Filed Pursuant to Rule 424(b)(5)
Registration No. 333-52601
Prospectus Supplement
Date December 22, 2000
(To prospectus dated May 26, 1998)
HOME PROPERTIES OF NEW YORK, INC.
300,000 Shares of Series E Convertible Cumulative Preferred Stock
Common Stock Purchase Warrants to Purchase 285,000 shares of Common Stock
Common Stock Issuable on Conversion of the Series E Convertible
Cumulative Preferred Stock and on Exercise of the Common Stock Purchase
Warrants
This prospectus supplement relates to our offering and sale of 300,000
shares of Series E convertible cumulative preferred stock, par value $.01 per
share, to certain institutional investors at a purchase price of approximately
$100 per share, for an aggregate purchase price of approximately $30 million.
Dividends on the Series E preferred stock will be cumulative from the
date of original issuance and payable quarterly in arrears beginning in
February, 2001, at the rate of the greater of 8.55% of the liquidation
preference per annum (equal to $8.55 per annum per share) or the dividends per
share payable on the number of shares of common stock into which the Series E
preferred stock is convertible. Except in certain instances described below,
the Series E preferred stock is not redeemable until December 22, 2005, on or
after which date we may redeem such shares at $100.00 per share plus cumulative
unpaid dividends through the date of redemption. The Series E preferred stock
has no maturity date and will remain outstanding indefinitely unless redeemed.
This prospectus supplement also relates to the common stock that may be
issued upon conversion of the Series E preferred stock. Each share of Series E
preferred stock is convertible at the option of the holder, at any time, into
3.16456 shares of our common stock, subject to adjustment. This prospectus
supplement also relates to common stock purchase warrants to be issued in
connection with the offering of the Series E preferred stock and the common
stock for which such warrants are exercisable. The warrants permit the holders
to purchase up to 285,000 shares of our common stock at a price equal to
$31.60 per share, subject to certain adjustments.
Our common stock is listed on the New York Stock Exchange under the
symbol "HME." The last reported sale price of our common stock on the NYSE was
$28.625 on December 18, 2000.
We have agreed to pay Mercury Partners LLC a financial advisory fee of
$300,000 in connection with the offering. That fee represents 1.0% of the
gross proceeds of the sale of the shares of Series E preferred stock in the
offering. In addition, the institutional investors and/or their affiliates,
will receive warrants to purchase 285,000 shares of common stock at an
exercise price of $31.60 per share in connection with the transaction. In
addition, we have agreed to indemnify Mercury Partners LLC against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
.
There is no public market for our Series E preferred stock. The Series E
preferred stock has priority over the common stock in the payment of dividends
and in the event of liquidation, is non-voting except in limited circumstances
and is convertible into common stock.
We are a fully integrated, self-administered and self-managed real estate
investment trust and the 11th largest apartment company in the United States.
With operations in select Northeast, Midwest, and Mid-Atlantic markets, we own,
operate, acquire, rehabilitate, and develop apartment communities. Currently,
we operate 318 communities containing 50,625 apartment units. Of these, we,
along with our subsidiaries, directly own 38,849 units in 146 communities, we
partially own and manage as general partner 8,225 units, and we manage 3,551
units for other owners. We also manage 1.7 million square feet of commercial
space.
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PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS SET FORTH
UNDER "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS SUPPLEMENT AND
PAGES 8 to 12 OF THE ACCOMPANYING PROSPECTUS
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
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The date of this Prospectus Supplement is December 22, 2000.
1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement 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 of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Although we believe expectations
reflected in such forward-looking statements are based on reasonable
assumptions, we can give no assurance that our expectations will be achieved.
Factors that may cause actual results to differ include general economic and
local real estate conditions, other conditions that might affect operating
expenses, and the timely completion of repositioning activities within
anticipated budgets, the actual pace of future acquisitions and developments,
and continued access to capital to fund growth. Our actual results could
differ materially from those set forth in the forward-looking statements. Other
factors that might cause such a difference are discussed in the section
entitled "Risk Factors" in this prospectus supplement and on pages 8 to 12 of
the accompanying prospectus.
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS . WE
HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL
INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THOSE DOCUMENTS.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy reports, statements or other
information at the SEC's public reference rooms in Washington D.C., New York,
New York or Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at http://www.sec.gov. You can also review
copies of our SEC filings at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-3 to
register the securities. This prospectus supplement and the accompanying
prospectus are part of that registration statement and, as permitted by the
SEC's rules, does not contain all the information set forth in the registration
statement. For further information you may refer to the registration statement
and to the exhibits and schedules filed as part of the registration statement.
You can review and copy the registration statement and its exhibits and
schedules at the public reference facilities maintained by the SEC as described
above. The registration statement, including its exhibits and schedules, is
also available on the SEC's web site.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus supplement and the accompanying
prospectus and the information that we file with the SEC later will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934:
- - Annual Report on Form 10-K/A for the fiscal year ended December 31,
1999;
- - Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000;
- - Current Reports on Form 8-K with respect to Item 7 and Item 9, dated
October 26 Form 8-K with respect to Item 2 and Item 7, filed December 1,
2000, Form 8-K/A amending such filing, filed December 5, 2000; and Form
8-K, with respect to Item 5, filed December 22, 2000; and
- - The description of the common stock contained in our registration
statement on Form 8-A filed under Section 12 of the Exchange Act,
including all amendments and reports filed for the purpose of updating
that description.
You may request a copy of these filings, at no cost, by writing or
telephoning us at: Home Properties of New York, Inc., Attention: Investor
Relations, 850 Clinton Square, Rochester, New York 14604; telephone number
(716) 546-4900.
HOME PROPERTIES
We are a fully integrated, self-administered, and self-managed real
estate investment trust ("REIT") and the 11th largest apartment company in the
United States. With operations in select Northeast, Midwest, and Mid-Atlantic
markets, we own, operate, acquire, rehabilitate, and develop apartment
communities. Currently, we operate 318 communities containing 50,625 apartment
units. Of these, we, along with our subsidiaries, directly own 38,849 units in
146 communities, we partially own and manage as general partner 8,225 units,
and we manage 3,551 units for other owners. We also manage 1.7 million square
feet of commercial space.
We were incorporated in November 1993 as a Maryland corporation. We are
the general partner of Home Properties of New York, L.P., a New York limited
partnership through which we own, acquire and operate most of our market rate
apartments. We frequently refer to Home Properties of New York, L.P. as the
"operating partnership." Certain of our activities, such as residential and
commercial property management for others, development activities and
construction, development and redevelopment services are carried on through two
subsidiaries: Home Properties Management Inc. and Conifer Realty Corporation.
We own 95% of the economic interest in these subsidiaries while certain member
of our management hold the remaining 5% in order to satisfy certain technical
tax requirements. We commonly refer to these two subsidiaries as the
"management companies."
RECENT DEVELOPMENTS
We recently announced that we have executed a binding contract to sell
our affordable housing development operations to Conifer Realty, LLC,
("Conifer") for its approximate book value of $6.7 million. We expect the
transaction to close effective as of December 31, 2000. Payment to us will
consist of $5.4 million in cash at closing plus $1.3 million in guaranteed
deferred payments. In addition, Conifer has committed to purchase land held
for future development within the next two years for $9.4 million (also at its
approximate book value) plus real estate taxes and interest carrying costs.
Management for nearly 640,000 square feet of commercial and mixed-use space
currently managed by us (but where an affiliate of Conifer is the general
partner) will also be assumed by Conifer. Property management operations for
8,225 apartment units in 135 existing affordable communities, as well as those
for a handful of soon-to-be-completed projects, will be retained by us. We
will also retain the general partner interests in these partnerships and other
affiliated assets.
Simultaneously with the closing of the above transaction, our subsidiary,
Conifer Realty Corporation, will change its name to Home Properties Resident
Services, Inc. Prior to March 31, 2001, it is expected that Home Properties
Resident Services, Inc. will convert to a taxable REIT subsidiary ("TRS") under
the REIT Modernization Provisions passed by Congress as part of the Tax Relief
Extension Act of 1999 to be effective January 1, 2001. As part of that
conversion, the operating partnership will acquire the interests of management
in the existing subsidiary, which will then be wholly-owned by the operating
partnership. We will then be able to offer services to our residents, such as
food service, van transportation, maid service through the TRS, which will be
taxed on the profits we earn from these activities.
RISK FACTORS
An investment in the Series E preferred stock and in our common stock
issuable upon conversion of the Series E preferred stock and upon exercise of
the common stock purchase warrants involves various risks. In addition to
general investment risks, investors should consider those factors set forth
elsewhere in this prospectus supplement and the accompanying prospectus as well
as in the documents whose information is incorporated into this prospectus
supplement.
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the Series E preferred
stock of approximately $29,650,000, after deducting the $300,000 financial
advisory fee to be paid to Mercury Partners LLC, and estimated expenses of the
offering of $50,000. We intend to use the net proceeds of the offering to
repay outstanding borrowings and to fund future acquisitions and upgrades at
existing properties. We cannot predict when or how much we will receive from
any exercise of the common stock purchase warrants.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
Our ratio of earnings to combined fixed charges and preferred stock
dividends for the year ended December 31, 1999 was 2.02x and for the nine
months ended September 30, 2000 was 1.83x. We computed our ratio of earnings
to fixed charges and preferred stock dividends by dividing earnings before
fixed charges by fixed charges and preferred distribution requirements. Fixed
charges consist 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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Home Properties consists of:
- 80 million shares of common stock, $0.01 par value, of which
21,268,029 shares were outstanding on September 30, 2000;
- 10 million shares of preferred stock, $0.01 par value,
-- 1,666,667 shares of which have been designated Series A
Convertible Preferred Stock (the "Series A preferred stock"),
all of which are currently outstanding
-- 2,000,000 shares of which have been designated Series B
Convertible Cumulative Preferred Stock (the "Series B
preferred stock"), all of which are currently outstanding, and
-- 600,000 shares of which have been designated Series C
preferred stock (the "Series C preferred stock), all of which are
currently outstanding;
-- 500,000 shares of which have been designated Series D
Convertible Cumulative Preferred Stock (the "Series D
preferred stock"), 250,000 of which are currently
outstanding;
-- 300,000 shares of which have been designated Series E preferred
stock (the "Series E preferred stock"), all of which are currently
outstanding; and
- 10 million shares of "excess stock," $0.01 par value, of which no
shares are currently outstanding.
For more detail about our Amended and Restated Articles of Incorporation, as
amended, and the Articles Supplementary thereto relating to the Series A
preferred stock, the Series B preferred stock, the Series C preferred, Series D
preferred stock and the Series E preferred stock (sometimes collectively
referred to as our "Articles of Incorporation" or "charter") and bylaws you
should refer to the charter and bylaws, which have been filed as exhibits to
other reports incorporated by reference into this prospectus supplement. In
addition, for a discussion of limitations on the ownership of our capital
stock, you should refer to the section entitled "Risk Factors" in this
prospectus supplement and on pages 8 to 12 of the accompanying prospectus.
The charter has been further amended by filing Articles Supplementary
with respect to the Series E preferred stock which has been filed as an
exhibit to a report incorporated by reference into this prospectus supplement.
The form of the common stock purchase warrants and the agreement pursuant to
which they were issued have also been filed as exhibits to a report
incorporated by reference into this 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 Home Properties' debts or obligations, and the holders of shares
will not be liable for further calls or assessments by Home Properties. Subject
to the provisions of Home Properties' 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 Home Properties out of funds legally available
therefor, and, upon liquidation of Home Properties, 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
Home Properties, including debts and liabilities arising out of its status as
general partner of the Operating Partnership, and any liquidation preference of
issued and outstanding Preferred Stock. Home Properties intends to continue
paying quarterly distributions.
The holder of each outstanding share of Common Stock is entitled to one
vote on all matters presented to stockholders for a vote, subject to the
provisions of Home Properties' Articles of Incorporation regarding Excess Stock
described below. As described below, the Board of Directors of Home Properties
has, and 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, Home
Properties cannot dissolve, amend its charter, merge with or into 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 Home Properties or Home
Properties Trust. Home Properties' Articles of Incorporation provide that its
Bylaws may be amended by its Board of Directors.
The holder of each outstanding share of Common Stock is 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, subject to certain rights
of the holders of Preferred Stock, described below. 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.
PREFERRED STOCK
We may issue shares of Preferred Stock from time to time, in one or more
series, as authorized by the Board of Directors of Home Properties. 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 Home Properties.
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of Home Properties, then, before any distribution or payment
shall be made to the holders of any shares of Common Stock, any Excess Stock or
any other class or series of capital stock of Home Properties ranking junior to
any outstanding Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding up of Home Properties, the holders of
shares of each series of Preferred Stock shall be entitled to receive out of
assets of Home Properties legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per
share, 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
dividends). 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 Home Properties. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of Home Properties 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 Home Properties 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.
Series A Convertible Preferred Stock
We have filed Articles Supplementary to our charter creating a series of
preferred stock designated as "Series A Convertible Preferred Stock" which has
substantially the same rights, privileges and preferences as the Class A
limited partnership interest in the Operating Partnership formerly held by the
State of Michigan Retirement System. The State of Michigan acquired the Class A
limited partnership interest in December 1996 for $35,000,000. At the request
of Home Properties, the State of Michigan Retirement System has exchanged its
Class A Limited Partnership interest for 1,666,667 shares of the Series A
preferred stock as of December 22, 1999. The rights, privileges and preferences
of the Series A Convertible Preferred Stock are set forth in the Articles
Supplementary to the charter creating that class of preferred stock.
The Series A preferred stock has a preference over the Series B preferred
stock, Series C preferred stock, Series D preferred stock and Series E
preferred stock and the Common Stock as to dividends, which are payable
quarterly at a rate equal to the greater of 9% per year or the rate declared
and payable on comparable number of shares of Common Stock through December 30,
2003 on a cumulative basis. The Series A preferred stock also has a liquidation
preference equal to $35,000,000 in the aggregate for all outstanding shares (or
$21.00 per share).
Pursuant to the terms of the agreement pursuant to which the State of
Michigan Retirement System invested, we agreed to elect a nominee of the State
of Michigan Retirement System to the Board of Directors of Home Properties and
to nominate such director for reelection annually. Under the Articles
Supplementary and the agreement pursuant to which Michigan invested, Home
Properties has agreed not take certain actions without the consent of the State
of Michigan such as creating any stock senior or on a parity with the Series A
preferred stock, consolidating, merging or selling all or substantially all of
its assets to another entity except under circumstances where the rights and
preferences of the Series A preferred stock are protected. amending its charter
or by-laws in a manner adverse to the holders of the Series A preferred stock
and certain other matters described in those documents (each of which is filed
as an exhibit to one of our filings with the Securities and Exchange Commission
which is incorporated herein by reference).
The Series A Convertible Preferred Stock is convertible into Common Stock
on a one-for-one basis, subject to adjustment. Home Properties may call the
Series A Preferred Stock for redemption on or after December 30, 2006 but the
holders may elect to convert the shares into Common Stock prior to redemption.
Series B Convertible Cumulative Preferred Stock
On September 30, 1999, Home Properties issued 2,000,000 shares of its
newly authorized Series B Convertible Cumulative Preferred Stock, which we
refer to as the "Series B preferred stock." The Articles Supplementary to the
charter establishing the Series B preferred stock sets forth the rights,
privileges and preferences of that stock.
The Series B preferred stock is junior to the right of payment to the
Series A preferred stock and is on parity in right of payment with the Series
C preferred stock, Series D preferred stock and Series E preferred stock, is
entitled to a liquidation preference of $25.00 per share and dividends equal to
the greater of the dividends payable on the shares of Common Stock into which
the Series B Preferred Stock is convertible, or 8.36% of the liquidation
preference (or $2.09 per share) each year.
The Series B preferred stock is redeemable at the option of Home
Properties after September 29, 2004 at the liquidation preference. Upon the
occurrence of certain events, the Series B preferred stock may be subject to
mandatory redemption at the option of the holders and, in certain instances, at
a premium over the liquidation preference. Those events include: a change in
control of Home Properties or the Operating Partnership, a merger,
consolidation or sale of all or substantially all of the assets, incurrence of
indebtedness in excess of 70% of total market capitalization, a loss of REIT
status and other events described in the Articles Supplementary. The holders of
the Series B preferred stock also have the right to elect two directors to the
Board of Directors of Home Properties in the event that the preferred dividends
are in arrears for six quarters (whether consecutive or not).
The Series B preferred stock is convertible into 1,679,543 shares of
Common Stock, subject to adjustment.
Series C Convertible Cumulative Preferred Stock
On May 22, 2000, Home Properties issued 400,000 shares of its Series C
Convertible Cumulative Preferred Stock, which, together with the additional
200,000 shares of Series C Convertible Cumulative Preferred Stock we issued on
June 19, 2000, we refer to as the "Series C preferred stock". The Articles
Supplementary to the charter establishing the Series C preferred stock were
filed on May 19, 2000, authorize an aggregate of 600,000 shares of Series C
preferred stock, and set forth the rights, privileges and preferences of that
stock. The Series C preferred stock is junior to the right of payment to the
Series A preferred stock and is on a parity with the Series B preferred stock,
Series D preferred stock and Series E preferred stock.
The Series C preferred stock is entitled to a liquidation preference
equal to the greater of: (a) $100 per share plus all accrued and unpaid
dividends to the date of liquidation; and (b) the amount the holder of the
Series C preferred stock would have received if the Series C preferred stock
were converted into common stock immediately prior to the liquidation,
dissolution or winding up.
Dividends on the Series C preferred stock accrue quarterly and are equal
to the greater of the dividends payable on the shares of Common Stock into
which the Series C preferred stock is convertible, or 8.75% of the liquidation
preference (or $8.75 per share) each year. Pursuant to covenants in a purchase
agreement with the institutional investors purchasing the Series C preferred
stock, if we fail to: (i) limit our ratio of total indebtedness to market
capitalization to 70%; (ii) limit our ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA) to fixed charges (consisting of total
interest expense and dividends on our preferred stock), to 1.75 to 1.0; or
(iii) maintain a rating on the Series C preferred stock, the dividends that
will accrue on the Series C preferred stock will increase by .50%. If we fail
to pay the full redemption price on redemption of the Series C preferred stock
or the full repurchase price on repurchase of the Series C preferred stock,
both in accordance with the purchase agreement for the Series C preferred
stock, the Series C preferred stock will accrue dividends at a rate of 11.25%
per year. If we fail to maintain one of the covenants listed above and fail to
make any payments described in the preceding sentence, then the Series C
preferred stock will accrue dividends at a rate of 11.75% per year. In
addition, on the occurrence of certain events resulting in a change of control
of Home Properties, the Series C preferred stock will accrue dividends at a
rate fixed at 8% above the then current five-year treasury note yield.
The Series C preferred stock is redeemable at our option after the fifth
anniversary of its issuance at $100 per share, plus accrued dividends. We may
also redeem the Series C preferred stock on or after the first anniversary of
its issuance in the event of a change of control (as defined in the Series C
Articles Supplementary). Upon the occurrence of certain limited events, the
Series C preferred stock may be subject to mandatory repurchase at the option
of the holders and, in certain instances, at a premium over the $100 stated
value per share. Those events include: sale of all or substantially all of
our assets, incurrence of indebtedness in excess of 65% of total value (with
real estate assets valued at original, historical cost basis), a loss of REIT
status and other events described in the Articles Supplementary relating to the
Series C preferred stock. The holders of the Series C preferred stock,
together with the holders of other classes of preferred stock, also have the
right to elect two directors to our Board of Directors of Home Properties in
the event that the preferred dividends are in arrears for six quarters (whether
consecutive or not).
Each share of Series C preferred stock is convertible into 3.30579 shares
of common stock (plus accrued and unpaid dividends), the equivalent of $30.25
per share conversion price, subject to adjustment. The number of shares of
common stock issuable upon conversion and the price per share are subject to
adjustment upon the occurrence of certain events, including in the event of
dividends or other distributions payable in capitable stock or combinations of
stock so that any holder of the Series C preferred stock will be entitled to
the same number of shares of common stock such holder could have received if
the holder had converted immediately prior to the event. The holders of the
Series C preferred stock may convert their shares into common stock at any
time.
If the holders of the Series C preferred stock intend to sell more than
200,000 shares of Series C preferred stock to any person or group of affiliated
persons, such shares of Series C preferred stock must first be offered to us.
Series D Convertible Cumulative Preferred Stock
On June 5, 2000, Home Properties issued 250,000 shares of its Series D
Convertible Cumulative Preferred Stock, which we refer to as the "Series D
preferred stock". The Articles Supplementary to the charter establishing the
Series D preferred stock were filed on June 2, 2000, authorize an aggregate of
500,000 shares of Series D preferred stock, and set forth the rights,
privileges and preferences of that stock. The Series D preferred stock is
junior to the right of payment to the Series A preferred stock and is on a
parity with the Series B preferred stock and Series C preferred stock and
Series E preferred stock.
The Series D preferred stock is entitled to a liquidation preference
equal to $100 per share plus all accrued and unpaid dividends to the date of
liquidation.
Dividends on the Series D preferred stock accrue quarterly and are equal
to the greater of the dividends payable on the shares of Common Stock into
which the Series D preferred stock is convertible, or 8.775% of the liquidation
preference (or $8.775 per share) each year. If we fail to limit our ratio of
earnings before interest, taxes, depreciation and amortization (EBITDA) to
fixed charges (consisting of total interest expense and dividends on our
preferred stock), to 1.75 to 1.0, the dividends that will accrue on the Series
D preferred stock will increase by .50%. In addition, on the occurrence of
certain events resulting in a change of control of Home Properties, the Series
D preferred stock will accrue dividends at a rate fixed at 8% above the then
current five-year treasury note yield, but in no event less than 8.775%
The Series D preferred stock is redeemable at our option after the fifth
anniversary of its issuance at $100 per share, plus accrued dividends. In
addition, we are required to redeem the Series D preferred stock on the
fiftieth anniversary of the issuance at a redemption price per share payable at
our option, either : (i) in cash at $100.00 per share, plus accrued dividends;
or (ii) by issuance of shares of our common stock based on the then current
conversion price, which is described below. We may also redeem the Series D
preferred stock in the event of change of control (as defined in the Articles
Supplementary) of Home Properties. Upon the occurrence of certain limited
events, the Series D preferred stock may be subject to mandatory repurchase at
the option of the holders and, in certain instances, at a premium over the $100
stated value per share. Those events include: sale of all or substantially
all of our assets, incurrence of indebtedness in excess of 65% of total value
(with real estate assets valued at original, historical cost basis), a loss of
REIT status and other events described in the Articles Supplementary.
Each share of Series D preferred stock is convertible into 3.33333 shares
of common stock (plus accrued and unpaid dividends), the equivalent of $30 per
share conversion price, subject to adjustment. The number of shares of common
stock issuable upon conversion and the price per share are subject to
adjustment upon the occurrence of certain events, including in the event of
dividends or other distributions payable in capital stock or combinations of
stock so that any holder of the Series D preferred stock will be entitled to
the same number of shares of common stock such holder could have received if
the holder had converted immediately prior to the event. The holders of the
Series D preferred stock may convert their shares into common stock at any
time.
Series E Convertible Cumulative Preferred Stock
The 300,000 shares of Series E preferred stock offered by this prospectus
supplement was authorized by the filing of Articles Supplementary to our
charter on December 21, 2000, which Articles Supplementary authorize 300,000
shares of Series E Preferred Stock. The Articles Supplementary to the charter
establishing the Series E preferred stock sets forth the rights, privileges and
preferences of that stock. A copy of the Articles Supplementary is filed as an
exhibit to one of the reports on Form 8-K which is incorporated in this
prospectus supplement and contains the complete details of the terms of the
Series E preferred stock. The Series E preferred stock is junior to the right
of payment to the Series A preferred stock and is on a parity with the Series
B preferred stock, the Series C preferred stock and the Series D preferred
stock described above.The Series E preferred stock is entitled to a liquidation
preference equal to the greater of: (a) $100 per share plus all accrued and
unpaid dividends to the date of liquidation, and (b) the amount the holder of
the Series E preferred stock would have received if the Series E preferred
stock were converted into common stock immediately prior to the liquidation,
dissolution or winding up.
Dividends on the Series E preferred stock accrue quarterly and are equal
to the greater of the dividends payable on the shares of Common Stock into
which the Series E preferred stock is convertible, or 8.55% of the liquidation
preference (or $8.55 per share) each year. Pursuant to covenants in a purchase
agreement with the institutional investors purchasing the Series E preferred
stock, if we fail to: (i) limit our ratio of total indebtedness to market
capitalization to 70%; (ii) limit our ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA) to fixed charges (consisting of total
interest expense and dividends on our preferred stock), to 1.75 to 1.0; or
(iii) maintain a rating on the Series E preferred stock; then the Series E
preferred stock will accrue dividends at a rate of 9.05% per year. If we fail
to pay the full redemption price on redemption of the Series E preferred stock
or the full repurchase price on repurchase of the Series E preferred stock,
both in accordance with the purchase agreement, the Series E preferred stock
will accrue dividends at a rate of 11.05% per year. If we fail to maintain one
of the covenants listed above and fail to make any payments described in the
preceding sentence, then the Series E preferred stock will accrue dividends at
a rate of 11.55% per year. On the occurrence of certain events resulting in a
change of control of Home Properties, the Series E preferred stock will accrue
dividends at a rate fixed at 8% above the then current five-year treasury note
yield.
The Series E preferred stock is redeemable at our option after the fifth
anniversary of its issuance at $100 per share, plus accrued dividends. We may
also redeem the Series E preferred stock on or after the first anniversary of
its issuance in the event of a change of control (as defined in the Series E
Articles Supplementary). We may also redeem the Series E preferred stock on or
after the first anniversary of its issuance in the event of change of control
(as defined in the Articles Supplementary) of Home Properties. Upon the
occurrence of certain limited events, the Series E preferred stock may be
subject to mandatory repurchase at the option of the holders and, in certain
instances, at a premium over the $100 stated value per share. Those events
include: sale of all or substantially all of the assets, incurrence of
indebtedness in excess of 65% of total value (with real estate assets valued at
original, historical cost basis), a loss of REIT status and other events
described in the Articles Supplementary. The holders of the Series E preferred
stock, together with the holders of other classes of preferred stock, also have
the right to elect two directors to our Board of Directors of Home Properties
in the event that the preferred dividends are in arrears for six quarters
(whether consecutive or not).
Each share of Series E preferred stock is convertible into 3.16456 shares
of common stock (plus accrued and unpaid dividends), the equivalent of a $31.60
per share conversion price, subject to adjustment. The number of shares of
common stock issuable upon conversion and the price per share are subject to
adjustment in the event of dividends or other distributions payable in capital
stock or combinations of stock so that any holder of the Series E preferred
stock will be entitled to the same number of shares of common stock such holder
could have received if the holder had converted immediately prior to the event.
The holders of the Series E preferred stock may convert their shares into
common stock at any time.
If the holders of the Series E preferred stock intend to sell more than
150,000 shares of Series E preferred stock to any person or group of affiliated
persons, such shares of Series E preferred stock must first be offered to us.
Common Stock Purchase Warrants
The common stock purchase warrants to purchase up to 285,000 shares of
common stock at a price $31.60 per share, subject to adjustment, which are
offered by this prospectus supplement, have been authorized for issuance by the
Board of Directors of Home Properties. Each warrant may be exercised from time
to time for not less than 10% of the shares of common stock issuable under the
warrant at any time prior to the fifth anniversary of the date of its issuance.
The number of shares of common stock issuable upon exercise of any warrant and
the price per share are subject to adjustment in the event of dividends or
other distributions payable in capital stock or combinations of stock so that
the holder of the warrant will be entitled to the same number of shares of
common stock such holder could have received if the holder had exercised the
warrant immediately prior to the event.
We previously issued warrants to purchase 240,000 shares of common stock
in connection with the sale of 600,000 shares of Series C preferred stock.
RESTRICTIONS ON TRANSFER OWNERSHIP LIMITS
Our charter contains certain restrictions on the number of shares of
capital stock that stockholders may own. For Home Properties 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 Internal Revenue 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 Home Properties expects
to continue to qualify as a REIT, its charter contains 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 charter, 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 Home
Properties. 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 Home Properties' 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 Home Properties 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 Home
Properties 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 Home Properties'
status as a REIT.
Any transfer of outstanding capital stock of Home Properties ("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 Home Properties
being closely held within the meaning of section 856(h) of the Code, or (iv)
otherwise prevent Home Properties from satisfying any criteria 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 Home Properties 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 Home Properties. 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 Home Properties 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, Home
Properties 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 Home Properties exercises its option to
purchase. Home Properties 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 Home Properties, 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). Home Properties' 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 Home Properties 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 Home Properties' 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 Home Properties in acquiring such Outstanding Stock and to
hold such Outstanding Stock on behalf of Home Properties unless Home Properties
waives its right to this remedy.
The foregoing ownership and transfer limitations may have the effect of
precluding acquisition of control of Home Properties 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 Home Properties 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 Home Properties must file a written notice with Home Properties
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 Home Properties in writing such information as Home
Properties may request in order to determine the effect of such stockholder's
direct, indirect and attributed ownership of shares of capital stock on Home
Properties' 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 Home
Properties' 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 supplement 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 Home Properties and its stockholders to the
fullest extent permitted from time to time by the MGCL and require Home
Properties 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 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 Home Properties 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 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.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain Federal income tax considerations
regarding an investment in Series E preferred stock and Warrants is based on
current law, is for general information only and is not tax advice. This
summary supersedes the discussion set forth in the accompanying prospectus
under the heading "Federal Income Tax Considerations."
The information in this section is based on the Internal Revenue Code as
currently in effect, current, temporary and proposed Treasury Regulations
promulgated under the Internal Revenue Code, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the IRS, including its practices and policies as expressed in private letter
rulings which are not binding on the IRS except with respect to the particular
taxpayers who requested and received such rulings, and court decisions, all as
of the date of this prospectus. There is no assurance that future legislation,
Treasury Regulations, administrative interpretations and practices or court
decisions will not adversely affect existing interpretations. Any change could
apply retroactively to transactions preceding the date of the change.
We have not requested, and do not plan to request, any rulings from the
IRS concerning our tax treatment and the statements in this prospectus
supplement are not binding on the IRS or a court. Thus, we can provide no
assurance that these statements will not be challenged by the IRS or sustained
by a court if challenged by the IRS. The tax treatment to holders of common
stock will vary depending on a holder's particular situation and this
discussion does not purport to deal with all aspects of address all tax
considerations applicable to prospective investors, nor does the discussion
give a detailed description of any state, local, or foreign tax considerations.
This discussion does not describe all of the aspects of Federal income taxation
that may be relevant to a holder of common stock or prospective stockholder in
light of his or her personal investments or tax particular circumstances, or to
certain types of stockholders (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) subject to
special treatment under the federal income tax laws except to the extent
discussed under the headings "Taxation of Tax-Exempt Stockholders" and
"Taxation of Non-U.S. Stockholders." Stockholders subject to special treatment
include, without limitation, insurance companies, financial institutions or
broker-dealers, tax-exempt organizations, stockholders holding securities as
part of a conversion transaction or hedge or hedging transaction or as a
position in a straddle for tax purposes, foreign corporations and persons who
are not citizens or residents of the United States.
In addition, the summary below does not consider the effect of any
foreign, state, local or other tax laws that may be applicable to holders of
the common stock. If we meet the detailed requirements in the Internal Revenue
Code for qualification as a REIT, which are summarized below, we will be
treated as a REIT for federal income tax purposes. In this case, we generally
will not be subject to federal corporate income taxes on our net income that is
currently distributed to our stockholders. This treatment substantially
eliminates the "double taxation" that generally results from investments in a
corporation. Double taxation refers to the imposition of corporate level tax on
income earned by a corporation and taxation at the shareholder level on funds
distributed to a corporation's shareholders. If we fail to qualify as a REIT in
any taxable year, we would not be allowed a deduction for dividends paid to our
stockholders in computing taxable income and would be subject to federal income
tax at regular corporate rates. Unless entitled to relief under specific
statutory provisions, we would be ineligible.
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 Series E preferred stock and Warrants in an entity
electing to be taxed as a REIT. Each prospective purchaser should consult his
or her own tax advisor regarding the specific tax consequences of the purchase,
ownership and sale of common stock real estate investment trust, including the
federal, state, local, foreign and other tax consequences of such purchase,
ownership and sale and of potential changes in applicable tax laws.
SERIES E PREFERRED STOCK
Redemption
Redemption of shares of Series E preferred stock will be treated under
Section 302 of the Code as a distribution taxable as a dividend (to the extent
of the Company's current and accumulated earnings and profits) at ordinary
income rates unless the redemption satisfies one of the tests set forth in
Section 302(b) of the Code and is therefore treated as a sale or exchange of
the redeemed shares. None of these dividend distributions will be eligible for
the dividends received deduction for corporate stockholders. The redemption
will be treated as a sale or exchange if it (i) is "substantially
disproportionate" with respect to the holder, (ii) results in a "complete
termination" of the holder's stock interest in the Company, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within
the meaning of Section 302(b) of the Code. In determining whether any of these
tests have been met, shares of common stock considered to be owned by the
holder by reason of certain constructive ownership rules set forth in the Code,
as well as shares of common stock actually owned by the holder, must generally
be taken into account. If a particular holder of shares of Series E preferred
stock owns (actually or constructively) no shares of common stock of the
Company, or an insubstantial percentage of the outstanding shares of common
stock of the Company, a redemption of shares of Series E preferred stock of
that holder is likely to qualify for sale or exchange treatment because the
redemption would not be "essentially equivalent to a dividend." However,
because the determination as to whether any of the alternative tests of Section
302(b) of the Code will be satisfied with respect to any particular holder of
shares of Series E preferred stock depends upon the facts and circumstances at
the time that the determination must be made, prospective holders of shares of
Series E preferred stock are advised to consult their own tax advisors to
determine such tax treatment.
If a redemption of shares of Series E preferred stock is not treated as a
distribution taxable as a dividend to a particular holder, it will be treated
as to that holder as a taxable sale or exchange. As a result, such holder will
recognize gain or loss for Federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the
extent of the Company's current and accumulated earnings and profits), and (ii)
the holder's adjusted basis the shares of Series E preferred stock for tax
purposes. Such gain or loss will be capital gain or loss if the shares of
Series E preferred stock have been held as a capital asset, and will be long-
term gain or loss if such shares of Series E preferred stock have been held
for more than one year. If a redemption of shares of Series E preferred stock
is treated as a distribution taxable as a dividend, the amount of the
distribution will be measured by the amount of cash and the fair market value
of any property received by the holder. The holder's adjusted basis in the
redeemed shares of Series E preferred stock for tax purposes will be
transferred to the holder's remaining shares of the Company. If the holder owns
no other shares of the Company, such basis may, under certain circumstances, be
transferred to a related person or it may be lost entirely.
Under Section 305(c) of the Code and the applicable Treasury Regulations
thereunder, if the cash redemption price of preferred stock exceeds its issue
price, the difference (the "redemption premium") may be taxable as a
constructive dividend of additional shares of preferred stock to holders over a
certain period. Because the terms of the Series E preferred stock provide for
an optional right of redemption for cash by the Company at a price in excess of
its issue price, holders could be required to recognize such redemption premium
under an economic accrual method if, based on all of the facts and
circumstances, the optional redemption is more likely than not to occur. The
Company believes that the existence of its optional redemption right for cash
does not result in a constructive dividend to holders of the Series E preferred
stock.
Conversion of Series E Preferred Stock for Common Stock
The conversion of Series E preferred stock for shares of common stock
should constitute a recapitalization for Federal income tax purposes.
Accordingly, income, gain or loss generally should not be recognized by a
holder of Series E preferred stock upon the exchange of Series E preferred
stock for common stock (except with respect to common stock received in
discharge of accrued dividends or with respect to cash received for a
fractional share interest of Series E preferred stock). A holder's tax basis
in common stock received pursuant to the conversion generally should equal the
holder's tax basis in the Series E preferred stock surrendered in exchange
therefor. Similarly, the holding period for common stock received pursuant to
the conversion generally should include the period for which the Series E
preferred stock surrendered in exchange therefor was held.
Common stock received by a shareholder pursuant to a conversion in
discharge of accrued dividends on the Series E preferred stock should be
treated as a distribution on the Series E preferred stock to the extent of such
accrued dividends. Such a distribution would be taxed as a dividend to the
extent of the Company's current or accumulated earnings and profits. The basis
of common stock received in discharge of accrued dividends on the Series E
preferred stock will be its fair market value on the date received and the
holding period of such common stock will commence on the day after its receipt.
A holder who receives cash in lieu of a fractional share of Series E
preferred stock upon conversion of its Series E preferred stock for common
stock will be treated as having first received such fractional share and as
having then exchanged such fractional share for cash in a taxable transaction.
Gain or loss will be recognized, measured by the difference between the amount
of cash received and the portion of the basis of the share of Series E
preferred stock allocable to such fractional interest. In general, such gain
or loss will constitute a capital gain or loss and will be a long term capital
gain or loss if the Series E preferred stock has been held for more than one
year as of the date of such conversion.
Future adjustments, if any, of the conversion rates of Series E preferred
stock (including adjustments to reflect the Company's issuance of certain
rights, warrants or evidence of indebtedness, or distributions of assets to
holders of common stock) may result in constructive distributions taxable as
dividends to the holders of Series E preferred stock (to the extent that the
Company has current or accumulated earnings and profits).
WARRANTS
Exercise
A U.S. Holder will not recognize gain or loss upon the exercise of a
Warrant, except as to cash in lieu of fractional shares. The tax basis of
the Warrant Shares received in the hands of the U.S. Holder will be equal
to the sum of the U.S. Holder's adjusted tax basis in the Warrant and the
cash exercise price paid (in each case, less any portion thereof
attributable to fractional shares). The U.S. Holder's holding period for
the Warrant Shares received will not include the period during which the
Warrant was held.
Expiration
Upon the expiration of a Warrant, a U.S. Holder will recognize capital
loss in an amount equal to its adjusted tax basis in the Warrant.
Sale or Exchange of Warrants
Upon the sale or exchange of a Warrant to a person other than the
Company, a U.S. Holder will recognize gain or loss in an amount equal to
the difference between the amount realized on the sale or exchange and the
U.S. Holder's adjusted tax basis in the Warrant. Such gain or loss will be
capital gain or loss and will be long-term capital gain or loss if the
Warrant was held for more than one year. The federal income tax
consequences to a holder of a Warrant from a sale of the Warrant to the
Company are uncertain. In particular, it is possible that a U.S. Holder
may recognize ordinary income on such a sale. U.S. Holders are advised to
consult their own tax advisors as to the consequences of a sale of Warrants
to the Company.
Constructive Dividend on or Constructive Exchange of Warrants
If, at any time, the Company makes a distribution of property to its
stockholders that is taxable to such shareholders as a dividend (for
example, a distribution of evidences of indebtedness or assets of the
Company, but generally not stock dividends or rights to subscribe for
stock) and, pursuant to the antidilution provisions of the Warrants, the
exercise price of the Warrants is adjusted, then such adjustment may be
deemed to be the payment of a taxable dividend to holders of Warrants.
TAXATION OF HOME PROPERTIES
General. We elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code, commencing with our taxable year ended December
31, 1994. We believe we have been organized and have operated in a manner which
qualifies for taxation as a REIT under the Internal Revenue Code commencing
with our taxable year ended December 31, 1994. We intend to continue to operate
in this manner. However, our qualification and taxation as a REIT depends upon
our ability to meet, through actual annual operating results, asset
diversification, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Internal Revenue Code.
Accordingly, there is no assurance that we have operated or will continue to
operate in a manner so as to qualify or remain qualified as a REIT. Further,
legislative, administrative or judicial action may change, perhaps
retroactively, the anticipated income tax treatment described in this
prospectus. See "Failure to Qualify."
Home Properties 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. Home
Properties has received an opinion from the law firm of Nixon Peabody LLP to
the effect that, beginning with its initial taxable year ended December 31,
1994, Home Properties was organized in conformity with the requirements for
qualification as a REIT under the Internal Revenue Code and that its actual
method of operation has enabled, and its proposed method of operation will
enable, Home Properties to meet the requirements for qualification and taxation
as a REIT. This opinion is based on certain assumptions and is conditioned
upon certain representations made by Home Properties as to certain factual
matters relating to Home Properties' organization, manner of operation, income
and assets. Nixon Peabody LLP is not aware of any facts or circumstances that
are inconsistent with these assumptions and representations. Home Properties'
qualification and taxation as a REIT will depend upon Home Properties'
satisfaction of the requirements necessary to be classified as a REIT,
discussed below, on a continuing basis. Nixon Peabody LLP will not review
compliance with these tests on a continuing basis. Therefore, no assurance can
be given that Home Properties will satisfy such tests on a continuing basis.
The sections of the Internal Revenue Code that relate to the
qualification and operation as a REIT are highly technical and complex. The
following sets forth the material aspects of the sections of the Internal
Revenue Code that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable
Internal Revenue Code provisions, relevant rules and regulations promulgated
under the Internal Revenue Code, and administrative and judicial
interpretations of the Internal Revenue Code, and these rules and these
regulations.
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on our net income that is currently distributed
to our stockholders. This treatment substantially eliminates the "double
taxation" that generally results from investment in a corporation. However,
Home Properties will be subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains; provided,
however, that properly designated undistributed capital gains will effectively
avoid taxation at the stockholder level. A REIT's "REIT taxable income" is the
otherwise taxable income of the REIT subject to certain adjustments, including
a deduction for dividends paid.
Second, we may be subject to the "alternative minimum tax" on our items
of tax preference under some circumstances.
Third, if we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on this
income. Foreclosure property is defined generally as property we acquired
through foreclosure or after a default on a loan secured by the property or a
lease of the property.
Fourth, we will be subject to a 100% tax on any net income from
prohibited transactions. Prohibited transactions generally include sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business, other than the sale or disposition of foreclosure
property.
Fifth, we will be subject to a 100% tax on an amount equal to (a) the
gross income attributable to the greater of the amount by which we fail the 75%
or 95% test multiplied by (b) a fraction intended to reflect our profitability,
if we fail to satisfy the 75% gross income test or the 95% gross income test
but have maintained our qualification as a REIT because we satisfied other
requirements. The gross income tests are discussed below.
Sixth, we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed if we fail to
distribute during each calendar year at least the sum of: 85% of our REIT
ordinary income for the year, 95% of our REIT capital gain net income for the
year, and any undistributed taxable income from prior periods.
Seventh, if we acquire any asset from a corporation which is or has been
a C corporation in a transaction in which the basis of the acquired asset in
our hands is determined by reference to the basis of the asset in the hands of
the C corporation, and we subsequently recognize gain on the disposition of the
asset during the ten-year period beginning on the date on which we acquired the
asset, then we will be subject to tax at the highest regular corporate tax rate
on this gain to the extent of the "built-in-gain" of the asset. The built-in-
gain of an asset equals the excess of (a) the fair market value of the asset
over (b) our adjusted basis in the asset, determined as of the date we acquired
the asset from the C corporation. A C corporation is generally a corporation
subject to full corporate-level tax. The results described in this paragraph
with respect to the recognition of built-in gain assume that we will make an
election pursuant to IRS Notice 88-19.
Requirements for Qualification as a REIT. The Internal Revenue Code
defines a REIT as a corporation, trust or association that:
(1) is managed by one or more trustees or directors;
(2) uses transferable shares or transferable certificates to evidence
beneficial ownership;
(3) would be taxable as a domestic corporation, but for Sections 856
through 860 of the Internal Revenue Code;
(4) is not a financial institution referred to in Section 582(c) of the
Internal Revenue Code or an insurance company to which subchapter L of the
Internal Revenue Code applies;
(5) is beneficially owned by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value
of its outstanding stock is owned, actually or constructively, by five or
fewer individuals, as defined in the Internal Revenue Code to include the
entities set forth in Section 542(a)(2) of the Internal Revenue Code; and
(7) meets other tests, described below, regarding the nature of its
income and assets and the amount of its distributions.
The Internal Revenue 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 twelve months, or during a
proportionate part of a taxable year of less than twelve months. Conditions (5)
and (6) do not apply until after the first taxable year for which an election
made to be taxed as a REIT. For purposes of condition (6), pension funds and
some other tax-exempt entities are treated as individuals, subject to a "look-
through" exception in the case of pension funds. We have satisfied condition
(5) and believe that we have issued sufficient shares to satisfy condition (6).
In addition, our articles of incorporation provides for restrictions regarding
ownership and transfer of shares. These restrictions are intended to assist us
in continuing to satisfy the share ownership requirements described in (5) and
(6) above. These ownership and transfer restrictions are described in the
accompanying prospectus in "Description of Capital Stock- Restrictions on
Transfer." Primarily, though not exclusively, as a result of fluctuations in
value among the different classes of our stock, these restrictions may not
ensure that we will, in all cases, be able to satisfy the share ownership
requirements described in conditions (5) and (6) above. If we fail to satisfy
these share ownership requirements, our status as a REIT will terminate.
However, if we comply with the rules contained in applicable Treasury
Regulations that require us to ascertain the actual ownership of our shares and
we do not know, or would not have known through the exercise of reasonable
diligence, that we failed to meet the requirement described in condition (6)
above, we will be treated as having met this requirement. See "Failure to
Qualify."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. We have and will continue to have a calendar
taxable year.
Ownership of Subsidiaries. Internal Revenue Code Section 856(i) provides
that a corporation which is a "qualified REIT subsidiary" shall not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities and items of income of the REIT for all purposes of the
Internal Revenue Code, including the REIT qualification tests. A "qualified
REIT subsidiary" is defined for taxable years beginning on or before August 5,
1997, as any corporation if 100 percent of the stock of the corporation is held
by the REIT at all times during the period the corporation was in existence.
A "qualified REIT subsidiary" is defined for taxable years beginning
after August 5, 1997, as any corporation 100 percent of the stock of which is
owned by the REIT, without regard to prior ownership, and that is not a taxable
REIT subsidiary. Each of our subsidiaries qualifies as a "qualified REIT
subsidiary." Thus, in applying the requirements described herein, our
subsidiaries are ignored, and all of our subsidiaries, assets, liabilities and
items of income, deduction and credit are treated as our assets, liabilities
and items of income, deduction, and credit for all purposes of the Internal
Revenue Code, including the REIT qualification tests. For this reason,
references under "Federal Income Tax Consequences" to our income and assets
include the income and assets of the our subsidiaries. Because our subsidiaries
are treated as "qualified REIT subsidiaries" they will not be subject to
federal income tax.
In addition, our ownership of the voting securities of the subsidiaries
will not violate the restrictions against ownership of securities of any one
issuer which constitutes more than 10% of such issuer's voting securities or
more than 5% in value of our assets, described below under "Asset Tests."
Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, IRS regulations provide that the REIT will be deemed
to own its proportionate share of the assets of the partnership. Also, a
partner in a partnership will be deemed to be entitled to the income of the
partnership attributable to its proportionate share. The character of the
assets and gross income of the partnership retains the same character in the
hands of Home Properties for purposes of Section 856 of the Internal Revenue
Code, including satisfying the gross income tests and the asset tests. Thus,
our proportionate share of the assets, liabilities and items of income of the
Operating Partnership, including the Operating Partnership's share of these
items for any partnership or limited liability company, are treated as our
assets, liabilities and items of income for purposes of applying the
requirements described in this prospectus supplement.
We have included a summary of the rules governing the Federal income
taxation of partnerships and their partners below in "Tax Aspects of the
Operating Partnership." We have direct control of the Operating Partnership and
will continue to operate it consistent with the requirements for qualification
as a REIT.
Income Tests. We must satisfy two gross income requirements annually to
maintain our qualification as a REIT. First, each taxable year we must derive
directly or indirectly at least 75% of our gross income from investments
relating to real property or mortgages on real property, including "rents from
real property" and, in specific circumstances, interest, or from particular
types of temporary investments. Gross income from prohibited transactions is
excluded for purposes of determining if we satisfy this test. Second, each
taxable year we must derive at least 95% of our gross income from these real
property investments, dividends, interest and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. Gross income
from prohibited transactions is excluded for purposes of determining if we
satisfy this test.
The term "interest" generally does not include any amount received or
accrued, directly or indirectly, if the determination of the amount depends 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 "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Rents we receive will qualify as "rents from real property"
in satisfying the gross income requirements for a REIT described above only if
several conditions are met.
First, the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property" solely
by reason of being based on a fixed percentage or percentages of receipts or
sales.
Second, the Internal Revenue Code provides that rents received from a
"related party tenant" will not qualify as "rents from real property" in
satisfying the gross income tests. A related party tenant is a tenant of Home
Properties that Home Properties, or one or more actual or constructive owners
of 10% or more of Home Properties, actually or constructively own in the
aggregate 10% or more of such tenant. As a result of the passage of the Ticket
to Work and Work Incentives Act of 1999 as enacted on December 17, 1999 (we
refer to this as the "REIT Modernization Act"), for taxable years after
December 31, 2000, Home Properties will be able to lease its properties to a
taxable REIT subsidiary and the rents received from that subsidiary will not be
disqualified from being "rents from real property" by reason of Home
Properties' ownership interest in the subsidiary so long as the property is
operated on behalf of the taxable REIT subsidiary by an "eligible independent
contractor." A taxable REIT subsidiary is a corporation other than a REIT in
which a REIT directly or indirectly holds stock and that has made a joint
election with the REIT to be treated as a taxable REIT subsidiary. A taxable
REIT subsidiary will be subject to federal income tax.
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 personal property
will not qualify as "rents from real property." Under currently effective law,
this 15% test is based on relative adjusted tax bases. As a result of the
passage of the REIT Modernization Act, however, for taxable years beginning
after December 31, 2000, the test will be based on relative fair market values.
Finally, for rents received to qualify as "rents from real property,"
Home Properties generally must not operate or manage the property or furnish or
render "impermissible services" to the tenants of the property, other than
through an independent contractor from whom Home Properties derives no revenue.
Home Properties may, however, directly perform services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant" of the property.
For Home Properties' taxable years beginning after December 31, 2000,
impermissible services can be provided to tenants at a property by a taxable
REIT subsidiary.
It is expected that Home Properties' 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 Home Properties' 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. We generally do not and do not intend to:
- charge rent for any property that is based in whole or in part on the
income or profits of any person, except by reason of being based on a
percentage of receipts or sales, as described above;
- rent any property to a related party tenant (except for leases to a
taxable REIT subsidiary after December 31, 2000);
- derive rental income attributable to personal property, other than
personal property leased in connection with the lease of real property, the
amount of which is less than 15% of the total rent received under the lease;
or
- perform services considered to be rendered to the occupant of the
property, other than through an independent contractor from whom we derive
no revenue or, for taxable years beginning after December 31, 2000, a
taxable REIT subsidiary of Home Properties.
Notwithstanding the foregoing, we may have taken and may continue to take the
actions set forth above to the extent these actions will not, based on the
advice of our tax counsel, jeopardize our status as a REIT.
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 which the Company owns, holds general
partnership interests in or manages. The income earned by and taxed to the
Management Companies would be nonqualifying income if earned by Home Properties
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, but not the 75% gross income test. We believe that the
aggregate amount of any non-qualifying income in any taxable year has not
exceeded and will not exceed the limit on non- qualifying income under the
gross income tests.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for the year if we
are entitled to relief under specific provisions of the Internal Revenue Code.
Generally, we may avail ourselves of the relief provisions if:
- our failure to meet these tests was due to reasonable cause and not due
to willful neglect;
- we attach a schedule of the sources of our income to our federal income
tax return; and
- any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It is not possible, however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. For example, if we fail to
satisfy the gross income tests because nonqualifying income that we
intentionally incur exceeds the limits on nonqualifying income, the IRS could
conclude that our failure to satisfy the tests was not due to reasonable cause.
If these relief provisions do not apply to a particular set of
circumstances, we will not qualify as a REIT. As discussed above in "Taxation
of Home Properties -General," even if these relief provisions apply, and we
retain our status as a REIT, a tax would be imposed with respect to our excess
net income. We may not always be able to maintain compliance with the gross
income tests for REIT qualification despite our periodic monitoring of our
income.
Prohibited Transaction Income. Any gain realized by us on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business, including our share of any such
gain realized by the Operating Partnership, will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. This prohibited
transaction income may also adversely effect our ability to satisfy the income
tests for qualification as a REIT. Under existing law, whether property is held
as inventory or primarily for sale to customers in the ordinary course of a
trade or business is a question of fact that depends on all the facts and
circumstances surrounding the particular transaction.
The Operating Partnership intends to hold the properties for investment
with a view to long- term appreciation, to engage in the business of acquiring,
developing, owning, and operating its properties and to make occasional sales
of the properties as are consistent with the Operating Partnership's investment
objectives. However, the IRS may contend that one or more of these sales is
subject to the 100% penalty tax.
Asset Tests. At the close of each quarter of our taxable year, we also
must satisfy three tests relating to the nature and diversification of our
assets.
First, at least 75% of the value of our total assets must be represented
by real estate assets, cash, cash items and government securities. For purposes
of this test, real estate assets include stock or debt instruments held for one
year or less that are purchased with the proceeds of a stock offering or a
long-term (at least five years) debt offering.
Second, not more than 25% of our total assets may be represented by
securities, other than those securities includable in the 75% asset test.
Third, of the investments included in the 25% asset class, the value of
any one issuer's securities may not exceed 5% of the value of our total assets
and we may not own more than 10% of any one issuer's outstanding voting
securities.
The Operating Partnership owns 100% of the nonvoting preferred stock of
the Management Companies. The Operating Partnership does not and will not own
any of the voting securities of the Management Companies. Therefore we will not
be considered to own more than 10% of the voting securities of the Management
Companies. In addition, we believe that the value of our pro rata share of the
securities of the Management Companies held by the Operating Partnership did
not exceed at any time up to and including the date of this prospectus
supplement 5% of the total value of our assets and will not exceed this amount
in the future. No independent appraisals have been obtained. Counsel, in
rendering its opinion as to the qualification of Home Properties as a REIT, is
relying on the conclusions of management regarding the value of such securities
of the Management Companies.
As previously discussed, Home Properties 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. After initially meeting the asset tests at the close of any
quarter, we will not lose our 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 we fail to satisfy the asset tests because we acquire additional
securities of the Management Companies or other securities or other property
during a quarter, including an increase in our interests in the Operating
Partnership, we can cure this failure by disposing of sufficient nonqualifying
assets within 30 days after the close of that quarter. We have maintained and
will continue to maintain adequate records of the value of our assets to ensure
compliance with the asset tests and to take such other actions within the 30
days after the close of any quarter as may be required to cure any
noncompliance. If we fail to cure noncompliance with the asset tests within
this time period, we would cease to qualify as a REIT.
As a result of the REIT Modernization Act, for taxable years beginning
after December 31, 2000, the 5% value test and the 10% voting security test
will be modified in two respects. First, the 10% voting security test will be
expanded so that Home Properties also will be prohibited from owning more than
10% of the value of the outstanding securities of any one issuer. Second, an
exception to these tests will be created so that Home Properties will be
permitted to own securities of a subsidiary that exceed the 5% value test and
the new 10% vote or value test if the subsidiary elects to be a taxable REIT
subsidiary. The Operating Partnership currently owns more than 10% of the total
value of the outstanding securities of each of the non-controlled subsidiaries.
The expanded 10% vote or value test, however, will not apply to a subsidiary
unless either of the following occurs:
- the subsidiary engages in a substantial new line of business or
acquires any substantial asset after July 12, 1999; or
- Home Properties has acquired, or acquires, additional securities of the
subsidiary after July 12, 1999.
Because Home Properties indirectly owns more than 10% of the value of the
outstanding securities in the Management Companies, which are not qualified
REIT subsidiaries, in order for Home Properties to comply with the REIT
qualification rules beginning in 2001 either: (1) the securities of the
Management Companies must be eligible for relief under the grandfather rule; or
(2) Home Properties and each of the Management Companies must elect to treat
the Management Companies as taxable REIT subsidiaries. Although the securities
of the Management Companies that Home Properties holds may be eligible for
relief under the grandfather rule, Home Properties anticipates that an election
will be made for Home Properties Resident Services, Inc. (formerly Conifer
Realty Corporation) to be treated as a taxable REIT subsidiary. Home
Properties believes that the value of the stock held by Home Properties in such
a taxable REIT subsidiary will not exceed, in the aggregate, 20% of the value
of Home Properties' total assets. However, no independent appraisals have been
obtained to support Home Properties' conclusions as to the value of the Home
Properties operating partnership's total assets and the value of the Home
Properties operating partnership's interest in the taxable REIT subsidiary and
these values are subject to change in the future.
It should be noted that the REIT Modernization Act contains two
provisions that will ensure that taxable REIT subsidiaries will be subject to
an appropriate level of federal income taxation. First, taxable REIT
subsidiaries will be limited in their ability to deduct interest payments made
to an affiliated REIT. Second, if a taxable REIT subsidiary pays an amount to a
REIT that exceeds the amount that would be paid to an unrelated party in an
arm's length transaction, the REIT generally will be subject to an excise tax
equal to 100% of such excess.
Annual Distribution Requirements. To maintain our qualification as a
REIT, we are required to distribute dividends, other than capital gain
dividends, to our stockholders in an amount at least equal to: the sum of:
- 95% (90% for taxable years beginning after December 31, 2000) of our
"REIT taxable income," computed without regard to the dividends paid
deduction and our net capital gain, and
- 95% (90% for taxable years beginning after December 31, 2000) of the
after tax net income, if any, from foreclosure property, minus:
- the excess of the sum of particular items of noncash income over 5% of
"REIT taxable income" as described above.
These distributions must be paid in the taxable year to which they relate, or
in the following taxable year if they are declared before we timely file our
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. These distributions are taxable to holders of
common stock and convertible preferred stock, other than tax-exempt entities,
as discussed below, in the year in which paid. This is so even though these
distributions relate to the prior year for purposes of our 95% (90% for taxable
years beginning after December 31, 2000) distribution requirement. The amount
distributed must not be preferential (e.g., every shareholder of the class of
stock to which a distribution is made must be treated the same as every other
shareholder of that class, and no class of stock may be treated otherwise than
in accordance with its dividend rights as a class).
To the extent that we do not distribute all of our net capital gain or
distribute at least 95% (90% for taxable years beginning after December 31,
2000), but less than 100%, of our "REIT taxable income," as adjusted, we will
be subject to tax thereon at regular ordinary and capital gain corporate tax
rates. We have made and intend to make timely distributions sufficient to
satisfy these annual distribution requirements. We expect that our REIT taxable
income will be less than our cash flow due to the allowance of depreciation and
other non-cash charges in computing REIT taxable income. Accordingly, we
anticipate that we will generally have sufficient cash or liquid assets to
enable us to satisfy the distribution requirements described above. In this
regard, the Partnership Agreement of the Operating Partnership authorizes Home
Properties, 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 Home Properties to meet these distribution requirements. However, from
time to time, we may not have sufficient cash or other liquid assets to meet
these distribution requirements due to timing differences between the actual
receipt of income and actual payment of deductible expenses, and the inclusion
of income and deduction of expenses in arriving at our taxable income. If these
timing differences occur, in order to meet the distribution requirements, we
may need to arrange for short-term, or possibly long-term, borrowings or need
to pay dividends in the form of taxable stock dividends. Under specific
circumstances identified in the Internal Revenue Code, we 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, which may be included
in our deduction for dividends paid for the earlier year. Thus, we may be able
to avoid being taxed on amounts distributed as deficiency dividends. However,
we will be required to pay interest based upon the amount of any deduction
taken for deficiency dividends.
Furthermore, we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed if we should fail
to distribute during each calendar year, or in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year, at least the sum
of:
- 85% of our REIT ordinary income for such year,
- 95% of our REIT capital gain income for the year,
- and any undistributed taxable income from prior periods.
Any REIT taxable income and net capital gain on which this excise tax is
imposed for any year is treated as an amount distributed during that year for
purposes of calculating such tax.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we fail to qualify
will not be deductible by us and we will not be required to distribute any
amounts to our stockholders. As a result, our failure to qualify as a REIT
would reduce the cash available for distribution by us to our stockholders.
In addition, if we fail to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income to the extent of our current
and accumulated earnings and profits, and subject to limitations identified in
the Internal Revenue Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, we will also be ineligible to be taxed as a REIT for the
four tax years following the year during which we lost our qualification. It is
not possible to state whether in all circumstances we would be entitled to this
statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used below, the term "U.S. stockholder" means a holder of shares of
common stock who, for United States federal income tax purposes: is a citizen
or resident of the United States; is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
state thereof or in the District of Columbia, unless, in the case of a
partnership, Treasury Regulations provide otherwise; is an estate the income of
which is subject to United States federal income taxation regardless of its
source; or is a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, some trusts in existence on August 20, 1996, and treated
as United States persons prior to this date that elect to continue to be
treated as United States persons, are also considered U.S. stockholders.
Distributions Generally. As long as we qualify as a REIT, distributions
out of our current or accumulated earnings and profits, other than capital gain
dividends discussed below, will constitute dividends taxable to our taxable
U.S. stockholders as ordinary income. These distributions will not be eligible
for the dividends-received deduction in the case of U.S. stockholders that are
corporations. To the extent that we make distributions, other than capital gain
dividends discussed below, in excess of our current and accumulated earnings
and profits, these distributions will be treated first as a tax-free return of
capital to each U.S. stockholder. This treatment will reduce the adjusted basis
which each U.S. stockholder has in his shares of stock for tax purposes by the
amount of the distribution. This reduction will not, however, reduce a holder's
adjusted basis below zero. Distributions in excess of a U.S. stockholder's
adjusted basis in his shares will be taxable as capital gain, provided that the
shares have been held as a capital asset. In addition, these distributions will
be taxable as long-term capital gain if the shares have been held for more than
one year.
Dividends that we declare in October, November, or December of any year
and that are payable to a stockholder of record on a specified date in any of
these months shall be treated as both paid by us and received by the
stockholder on December 31 of that year, provided we actually pay the dividend
on or before January 31 of the following calendar year. Stockholders may not
include in their own income tax returns any of our net operating losses or
capital losses.
Capital Gain Distributions. Distributions that we properly designate as
capital gain dividends will be taxable to U.S. stockholders as gains, to the
extent that they do not exceed our actual net capital gain for the taxable
year, from the sale or disposition of a capital asset. Depending on the period
of time we have held the assets which produced these gains, and on designations
which we may make, these gains may be taxable to non-corporate U.S.
stockholders at a 20% or 25% rate. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of some capital gain dividends as
ordinary income.
Passive Activity Losses and Investment Interest Limitations.
Distributions we make and gain arising from the sale or exchange by a U.S.
stockholder of our shares will not be treated as passive activity income. As a
result, U.S. stockholders generally will not be able to apply any "passive
losses" against this income or gain. Distributions we make, to the extent they
do not constitute a return of capital, generally will be treated as investment
income for purposes of computing the investment income limitation. Gain arising
from the sale or other disposition of our shares, however, will not be treated
as investment income under some circumstances.
Retention of Net Long-Term Capital Gains. We may elect to retain, rather
than distribute as a capital gain dividend, our net long-term capital gains. If
we make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. stockholder generally
would: include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its taxable
year in which the last day of our taxable year falls subject to limitations as
to the amount that is includable; be deemed to have paid the capital gains tax
imposed on us on the designated amounts included in the U.S. stockholder's
long-term capital gains; receive a credit or refund for the amount of tax
deemed paid by it; increase the adjusted basis of its common stock by the
difference between the amount of includable gains and the tax deemed to have
been paid by it; and in the case of a U.S. stockholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
DISPOSITIONS OF COMMON STOCK
If you are a U.S. stockholder and you sell or dispose of your shares of
common stock, you will recognize gain or loss for federal income tax purposes
in an amount equal to the difference between the amount of cash and the fair
market value of any property you receive on the sale or other disposition and
your adjusted basis in the shares for tax purposes. This gain or loss will be
capital if you have held the common stock as a capital asset and will be long-
term capital gain or loss if you have held the common stock for more than one
year. In general, if you are a U.S. stockholder and you recognize loss upon the
sale or other disposition of common stock that you have held for six months or
less, after applying holding period rules set forth in the Internal Revenue
Code, the loss you recognize will be treated as a long-term capital loss, to
the extent you received distributions from us which were required to be treated
as long-term capital gains.
BACKUP WITHHOLDING
We report to our U.S. stockholders and the IRS the amount of dividends
paid during each calendar year, and the amount of any tax withheld. Under the
backup withholding rules, a stockholder may be subject to backup withholding at
the rate of 31% with respect to dividends paid unless the holder is a
corporation or comes within other exempt categories and, when required,
demonstrates this fact, or provides a taxpayer identification number, certifies
as to no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A U.S. stockholder
that does not provide us with his correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the stockholder's income tax liability.
In addition, we may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their non-foreign status.
See "Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt
shareholder, except tax-exempt shareholders described below, has not held its
shares as "debt financed property" within the meaning of the Internal Revenue
Code and the shares are not otherwise used in a trade or business, dividend
income from us will not be unrelated business taxable income to a tax-exempt
shareholder. Similarly, income from the sale of shares will not constitute
unrelated business taxable income unless a tax-exempt shareholder has held its
shares as "debt financed property" within the meaning of the Internal Revenue
Code or has used the shares in its trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Internal
Revenue Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively,
income from an investment in our shares will constitute unrelated business
taxable income unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in our shares. These prospective investors should
consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act
of 1993 provides that, effective for taxable years beginning in 1994, a portion
of the dividends paid by a "pension held REIT" shall be treated as unrelated
business taxable income as to any trust which: is described in Section 401(a)
of the Internal Revenue Code; is tax-exempt under Section 501(a) of the
Internal Revenue Code; and holds more than 10%, by value, of the interests in a
REIT. Tax-exempt pension funds that are described in Section 401(a) of the
Internal Revenue Code are referred to below as "qualified trusts." A REIT is a
"pension held REIT" if: it would not have qualified as a REIT but for the fact
that Section 856(h)(3) of the Internal Revenue Code provides that stock owned
by qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust, rather than by the
trust itself; and either at least one such qualified trust holds more than 25%,
by value, of the interests in a REIT, or one or more such qualified trusts,
each of which owns more than 10%, by value, of the interests in a REIT, holds
in the aggregate more than 50%, by value, of the interests in the REIT.
The percentage of any REIT dividend treated as unrelated business taxable
income is equal to the ratio of: the unrelated business taxable income earned
by Home Properties, treating Home Properties as if it were a qualified trust
and therefore subject to tax on unrelated business taxable income, to the total
gross income of Home Properties. A de minimis exception applies where the
percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as unrelated business taxable
income will not apply if Home Properties is able to satisfy the "not closely
held" requirement without relying upon the "look-through" exception with
respect to qualified trusts. As a result of the limitations on the transfer and
ownership of stock contained in our articles of incorporation, we are not and
do not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
When we use the term "non-U.S. stockholders," we mean holders of shares
of common stock that are nonresident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts. The rules governing United
States federal income taxation of the ownership and disposition of stock by
persons that are non-U.S. stockholders are complex. No attempt is made in this
prospectus supplement to provide more than a brief summary of these rules.
Accordingly, this discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a non-U.S. stockholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that we qualify for taxation as a REIT.
Prospective non- U.S. stockholders should consult with their own tax advisers
to determine the impact of federal, state, local and foreign income tax laws
with regard to an investment in stock, including any reporting requirements.
Distributions. If we make a distribution that is not attributable to gain
from the sale or exchange of United States real property interests and is not
designated as capital gains dividends, then the distribution will be treated as
dividends of ordinary income to the extent it is made out of current or
accumulated earnings and profits. These distributions ordinarily will be
subject to withholding of United States federal income tax on a gross basis at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. However, if the dividends are treated as effectively connected with the
conduct by the non-U.S. stockholder of a United States trade or business, or if
an income tax treaty applies, as attributable to a United States permanent
establishment of the non-U.S. stockholder, the dividends will be subject to tax
on a net basis at graduated rates, in the same manner as domestic stockholders
are taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a non-U.S. stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under current Treasury Regulations, dividends paid to an address in a country
outside the United States are generally presumed to be paid to a resident of
the country for purposes of determining the applicability of the withholding
rules discussed above and the applicability of a tax treaty rate. Under some
treaties, lower withholding rates generally applicable to dividends do not
apply to dividends from a REIT. Certification and disclosure requirements must
be satisfied to be exempt from withholding under the effectively connected
income and permanent establishment exemptions discussed above.
Distributions we make in excess of our current or accumulated earnings
and profits will not be taxable to a non-U.S. stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's stock, but rather
will reduce the adjusted basis of such stock. To the extent that these
distributions exceed the adjusted basis of a non-U.S. stockholder's stock, they
will give rise to gain from the sale or exchange of his stock. The tax
treatment of this gain is described below. If it cannot be determined at the
time a distribution is made whether or not a distribution will be in excess of
current or accumulated earnings and profits, the distribution will generally be
treated as a dividend for withholding purposes. However, the IRS will generally
refund amounts that are withheld if it is subsequently determined that the
distribution was, in fact, in excess of our current or accumulated earnings and
profits.
Distributions to a non-U.S. stockholder that we designate at the time of
distribution as capital gains dividends, other than those arising from the
disposition of a United States real property interest, generally will not be
subject to United States federal income taxation, unless: investment in the
stock is effectively connected with the non-U.S. stockholder's United States
trade or business, in which case the non-U.S. stockholder will be subject to
the same treatment as domestic stockholders with respect to such gain, except
that a stockholder that is a foreign corporation may also be subject to the 30%
branch profits tax, as discussed above; or the non-U.S. stockholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Distributions to a non-U.S. stockholder that are attributable to gain
from our sale or exchange of United States real property interests will cause
the non- U.S. stockholder to be treated as recognizing this gain as income
effectively connected with a United States trade or business. Non-U.S.
stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders, subject to a special alternative minimum tax in the case
of nonresident alien individuals. Also, this gain may be subject to a 30%
branch profits tax in the hands of a non-U.S. stockholder that is a
corporation, as discussed above. We are required to withhold 35% of any such
distribution. That amount is creditable against the non-U.S. stockholder's
United States federal income tax liability. We or any nominee (e.g., a broker
holding shares in street name) may rely on a certificate of non-foreign status
on Form W-8 or Form W-9 to determine whether withholding is required on gains
realized from the disposition of United States real property interests. A
domestic person who holds shares of common stock on behalf of a non-U.S.
stockholder will bear the burden of withholding, provided that we have properly
designated the appropriate portion of a distribution as a capital gain
dividend.
Sale of Stock. If you are a non-U.S. stockholder and you recognize gain
upon the sale or exchange of shares of stock, the gain generally will not be
subject to United States taxation unless the stock constitutes a "United States
real property interest" within the meaning of FIRPTA. If we are a "domestically
controlled REIT," then the stock will not constitute a "United States real
property interest." A "domestically-controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by non-U.S. stockholders. Because our shares of
stock are publicly traded, there is no assurance that we are or will continue
to be a "domestically-controlled REIT." Notwithstanding the foregoing, if you
are a non-U.S. stockholder and you recognize gain upon the sale or exchange of
shares of stock and the gain is not subject to FIRPTA, the gain will be subject
to United States taxation if: your investment in the stock is effectively
connected with a United States trade or business, or, if an income treaty
applies, is attributable to a United States permanent establishment; or you are
a nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and you have a "tax home" in the United States.
In this case, a nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
If we are not or cease to be a "domestically-controlled REIT" whether
gain arising from the sale or exchange by a non-U.S. stockholder of shares of
stock would be subject to United States taxation under FIRPTA as a sale of a
"United States real property interest" will depend on whether the shares are
"regularly traded," as defined by applicable Treasury Regulations, on an
established securities market and on the size of the selling non-U.S.
stockholder's interest in our shares. If gain on the sale or exchange of shares
of stock were subject to taxation under FIRPTA, the non-U.S. stockholder would
be subject to regular United States income tax on this gain in the same manner
as a U.S. stockholder and the purchaser of the stock would be required to
withhold and remit to the IRS 10% of the purchase price. In addition in this
case, non- U.S. stockholders would be subject to any applicable alternative
minimum tax, nonresident alien individuals may be subject to a special
alternative minimum tax and foreign corporations may be subject to the 30%
branch profits tax.
Backup Withholding Tax and Information Reporting. Backup withholding tax
generally is a withholding tax imposed at the rate of 31% on reportable
payments, as defined in Section 3406 of the Internal Revenue Code, to persons
that fail to furnish the required information under the United States
information reporting requirements. Backup withholding tax and information
reporting will generally not apply to distributions paid to non-U.S.
stockholders outside the United States that are treated as: dividends subject
to the 30%, or lower treaty rate, withholding tax discussed above; capital
gains dividends; or distributions attributable to gain from our sale or
exchange of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of stock by or through a foreign office of a foreign broker.
Information reporting, but not backup withholding, will apply, however, to a
payment of the proceeds of a sale of stock by a foreign office of a broker
that: is a United States person; derives 50% or more of its gross income for
specific periods from the conduct of a trade or business in the United States;
or is a "controlled foreign corporation" for United States tax purposes.
Information reporting will not apply if the broker has documentary evidence in
its records that the holder is a non-U.S. stockholder and other conditions are
met, or the stockholder otherwise establishes an exemption. Payment to or
through a United States office of a broker of the proceeds of sale of stocks is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalties of perjury that the stockholder is a non-
U.S. stockholder, or otherwise establishes an exemption. A non-U.S. stockholder
may obtain a refund of any amounts withheld under the backup withholding rules
by filing the appropriate claim for refund with the IRS.
New Withholding Regulations. Final regulations dealing with withholding
tax on income paid to foreign persons and related matters were recently
promulgated. In general, these new withholding regulations do not significantly
alter the substantive withholding and information reporting requirements, but
unify current certification procedures and forms and clarify reliance
standards. For example, these new withholding regulations adopt a certification
rule under which a foreign stockholder who wishes to claim the benefit of an
applicable treaty rate with respect to dividends received from a United States
corporation will be required to satisfy certification and other requirements.
In addition, these new withholding regulations require a corporation that is a
REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax, subject to any applicable deduction or exemption, to such
portion, and to apply the FIRPTA withholding rules, discussed above, with
respect to the portion of the distribution designated by Home Properties as
capital gain dividend. These new withholding regulations will generally be
effective for payments made after December 31, 2000, subject to transition
rules. The discussion set forth above in "Taxation of Non-U.S. Stockholders"
does not take these new withholding regulations into account. Prospective non-
U.S. stockholders are strongly urged to consult their own tax advisors with
respect to these new withholding regulations.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
General. Substantially all of our investments will be held indirectly
through the Operating Partnership. In general, partnerships are "pass-through"
entities which are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. We will include in our income our proportionate share of the
foregoing partnership items for purposes of the various REIT income tests and
in the computation of our REIT taxable income. Moreover, for purposes of the
REIT asset tests, we will include our proportionate share of assets held by the
Operating Partnership. See "Taxation of Home Properties."
Entity Classification. Our interests in the Operating Partnership involve
special tax considerations, including the possibility of a challenge by the IRS
of the status of the Operating Partnership as a partnership, as opposed to an
association taxable as a corporation, for federal income tax purposes. If the
Operating Partnership were treated as an association, it would be taxable as a
corporation and therefore be subject to an entity-level tax on its income. In
such a situation, the character of our assets and items of gross income would
change and preclude us from satisfying the asset tests and possibly the income
tests (see "Taxation of Home Properties - Asset Tests" and "-Income Tests").
This, in turn, would prevent us from qualifying as a REIT. See "Taxation of
Home Properties - Failure to Qualify" above for a discussion of the effect of
our failure to meet these tests for a taxable year. In addition, a change in
the Operating Partnership's status for tax purposes might be treated as a
taxable event. If so, we might incur a tax liability without any related cash
distributions.
Treasury Regulations that apply for tax period beginning on or after
January 1, 1997 provide that an "eligible entity" may elect to be taxed as a
partnership for federal income tax purposes. An eligible entity is a domestic
business entity not otherwise classified as a corporation and which has at
least two members. Unless it elects otherwise, an eligible entity in existence
prior to January 1, 1997, will have the same classification for federal income
tax purposes that it claimed under the entity classification Treasury
Regulations in effect prior to this date. In addition, an eligible entity which
did not exist, or did not claim a classification, prior to January 1, 1997,
will be classified as a partnership for federal income tax purposes unless it
elects otherwise. The Operating Partnership intends to claim classification as
a partnership under these regulations.
Even if the Operating Partnership is taxable as a partnership under these
Treasury Regulations, it could be treated as a corporation for federal income
tax purposes under the "publicly traded partnership" rules of Section 7704 of
the Internal Revenue Code. A publicly traded partnership is a partnership whose
interests trade on an established securities market or are readily tradable on
a secondary market, or the substantial equivalent thereof. While units of the
Operating Partnership are not and will not be traded on an established trading
market, there is some risk that the IRS might treat the units held by the
limited partners of the Operating Partnership as readily tradable because,
after any applicable holding period, they may be exchanged for our common
stock, which is traded on an established market. A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at
least 90% of such partnership's gross income for a taxable year consists of
"qualifying income" under the publicly traded partnership provisions of Section
7704 of the Internal Revenue Code. "Qualifying income" under Section 7704 of
the Internal Revenue Code includes interest, dividends, real property rents,
gains from the disposition of real property, and certain income or gains from
the exploitation of natural resources. Therefore, qualifying income under
Section 7704 of the Internal Revenue Code generally includes any income that is
qualifying income for purposes of the 95% gross income test applicable to
REITs. We anticipate that the Operating Partnership will satisfy the 90%
qualifying income test under Section 7704 of the Internal Revenue Code and,
thus, will not be taxed as a corporation.
There is one significant difference, however, regarding rent received
from related party tenants. For a REIT, rent from a tenant does not qualify as
rents from real property if the REIT and/or one or more actual or constructive
owners of 10% or more of the REIT actually or constructively own 10% or more of
the tenant. See "Taxation of Home Properties - Income Tests." Under Section
7704 of the Internal Revenue Code, rent from a tenant is not qualifying income
if a partnership and/or one or more actual or constructive owners of 5% or more
of the partnership actually or constructively own 10% or more of the tenant.
As described above, as a result of the passage of the REIT Modernization
Act, for taxable years beginning after December 31, 2000, the Operating
Partnership should be able to lease its real properties to a taxable REIT
subsidiary and the rents received from that subsidiary would not be
disqualified from being "rents from real property" under the REIT rules by
reason of the Operating Partnership's ownership interest in the subsidiary. See
"Federal Income Taxation of Home Properties-Income Tests." Home Properties and
the Operating Partnership have not made a decision whether or not to lease any
properties to taxable REIT subsidiaries in the future. If should be noted,
though, that as a further result of the passage of the REIT Modernization Act,
rent received from a taxable REIT subsidiary also would not be disqualified
from being "qualifying income" under Section 7704 of the Internal Revenue Code
because of the Operating Partnership's ownership of the taxable REIT
subsidiary. Accordingly, Home Properties could lease its real property to one
or more taxable REIT subsidiaries without, by virtue of that act, causing the
Operating Partnership to be treated as a corporation for federal income tax
purposes.
Accordingly, we will need to monitor compliance with both the REIT rules
and the publicly traded partnership rules. The Operating Partnership has not
requested, nor does it intend to request, a ruling from the IRS that it will be
treated as a partnership for federal income tax purposes. In the opinion of
Nixon Peabody LLP, which is based on the provisions of the partnership
agreement of the Operating Partnership and on certain factual assumptions and
representations of Home Properties, 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 Peabody LLP's opinion is not binding on the IRS or the courts.
Partnership Allocations. A partnership agreement will generally determine
the allocation of income and losses among partners. However, these allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Internal Revenue Code and the Treasury Regulations
promulgated under this section of the Internal Revenue Code. Generally, Section
704(b) and the Treasury Regulations promulgated under this section of the
Internal Revenue Code require that partnership allocations respect the economic
arrangement of the partners. If an allocation is not recognized for federal
income tax purposes, the item subject to the allocation will be reallocated in
accordance with the partners' interests in the partnership. This reallocation
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
The Operating Partnership's allocations of taxable income and loss are intended
to comply with the requirements of Section 704(b) of the Internal Revenue Code
and the Treasury Regulations promulgated under this section of the Internal
Revenue Code.
Tax Allocations with Respect to the Properties. Under Section 704(c) of
the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership, must be allocated in a manner so
that the contributing partner is charged with the "book-tax difference"
associated with the property at the time of the contribution. The book-tax
difference with respect to property that is contributed to a partnership is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution. These allocations are solely for federal income
tax purposes and do not affect the book capital accounts or other economic or
legal arrangements among the partners. The Operating Partnership was formed by
way of contributions of appreciated property, including some of the properties.
Moreover, subsequent to the formation of the Operating Partnership, additional
persons have contributed appreciated property to the Operating Partnership in
exchange for interests in the Operating Partnership.
The partnership agreement requires that these allocations be made in a
manner consistent with Section 704(c) of the Internal Revenue Code. In general,
limited partners of the Operating Partnership who acquired their limited
partnership interests through a contribution of appreciated property will be
allocated depreciation deductions for tax purposes which are lower than these
deductions would be if determined on a pro rata basis. In addition, in the
event of the disposition of any of the contributed assets which have a book-tax
difference all income attributable to the book-tax difference will generally be
allocated to the limited partners who contributed the property, and we will
generally be allocated only our share of capital gains attributable to
appreciation, if any, occurring after the time of contribution to the Operating
Partnership. This will tend to eliminate the book-tax difference over the life
of the Operating Partnership. However, the special allocation rules of Section
704(c) do not always 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 assets in the hands of the Operating
Partnership may cause us to be allocated lower depreciation and other
deductions. Possibly we could be allocated an amount of taxable income in the
event of a sale of these contributed assets in excess of the economic or book
income allocated to us as a result of the sale. This may cause us to recognize
taxable income in excess of cash proceeds, which might adversely affect our
ability to comply with the REIT distribution requirements. See "Taxation of
Home Properties - Annual Distribution Requirements."
Treasury Regulations issued under Section 704(c) of the Internal Revenue
Code provide partnerships with a choice of several methods of accounting for
book- tax differences, including retention of the "traditional method" or the
election of other methods which would permit any distortions caused by a book-
tax difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. We and the Operating Partnership
have determined to use the "traditional method" for accounting for book-tax
differences for the properties initially contributed to the Operating
Partnership and for some assets acquired subsequently. We and the Operating
Partnerships have not yet decided what method will be used to account for book-
tax differences for properties acquired by the Operating Partnership in the
future. Any property acquired by the Operating Partnership in a taxable
transaction will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
Basis in the Operating Partnership Interest. The adjusted tax basis in
our interest in the Operating Partnership generally will be equal to: the
amount of cash and the basis of any other property we contribute to the
Operating Partnership, increased by our allocable share of the Operating
Partnership's income and our allocable share of indebtedness of the Operating
Partnership, and reduced, but not below zero, by our allocable share of losses
suffered by the Operating Partnership, the amount of cash distributed to us and
constructive distributions resulting from a reduction in our share of
indebtedness of the Operating Partnership. If the allocation of our
distributive share of the Operating Partnership's loss exceeds the adjusted tax
basis of our partnership interest in the Operating Partnership, the recognition
of this excess loss will be deferred until such time and to the extent that we
have adjusted tax basis in our interest in the Operating Partnership. We will
recognize taxable income to the extent that the Operating Partnership's
distributions, or any decrease in our share of the indebtedness of the
Operating Partnership, exceeds our adjusted tax basis in the Operating
Partnership. A decrease in our share of the indebtedness of the Operating
Partnership is considered a cash distribution.
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, Home Properties' 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 Home Properties." Such
prohibited transaction income will also have an adverse effect upon Home
Properties' ability to satisfy the income tests for REIT status. 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 includable 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 intends
to hold 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 Home Properties' 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 CONSEQUENCES
State and Local Tax Considerations. We may be subject to state or local
taxation in various state or local jurisdictions, including those in which we
transact business and our stockholders may be subject to state or local
taxation in various state or local jurisdiction, including those in which they
reside. Our state and local tax treatment may not conform to the federal income
tax consequences discussed above. In addition, your state and local tax
treatment may not conform to the federal income tax consequences discussed
above. Consequently, you should consult your own tax advisors regarding the
effect of state and local tax laws on an investment in our shares.
The Management Companies. A portion of the cash to be used by the
Operating Partnership to fund distributions to partners is expected to come
from the Management Companies, through interest payments and dividends on non-
voting preferred stock to be held by the Operating Partnership. The Management
Companies will pay federal and state tax on their net income at full corporate
rates, which will reduce the cash available for distribution to stockholders.
Home Properties 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 IRS disallows the items
of expense which Home Properties expects to be allocated to the Management
Companies.
As described above in "Taxation of Home Properties - Income Tests" and "
- Asset Tests," some of the non-controlled subsidiaries may elect to be treated
as a taxable REIT subsidiary for years commencing after December 31, 2000. The
non-controlled subsidiaries that make this election will be restrained in their
ability to reduce their tax liability for two reasons. First, taxable REIT
subsidiaries will be limited in their ability to deduct interest payments made
to an affiliated REIT. Accordingly, if a non-controlled subsidiary elects to be
treated as a taxable REIT subsidiary, it will be limited significantly in its
ability to deduct interest payments on notes issued to the Operating
Partnership. Second, if a taxable REIT subsidiary pays an amount to a REIT that
exceeds the amount that would be paid in an arm's length transaction, the REIT
generally will be subject to an excise tax equal to 100% of the excess. This
rule generally will apply to amounts paid to the Operating Partnership by a
non-controlled subsidiary that elects to be treated as a taxable REIT
subsidiary.
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 Home Properties 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
Home Properties or its stockholders. Consequently, the tax treatment described
herein may be modified prospectively or retroactively by legislative, judicial
or administrative action.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 1998, and the
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999, incorporated by
reference in this prospectus supplement, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
PLAN OF DISTRIBUTION
Pursuant to a Purchase Agreement dated December 22, 2000, we are selling
300,000 shares of Series E Convertible Cumulative Preferred Stock to certain
institutional investors. In connection with this transaction Mercury Partners
LLC will receive a cash financial advisory fee of $300,000. That fee represents
1.0% of the gross proceeds of the sale of the shares of Series E preferred
stock in the offering. In addition, the institutional investors and/or
their affiliates under this offering will receive warrants to purchase 285,000
shares of common stock at an exercise price of $31.60 per share. In addition,
we have agreed to indemnify Mercury Partners LLC against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the
Series E preferred stock, the common stock to be issued on conversion thereof,
the Warrants and the common stock issuable on exercise thereof, will be passed
upon for Home Properties by Ann McCormick, General Counsel of Home Properties
and by Nixon Peabody LLP, Rochester, New York.
<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.
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 was
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 current 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.
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-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.
RATIO OF EARNINGS TO FIXED CHARGES
Original Properties*
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended August 4- January 1- Year Ended
December 31, December 31, December 31, December 31, August 3 December 31,
<S> <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.
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.
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 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
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
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 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 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 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 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.
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 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 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
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.
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. 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.
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 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.
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 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 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.
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
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 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 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 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.
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.
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
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.
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 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 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.
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.
