end of the lease term for a nominal fee.
B-18
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
4. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
1996 1995
----------- -------
Land $33,850,436 $ 8,890,471
Buildings 24,152,610 10,049,032
----------- -----------
58,003,046 18,939,503
Less accumulated depreci-
ation (611,396) (100,318)
----------- -----------
57,391,650 18,839,185
Construction in progress 2,851,496 884,541
----------- -----------
$60,243,146 $19,723,726
=========== ===========
Some leases provide for scheduled rent increases throughout the lease
term and/or rental payments during the construction of a Property prior
to the date it is placed in service. Such amounts are recognized on a
straight-line basis over the terms of the leases commencing on the date
the Property is placed in service. For the years ended December 31,
1996 and 1995, the Company recognized $517,067 and $39,142,
respectively, of such rental income.
The following is a schedule of future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1996:
1997 $ 5,359,617
1998 5,368,667
1999 5,383,078
2000 5,406,750
2001 5,591,865
Thereafter 73,053,334
------------
$100,163,311
============
Since lease renewal periods are exercisable at the option of the
tenant, the above table only presents future minimum lease payments due
during the initial lease terms. In addition, this table does not
include any amounts for future contingent rentals which may be received
on the leases based on a percentage of the tenant's gross sales. These
amounts also do not include minimum lease payments that will become due
when Properties under development are completed (see Note 12).
B-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
5. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct
financing leases at December 31:
1996 1995
------------ ------------
Minimum lease payments
receivable $ 30,162,465 $ 2,498,881
Estimated residual values 1,346,332 343,740
Less unearned income (16,322,111) (1,468,739)
------------ ------------
Net investment in direct
financing leases $ 15,186,686 $ 1,373,882
============ ============
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 1996:
1997 $ 2,329,762
1998 2,329,762
1999 2,329,762
2000 2,333,080
2001 2,276,690
Thereafter 18,563,409
-----------
$30,162,465
============
The above table does not include future minimum lease payments for
renewal periods or for contingent rental payments that may become due
in future periods (see Note 4).
6. Mortgage Notes Receivable:
During 1996, in connection with the acquisition of land for 35 Pizza
Hut restaurants, the Company accepted three promissory notes in the
aggregate principal sum of $12,847,000, collateralized by mortgages on
the buildings on the 35 Pizza Hut Properties. The promissory notes bear
interest at a rate of 10.75% per annum and are being collected in 240
equal
B-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
6. Mortgage Notes Receivable - Continued:
monthly installments totalling $130,426. Mortgage notes
receivable consisted of the following at December 31, 1996:
Outstanding principal $12,713,151
Accrued interest income 35,285
Deferred financing income (46,268)
Unamortized loan costs 687,439
-----------
$13,389,607
===========
Management believes that the estimated fair value of mortgage notes
receivable at December 31, 1996, approximates the outstanding principal
amount based on estimated current rates at which similar loans would be
made to borrowers with similar credit and for similar maturities.
7. Note Payable:
On March 5, 1996, the Company entered into a line of credit (the
"Loan") and security agreement with a bank. The Loan is to be used by
the Company to offer Secured Equipment Leases. The Loan provides that
the Company will be able to receive advances of up to $15,000,000 until
March 4, 1998. Generally, advances under the Loan will be fully
amortizing term loans repayable in terms equal to the duration of the
Secured Equipment Leases, but in no event greater than 72 months.
Generally, all advances under the Loan will bear interest at either (i)
a rate per annum equal to 215 basis points above the Reserve Adjusted
LIBOR Rate (as defined in the Loan) or (ii) a rate per annum equal to
the bank's prime rate, whichever the Company selects at the time
advances are made. As a condition of obtaining the Loan, the Company
agreed to grant to the bank a first security interest in the Secured
Equipment Leases. In addition, in connection with the Loan, the Company
incurred a commitment fee, legal fees and closing costs of $54,533.
As of December 31, 1996, the Company had obtained advances totalling
$3,666,896 relating to the Loan. In general, the advances are fully
amortizing term loans repayable over six years and bear interest at a
rate per annum equal to 215 basis points above the Reserve Adjusted
LIBOR Rate (ranging from 7.71% to 7.82% as of December 31, 1996). As of
December 31,
B-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
7. Note Payable - Continued:
1996, $3,521,816 of principal was outstanding relating to the Loan,
plus $13,164 of accrued interest. The Company believes, based on
current terms, that the carrying value of its note payable at December
31, 1996 approximates fair value.
During 1996, the Company entered into interest rate swap agreements
with a commercial bank to reduce the impact of changes in interest
rates on its floating rate long-term debt. The agreements effectively
change the Company's interest rate exposure on notional amounts
totalling approximately $2,110,000 of the outstanding floating rate
notes to fixed rates ranging from 8.75% to nine percent per annum. The
notional amounts of the interest rate swap agreements amortize over the
period of the agreements which approximate the term of the related
notes. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreements;
however, the Company does not anticipate nonperformance by the
counterparty.
Interest costs (including amortization of loan costs) incurred for the
year ended December 31, 1996, were $127,012, all of which were
capitalized as part of the cost of buildings under construction.
8. Stock Issuance Costs:
The Company has incurred certain expenses of its offering of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the offering.
Preliminary costs incurred prior to raising capital were advanced by an
affiliate of the Company, CNL Fund Advisors, Inc. (the "Advisor"). The
Advisor has agreed to pay all organizational and offering expenses
(excluding commissions and marketing support and due diligence expense
reimbursement fees) which exceed three percent of the gross offering
proceeds received from the sale of shares of the Company.
B-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
8. Stock Issuance Costs - Continued:
During the years ended December 31, 1996 and 1995, the Company had
incurred $9,216,102 and $6,423,671, respectively, in organizational and
offering costs, including $8,063,439 and $3,076,333, respectively, in
commissions and marketing support and due diligence expense
reimbursement fees (see Note 10). Of these amounts, as of December 31,
1996 and 1995, $15,619,773 and $6,403,671, respectively, have been
treated as stock issuance costs and $20,000 has been treated as
organization costs. The stock issuance costs have been charged to
stockholders' equity subject to the three percent cap described above.
9. Distributions:
For the years ended December 31, 1996 and 1995, 90.25% and 59.82%,
respectively, of the distributions received by stockholders were
considered to be ordinary income and 9.75% and 40.18%, respectively,
were considered a return of capital for federal income tax purposes. No
amounts distributed to stockholders for the years ended December 31,
1996 and 1995, are required to be or have been treated by the Company
as a return of capital for purposes of calculating the stockholders'
return on their invested capital.
10. Related Party Transactions:
Certain directors and officers of the Company hold similar positions
with the Advisor and the managing dealer of the Company's common stock
offerings, CNL Securities Corp. In addition, as of December 31, 1994,
the Advisor was the sole stockholder of the Company.
CNL Securities Corp. is entitled to receive selling commissions
amounting to 7.5% of the total amount raised from the sale of shares
for services in connection with the formation of the Company and the
offering of shares, a substantial portion of which has been or will be
paid as commissions to other broker-dealers. During the years ended
December 31, 1996 and 1995, the Company incurred $7,559,474 and
$2,884,062, respectively, of such fees, of which approximately
$7,059,000 and $2,682,000, respectively, were or will be paid by CNL
Securities Corp. as commissions to other broker-dealers.
B-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
10. Related Party Transactions - Continued:
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the years ended December
31, 1996 and 1995, the Company incurred $503,965 and $192,271,
respectively, of such fees, the majority of which were reallowed to
other broker-dealers and from which all bona fide due diligence
expenses were paid.
CNL Securities Corp. will also receive a soliciting dealer servicing
fee payable annually by the Company beginning on December 31 of the
year following the year in which the offering terminates in the amount
of 0.20% of the stockholders' investment in the Company. CNL Securities
Corp. in turn may reallow all or a portion of such fee to soliciting
dealers whose clients held shares on such date. As of December 31,
1996, no such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
identifying the Properties and structuring the terms of the acquisition
and leases of the Properties and structuring the terms of the Mortgage
Loans equal to 4.5% of the total amount raised from the sale of shares.
During the years ended December 31, 1996 and 1995, the Company incurred
$4,535,685 and $1,730,437, respectively, of such fees. Such fees are
included in land and buildings on operating leases, net investment in
direct financing leases, mortgage notes receivable and other assets.
In connection with the acquisition of Properties that are being or have
been constructed or renovated by affiliates, subject to approval by the
Company's Board of Directors, the Company may incur
development/construction management fees of generally five to ten
percent of the cost of constructing or renovating a Property, payable
to affiliates of the Company. Such fees are included in the purchase
price of the Properties and are therefore included in the basis on
which the Company charges rent on the Properties. During the year ended
December 31, 1996, the Company incurred $159,350 of such amounts
relating to three Properties. No such amounts were incurred for the
year ended December 31, 1995.
B-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
10. Related Party Transactions - Continued:
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor is entitled to receive a one-time
secured equipment lease servicing fee of two percent of the purchase
price of the Equipment that is the subject of a Secured Equipment
Lease. During the year ended December 31, 1996, the Company incurred
$70,070 in secured equipment lease servicing fees. No secured equipment
lease servicing fees were incurred for the year ended December 31,
1995.
The Company and the Advisor have entered into an advisory agreement
pursuant to which the Advisor will receive a monthly asset and mortgage
management fee of one-twelfth of 0.60% of the Company's real estate
asset value (generally, the total amount invested in the Properties as
of the end of the preceding month, exclusive of acquisition fees and
acquisition expenses), plus one-twelfth of 0.60% of the Company's total
principal amount of the Mortgage Loans as of the end of the preceding
month. The management fee, which will not exceed fees which are
competitive for similar services in the same geographic area, may or
may not be taken, in whole or in part as to any year, in the sole
discretion of the Advisor. All or any portion of the management fee not
taken as to any fiscal year shall be deferred without interest and may
be taken in such other fiscal year as the Advisor shall determine.
During the years ended December 31, 1996 and 1995, the Company incurred
$278,902 and $27,950, respectively, of such fees, $27,702 and $4,872,
respectively, of which has been capitalized as part of the cost of
buildings for Properties that have been or are being constructed.
Prior to such time, if any, as shares of the Company's common stock are
listed on a national securities exchange or over-the-counter market,
the Advisor is entitled to receive a deferred, subordinated real estate
disposition fee, payable upon the sale of one or more Properties based
on the lesser of one-half of a competitive real estate commission or
three percent of the sales price if the Advisor provides a substantial
amount of services in connection with the sale. The real estate
disposition fee is payable only after the stockholders receive
distributions equal to the sum of an annual, aggregate, cumulative,
noncompounded eight percent return on their invested capital
("Stockholders' 8% Return")
B-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
10. Related Party Transactions - Continued:
plus their aggregate invested capital. No deferred, subordinated real
estate disposition fees have been incurred to date.
A subordinated share of net sales proceeds will be paid to the Advisor
upon the sale of Company assets in an amount equal to ten percent of
net sales proceeds. This amount will be paid only after the
stockholders receive distributions equal to the sum of the
stockholders' aggregate invested capital and the Stockholders' 8%
Return. As of December 31, 1996, no such payments have been made to the
Advisor.
The Advisor and its affiliates provide accounting and administrative
services to the Company (including accounting and administrative
services in connection with the offering of shares) on a day-to-day
basis. For the years ended December 31, 1996 and 1995, expenses
incurred for these services were classified as follows:
1996 1995
---------- ----------
Stock issuance costs $ 769,225 $ 714,674
General operating and
administrative expenses 334,603 68,016
---------- ----------
$1,103,828 $ 782,690
========== ==========
During 1996, the Company acquired four Properties for an aggregate
purchase price of approximately $2,609,800 from affiliates of the
Company and during 1995, the Company acquired nine Properties for an
aggregate purchase price of approximately $6,621,000 from affiliates of
the Company. The affiliates had purchased and temporarily held title to
these Properties in order to facilitate the acquisition of the
Properties by the Company. Each Property was acquired at a cost no
greater than the lesser of the cost of the Property to the affiliate
(including carrying costs) or the Property's appraised value.
B-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
10. Related Party Transactions - Continued:
The due to related parties consisted of the following at December 31:
1996 1995
-------- --------
Due to the Advisor:
Expenditures incurred on
behalf of the Company and
accounting and administra-
tive services $199,068 $108,316
Acquisition fees 383,210 45,118
Asset and mortgage manage-
ment fees - 9,108
Distributions - 3,332
-------- --------
582,278 165,874
-------- --------
Due to CNL Securities Corp:
Commissions 372,227 75,197
Marketing support and due
diligence expense reim-
bursement fees 42,579 5,013
-------- --------
414,806 80,210
-------- --------
Other - 2,500
-------- --------
$997,084 $248,584
======== ========
B-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
11. Concentration of Credit Risk:
The following schedule presents rental, earned and interest income from
individual lessees or borrowers, or affiliated groups of lessees or
borrowers, each representing more than ten percent of the Company's
total rental, earned and interest income from its Properties, Mortgage
Loans and Secured Equipment Leases for at least one of the years ended
December 31:
1996 1995
---------- ----------
Castle Hill Holdings V,
L.L.C., Castle Hill
Holdings VI, L.L.C. and
Castle Hill Holdings VII,
L.L.C. ("Castle Hill") $1,699,986 $ -
Golden Corral Corporation 577,003 212,406
DenAmerica Corp. 420,810 66,595
Foodmaker, Inc. 346,179 66,813
Northstar Restaurants, Inc. 329,117 73,219
Roasters Corp. 187,609 82,136
In addition, the following schedule presents total rental, earned and
interest income from individual restaurant chains, each representing
more than ten percent of the Company's total rental, earned and
interest income from its Properties, Mortgage Loans and Secured
Equipment Leases for at least one of the years ended December 31:
1996 1995
---------- ----------
Pizza Hut $1,699,986 $ -
Golden Corral Family
Steakhouse Restaurants 1,459,349 212,406
Boston Market 547,590 73,219
Denny's 420,810 66,595
Jack in the Box 346,179 66,813
Kenny Rogers' Roasters 187,609 82,136
B-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
11. Concentration of Credit Risk - Continued:
Although the Company's Properties are geographically diverse throughout
the United States and the lessees and borrowers operate a variety of
restaurant concepts, default by any lessee or borrower that contributes
more than ten percent of the Company's rental, earned and interest
income could significantly impact the results of the Company. However,
management believes that the risk of such a default is reduced due to
the essential or important nature of these Properties for the on-going
operations of the lessees and borrowers.
12. Commitments:
The Company has entered into various development agreements with
tenants which provide terms and specifications for the construction of
buildings the tenants have agreed to lease. The agreements provide a
maximum amount of development costs (including the purchase price of
the land and closing costs) to be paid by the Company. The aggregate
maximum development costs the Company has agreed to pay is
approximately $11,749,700, of which approximately $7,495,200 in land
and other costs had been incurred as of December 31, 1996. The
buildings currently under construction are expected to be operational
by August 1997. In connection with the purchase of each Property, the
Company, as lessor, entered into a long-term lease agreement. The
general terms of the lease agreements are substantially the same as
those described in Note 3.
During 1996, the Company entered into three temporary Secured Equipment
Leases, as lessor, with operators of family-style restaurants. In
connection therewith, the Company provided initial funding in the
aggregate amount of $455,637 for the equipment which is included in
other assets at December 31, 1996. The Company has agreed to fund the
remaining balance of the equipment purchase prices of approximately
$732,400. Upon funding the balance, which is expected to occur in
January 1997, the Company will enter into final Secured Equipment
Leases which are expected to have substantially the same terms as those
described in Note 3. Until final Secured Equipment Leases are entered
into, the tenants will pay monthly rent in accordance with the
temporary leases.
B-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
13. Subsequent Events:
During the period January 1, 1997 through January 22, 1997, the Company
received subscription proceeds for an additional 616,330 shares
($6,163,297) of common stock.
On January 1, 1997, the Company declared distributions of $827,967 or
$.0594 per share of common stock, payable on March 21, 1997, to
stockholders of record on January 1, 1997.
During the period January 1, 1997 through January 22, 1997, the Company
acquired six Properties for cash at a total cost of approximately
$6,879,700, excluding closing costs. The buildings under construction
are expected to be operational by July 1997. In connection with the
purchase of each Property, the Company, as lessor, has entered into a
long-term, triplenet lease agreement.
B-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
-------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent Gross Amount at Which Carried
Initial Cost To Acquisition at Close of Period (c)
----------------------- --------------------- ---------------------------------
Buildings Buildings
Encum- and Improve- Carrying and
brances Land Improvements ments Costs Land Improvements Total
-------- ----- ------------- --------- --------- --------- ------------ ---------
<S> <C>
Properties the Company
has Invested in Under
Operating Leases:
Applebee's Restaurants:
Montclair, California - $ 874,315 $ - $ - $ - $ 874,315 (g) $ 874,315
Salinas, California - 779,928 - 562,070 - 779,928 $ 562,070 1,341,998
Arby's Restaurants:
Kendallville, Indiana - 276,567 505,359 - - 276,567 505,359 781,926
Avon, Indiana - 338,486 497,282 - - 338,486 497,282 835,768
Black-eyed Pea Restaurant:
Hillsboro, Texas - 368,942 - 20,193 - 368,942 20,193 389,135
Boston Market Restaurants:
Franklin, Tennessee (k) - 566,562 442,992 - - 566,562 442,992 1,009,554
Grand Island, Nebraska - 234,685 644,615 - - 234,685 644,615 879,300
Dubuque, Iowa - 353,608 663,969 - - 353,608 663,969 1,017,577
Chanhassen, Minnesota - 376,929 639,875 - - 376,929 639,875 1,016,804
Ellisville, Missouri - 397,036 - 639,422 - 397,036 639,422 1,036,458
Golden Valley, Minnesota - 665,555 - 475,994 - 665,555 475,994 1,141,549
Corvallis, Oregon - 365,934 - 595,687 - 365,934 595,687 961,621
Rockwall, Texas - 528,118 - 340,297 - 528,118 340,297 868,415
Upland, California - 787,182 - 238,273 - 787,182 238,273 1,025,455
Florissant, Missouri - 705,522 - 626,845 - 705,522 626,845 1,332,367
La Quinta, California - 681,964 - 287,597 - 681,964 287,597 969,561
Merced, California - 573,163 - 402,636 - 573,163 402,636 975,799
Atlanta, Georgia - 538,580 - 33,151 - 538,580 33,151 571,731
St. Joseph, Missouri - 378,786 388,489 - - 378,786 388,489 767,275
Burger King Restaurants:
Burbank, Illinois - 543,095 - 620,617 - 543,095 620,617 1,163,712
Oaklawn, Illinois - 1,211,336 - 824,061 - 1,211,336 824,061 2,035,397
Highland, Indiana - 672,815 - 621,133 - 672,815 621,133 1,293,948
Indian Head Park, Illinois - 599,949 - 170,723 - 599,949 170,723 770,672
Chicago, Illinois - 907,636 - 460,692 - 907,636 460,692 1,368,328
Chattanooga, Tennessee - 516,447 - 152,178 - 516,447 152,178 668,625
Denny's Restaurants:
Pasadena, Texas - 466,555 240,925 265,169 - 466,555 506,094 972,649
Shawnee, Oklahoma - 528,090 373,427 252,225 - 528,090 625,652 1,153,742
Grand Rapids, Michigan - 320,594 559,433 - - 320,594 559,433 880,027
McKinney, Texas - 439,961 - - - 439,961 (g) 439,961
</TABLE>
B-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
--------------------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
Life
on Which
Depreciation
in Latest
Date Income
Accumulated of Con- Date Statement is
Depreciation struction Acquired Computed
------------ --------- -------- -----------
<S> <C>
Properties the Company
has Invested in Under
Operating Leases:
Applebee's Restaurants:
Montclair, California (h) 1996 08/96 (h)
Salinas, California (c) (d) 09/96 (c)
Arby's Restaurants:
Kendallville, Indiana $ 8,077 1995 07/96 (e)
Avon, Indiana 4,769 1996 09/96 (e)
Black-eyed Pea Restaurant:
Hillsboro, Texas (c) (d) 06/96 (c)
Boston Market Restaurants:
Franklin, Tennessee (k) 20,238 1995 08/95 (e)
Grand Island, Nebraska 27,566 1995 09/95 (e)
Dubuque, Iowa 27,529 1995 10/95 (e)
Chanhassen, Minnesota 24,543 1995 11/95 (e)
Ellisville, Missouri 7,007 1996 06/96 (e)
Golden Valley, Minnesota 4,043 1996 06/96 (e)
Corvallis, Oregon 4,733 1996 07/96 (e)
Rockwall, Texas 2,051 1996 07/96 (e)
Upland, California 3,503 1996 07/96 (e)
Florissant, Missouri 172 1996 09/96 (e)
La Quinta, California 420 1996 09/96 (e)
Merced, California 3,199 1996 09/96 (e)
Atlanta, Georgia (c) (d) 12/96 (c)
St. Joseph, Missouri 532 1996 12/96 (e)
Burger King Restaurants:
Burbank, Illinois 8,275 1996 03/96 (e)
Oaklawn, Illinois 7,902 1996 03/96 (e)
Highland, Indiana 7,771 1996 04/96 (e)
Indian Head Park, Illinois (c) (d) 04/96 (c)
Chicago, Illinois (c) (d) 10/96 (c)
Chattanooga, Tennessee (c) (d) 12/96 (c)
Denny's Restaurants:
Pasadena, Texas 22,261 1981 09/95 (e)
Shawnee, Oklahoma 27,515 1987 09/95 (e)
Grand Rapids, Michigan 14,714 1967 03/96 (e)
McKinney, Texas (h) 1996 06/96 (h)
</TABLE>
B-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent Gross Amount at Which Carried
Initial Cost To Acquisition at Close of Period (c)
------------------------- --------------------- ----------------------------
Buildings Buildings
Encum- and Improve- Carrying and
brances Land Improvements ments Costs Land Improvements
------- -------- ------------ ---------- -------- ---------- ------------
<S> <C>
Golden Corral Family
Steakhouse Restaurants:
Carlsbad, New Mexico - 384,221 - 643,854 - 384,221 643,854
Cleburne, Texas - 359,455 - 653,853 - 359,455 653,853
Corsicana, Texas - 349,227 699,756 - - 349,227 699,756
Dover, Delaware - 1,043,108 - 977,508 - 1,043,108 977,508
Ft. Worth, Texas - 640,320 898,171 - - 640,320 898,171
Tampa, Florida - 825,065 - 1,222,843 - 825,065 1,222,843
Universal City, Texas - 357,429 - 650,249 - 357,429 650,249
Columbus, Ohio - 1,031,098 - 1,092,939 - 1,031,098 1,092,939
Port Richey, Florida - 627,739 - 1,025,611 - 627,739 1,025,611
Lufkin, Texas - 462,689 - 1,006,558 - 462,689 1,006,558
Columbia, Tennessee - 442,218 - - - 442,218 (g)
Moberly, Missouri - 373,214 - 9,317 - 373,214 9,317
Jack in the Box Restaurants:
Los Angeles, California - 603,354 602,630 - - 603,354 602,630
Houston, Texas - 545,485 - 527,020 - 545,485 527,020
Humble, Texas - 437,667 - 591,877 - 437,667 591,877
Houston, Texas - 376,267 - 574,359 - 376,267 574,359
Houston, Texas - 403,350 - 565,866 - 403,350 565,866
Dallas, Texas - 368,932 - 509,758 - 368,932 509,758
Kenny Rogers' Roasters
Restaurant:
Grand Rapids, Michigan - 282,806 599,309 - - 282,806 599,309
Pizza Hut Restaurants:
Adrian, Michigan - 242,239 - - - 242,239 -
Bedford, Ohio - 174,721 - - - 174,721 -
Bowling Green, Ohio - 200,442 - - - 200,442 -
Cleveland, Ohio - 116,849 - - - 116,849 -
Cleveland, Ohio - 226,163 - - - 226,163 -
Cleveland, Ohio - 126,494 - - - 126,494 -
Defiance, Ohio - 242,239 - - - 242,239 -
East Cleveland, Ohio - 194,012 - - - 194,012 -
Euclid, Ohio - 202,050 - - - 202,050 -
Fairview Park, Ohio - 142,570 - - - 142,570 -
Lambertville, Michigan - 99,166 - - - 99,166 -
Middleburg Heights, Ohio - 216,518 - - - 216,518 -
Monroe, Michigan - 152,215 - - - 152,215 -
Norwalk, Ohio - 261,529 - - - 261,529 -
North Olmstead, Ohio - 259,922 - - - 259,922 -
Sandusky, Ohio - 259,922 - - - 259,922 -
Seven Hills, Ohio - 239,023 - - - 239,023 -
Toledo, Ohio - 197,227 - - - 197,227 -
Toledo, Ohio - 176,170 - - - 176,170 -
Toledo, Ohio - 208,480 - - - 208,480 -
Mayfield Heights, Ohio - 202,552 - - - 202,552 -
Strongsville, Ohio - 186,476 - - - 186,476 -
</TABLE>
B-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
<TABLE>
<CAPTION>
Life
Gross Amount at on Which
Which Carried Depreciation
at Close of in Latest
Period (c) Date Income
------------- Accumulated of Con- Date Statement is
Total Depreciation struction Acquired Computed
----------- ------------ --------- -------- -----------
<S> <C>
Golden Corral Family 1,028,075 28,953 1995 08/95 (e)
Steakhouse Restaurants: 1,013,308 26,600 1995 08/95 (e)
Carlsbad, New Mexico 1,048,983 32,558 1995 08/95 (e)
Cleburne, Texas 2,020,616 41,454 1995 08/95 (e)
Corsicana, Texas 1,538,491 41,033 1995 08/95 (e)
Dover, Delaware 2,047,908 36,734 1996 08/95 (e)
Ft. Worth, Texas 1,007,678 28,578 1995 08/95 (e)
Tampa, Florida 2,124,037 39,990 1995 11/95 (e)
Universal City, Texas 1,653,350 9,647 1996 05/96 (e)
Columbus, Ohio 1,469,247 460 1996 11/96 (e)
Port Richey, Florida 442,218 (h) 1996 12/96 (h)
Lufkin, Texas 382,531 (c) (d) 12/96 (c)
Columbia, Tennessee
Moberly, Missouri
1,205,984 30,184 1986 06/95 (e)
Jack in the Box Restaurants: 1,072,505 14,631 1996 11/95 (e)
Los Angeles, California 1,029,544 6,000 1996 06/96 (e)
Houston, Texas 950,626 5,140 1996 07/96 (e)
Humble, Texas 969,216 4,806 1996 08/96 (e)
Houston, Texas 878,690 (c) (d) 12/96 (c)
Houston, Texas
Dallas, Texas
Kenny Rogers' Roasters 882,115 28,146 1995 08/95 (e)
Restaurant:
Grand Rapids, Michigan
242,239 (f) 1989 01/96 (f)
Pizza Hut Restaurants: 174,721 (f) 1975 01/96 (f)
Adrian, Michigan 200,442 (f) 1985 01/96 (f)
Bedford, Ohio 116,849 (f) 1978 01/96 (f)
Bowling Green, Ohio 226,163 (f) 1987 01/96 (f)
Cleveland, Ohio 126,494 (f) 1986 01/96 (f)
Cleveland, Ohio 242,239 (f) 1977 01/96 (f)
Cleveland, Ohio 194,012 (f) 1986 01/96 (f)
Defiance, Ohio 202,050 (f) 1983 01/96 (f)
East Cleveland, Ohio 142,570 (f) 1977 01/96 (f)
Euclid, Ohio 99,166 (f) 1994 01/96 (f)
Fairview Park, Ohio 216,518 (f) 1975 01/96 (f)
Lambertville, Michigan 152,215 (f) 1994 01/96 (f)
Middleburg Heights, Ohio 261,529 (f) 1993 01/96 (f)
Monroe, Michigan 259,922 (f) 1976 01/96 (f)
Norwalk, Ohio 259,922 (f) 1978 01/96 (f)
North Olmstead, Ohio 239,023 (f) 1983 01/96 (f)
Sandusky, Ohio 197,227 (f) 1978 01/96 (f)
Seven Hills, Ohio 176,170 (f) 1985 01/96 (f)
Toledo, Ohio 208,480 (f) 1975 01/96 (f)
Toledo, Ohio 202,552 (f) 1980 04/96 (f)
Toledo, Ohio 186,476 (f) 1976 04/96 (f)
Mayfield Heights, Ohio
Strongsville, Ohio
</TABLE>
B-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent Gross Amount at Which Carried
Initial Cost To Acquisition at Close of Period (c)
-------------------------- -------------------- -------------------------------------
Buildings Buildings
Encum- and Improve- Carrying and
brances Land Improvements ments Costs Land Improvements Total
------- -------- ------------ -------- -------- ----------- ------------ -----------
<S> <C>
Toledo, Ohio - 128,604 - - - 128,604 - 128,604
Beaver, West Virginia - 212,053 - - - 212,053 - 212,053
Beckley, West Virginia - 209,432 - - - 209,432 - 209,432
Belle, West Virginia - 46,737 - - - 46,737 - 46,737
Bluefield, West Virginia - 120,449 - - - 120,449 - 120,449
Cross Lanes, West Virginia - 215,881 - - - 215,881 - 215,881
Huntington, West Virginia - 212,093 - - - 212,093 - 212,093
Hurricane, West Virginia - 180,803 - - - 180,803 - 180,803
Marietta, Ohio - 169,454 - - - 169,454 - 169,454
Milton, West Virginia - 99,815 - - - 99,815 - 99,815
Ronceverte, West Virginia - 99,733 - - - 99,733 - 99,733
Bowling Green, Ohio - 135,831 - - - 135,831 - 135,831
Toledo, Ohio - 194,097 - - - 194,097 - 194,097
Ryan's Family Steak House
Restaurant:
Spring Hill, Florida - 588,586 - 933,414 - 588,586 933,414 1,522,000
Wendy's Old Fashioned
Hamburgers Restaurants:
Knoxville, Tennessee - 357,760 - - - 357,760 (g) 357,760
Camarillo, California - 640,145 - 673,885 - 640,145 673,885 1,314,030
----------- ----------- ----------- ------- ----------- ----------- -----------
$33,850,436 $ 7,756,232 $19,247,874 $ - $33,850,436 $27,004,106 $60,854,542
=========== =========== =========== ======= =========== =========== ===========
</TABLE>
B-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
<TABLE>
<CAPTION>
Life
on Which
Depreciation
in Latest
Date Income
Accumulated of Con- Date Statement is
Depreciation struction Acquired Computed
------------ --------- -------- ----------
<S> <C>
Toledo, Ohio (f) 1988 04/96 (f)
Beaver, West Virginia (f) 1986 05/96 (f)
Beckley, West Virginia (f) 1978 05/96 (f)
Belle, West Virginia (f) 1980 05/96 (f)
Bluefield, West Virginia (f) 1986 05/96 (f)
Cross Lanes, West Virginia (f) 1990 05/96 (f)
Huntington, West Virginia (f) 1978 05/96 (f)
Hurricane, West Virginia (f) 1978 05/96 (f)
Marietta, Ohio (f) 1986 05/96 (f)
Milton, West Virginia (f) 1986 05/96 (f)
Ronceverte, West Virginia (f) 1991 05/96 (f)
Bowling Green, Ohio (f) 1992 12/96 (f)
Toledo, Ohio (f) 1993 12/96 (f)
Ryan's Family Steak House
Restaurant:
Spring Hill, Florida (c) (d) 09/96 (c)
Wendy's Old Fashioned
Hamburgers Restaurants:
Knoxville, Tennessee (h) 1996 05/96 (h)
Camarillo, California 9,662 1996 06/96 (e)
--------
$611,396
========
</TABLE>
B-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
-------------------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
----------------------------- -----------------------
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
-------- ------ ------------- --------- ---------
<S> <C>
Properties the Company
has Invested in Under
Direct Financing Leases:
Applebee's Restaurant:
Montclair, California - $ - $ - $ 823,193 $ -
Denny's Restaurant:
McKinney, Texas - - 655,052 - -
Golden Corral Family
Steakhouse Restaurants:
Brooklyn, Ohio - - 1,044,311 - -
Columbia, Tennessee - - 939,713 - -
Eastlake, Ohio - 256,332 1,473,306 - -
TGI Friday's Restaurants:
Orange, Connecticut - - - 1,379,330 -
Marlboro, New Jersey - - - 1,409,354 -
Hazlet, New Jersey - - - 1,370,519 -
Hamden, Connecticut - - - 1,272,835 -
Wendy's Old Fashioned
Hamburgers Restaurants:
Knoxville, Tennessee - - - 482,105 -
Sevierville, Tennessee - - - 529,941 -
San Diego, California - - - 653,753 -
----------- ----------- ----------- -------
$ 256,332 $ 4,112,382 $ 7,921,030 $ -
=========== =========== =========== =======
</TABLE>
B-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
-------------------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
Life
Gross Amount at Which Carried on Which
at Close of Period (c) Depreciation
-------------------------------------- in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
---------- ------------ ----------- ------------ --------- -------- ----------
<S> <C>
Properties the Company
has Invested in Under
Direct Financing Leases:
Applebee's Restaurant:
Montclair, California (g) (g) (g) (h) 1996 08/96 (h)
Denny's Restaurant:
McKinney, Texas (g) (g) (g) (h) 1996 06/96 (h)
Golden Corral Family
Steakhouse Restaurants:
Brooklyn, Ohio (j) (g) (g) (h) 1996 07/96 (h)
Columbia, Tennessee (g) (g) (g) (h) 1996 12/96 (h)
Eastlake, Ohio (g) (g) (g) (i) 1996 12/96 (i)
TGI Friday's Restaurants:
Orange, Connecticut (j) (g) (g) (h) 1995 07/95 (h)
Marlboro, New Jersey (j) (g) (g) (h) 1996 02/96 (h)
Hazlet, New Jersey (j) (g) (g) (h) 1996 03/96 (h)
Hamden, Connecticut (j) (g) (g) (h) 1996 04/96 (h)
Wendy's Old Fashioned
Hamburgers Restaurants:
Knoxville, Tennessee (g) (g) (g) (h) 1996 05/96 (h)
Sevierville, Tennessee (j) (g) (g) (h) 1996 06/96 (h)
San Diego, California (j) (g) (g) (h) 1996 10/96 (h)
</TABLE>
B-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------------------------------
December 31, 1996
(a) Transactions in real estate and accumulated depreciation during 1996
and 1995 are summarized as follows:
Accumulated
Cost (b) Depreciation
------------- ------------
Properties the Partnership
has Invested in Under
Operating Leases:
Balance, December 31, 1994 $ - $ -
Acquisitions (l) 19,824,044 -
Depreciation expense (e) - 100,318
----------- -----------
Balance, December 31, 1995 19,824,044 100,318
Acquisitions (l) 41,030,498 -
Depreciation expense - 511,078
----------- -----------
Balance, December 31, 1996 $60,854,542 $ 611,396
=========== ===========
(b) As of December 31, 1996 and 1995, the aggregate cost of the
Properties owned by the Company and its subsidiary for federal income
tax purposes was $73,144,286 and $21,199,004, respectively. All of
the leases are treated as operating leases for federal income tax
purposes.
(c) Property was not placed in service as of December 31, 1996;
therefore, no depreciation was taken.
(d) Scheduled for completion in 1997.
(e) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(f) The building portion of this property is owned by the tenant;
therefore, depreciation is not applicable.
(g) For financial reporting purposes, certain components of the lease
relating to land and building have been recorded as direct financing
lease. Accordingly, costs relating to these components of this lease
are not shown.
(h) For financial reporting purposes, the portion of this lease relating
to the building has been recorded as direct financing lease. The cost
of the building has been included in net investment in direct
financing leases; therefore, depreciation is not applicable.
(i) For financial reporting purposes, the lease for the land and building
has been recorded as direct financing lease. The cost of the land and
building has been included in net investment in direct financing
leases; therefore, depreciation is not applicable.
B-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1996
(j) The Company owns the building only relating to this Property. This
property is subject to a ground lease between the tenant and an
unaffiliated third party. In connection therewith, the Company
entered into either a tri-party agreement with the tenant and the
owner of the land or an assignment of interest in the ground lease
with the landlord of the land. The tri-party agreement or assignment
of interest each provide that the tenant is responsible for all
obligations under the ground lease and provide certain rights to the
Company to help protect its interest in the building in the event of
a default by the tenant under the terms of the ground lease.
(k) The restaurant on the property in Franklin, Tennessee, was converted
from a Kenny Rogers' Roasters restaurant to a Boston Market
restaurant in 1996.
(l) During the years ended December 31, 1996 and 1995, the Company (i)
incurred acquisition fees totalling $4,535,685 and $1,730,437,
respectively, paid to the Advisor, (ii) purchased land and buildings
from affiliates of the Company for an aggregate cost of approximately
$2,609,800 and $6,621,000, respectively, and (iii) paid
development/construction management fees to affiliates of the Company
totalling $159,350 during the year ended December 31, 1996. Such
amounts are included in land and buildings on operating leases, net
investment in direct financing leases and other assets at December
31, 1996 and 1995.
B-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
- ------------------------------ -------- ------------- -------- ----- ----------- ----------- -----------
<S> <C>
Castle Hill Holdings V, L.L.C.
First Mortgages 10.75% January, 2016 (1) $ - $ 8,475,000 $ 8,812,787 $ -
Pizza Hut Restaurants:
Bedford, OH
Middleburg Heights, OH
Fairview Park, OH
Strongsville, OH
Cleveland, OH
East Cleveland, OH
North Olmstead, OH
Norwalk, OH
Sandusky, OH
Mayfield Heights, OH
Euclid, OH
Seven Hills, OH
Cleveland, OH
Cleveland, OH
Toledo, OH
Toledo, OH
Defiance, OH
Toledo, OH
Bowling Green, OH
Monroe, MI
Lambertville, MI
Adrian, MI
Toledo, OH
Castle Hill Holdings VI, L.L.C.
First Mortgages 10.75% June, 2016 (1) - 3,888,000 4,071,755 -
Pizza Hut Restaurants:
Hurricane, WV
Marietta, OH
Bluefield, WV
Huntington, WV
Ronceverte, WV
Milton, WV
Beckley, WV
Belle, WV
Cross Lanes, WV
Beaver, WV
Castle Hill Holdings VII, L.L.C.
First Mortgages 10.75% January, 2017 (1) - 484,000 505,065 -
Pizza Hut Restaurants:
Bowling Green, OH
Toledo, OH
---- ----------- ------------- --------
Total
$ - $12,847,000 $13,389,607(3) $ -
===== =========== ============== =======
</TABLE>
B-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
SCHEDULE IV - NOTES TO MORTGAGE LOANS ON REAL ESTATE
----------------------------------------------------
December 31, 1996
(1) Equal monthly payments of principal and interest at an annual rate of
10.75%.
(2) The tax carrying value of the notes is $13,389,607.
(3) The changes in the carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- -------
<S> <C>
Balance at beginning of period $ - $ - $ -
New mortgage loans 12,847,000 - -
Accrued interest 35,286 - -
Collection of principal (133,850) - -
Deferred financing income (46,268) - -
Unamortized loan costs 687,439 - -
----------- --------- -------
Balance at end of period $13,389,607 $ - $ -
=========== ========= =======
</TABLE>
B-42
<PAGE>
EXHIBIT C
PRIOR PERFORMANCE TABLES
<PAGE>
EXHIBIT C
PRIOR PERFORMANCE TABLES
The information in this Exhibit C contains certain relevant summary
information concerning certain prior public partnerships sponsored by two of the
Company's principals (who also serve as the Chairman of the Board and President
of the Company) and their Affiliates (the "Prior Public Partnerships") which
like the Company, were formed to invest in restaurant properties leased on a
triple-net basis to operators of national and regional fast-food and
family-style restaurant chains.
A more detailed description of the acquisitions by the Prior Public
Partnerships is set forth in Part II of the registration statement filed with
the Securities and Exchange Commission for this Offering and is available from
the Company upon request, without charge. In addition, upon request to the
Company, the Company will provide, without charge, a copy of the most recent
Annual Report on Form 10-K filed with the Securities and Exchange Commission for
CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL
Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL
Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL
Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL
Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII,
Ltd., as well as a copy, for a reasonable fee, of the exhibits filed with such
reports.
The investment objectives of the Prior Public Partnerships (like those
of the Company) generally include preservation and protection of capital, the
potential for increased income and protection against inflation, and potential
for capital appreciation, all through investment in restaurant properties. In
addition, the investment objectives of the Prior Public Partnerships included
making partially tax-sheltered distributions.
STOCKHOLDERS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN
SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS, OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. STOCKHOLDERS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY INTEREST IN ANY
PRIOR PUBLIC PARTNERSHIPS.
Description of Tables
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table V - Sales or Disposal of Properties
Unless otherwise indicated in the Tables, all information contained in
the Tables is as of June 30, 1996. The following is a brief description of the
Tables:
Table I - Experience in Raising and Investing Funds
Table I presents information on a percentage basis showing the
experience of two of the principals of the Company and their Affiliates in
raising and investing funds for the Prior Public Partnerships, the offerings of
which were fully subscribed between October 1991 and September 1996.
C-1
<PAGE>
The Table sets forth information on the offering expenses incurred and
amounts available for investment expressed as a percentage of total dollars
raised. The Table also shows the percentage of property acquisition cost
leveraged, the date the offering commenced, and the time required to raise funds
for investment.
Table II - Compensation to Sponsor
Table II provides information, on a total dollar basis, regarding
amounts and types of compensation paid to the general partners of the Prior
Public Partnerships.
The Table indicates the total offering proceeds and the portion of such
offering proceeds paid or to be paid to two of the principals of the Company and
their Affiliates in connection with the Prior Public Partnerships, the offerings
of which were fully subscribed between October 1991 and September 1996. The
Table also shows the amounts paid to two of the principals of the Company and
their Affiliates from cash generated from operations and from cash generated
from sales or refinancing by each of the Prior Public Partnerships on a
cumulative basis commencing with inception and ending June 30, 1996.
Table III - Operating Results of Prior Programs
Table III presents a summary of operating results for the period from
inception through June 30, 1996, of the Prior Public Partnerships, the offerings
of which were fully subscribed between October 1991 and September 1996.
The Table includes a summary of income or loss of the Prior Public
Partnerships, which are presented on the basis of generally accepted accounting
principles ("GAAP"). The Table also shows cash generated from operations, which
represents the cash generated from operations of the properties of the Prior
Public Partnerships, as distinguished from cash generated from other sources
(special items). The section of the Table entitled "Special Items" provides
information relating to cash generated from or used by items which are not
directly related to the operations of the properties of the Prior Public
Partnerships, but rather are related to items of a partnership nature. These
items include proceeds from capital contributions of limited partners and
disbursements made from these sources of funds, such as syndication and
organizational costs, acquisition of the properties and other costs which are
related more to the organization of the partnership and the acquisition of
properties than to the actual operations of the partnerships.
The Table also presents information pertaining to investment income,
returns of capital on a GAAP basis, cash distributions from operations, sales
and refinancing proceeds expressed in total dollar amounts as well as
distributions and tax results on a per $1,000 investment basis.
Table IV - Results of Completed Programs
Table IV is omitted from this Exhibit C because none of the directors
of the Company or their Affiliates has been involved in completed public
programs which made investments similar to those of the Company.
Table V - Sales or Disposal of Properties
Table V provides information regarding the sale or disposal of
properties owned by the Prior Public Partnerships between October 1991 and June
1996.
This Table includes the selling price of the property, the cost of the
property, the date acquired and the date of sale.
C-2
<PAGE>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income CNL Income
Fund X, Fund XI, Fund XII, Fund XIII, Fund XIV,
Ltd. Ltd. Ltd. Ltd. Ltd.
<S> <C>
Dollar amount offered $40,000,000 $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== =========== ===========
Dollar amount raised 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5) (8.5) (8.5) (8.5)
Organizational expenses (3.0) (3.0) (3.0) (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5) (0.5) (0.5) (0.5)
----------- ----------- ----------- ----------- -----------
(12.0) (12.0) (12.0) (12.0) (12.0)
----------- ----------- ----------- ----------- -----------
Reserve for operations -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Percent available for
investment 88.0% 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== =========== ===========
Acquisition costs:
Cash down payment 83.0% 83.0% 83.0% 82.5% 82.5%
Acquisition fees paid
to affiliates 5.0 5.0 5.0 5.5 5.5
Loan costs -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Total acquisition costs 88.0% 88.0% 88.0% 88.0% 88.0%
=========== =========== =========== =========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- -- -- -- --
Date offering began 9/09/91 3/18/92 9/29/92 3/31/93 8/27/93
Length of offering (in
months) 6 6 6 5 6
Months to invest 90% of
amount available for
investment measured
from date of offering 7 6 11 10 11
</TABLE>
Note 1: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective August 11, 1995, CNL Income Fund
XVII, Ltd. and CNL Income Fund XVIII, Ltd. each registered for sale
$30,000,000 of units of limited partnership interest (the "Units"). The
offering of Units of CNL Income Fund XVII, Ltd. commenced September 2,
1995. Pursuant to the Registration Statement, the offering of Units of
CNL Income Fund XVIII, Ltd. would not commence until the offering of
Units of CNL Income Fund XVII, Ltd. had terminated. As of June 30,
1996, CNL Income Fund XVII, Ltd. was in the offering stage; therefore,
CNL Income Fund XVIII, Ltd. had not commenced its offering of Units.
C-3
<PAGE>
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XV, Fund XVI, Fund XVII, Fund XVIII,
Ltd. Ltd. Ltd. Ltd.
(Note 1) (Note 1)
<S> <C>
Dollar amount offered $40,000,000 $45,000,000
============= =============
Dollar amount raised 100.0% 100.0%
----------- -----------
Less offering expenses:
Selling commissions
and discounts (8.5) (8.5)
Organizational expenses (3.0) (3.0)
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated
entities) (0.5) (0.5)
----------- -----------
(12.0) (12.0)
----------- -----------
Reserve for operations -- --
----------- ----------
Percent available for
investment 88.0% 88.0%
=========== ===========
Acquisition costs:
Cash down payment 82.5% 82.5%
Acquisition fees paid
to affiliates 5.5 5.5
Loan costs -- --
----------- ----------
Total acquisition costs 88.0% 88.0%
=========== ===========
Percent leveraged
(mortgage financing
divided by total
acquisition costs) -- --
Date offering began 2/23/94 9/02/94
Length of offering (in
months) 6 9
Months to invest 90% of
amount available for
investment measured
from date of offering 10 11
</TABLE>
C-4
<PAGE>
TABLE II
COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income CNL Income
Fund X, Fund XI, Fund XII, Fund XIII, Fund XIV,
Ltd. Ltd. Ltd. Ltd. Ltd.
<S> <C>
Date offering commenced 9/09/91 3/18/92 9/29/92 3/31/93 8/27/93
Dollar amount raised $40,000,000 $40,000,000 $45,000,000 $40,000,000 $45,000,000
=========== =========== =========== =========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,400,000 3,825,000 3,400,000 3,825,000
Real estate commissions - - - - -
Acquisition fees 2,000,000 2,000,000 2,250,000 2,200,000 2,475,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 200,000 225,000 200,000 225,000
----------- ----------- ----------- ----------- -----------
Total amount paid to sponsor 5,600,000 5,600,000 6,300,000 5,800,000 6,525,000
=========== =========== =========== =========== ===========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1996 (6 Months) 1,877,818 1,866,649 1,986,907 1,701,335 1,857,023
1995 3,603,470 3,758,271 3,928,473 3,482,461 3,823,939
1994 3,828,234 3,574,474 3,933,486 3,232,046 2,897,432
1993 3,499,905 3,434,512 3,320,549 1,148,550 329,957
1992 3,141,123 1,525,462 63,401 - -
1991 204,240 - - - -
1990 - - - - -
1989 - - - - -
1988 - - - - -
1987 - - - - -
1986 - - - - -
1985 - - - - -
1984 - - - - -
1983 - - - - -
1982 - - - - -
1981 - - - - -
1980 - - - - -
1979 - - - - -
1978 - - - - -
Amount paid to sponsor from operations
(administrative, accounting and
management fees):
1996 (6 Months) 55,272 55,339 55,932 53,682 57,121
1995 76,108 106,086 109,111 103,083 114,095
1994 42,741 76,533 84,524 83,046 84,801
1993 38,999 78,926 73,789 27,003 8,220
1992 39,505 30,237 2,031 - -
1991 2,834 - - - -
1990 - - - - -
1989 - - - - -
1988 - - - - -
1987 - - - - -
1986 - - - - -
1985 - - - - -
1984 - - - - -
1983 - - - - -
1982 - - - - -
1981 - - - - -
1980 - - - - -
1979 - - - - -
1978 - - - - -
Dollar amount of property sales and
refinancing before deducting payments to
sponsor:
Cash 1,057,386 - 1,640,000 286,411 696,012
Notes - - - - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - - - - -
Incentive fees - - - - -
Other - - - - -
</TABLE>
Note 1: During the year ended December 31, 1995, CNL Income Fund X, Ltd.
received proceeds of $7,200 for a small parcel of land as a result of
an easement relating to a certain property.
C-5
<PAGE>
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XV, Fund XVI, Fund XVII, Fund XVIII,
Ltd. Ltd. Ltd. Ltd.
<S> <C> (Note 2) (Note 2)
Date offering commenced 2/23/94 9/02/94
Dollar amount raised $40,000,000 $45,000,000
=========== ===========
Amount paid to sponsor from
proceeds of offering:
Selling commissions and
discounts 3,400,000 3,825,000
Real estate commissions - -
Acquisition fees 2,200,000 2,475,000
Marketing support and
due diligence expense
reimbursement fees
(includes amounts
reallowed to
unaffiliated entities) 200,000 225,000
----------- ----------
Total amount paid to sponsor 5,800,000 6,525,000
=========== ==========
Dollar amount of cash generated
from operations before
deducting payments to
sponsor:
1996 (6 Months) 1,741,150 1,936,583
1995 3,361,477 2,619,840
1994 1,154,454 212,171
1993 - -
1992 - -
1991 - -
1990 - -
1989 - -
1988 - -
1987 - -
1986 - -
1985 - -
1984 - -
1983 - -
1982 - -
1981 - -
1980 - -
1979 - -
1978 - -
Amount paid to sponsor from operations
(administrative, accounting and
management fees):
1996 (6 Months) 53,223 74,887
1995 122,107 138,445
1994 37,620 7,023
1993 - -
1992 - -
1991 - -
1990 - -
1989 - -
1988 - -
1987 - -
1986 - -
1985 - -
1984 - -
1983 - -
1982 - -
1981 - -
1980 - -
1979 - -
1978 - -
Dollar amount of property sales and
refinancing before deducting payments to
sponsor:
Cash 811,706 775,000
Notes - -
Amount paid to sponsors
from property sales and
refinancing:
Real estate commissions - -
Incentive fees - -
Other - -
</TABLE>
Note 2: Pursuant to a Registration Statement on Form S-11 under the Securities
Act of 1933, as amended, effective August 11, 1995, CNL Income Fund
XVII, Ltd. and CNL Income Fund XVIII, Ltd. each registered for sale
$30,000,000 of units of limited partnership interest (the "Units"). The
offering of Units of CNL Income Fund XVII, Ltd. commenced September 2,
1995. Pursuant to the Registration Statement, the offering of Units of
CNL Income Fund XVIII, Ltd. would not commence until the offering of
Units of CNL Income Fund XVII, Ltd. had terminated. As of June 30,
1996, CNL Income Fund XVII, Ltd. was in the offering stage; therefore,
CNL Income Fund XVIII, Ltd. had not commenced its offering of Units.
As of June 30, 1996, CNL Income Fund XVII, Ltd. had sold 2,113,286
Units, representing $21,132,863 of capital contributed by limited
partners, and 13 properties had been acquired. From commencement of
the offering through June 30, 1996, total selling commissions and
discounts were $1,796,293, due diligence expense reimbursement fees
were $105,665, and acquisition fees were $950,978, for a total amount
paid to sponsor of $2,852,936. CNL Income Fund XVII, Ltd. had cash
generated from operations for the period November 3, 1995 (the date
funds were originally released from escrow) through June 30, 1996, of
$266,033. CNL Income Fund XVII, Ltd. made payments of $47,754 to the
sponsor from operations for this period.
C-6
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND X, LTD.
<TABLE>
<CAPTION>
1990
(Note 1) 1991 1992 1993
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 80,723 $ 2,985,620 $ 3,729,533
Equity in earnings of unconsolidated
joint venture 0 0 184,425 273,564
Profit from sale of properties 0 0 0 0
Interest income 0 77,424 149,051 35,072
Less: Operating expenses 0 (7,078) (147,094) (178,294)
Interest expense 0 0 0 0
Depreciation and amortization 0 (5,603) (261,058) (215,143)
Minority interest in income of
consolidated joint venture 0 0 (4,902) (8,159)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 145,466 2,906,042 3,636,573
============ ============ ============ ============
Taxable income
- from operations 0 187,164 2,652,037 2,936,325
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 5) 0 201,406 3,101,618 3,460,906
Cash generated from sales (Note 4) 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 201,406 3,101,618 3,460,906
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (163,012) (2,760,446) (2,659,655)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 38,394 341,172 801,251
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 19,972,663 20,027,337 0
General partners' capital
contributions 1,000 0 0 0
Organization costs 0 (10,000) 0 0
Syndication costs 0 (1,942,339) (1,880,824) 0
Acquisition of land and buildings 0 (7,317,942) (12,095,378) (316)
Investment in direct financing
leases 0 (3,024,796) (8,018,153) (46,364)
Investment in joint ventures 0 0 (3,687,069) 0
Return of capital from joint
ventures 0 0 0 0
Deposit received for sale of land
and building 0 0 0 0
Increase in other assets (78) (482,466) 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund X, Ltd. by
related parties 0 (815,938) (313,196) (544)
Distributions to holder of minority
interest 0 0 (5,729) (5,543)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 922 6,417,576 (5,631,840) 748,484
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 70 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
6 Months
1994 1995 1996
------------ ------------ --------
<S> <C>
Gross revenue $ 3,710,792 $ 3,544,446 $ 1,763,069
Equity in earnings of unconsolidated
joint venture 271,512 267,799 134,133
Profit from sale of properties 0 67,214 0
Interest income 46,456 72,600 30,695
Less: Operating expenses (138,507) (189,230) (116,253)
Interest expense 0 0 0
Depreciation and amortization (208,941) (201,696) (95,126)
Minority interest in income of
consolidated joint venture (8,471) (9,066) (3,986)
------------ ------------ ------------
Net income - GAAP basis 3,672,841 3,552,067 1,712,532
============ ============ ============
Taxable income
- from operations 3,212,304 2,956,800 1,447,328
============ ============ ============
- from gain on sale 0 50,819 0
============ ============ ============
Cash generated from operations
(Notes 2 and 5) 3,785,493 3,527,362 1,822,546
Cash generated from sales (Note 4) 0 1,057,386 0
Cash generated from refinancing 0 0 0
------------ ------------ ------------
Cash generated from operations, sales
and refinancing 3,785,493 4,584,748 1,822,546
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,500,017) (3,527,362) (1,822,546)
- from sale of properties 0 0 0
- from cash flow from prior period 0 (172,641) (17,454)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 285,476 884,745 (17,454)
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0 0
General partners' capital
contributions 0 0 0
Organization costs 0 0 0
Syndication costs 0 0 0
Acquisition of land and buildings 0 (359,506) (978)
Investment in direct financing
leases 0 (566,097) (1,542)
Investment in joint ventures 0 0 (129,503)
Return of capital from joint
ventures 0 0 0
Deposit received for sale of land
and building 0 69,000 0
Increase in other assets 0 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund X, Ltd. by
related parties 0 0 0
Distributions to holder of minority
interest (7,909) (7,998) (3,677)
------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 277,567 20,144 (153,154)
============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 80 73 36
============ ============ ============
- from recapture 0 0 0
============ ============ ============
Capital gain (loss) 0 1 0
============ ============ ============
</TABLE>
C-8
<PAGE>
TABLE III - CNL INCOME FUND X, LTD. (continued)
<TABLE>
<CAPTION>
1990
(Note 1) 1991 1992 1993
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 13 73 66
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 3) 0 2 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 0 15 73 66
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 15 73 66
- from cash flow from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis
(Note 6) 0 15 73 66
============ ============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 0.00% 5.75% 7.38% 8.75%
Total cumulative cash distributions
per $1,000 investment from inception 0 15 88 154
Amount (in percentage terms) remaining
invested in program properties at the end of
each year (period) presented
(original total acquisition cost of properties
retained, divided by original
total acquisition cost of all properties
in program) (Note 4) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund X, Ltd. ("CNL X") and CNL
Income Fund IX, Ltd. each registered for sale $35,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund IX, Ltd. commenced March 20, 1991. Pursuant to the
registration statement, CNL X's offering of Units could not commence
until the offering of Units of CNL Income Fund IX, Ltd. was terminated.
CNL Income Fund IX, Ltd. terminated its offering of Units on September
6, 1991, at which time the maximum offering proceeds of $35,000,000 had
been received. Upon the termination of the offering of Units of CNL
Income Fund IX, Ltd., CNL X commenced its offering of Units.
Activities through September 24, 1991, were devoted to organization of
the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income includes
deductions for depreciation and amortization expense and income from
certain non-cash items. This amount is not required to be presented as
a return of capital except for purposes of this table, and CNL Income
Fund X, Ltd. has not treated this amount as a return of capital for any
other purpose.
Note 4: In August 1995, CNL Income Fund X, Ltd. sold one of its properties
and received net sales proceeds of $1,050,186. In September 1995, the
partnership reinvested $928,122 in an additional property. In addition,
in January 1996, the partnership reinvested the remaining net sales
proceeds in an additional property as tenants-in-common with affiliates
of the general partners.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund X, Ltd.
Note 6: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
C-9
<PAGE>
<TABLE>
<CAPTION>
6 Months
1994 1995 1996
------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 88 87 42
- from capital gain 0 2 0
- from investment income from
prior period 0 4 4
- from return of capital (Note 3) 0 0 0
------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 88 93 46
============ ============ ============
Source (on cash basis)
- from sales 0 0 0
- from refinancing 0 0 0
- from operations 88 88 46
- from cash flow from prior
period 0 5 0
------------ ------------ ------------
Total distributions on cash basis
(Note 6) 88 93 46
============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 7 and 8) 9.06% 9.03% 9.00%
Total cumulative cash distributions
per $1,000 investment from inception 242 335 381
Amount (in percentage terms) remaining
invested in program properties at the end of each
year (period) presented (original total
acquisition cost of properties retained, divided
by original total acquisition cost of all
properties in program) (Note 4) 100% 99% 100%
</TABLE>
Note 7: On December 31, 1994 and December 31, 1995, CNL Income Fund X, Ltd.
declared a special distribution of cumulative excess operating reserves
equal to .25% and .10%, respectively, of the total invested capital.
Accordingly, the total yield for 1994 and 1995 was 9.06% and 9.03%,
respectively.
Note 8: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 6 above)
Note 9: Certain data for columns representing less than 12 months have been
annualized.
C-10
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XI, LTD.
<TABLE>
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,269,086 $ 3,831,648 $ 3,852,107
Equity in earnings of unconsolidated
joint ventures 0 33,367 121,059 119,370
Profit from sale of properties 0 0 0 0
Interest income 0 150,535 24,258 30,894
Less: Operating expenses 0 (63,390) (206,987) (179,717)
Interest expense 0 0 0 0
Depreciation and amortization 0 (180,631) (469,127) (481,226)
Minority interests in income of
consolidated joint ventures 0 (23,529) (68,399) (68,936)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,438 3,232,452 3,272,492
============ ============ ============ ============
Taxable income
- from operations 0 1,295,104 2,855,026 2,947,445
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 4) 0 1,495,225 3,355,586 3,497,941
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,495,225 3,355,586 3,497,941
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (1,205,030) (2,495,002) (3,400,001)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 290,195 860,584 97,940
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Minority interests' capital
contributions 0 426,367 0 0
Organization costs 0 (10,000) 0 0
Syndication costs 0 (3,922,875) 0 0
Acquisition of land and buildings 0 (26,428,556) (276,157) 0
Investment in direct financing
leases 0 (6,716,561) (276,206) 0
Investment in joint ventures 0 (1,658,925) (772) 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XI, Ltd. by
related parties 0 (1,011,487) (900) 0
Increase in other assets 0 (122,024) 0 0
Distributions to holders of minority
interests 0 (17,467) (51,562) (57,641)
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 828,667 254,987 40,299
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 45 71 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
6 Months
1995 1996
------------ ------------
<S> <C>
Gross revenue $ 3,820,990 $ 1,905,317
Equity in earnings of unconsolidated
joint ventures 118,384 56,598
Profit from sale of properties 0 0
Interest income 51,192 24,214
Less: Operating expenses (237,126) (148,842)
Interest expense 0 0
Depreciation and amortization (481,226) (240,613)
Minority interests in income of
consolidated joint ventures (70,038) (34,437)
------------ ------------
Net income - GAAP basis 3,202,176 1,562,237
============ ============
Taxable income
- from operations 2,985,221 1,414,282
============ ============
- from gain on sale 0 0
============ ============
Cash generated from operations
(Notes 2 and 4) 3,652,185 1,811,310
Cash generated from sales 0 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 3,652,185 1,811,310
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (3,500,023) (1,790,012)
- from sale of properties 0 0
- from cash flow from prior period 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions 152,162 21,298
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0
General partners' capital
contributions 0 0
Minority interests' capital
contributions 0 0
Organization costs 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Investment in joint ventures 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XI, Ltd. by
related parties 0 0
Increase in other assets 0 0
Distributions to holders of minority
interests (54,227) (27,839)
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 97,935 (6,541)
============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 74 35
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) 0 0
============ ============
</TABLE>
C-12
<PAGE>
TABLE III - CNL INCOME FUND XI, LTD. (continued)
<TABLE>
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 41 62 81
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 4
- from return of capital (Note 3) 0 1 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis
(Note 5) 0 42 62 85
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 42 62 85
- from cash flow from prior
period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis
(Note 5) 0 42 62 85
============ ============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 6 and 7) 0.00% 6.17% 8.31% 8.56%
Total cumulative cash distributions
per $1,000 investment from inception 0 42 104 189
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to the offering of Units by CNL
Income Fund XI, Ltd. became effective on March 12, 1992. Activities
through April 22, 1992, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants, plus
distributions from joint ventures, less cash paid for expenses, plus
interest received.
Note 3: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income includes
deductions for depreciation and amortization expense and income from
certain non-cash items. This amount is not required to be presented as a
return of capital except for purposes of this table, and CNL Income Fund
XI, Ltd. has not treated this amount as a return of capital for any
other purpose.
Note 4: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XI, Ltd.
Note 5: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and paid
in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
Note 6: On December 31, 1995, CNL Income Fund XI, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .10% of
the total invested capital. Accordingly, the total yield for 1995 was
8.78%.
Note 7: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 8: Certain data for columns representing less than 12 months have been
annualized.
C-13
<PAGE>
<TABLE>
<CAPTION>
6 Months
1995 1996
------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 79 39
- from capital gain 0 0
- from investment income from
prior period 9 5
- from return of capital (Note 3) 0 1
------------ ------------
Total distributions on GAAP basis
(Note 5) 88 45
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 88 45
- from cash flow from prior
period 0 0
------------ ------------
Total distributions on cash basis
(Note 5) 88 45
============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 6 and 7) 8.78% 8.75%
Total cumulative cash distributions
per $1,000 investment from inception 277 322
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) 100% 100%
</TABLE>
C-14
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XII, LTD.
<TABLE>
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 25,133 $ 3,374,640 $ 4,397,881
Equity in earnings of joint ventures 0 46 49,604 85,252
Profit (Loss) from sale of properties 0 0 0 0
Interest income (Note 7) 0 45,228 190,082 65,447
Less: Operating expenses 0 (7,211) (193,804) (192,951)
Interest expense 0 0 0 0
Depreciation and amortization 0 (3,997) (286,293) (327,795)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 59,199 3,134,229 4,027,834
============ ============ ============ ============
Taxable income
- from operations 0 58,543 2,749,072 3,301,005
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 5) 0 61,370 3,246,760 3,848,962
Cash generated from sales (Note 7) 0 0 0 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 61,370 3,246,760 3,848,962
Less: Cash distributions to investors
(Note 6)
- from operating cash flow 0 (61,370) (1,972,769) (3,768,754)
- from sale of properties 0 0 0 0
- from return of capital (Note 4) 0 (60,867) 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 (60,867) 1,273,991 80,208
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 21,543,270 23,456,730 0
General partners' capital
contributions 1,000 0 0 0
Organization costs 0 (10,000) 0 0
Syndication costs 0 (2,066,937) (2,277,637) 0
Acquisition of land and buildings 0 (7,536,009) (15,472,737) (230)
Investment in direct financing
leases 0 (2,503,050) (11,875,100) (591)
Loan to tenant of joint venture,
net of repayments 0 0 (207,189) 6,400
Investment in joint ventures 0 (372,045) (468,771) (4,400)
Increase in restricted cash 0 0 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XII, Ltd. by
related parties 0 (704,923) (432,749) 0
Increase in other assets 0 (654,497) 0 0
Other 0 0 0 973
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 7,634,942 (6,003,462) 82,360
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 5 64 73
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
6 Months
1995 1996
------------ ------------
<S> <C>
Gross revenue $ 4,404,792 $ 2,171,212
Equity in earnings of joint ventures 81,582 55,297
Profit (Loss) from sale of properties 0 (15,355)
Interest income (Note 7) 84,197 49,199
Less: Operating expenses (228,404) (150,511)
Interest expense 0 0
Depreciation and amortization (327,795) (156,420)
------------ ------------
Net income - GAAP basis 4,014,372 1,953,422
============ ============
Taxable income
- from operations 3,262,046 1,591,118
============ ============
- from gain (loss) on sale 0 (66,395)
============ ============
Cash generated from operations
(Notes 2 and 5) 3,819,362 1,930,975
Cash generated from sales (Note 7) 0 1,640,000
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 3,819,362 3,570,975
Less: Cash distributions to investors
(Note 6)
- from operating cash flow (3,819,362) (1,930,975)
- from sale of properties 0 0
- from return of capital (Note 4) 0 0
- from cash flow from prior period (5,645) (26,529)
------------ ------------
Cash generated (deficiency) after cash
distributions (5,645) 1,613,471
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 0
General partners' capital
contributions 0 0
Organization costs 0 0
Syndication costs 0 0
Acquisition of land and buildings 0 0
Investment in direct financing
leases 0 0
Loan to tenant of joint venture,
net of repayments 7,008 3,774
Investment in joint ventures 0 (1,655,928)
Increase in restricted cash 0 0
Reimbursement of syndication and
acquisition costs paid on behalf
of CNL Income Fund XII, Ltd. by
related parties 0 0
Increase in other assets 0 0
Other 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,363 (38,683)
============== =============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 72 35
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) 0 (1)
============ ============
</TABLE>
C-16
<PAGE>
TABLE III - CNL INCOME FUND XII, LTD. (continued)
<TABLE>
<CAPTION>
1991
(Note 1) 1992 1993 1994
------------ ------------ ------------ -----------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 5 46 84
- from capital gain 0 0 0 0
- from investment income from
prior period 0 0 0 0
- from return of capital (Note 3) 0 7 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis
(Note 6) 0 12 46 84
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 6 46 84
- from return of capital (Note 4) 0 6 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis
(Note 6) 0 12 46 84
============ ============ ============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 8 and 9) 0.00% 5.00% 6.75% 8.50%
Total cumulative cash distributions
per $1,000 investment from inception 0 12 58 142
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XII, Ltd. ("CNL XII") and CNL
Income Fund XI, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XI, Ltd. commenced March 12, 1992. Pursuant to the
registration statement, CNL XII could not commence until the offering
of Units of CNL Income Fund XI, Ltd. was terminated. CNL Income Fund
XI, Ltd. terminated its offering of Units on September 28, 1992, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XI, Ltd., CNL XII commenced its offering of Units. Activities
through October 8, 1992, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash distributions presented above as a return of capital on a GAAP
basis represent the amount of cash distributions in excess of
accumulated net income on a GAAP basis. Accumulated net income includes
deductions for depreciation and amortization expense and income from
certain non-cash items. This amount is not required to be presented as
a return of capital except for purposes of this table, and CNL Income
Fund XII, Ltd. has not treated this amount as a return of capital for
any other purpose.
Note 4: CNL Income Fund XII, Ltd. makes its distributions in the current
period rather than in arrears based on estimated operating results. In
cases where distributions exceed cash from operations in the current
period, once finally determined, subsequent distributions are lowered
accordingly in order to avoid any return of capital. This amount is not
required to be presented as a return of capital except for purposes of
this table, and CNL Income Fund XII, Ltd. has not treated this amount
as a return of capital for any other purpose.
Note 5: Cash generated from operations per this table agrees to cash
generated from operations per the statement of cash flows included in
the financial statements of CNL Income Fund XII, Ltd.
Note 6: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
C-17
<PAGE>
<TABLE>
<CAPTION>
6 Months
1995 1996
------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 85 44
- from capital gain 0 0
- from investment income from
prior period 0 0
- from return of capital (Note 3) 0 0
------------ ------------
Total distributions on GAAP basis
(Note 6) 85 44
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 85 43
- from return of capital (Note 4) 0 0
- from cash flow from prior period 0 1
------------ ------------
Total distributions on cash basis
(Note 6) 85 44
============ ============
Total cash distributions as a
percentage of original $1,000
investment (Notes 8 and 9) 8.53% 8.50%
Total cumulative cash distributions
per $1,000 investment from inception 227 271
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) 100% 100%
</TABLE>
Note 7: In April 1996, CNL Income Fund XII, Ltd. sold one of its properties to
an unrelated third party for $1,640,000. As a result of this
transaction, CNL Income Fund XII, Ltd. recognized a loss of $15,355 for
financial reporting purposes primarily due to acquisition fees and
miscellaneous acquisition expenses CNL Income Fund XII, Ltd. had
allocated to this property. In May 1996, CNL Income Fund XII, Ltd.
reinvested the proceeds from this sale, along with additional funds,
for a total of $1,655,928 in Middleburg Joint Venture.
Note 8: On December 31, 1995, CNL Income Fund XII, Ltd. declared a special
distribution of cumulative excess operating reserves equal to .10% of
the total invested capital. Accordingly, the total yield for 1995 was
8.53%.
Note 9: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 6 above)
Note 10: Certain data for columns representing less than 12 months have been
annualized.
C-18
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIII, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 966,564 $ 3,558,447 $ 3,806,944
Equity in earnings of joint ventures 0 1,305 43,386 98,520
Profit (Loss) from sale of properties
(Note 4) 0 0 0 (29,560)
Interest income 0 181,568 77,379 51,410
Less: Operating expenses 0 (59,390) (183,311) (214,705)
Interest expense 0 0 0 0
Depreciation and amortization 0 (148,170) (378,269) (393,435)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 941,877 3,117,632 3,319,174
============ ============ ============ ============
Taxable income
- from operations 0 978,535 2,703,252 2,920,859
============ ============ ============ ============
- from gain (loss) on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,121,547 3,149,000 3,379,378
Cash generated from sales (Note 4) 0 0 0 286,411
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,121,547 3,149,000 3,665,789
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (528,364) (2,800,004) (3,350,014)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after
cash distributions 0 593,183 348,996 315,775
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0 40,000,000 0 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (3,932,017) (181) 0
Acquisition of land and buildings 0 (19,691,630) (5,764,308) (336,116)
Investment in direct financing leases 0 (6,760,624) (1,365,075) 0
Investment in joint ventures 0 (314,998) (545,139) (140,052)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0 (799,980) (25,036) (3,074)
Increase in other assets 0 (454,909) 9,226 0
Other 0 0 0 954
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 8,639,025 (7,341,517) (162,513)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 67 72
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
6 Months
1996
------------
<S> <C>
Gross revenue $ 1,773,791
Equity in earnings of joint ventures 52,525
Profit (Loss) from sale of properties
(Note 4) 0
Interest income 18,430
Less: Operating expenses (173,194)
Interest expense 0
Depreciation and amortization (196,717)
-------------
Net income - GAAP basis 1,474,835
=============
Taxable income
- from operations 1,427,419
============
- from gain (loss) on sale 0
============
Cash generated from operations
(Notes 2 and 3) 1,647,653
Cash generated from sales (Note 4) 0
Cash generated from refinancing 0
-----------
Cash generated from operations, sales
and refinancing 1,647,653
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (1,647,653)
- from sale of properties 0
- from cash flow from prior period (52,351)
----------
Cash generated (deficiency) after
cash distributions (52,351)
Special items (not including sales
and refinancing):
Limited partners' capital
contributions 0
General partners' capital
contributions 0
Syndication costs 0
Acquisition of land and buildings 0
Investment in direct financing leases 0
Investment in joint ventures 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIII, Ltd. by related parties 0
Increase in other assets 0
Other 0
-----------
Cash generated (deficiency) after cash
distributions and special items (52,351)
===========
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 35
===========
- from recapture 0
===========
Capital gain (loss) (Note 4) 0
===========
</TABLE>
C-20
<PAGE>
TABLE III - CNL INCOME FUND XIII, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 18 70 82
- from capital gain 0 0 0 0
- from investment income from prior
period 0 0 0 2
------------ ------------ ------------ --------
Total distributions on GAAP basis (Note 5) 0 18 70 84
============ ============ ============ ========
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 18 70 84
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ --------
Total distributions on cash basis (Note 5) 0 18 70 84
============ ============ ============ ========
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 5.33% 7.56% 8.44%
Total cumulative cash distributions per
$1,000 investment from inception 0 18 88 172
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to the offering of Units by CNL
Income Fund XIII, Ltd. became effective on March 17, 1993. Activities
through April 15, 1993, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XIII, Ltd.
Note 4: During 1995, the partnership sold one of its properties to a tenant for
its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The net sales proceeds were used
to acquire an additional property. As a result of this transaction,
the partnership recognized a loss for financial reporting purposes of
$29,560 primarily due to acquisition fees and miscellaneous acquisition
expenses the partnership had allocated to the property and due to the
accrued rental income relating to future scheduled rent increases that
the partnership had recorded and reversed at the time of sale.
Note 5: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996, are not included in the 1994, 1995 and 1996
totals, respectively.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-21
<PAGE>
<TABLE>
<CAPTION>
6 Months
1996
-------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 37
- from capital gain 0
- from investment income from prior
period 6
-----------
Total distributions on GAAP basis (Note 5) 43
===========
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 41
- from cash flow from prior period 2
-----------
Total distributions on cash basis (Note 5) 43
===========
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 8.50%
Total cumulative cash distributions per
$1,000 investment from inception 215
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) 100%
</TABLE>
C-22
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XIV, LTD.
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ --------
<S> <C>
Gross revenue $ 0 $ 256,234 $ 3,135,716 $ 4,017,266
Equity in earnings of joint ventures 0 1,305 35,480 338,717
Profit (Loss) from sale of properties
(Note 4) 0 0 0 (66,518)
Interest income 0 27,874 200,499 50,724
Less: Operating expenses 0 (14,049) (181,980) (248,840)
Interest expense 0 0 0 0
Depreciation and amortization 0 (28,918) (257,640) (340,112)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 242,446 2,932,075 3,751,237
============ ============ ============ ============
Taxable income
- from operations 0 278,845 2,482,240 3,162,165
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 321,737 2,812,631 3,709,844
Cash generated from sales (Note 4) 0 0 0 696,012
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 321,737 2,812,631 4,405,856
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (9,050) (2,229,952) (3,543,751)
- from sale of properties 0 0 0 0
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 312,687 582,679 862,105
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0 28,785,100 16,214,900 0
General partners' capital
contributions 1,000 0 0 0
Syndication costs 0 (2,771,892) (1,618,477) 0
Acquisition of land and buildings 0 (13,758,004) (11,859,237) (964,073)
Investment in direct financing leases 0 (4,187,268) (5,561,748) (75,352)
Investment in joint ventures 0 (315,209) (1,561,988) (1,087,218)
Return of capital from joint venture 0 0 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0 (706,215) (376,738) (577)
Increase in other assets 0 (444,267) 0 0
Other 0 0 0 5,530
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 1,000 6,914,932 (4,180,609) (1,259,585)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 16 56 70
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
6 Months
1996
-----------
<S> <C>
Gross revenue $ 1,987,463
Equity in earnings of joint ventures 177,099
Profit (Loss) from sale of properties
(Note 4) 0
Interest income 21,659
Less: Operating expenses (138,978)
Interest expense 0
Depreciation and amortization (170,044)
Net income - GAAP basis 1,877,199
==============
Taxable income
- from operations 1,570,651
==============
- from gain on sale 0
==============
Cash generated from operations
(Notes 2 and 3) 1,799,902
Cash generated from sales (Note 4) 0
Cash generated from refinancing 0
-------------
Cash generated from operations, sales
and refinancing 1,799,902
Less: Cash distributions to investors
(Note 5)
- from operating cash flow (1,799,902)
- from sale of properties 0
- from cash flow from prior period (56,358)
--------------
Cash generated (deficiency) after cash
distributions (56,358)
Special items (not including sales and
refinancing):
Limited partners' capital
contributions 0
General partners' capital
contributions 0
Syndication costs 0
Acquisition of land and buildings 0
Investment in direct financing leases 0
Investment in joint ventures 0
Return of capital from joint venture 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XIV, Ltd. by related parties 0
Increase in other assets 0
Other 0
-------------
Cash generated (deficiency) after cash (56,358)
distributions and special items
==============
TAX AND DISTRIBUTION DATA PER
$1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 35
==============
- from recapture 0
==============
Capital gain (loss) (Note 4) 0
==============
</TABLE>
C-24
<PAGE>
TABLE III - CNL INCOME FUND XIV, LTD. (continued)
<TABLE>
<CAPTION>
1992
(Note 1) 1993 1994 1995
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 51 79
- from capital gain 0 0 0 0
- from return of capital 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 1 51 79
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 51 79
- from cash flow from prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 1 51 79
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 4.50% 6.50% 8.06%
Total cumulative cash distributions
per $1,000 investment from inception 0 1 52 131
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XIV, Ltd. ("CNL XIV") and CNL
Income Fund XIII, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XIII, Ltd. commenced March 17, 1993. Pursuant to the
registration statement, CNL XIV could not commence until the offering
of Units of CNL Income Fund XIII, Ltd. was terminated. CNL Income Fund
XIII, Ltd. terminated its offering of Units on August 26, 1993, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XIII, Ltd., CNL XIV commenced its offering of Units. Activities
through September 13, 1993, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint ventures, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XIV, Ltd.
Note 4: During 1995, the partnership sold two of its properties to a tenant for
its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The net sales proceeds were used
to acquire two additional properties. As a result of these
transactions, the partnership recognized a loss for financial reporting
purposes of $66,518 primarily due to acquisition fees and miscellaneous
acquisition expenses the partnership had allocated to the property and
due to the accrued rental income relating to future scheduled rent
increases that the partnership had recorded and reversed at the time of
sale.
Note 5: As a result of the partnership's change in investor services agents in
1993, distributions are now declared at the end of each quarter and
paid in the following quarter. Since this table generally presents
distributions on a cash basis (rather than amounts declared),
distributions on a cash basis for 1993 only reflect payments for three
quarters. Distributions declared for the quarters ended December 31,
1993, 1994 and 1995, are reflected in the 1994, 1995 and 1996 columns,
respectively, for distributions on a cash basis due to the payment of
such distributions in January 1994, 1995 and 1996, respectively. As a
result of 1994, 1995 and 1996 distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-25
<PAGE>
<TABLE>
<CAPTION>
6 Months
1996
--------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 41
- from capital gain 0
- from return of capital 0
---------
Total distributions on GAAP basis (Note 5) 41
---------
Source (on cash basis)
- from sales 0
- from refinancing 0
- from operations 40
- from cash flow from prior period 1
----------
Total distributions on cash basis (Note 5) 41
==========
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 8.25%
Total cumulative cash distributions
per $1,000 investment from inception 172
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) 100%
</TABLE>
C-26
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XV, LTD.
<TABLE>
<CAPTION>
1993 6 Months
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 1,143,586 $ 3,546,320 $ 1,799,609
Equity in earnings of joint venture 0 8,372 280,606 144,539
Profit (Loss) from sale of properties
(Note 4) 0 0 (71,023) 0
Interest income 0 167,734 88,059 21,155
Less: Operating expenses 0 (62,926) (228,319) (138,719)
Interest expense 0 0 0 0
Depreciation and amortization 0 (70,848) (243,175) (124,093)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 1,185,918 3,372,468 1,702,491
============ ============ ============ ============
Taxable income
- from operations 0 1,026,715 2,861,912 1,399,634
============ ============ ============ ============
- from gain on sale 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 1,116,834 3,239,370 1,687,927
Cash generated from sales (Note 4) 0 0 811,706 0
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 1,116,834 4,051,076 1,687,927
Less: Cash distributions to investors
(Note 5)
- from operating cash flow 0 (635,944) (2,650,003) (1,600,000)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 480,890 1,401,073 87,927
Special items (not including sales and
refinancing):
Limited partners' capital contra-
bunions 0 40,000,000 0 0
General partners' capital contra-
bunions 1,000 0 0 0
Syndication costs 0 (3,892,003) 0 0
Acquisition of land and buildings 0 (22,152,379) (1,625,601) 0
Investment in direct financing
leases 0 (6,792,806) (2,412,973) 0
Investment in joint venture 0 (1,564,762) (720,552) (145,526)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XV, Ltd. by related parties 0 (1,098,197) (23,507) 0
Increase in other assets 0 (187,757) 0 0
Other (38) (6,118) 25,150 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 962 4,786,868 (3,356,410) (57,599)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 33 71 35
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 4) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-27
<PAGE>
TABLE III - CNL INCOME FUND XV, LTD. (continued)
<TABLE>
<CAPTION>
1993 6 Months
(Note 1) 1994 1995 1996
------------ ------------ ------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 21 66 40
- from capital gain 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 5) 0 21 66 40
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 21 66 40
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 5) 0 21 66 40
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 5.00% 7.25% 8.00%
Total cumulative cash distributions per
$1,000 investment from inception 0 21 87 127
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100% 100% 100%
</TABLE>
Note 1: The registration statement relating to this offering of Units of CNL
Income Fund XV, Ltd. became effective February 23, 1994. Activities
through March 23, 1994, were devoted to organization of the partnership
and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
plus distributions from joint venture, less cash paid for expenses,
plus interest received.
Note 3: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XV, Ltd.
Note 4: During 1995, the partnership sold three of its properties to a tenant
for its original purchase price, excluding acquisition fees and
miscellaneous acquisition expenses. The majority of the net sales
proceeds were used to acquire additional properties. As a result of
these transactions, the partnership recognized a loss for financial
reporting purposes of $71,023 primarily due to acquisition fees and
miscellaneous acquisition expenses the partnership had allocated to the
three properties and due to the accrued rental income relating to
future scheduled rent increases that the partnership had recorded and
reversed at the time of sale.
Note 5: Distributions declared for the quarters ended December 31, 1994 and
1995 are reflected in the 1995 and 1996 columns, respectively, due to
the payment of such distributions in January 1995 and 1996,
respectively. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-28
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVI, LTD.
<TABLE>
<CAPTION>
1993 6 Months
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross revenue $ 0 $ 186,257 $ 2,702,504 $ 2,143,589
Profit from sale of properties (Note 5) 0 0 0 124,305
Interest income 0 21,478 321,137 43,562
Less: Operating expenses 0 (10,700) (274,595) (148,823)
Interest expense 0 0 0 0
Depreciation and amortization 0 (9,458) (318,205) (270,831)
------------ ------------ ------------ ------------
Net income - GAAP basis 0 187,577 2,430,841 1,891,802
============ ============ ============ ============
Taxable income
- from operations 0 189,864 2,139,382 1,550,241
============ ============ ============ ============
- from gain on sale (Note 5) 0 0 0 0
============ ============ ============ ============
Cash generated from operations
(Notes 2 and 3) 0 205,148 2,481,395 1,861,696
Cash generated from sales (Note 5) 0 0 0 775,000
Cash generated from refinancing 0 0 0 0
------------ ------------ ------------ ------------
Cash generated from operations, sales
and refinancing 0 205,148 2,481,395 2,636,696
Less: Cash distributions to investors
(Note 4)
- from operating cash flow 0 (2,845) (1,798,921) (1,631,251)
- from sale of properties 0 0 0 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions 0 202,303 682,474 1,005,445
Special items (not including sales and
refinancing):
Limited partners' capital contra-
bunions 0 20,174,172 24,825,828 0
General partners' capital contra-
bunions 1,000 0 0 0
Syndication costs 0 (1,929,465) (2,452,743) 0
Acquisition of land and buildings 0 (13,170,132) (16,012,458) (2,392,562)
Investment in direct financing
leases 0 (975,853) (5,595,236) (382,372)
Increase in restricted cash 0 0 0 (775,000)
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVI, Ltd. by related parties 0 (854,154) (405,569) 0
Collection of overpayment of acquit-
cyton and syndication costs paid
by related parties on behalf of the
partnership 0 0 0 1,204
Increase in other assets 0 (443,625) (58,720) 0
Other (36) (20,714) 20,714 0
------------ ------------ ------------ ------------
Cash generated (deficiency) after cash
distributions and special items 964 2,982,532 1,004,290 (2,543,285)
============ ============ ============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 0 17 53 34
============ ============ ============ ============
- from recapture 0 0 0 0
============ ============ ============ ============
Capital gain (loss) (Note 5) 0 0 0 0
============ ============ ============ ============
</TABLE>
C-29
<PAGE>
TABLE III - CNL INCOME FUND XVI, LTD. (continued)
<TABLE>
<CAPTION>
1993 6 Months
(Note 1) 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 0 1 45 33
- from capital gain 0 0 0 3
- from investment income from
prior period 0 0 0 0
------------ ------------ ------------ ------------
Total distributions on GAAP basis (Note 4) 0 1 45 36
============ ============ ============ ============
Source (on cash basis)
- from sales 0 0 0 0
- from refinancing 0 0 0 0
- from operations 0 1 45 36
------------ ------------ ------------ ------------
Total distributions on cash basis (Note 4) 0 1 45 36
============ ============ ============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 6) 0.00% 4.50% 6.00% 8.00%
Total cumulative cash distributions per
$1,000 investment from inception 0 1 46 82
Amount (in percentage terms) remaining
invested in program properties at the end
of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) (Note 5) N/A 100% 100% 98%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XVI, Ltd. ("CNL XVI") and CNL
Income Fund XV, Ltd. each registered for sale $40,000,000 units of
limited partnership interests ("Units"). The offering of Units of CNL
Income Fund XV, Ltd. commenced February 23, 1994. Pursuant to the
registration statement, CNL XVI could not commence until the offering
of Units of CNL Income Fund XV, Ltd. was terminated. CNL Income Fund
XV, Ltd. terminated its offering of Units on September 1, 1994, at
which time the maximum offering proceeds of $40,000,000 had been
received. Upon the termination of the offering of Units of CNL Income
Fund XV, Ltd., CNL XVI commenced its offering of Units. Activities
through September 22, 1994, were devoted to organization of the
partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XVI, Ltd.
Note 4: Distributions declared for the quarters ended December 31, 1994 and
1995 are reflected in the 1995 and 1996 columns, respectively, due to
the payment of such distributions in January 1995 and 1996,
respectively. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of December 31, 1994 and
1995, and June 30, 1996 are not included in the 1994, 1995 and 1996
totals, respectively.
Note 5: In April 1996, CNL Income Fund XVI, Ltd. sold one of its properties for
$775,000, resulting in a gain for financial reporting purposes of
$124,305. As of June 30, 1996, the net sales proceeds of $775,000,
plus accrued interest of $3,526, were being held in an interest-bearing
escrow account. The general partners believe that the sale of this
property will qualify as a like-kind exchange transaction in accordance
with Section 1031 of the Internal Revenue Code. As a result, no gain
or loss was recognized for federal income tax purposes. The remaining
net sales proceeds are expected to be invested in an additional
property or used for other Partnership purposes.
Note 6: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 5 above)
Note 7: Certain data for columns representing less than 12 months have been
annualized.
C-30
<PAGE>
TABLE III
Operating Results of Prior Programs CNL
INCOME FUND XVII, LTD.
<TABLE>
<CAPTION>
1995 6 Months
(Note 1) 1996
------------ --------
<S> <C>
Gross revenue $ 0 $ 264,636
Profit from sale of properties 0 0
Interest income 12,153 102,696
Less: Operating expenses (3,493) (68,597)
Interest expense 0 0
Depreciation and amortization (309) (32,931)
------------ ------------
Net income - GAAP basis 8,351 265,804
============ ============
Taxable income
- from operations 12,153 254,708
============ ============
- from gain on sale 0 0
============ ============
Cash generated from operations
(Notes 2 and 3) 9,012 257,021
Cash generated from sales 0 0
Cash generated from refinancing 0 0
------------ ------------
Cash generated from operations, sales
and refinancing 9,012 257,021
Less: Cash distributions to investors
(Note 4)
- from operating cash flow (1,199) (142,120)
- from sale of properties 0 0
------------ ------------
Cash generated (deficiency) after cash
distributions 7,813 114,901
Special items (not including sales and
refinancing):
Limited partners' capital contra-
bunions 5,696,921 15,435,942
General partners' capital contra-
bunions 1,000 0
Syndication costs (604,348) (1,544,293)
Acquisition of land and buildings (332,928) (10,087,458)
Investment in direct financing
leases 0 (1,258,674)
Increase in restricted cash 0 0
Reimbursement of organization,
syndication and acquisition costs
paid on behalf of CNL Income Fund
XVII, Ltd. by related parties (347,907) (339,105)
Increase in other assets (221,282) (65,775)
Other (410) 0
------------ ------------
Cash generated (deficiency) after cash
distributions and special items 4,198,859 2,255,538
============ ============
TAX AND DISTRIBUTION DATA PER $1,000
INVESTED
Federal income tax results:
Ordinary income (loss)
- from operations 36 194
============ ============
- from recapture 0 0
============ ============
Capital gain (loss) 0 0
============ ============
</TABLE>
C-31
<PAGE>
TABLE III - CNL INCOME FUND XVII, LTD. (continued)
<TABLE>
<CAPTION>
1995 6 Months
(Note 1) 1996
------------ --------
<S> <C>
Cash distributions to investors
Source (on GAAP basis)
- from investment income 4 108
- from capital gain 0 0
- from investment income from
prior period 0 0
------------ ------------
Total distributions on GAAP basis (Note 4) 0 108
============ ============
Source (on cash basis)
- from sales 0 0
- from refinancing 0 0
- from operations 4 108
------------ ------------
Total distributions on cash basis (Note 4) 4 108
============ ============
Total cash distributions as a percentage
of original $1,000 investment (Note 5) 0.00% 5.17%
Total cumulative cash distributions per
$1,000 investment from inception 4 112
Amount (in percentage terms) remaining
invested in program properties at the
end of each year (period) presented
(original total acquisition cost of
properties retained, divided by original
total acquisition cost of all properties
in program) N/A 100%
</TABLE>
Note 1: Pursuant to a registration statement on Form S-11 under the Securities
Act of 1933, as amended, CNL Income Fund XVII, Ltd. ("CNL XVII") and
CNL Income Fund XVIII, Ltd. each registered for sale $30,000,000 units
of limited partnership interests ("Units"). The offering of Units of
CNL Income Fund XVII, Ltd. commenced September 2, 1995. Pursuant to
the registration statement, CNL XVIII could not commence until the
offering of Units of CNL Income Fund XVII, Ltd. was terminated. CNL
Income Fund XVII, Ltd. terminated its offering of Units on September
19, 1996, at which time subscriptions for the maximum offering proceeds
of $30,000,000 had been received. Upon the termination of the offering
of Units of CNL Income Fund XVII, Ltd., CNL XVIII commenced its
offering of Units. Activities through September 30, 1996, were devoted
to organization of the partnership and operations had not begun.
Note 2: Cash generated from operations includes cash received from tenants,
less cash paid for expenses, plus interest received.
Note 3: Cash generated from operations per this table agrees to cash generated
from operations per the statement of cash flows included in the
financial statements of CNL Income Fund XVII, Ltd.
Note 4: Distributions declared for the quarter ended December 31, 1995 are
reflected in the 1996 column due to the payment of such distributions
in January 1996. As a result of distributions being presented on a cash
basis, distributions declared and unpaid as of June 30, 1996 are not
included in the 1996 totals.
Note 5: Total cash distributions as a percentage of original $1,000 investment
are calculated based on actual distributions declared for the period.
(See Note 4 above)
Note 6: Certain data for columns representing less than 12 months have been
annualized.
C-32
<PAGE>
<TABLE>
<CAPTION>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
==================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from
Date Date of closing at time back by application
Property Acquired Sale costs of sale program of GAAP
==================================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA 02/05/87 06/12/92 $1,169,021 0 0 0
Wendy's -
Fairfield, CA 07/01/87 10/03/94 1,018,490 0 0 0
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 05/29/87 07/21/93 746,800 0 0 0
Pizza Hut -
Graham, TX 08/24/87 07/28/94 261,628 0 0 0
Golden Corral -
Medina, OH 11/18/87 11/30/94 626,582 0 0 0
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 03/22/89 04/27/94 712,000 0 0 0
Burger King -
Hastings, MI 08/12/88 12/15/95 518,650 0 0 0
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 02/28/90 08/25/95 0 0 1,040,000 0
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 11/02/89 05/24/94 791,211 0 0 0
Hardee's -
Heber Springs, AR 02/13/90 05/24/94 638,270 0 0 0
Hardee's -
Little Canada, MN 11/28/89 06/29/95 899,503 0 0 0
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
Cost of Properties
Including Closing and
Soft Costs
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
Original improvements receipts over
mortgage closing and cash
Property Total financing soft costs (1) Total expenditures
==============================================================================================
<S> <C>
CNL Income Fund, Ltd.:
Burger King -
San Dimas, CA $1,169,021 0 $955,000 $955,000 $214,021
Wendy's -
Fairfield, CA 1,018,490 0 861,500 861,500 156,990
CNL Income Fund II, Ltd.:
Golden Corral -
Salisbury, NC 746,800 0 642,800 642,800 104,000
Pizza Hut -
Graham, TX 261,628 0 205,500 205,500 56,128
Golden Corral -
Medina, OH 626,582 0 743,000 743,000 (116,418)
CNL Income Fund IV, Ltd.:
Taco Bell -
York, PA 712,000 0 616,501 616,501 95,499
Burger King -
Hastings, MI 518,650 0 419,936 419,936 98,714
CNL Income Fund V, Ltd.:
Perkins -
Myrtle Beach, SC (2) 1,040,000 0 986,418 986,418 53,582
CNL Income Fund VI, Ltd.:
Hardee's -
Batesville, AR 791,211 0 605,500 605,500 185,711
Hardee's -
Heber Springs, AR 638,270 0 532,893 532,893 105,377
Hardee's -
Little Canada, MN 899,503 0 821,692 821,692 77,811
</TABLE>
C-33
<PAGE>
<TABLE>
<CAPTION>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
===================================================================================================================================
<S> <C>
Cost of Properties
Selling Price, Net of Including Closing and
Closing Costs and GAAP Adjustments Soft Costs
Purchase Total
Cash money Adjustments acquisition
received Mortgage mortgage resulting cost, capital
net of balance taken from Original improvements
Date Date of closing at time back by application mortgage closing and
Property Acquired Sale costs of sale program of GAAP Total financing soft costs (1)
===================================================================================================================================
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 06/14/90 05/19/92 700,000 0 0 0 700,000 0 560,202
Hardee's -
St. Paul, MN 08/09/90 05/24/94 869,036 0 0 0 869,036 0 742,333
Perkins -
Florence, SC (3) 08/28/90 08/25/95 0 0 1,160,000 0 1,160,000 0 1,084,905
Church's Fried Chicken -
Jacksonville, FL (4) 04/30/90 12/01/95 0 0 240,000 0 240,000 0 233,728
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 03/16/91 07/31/95 1,184,865 0 0 0 1,184,865 0 949,199
Church's Fried Chicken -
Jacksonville, FL (4) 09/28/90 12/01/95 0 0 240,000 0 240,000 0 238,153
Church's Fried Chicken -
Jacksonville, FL (5) 09/28/90 12/01/95 0 0 220,000 0 220,000 0 215,845
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 03/04/92 08/11/95 1,050,186 0 0 0 1,050,186 0 987,679
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 12/28/92 04/10/96 1,640,000 0 0 0 1,640,000 0 1,636,643
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 03/31/94 04/24/95 286,411 0 0 0 286,411 0 286,411
</TABLE>
<TABLE>
<CAPTION>
Excess
(deficiency)
of property
operating cash
receipts over
cash
Property Total expenditures
================================= ========== ==================
<S> <C>
CNL Income Fund VII, Ltd.:
Taco Bell -
Kearns, UT 560,202 139,798
Hardee's -
St. Paul, MN 742,333 126,703
Perkins -
Florence, SC (3) 1,084,905 75,095
Church's Fried Chicken -
Jacksonville, FL (4) 233,728 6,272
CNL Income Fund VIII, Ltd.:
Denny's -
Ocoee, FL 949,199 235,666
Church's Fried Chicken -
Jacksonville, FL (4) 238,153 1,847
Church's Fried Chicken -
Jacksonville, FL (5) 215,845 4,155
CNL Income Fund X, Ltd.:
Shoney's -
Denver, CO 987,679 62,507
CNL Income Fund XII, Ltd.:
Golden Corral -
Houston, TX 1,636,643 3,357
CNL Income Fund XIII, Ltd.:
Checkers -
Houston, TX 286,411 0
</TABLE>
C-34
<PAGE>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
<TABLE>
<CAPTION>
=====================================================================================================================
Selling Price, Net of
Closing Costs and GAAP Adjustments
Purchase
Cash money Adjustments
received Mortgage mortgage resulting
net of balance taken from Original
Date Date of closing at time back by application mortgage
Property Acquired Sale costs of sale program of GAAP Total financing
=====================================================================================================================
<S> <C>
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 03/31/94 03/01/95 339,031 0 0 0 339,031 0
Checkers -
Dallas, TX 03/31/94 03/01/95 356,981 0 0 0 356,981 0
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 05/27/94 03/01/95 263,221 0 0 0 263,221 0
Checkers -
Leavenworth, KS 06/22/94 03/01/95 259,600 0 0 0 259,600 0
Checkers -
Knoxville, TN 07/08/94 03/01/95 288,885 0 0 0 288,885 0
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 06/24/95 04/24/96 775,000 0 0 0 775,000 0
</TABLE>
<TABLE>
<CAPTION>
============================================================================
Cost of Properties
Including Closing and
Soft Costs
Excess
Total (deficiency)
acquisition of property
cost, capital operating cash
improvements receipts over
closing and cash
Property soft costs (1) Total expenditures
=============================================================================
<S> <C>
CNL Income Fund XIV, Ltd.:
Checkers -
Knoxville, TN 339,031 339,031 0
Checkers -
Dallas, TX 356,981 356,981 0
CNL Income Fund XV, Ltd.:
Checkers -
Knoxville, TN 263,221 263,221 0
Checkers -
Leavenworth, KS 259,600 259,600 0
Checkers -
Knoxville, TN 288,885 288,885 0
CNL Income Fund XVI, Ltd.:
Long John Silver's -
Appleton, WI 613,838 613,838 161,162
</TABLE>
(1) Amounts shown do not include pro rata share of original offering costs or
acquisition fees.
(2) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,006,004 in July 2000.
(3) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.25% per annum and provides
for a balloon payment of $1,106,657 in July 2000.
(4) Amounts shown are face value and do not represent discounted current value.
Each mortgage note bears interest at a rate of 10.00% per annum and
provides for a balloon payment of $218,252 in December 2005.
(5) Amount shown is face value and does not represent discounted current value.
The mortgage note bears interest at a rate of 10.00% per annum and provides
for a balloon payment of $200,324 in December 2005.
C-35
<PAGE>
Exhibit D
Subscription Agreement
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
-------------------------------------------------------------------
Up to 27,500,000 Shares -- $10.00 per Share
Minimum Purchase -- 250 Shares ($2,500)
100 Shares ($1,000) for IRAs, Keogh, and Qualified Plans
(Minimum purchase may be higher in certain states)
==============================================================================
PLEASE READ CAREFULLY this Subscription Agreement and the Notices (on the back
of the Agreement) before completing this document. TO SUBSCRIBE FOR SHARES,
complete and sign, where appropriate, and deliver the Subscription Agreement,
along with your check, to your Financial Advisor. YOUR CHECK SHOULD BE MADE
PAYABLE TO:
SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A.
ALL ITEMS ON THE SUBSCRIPTION AGREEMENT MUST BE COMPLETED IN ORDER FOR YOUR
SUBSCRIPTION TO BE PROCESSED.
==============================================================================
Overnight Packages: Regular Mail Packages:
Attn: Investor Services Attn: Investor Services
400 E. South Street, Suite 500 Post Office Box 1033
Orlando, Florida 32801 Orlando, Florida 32802-1033
For Telephone Inquiries:
CNL SECURITIES CORP.
(407) 422-1574 OR (800) 522-3863
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
- ------------------------------------------------------------------------------
1. INVESTMENT
This subscription is in the amount of $ for the purchase of Shares ($10.00 per
Share). The minimum initial subscription is 250 Shares ($2,500); 100 Shares
($1,000) for IRA, Keogh and qualified plan accounts (except in states with
higher minimum purchase requirements).
<TABLE>
<S> <C>
|_| ADDITIONAL PURCHASE |_| REINVESTMENT PLAN - Investor elects to participate in Plan (See prospectus for details.)
</TABLE>
2. SUBSCRIBER INFORMATION
Name (1st)___________________________ Date of Birth (MM/DD/YY) _______________
Name (2nd)___________________________ Date of Birth (MM/DD/YY) _______________
Address ________________________ City _________ State ____ Zip Code __________
Custodian Account No._______________________ Daytime Phone # (___)____________
[ ] U.S. Citizen [ ] Resident Alien [ ] Foreign Resident Country _________
[ ] Check if Subscriber is a U.S. citizen residing outside the U.S.
Income Tax Filing State __________________________
ALL SUBSCRIBERS: State of Residence of Subscriber/Plan Beneficiary (required)
Taxpayer Identification Number: For most individual taxpayers, it is their
Social Security number. Note: If the purchase is in more than one name, the
number should be that of the first person listed. For IRAs, Keoghs and
qualified plans, enter both the Social Security number and the taxpayer
identification number.
Taxpayer ID# - Social Security # - -
--------- ----------- --------------------------
3. INVESTOR MAILING ADDRESS
For the Subscriber of an IRA, Keogh, or qualified plan to receive informational
mailings, please complete if different from address in Section 2.
Name
-------------------------------------------------------------------
Address
----------------------------------------------------------------
City State Zip Code
--------------------------------------------- -------- -----
Daytime Phone #( )
---------------- ------------
4. DIRECT DEPOSIT ADDRESS
Investors requesting direct deposit of distribution checks to another financial
institution or mutual fund, please complete below. In no event will the Company
or Affiliates be responsible for any adverse consequences of direct deposit.
Company
---------------------------------------------------------------
Address
----------------------------------------------------------------
City State Zip Code
----------------------------------------- ------- ------
Account No. Daytime Phone #( )
--------------------------- -------------------
5. FORM OF OWNERSHIP
(Select only one)
|_| INDIVIDUAL-one signature required (1)
|_| HUSBAND AND WIFE, AS COMMUNITY PROPERTY- two
signatures required (15)
|_| TENANTS IN COMMON-two signatures required (3)
|_| TENANTS BY THE ENTIRETY-two
signatures required (31)
|_|CORPORATIONS
|_| S-Corporation (22)
|_| C-Corporation (5)
|_| IRA-custodian signature required (23)
|_| SEP-custodian signature required (38)
|_| TAXABLE TRUST (7)
|_| TAX-EXEMPT TRUST (28)
|_| IRREVOCABLE TRUST-trustee signature required (21)
|_| JOINT TENANTS WITH RIGHT
OF SURVIVORSHIP-all parties must sign (8)
|_| A MARRIED PERSON/SEPARATE PROPERTY-one signature required (34)
|_| KEOGH (H.R.10)-trustee signature
required (24)
|_| CUSTODIAN-custodian signature required (33)
|_| PARTNERSHIP (3)
|_| NON-PROFIT ORGANIZATION (12)
|_| PENSION PLAN-trustee signature(s) required (19)
|_| PROFIT SHARING PLAN-trustee signature(s) required (27)
|_| CUSTODIAN UGMA-STATE of-custodian signature required (16)
|_| CUSTODIAN UTMA-STATE of-custodian signature required (42)
|_| ESTATE-Personal Representative signature required (13)
|_| REVOCABLE GRANTOR TRUST-grantor signature required (25)
|_| IRREVOCABLE TRUST-trustee signature required (21)
|_| SUBSCRIBER elects to have the Shares covered by this subscription placed in
a new sponsored IRA account offered by Franklin Bank as custodian. IRA
documents will be sent to subscriber upon receipt of subscription documents.
There is no annual fee involved for CNL American Properties Fund, Inc.
investments.
<PAGE>
6. SUBSCRIBER SIGNATURES
If the Subscriber is executing the Subscriber Signature Page, the Subscriber
understands that, BY EXECUTING THIS AGREEMENT A SUBSCRIBER DOES NOT WAIVE ANY
RIGHTS HE MAY HAVE UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934 OR UNDER ANY STATE SECURITIES LAW:
X X
---------------------------- ------ ---------------------------- ----------
Signature of 1st Subscriber Date Signature of 2nd Subscriber Date
7. BROKER/DEALER INFORMATION
Broker/Dealer NASD Firm Name
--------------------------------------------------
Financial Advisor
------------------------------------------------------------
Branch Mail Address
------------------------------------------------------------
City State Zip Code
------------------------------------- --------------- --------
|_| Please check if new address
Phone #( ) Fax #( )
-------------- --------------------- --------------- ---------
|_| Sold CNL before
Shipping Address City State Zip Code
-------------------------- ---------- ---- --
|_| Telephonic Subscriptions (check here): If the Registered Representative and
Branch Manager are executing the signature page on behalf of the Subscriber,
both must sign below. Registered Representatives and Branch Managers may not
sign on behalf of residents of Florida, Iowa, Maine, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, North
Carolina, Ohio, Oregon, South Dakota, Tennessee, or Washington. [NOTE: Not
to be executed until Subscriber(s) has (have) acknowledged receipt of final
prospectus.] Telephonic subscriptions may not be completed for IRA accounts.
|_| Registered Investment Advisor (check here): If an owner or principal or any
member of the RIA firm is an NASD licensed Registered Representative
affiliated with a Broker/Dealer, the transaction should be conducted through
that Broker/Dealer, not through the RIA.
PLEASE READ CAREFULLY THE REVERSE SIDE OF THIS SIGNATURE PAGE AND SUBSCRIPTION
AGREEMENT BEFORE COMPLETING
<TABLE>
<S> <C>
X
------------------------------------------------------------ ----------------------- -------------------------------------
Principal, Branch Manager or Other Authorized Signature Date Print or Type Name of Person Signing
X
------------------------------------------------------------ ----------------------- -------------------------------------
Registered Representative/Investment Advisor Signature Date Print or Type Name of Person Signing
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Make check payable to : SOUTHTRUST ASSET MANAGEMENT COMPANY OF FLORIDA, N.A., ESCROW AGENT
Please remit check and For overnight delivery, please send to:
subscription document to: For Office Use Only
CNL SECURITIES CORP. CNL SECURITIES CORP.
Attn: Investor Services Attn: Investor Services
P. O. Box 1033 400 E. South Street, Suite 500
Orlando, FL 32802-1033 Orlando, FL 32801
(800) 522-3863 (407) 422-1574
(800) 522-3863
Sub. #
-----------------
Admit Date
-------------
Amount
-----------------
Region
-----------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTICE TO ALL INVESTORS:
(a) The purchase of Shares by an IRA, Keogh, or other tax-qualified plan
does not, by itself, create the plan.
(b) The Company, in its sole and absolute discretion, may accept or
reject the Subscriber's subscription which if rejected will be promptly returned
to the Subscriber, without interest. Non-U.S. stockholders (as defined in the
Prospectus) will be admitted as stockholders with the approval of the Advisor.
(c) THE SALE OF SHARES SUBSCRIBED FOR HEREUNDER MAY NOT BE COMPLETED UNTIL
AT LEAST FIVE BUSINESS DAYS AFTER THE DATE THE SUBSCRIBER RECEIVES A FINAL
PROSPECTUS. EXCEPT AS PROVIDED IN THIS NOTICE, THE NOTICE BELOW, AND IN THE
PROSPECTUS, THE SUBSCRIBER WILL NOT BE ENTITLED TO REVOKE OR WITHDRAW HIS
SUBSCRIPTION.
NOTICE TO CALIFORNIA RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
California investors who do not execute the Subscription Agreement will receive
a confirmation of investment accompanied by a second copy of the final
Prospectus, and will have the opportunity to rescind the investment within ten
(10) days from the date of confirmation.
NOTICE TO NORTH CAROLINA RESIDENTS: By signing this Subscription Agreement,
North Carolina investors acknowledge receipt of the Prospectus and represent
that they meet the suitability standards for North Carolina investors listed in
the Prospectus.
BROKER/DEALER AND FINANCIAL ADVISOR:
By signing this subscription agreement, the signers certify that they recognize
and have complied with their obligations under the NASD's Rules of Fair
Practice, and hereby further certify as follows: (i) a copy of the Prospectus,
including the Subscription Agreement attached thereto as Exhibit C, as amended
and/or supplemented to date, has been delivered to the Subscriber; (ii) they
have discussed such investor's prospective purchase of Shares with such investor
and have advised such investor of all pertinent facts with regard to the
liquidity, valuation, and marketability of the Shares; and (iii) they have
reasonable grounds to believe that the purchase of Shares is a suitable
investment for such investor, that such investor meets the suitability standards
applicable to such investor set forth in the Prospectus and related supplements,
if any, that such investor is legally capable of purchasing such Shares and will
not be in violation of any laws for having engaged in such purchase, and that
such investor is in a financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may occur with
respect thereto and will maintain documentation on which the determination was
based for a period of not less than six years; (iv) under penalties of perjury,
(a) the information provided in this Subscription Agreement to the best of our
knowledge and belief is true, correct, and complete, including, but not limited
to, the number shown above as the Subscriber's taxpayer identification number;
(b) to the best of our knowledge and belief, the Subscriber is not subject to
backup withholding either because the Subscriber has not been notified that the
Subscriber is subject to backup withholding as result of failure to report all
interest or dividends or the Internal Revenue Service has notified the
subscriber that the Subscriber is no longer subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code of 1986, as amended; and (c)
to the best of our knowledge and belief, the Subscriber is not a nonresident
alien, foreign corporation, foreign trust, or foreign estate for U.S. tax
purposes, and we hereby agree to notify the Company if it comes to the attention
of either of us that the Subscriber becomes such a person within sixty (60) days
of any event giving rise to the Subscriber becoming such a person.
<PAGE>
Franklin Bank, N.A.
- --------------------------------------------------------------------------
FRANKLIN BANK, N.A., INDIVIDUAL RETIREMENT ACCOUNT APPLICATION
ACCOUNTHOLDER INFORMATION: NAME _________________________________________
DISCLAIMER:
Franklin Bank, N.A. is a national bank, not associated with CNL
Group, Inc. or any CNL entity. Franklin Bank, N.A. is a custodian for IRAs and
will act in a custodial capacity for all beneficial owners of IRAs. CNL has no
affiliation with Franklin Bank, N.A.
It is not reasonable to project the growth of your IRA investments
include assets other than bank time deposits or savings accounts. Therefore,
your final account balance will depend upon many factors - the amount of your
contributions, the amount of time the funds are invested, the earnings and/or
losses from the investments, expenses incurred such as brokerage commissions and
trustee's fees and the overall performance of your investments. We expressly
state that the growth in the value of your IRA cannot be guaranteed or
projected.
SIGNATURES IMPORTANT: Please read before signing.
I understand the eligibility requirements for the type of
IRA deposit I am making and I state that I do qualify to
make the deposit. I understand that the terms and
conditions which apply to the Individual Retirement
Account are contained in this Application and Form 5305A
(which will be provided within 10 days of our receipt of
this application). I agree to be bound by those terms and
conditions. I understand that I will not be required to
pay an annual fee as long as all investments in this IRA
are sponsored by a CNL entity. Within seven (7) days from
the date I establish the Individual Retirement Account I
may revoke it without penalty by mailing or delivering a
written notice to the Custodian.
I assume complete responsibility for:
1. Determining that I am eligible for an IRA each year I
make a contribution.
2. Insuring that all contributions I make are within the
limits set forth by the tax laws.
3. The tax consequences of any contribution (including
rollover contributions) and distributions.
Signature _______________________________________________
Accountholder
----------------------------------------------- ------------
Authorized Signature Trustee Date
DESIGNATION OF
BENEFICIARY(IES): I designate the individual(s) named below as my primary and
contingent Beneficiary(ies) of the IRA. I revoke all prior
IRA Beneficiary designations, if any, made by me. I
understand that I may change or add Beneficiaries at any
time by completing and delivering the proper form to the
Custodian. (If you wish to name more than one Beneficiary,
attach a list of each Beneficiary's name, social security
number, relationship to you and percentage share in this
IRA.) If any primary or contingent Beneficiary dies before
me, his or her interest and the interest of his or her heirs
shall terminate completely, and the percentage share of any
remaining Beneficiary(ies) shall be increased on a pro rata
basis.
<TABLE>
<S> <C>
Primary The following individual(s) shall be my Primary Beneficiary(ies):
Beneficiary(ies)
Name______________________________________________________________ Social Security #__________________
Address___________________________________________________________ Date of Birth__________ Share______
__________________________________________________________________ Relationship________________________
Contingent If none of the Primary Beneficiaries survive me, the following individual(s) shall be my Beneficiary(ies):
Beneficiary(ies)
Name______________________________________________________________ Social Security #___________________
Address___________________________________________________________ Date of Birth__________ Share______
__________________________________________________________________ Relationship________________________
Spousal Consent
I am the spouse of IRA accountholder named above. I agree to
my spouse's naming of a primary Beneficiary other than
myself. I acknowledge that I have received a fair and
reasonable disclosure of my spouse's property and financial
obligation. I also acknowledge that I shall have no claim
whatsoever against the Custodian for any payments to my
spouse's Beneficiary(ies).
</TABLE>
- ------------------------------------------------- ---------------
Spouse's Signature Date
- -------------------------------------------------------------------------
Custodial Services P.O. Box 7090 Troy, MI 48007-7090
1-800-344-0667
<PAGE>
INVESTMENT OPTIONS:
|_| I would like to receive information regarding mutual fund investments.
|_| I would like to receive information regarding money market accounts.
Note: Franklin Bank, N.A. may consider other investment options for your IRA.
Please provide the following information on your options.
Fund Name __________________________________________________________________
Sponsor Name________________________________________________________________
Address_____________________________________________________________________
Account No._______________________________________ Telephone #___________
Registered Representative information:
Registered Representative's Name_____________________________________________
Company_____________________________________________________________________
Address_____________________________________________________________________
Telephone #___________________________________________________________________
<PAGE>
EXHIBIT E
PRO FORMA ESTIMATE OF TAXABLE INCOME
BEFORE DIVIDENDS PAID DEDUCTION
<PAGE>
PRO FORMA ESTIMATE OF TAXABLE INCOME BEFORE DIVIDENDS PAID DEDUCTION OF
CNL AMERICAN PROPERTIES FUND, INC.
GENERATED FROM THE OPERATIONS OF PROPERTIES ACQUIRED FROM JANUARY 1, 1997
THROUGH MARCH 6, 1997
For a 12-Month Period (Unaudited)
The following schedule represents pro forma unaudited estimates of
taxable income before dividends paid deduction of each Property acquired by the
Company from January 1, 1997 through March 6, 1997, for the 12-month period
commencing on the date of the inception of the respective lease on such
Property. The schedule should be read in light of the accompanying footnotes.
These estimates do not purport to present actual or expected operations
of the Company for any period in the future. These estimates were prepared on
the basis described in the accompanying notes which should be read in
conjunction herewith. No single lessee or group of affiliated lessees lease
Properties or has borrowed funds from the Company with an aggregate purchase
price in excess of 20% of the expected total net offering proceeds of the
Company.
<TABLE>
<CAPTION>
Jack in the Box Jack in the Box Jack in the Box Jack in the Box
Los Angeles, CA (5)(6) Las Vegas, NV (5)(6) Moscow, ID (5)(6) Kent #1, WA (5)(6)
---------------------- -------------------- ----------------- ------------------
<S> <C>
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction:
Base Rent (1) $ 143,272 $ 127,954 $ 93,358 $ 129,137
Asset Management Fees (3) (8,381) (7,484) (5,459) (7,553)
General and Administrative
Expenses (5) (8,883) (7,933) (5,788) (8,006)
---------- ---------- ---------- ----------
Estimated Cash Available from
Operations 126,008 112,537 82,111 113,578
Depreciation and Amortization
Expense (6) (14,548) (15,187) (19,077) (15,280)
---------- ---------- ---------- ----------
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction of the Company $ 111,460 $ 97,350 $ 63,034 $ 98,298
========== ========== ========== ==========
</TABLE>
See Footnotes
E-1
<PAGE>
<TABLE>
<CAPTION>
Jack in the Box Jack in the Box Shoney's
Hollister, CA (5)(6) Kingsburg, CA (5)(6) Indian Harbour Beach, FL (5)
-------------------- -------------------- ----------------------------
<S> <C>
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction:
Base Rent (1) $ 108,836 $ 102,610 $ 71,504
Asset Management Fees (2) (6,365) (6,000) (3,857)
General and Administrative
Expenses (3) (6,748) (6,362) (4,433)
---------- ---------- ----------
Estimated Cash Available from
Operations 95,723 90,248 63,214
Depreciation and Amortization
Expense (4) (15,019) (16,464) (12,156)
---------- ---------- ----------
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction of the Company $ 80,704 $ 73,784 $ 51,058
========== ========== ==========
</TABLE>
See Footnotes
E-2
<PAGE>
<TABLE>
<CAPTION>
Jack in the Box Jack in the Box Golden Corral Burger King
Murrieta, CA (5)(6) Humble, TX (5)(6) Winchester, KY (5) Kent #2, OH
------------------- ----------------- ------------------ -----------
<S> <C>
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction:
Base Rent (1) $ 97,630 $ 94,696 $ 126,063 $ 89,688
Asset Management Fees (2) (5,709) (5,294) (6,904) (5,237)
General and Administrative
Expenses (3) (6,053) (5,871) (7,816) (5,561)
---------- ---------- ---------- ----------
Estimated Cash Available from
Operations 85,868 83,531 111,343 78,890
Depreciation and Amortization
Expense (4) (15,822) (16,083) (23,332) (17,602)
---------- ---------- ---------- ----------
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction of the Company $ 70,046 $ 67,448 $ 88,011 $ 61,288
========== ========== ========== ==========
</TABLE>
See Footnotes
E-3
<PAGE>
<TABLE>
<CAPTION>
Burger King Denny's Jack in the Box Jack in the Box
Chattanooga, TN (5) Tampa, FL (5) Palmdale, CA (5)(6) Houston #3, TX (5)(6)
------------------- ------------- ------------------- ---------------------
<S> <C>
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction:
Base Rent (1) $ 127,158 $ 110,291 $ 115,338 $ 88,328
Asset Management Fees (2) (6,662) (6,203) (6,745) (5,164)
General and Administrative
Expenses (3) (7,884) (6,838) (7,151) (5,476)
---------- ---------- ---------- ----------
Estimated Cash Available from
Operations 112,612 97,250 101,442 77,688
Depreciation and Amortization
Expense (4) (12,122) (17,818) (14,329) (13,923)
---------- ---------- ---------- ----------
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction of the Company $ 100,490 $ 79,432 $ 87,113 $ 63,765
========== ========== ========== ==========
</TABLE>
See Footnotes
E-4
<PAGE>
Golden Corral
Hopkinsville, KY Total
---------------- ----------
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction:
Base Rent (1) $ 141,912 $1,767,775
Asset Management Fees (2) (7,518) (100,535)
General and Administrative
Expenses (3) (8,799) (109,602)
---------- ----------
Estimated Cash Available from
Operations 125,595 1,556,638
Depreciation and Amortization
Expense (4) (22,573) (261,335)
---------- ----------
Pro Forma Estimate of Taxable
Income Before Dividends Paid
Deduction of the Company $ 103,022 $1,295,303
========== ==========
FOOTNOTES:
(1) Base rent does not include percentage rents which become due if
specified levels of gross receipts are achieved.
(2) The Properties will be managed pursuant to an advisory agreement
between the Company and CNL Fund Advisors, Inc. (the "Advisor"),
pursuant to which the Advisor will receive monthly asset management
fees in an amount equal to one-twelfth of .60% of the Company's Real
Estate Asset Value as of the end of the preceding month as defined in
such agreement. See "Management Compensation."
(3) Estimated at 6.2% of gross rental income based on the previous
experience of Affiliates of the Advisor with 18 public limited
partnerships which own properties similar to those owned by the
Company. Amount does not include soliciting dealer servicing fee due to
the fact that such fee will not be incurred until December 31 of the
year following the year in which the offering terminates.
(4) The estimated federal tax basis of the depreciable portion (the
building portion) of the Properties has been depreciated on the
straight-line method over 39 years.
E-5
<PAGE>
(5) The development agreements for the Properties which are to be
constructed or renovated, provide that construction or renovation must
be completed no later than the dates set forth below:
Property Estimated Final Completion Date
-------- -------------------------------
Los Angeles Property July 6, 1997
Las Vegas Property July 6, 1997
Moscow Property July 21, 1997
Kent #1 Property July 21, 1997
Hollister Property July 21, 1997
Kingsburg Property July 21, 1997
Indian Harbour Beach Property July 23, 1997
Murrieta Property July 30, 1997
Humble Property August 2, 1997
Winchester Property August 2, 1997
Chattanooga Property June 24, 1997
Tampa Property August 10, 1997
Palmdale Property August 10, 1997
Houston #3 Property August 10, 1997
(6) The lessee of the Los Angeles, Las Vegas, Moscow, Kent #1, Hollister,
Kingsburg, Murrieta, Humble, Palmdale and Houston #3 Properties is the
same unaffiliated lessee.
E-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 35. Financial Statements and Exhibits.
(a) Financial Statements:
The following financial statements are included in the
Prospectus.
(1) Pro Forma Consolidated Balance Sheet as of
December 31, 1996
(2) Pro Forma Consolidated Statement of Earnings for the
year ended December 31, 1996
(3) Notes to Pro Forma Consolidated Financial Statements
for the year ended December 31, 1996
(4) Report of Independent Accountants for CNL American
Properties Fund, Inc.
(5) Consolidated Balance Sheets at December 31, 1996 and
1995
(6) Consolidated Statements of Earnings for the years
ended December 31, 1996 and 1995 and the period May
May 2, 1994 (date of inception) through December 31,
1994
(7) Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996 and 1995 and the
period May 2, 1994 (date of inception) through
December 31, 1994
(8) Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 and the period
May 2, 1994 (date of inception) through December 31,
1994
(9) Notes to Consolidated Financial Statements for the
years ended December 31, 1996 and 1995 and the period
May 2, 1994 (date of inception) through December 31,
1994
(10) Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1996
(11) Notes to Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1996
(12) Schedule IV - Mortgage Loans on Real Estate as of
December 31, 1996
All other Schedules have been omitted as the required
information is inapplicable or is presented in the financial statements
or related notes.
(b) Exhibits:
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*3.1 CNL American Properties Fund, Inc. Amended and
Restated Articles of Incorporation (Included as
Exhibit 3.4 to Registration Statement No. 33-78790 on
Form S-11 and incorporated herein by reference.)
II-1
<PAGE>
*3.2 CNL American Properties Fund, Inc. Bylaws (Included
as Exhibit 3.5 to Registration Statement No. 33-78790
on Form S-11 and incorporated herein by reference.)
*4.1 CNL American Properties Fund, Inc. Amended and
Restated Articles of Incorporation (Previously filed
as Exhibit 3.4.)
*4.2 CNL American Properties Fund, Inc. Bylaws (Included
as Exhibit 3.5 to Registration Statement No. 33-78790
on Form S-11 and incorporated herein by reference.)
*4.3 Form of Amended Reinvestment Plan (Included as
Exhibit A in the Prospectus and incorporated herein
by reference.)
*4.4 Form of Stock Certificate (Included as Exhibit 4.5 to
Registration Statement No. 33-78790 on Form S-11 and
incorporated herein by reference.)
*5.1 Opinion of Shaw, Pittman, Potts & Trowbridge as to
the legality of the securities being registered by
CNL American Properties Fund, Inc.
*8.1 Opinion of Shaw, Pittman, Potts & Trowbridge
regarding certain material tax issues relating to CNL
American Properties Fund, Inc.
*10.1 Form of Escrow Agreement between CNL American
Properties Fund, Inc. and South Trust Asset
Management Company of Florida, N.A.
*10.2 Advisory Agreement (Included as Exhibit 10.15 to
Registration Statement No. 33-78790 on Form S-11 and
incorporated herein by reference.)
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
*10.5 Form of Unconditional Guarantee of Payment and
Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum,
Construction Addendum and Memorandum of Lease
*10.8 Form of Amended Reinvestment Plan (Included in the
prospectus as Exhibit A and incorporated herein by
reference.)
*10.9 Form of Indemnification Agreement dated as of April
18, 1995 between CNL American Properties Fund, Inc.
and each of James M. Seneff, Jr., Robert A. Bourne,
G. Richard Hostetter, J. Joseph Kruse, Richard C.
Huseman, John T. Walker, Jeanne A. Wall, Lynn E. Rose
and Edgar J. McDougall
23.1 Consent of Coopers & Lybrand L.L.P., Certified Public
Accountants, dated March 13, 1997 (Filed herewith.)
*23.2 Consent of Shaw, Pittman, Potts & Trowbridge
(Previously included in its opinion filed as Exhibit
5.1.)
*Previously filed.
II-2
<PAGE>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS
Table VI presents information concerning the acquisition of real
properties by public real estate limited partnerships sponsored by Affiliates of
the Company in the nine years ended June 30, 1996. The information includes the
gross leasable space or number of units and total square feet of units, dates of
purchase, locations, cash down payment and contract purchase price plus
acquisition fee. This information is intended to assist the prospective investor
in evaluating the terms involved in acquisitions by such prior partnerships.
<PAGE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund, Fund II, Fund III, Fund IV,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
(Note 2) (Note 3) (Note 4) (Note 5)
<S> <C>
AL,DC,FL,GA,
AL,AZ,CO,FL, AZ,CA,FL,GA, IL,IN,KS,MA,
AL,AZ,CA,FL, GA,IL,IN,LA, IA,IL,IN,KS, MD,MI,MS,NC,
GA,LA,MD,OK, MI,MN,MO,NC, KY,MD,MI,MN, OH,PA,TN,TX,
Locations TX,VA NM,OH,TX,WY MO,NE,OK,TX VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 20 units 43 units 32 units 43 units
total square feet
of units 67,645 s/f 149,829 s/f 131,992 s/f 156,317 s/f
Dates of purchase 6/17/86 - 2/11/87- 10/04/87- 6/24/88-
12/17/87 12/08/94 6/30/88 1/24/96
Cash down payment (Note 1) $12,296,264 $23,182,624 $19,637,008 $26,594,469
Contract purchase price
plus acquisition fee $12,222,062 $23,022,783 $19,512,548 $26,479,912
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 74,202 159,841 124,460 114,557
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $12,296,264 $23,182,624 $19,637,008 $26,594,469
=========== =========== =========== ===========
</TABLE>
Note 1: This amount was derived from capital contributions from partners and net
sales proceeds reinvested in other properties.
Note 2: The partnership owns a 50% interest in three separate joint ventures
which each own a restaurant property.
Note 3: The partnership owns a 49%, 50% and 64% interest in three separate joint
ventures. Each joint venture owns one restaurant property. In addition,
the partnership owns a 33.87% interest in one restaurant property held
as tenants-in-common with an affiliate.
Note 4: The partnership owns a 73.4% and 69.07% interest in two separate joint
ventures. Each joint venture owns one restaurant property.
Note 5: The partnership owns a 51%, 26.6%, 57%, 96.1% and 68.87% interest in
five separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 53.68% interest in one
restaurant property held as tenants-in-common with affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund V, Fund VI, Fund VII, Fund VIII,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
(Note 6) (Note 7) (Note 8) (Note 9)
<S> <C>
AR,AZ,FL,IN,
FL,GA,IL,IN, MA,MI,MN,NC, AZ,CO,FL,GA,
MI,NH,NY,OH, NE,NM,NY,OH, IN,LA,MI,MN, AZ,FL,IN,LA,
SC,TN,TX,UT, OK,PA,TN,TX, OH,SC,TN,TX, MI,MN,NC,NY,
Locations WA VA,WY UT,WA OH,TN,TX,VA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 30 units 46 units 45 units 40 units
total square feet
of units 117,652 s/f 173,841 s/f 160,939 s/f 179,705 s/f
Dates of purchase 2/06/89- 7/13/89- 3/30/90- 9/13/90-
1/05/90 1/24/96 7/29/94 5/31/96
Cash down payment (Note 1) $22,113,522 $32,679,181 $27,310,125 $31,985,071
Contract purchase price
plus acquisition fee $21,706,859 $32,146,520 $26,638,040 $31,450,507
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 406,663 532,661 672,085 534,564
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $22,113,522 $32,679,181 $27,310,125 $31,985,071
=========== =========== =========== ===========
</TABLE>
Note 6: The partnership owns a 43%, 49% and 66.5% interest in three separate
joint ventures. Each joint venture owns one restaurant property.
Note 7: The partnership owns a 3.9%, 14.5%, 36% and a 66.14% interest in four
separate joint ventures. Each joint venture owns one restaurant
property. In addition, the partnership owns a 51.67% and a 17.93%
interest in two restaurant properties held separately as
tenants-in-common with affiliates.
Note 8: The partnership owns a 51%, 83.3%, 4.79% and a 18% interest in four
separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 48.33% interest in one
restaurant property held as tenants-in-common with an affiliate.
Note 9: The partnership owns a 85.5%, 87.68%, 36.8% and a 12% interest in four
separate joint ventures. Three of the joint ventures each own one
restaurant property and the other joint venture owns six restaurant
properties.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund IX, Fund X, Fund XI, Fund XII,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
(Note 10) (Note 11) (Note 12) (Note 13)
<S> <C>
AL,AZ,CA,CO,
AL,CA,CO,FL, CT,FL,KS,LA,
AL,FL,GA,IL, ID,IL,LA,MI, MA,MI,MS,NC, AL,AZ,CA,FL,
IN,LA,MI,MN, MO,MT,NC,NH, NH,NM,OH,OK, GA,LA,MO,MS,
MS,NC,NH,NY, NM,NY,OH,PA, PA,SC,TX,VA, NC,NM,OH,SC,
Locations OH,SC,TN,TX SC,TN,TX WA TN,TX,WA
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 41 units 49 units 39 units 49 units
total square feet
of units 177,469 s/f 203,466 s/f 168,418 s/f 206,865 s/f
Dates of purchase 5/31/91- 10/01/91- 5/18/92- 11/20/92-
10/01/92 1/24/96 10/16/92 5/31/96
Cash down payment (Note 1) $30,748,694 $36,036,814 $35,200,825 $40,840,795
Contract purchase price
plus acquisition fee $30,021,833 $35,320,865 $34,595,348 $40,339,796
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 726,861 715,949 605,477 500,999
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $30,748,694 $36,036,814 $35,200,825 $40,840,795
=========== =========== =========== ===========
</TABLE>
Note 10: The partnership owns a 50%, 45.2% and 27.3% interest in three separate
joint ventures. One of the joint ventures owns one restaurant property
and the other two joint ventures own six restaurant properties each.
Note 11: The partnership owns a 50%, 88.3%, 40.95% and 10.5% interest in four
separate joint ventures. Three of the joint ventures own one restaurant
property each and the other joint venture owns six restaurant
properties. In addition, the partnership owns a 13.37% interest in one
restaurant property held as tenants-in-common with affiliates.
Note 12: The partnership owns a 62.2%, 77.33%, 85% and 76.6% interest in four
separate joint ventures. Each joint venture owns one restaurant
property.
Note 13: The partnership owns a 31.13%, 59.05%, 18.61% and 88% interest in four
separate joint ventures. Each joint venture owns one restaurant
property.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income CNL Income CNL Income CNL Income
Fund XIII, Fund XIV, Fund XV, Fund XVI,
Ltd. Ltd. Ltd. Ltd.
----------- ----------- ----------- -----------
(Note 14) (Note 15) (Note 16)
<S> <C>
AL,AR,AZ,CA, AL,AZ,CO,FL, CA,FL,GA,KS, AZ,CA,CO,DC,
CO,FL,GA,IN, GA,KS,LA,MO, KY,MO,MS,NC, FL,GA,ID,IN,
KS,LA,MD,NC, MS,NC,NJ,NV, NJ,NM,OH,OK, KS,MN,MO,NC,
OH,PA,SC,TN, OH,SC,TN,TX, PA,SC,TN,TX, NM,NV,OH,TN,
Locations TX,VA VA VA TX,UT,WI
Type of property Restaurants Restaurants Restaurants Restaurants
Gross leasable space
(sq. ft.) or number
of units and 48 units 56 units 48 units 43 units
total square feet
of units 156,156 s/f 161,913 s/f 143,473 s/f 166,793 s/f
Dates of purchase 5/18/93- 9/27/93- 4/28/94- 10/21/94-
4/24/95 3/16/95 1/24/96 3/15/96
Cash down payment (Note 1) $34,905,219 $39,943,098 $35,778,136 $39,421,376
Contract purchase price
plus acquisition fee $34,535,596 $39,515,928 $35,388,860 $39,030,014
Other cash expenditures
expensed - - - -
Other cash expenditures
capitalized 369,623 427,170 389,276 391,362
----------- ----------- ----------- -----------
Total acquisition cost
(Note 1) $34,905,219 $39,943,098 $35,778,136 $39,421,376
=========== =========== =========== ===========
</TABLE>
Note 14: The partnership owns a 50% and 28% interest in two separate joint
ventures. Each joint venture owns one restaurant property. In addition,
the Partnership owns a 66.13% interest in one restaurant property held
as tenants-in-common with an affiliate.
Note 15: The partnership owns a 50% interest in two separate joint ventures and
a 72% interest in one joint venture. Two of the joint ventures each own
one restaurant property and the other joint venture owns two restaurant
properties.
Note 16: The partnership owns a 50% interest in a joint venture which owns two
restaurant properties. In addition, the partnership owns a 15.02%
interest in one restaurant property held as tenants-in-common with
affiliates.
<PAGE>
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS (continued)
<TABLE>
<CAPTION>
CNL Income
Fund XVII,
Ltd.
-----------
<S> <C>
CA,FL,IL,IN,
MI,NV,SC,TN,
Locations TX
Type of property Restaurants
Gross leasable space
(sq. ft.) or number
of units and 13 units
total square feet
of units 62,488 s/f
Dates of purchase 12/20/95 -
6/30/96
Cash down payment (Note 1) $12,616,047
Contract purchase price
plus acquisition fee $12,574,025
Other cash expenditures
expensed -
Other cash expenditures
capitalized 42,022
-----------
Total acquisition cost
(Note 1) $12,616,047
===========
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certified that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
PostEffective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orlando,
State of Florida, on the 14th day of March, 1997.
CNL AMERICAN PROPERTIES FUND, INC.
(Registrant)
By: /s/JAMES M. SENEFF, JR.
----------------------------------
JAMES M. SENEFF, JR.,
Chairman of the Board and
Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/James M. Seneff, Jr. Chairman of the Board and March 14, 1997
- -------------------------- Chief Executive Officer
JAMES M. SENEFF, JR. (Principal Executive Officer)
/s/Robert A. Bourne Director and President March 14, 1997
- -------------------------- (Principal Financial and
ROBERT A. BOURNE Accounting Officer)
/s/G. Richard Hostetter Independent Director March 14, 1997
- --------------------------
G. RICHARD HOSTETTER
/s/J. Joseph Kruse Independent Director March 14, 1997
- --------------------------
J. JOSEPH KRUSE
/s/Richard C. Huseman Independent Director March 14, 1997
- --------------------------
RICHARD C. HUSEMAN
<PAGE>
EXHIBIT INDEX
-------------
</TABLE>
<TABLE>
<CAPTION>
Exhibit Number Page
- -------------- ----
<S> <C>
*1.1 Form of Managing Dealer Agreement
*1.2 Form of Participating Broker Agreement
*3.1 CNL American Properties Fund, Inc. Amended and Restated
Articles of Incorporation (Included as Exhibit 3.4 to
Registration Statement No. 33-78790 on Form S-11 and
incorporated herein by reference.)
*3.2 CNL American Properties Fund, Inc. Bylaws (Included as
Exhibit 3.5 to Registration Statement No. 33-78790 on Form
S-11 and incorporated herein by reference.)
*4.1 CNL American Properties Fund, Inc. Amended and Restated
Articles of Incorporation (Previously filed as
Exhibit 3.4.)
*4.2 CNL American Properties Fund, Inc. Bylaws (Included as
Exhibit 3.5 to Registration Statement No. 33-78790 on Form
S-11 and incorporated herein by reference.)
*4.3 Form of Amended Reinvestment Plan (Included as Exhibit A
in the Prospectus and incorporated herein by reference.)
*4.4 Form of Stock Certificate (Included as Exhibit 4.5 to
Registration Statement No. 33-78790 on Form S-11 and
incorporated herein by reference.)
*5.1 Opinion of Shaw, Pittman, Potts & Trowbridge as to
the legality of the securities being registered by
CNL American Properties Fund, Inc.
*8.1 Opinion of Shaw, Pittman, Potts & Trowbridge
regarding certain material tax issues relating to CNL
American Properties Fund, Inc.
*10.1 Form of Escrow Agreement between CNL American Properties
Fund, Inc. and South Trust Asset Management Company of
Florida, N.A.
*10.2 Advisory Agreement (Included as Exhibit 10.15 to Registration
Statement No. 33-78790 on Form S-11 and incorporated herein
by reference.)
*10.3 Form of Joint Venture Agreement
*10.4 Form of Indemnification and Put Agreement
</TABLE>
*Previously filed.
i
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Page
- -------------- ----
<S> <C>
*10.5 Form of Unconditional Guarantee of Payment and Performance
*10.6 Form of Purchase Agreement
*10.7 Form of Lease Agreement including Rent Addendum,
Construction Addendum and Memorandum of Lease
*10.8 Form of Amended Reinvestment Plan (Included in the
prospectus as Exhibit A and incorporated herein by reference.)
*10.9 Form of Indemnification Agreement dated as of April 18, 1995
between CNL American Properties Fund, Inc. and each of
James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter,
J. Joseph Kruse, Richard C. Huseman, John T. Walker, Jeanne
A. Wall, Lynn E. Rose and Edgar J. McDougall
23.1 Consent of Coopers & Lybrand L.L.P., Certified Public
Accountants, dated March 13, 1997 (Filed herewith.)
*23.2 Consent of Shaw, Pittman, Potts & Trowbridge
(Previously included in its opinion filed as Exhibit
5.1.)
*Previously filed.
ii
</TABLE>
EXHIBIT 23.2
Consent of Coopers & Lybrand L.L.P.,
Certified Public Accountants,
dated March 13, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 (File
No. 333-15411) of our report dated January 22, 1997 on our audits of the
financial statements of CNL American Properties Fund, Inc. We also consent to
the reference to our Firm under the caption "Experts".
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Orlando, Florida
March 13, 1997
