Filed Pursuant to Rule 424(b)(5 )
Registration No. 333-52601
Prospectus Supplement
Date May 22, 2000
(To prospectus dated May 26, 1998)
HOME PROPERTIES OF NEW YORK, INC.
400,000 Shares of Series C Convertible Cumulative Preferred Stock
Common Stock Purchase Warrants to Purchase 160,000 shares of Common Stock
Common Stock Issuable on Conversion of the Series C Convertible
Cumulative Preferred Stock and on Exercise of the Common Stock Purchase
Warrants
This prospectus supplement relates to our offering and sale of up to
400,000 shares of Series C 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 $40 million.
Dividends on the Series C preferred stock will be cumulative from the
date of original issuance and payable quarterly in arrears beginning in
August, 2000, at the rate of the greater of 8.75% of the liquidation
preference per annum (equal to $8.75 per annum per share) or the dividends
per share payable on the number of shares of common stock into which the
Series C preferred stock is convertible. Except in certain instances
described below, the Series C preferred stock is not redeemable until May
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 C 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 C preferred stock. Each share of
Series C preferred stock is convertible at the option of the holder, at any
time, into 3.30579 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 C preferred sock
stock and the common stock for which such warrants are exercisable. The
warrants permit the holders to purchase up to 160,000 shares of our common
stock at a price equal to $30.25 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 $28.375 on May 19, 2000.
We have agreed to pay Mercury Partners LLC a financial advisory fee of
$600,000 in connection with the offering. That fee represents 1.5% of the
gross proceeds of the sale of the shares of Series C preferred stock in the
offering. In addition, the institutional investors and/or their
affiliates, pursuant to an Agency Fee and Warrant Agreement will receive
warrants to purchase 160,000 shares of common stock at an exercise price of
$30.25 per share and a cash fee of $400,000, in connection with the
transaction. Further, pursuant to such agreement, we have granted an
option to an affiliate of one of the institutional investors or its
designee(s) to acquire up to 200,000 additional shares of Series C
Convertible Cumulative Preferred Stock on the same terms and conditions as
the sale hereunder for a 15 business day period. If the entire option is
exercised, Mercury Partners LLC will receive an additional financial
advisory fee of $300,000, and the affiliate of one of the institutional
investors, its designees, or its affiliates will receive additional
warrants to purchase 80,000 shares of common stock and an additional cash
fee of $200,000. 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 C preferred stock. The Series
C 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 297 communities containing
47,155 apartment units. Of these, we, along with our subsidiaries,
directly own 36,331 units in 135 communities, we partially own and manage
as general partner 7,690 units, and we manage 3,134 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 May 22, 2000.
<PAGE>
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 March 31,
2000;
- - - Current Reports on Form 8-K with respect to Item 2, dated April 5,
2000, and Form 8-K/A amending such filing, dated May 22, 2000; Form 8-K
with respect to Item 5, filed May 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 297 communities containing
47,155 apartment units. Of these, we, along with our subsidiaries,
directly own 36,331 units in 135 communities, we partially own and manage
as general partner 7,690 units, and we manage 3,134 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 have recently announced that we are considering strategic
alternatives for our affordable housing development subsidiary, Conifer
Realty Corporation, as we evaluate the role of affordable housing
development in our strategic growth plans. The strategic alternatives we
are considering include a public spin-off or a sale of all or a portion of
the business of our affordable housing development subsidiary.
We have engaged Mercury Partners LLC to act as an advisor in reviewing
these alternatives. We expect that a sale or spin-off will strengthen our
long-term performance by freeing up capital and allowing senior management
to concentrate resources on our core business of owning and operating
market-rate apartment communities.
The development of affordable housing has been a successful and
rewarding business for us since we merged with the Conifer organization on
January 1, 1996. However, with the tremendous growth in our owned portfolio
of market-rate properties, which has grown six-fold since January 1, 1996,
development activities for the year ended December 31, 1999 generated only
approximately 2% of annual "funds from operations, or "FFO" per share. (FFO
is a primary earnings measure for equity REITs.) These development
activities have required a disproportionate allocation of our financial and
management resources. We plan to reach a decision regarding our affordable
housing development segment by year end 2000.
RISK FACTORS
An investment in the Series C preferred stock and in our common
stock issuable upon conversion of the Series C 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 C
preferred stock of approximately $38,900,000, after deducting the $600,000
financial advisory fee to be paid to Mercury Partners LLC, the $400,000 fee
to Prudential Investment Management Services, LLC and estimated expenses of
the offering of $100,000. We intend to use the net proceeds of the
offering to fully repay our unsecured revolving credit facility. That
credit facility bears interest at 1.25% over the one-month LIBOR rate and
expires on September 4, 2000. 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
quarter ended March 31, 2000 was 1.77x. 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
20,118,715 shares were outstanding on March 31, 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 were outstanding as of March 31, 2000
-- 2,000,000 shares of which have been designated Series B
Convertible Cumulative Preferred Stock (the "Series B preferred stock"),
all of which were outstanding on March 31, 2000, and
-- 600,000 shares of which have been designated Series C
preferred stock; and
- 10 million shares of "excess stock," $0.01 par value, of which no
shares were outstanding on such date.
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 and the Series B 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 C 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 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, 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
The 400,000 shares of Series C preferred stock offered by this
prospectus supplement was authorized by the filing of Articles
Supplementary to our charter on May 19, 2000, which Articles Supplementary
authorize up to 600,000 shares of Series C Preferred Stock. The Articles
Supplementary to the charter establishing the Series C preferred stock sets
forth the rights, privileges and preferences of that stock. A copy of the
Articles Supplementary are 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 C preferred stock. The
Series C preferred stock is junior to the right of payment to the Series A
Convertible Preferred Stock and is on a parity with the Series B 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; then the Series C preferred stock
will accrue dividends at a rate of 9.25% per year. 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, 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. 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 change of control (as
defined in the Articles Supplementary) of Home Properties. 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 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 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 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 a $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 in the event of dividends or other distributions
payable in capital 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.
An affiliate of one of the institutional investors purchasing the Series C
preferred stock pursuant to this prospectus supplement has the option to
purchase up to 200,000 additional shares of Series C preferred stock at
substantially the same terms as provided in this prospectus supplement for
a period of 15 business days following the original issuance.
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.
Common Stock Purchase Warrants
We have authorized the issuance of common stock purchase warrants to
purchase up to 240,000 shares of common stock at a price $30.25 per share,
subject to adjustment. This prospectus supplement relates to warrants to
purchase 160,000 shares of common stock. The 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.
If the affiliate of the institutional investor exercises its option to
purchase an additional 200,000 shares of Series C preferred stock, we will
issue additional common stock purchase warrants to purchase up to 80,000
shares of common stock on the same terms.
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 C 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 C 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 C PREFERRED STOCK
Redemption
Redemption of shares of Series C 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 C 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 C 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 C preferred stock depends upon the facts and
circumstances at the time that the determination must be made, prospective
holders of shares of Series C preferred stock are advised to consult their
own tax advisors to determine such tax treatment.
If a redemption of shares of Series C 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 C preferred stock for tax purposes. Such gain or loss
will be capital gain or loss if the shares of Series C preferred stock have
been held as a capital asset, and will be long-term gain or loss if such
shares of Series C preferred stock have been held for more than one year.
If a redemption of shares of Series C 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 C 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 C
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 C preferred stock.
Conversion of Series C Preferred Stock for Common Stock
The conversion of Series C 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 C preferred stock upon the exchange of Series C 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 C 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 C 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 C 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 C preferred stock should be
treated as a distribution on the Series C 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 C 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 C
preferred stock upon conversion of its Series C 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 C 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 C 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 C
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 C 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.
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.
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.
At the present time, a final decision has not been made regarding
which non-controlled subsidiaries, if any, will elect to be treated as
taxable REIT subsidiaries. For taxable years beginning after December 31,
2000, not more than 20% of the value of our total assets will be permitted
to be represented by securities of taxable REIT subsidiaries.
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 May 22, 2000, we are selling
400,000 shares of Series C Convertible Cumulative Preferred Stock to
certain institutional investors. In connection with this transaction
Mercury Partners LLC will receive a cash financial advisory fee of
$600,000. That fee represents 1.5% of the gross proceeds of the sale of the
shares of Series C preferred stock in the offering. In addition, the
institutional investors and/or their affiliates, pursuant to an Agency Fee
and Warrant Agreement will receive warrants to purchase 160,000 shares of
common stock at an exercise price of $30.25 per share and a cash fee of
$400,000, in connection with the transaction. Further, pursuant to such
agreement, we have granted an option to an affiliate of one of the
institutional investors or its designee(s) to acquire up to 200,000
additional shares of Series C Convertible Cumulative Preferred Stock on the
same terms and conditions as the sale hereunder for a 15 business day
period. If the entire option is exercised, Mercury Partners LLC will
receive an additional financial advisory fee of $300,000, and the affiliate
of one of the institutional investors, its designees, or its affiliates
will receive additional warrants to purchase 80,000 shares of common stock
and an additional cash fee of $200,000. 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 C 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.
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.
<PAGE>
No person has been authorized
to give any information or to
make any representations in
1,085,000 SHARES OF connection
with the offering of
securities made COMMON STOCK
hereby other than 1,085,000
those contained or
incorporated by reference In
this Prospectus Supplement or
the accompanying Prospectus
and, if given or made, such
information or representations
must not be relied upon as
having been authorized by the
Company or the PaineWebber.
Neither the delivery of this
Prospectus Supplement or the
accompanying Prospectus nor
any sale made hereunder shall,
under any circumstances,
create any implication that
there has been no change in
the affairs of the Company
since the date hereof or that
the information contained
herein is correct as of
anytime subsequent to its
date. This Prospectus
Supplement and the
accompanying Prospectus do not
constitute an offer to sell or
a solicitation of an offer to
buy such securities in any
circumstances in which such
offer or solicitation is
unlawful.
