Registration Statement on Form S-3
(N0. 333-52601)
Filing pursuant to Rule 424(b)(ii)
Prospectus Supplement
(To Prospectus dated May 26, 1998)
1,085,000 Shares
HOME PROPERTIES OF NEW YORK, INC.
Common Stock
All of the 1,085,000 shares of common stock, par value $.01 per share
(the "Common Stock"), offered hereby (the "Offering") will be sold by Home
Properties of New York, Inc. ("Home Properties" or the "Company"). The
Company's Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "HME." The last reported sale price of the shares of Common
Stock on the NYSE on May 27, 1998 was $26.5625 per share. To ensure that the
Company maintains its qualification as a real estate investment trust (a
"REIT"), ownership of the Common Stock by any single stockholder is generally
limited to 8% of the value of the Company's outstanding capital stock. See
"Description of Capital Stock" in the accompanying Prospectus.
PaineWebber Incorporated ("PaineWebber") has agreed to purchase the
shares of Common Stock from the Company at a price of $25.2344 per share,
resulting in aggregate proceeds to the Company of $27,379,324, before payment
of expenses by the Company estimated at $20,000, subject to the terms and
conditions of the underwriting agreement between the Company and PaineWebber
(the "Underwriting Agreement"). PaineWebber plans to deposit the shares of
Common Stock with the trustee of PaineWebber Equity Trust REIT Series 1 (the
"Trust") in exchange for units in the Trust. If all of the shares of Common
Stock so deposited with the trustee of the Trust are valued at their reported
last sale price on the NYSE on May 27, 1998, the aggregate underwriting
commissions would be $1,440,989. The Company and Home Properties of New York,
L.P. (the "Operating Partnership") have agreed to indemnify PaineWebber against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED
UNDER "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares of Common Stock are offered by PaineWebber, subject to prior
sale, when, as and if delivered to and accepted by PaineWebber and subject to
its right to reject orders in whole or in part. It is expected that delivery
of the shares of Common Stock will be in New York City on or about May 29,
1998.
PAINEWEBBER INCORPORATED
The date of this Prospectus Supplement is May 27, 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS
MARKET PRICE AND TO COVER SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
THE FOLLOWING INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING IN THE ACCOMPANYING
PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE INTO THE ACCOMPANYING
PROSPECTUS. REFERENCES TO THE COMPANY IN THIS PROSPECTUS SUPPLEMENT MEAN,
EXCEPT AS THE CONTEXT OTHERWISE REQUIRES, THE COMPANY, THE OPERATING
PARTNERSHIP., HOME PROPERTIES TRUST, HP MANAGEMENT, INC., CONIFER REALTY, INC.
AND ALL OTHER SUBSIDIARIES OF THE COMPANY ON A CONSOLIDATED BASIS
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS SUPPLEMENT, CONTAINS, AND THE ACCOMPANYING PROSPECTUS
CONTAINS OR INCORPORATES BY REFERENCE, STATEMENTS THAT MAY BE DEEMED TO BE
"FORWARD-LOOKING" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 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 ARE
DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS" IN THE ACCOMPANYING
PROSPECTUS.
THE COMPANY
Home Properties is a fully integrated, self-administered and self-managed
real estate investment trust (a "REIT"), which owns, operates, acquires and
develops multifamily apartment communities throughout the Northeastern, Mid-
Atlantic and Midwestern regions of the United States. The Company currently
operates 231 communities containing 26,090 apartment units. Of these, 17,103
units in 71 communities are wholly owned by the Company, 6,139 units in 119
communities are managed and partially owned by the Company as general partner,
and 2,848 units in 41 communities are managed for other owners. The
communities are located throughout the Northeastern quadrant of the United
States in New York, Michigan, Pennsylvania, Maryland, New Jersey, Virginia,
Connecticut, Ohio, and Indiana (the "Current Markets"). Since its initial
public offering in August 1994, the Company has more than quadrupled the size
of its wholly owned portfolio and has expanded its geographic presence from
Upstate New York to eight additional states. During the same period, the
Company acquired 59 communities containing 13,736 apartment units for a total
acquisition cost of approximately $483 million.
Home Properties conducts substantially all of its business and operations
through, and all of the communities and other assets of the Company are held
by, the Operating Partnership. Home Properties indirectly owns a controlling
57.8% interest in the Operating Partnership and is solely responsible for all
aspects of its management. The Operating Partnership performs certain
operations relating to its property management and development activities
through management companies beneficially owned by the Operating Partnership
and controlled by one or more officers of Home Properties.
The Company's executive offices are located at 850 Clinton Square,
Rochester, New York 14604, and its telephone number is (716) 546-4900.
RECENT DEVELOPMENTS
PENDING ACQUISITIONS
On May 15, 1998, the Company entered into purchase agreements to acquire
a portfolio of 17 multifamily communities containing 4,002 apartment units (the
"Acquisition Portfolio") for a total purchase price of $155 million. The
Acquisition Portfolio communities are located in New Jersey, Maine,
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<PAGE>
New York,
Pennsylvania, Ohio and Michigan. During the first quarter of 1998, the
Acquisition Portfolio had an average occupancy rate of 96%. In addition to the
Acquisition Portfolio, the Company has entered into agreements to acquire three
other apartment communities (the "Other Pending Acquisitions") aggregating
1,647 units for a total purchase price of approximately $57 million. The Other
Pending Acquisitions communities are located in Illinois, Pennsylvania and New
York. The closings of the Acquisition Portfolio and the Other Pending
Acquisitions are subject to customary approvals and conditions.
1998 COMPLETED ACQUISITIONS
Since January 1, 1998, the Company has completed the acquisition of nine
multifamily communities aggregating 3,055 apartment units for a total purchase
price of approximately $120 million. These communities are located in the
Current Markets where the Company continues to increase its presence and
diversify its portfolio.
FINANCING ACTIVITIES
On May 15, 1998, the Company signed a commitment for a $155 million
standby acquisition facility (the "Acquisition Facility") in connection with
the pending purchase of the Acquisition Portfolio. The Acquisition Facility
provides financing in addition to the Company's $50 million unsecured credit
facility. The Acquisition Facility, if drawn, will bear interest at LIBOR plus
1.65 % and mature one year following funding. The Company may draw on the
Acquisition Facility at any time during the 90 days following May 15, 1998 to
fund up to 100% of the purchase price of the Acquisition Portfolio, subject to
certain conditions.
On April 14, 1998, the Company completed a direct placement of 1,320,755
shares of Common Stock at a price of $26.50 per share. The net cash proceeds
from the offering of $35 million were used primarily to repay amounts
outstanding on the Company's unsecured credit facility, with remaining funds
available for general corporate purposes and to fund acquisitions.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are expected to be approximately $27,359,324. The Company
intends to contribute or otherwise transfer the net proceeds of the sale of the
Common Stock offered hereby to Home Properties Trust, a wholly-owned qualified
REIT subsidiary of the Company, and that entity will contribute such proceeds
to the Operating Partnership in exchange for an equal number of units of
limited partnership interest in the Operating Partnership. Such net proceeds
will be used to fund acquisitions, which may include the Acquisition Portfolio,
and for general corporate purposes.
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, the Company has agreed to sell to PaineWebber, and PaineWebber has
agreed to purchase from the Company, all of the shares of Common Stock offered
hereby at the price set forth on the cover page of this Prospectus Supplement.
Pursuant to the terms of the Underwriting Agreement, PaineWebber is obligated
to purchase all of the shares of Common Stock if any shares are purchased.
PaineWebber intends to deposit the shares of Common Stock offered hereby
with the trustee of the Trust, a registered unit investment trust under the
Investment Company Act of 1940, as amended, in exchange for units in Trust. If
all of the shares of Common Stock so deposited with the trustee of the Trust
are valued at their last sale price on the NYSE on May 27, 1998, the aggregate
underwriting commissions
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<PAGE>
would be $1,440,989. PaineWebber is acting as sponsor
and depositor of the Trust and is therefore considered an affiliate of the
Trust.
In the Underwriting Agreement, the Company and the Operating Partnership
have agreed to indemnify PaineWebber against certain liabilities, including
liabilities under the federal securities laws, or to contribute to payments
PaineWebber may be required to make in respect thereof.
In connection with this offering of Common Stock, the rules of the
Securities and Exchange Commission permit PaineWebber to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If PaineWebber creates a short position in the Common Stock in connection
with this offering (I.E., if it sells more shares of Common Stock than are set
forth on the cover page of this Prospectus Supplement), PaineWebber may reduce
that short position by purchasing Common Stock in the open market. In general,
purchases of a security for purposes of stabilization could cause the price of
the security to be higher than it might be in the absence of such purchases.
Neither the Company nor PaineWebber makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Common Stock. In addition,
neither the Company nor PaineWebber makes any representation that PaineWebber
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
The Common Stock is listed on the NYSE under the symbol "HME" and on the
Berlin Stock Exchange under the symbol "HMPGR." The Company has applied for
listing of the shares of Common Stock offered hereby on the NYSE.
In the ordinary course of business, PaineWebber has in the past engaged
and may in the future engage in financial advisory, investment banking and
other transactions with the Company for which customary compensation has been,
and will be, received.
EXPERTS
The financial statements incorporated by reference in this Prospectus
Supplement or elsewhere in the Registration Statement have been incorporated
herein in reliance on the reports audited by Coopers & Lybrand L.L.P,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters, including the legality of the shares of Common
Stock offered hereby, will be passed upon for the Company by Nixon, Hargrave,
Devans & Doyle LLP, Rochester, New York, and for PaineWebber by Rogers & Wells
LLP, New York, New York. Mr. Alan L. Gosule, a director and shareholder of the
Company, is a member of the firm of Rogers & Wells, LLP. As to matters of
Maryland law contained in its opinion, Rogers & Wells LLP will rely on the
opinion of Nixon, Hargrave, Devans & Doyle LLP.
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<PAGE>
SUBJECT TO COMPLETION
PROSPECTUS
$400,000,000
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK PREFERRED STOCK COMMON STOCK PURCHASE
RIGHTS OR WARRANTS AND DEBT SECURITIES
Home Properties of New York, Inc., a Maryland corporation (the
"Company"),may from time to time offer in one or more series (i) shares of
its common stock, par value $.01 per share (the "Common Stock"); (ii)
shares of its preferred stock, par value $.01 per share (the "Preferred
Stock); (iii) rights or warrants to purchase shares of its Common Stock (the
"Common Stock Purchase Rights") and (iv) one or more series of debt
securities ("Debt Securities"), which may be either senior debt securities or
subordinated debt securities, with an aggregate public offering price of up
to $400,000,000. The Common Stock, Preferred Stock, Common Stock Purchase
Rights or Warrants and Debt Securities (collectively, the "Offered Securities")
may be offered, separately or together, in separate classes or series, in
amounts, at prices and on terms to be determined at the time of offering
and set forth in a supplement to this
Prospectus (each, a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of which
this Prospectus is being delivered will be set forth in the applicable
Prospectus Supplement and will include, where applicable, (i) in the case of
Common Stock, any public offering price; (ii) in the case of Preferred
Stock, the specific title and stated value, any distribution, any return of
capital, liquidation, redemption, conversion, voting and other rights, and any
initial public offering price; (iii) in the case of Common Stock Purchase
Rights, the duration, offering price, exercise price and any reallocation
of Purchase Rights not initially subscribed, and (iv) in the case of Debt
Securities, the title, aggregate principal amount, denominations, maturity,
rate (which may be fixed or variable) or method of calculation thereof, time of
payment of any interest, any terms for redemption at the option of the holder
or the Company, any terms for sinking fund payments, rank, any
conversion or exchange rights, any listing on a securities exchange, and
the initial public offering price and any other terms in connection with the
offering and sale of any Debt Securities. In addition, such specific terms
may include limitations on direct or beneficial ownership and restrictions
on transfer of the Offered Securities, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for federal income tax purposes.
The applicable Prospectus Supplement will also contain information,
where applicable, about all material United States federal income tax
considerations relating to, and any listing on a securities exchange of, the
Offered Securities covered by such Prospectus Supplement. The Common Stock
is listed on the New York Stock Exchange under the symbol "HME." Any Common
Stock offered pursuant to a Prospectus Supplement will be listed on such
exchange, subject to official
notice of issuance.
The Offered Securities may be offered directly, through agents
designated from time to time by the Company, or to or through underwriters or
dealers. If any agents or underwriters are involved in the sale of any of
the Offered Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement between or among them will be set
forth, or will be calculable from the information set forth, in the
applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be
sold without delivery of the applicable Prospectus Supplement describing the
method and terms of the offering of such class or series of the Offered
Securities.
SEE "RISK FACTORS" (beginning on page 4) FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Prospectus is May 26, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR
SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
--------------------------
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These Securities may not be sold
nor may offers to by be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy not shall there by any sale of
these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "Commission"), a Registration Statement on Form S-3 under the Securities
Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, with respect to the Offered Securities.
This Prospectus, which is part of such Registration Statement, does not
contain all of the information set forth in the Registration Statement and
the exhibits thereto. For further information with respect to the Company
and the Offered Securities, reference is hereby made to the Registration
Statement and such exhibits, copies of which may be examined without charge
at, or obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the locations described
above. Copies of such materials can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding Company at http://www.sec.gov. In addition, the Common Stock is
listed on the New York Stock Exchange and similar information concerning the
Company can be inspected at the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The Company furnishes its stockholders with annual reports
containing audited financial statements with a report thereon by its
independent public accountants.
FORWARD LOOKING STATEMENTS
Certain information contained herein or incorporated by reference may
contain forward-looking statements. Although the Company believes
expectations reflected in such forward-looking statements are based on
reasonable assumptions, it can give no assurance that its expectations will
be achieved. Factors that may cause actual results to differ include the
general economic and local real estate conditions, the weather and other
conditions that might affect operating expenses, the timely completion
of repositioning activities, the actual pace of acquisitions, and the
continued access to capital to fund growth.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, which have been filed by the Company
(Commission File No. 1-13136) under the Exchange Act are incorporated into
this Prospectus by reference: the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed on March 24, 1998; the Company's
Current Reports on Form 8-K filed on February 20, 1998, as amended by Form 8-
K/A filed on March 24, 1998, on March 24, 1998, on March 26, 1998 and on
April 15, 1998, the Company's Current Report on Form 8-K/A filed January 12,
1998 amending its Current Report on Form 8-K filed on October 7, 1997
and the Company's registration statement with respect to its Common Stock
on Form 8-A effective July 27, 1994.
Documents incorporated herein by reference are available to any
stockholder of the Company, on written or oral request, without charge, from
the Company. Requests should be directed to David P. Gardner, Chief
Financial Officer, Home Properties of New York, Inc., 850 Clinton Square,
Rochester, New York 14604, telephone (716) 546-4900. Copies of documents so
requested will be sent by first class mail, postage paid.
All reports and other documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to
the filing of a post-effective amendment which indicates that all securities
offered hereby have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference in,
and to be a part of, this Prospectus from the date of filing of such reports
and documents (provided, however, that the information referred to in
Instruction 8 to Item 402(a)(3) of Regulation S-K promulgated by the
Securities and Exchange Commission is not incorporated herein by reference).
Any statement or information contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a
statement contained herein, in the Registration Statement containing this
Prospectus or in any subsequently filed documents which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
2
<PAGE>
THE COMPANY AS USED IN THIS SECTION, THE TERMS "HOME PROPERTIES"
AND "COMPANY", INCLUDE HOME PROPERTIES OF NEW YORK, INC., A
MARYLAND CORPORATION, HOME PROPERTIES OF NEW YORK, L.P. (THE "OPERATING
PARTNERSHIP") A NEW YORK LIMITED PARTNERSHIP, HOME PROPERTIES TRUST
(THE "TRUST"), A MARYLAND REAL ESTATE INVESTMENT TRUST,
AND THE TWO MANAGEMENT COMPANIES (THE "MANAGEMENT COMPANIES") - HOME
PROPERTIES MANAGEMENT, INC. ("HP MANAGEMENT") AND
CONIFER REALTY CORPORATION ("CONIFER REALTY"), BOTH OF WHICH ARE
MARYLAND CORPORATIONS.
The Company is a self-administered, self-managed and fully integrated
real estate investment trust ("REIT")formed in November, 1993 to continue and
expand the multifamily residential real estate business of Home Leasing
Corporation, which was organized in 1967. The Company is one of the
largest owners and operators of multifamily residential properties in
upstate New York (based on the number of apartment units owned and managed).
The Company, as of May 11, 1998, operates 231 communities (the
"Properties") containing 26,090 apartment units. Of these, 17,103 units in
71 communities are owned outright by the Company, 6,139 units are managed by
the Company as general partner of a limited partnership, and 2,848 units are
managed for third-party owners. The Properties are located throughout the
Northeast, Mid-Atlantic and Midwest. In addition, the Company manages 1.7
million square feet of commercial space.
The Company conducts substantially all of its business and owns all of
its properties through the Operating Partnership and the Management
Companies. To comply with certain technical requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to REITs, the
Operating Partnership carries out portions of its property management and
development activities through the Management Companies, which are
beneficially owned by the Operating Partnership but controlled by one or more
officers of the Company. The Company owns a 1% general partnership interest
in the Operating Partnership and, through its wholly owned subsidiary the
Trust, a 55.9% limited partnership interest in the Operating Partnership as of
March 31, 1998.
The Company's executive offices are located at 850 Clinton
Square, Rochester, New York 14604. Its telephone number is (716) 546-4900.
RISK FACTORS
An investment in the Offered Securities involves various risks.
In addition to general investment risks and those factors set forth
elsewhere in this Prospectus, prospective investors should consider, among
other things, the following factors:
ASSIMILATION OF A SUBSTANTIAL NUMBER OF NEW ACQUISITIONS.
The Company has undertaken a strategy of aggressive growth through
acquisitions. From January 1, 1997 through April 30, 1998, the Company has
acquired 44 new communities with 10,551 apartment units, more than doubling
the number of its owned multifamily units. The Company's ability to manage
its growth effectively will require the Company, among other things, to
successfully apply its experience in managing its existing portfolio to an
increased number of properties. In addition, the Company will be required to
successfully manage the integration of a substantial number of new
personnel. There can be no assurances that the Company will
be able to integrate and manage these operations effectively or maintain or
improve on their historical financial performance.
REAL ESTATE FINANCING RISKS
GENERAL. The Company is subject to the customary risks associated
with debt financing including the potential inability to refinance
existing mortgage indebtedness upon maturity on favorable terms. If a
property is mortgaged to secure payment of indebtedness and the Company is
unable to meet its debt service obligations, the property could be foreclosed
upon. This could adversely affect the Company's cash flow and, consequently,
the amount available for distributions to stockholders.
NO LIMITATION ON DEBT. The Board of Directors has adopted a policy
of limiting the Company's indebtedness to approximately 50% of its total
market capitalization (i.e., the market value of issued and outstanding
shares of Common Stock and limited partnership interest in the Operating
Partnership ("Units") plus total debt), but the organizational documents
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company may incur. Accordingly,
the Board of Directors could alter or eliminate its current policy on
borrowing. If this policy were changed, the Company could become more
highly leveraged, resulting in an increase in debt service that could
adversely affect the Company's ability to make expected distributions
to its stockholders and an increased risk of default on the
Company's indebtedness.
The Company's debt to total market capitalization ratio fluctuates
based on the timing of acquisitions and financings. At December 31, 1997, the
ratio of the Company's indebtedness to its total capitalization ws 33%, based
on a year-end closing price of the Company's Stock of $27.1875, and at
March 31, 1998 was 32%, based on the closing price of the Company's Common
Stock on that date of $27.75.
EXISTING DEBT MATURITIES. The Company is subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet the required payments of principal
and interest. Because much of the financing is not fully self-amortizing,
the Company anticipates that only a portion of the principal of the
Company's indebtedness will be repaid prior to maturity. So, it will be
necessary for the Company to refinance debt. Accordingly, there is a risk
that existing indebtedness will not be able to be refinanced or that the
terms of such refinancing will not be as favorable as the terms of the
existing indebtedness. The Company aims to stagger its debt maturities
with the goal of minimizing the amount of debt which must be refinanced
in any year.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Although the Company believes that it was organized and has operated
to qualify as a REIT under the Code, no assurance can be given that the
Company will remain so qualified. Qualification as a REIT involves the
application of highly technical and complex Code provisions and REIT
qualification rules, which include (i) maintaining ownership of specified
minimum levels of real estate related assets; (ii) generating specified minimum
levels of real estate related income; (iii) maintaining diversity of ownership
of Common Stock; and (iv) distributing at least 95% of all real estate
investment taxable income on an annual basis.
If in any taxable year the Company fails to qualify as a REIT, the
Company would not be allowed a deduction in computing its taxable income for
distributions to stockholders and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. As a result, the amount available for
distribution to the Company's stockholders would be reduced for the year or
years involved. In addition, unless entitled to relief under certain statutory
provisions, the Company would also be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification was
lost.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying
degrees of risk. If the Company's communities do not generate revenues
sufficient to meet operating expenses, including debt service and capital
expenditures, the Company's cash flow and ability to make distributions to its
stockholders will be adversely affected. A multifamily apartment community's
revenues and value may be adversely affected by the general economic climates;
the local economic climate; local real estate considerations (such as over
supply of or reduced demand for apartments); the perception by prospective
residents of the safety, convenience and attractiveness of the communities or
neighborhoods in which they are located and the quality of local schools and
other amenities; and increased operating costs (including real estate taxes and
utilities). Certain significant fixed expenses are generally not reduced when
circumstances cause a reduction in income from the investment.
OPERATING RISKS. The Company is dependent on rental income to pay
operating expenses and to generate cash to enable the Company to make
distributions to its stockholders. If the Company is unable to attract and
retain residents or if its residents are unable, due to an adverse change in
the economic condition of the region or otherwise, to pay their rental
obligations, the Company's ability to make expected distributions will
be adversely affected.
DEPENDENCE ON PRIMARY MARKETS. The Properties are located in the
Northeast, Midwest and Mid-Atlantic regions of the United States. At
April 30, 1998, 6,550 of the Company's owned multifamily units were located
in the upstate New York region and 3,482 units were located in markets
surrounding Detroit, Michigan (representing approximately 38.3% and
approximately 20.4% of the units respectively of the Company's portfolio).
Accordingly, the Company's performance is partially linked to economic
conditions and the demand for apartments in upstate New York and the
Detroit, Michigan area. A decline in the economy in these regions particularly,
or in any other areas where the Company has a concentration of apartment units,
may result in a decline in the demand for apartments which may adversely affect
the ability of the Company to make distributions to stockholders.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid and, therefore, the Company has limited ability to vary its
portfolio quickly in response to changes in economic or other conditions. In
addition, the prohibition in the Code on REITs holding property for
sale and related regulations may affect the Company's ability to sell
properties without adversely affecting distributions to stockholders. A
significant number of the Company's properties acquired using Units restrict
the Company's ability to sell such properties in transactions which would
create currrent taxable income to the former owners.
COMPLIANCE WITH LAWS AND REGULATIONS. Many laws an
governmental regulations are applicable to the Properties
and changes in these laws and regulations, or their interpretation
by agencies and the courts, occur frequently. Under
the Americans with Disabilities Act of 1990 (the "ADA"), all places of
public accommodation are required to meet certain federal
requirements related to access and use by disabled persons. These
requirements became effective in 1992. Compliance with
the ADA requires removal of structural barriers to handicapped
access in certain public areas of the Properties, where such
removal is "readily achievable." The ADA does not, however,
consider residential properties, such as apartment
communities, to be public accommodations or commercial facilities,
except to the extent portions of such facilities, such as
a leasing office, are open to the public. A number of additional
federal, state and local laws exist which also may
require modifications to the Properties, or restrict certain further
renovations thereof, with respect to access thereto by
disabled persons. For example, the Fair Housing Amendments Act of 1988
(the "FHAA") requires apartment communities first occupied after March 13,
1990 to be accessible to the handicapped. Noncompliance with the ADA or
the FHAA could result in the imposition of fines or an award of damages to
private litigants. Although management believes that the Properties are
substantially in compliance with present requirements, the Company may incur
additional costs in complying with the ADA for both existing properties
and properties acquired in the future. The Company believes that the
Properties that are subject to the FHAA are in compliance with such laws.
Under the federal Fair Housing Act and state fair housing
laws, discrimination on the basis of certain protected
classes is prohibited. The Company has a policy against any kind of
discriminatory behavior and trains its employees to avoid
discrimination or the appearance of discrimination. There is no assurance,
however, that an employee will not violate the Company's policy against
discrimination and violate the fair housing laws. Such a violation could
subject the Company to legal action and the possible awards of damages.
Under various laws, ordinances and regulations relating to the
protection of the environment, a current or previous owner or operator of
real estate may be held liable for the costs of removal or remediation of
certain hazardous or toxic substances located on, under or in the property.
These laws often impose liability without regard to whether the owner or
operator was responsible for, or even knew of, the presence of such
substances. The presence of contamination from hazardous or toxic
substances, or the failure to remediate such contaminated property
properly, may adversely affect the owner's ability to rent or sell the
property or use the property as collateral. Independent environmental
consultants conducted "Phase I" environmental audits (which involve
visual inspection but not soil or groundwater analysis) of substantially
all of the Properties owned by the Company prior to their acquisition by
the Company. The Phase I audit reports did not reveal any significant
issues of environmental concern, nor is the Company aware of any environmental
liability that management believes would have a material adverse effect on
the Company. There is no assurance that Phase I reports would reveal
all environmental liabilities or that environmental conditions not known
to the Company may exist now or in the future on existing properties
or those subsequently acquired which would result in liability to the
Company for remediation or fines, either under existing laws and
regulations or future changes to such requirements.
If compliance with the various laws and regulations, now existing
or hereafter adopted, exceeds the Company's budgets for such items, the
Company's ability to make expected distributions could be adversely affected.
COMPETITION. The Company plans to continue to acquire additional
multifamily residential properties in the Northeast, Mid-Atlantic and
Midwest regions of the United States. There are a number of multifamily
developers and other real estate companies that compete with the Company
in seeking properties for acquisition, prospective residents and land
for development. Most of the Company's Properties are in developed areas
where there are other properties of the same type. Competition from other
properties may affect the Company's ability to attract and retain residents,
to increase rental rates and to minimize expenses of operation. Virtually all
of the leases for the Properties are short-term leases (i.e., one year or
less).
UNINSURED LOSSES. Certain extraordinary losses may not be covered by
the Company's comprehensive liability, fire, extended and rental loss
insurance. If an uninsured loss occurred, the Company could lose its
investment in and cash flow from the affected Property (but would be required
to repay any indebtedness secured by that Property and related taxes and other
charges).
LIMITS ON OWNERSHIP
OWNERSHIP LIMIT. In order for the Company to maintain its qualification
as a REIT, not more than 50% in value of the outstanding stock of the
Company may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) at any time during the
last half of its taxable year. The Company has limited ownership of the
issued and outstanding shares of Common Stock by any single stockholder to
8.0% of the outstanding shares. Shares of Common Stock held by certain
entities, such as qualified pension plans, are treated as if the beneficial
owners of such entities were the holders of the
Common Stock. Norman and Nelson Leenhouts will be permitted to acquire
additional shares, except to the extent that such acquisition results in
50% or more in value of the outstanding Common Stock of the Company being
owned, directly or indirectly, by five or fewer individuals. These
restrictions can be waived by the Board of Directors if it were satisfied,
based upon the advice of tax counsel or otherwise, that such action would be
in the best interests of the Company. Shares acquired or transferred in
breach of the limitation may be redeemed by the Company for the lesser of the
price paid or the average closing price for the ten trading days immediately
preceding redemption or may be sold at the direction of the Company. A
transfer of Shares to a person who, as a result of the transfer, violates the
ownership limit will be void and the Shares will automatically be converted
into shares of "Excess Stock", which is subject to a number of
limitations. See "Description of Capital Stock -
Restrictions on Transfer" for additional information regarding the
ownership limits.
8
<PAGE>
CHANGE OF CONTROL The Articles of Amendment and Restatement of the
Articles of incorporation, as amended, (the "Articles of Incorporation")
authorize the Board of Directors to issue up to a total of fifty million shares
of Common Stock and ten million shares of preferred stock and to establish
the rights and preferences of any shares issued. No shares of preferred stock
are currently issued or outstanding. Further, under the Articles of
Incorporation, the stockholders do not have cumulative voting rights.
The percentage ownership limit, the issuance of preferred stock in the
future and the absence of cumulative voting rights could have the effect of
(i) delaying or preventing a change of control of the Company even if a
change in control were in stockholders' interest; (ii) deterring tender
offers for the Common Stock that may be beneficial to the stockholders; or
(iii) limiting the opportunity for stockholders to receive a premium for their
Common Stock that might otherwise exist if an investor attempted to assemble a
block of Shares in excess of the percentage ownership limit or otherwise to
effect a change of control of the Company.
POTENTIAL CONFLICTS OF INTEREST
Unlike persons acquiring Common Stock, the Company's executive officers
own most of their interest in the Company through Units. As a result of their
status as holders of Units, the executive officers and other limited partners
may have interests that conflict with stockholders with respect to business
decisions affecting the Company and the Operating Partnership. In
particular, certain executive officers may suffer different or more adverse
tax consequence than the Company upon the sale or refinancing of some of the
Properties as a result of unrealized gain attributable to certain Properties.
Thus, executive officers and the stockholders may have different objectives
regarding the appropriate pricing and timing of any sale or refinancing of
Properties. In addition, executive officers of the Company, as limited
partners of the Operating Partnership, have the right to approve certain
fundamental transactions such as the sale of all or substantially all of the
assets of the Operating Partnership, merger or consolidation or
dissolution of the Operating Partnership and certain amendments to the
Operating Partnership Agreement.
The Company manages multifamily residential properties through
the Operating Partnership and commercial and development properties and
certain multifamily residential properties not owned by the Company
through the Management Companies. As a result, officers of the Company
will devote a significant portion of their business time and efforts to the
management of properties not owned by the Company.
Some officers of the Company have a significant interest in certain of
the managed properties as the only stockholders of the general partners
of the partnerships that own such managed properties and as holders of other
ownership interests. Accordingly, such officers will have conflicts of
interest between their fiduciary obligations to the partnerships that own such
managed properties and their fiduciary obligations as officers and
directors of the Company, particularly with respect to the enforcement of
the management contracts and timing of the sale of the managed properties.
In order to comply with technical requirements of the Code pertaining
to the qualification of REITs, the Operating Partnership owns
all of the outstanding non-voting common stock (990 shares) of one of
the Management Companies, Home Properties Management, Inc., and Norman and
Nelson Leenhouts own all of the outstanding voting common stock (10
shares). The Operating Partnership also owns all of the outstanding non-
9
<PAGE>
voting common stock (891 shares) of the other Management Company, Conifer
Realty Corporation, and Norman and Nelson Leenhouts and Richard Crossed own
all of the outstanding voting common stock (9 shares). As a result, although
the Company will receive substantially all of the economic benefits of the
business carried on by the Management Companies through the Company's
right to receive dividends, the Company will not be able to elect directors
and officers of the Management Companies and, therefore, the Company's
ability to cause dividends to be declared or paid or influence the day-
to-day operations of the Management Companies will be limited.
Furthermore, although the Company will receive a management fee for
managing the managed properties, this fee has not been negotiated at
arm's length and may not represent a fair price for the services rendered.
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public
market or the perception that such sales might occur could adversely affect
the market price of the Common Stock. The Operating Partnership has
issued an aggregate of 8,989,512 Units through April 30, 1998 to persons other
than the Company which may be exchanged on a one-for-one basis for shares of
Common Stock under certain circumstances. The Operating Partnership has also
issued a Class A Interest which is presently convertible into 1,666,667
shares of Common Stock (which number will be adjusted under certain
circumstances to prevent such interest from being diluted). In addition, as
of April 30, 1998, the Company has granted options to purchase an aggregate
of 836,102 shares of Common Stock to certain directors, officers and employees
of the Company.
All of the shares of Common Stock issuable upon the exchange of Units
or the exercise of options will be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be transferred
unless they are registered under the Securities Act or are otherwise
transferrable under Rule 144. The Company has filed or expects to file
registration statements with respect to such shares of Common Stock, thereby
allowing shares issuable under the Company's stock benefit plans and in
exchange for Units to be transferred or resold without restriction under the
Securities Act, unless held by directors, executive officers or other
affiliates of the Company.
<TABLE>
<CAPTION>
RATIO OF EARNINGS TO FIXED CHARGES
Original Properties*
----------------------
Year Ended Year Ended Year Ended August 4- January 1- Year Ended
December 31, December 31, December 31, December 31, August 3 December 31,
------------- ------------- ------------- ------------ ------------ ---------
<C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1994 1993
2.06 1.52 1.68 2.77 1.23 1.33
</TABLE>
- ------
*Original Properties is not a legal entity but rather a combination of twelve
entities which were owned by the predecessor corporation and its affiliates
prior the Company's initial public offering.
10
<PAGE>
For purposes of computing the ratio of earnings to combined fixed
charges, "earnings" consists of income from operations before Federal income
taxes and fixed charges. "Fixed charges" consists of interest expense,
capitalized interest, amortization of debt expense, such portion of rental
expense as can be demonstrated to be representative of the interest factor in
the particular case and preferred stock dividend requirements.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement,
the Company intends to use the net proceeds from the sale of the Offered
Securities for the acquisition of multifamily residential properties
as suitable opportunities arise, the expansion and improvement of certain
properties in the Company's portfolio, payment of development costs
for new multifamily residential properties, the repayment of certain
indebtedness outstanding at such time and general corporate purposes.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50 million
shares of Common Stock, par value $.01 per share ("Common Stock"), 10 million
shares of excess stock ("Excess Stock"), par value $.01 per share, and 10
million shares of preferred stock ("Preferred Stock"), par value $.01 per
share. The following summary description of the Common Stock, the Preferred
Stock and the Common Stock Purchase Rights or Warrants and Debt Securities sets
forth certain general terms and conditions of the capital stock of the Company
to which any Prospectus Supplement may relate. The descriptions below do not
purport to be complete and are qualified entirely by reference to the Company's
Articles of Incorporation, as amended, any certificate of designations with
respect to Preferred Stock and any applicable Prospectus Supplement.
COMMON STOCK
All shares of Common Stock offered will be duly authorized, fully
paid, and nonassessable. Holders of the Common Stock will have no
conversion, redemption, sinking fund or preemptive rights; however, shares of
Common Stock will automatically convert into shares of Excess Stock as
described below. Under the Maryland General Corporation Law ("MGCL"),
stockholders are generally not liable for the Company's' debts or obligations,
and the holders of shares will not be liable for further calls or assessments
by the Company. Subject to the provisions of the Company's Articles of
Incorporation regarding Excess Stock described below, all shares of Common
Stock have equal dividend, distribution, liquidation and other rights and will
have no preference or exchange rights.
Subject to the right of any holders of Preferred Stock to
receive preferential distributions, the holders of the shares of Common
Stock will be entitled to receive distributions in the form of dividends if
and when declared by the Board of Directors of the Company out of funds
legally available therefor, and, upon liquidation of the Company, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company, including debts and liabilities
arising out of its status of general partner of the Operating Partnership,
and any liquidation preference of issued and outstanding Preferred Stock.
the Company intends to continue paying quarterly distributions.
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<PAGE>
The holder of each outstanding share of Common Stock will be entitled
to one vote on all matters presented to stockholders for a vote, subject to
the provisions of the Company's' Articles of Incorporation regarding Excess
Stock described below. As described below, the Board of Directors of the
Company may, in the future, grant holders of one or more series of Preferred
Stock the right to vote with respect to certain matters when it fixes the
attributes of such series of Preferred Stock. Pursuant to the MGCL, the
Company cannot dissolve, amend its charter, merge with another entity, sell
all or substantially all its assets, engage in a share exchange or engage in
similar transactions unless such action is approved by stockholders holding a
majority of the outstanding shares entitled to vote on such matter. In
addition, the Second Amended and Restated Partnership Agreement of the
Operating Partnership, as amended (the "Partnership Agreement") requires that
any merger or sale of all or substantially all of the assets of Operating
Partnership be approved by partners holding a majority of the outstanding
Units, excluding Operating Partnership Units held by the Company. The
Company's Articles of Incorporation provide that its Bylaws may be amended by
its Board of Directors.
The holder of each outstanding share of Common Stock will be entitled
to one vote in the election of directors who serve for terms of one year.
Holders of the shares of Common Stock will have no right to cumulative
voting for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares entitled to vote
in the election of directors will be able to elect all of the directors.
Directors may be removed only for cause and only with the affirmative vote of
the holders of a majority of the shares entitled to vote in the election of
directors. The State Treasurer of the State of Michigan, as custodian of
various public employee retirement systems (the "Michigan Retirement System"),
owns the Class A interest in the Operating Partnership which is, under certain
circumstances, convertible into 1,666,667 shares of Common Stock (subject to
adjustment). Under the purchase agreement with respect to that Class A
interest, the Michigan Retirement System has the right to nominate one person
to stand for election to the Company's Board of Directors. If the preferred
return on the Class A interest is not paid by the Operating Partnership, the
Michigan Retirement System may nominate additional directors.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series,
as authorized by the Board of Directors of the Company. The Board of Directors
will fix the attributes of any Preferred Stock that it authorizes for
issuance. Because the Board of Directors has the power to establish the
preferences and rights of each series of Preferred Stock, it may afford
the holders of any series of Preferred Stock preferences, powers and rights,
voting or otherwise, senior to the rights of holders of shares of Common
Stock. The issuance of Preferred Stock could have the effect of delaying
or preventing a change in control of the Company.
The applicable Prospectus Supplement will describe specific terms of
the shares of Preferred Stock offered thereby, including, among other things:
(i) the title or designation of the series of Preferred Stock; (ii) the
number of shares of the series of Preferred Stock offered, the liquidation
preference per share and the offering price of the Preferred Stock; (iii) the
dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation
thereof applicable to the Preferred Stock; (iv) the date from which
dividends on such Preferred Stock shall accumulate, if at all; (v) any
restrictions on the issuance of shares of the same series or of any other
class or series; (vi) the provision for a sinking fund, if any, for such
Preferred Stock; (vii) the provision for redemption, if applicable, of such
Preferred Stock; (viii) any listing of such Preferred Stock on any securities
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<PAGE>
exchange; (ix) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock of the Company,
including the conversion price (or manner of calculation thereof); (x) any
other specific terms, preferences, rights, limitations or restrictions of
such Preferred Stock, including any voting rights; (xi) a discussion of
federal income tax considerations applicable to such Preferred Stock;
(xii) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; (xiii) any limitations on issuance of any
series of Preferred Stock, ranking senior to or on a parity with such series
of Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding of the affairs of the Company; and (xiv) any limitations
on direct or beneficial ownership and restriction on transfer, in each case
as may be appropriate to preserve the status of the Company as a REIT.
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to
all classes or series of Common Stock and to all other equity securities
ranking junior to such Preferred Stock, (ii) on a parity with all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Stock, and (iii)
junior to all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank senior to the Preferred
Stock. The term "equity securities" does not include convertible debt
securities.
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, then, before any distribution or payment
shall be made to the holders of any shares of Common Stock, any Excess
Shares or any other class or series of capital stock of the Company ranking
junior to the Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding up of the Company, the holders of shares
of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per
share (set forth in the applicable Prospectus Supplement), plus an amount
equal to all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if
such shares of Preferred Stock do not have cumulative dividend). After
payment of the full amount of the liquidating distributions to which they
are entitled, the holders of shares of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidating distributions on all outstanding shares of Preferred
Stock and the corresponding amounts payable on all shares of other classes
or series of capital stock of the Company ranking on a parity with such shares
of Preferred Stock in the distribution of assets, then the holders of such
shares of Preferred Stock and all other such classes or series of capital
stock shall share ratably in any such distribution of assets in proportion
to the full liquidating distributions to which they would otherwise be
respectively entitled.
COMMON STOCK PURCHASE RIGHTS
The applicable Prospectus Supplement will describe the specific terms
of any rights or warrants to purchase Common Stock offered thereby,
including, among other things: the duration, offering price and exercise
price of the Common Stock Purchase Rights and any provisions for the
reallocation of Purchase Rights not initially subscribed. The Prospectus
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<PAGE>
Supplement will describe the persons to whom the Common Stock Purchase
Rights will be issued (the Company's stockholders, the general public or
others) and any conditions to the offer and sale of the Common Stock Purchase
Rights offered thereby.
RESTRICTIONS ON TRANSFER
Ownership Limits. The Company's Articles of Incorporation contain
certain restrictions on the number of shares of capital stock that stockholders
may own. For the Company to qualify as a REIT under the Code, no more than
50% in value of its outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year or during a
proportionate part of a shorter taxable year. The capital stock must also be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
Because the Company expects to continue to qualify as a REIT, its
Articles of Incorporation contain restrictions on the ownership and
transfer of shares of its capital stock intended to ensure compliance with
these requirements.
Subject to certain exceptions specified in the Articles of
Incorporation, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 8.0% (the "Ownership Limit")
of the value of the issued and outstanding shares of capital stock of the
Company. Certain entities, such as qualified pension plans, are treated as if
their beneficial owners were the holders of the Common Stock held by such
entities. Stockholders ("Existing Holders") whose holdings exceeded the
Ownership Limit immediately after the Company's initial public offering of
its Common Stock, assuming that all Units of the Operating Partnership are
counted as shares of Common Stock, are permitted to continue to hold
the number of shares they held on such date and may acquire additional shares
of capital stock upon (i) the exchange of Units for Shares, (ii) the exercise
of stock options or receipt of grants of shares of capital stock pursuant to a
stock benefit plan, (iii) the acquisition of shares of capital stock pursuant
to a dividend reinvestment plan, (iv) the transfer of shares of capital
stock from another Existing Holder or the estate of an Existing Holder by
devise, gift or otherwise, or (v) the foreclosure on a pledge of shares of
capital stock; provided, no such acquisition may cause any Existing Holder to
own, directly or by attribution, more than 17.5% (the "Existing Holder Limit")
of the issued and outstanding Shares, subject to certain additional
restrictions. The Board of Directors of the Company may increase or decrease
the Ownership Limit and Existing Holder Limit from time to time, but may not
do so to the extent that after giving effect to such increase or decrease
(i) five beneficial owners of Shares could beneficially own in the aggregate
more than 49.5% of the aggregate value of the outstanding capital stock of the
Company or (ii) any beneficial owner of capital stock would violate the
Ownership Limit or Existing Holder Limit as a result of a decrease. The
Board of Directors may waive the Ownership Limit or the Existing Holder
Limit with respect to a holder if such holder provides evidence acceptable to
the Board of Directors that such holder's ownership will not jeopardize the
Company's status as a REIT.
Any transfer of outstanding capital stock of the Company
("Outstanding Stock") that would (i) cause any holder, directly or by
attribution, to own capital stock having a value in excess of the Ownership
Limit or Existing Holder Limit, (ii) result in shares of capital stock other
than Excess Stock, if any, to be owned by fewer than 100 persons, (iii) result
in the Company being closely held within the meaning of section 856(h) of the
Code, or (iv) otherwise prevent the Company from satisfying any criteria
14
<PAGE>
necessary for it to qualify as a REIT, is null and void, and the purported
transferee acquires no rights to such Outstanding Stock.
Outstanding Stock owned by or attributable to a stockholder or shares
of Outstanding Stock purportedly transferred to a stockholder which cause
such stockholder or any other stockholder to own shares of capital stock in
excess of the Ownership Limit or Existing Holder Limit will automatically
convert into shares of Excess Stock. Such Excess Stock will be transferred
by operation of law to a separate trust, with the Company acting as trustee,
for the exclusive benefit of the person or persons to whom such
Outstanding Stock may be ultimately transferred without violating the
Ownership Limit or Existing Holder Limit. Excess Stock is not treasury stock,
but rather constitutes a separate class of issued and outstanding stock of the
Company. While the Excess Stock is held in trust, it will not be entitled
to vote, will not be considered for purposes of any stockholder vote or the
determination of a quorum for such vote and will not be entitled to participate
in dividends or other distributions. Any record owner or purported transferee
of Outstanding Stock which has converted into Excess Stock (the "Excess
Holder") who receives a dividend or distribution prior to the discovery by
the Company that such Outstanding Stock has been converted into Excess
Stock must repay such dividend or distribution upon demand. While Excess
Stock is held in trust, the Company will have the right to purchase it from
the trust for the lesser of (i) the price paid for the Outstanding Stock
which converted into Excess Stock by the Excess Holder (or the market value
of the Outstanding Stock on the date of conversion if no consideration
was given for the Outstanding Stock) or (ii) the market price of shares of
capital stock equivalent to the Outstanding Stock which converted into Excess
Stock (as determined in the manner set forth in the Articles of
Incorporation) on the date the Company exercises its option to purchase.
The Company must exercise this right within the 90-day period beginning on the
date on which it receives written notice of the transfer or other event
resulting in the conversion of Outstanding Stock into Excess Stock. Upon the
liquidation of the Company, distributions will be made with respect to such
Excess Stock as if it consisted of the Outstanding Stock from which it was
converted.
Any Excess Holder, with respect to each trust created upon the conversion
of Outstanding Stock into Excess Stock, may designate any individual as
a beneficiary of such trust; provided, such person would be permitted to own
the Outstanding Stock which converted into the Excess Stock held by the trust
under the Ownership Limit or Existing Holder Limit and the consideration paid
to such Excess Holder in exchange for designating such person as the
beneficiary is not in excess of the price paid for the Outstanding Stock
which converted into Excess Stock by the Excess Holder (or the market value
of the Outstanding Stock on the date of conversion if no consideration was
given for the Outstanding Stock). The Company's redemption right must have
expired or been waived prior to such designation. Immediately upon the
designation of a permitted beneficiary, the Excess Stock, if any, will
automatically convert into shares of the Outstanding Stock from which it
was converted and the Company as trustee of the trust will transfer such
shares, if any, and any proceeds from redemption or liquidation to the
beneficiary.
If the restrictions on ownership and transfer, conversion provisions
or trust arrangements in the Company's Articles of Incorporation are
determined to be void or invalid by virtue of any legal decision, statute, rule
or regulation, then the Excess Holder of any Outstanding Stock that would
have converted into shares of Excess Stock if the conversion provisions
of the Articles of Incorporation were enforceable and valid shall be
deemed to have acted as an agent on behalf of the Company in acquiring such
15
<PAGE>
Outstanding Stock and to hold such Outstanding Stock on behalf of the
Company unless the Company waives its right to this remedy.
The foregoing ownership and transfer limitations may have the effect
of precluding acquisition of control of the Company without the consent of
its Board of Directors. All certificates representing shares of capital stock
will bear a legend referring to the restrictions described above. The
foregoing restrictions on transferability and ownership will not apply if
the Board of Directors determines, and the stockholders concur, that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT. Approval of the limited partners of the
Operating Partnership to terminate REIT status is also required.
Ownership Reports. Every owner of more than 5% of the issued
and outstanding shares of capital stock of the Company must file a written
notice with the Company containing the information specified in the
Articles of Incorporation no later than January 31 of each year. In
addition, each stockholder shall, upon demand, be required to disclose
to the Company in writing such information as the Company may request in
order to determine the effect of such stockholder's direct, indirect and
attributed ownership of shares of capital stock on the Company's status
as a REIT or to comply with any requirements of any taxing authority or other
governmental agency.
CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND CHARTER DOCUMENTS
THE FOLLOWING DISCUSSION SUMMARIZES CERTAIN PROVISIONS OF MGCL AND
THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS. THIS SUMMARY DOES NOT
PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE ARTICLES OF INCORPORATION AND BYLAWS, COPIES OF WHICH ARE
FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS
CONSTITUTES A PART. SEE "ADDITIONAL INFORMATION."
Limitation of Liability and Indemnification. The Articles of
Incorporation and Bylaws limit the liability of directors and officers to the
Company and its stockholders to the fullest extent permitted from time to
time by the MGCL and require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time
to time by the MGCL.
Business Combinations. Under the MGCL, certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially
owns 10% or more of the voting power of the outstanding voting stock of the
corporation or an affiliate or associate of the corporation who, at any time
within the two-year period immediately prior to the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then-outstanding voting stock of the corporation (an "Interested
Stockholder") or an affiliate thereof, are prohibited for five years after the
most recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, in addition to any other required vote, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock
of the corporation, voting together as a single voting group, and (ii) two-
thirds of the votes entitled to be cast by holders of voting stock of the
corporation (other than voting stock held by the Interested Stockholder
who will, or whose affiliate will, be a party to the business combination
or by an affiliate or associate of the Interested Stockholder) voting
together as a single voting group. The extraordinary voting provisions do not
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apply if, among other things, the corporation's stockholders receive a price
for their shares determined in accordance with the MGCL and the consideration
is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Articles of Incorporation
of the Company contain a provision exempting from these provisions of the MGCL
any business combination involving the Leenhoutses (or their affiliates) or
any other person acting in concert or as a group with any of the foregoing
persons.
Control Share Acquisitions. The MGCL provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no
voting rights except to the extent approved by the affirmative vote of two-
thirds of the votes entitled to be cast on the matter other than
"interested shares" (shares of stock in respect of which any of the following
persons is entitled to exercise or direct the exercise of the voting power
of shares of stock of the corporation in the election of directors: an
"acquiring person," an officer of the corporation or an employee of the
corporation who is also a director). "Control shares" are shares of stock
which, if aggregated with all other such shares of stock owned by the
acquiring person, or in respect of which such person is entitled to
exercise or direct the exercise of voting power of shares of stock of the
corporation in electing directors within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority of more of
all voting power. Control shares do not include shares the acquiring
person is entitled to vote as a result of having previously obtained
stockholder approval. The control share acquisition statute does not apply
to shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or to acquisitions approved or
exempted by the charter or bylaws of the corporation.
A person who has made or proposes to make a control share
acquisition, under certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting
rights of the control shares upon delivery of an acquiring person statement
containing certain information required by the MGCL, including a
representation that the acquiring person has the financial capacity to make
the proposed control share acquisition, and a written undertaking to pay
the corporation's expenses of the special meeting (other than the expenses
of those opposing approval of the voting rights). If no request for a meeting
is made, the corporation may itself present the question at any stockholders
meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement as required
by the MGCL, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair value,
determined without regard to the absence of voting rights for control shares,
as of the date of the last control share acquisition or, if a stockholder
meeting is held, as of the date of the meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting
rights for control shares are approved at a stockholders' meeting
before the control share acquisition and the acquiring person becomes
entitled to exercise or direct the exercise of a majority or more of all voting
power, all other stockholders may exercise rights of objecting stockholders
under Maryland law to receive the fair value of their Shares. The fair value
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of the Shares for such purposes may not be less than the highest price per
share paid by the acquiring person in the control share acquisition.
Certain limitations and restrictions otherwise applicable to the exercise
of objecting stockholders' rights do not apply in the context of a control
share acquisition.
The Articles of Incorporation contain a provision exempting from
the control share acquisition statute any and all acquisitions to the extent
that such acquisitions would not violate the Ownership Limit or Existing Owner
Limit. There can be no assurance that such provision will not be amended or
eliminated at any point in the future.
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets
forth certain general terms and provisions of the Debt Securities to
which any Prospectus Supplement may relate. The particular terms of the
Debt Securities offered by any Prospectus Supplement and the extent, if
any, to which such general provisions may apply to the Debt Securities so
offered will be described in the Prospectus Supplement relating to such Debt
Securities.
The Debt Securities are to be issued in one or more series under
an Indenture, a copy of which is incorporated as an Exhibit to the Registration
Statement of which this Prospectus forms a part, as amended or supplemented by
one or more supplemental indentures (the "Indenture"), to be entered into
between the Company and a financial institution as Trustee (the "Trustee").
The statements herein relating to the Debt Securities and the Indenture are
summaries and are subject to the detailed provisions of the applicable
Indenture. The following summaries of certain provisions of the Indenture do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Indenture, including
the definitions therein of certain terms capitalized in this Prospectus.
GENERAL
The Indenture does not limit the aggregate amount of Debt Securities
which may be issued thereunder, nor does it limit the incurrence or issuance
of other secured or unsecured debt of the Company.
The Debt Securities will be unsecured general obligations of the
Company and will rank with all other unsecured and unsubordinated
obligations of the Company as described in the applicable Prospectus
Supplement. The Indenture provides that the Debt Securities may be issued
from time to time in one or more series. The Company may authorize the
issuance and provide for the terms of a series of Debt Securities pursuant to a
supplemental indenture.
Reference is made to the Prospectus Supplement relating to the
particular series of Debt Securities being offered thereby for the terms
of such Debt Securities, including, where applicable: (1) the specific
designation of such Debt Securities; (2) any limit upon the aggregate
principal amount of such Debt Securities; (3) the date or dates on which the
principal of and premium, if any, on such Debt Securities will mature or the
method of determining such date or dates; (4) the rate or rates (which may
be fixed, variable or zero) at which such Debt Securities will bear
interest, if any, or the method of calculating such rate or rates; (5) the
date or dates from which interest, if any, will accrue or the method by
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which such date or dates will be determined; (6) the date or dates on which
interest, if any, will be payable and the record date or dates therefor; (7)
the place or places where principal of, premium, if any, and interest, if any,
on such Debt Securities may be redeemed, in whole or in part, at the option of
the Company; (8) the obligation, if any, of the Company to redeem or
purchase such Debt Securities pursuant to any sinking fund or analogous
provisions or upon the happening of a specified event and the period or
periods within which, the price or prices at which and the other terms and
conditions upon which, such Debt Securities shall be redeemed or purchased,
in whole or in part, pursuant to such obligations; (9) the denominations in
which such Debt Securities are authorized to be issued; (10) the currency or
currency unit for which Debt Securities may be purchased or in which Debt
Securities may be denominated and/or the currency or currencies (including
currency unit or units) in which principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable and whether the
Company or the holders of any such Debt Securities may elect to receive
payments in respect of such Debt Securities in a currency or currency
unit other than that in which such Debt Securities are stated to be payable;
(11) if the amount of payments of principal of and premium, if any, or any
interest, if any, on such Debt Securities may be determined with reference
to an index based on a currency or currencies other than that in which such
Debt Securities are stated to be payable, the manner in which such amount
shall be determined; (12) if the amount of payments of principal of and
premium, if any, or interest, if any, on such Debt Securities may be
determined with reference to changes in the prices of particular
securities or commodities or otherwise by application of a formula, the
manner in which such amount shall be determined; (13) if other than the
entire principal amount thereof, the portion of the principal amount of
such Debt Securities which will be payable upon declaration of the
acceleration of the maturity thereof or the method by which such portion
shall be determined; (14) the person to whom any interest on any such Debt
Security shall be payable if other than the person in whose name such Debt
Security is registered on the applicable record date; (15) any addition
to, or modification or deletion of, any Event of Default or any covenant of
the Company specified in the Indenture with respect to such Debt
Securities; (16) the application, if any, of such means of defeasance as may
be specified for such Debt Securities; and (17) any other special terms
pertaining to such Debt Securities. Unless otherwise specified in the
applicable Prospectus Supplement, the Debt Securities will not be listed on
any securities exchange.
Unless otherwise specified in the applicable Prospectus Supplement,
Debt Securities will be issued only in fully registered form without coupons.
Unless the Prospectus Supplement relating thereto specifies otherwise, Debt
Securities will be denominated in U.S. dollars and will be issued only in
denominations of U.S. $1,000 and any integral multiple thereof.
Debt Securities may be sold at a substantial discount below their
stated principal amount and may bear no interest or interest at a rate
which at the time of issuance is below market rates. Certain federal income
tax consequences and special considerations applicable to any such Debt
Securities will be described in the applicable Prospectus Supplement.
If the amount of payments of principal of and premium, if any, or
any interest on Debt Securities of any series is determined with reference
to any type of index or formula or changes in prices of particular
securities or commodities, the federal income tax consequences, specific
terms and other information with respect to such Debt Securities and such
index or formula and securities or commodities will be described in the
applicable Prospectus Supplement.
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If the principal of and premium, if any, or any interest on
Debt Securities of any series are payable in a foreign or composite
currency, the restrictions, elections, federal income tax consequences,
specific terms and other information with respect to such Debt Securities and
such currency will be described in the applicable Prospectus Supplement.
The Prospectus Supplement, with respect to any particular series of
Debt Securities being offered thereby which provide for optional
redemption, prepayment or conversion of such Debt Securities on the
occurrence of certain event, such as a change of control of the Company,
will provide: (1) a discussion of the effects that such provisions may
have in deterring certain mergers, tender offers or other takeover
attempts, as well as any possible adverse effect on the market price of the
Company's securities or the ability to obtain additional financing in the
future; (2) a statement the Company will comply with any applicable
provisions of the requirements of Rule 14e-1 under the Securities Exchange
Act of 1934 and any other applicable securities laws in connection with any
optional redemption, prepayment or conversion provisions and any related
offers by the Company (including, if such Debt Securities are convertible,
Rule 13e-4); (3) a disclosure of any cross-defaults in other indebtedness
which may result as a consequence of the occurrence of certain events so
that the payments on such Debt Securities would be effectively
subordinated; (4) a disclosure of effect of any failure to repurchase under
the applicable Indenture, including in the event of a change of control
of the Company; (5) a disclosure of any risk that sufficient funds may not be
available at the time of any event resulting in a repurchase obligation;
and (6) a discussion of any definition of "change of control" contained in the
applicable Indenture.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus
Supplement, payments in respect of the Debt Securities will be made in
the designated currency at the office or agency of the Company maintained
for that purpose as the Company may designate from time to time, except that,
at the option of the Company, interest payments, if any, on Debt Securities in
registered form may be made by checks mailed to the holders of Debt
Securities entitled thereto at their registered addresses. Unless
otherwise indicated in an applicable Prospectus Supplement, payment of any
installment of interest on Debt Securities in registered form will be made to
the person in whose name such Debt Security is registered at the close of
business on the regular record date for such interest.
Unless otherwise provided in the applicable Prospectus Supplement,
Debt Securities in registered form will be transferable or exchangeable at the
agency of the Company maintained for such purpose as designated by the
Company from time to time. Debt Securities may be transferred or exchanged
without service charge, other than any tax or other governmental charge
imposed in connection therewith.
CONSOLIDATION, MERGER OR SALE BY THE COMPANY
Under the terms of the Indenture, the Company shall not be
consolidated with or merge into any other corporation or transfer or
lease its assets substantially as an entirety, unless (i) the
corporation formed by such consolidation or into which the Company is
merged or the corporation which acquires its assets is organized in the
United States and expressly assumes all of the obligations of the Company
under the Debt Securities and all Indentures and (ii) immediately after
giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing. Upon any such consolidation, merger or
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transfer, the successor corporation formed by such consolidation, or into
which the Company is merged or to which such sale is made shall succeed to, and
be substituted for the Company under the Indenture.
The Indenture contains no covenants or other specific provisions to
afford protection to holders of the Debt Securities in the event of a highly
leveraged transaction or a change in control of the Company, except to the
limited extent described above. Such covenants or provisions are not subject
to waiver by the Company's Board of Directors without the consent of the
holders of not less than a majority in principal amount of the outstanding Debt
Securities of each series affected by the waiver as described under
"Modification of the Indenture" below.
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
The Indenture provides that, if an Event of Default specified
therein occurs with respect to the Debt Securities of any series and is
continuing, the Trustee for such series or the holders of 25% in aggregate
principal amount of all of the outstanding Debt Securities of that series, by
written notice to the Company (and to the Trustee for such series, if notice
is given by such holders of Debt Securities), may declare the principal of (or,
if the Debt Securities of that series are Original Issue Discount
Securities, such portion of the principal amount specified in the Prospectus
Supplement) and accrued interest on all the Debt Securities of that series to
be immediately due and payable.
The Indenture provides that the Trustee will, subject to
certain exceptions, within a specified number of days after the occurrence of
a Default with respect to the Debt Securities of any series, give to the
holders of the Debt Securities of that series notice of all Defaults known
to it unless such Default shall have been cured or waived. "Default" means
any event which is or after notice or passage of time or both, would be an
Event of Default.
The Indenture provides that the holders of a majority in
aggregate principal amount of the Debt Securities of each series affected
(with each such series voting as a class) may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee
for such series, or exercising any trust or power conferred on such Trustee.
The Indenture includes a covenant that the Company will file annually
with the Trustee a certificate as to the Company's compliance with all
conditions and covenants of the Indenture.
The holders of a majority in aggregate principal amount of any series
of Debt Securities by notice to the Trustee may waive on behalf of the
holders of all Debt Securities of such series, any past Default or Event of
Default with respect to that series and its consequences, except a
Default or Event of Default in the payment of the principal of, premium, if
any, or interest, if any, on any Debt Security or a provision of the
Indenture which cannot be amended without the consent of the holder of each
Outstanding Security of such series adversely affected.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Trustee to enter into one or more supplemental indentures without the
consent of the holders of any of the Debt Securities in order (i) to evidence
the succession of another corporation to the Company and the assumption of
the covenants of the Company by a successor to the Company; (ii) to add to
the covenants of the Company or surrender any right or power of the Company;
(iii) to add additional Events of Default with respect to any series of Debt
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Securities; (iv) to add or change any provisions to such extent as necessary
to permit or facilitate the issuance of Debt Securities in book entry form
or, if allowed without penalty under applicable laws and regulations, to
permit payment in respect of Debt Securities in bearer form in the United
States; (v) to change or eliminate any provision affecting Debt Securities
not yet issued; (vi) to secure the Debt Securities; (vii) to establish the
form or terms of Debt Securities; (viii) to cure any ambiguity, to correct
or supplement any provision of the Indenture which may be inconsistent with
any other provision thereof, provided that such action does not adversely
affect the interests of any holder of Debt Securities of any series; (ix) to
make provision with respect to the conversion rights of holders of Debt
Securities; or (x) to conform to any mandatory provisions of law.
The Indenture also contains provisions permitting the Company and
the Trustee, with the consent of the holders of a majority in aggregate
principal amount of the outstanding Debt Securities affected by such
supplemental indenture (with the Debt Securities of each series voting as
a class), to execute supplemental indentures adding any provisions to
or changing or eliminating any of the provisions of the Indenture or any
supplemental indenture or modifying the rights of the holders of Debt
Securities of such series, except that no such supplemental indenture may,
without the consent of the holder of each Debt Security so affected, (i)
change the time for payment of principal or premium, if any, or interest on any
Debt Security; (ii) reduce the principal of, or any installment of principal
of, or premium, if any, or interest on any Debt Security, or change the
manner in which the amount of any of the foregoing is determined; (iii)
reduce the amount of premium, if any, payable upon the redemption of any
Debt Security; (iv) reduce the amount of principal payable upon acceleration
of the maturity of any Original Issue Discount Security; (v) reduce the
percentage in principal amount of the outstanding Debt Securities affected
thereby, the consent of whose holders is required for modification or
amendment of the Indenture or for waiver or compliance with certain
provisions of the Indenture or for waiver of certain defaults; (vi) make any
change which adversely affects the right to convert convertible Debt
Securities or decrease the conversion rate or increase the conversion
price; or (vii) modify the provisions relating to waiver of certain
defaults or any of the foregoing provisions.
DEFEASANCE
If so described in the Prospectus Supplement relating to Debt
Securities of a specific series, the Company may discharge its
indebtedness and its obligations or terminate certain of its obligations
and covenants under the Indenture with respect to the Debt Securities of such
series by depositing funds or obligations issued or guaranteed by the United
States government with the Trustee. The Prospectus Supplement will more
fully describe the provisions, if any, relating to such discharge or
termination of obligations.
THE TRUSTEE
The Prospectus Supplement will identify the Trustee under the
applicable Indenture. The Company may also maintain
banking and other commercial relationships with any Trustee and its
affiliates in the ordinary course of business.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTORY NOTES
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The following is a general summary of certain federal income
tax considerations that may be relevant to a prospective holder of shares of
Common Stock. Any Prospectus Supplement which relates to a series of Preferred
Stock or of Debt Securities will set forth the federal income tax
consequences of that Preferred Stock to a prospective holder. Nixon, Hargrave,
Devans & Doyle LLP has acted as tax counsel to the Company in connection with
its formation and its election to be taxed as a REIT, has reviewed the
following discussion and is of the opinion that it fairly summarizes the
federal income tax considerations that are likely to be material to a holder of
Shares. The following discussion is not exhaustive of all possible tax
considerations and does not give a detailed discussion of any state, local
or foreign tax considerations. This discussion does not address all of the
aspects of federal income taxation that may be relevant to stockholders
in light of their particular circumstances or to certain types of
stockholders subject to special treatment under the federal income tax laws
(including insurance companies, tax-exempt entities, financial institutions
or broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States).
This discussion contains a general summary of certain Code sections
that govern the federal income tax treatment of a REIT and its stockholders.
These sections of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, the Treasury
Regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retroactively. The Company has not sought or obtained any ruling from the
Internal Revenue Service or any opinions of counsel specifically related to
the tax matters described below.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF SHARES OF COMMON STOCK AND THE ELECTION BY THE
COMPANY TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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TAXATION OF THE COMPANY AS A REIT
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code commencing with its taxable year ending December 31,
1994. The Company believes that it was organized and has operated in such a
manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner. No assurance,
however, can be given that the Company has operated or will operate in a
manner so as to qualify or remain qualified as a REIT.
In the opinion of Nixon, Hargrave, Devans & Doyle LLP, commencing with
the Company's taxable year ending December 31, 1994, the Company was
organized in conformity with the requirements for qualification as a REIT, and
its method of operation has enabled it to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
certain assumptions and is conditioned upon certain representations made
by the Company as to certain factual matters relating to the Company's
organization, manner of operation, income and assets. Nixon, Hargrave, Devans
& Doyle LLP is not aware of any facts or circumstances that are
inconsistent with these assumptions and representations. the Company's
qualification and taxation as a REIT will depend upon satisfaction of the
requirements necessary to be classified as a REIT, discussed below, on a
continuing basis. Nixon, Hargrave, Devans & Doyle LLP will not review
compliance with these tests on a continuing basis. Therefore, no
assurance can be given that the Company will satisfy such tests on a
continuing basis. See "- Requirements for Qualification - FAILURE TO QUALIFY"
below.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on net income that it
currently distributes to its stockholders. This treatment substantially
eliminates the "double taxation" (at the corporate and stockholder levels)
that generally results from investment in a regular 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 REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be
subject to the "alternative minimum tax" on its items of tax preference.
Third, if the Company has (i) net income from the sale or other disposition
of "foreclosure property" (which is, in general, property acquired by the
Company by foreclosure or otherwise on default on a loan secured by the
property) which is held primarily for sale to customers in the ordinary
course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
(other than foreclosure property) held primarily for sale to customers in the
ordinary course of business), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed in "Requirements for Qualification -
INCOME TESTS" below), and 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, multiplied by a fraction
intended to reflect the Company's profitability. Sixth, if the Company
should fail to distribute during each calendar year at least the sum of (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year, and (iii) any undistributed taxable income from
prior years, the Company would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed.
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Seventh, if the Company disposes of any asset acquired from a C corporation
(i.e., a corporation generally subject to full corporate level tax) in a
transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the
date on which such asset was acquired by the Company, then, to the
extent of such property's "built-in" gain (i.e., the excess of the fair
market value of such property at the time of acquisition by the Company over
the adjusted basis in such property at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
Treasury Regulations that have not yet been promulgated). The results
described above with respect to the tax on "built-in-gain" assume that the
Company will elect pursuant to IRS Notice 88-19 to be subject to the rules
described in the preceding sentence if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION.
GENERALLY. To qualify as a REIT, an entity must be a corporation, trust
or association: (1) which is managed by one or more trustees or directors; (2)
the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest; (3) which would be
taxable as a domestic corporation but for Sections 856 through 859 of the
Code; (4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) during the last half of each taxable
year not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities); (7) that makes an election to be a REIT (or
has made such election for a previous taxable year) and satisfies
all relevant filing and other administrative requirements established by
the Service that must be met in order to elect and maintain REIT status; and
(8) which meets certain other tests, described below, regarding the
nature of its income and assets. The Code provides that conditions (1) to
(4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12
months. Electing REIT treatment requires that the entity adopt a calendar
year accounting period.
The Company satisfies the requirements set forth above. In addition,
the Company's Articles of Incorporation provide restrictions regarding the
transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements described in (5) and (6)
above. See "Description of Capital Stock -- Restrictions on Transfer."
In the case of a REIT which is a partner in a partnership,
Treasury Regulations provide that the REIT is deemed to own its proportionate
share of the assets of the partnership and is deemed to be entitled to the
income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership retain the same
character in the hands of the REIT for purposes of Section 856 of the Code,
including satisfying the gross income tests and asset tests. Thus, the
Company's proportionate share of the assets, liabilities and items of
income of the Operating Partnership and the partnerships, if any, in which
the Operating Partnership will have an interest will be treated as assets,
liabilities and items of the Company for purposes of applying the requirements
described herein.
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INCOME TESTS. In order to maintain qualification as a REIT, there
are three gross income requirements that must be satisfied annually. First, at
least 75% of the REIT's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments.
Second, at least 95% of the REIT's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, and from dividends, interest and gain from the sale or
disposition of stock or securities, or from any combination of the foregoing.
Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent
less than 30% of the REIT's gross income (including gross income from
prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent must not be
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts of sales. Second, the Code provides
that rents received from a resident will not qualify as "rents from real
property" in satisfying the gross income tests if the Company, or an owner of
10% or more of the Company, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as "rents from
real property." Finally, for rents received to qualify as "rents from real
property," the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an
"independent contractor" who is adequately compensated and from whom the
Company derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by the Company are
"usually or customarily rendered" in connection with the rental of space for
occupancy only (such as furnishing water, heat, light and air
conditioning, and cleaning windows, public entrances and lobbies) and
are not otherwise considered "rendered to the occupant." However, all of
the rental income derived by the Company with respect to a property will not
cease to qualify as "rents from real property" if any impermissible tenant
services income from such property (which is deemed to be an amount that is
no less than 150% of the Company's direct costs of furnishing or rendering
the service or providing the management or operation) does not exceed 1% of
all amounts received or accrued during the taxable year directly or
indirectly by the Company with respect to such property.
REITs generally are subject to tax at the maximum corporate rate on
any income from foreclosure property (other than income that would be
qualifying income for purposes of the 75% gross income test), less
expense directly connected with the production of such income. "Foreclosure
property" is defined as any real property (including interests in real
property) and any personal property incident to such real property (i) that
is acquired by a REIT as the result of such REIT having bid in such
property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness owed to the REIT that such property secured, (ii) for which the
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related loan was acquired by the REIT at a time when default was not imminent
or anticipated, and (iii) for which such REIT makes a proper election to
treat such property as foreclosure property. The Company oes not anticipate
that it will receive significant income from foreclosure property that is not
qualifying income for purposes of the 75% gross income test, but, if election
to treat the related property as foreclosure property.
If property is not eligible for the election to be treated as
foreclosure property ("Ineligible Property") because the related loan was
acquired by the REIT at a time when default was imminent or anticipated,
income received with respect to such Ineligible Property may not be qualifying
income for purposes of receives with respect to Ineligible Property will be
qualifying income for purposes of the 75% and 95% gross income tests.
It is expected that the Company's real estate investments will continue
to give rise to income that will enable it to satisfy all of the income
tests described above. Substantially all of the Company's income will be
derived from its interest in the Operating Partnership, which will, for
the most part, qualify as "rents from real property" for purposes of the 75%
and the 95% gross income tests.
The Operating Partnership does not and does not anticipate charging
more than a de minimis amount of rent that is based in whole or in part on the
income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above). The Operating
Partnership does not anticipate receiving rents in excess of a de minimis
amount from Related Party Tenants. The Operating Partnership does not
anticipate holding a lease on any property in which rents attributable to
personal property constitute greater than 15% of the total rents received
under the lease. Neither the Company nor the Operating Partnership will
knowingly directly perform services considered to be rendered to the occupant
of property. The Operating Partnership will perform all development,
construction and leasing services for, and will operate and manage, the
properties owned by it directly without using an "independent contractor."
Management believes that the only material services to be provided to lessees
of these properties will be those usually or customarily rendered in
connection with the rental of space for occupancy only. The Company does
not anticipate that the Operating Partnership will provide services that
might be considered rendered primarily for the convenience of the
occupants of the property.
The Operating Partnership owns all of the non-voting common stock of
the Management Companies, corporations that are taxable as regular
corporations. The Management Companies will perform management, development,
construction and leasing services for certain properties not owned by the
Company. The income earned by and taxed to the Management Companies would be
nonqualifying income if earned by the Company through the Operating
Partnership. As a result of the corporate structure, the income will be
earned by and taxed to the Management Companies and will be received by the
Operating Partnership only indirectly as dividends that qualify under the 95%
test.
To the extent the Operating Partnership does not immediately use
the proceeds of the Offering, these funds will be invested in interest-
bearing accounts and short-term, interest-bearing securities. The interest
income earned on those funds is expected to be includible under the 75% test
as "qualified temporary investment income" (which includes income earned
on stock or debt instruments acquired with the proceeds of a stock
offering, not including amounts received under a dividend reinvestment
plan). Qualified temporary investment income treatment only applies during
the one-year period beginning on the date the Company receives the new capital.
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If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any income information on the schedules was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in
all circumstances the Company ould be entitled to the benefit of these relief
provisions. As discussed above in "GENERALLY," even if these relief
provisions apply, a 100% tax would be imposed on the net income attributable
to the greater of the amount by which the Company fails the 75% or 95% gross
income test.
Although not an income test for REIT qualification, the
"prohibited transaction" penalty tax is imposed on certain types of REIT
income. As discussed below, any gain realized by the Company on the sale of
any property held as inventory or other property held primarily for sale to
customers in the ordinary course of its trade or business will be treated
as income from a prohibited transaction that is subject to a 100% penalty tax.
ASSET TESTS. The Company, at the close of each quarter of its taxable
year, must also satisfy two tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, cash and cash items (including certain
receivables) and government securities. For this purpose real estate
assets include (i) the Company's allocable share of real estate assets
held by the Operating Partnership and partnerships in which the Operating
Partnership owns an interest or held by "qualified REIT subsidiaries" of the
Company and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a tock offering or long-term (at least five-
year) debt offering of the Company.
For purposes of the 75% asset test, the term "interest in real
property" includes an interest in mortgage loans or land and improvements
thereon, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). An "interest in real property"
also generally includes an interest in mortgage loans secured by controlling
equity interests in entities treated as partnerships for federal income tax
purposes that own real property, to the extent that the principal balance
of the mortgage does not exceed the fair market value of the real property
that is allocable to the equity interest.
The second asset test requires that, of the investments not included
in the 75% asset class, the value of any one issuer's securities owned by
the Company may not exceed 5% of the value of the Company's total assets,
and the Company may not own more than 10% of any one issuer's
outstanding voting securities (except for its interests in the Operating
Partnership, the Trust, any other interests in any qualified REIT subsidiary
or in any other entity that is disregarded as a separate entity under
Treasury Regulations dealing with entity classification). The 1998 Budget
Proposal would prohibit REITs from holding stock possessing more than 10% of
the vote or value of all classes of stock of a corporation. This proposal
would be effective with respect to stock acquired on or after the date of
first committee action. In addition, to the extent that a REIT's stock
ownership is grandfathered by virtue of this effective date, that
grandfathered status will terminate if the subsidiary corporation engages
in a trade or business that is not engaged in on the date of first committee
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action or acquires substantial new assets on or after such date. Reference
to these provisions was excluded from the final language included in the
U.S. Senate Budget Committee's proposal for the 1998 budget, but it still
could be included in any number of steps required for final budget approval.
The Company anticipates that it will continue to be able to comply with
these asset tests. The Company is deemed to hold directly its proportionate
share of all real estate and other assets of the Operating Partnership and
should be considered to hold its proportionate share of all assets deemed
owned by the Operating Partnership through its ownership of partnership
interests in other partnerships. As a result, the Company plans to hold more
than 75% of its assets as real estate assets. In addition, the Company
does not plan to hold any securities representing more than 10% of any one
issuer's voting securities, other than any qualified REIT subsidiary, nor
securities of any one issuer exceeding 5% of the value of the Company's
gross assets (determined in accordance with generally accepted
accounting principles). As previously discussed, the Company is deemed to
own its proportionate share of the assets of a partnership in which it is a
partner so that the partnership interest, itself, is not a security for
purposes of this asset test.
The Operating Partnership owns all of the nonvoting common stock of
the Management Companies. The Operating Partnership does not own any of the
voting securities of the Management Companies. Management believes that the
Company's interest in the securities of the Management Companies through
the Operating Partnership does not exceed 5% of the total value of the
Company's assets. No independent appraisals have been obtained. Counsel, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on the conclusions of management regarding the value of such securities
of the Management Companies.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an
acquisition of securities or other property during a quarter, the failure
can be cured by disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset
tests, and to take such other action within 30 days after the close of any
quarter as may be required to cure any noncompliance. However, there can be
no assurance that such other action will always be successful.
OPERATING PARTNERSHIP
In the case of a REIT that 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 gross income of the partnership attributable to such share.
In addition, the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income and asset tests described below.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to avoid
corporate income taxation of the earnings that it distributes, is required to
distribute dividends (other than capital gain dividends) to its stockholders
in an amount at least equal to (a) the sum of (i) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction
and the REIT's net apital gain) and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (b) the sum of certain items
of noncash income. Such distributions must be paid in the taxable year to
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which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration.
To the extent that the Company does not distribute of its "REIT
taxable income," as adjusted, it will be subject to tax on the undistributed
amount at regular capital gains and ordinary corporate tax rates. The Company
may elect, however, to pay the tax on its undistributed long-term capital
gains on behalf of its stockholders, in which case the stockholders would
include in income their proportionate share of the undistributed long-term
capital gains and receive a credit or refund for their share of the tax paid
by the Company.
Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year; (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% nondeductable excise tax on the excess of such required
distribution over the amounts actually distributed (apparently regardless
of whether the Company elects (as described above) to pay the capital
gains tax on undistributed capital gains).
The Company intends to continue to make timely distributions sufficient
to satisfy the annual distribution requirements. In this regard, the
Partnership Agreement of the Operating Partnership authorizes the
Company, as general partner, to take such steps as may be necessary to
cause the Operating Partnership to distribute to its partners an amount
sufficient to permit the Company to meet these distribution requirements. It
is possible, however, that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution
requirement due to timing differences between the actual receipt of income
and actual payment of deductible expenses and the inclusion of such income
and deduction of such expenses in arriving at taxable income of the Company,
or if the amount of nondeductible expenses such as principal amortization or
capital expenditures exceed the amount of noncash deductions. In the event
that such timing differences occur, in order to meet the 95% distribution
requirement, the Company may cause the Operating Partnership to arrange
for short-term, or possibly long-term, borrowing to permit the payment
of required dividends. If the amount of nondeductible expenses exceeds
noncash deductions, the Operating Partnership may refinance its indebtedness
to reduce principal payments and borrow funds for capital
expenditures.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year that may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest to the
Service based upon the amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to be able to
elect to be taxed as a REIT, the Company must maintain certain records and
request on an annual basis certain information from its stockholders designed
to disclose the actual ownership of its outstanding stock. The Company
intends to comply with such requirements. A REIT's failure to comply with such
requirements would result in a monetary fine imposed on such REIT. However,
no penalty would be imposed if such failure is due to reasonable cause and not
to willful neglect.
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FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
in any year in which the Company fails to qualify will not be deductible by
the Company, nor will they be required to be made. In such event, to the
extent of current and accumulated earnings and profits, distributions to
stockholders will be taxable as ordinary income to the extent of current
and accumulated earnings and profits, and, subject to certain limitations in
the Code, corporate distributees may be eligible to claim the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. If is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief.
TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as the
Company qualifies as a REIT, distributions made to the Company's taxable
domestic stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account
by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. As used herein, the term "U.S.
Stockholder" means a holder of Common Stock that for U.S. federal income
tax purposes is (i) a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity taxable as such created or
organized in or under the laws of the United States or of any State
(including the District of Columbia), (iii) an estate whose income from
sources without the United States is includible in gross income for U.S.
federal income tax purposes, regardless of its connection with the conduct of
a trade or business within the United States, or (iv) any trust with respect
to which (A) a U.S. court is able to exercise primary supervision over
the administration of such trust and (B) one or more U.S. fiduciaries
have the authority to control all substantial decisions of the trust.
Distributions that are properly designated by the Company as capital
gain dividends are subject to special treatment. According to a notice
published by the Service, until further guidance is issued, if the Company
designates a dividend as a capital gain dividend, it may also designate the
dividend as (i) a 20% rate gain distribution, (ii) an unrecaptured Section
1250 gain distribution (25% rate) or (iii) a 28% rate gain distribution. The
maximum amount which may be designated in each class of capital gain dividends
is determined by treating the Company as an individual with capital gains
that may be subject to the maximum 20% rate, the maximum 25% rate, and the
maximum 28% rate. If the Company does not designate all or part of a capital
gain dividend as within such classes, the undesignated portion will be
considered as a 28% rate gain distribution. Such designations are binding on
each stockholder, without regard to the period for which the stockholder has
held its Common Stock. However, corporate stockholders may be required to
treat up to 20% of certain capital gain dividends as ordinary income.
Capital gain dividends are not eligible for the dividends received deduction
for corporations.
Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's Common Stock, but rather
will reduce the adjusted basis of such stock. To the extent that such
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distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a stockholder's Common Stock, such
distributions will be included in income as long-term capital gain (or short-
term capital gain if the Common Stock had been held for one year or less),
assuming the Common Stock is a capital asset in the hands of the stockholder.
In addition, any distribution declared by the Company in October, November,
or December of any year and payable to a stockholder of record on a specified
date in any such month shall be treated as both paid by the Company and
received by the stockholder on December 31 of such year, provided that the
distribution is actually paid by the Company during January of the following
calendar year.
Stockholders may not include in their individual income tax returns any
net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against its
future income (subject to certain limitations). Taxable distributions from
the Company and gain from the disposition of the Common Stock will not be
treated as passive activity income and, therefore, stockholders generally will
not be able to apply any passive activity losses (such as losses from
certain types of limited partnerships in which a stockholder is a limited
partner) against such income. In addition, taxable distributions from the
Company generally will be treated as investment income for purposes of the
investment interest limitations. Capital gains from the disposition of Common
Stock (or distributions treated as such), however, will be treated as
investment income only if the stockholder so elects, in which case such capital
gains will be taxed at ordinary income rates. The Company will notify
stockholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute
ordinary income or capital gain dividends.
CAPITAL GAINS AND LOSSES. A capital asset generally must be held for
more than one year in order for gain or loss derived from its sale or exchange
to be treated as long-term capital gain or loss. The highest marginal
individual income tax rate is 39.6% and the tax rate on long-term capital
gains applicable to non-corporate taxpayers is 28% for sales and exchanges
of assets held for more than one year but not more than eighteen months,
and 20% for sales and exchanges of assets held for more than eighteen
months. Thus, the tax rate differential between capital gain and
ordinary income for non-corporate taxpayers may be significant. In
addition, the characterization of income as capital gain or ordinary income
may affect the deductibility of capital losses. All or a portion of any loss
realized upon a taxable disposition of the Common Stock may be disallowed if
other shares of Common Stock are purchased within 30 days before or after the
disposition. Capital losses not offset by capital gains may be deducted against
a non-corporate taxpayer's ordinary income only up to a maximum annual amount
of $3,000. Unused capital losses may be carried forward indefinitely by
non-corporate taxpayers. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Recently enacted legislation reduces the maximum rate on long-term
capital gains of non-corporate taxpayers from 28% to 20% (10% for taxpayers
in the 15% tax bracket). However, the reduced long-term capital gains
rates are only available for sales or exchanges of capital assets held for more
than 18 months. Any long-term capital gains from the sale or exchange of
depreciable real property that would be subject to ordinary income taxation
(i.e., "depreciation recapture") if it were treated as personal property will
be subject to a maximum tax rate of 25% instead of the 20% maximum rate for
gains taken into account after July 28, 1997. Also, under the legislation,
for taxable years beginning after December 31, 2000 the maximum capital
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gains rates for assets which are held more than five years are 18% and 8%
(rather than 20% and 10%). These rates will generally only apply to assets
for which the holding period begins after December 31, 2000.
The capital gains provisions in the legislation authorize the Service
to issue regulations (including regulations requiring reporting) applying
the provisions to any "pass-through entity" including a REIT and interests in
such an entity. No assurance can be given concerning the content of
any such regulations. Generally, the determination of when gain is properly
taken into account will be made at the entity level.
Distributions from the Company and gain from the disposition of
shares will not ordinarily be treated as passive activity income, and
therefore, stockholders generally will not be able to apply any "passive
losses" against such income. Dividends from the Company (to the extent they
do not constitute a return of capital) and gain from the disposition of
shares generally will be treated as investment income for purposes of the
investment interest limitation.
The Company will report to its domestic stockholders and the Service
the amount of dividends paid during each calendar year, and the amount
of tax withheld, if any, with respect thereto. 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 who does not provide the Company with its correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain distributions made to any stockholders
who fail to certify their non-foreign status to the Company. See "TAXATION OF
FOREIGN STOCKHOLDERS" below.
Tax-exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts ("Exempt
Organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, the
Service has issued a published ruling that dividend distributions from a REIT
to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or
business of the exempt employee pension trust. Based on that ruling,
amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances
its acquisition of the Common Stock with debt, a portion of its income from
the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Section 501(c) of the Code are subject to
different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. See "ERISA
CONSIDERATIONS."
TAXATION OF FOREIGN STOCKHOLDERS. The rules governing United States
federal income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships and other foreign stockholders (collectively,
"Non-U.S. Stockholders") are complex, and no attempt will be made herein to
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provide more than a limited summary of such rules. Prospective Non-U.S.
Stockholders should consult with their own tax advisors to determine the
impact of U.S. federal, state and local income tax laws with regard to an
investment in the capital stock of the Company, including any reporting
requirements, as well as the tax treatment of such an investment under their
home country laws.
Distributions that are not attributable to gain from sales or exchanges
by the Company of a U.S. real property interest and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions, ordinarily, will be subject
to a withholding tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces that tax. However, if income from
the investment in the shares is treated as effectively connected with the
Non-U.S. Stockholder's conduct of a United States trade or business, the Non-
U.S. Stockholder generally will be subject to a tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such
dividends (and may also be subject to the 30% branch profits tax if the
stockholder is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any
dividends paid to a Non-U.S. Stockholder (31% if appropriate documentation
evidencing such Non-U.S. Stockholders' foreign status has not been provided)
unless (1) a lower treaty rate applies and the required form
evidencing eligibility for that reduced rate is filed with the Company or
(2) the Non-U.S. Stockholder files an Service Form 4224 with the Company
claiming that the distribution is "effectively connected" income. The Treasury
Department issued final regulations in October 1997 that modify the manner
in which the Company complies with the withholding requirements, generally
effective for distributions after December 31, 1998.
Distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a stockholder to the extent that they 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 such distributions
exceed the adjusted basis of a Non-U.S. Stockholder's shares, they 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 his shares as described
below. Because it generally cannot be determined at the time a distribution
is made whether or not such distribution will be in excess of current and
accumulated earnings and profits, amounts in excess thereof may be withheld by
the Company. However, any such excess amount withheld would be refundable to
the extent it is determined subsequently that such distribution was, in
fact, in excess of current and accumulated earnings and profits of the
Company. Under a separate provision, the Company is required to withhold
10% of any distribution in excess of the Company's current and accumulated
earnings and profits. Consequently, although the Company intends to withhold
at a rate of 30% (or 31%, if applicable) on the entire amount of any
distribution, to the extent that the Company does not do so, any portion of a
distribution not subject to withholding at a rate of 30% (or 31%, if
applicable) will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
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
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a U.S. business.
Thus, Non-U.S. Stockholders would be taxed at the normal capital gain rates
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applicable to U.S. stockholders (subject to applicable alternative minimum tax
and a special alternative minimum tax in the case of nonresident alien
individuals). Distributions subject to FIRPTA may also be subject to a
30% branch profits tax in the hands of a corporate Non-U.S. Stockholder
not entitled to treaty relief or exemption. The Company is required to
withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the
Non-U.S. Stockholder's FIRPTA tax liability.
The Company will be required to withhold from distributions to Non-
U.S. Stockholders, and remit to the IRS, (a) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could be
designated as capital gain dividends) and (b) 30% of ordinary dividends
paid out of earnings and profits. In addition, if the Company designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. A distribution in excess of the Company's
earnings and profits may be subject to 30% dividend withholding if at the
time of the distribution it cannot be determined whether the distribution
will be in an amount in excess of the Company's current or accumulated
earnings and profits. Tax treaties may reduce the Company's withholding
obligations. If the amount withheld by the Company with respect to a
distribution to a Non-U.S. Stockholder exceeds the stockholder's United
States tax liability with respect to such distribution (as determined under the
rules described above), the Non-U.S. Stockholder may file for a refund of
such excess from the IRS. It should be noted that the 35% withholding
tax rate on capital gain dividends currently corresponds to the maximum
income tax rate applicable to corporations, but is higher than the 28%
maximum rate on capital gains of individuals.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of
capital stock generally will not be taxed under FIRPTA if a REIT 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
therefore the sale of shares will not be subject to taxation under FIRPTA.
However, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder
if (i) investment in the shares of capital stock is "effectively connected"
with the Non-U.S. Stockholder's U.S. trade or business, in which case the
Non-U.S. Stockholder will be subject to the same treatment as United States
stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183
days or more during the taxable year and has a "tax home" in the United
States, in which case the nonresident alien individual who was present in the
U.S. will be subject to a 30% tax on the individual's capital gains. 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, possible withholding tax and a special alternative
minimum tax in the case of nonresident alien individuals). A purchaser of
shares of capital stock from a Non-U.S. Stockholder will not be required under
FIRPTA to withhold on the purchase price if the purchased shares are
"regularly traded" on an established securities market or if the Company is
a domestically controlled REIT. Otherwise, under FIRPTA the purchaser
of shares may be required to withhold 10% of the purchase price and remit
such amount to the IRS.
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INCOME TAXATION OF THE OPERATING PARTNERSHIP, THE UNDERLYING PARTNERSHIPS AND
THEIR PARTNERS
The following discussion summarizes certain federal income
tax considerations applicable to the Company's
investment in the Operating Partnership.
CLASSIFICATION OF THE OPERATING PARTNERSHIP. the Company will be
entitled to include in its income its distributive share of the income and to
deduct its distributive share of the losses of the Operating Partnership
(including the Operating Partnership's share of the income or losses of any
partnerships in which it owns an interest) only if the Operating Partnership
is classified for federal income tax purposes as a partnership rather than an
association taxable as a corporation. On December 17, 1996, the Service
issued final Treasury Regulations regarding the classification of business
entities (known as the "check-the-box" rules) which changed the process for
electing business tax status.
The new Treasury Regulations, which were effective January 1,
1997, replaced the former rules for classifying business organizations with a
simpler elective classification system that generally allows eligible entities
to choose to be taxed as partnerships or corporations. Under the Treasury
Regulations, a limited partnership which qualifies as an eligible entity
will generally be allowed to choose to be taxed as a partnership or a
corporation. The default classification for an existing entity is the
classification that the entity claimed immediately prior to January 1, 1997.
Alternatively, an eligible entity may affirmatively elect its classification.
An entity's default classification continues until the entity elects to
change its classification by means of an affirmative election. Because the
Operating Partnership was classified as a partnership as of December 31,
1996, the Operating Partnership will be treated as a partnership for federal
income tax purposes for periods after December 31, 1996 pursuant to the new
Treasury Regulations. The Operating Partnership confirmed this tax treatment
by electing to be treated as a partnership under the Treasury Regulations.
The Treasury Regulations state that the Service will not challenge
the prior classification of an existing eligible entity for periods before
January 1, 1997 if: (1) the entity had a reasonable basis for its
claimed classification;(2) the entity and all of its partners recognized
the tax consequences of any change in the entity's classification within
60 months before January 1, 1997; and (3) neither the entity nor any
member had been notified in writing on or before May 8, 1996, that the
classification was under examination by the IRS. Requirements (2) and (3)
described in this paragraph are either not relevant to, or have been satisfied
by, the Operating Partnership. Accordingly, the Operating Partnership's
claimed classification as a partnership for periods prior to January 1, 1997
should be respected if the Operating Partnership had a reasonable basis for
such classification.
In determining whether a reasonable basis for partnership
classification existed for periods prior to January 1, 1997, it is
necessary to review the former classification rules, under which an
organization formed as a partnership will be treated as a partnership for
federal income tax purposes rather than as a corporation only if it has
no more than two of the four corporate characteristics that the
Treasury Regulations use to distinguish a partnership from a corporation for
tax purposes. These four characteristics are continuity of life,
centralization of management, limited liability, and free
transferability of interests.
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The Operating Partnership has not requested, nor does it intend
to request, a ruling from the Service that it will be treated as a partnership
for federal income tax purposes. In the opinion of Nixon, Hargrave, Devans &
Doyle LLP, which is based on the provisions of the partnership agreement
of the Operating Partnership and on certain factual assumptions and
representations of the Company, the Operating Partnership has a reasonable
basis for its claim to be classified as a partnership for federal income
tax purposes and therefore should be taxed as a partnership rather than an
association taxable as a corporation for periods prior to January 1, 1997.
Nixon, Hargrave, Devans & Doyle LLP's opinion is not binding on the Service
or the courts.
If for any reason the Operating Partnership was taxable as a
corporation rather than as a partnership for federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for REIT
status. See "-Requirements for Qualification -Income Tests" and "-
Requirements for Qualification - Asset Tests." In addition, any change
in the Operating Partnership's status for tax purposes might be treated as a
taxable event, in which case the Company might incur a tax liability
without any related cash distribution. See "- Requirements for
Qualification - Annual Distribution Requirements." Further, items of
income and deduction of the Operating Partnership would not pass through
to its partners, and its partners would be treated as stockholders for tax
purposes. The Operating Partnership would be required to pay income tax
at corporate tax rates on its net income, and distributions to its
partners would constitute dividends that would not be deductible in
computing the Operating Partnership's taxable income.
PARTNERS, NOT PARTNERSHIPS, SUBJECT TO TAX. A partnership is not a
taxable entity for federal income tax purposes. Rather, a partner is
required to take into account its allocable share of a partnership's
income, gains, losses, deductions and credits for any taxable year of the
partnership ending within or with the taxable year of the partner, without
regard to whether the partner has received or will receive any distributions
from the partnership.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will
generally determine the allocation of income and losses among partners, such
allocations may be disregarded for tax purposes under section 704(b) of the
Code if they do not have substantial economic effect. If an allocation is
not recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners' interests in
the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. The Operating Partnership's allocations of taxable
income and loss are intended to comply with the requirements of section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. When property
is contributed to a partnership in exchange for an interest in the partnership,
the partnership generally takes a carryover basis in that property for tax
purposes equal to the adjusted basis of the contributing partners in the
property, rather than a basis equal to the fair market value of the
property at the time of contribution. Pursuant to section 704(c) of the Code,
income, gain, loss and deduction attributable to such contributed
property must be allocated in a manner such that the contributing partner
is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis
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of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and
do not affect the book capital accounts or other economic or legal
arrangements among the partners.
The partners of the Operating Partnership other than the Company
(the "Contributing Partners") are deemed to have contributed general or
limited partnership interests in other partnerships owning multifamily
residential properties which were acquired by Operating Partnership and which
may have had an adjusted tax basis which is less than the fair market value of
such interests (the "Contributed Interests"). Upon the merger or
dissolution of the such partnerships and the transfer of the properties to
the Operating Partnership, the Contributing Partners were deemed to have
contributed the portion of the properties represented by the Contributed
Interests (the "Contributed Property") to the Operating Partnership, and the
Operating Partnership's tax basis in the Contributed Property will be the tax
basis of the Contributing Partners in the Contributed Interests. Because
the Contributed Property has a Book-Tax Difference, the Operating
Partnership Agreement will require allocations to be made in a manner
consistent with section 704(c) of the Code.
Under these special rules, the Contributing Partners may be
allocated lower amounts of depreciation deductions for tax purposes with
respect to the Contributed Property than the amount of such deductions that
would be allocated to them if such Contributed Property had a tax basis
equal to its fair market value at the time of contribution. In addition, in
the event of the disposition of any of the Contributed Property, all income
attributable to the Book-Tax Difference of such Contributed Property
generally will be allocated to the Contributing Partners, and the Company
generally will be allocated only its share of capital gains attributable to
appreciation, if any, occurring after the contribution of the Contributed
Property. These allocations will tend to eliminate the Book-Tax
Differences with respect to the Contributed Property over the life of the
Operating Partnership. However, the special allocation rules of Section 704(c)
may not entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the
carryover basis of the Contributed Property in the hands of the Operating
Partnership could cause the Company (i) to be allocated lower amounts
of depreciation and other deductions for tax purposes than would be
allocated to the Company if the Contributed Property had a tax basis equal to
its fair market value at the time of contribution, and (ii) possibly to be
allocated taxable gain in the event of a sale of Contributed Property in
excess of the economic or book income allocated to the Company as a result of
such sale. These allocations possibly could cause the Company to recognize
taxable income in excess of cash proceeds, which might adversely affect its
ability to comply with the REIT distribution requirements. See " -
Requirements for Qualification - ANNUAL DISTRIBUTION REQUIREMENTS."
DEPRECIATION. The Operating Partnership's assets other than cash
will consist largely of property treated as purchased by the Operating
Partnership. The Operating Partnership has an aggregate basis in the
assets of each partnership it acquires equal to the sum of the purchase
price paid for the partnership interests. To the extent that the Operating
Partnership's basis in a piece of depreciable property exceeds the basis of the
property when it was held by the acquired partnership, such basis should in
effect be treated as a newly acquired, separate asset and entitled to 39-year
depreciation.
Section 704(c) of the Code requires that depreciation as well as gain
and loss be allocated in a manner so as to take into account the variation
between the fair market value and tax basis of the property contributed.
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Similarly, amortization on intangible contracts for services contributed to
the Operating Partnership will be allocated as required by section
704(c) of the Code. Depreciation with respect to any property purchased by the
Operating Partnership subsequent to the admission of its partners will be
allocated among the partners in accordance with their respective percentage
interests in the Operating Partnership.
SALE OF PARTNERSHIP PROPERTY. Generally, any gain realized by a
partnership on the sale of property held by the
partnership for more than one year will be long-term capital gain, except for
any portion of such gain that is treated as
depreciation or cost recovery recapture. However, under the REIT
Requirements, the Company's share as a partner of any gain
realized by the Operating Partnership on the sale of any property held
as inventory or other property held primarily for sale
to customers in the ordinary course of a trade or business will be treated
as income from a prohibited transaction that is
subject to a 100% penalty tax. See "- Taxation of the Company as a REIT."
Such prohibited transaction income will also have
an adverse effect upon the Company's ability to satisfy the income
tests for REIT status. See "- Requirements for
Qualification - INCOME TESTS." Under existing law, whether property is
held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that
depends on all the facts and circumstances with
respect to the particular transaction. A safe harbor to avoid classification
as a prohibited transaction exists as to real estate assets held for the
production of rental income by a REIT for at least four years where in any
taxable year the REIT has made no more than seven sales of property or, in
the alternative, the aggregate of the adjusted bases of all properties
sold does not exceed 10% of the adjusted bases of all of the REIT's properties
during the year and the expenditures includible in a property's basis made
during the four-year period prior to disposition must not exceed 30% of the
property's net sales price. The Operating Partnership to holds its
properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning, and operating and leasing
the properties and to make such occasional sales of the properties,
including adjoining land, as are consistent with the Company's and the
Operating Partnership's investment objectives. No assurance can be given,
however, that every property sale by the Operating Partnership will constitute
a sale of property held for investment.
OTHER TAX CONSIDERATIONS THE MANAGEMENT COMPANIES. A portion of the
amounts to be used to fund distributions to stockholders is expected to come
from the Management Companies through dividends on stock of the
Management Companies to be held by the Operating Partnership.
The Management Companies do not qualify as REITs and will pay federal,
state and local tax income taxes on its net income at normal corporate
tax rates. The Company expects that the Management Companies' income, after
deducting its expenses, will not give rise to significant corporate tax
liabilities. The amount of corporate tax liability will increase if the
Service disallows the items of expense which the Company expects to be
allocated to the Management Companies.
THE TRUST. The Trust was formed as a "qualified REIT subsidiairy." As
such it is treated together with the Company as a single entity for federal
income tax purposes.
STATE AND LOCAL TAX CONSIDERATIONS. The Company and the
Management Companies will, and the Company's stockholders may, be subject to
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state or local taxation in various states or local jurisdictions, including
those in which the Company, its stockholders or the Operating Partnership
transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and
local tax laws on their investment in the Company.
POSSIBLE FEDERAL TAX DEVELOPMENTS. The rules dealing with federal
income taxation are constantly under review by the IRS, the Treasury
Department and Congress. New federal tax legislation or other provisions
may be enacted into law or new interpretations, rulings or Treasury
Regulations could be adopted, all of which could affect the taxation of the
Company or of its stockholders. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions
either directly or indirectly affecting the Company or its stockholders.
Consequently, the tax treatment described herein may be modified
prospectively or retroactively by legislative, judicial or administrative
action.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other
employee benefit plan ("Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the Plan's particular circumstances
before authorizing an investment of any of such Plan's assets in shares
of the Company's capital stock. Accordingly, such fiduciary should
consider whether the investment (i) satisfies the diversification
requirements of section 404(a)(1)(C) of ERISA, (ii) is in accordance with the
documents and instruments governing the Plan to the extent consistent with
ERISA, (iii) is prudent and an appropriate investment for the Plan, based on
examination of the Plan's overall investment portfolio and (iv) is for the
exclusive benefit of Plan participants and beneficiaries, as required by ERISA.
In addition to the imposition of general fiduciary standards, ERISA
and the corresponding provisions of the Code prohibit a wide range of
transactions involving Plans and persons who have certain relationships to
Plans ("parties in interest" within the meaning of ERISA, "disqualified
persons" within the meaning of the Code). The Code's prohibited transaction
rules also apply to certain direct or indirect transactions between
"disqualified persons" and individual retirement accounts or annuities
("IRAs"), as defined in section 408(a) and (b) of the Code. Thus, a Plan
fiduciary and an IRA considering an investment in shares also should
consider whether the acquisition or the continued holding of shares might
constitute or give rise to a prohibited transaction.
Those persons proposing to invest on behalf of Plans should also
consider whether a purchase of one or more shares of capital stock will cause
the assets of the Company to be deemed assets of the Plan for purposes of
the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code. The Department of Labor (the "DOL") has issued regulations (the
"DOL Regulations") as to what constitutes assets of a Plan under ERISA. Under
the DOL Regulations, if a Plan acquires an equity interest in an entity, the
Plan's assets would include, for purposes of the fiduciary responsibility
provisions of ERISA and the prohibited transaction rules of ERISA and the Code,
both the equity interest and an undivided interest in each of the entity's
underlying assets unless (a) such interest is a "publicly offered security,"
(b) such interest is a security issued by an investment company registered
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under the Investment Company Act of 1940, as amended, or (c) another specified
exception applies.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities through underwriters
or dealers, directly to one or more purchasers, through agents or
through a combination of any such methods of sale. Any such underwriter or
agent involved in the offer and sale of the Offered Securities will be named
in the applicable Prospectus Supplement.
The distribution of the Common Stock by the Company may be
affected from time to time in one or more transactions (which may
involve block transactions) on the NYSE or otherwise pursuant to and in
accordance with the applicable rules of the NYSE, in the over-the-counter
market, in negotiated transactions, through the writing of Common Stock
Warrants or through the issuance of Preferred Stock convertible into Common
Stock (whether such Common Stock Warrants or Preferred Stock is listed on
a securities exchange or otherwise), or a combination of such methods of
distribution, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices.
In connection with the sale of the Offered Securities, underwriters
or agents may receive compensation from the Company or from purchasers of
the Offered Securities, for whom they may act as agents, in the form of
discounts, concessions or commissions. Underwriters may sell the Offered
Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the
distribution of the Offered Securities may be deemed to be underwriters
under the Securities Act, and any discounts or commissions they receive
from the Company and any profit on the sale of the Offered Securities they
realize may be deemed to be underwriting discounts and commissions under the
Securities Act. Any such underwriter or agent will be identified, and any
such compensation received from the Company will be described, in the
applicable Prospectus Supplement.
Any Common Stock sold pursuant to a Prospectus Supplement will be
listed on the New York Stock Exchange, subject to official notice of issuance.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Offered Securities other than Common Stock will be a new
issue with no established trading market. The Company may elect to
list any series of Preferred Stock or other securities on an exchange, but
is not obligated to do so. It is possible that one or more underwriters may
make a market in a series of Offered Securities, but will not be obligated to
do so and may discontinue any market making at any time without notice.
Therefore, no assurance can be given as to the liquidity of, or the trading
market for, the Offered Securities.
Under agreements into which the Company may enter, underwriters,
dealers and agents who participate in the distribution of the Offered
Securities may be entitled to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with,
or perform services for, or be tenants of, the Company in the ordinary
course of business.
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In order to comply with the securities laws of certain states,
if applicable, the Offered Securities will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in
certain states the Offered Securities may not be sold unless they have been
registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and
is complied with.
LEGAL MATTERS
The legality of the Offered Securities issued pursuant to any
Prospectus Supplement will be passed upon by Nixon, Hargrave, Devans &
Doyle LLP. In addition, Nixon, Hargrave, Devans & Doyle LLP will provide
an opinion with respect to certain tax matters which form the basis of the
discussion under "Federal Income Tax Considerations".
EXPERTS
The financial statements incorporated by reference in this Prospectus
or elsewhere in the Registration Statement have been incorporated herein
in reliance on the reports audited by Coopers & Lybrand LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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No person has been authorized to give any
information or to make any representations in 1,085,000 SHARES OF
connection with the offering of securities made COMMON STOCK
hereby other than 1,085,000 those contained or
incorporated by reference In this Prospectus
Supplement or the accompanying Prospectus and, if
given or made, such information or representations
must not be relied upon as having been authorized
by the Company or the PaineWebber. Neither the
delivery of this Prospectus Supplement or the
accompanying Prospectus nor any sale made
hereunder shall, under any circumstances, create
any implication that there has been no change in
the affairs of the Company since the date hereof
or that the information contained herein is
correct as of anytime subsequent to its date.
This Prospectus Supplement and the accompanying
Prospectus do not constitute an offer to sell or a HOME PROPERTIES OF
solicitation of an offer to buy such securities in NEW YORK, INC.
any circumstances in which such offer or
solicitation is unlawful.
Table of Contents
Prospectus Supplement
PAINEWEBBER INCORPORATED
Forward-Looking Statements..... 2
The Company.................... 2
Recent Developments............ 2
Use of Proceeds................ 3
Underwriting................... 3
Experts ....................... 4
Legal Matters.................. 4
PROSPECTUS
Available information. . . . .. . 2
Forward Looking Statements . . . .3
Documents Incorporated by
Reference. . . . . . . .. . . .3
The Company . . . . . . . . . . .4
Risk Factors. . . . . . . . . . .4
Use of Proceeds . . . . . . . . .11
Description of Capital Stock . . .11
Description of Debt Securities . .18
Federal Income Tax Considerations.22 MAY 27, 1998
Other Tax Considerations. . . . . 39
ERISA Considerations . . . . . . 40
Plan of Distribution. . . . . . . 41
Legal Matters. . . . .. . . . . . 42
Experts. . . . . . . . . . . . . 42
