<PAGE> 1
As filed with the Securities and Exchange Commission on June 17, 1996
Registration No. 33-79012
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE
AMENDMENT NO. 10
TO
FORM S-11
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------------
INLAND MONTHLY INCOME FUND III, INC.
(Exact name of registrant as specified in governing instruments)
----------------------
2901 Butterfield Road
Oak Brook, Illinois 60521
(Address of principal executive offices)
----------------------
Robert H. Baum, Esq.
Inland Monthly Income Fund III, Inc.
2901 Butterfield Road
Oak Brook, Illinois 60521
(Name and address of agent for service)
----------------------
With a copy to:
Stuart K. Taussig, Esq.
Shefsky Froelich & Devine Ltd.
444 North Michigan Avenue
Suite 2500
Chicago, Illinois 60611
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<Caption
==================================================================================
Proposed
Proposed maximum
Title of Amount be- maximum aggregate Amount of
securities being ing regis- offering price offering registration
registered tered(1) per share(2) price(2) fee
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value . . . . . . 6,000,000 $10.00 $59,050,000 (3)
==================================================================================
</TABLE>
(1) Includes a total of 1,000,000 Shares which may be issued pursuant to the
Registrant's Distribution Reinvestment Program.
(2) The proposed maximum offering price per share for the 1,000,000 Shares
which may be issued pursuant to the Registrant's Distribution Reinvestment
Program will be $9.05 per Share.
(3) All applicable registration fees previously paid.
================================================================================
<PAGE> 2
INLAND MONTHLY INCOME FUND III, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
LOCATION OR HEADING
ITEM NUMBER AND CAPTION IN PROSPECTUS DATED MAY 7, 1996
----------------------- -------------------------------
1. Forepart of Registration Registration Statement Cover Page and
Statement and Outside Front Prospectus Cover Page
Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page of Prospectus;
Cover Pages of Prospectus Outside Back Cover Page of Prospectus
3. Summary Information, Risk Prospectus Cover Page; Prospectus Summary;
Factors and Ratio of Earnings Compensation Table; Risk Factors;
to Fixed Charges Conflicts of Interest; Plan of
Distribution*
4. Determination of Offering Not Applicable
Price
5. Dilution Not Applicable
6. Selling Security Holders Not Applicable
7. Plan of Distribution Cover Page; Prospectus Summary; Plan of
Distribution; Investment, Reinvestment and
Share Repurchase Programs*
8. Use of Proceeds Estimated Use of Proceeds of Offering
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Capitalization; Management's Discussion
Analysis of Financial and Analysis of the Financial Condition of
Condition and Results of the Company*
Operations
11. General Information as to Prospectus Summary; Prior Performance of
Registrant the Company's Affiliates; Management;
Summary of the Organizational Documents;
Prior Performance Tables
12. Policy with Respect to Risk Factors; Conflicts of Interest;
Certain Activities Investment Objectives and Policies; Real
Property Investments; Summary of the
Organizational Documents; Reports to
Stockholders
i
<PAGE> 3
LOCATION OR HEADING
ITEM NUMBER AND CAPTION IN PROSPECTUS DATED MAY 7, 1996
----------------------- -------------------------------
13. Investment Policies of Risk Factors; Conflicts of Interest;
Registrant Investment Objectives and Policies; Real
Property Investments; Summary of the
Organizational Documents
14. Description of Real Estate Investment Objectives and Policies; Real
Property Investments*
15. Operating Data Prior Performance of the Company's
Affiliates; Prior Performance Tables
16. Tax Treatment of Registrant Risk Factors; Federal Income Tax
and Its Security Holders Considerations; ERISA Considerations
17. Market Price of and Risk Factors
Distributions on the
Registrant's Common Equity
and Related Stockholder
Matters
18. Description of Registrant's Description of Securities
Securities
19. Legal Proceedings Not Applicable
20. Security Ownership of Certain Capitalization
Beneficial Owners and
Management
21. Directors and Executive Management
Officers
22. Executive Compensation Compensation Table; Management
23. Certain Relationships and Conflicts of Interest; Management;
Related Transactions Investment Objectives and Policies; Real
Property Investments*
24. Selection, Management and Prospectus Summary; Investment Objectives
Custody of Registrant's and Policies; Real Property Investments
Investments
25. Policies with Respect to Conflicts of Interest; Investment
Certain Transactions Objectives and Policies; Summary of the
Organizational Documents
26. Limitations of Liability Fiduciary Responsibility of Directors and
the Advisor; Indemnification
ii
<PAGE> 4
LOCATION OR HEADING
ITEM NUMBER AND CAPTION IN PROSPECTUS DATED MAY 7, 1996
----------------------- -------------------------------
27. Financial Statements and Index to Financial Statements*
Information
28. Interests of Named Experts Legal Matters; Experts*
and Counsel
29. Disclosure of Commission Fiduciary Responsibility of Directors and
Position on Indemnification the Advisor; Indemnification; Plan of
for Securities Act Distribution
Liabilities
- ---------------
* Included in Post-Effective Amendment No. 10
iii
<PAGE> 5
Inland Monthly Income Fund III, Inc.
Sticker Supplement
Supplement No. 1 to the Prospectus of Inland Monthly Income Fund III,
Inc. (the "Company") includes information regarding: (i) the status of the
Offering; (ii)the Amended and Restated Independent Director Stock Option
Plan; (iii) proposed acquisition of additional properties (see "Real Property
Investments"); and (vi) the Company's financial condition.
As of June 12, 1996, subscriptions for approximately 4,043,061 Shares
were received. As of June 12, 1996, the Company owned seven Neighborhood
Retail Centers and one single-user retail property. Of the eight properties
acquired as of such date by the Company, the Company utilized financing in
connection with acquisition of seven of the properties. The financing on five
of the properties acquired was provided by an Affiliate of the Advisor.
Financing on the remaining two properties was provided by an entity
unaffiliated with the Company, which financing contained terms deemed
favorable by management of both the Advisor and the Company. The Company has
approximately $10,600,000 available for investment in additional properties.
See "Real Property Investments" regarding the proposed acquisition, on an all
cash basis, of three additional properties for $8,039,000.
An Affiliate of the Advisor serves as dealer manager of the Offering and
is entitled to receive selling commissions. Such commissions incurred were
$2,526,845 as of March 31, 1996 and $1,719,406 as of December 31, 1995. An
Affiliate of the Advisor is entitled to receive Property Management Fees
for management and leasing services. The Company incurred and paid
Property Management Fees of $29,136 for the three months ended March
31, 1996 and $46,791 for the year ended December 31, 1995. The Advisor may
receive an annual Advisor Asset Management Fee of not more than 1% of the
Average Invested Assets, paid quarterly. As of March 31, 1996, the Company
had incurred $48,540 of such fees, all of which remained unpaid on such date.
As of December 31, 1995, the Company had not incurred or paid any such fees.
<PAGE> 6
SUPPLEMENT NO. 1
DATED JUNE 17, 1996
TO THE PROSPECTUS DATED MAY 7, 1996
OF INLAND MONTHLY INCOME FUND III, INC.
This Supplement No. 1 is provided for the purpose of supplementing the
Prospectus dated May 7, 1996 of Inland Monthly Income Fund III, Inc. (the
"Company"). This Supplement No. 1 expands upon, supplements, modifies and
supersedes certain information contained in the Prospectus and must be read in
conjunction therewith. Unless otherwise defined, capitalized terms used herein
shall have the same meaning as in the Prospectus.
PLAN OF DISTRIBUTION
GENERAL
As of January 3, 1995, the Company sold in excess of the Minimum Offering
(150,000 Shares); accordingly, all funds were released from escrow as of that
date for use by the Company. As of June 12, 1996, the Company had issued
approximately 4,043,061 Shares through sales pursuant to the Offering and
participation in the Company's Distribution Reinvestment Program (the "DRP")
leaving approximately 1,956,939 Shares unsold. The Company has approximately
$10,600,000 (including funds received through the Company's DRP) available for
investment in additional properties. Of this amount, $8,039,000 has been
allocated to the proposed acquisition of the three properties described in
this Supplement No. 1 in the Section entitled "Real Property Investments."
The Company expects to complete this Offering in August 1996 and must
complete this Offering by October 13, 1996. The Company intends to commence an
additional offering of up to 11,000,000 Shares after completing this Offering.
In all other respects, this section entitled "Plan of Distribution" of the
Prospectus remains unchanged.
MANAGEMENT
INDEPENDENT DIRECTOR STOCK OPTION PLAN
This section is amended and restated in its entirety as follows:
The Company adopted the Independent Director Stock Option Plan (the
"Independent Director Stock Option Plan") concurrently with the commencement of
the Offering. Only non-employee Directors who are "disinterested persons" as
defined under Rule 16b-3 of the Exchange Act are eligible to participate in the
Independent Director Stock Option Plan.
A total of 50,000 shares of Common Stock have been authorized and reserved
for issuance under the Independent Director Stock Option Plan. If the
outstanding shares of Common Stock are increased, decreased or changed into, or
exchanged for, a different number or kind of shares or securities of the
Company through a reorganization or merger in which the Company is the
surviving entity, or through
-1-
<PAGE> 7
a combination, recapitalization, reclassification, stock split, stock dividend,
stock consolidation or otherwise, an appropriate adjustment shall be made in
the number and kind of shares that may be issued pursuant to options. A
corresponding adjustment to the consideration payable with respect to options
granted prior to any such change shall also be made. Any such adjustment,
however, shall be made without change in the total payment, if any, applicable
to the portion of the options not exercised but with a corresponding adjustment
in the price for each share.
The Independent Director Stock Option Plan provides for the grant of
non-qualified stock options to purchase 3,000 Shares to Independent Directors
as of the date such individuals become Directors (the "Initial Options"), and
subsequent grants of options to purchase 500 Shares on the date of each annual
stockholder's meeting to each Independent Director then in office (the
"Subsequent Options", collectively with the "Initial Options" referred to
herein as an "Option" or "Options"). As of the date of this Supplement No. 1,
Options to purchase 10,000 of the Shares at $9.05 per Share had been granted.
The purchase price of Common Stock (the "Option Price") under each Initial
Option granted to Independent Directors who became Directors on or before the
date of the Offering is the fair market value of the Common Stock at the date
of the commencement of the Offering. The Option Price under each Initial
Option granted to Directors who become Directors after the commencement of the
Offering will be the fair market value of the Common Stock as of the date of
grant. The Option Price under each Subsequent Option granted to Directors
shall be the fair market value of the Common Stock on the last business day
preceding the annual meeting. The Option Price under Options granted during
the period of the Offering is fixed in the Independent Director Stock Option
Plan at $9.05 per share.
The Initial Options are exercisable as follows: 1,000 Shares on the date
of grant and 1,000 Shares on each of the first and second anniversaries of the
date of grant. The Subsequent Options are exercisable on the second
anniversary of the date of grant. Options granted under the Independent
Director Stock Option Plan continue to be exercisable until the first to occur
of the tenth anniversary of the date of grant or three months following the
date the Independent Director ceases to be a Director and may be exercised by
payment of cash or through the delivery of Common Stock. Notwithstanding any
other provisions of the Independent Director Stock Option Plan to the contrary,
no Option issued pursuant thereto may be exercised if such exercise would
jeopardize the Company's status as a REIT under the Code.
No Option may be sold, pledged, assigned or transferred by an Independent
Director in any manner otherwise than by will or the laws of descent or
distribution. Options granted under the Independent Director Stock Option Plan
are generally exercisable in the case of death or disability for a period of
one year after death or the disabling event or three months after the
Independent Director ceases to be a member of the Board for any reason except
death or disability.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or upon sale of all or substantially all of the Company's property, the
Independent Director Stock Option Plan shall terminate, and any outstanding
options shall terminate and be forfeited. Notwithstanding the foregoing, the
Board may provide in writing in connection with, or in contemplation of, any
such transaction for any or all of the following alternatives (separately or in
combinations): (i) for the assumption by the successor corporation of the
options theretofore granted or the substitution by such corporation for such
options of options covering the stock of the successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices; (ii) for the continuance of the Independent Director
Stock Option Plan by such successor corporation in which event the Independent
Director Stock Option Plan and the options shall continue in the manner and
under
-2-
<PAGE> 8
the terms so provided; or (iii) for the payment in cash or Shares in lieu of
and in complete satisfaction of such options.
In all other respects, this section entitled "Management" of the Prospectus
remains unchanged.
SELECTED FINANCIAL DATA
This section is amended and restated in its entirety as follows:
The following table sets forth selected financial information derived from
the financial statements of the Company. Balance sheet data at March 31, 1996
and December 31, 1995 and 1994 and income statement data for the three
months ended March 31, 1996 and for the years ended December 31, 1995 and 1994
have been derived from the financial statements of the Company. In addition,
the data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements of the Company and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION> Three
Months
Ended
Year Ended December 31, March 31,
----------------------- -----------
1995 1994 1996
------------ ---------- -----------
<S> <C> <C> <C>
Total assets ........................... $18,750,877 $2,402,373 $26,428,081
Mortgage payable ....................... 750,727 -- 748,011
Total income ........................... 1,180,422 -- 761,079
Net income ............................. 496,514 -- 235,266
Net income per share (a) ............... .53 -- .12
Distributions declared ................. 736,627 -- 476,675
Distributions per share (a) ............ .78 -- .20
Funds from Operations (a) (b) .......... 666,408 -- 338,357
Funds available for distributions (b) .. 787,011 -- 440,406
Cash flows used in operating
activities ........................... 978,350 -- 596,106
Cash flows from
investing activities ................. ( 6,577,843) ( 1,703,498) ( 5,811,430)
Cash flows from financing
activities ........................... 6,327,490 $1,714,432 7,413,866
Weighted average number of common
shares outstanding ................... 943,156 20,000 2,394,092
</TABLE>
-3-
<PAGE> 9
(a) The net income and distributions per share are based upon the weighted
average number of common shares outstanding. The $.20 per share
Distribution for the three months ended March 31, 1996 and the $.78 per
share Distribution for the fiscal year ended December 31, 1995,
represented 141% and 110.5% of the Company's Funds From Operations
("FFO") and 108% and 93.6% of funds available for distribution for those
periods. See Footnote (b) below for information regarding the Company's
calculation of FFO. Distributions by the Company to the extent of its
current and accumulated earnings and profits for federal income tax
purposes will be taxable to Stockholders as ordinary dividend income.
Distributions in excess of earnings and profits generally will be treated
as a non-taxable reduction of the stockholder's basis in the Shares to the
extent thereof, and thereafter as taxable gain (a return of capital).
These Distributions will have the effect of deferring taxation of the
amount of the Distribution until the sale of the Stockholder's Shares.
The Company cannot calculate the portion of the Distribution for the three
months ended March 31, 1996 that represented a return of capital. For
1995, $42,414 (or 5.76%) of the $736,627 Distribution paid for 1995
represented a return of capital. In order to maintain its qualification
as a REIT, the Company must make annual distributions to Stockholders of
at least 95% of its taxable income (which does not include net capital
gains) which was approximately $659,500 (or 89.5%) of the Distribution
paid in 1995. Under certain circumstances, the Company may be required to
make Distributions in excess of cash available for distribution in order
to meet the REIT distribution requirements. Distributions are determined
by the Company's Board of Directors and are dependent on a number of
factors, including the amount of funds available for distribution, the
Company's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute the funds, the Company's capital
expenditure, the annual distribution required to maintain REIT status
under the Code and other factors the Board of Directors may deem relevant.
(b) "FFO" means net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations on the same basis. FFO and
funds available for distribution are calculated as follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------- ---------------
1996 1995 1994
-------- -------- ----
<S> <C> <C>
Net income .......................... $235,266 $496,514 --
Depreciation ........................ 103,091 169,894 --
------- --------
Funds from operations (1) ....... 338,357 666,408 --
Deferred rent receivable ............ (7,284) (12,413)(2) --
Rental income received under master
lease agreements (3) .............. 109,333 133,016 --
------- --------
Funds available for distribution .... 440,406 $787,011 --
======= ========
</TABLE>
(1) FFO does not represent cash generated from operating
activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available
-4-
<PAGE> 10
to fund cash needs. FFO should not be considered as an alternative
to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of
liquidity. FFO as reported by the Company may not be comparable to
other similarly titled measures of other real estate companies.
(2) Reference is made to Note (5) of the Notes to Financial
Statements of the Company.
(3) As part of the Montgomery-Goodyear, Hartford/Naperville
Plaza, Nantucket Square and Antioch Plaza purchases, the Company
will receive rent under master lease agreements on the spaces
currently vacant for periods ranging from one year to 18 months or
until the spaces are leased. Generally accepted accounting
principles require that as these payments are received, they be
recorded as a reduction in the purchase price of the properties
rather than as rental income. For the three months
ended March 31, 1996, the Company recorded $109,333 of such
payments. As of December 31, 1995, the Company had recorded
$133,016 of such payments.
REAL PROPERTY INVESTMENTS
On June 3, 1996, the Company committed to purchase, subject to completion of due
diligence, two additional Neighborhood Retail Centers, the Prospect Heights
Plaza property ("Prospect Heights") and the Montgomery-Sears Shopping Center
property ("Montgomery-Sears"), and a single-user retail property, the Zany
Brainy property (the "Zany Brainy Store"). The properties are being purchased
from an unaffiliated third party. The Company expects to acquire the
properties within the next 30 days, if at all. Acquisition of the properties
is further subject to receipt of appraisals and Board approval. There can be
no assurances that any of these properties will be acquired.
-5-
<PAGE> 11
Prospect Heights Plaza, Prospect Heights, Illinois
The Company, through the Advisor, is currently completing its due diligence on
Prospect Heights. It is anticipated that the Company will purchase
this property in June 1996 for a purchase price of $2,165,000 on an all cash
basis.
Prospect Heights, built in 1985, consists of two one-story, multi-tenant brick
buildings aggregating 28,080 rentable square feet.
The table below sets forth certain information with respect to the occupancy
rate at Prospect Heights expressed as a percentage of total gross leasable area
for each of the last five years and the average effective annual base rent per
square foot for each of the last five years.
<TABLE>
<CAPTION>
Year Ending Occupancy Annual Rents Received
December 31, Rate Per Square Foot
------------ --------- ---------------------
<S> <C> <C> <C>
1991 100% $ 7.53
1992 100% 7.53
1993 100% 7.53
1994 100% 7.53
1995 78% 5.85
</TABLE>
As of June 14, 1996, Prospect Heights was 100% leased and 78% occupied. Tenants
leasing more than 10% of the total square footage currently include Walgreens
with 12,600 square feet, United Farm Stands Corp. with 4,680 square feet and
Blockbuster Video with 6,250 square feet.
The lease with Walgreens requires a base rent of $5.50 per square foot per annum
until July 31, 2005, $6.00 per square foot per annum from August 1, 2005 to July
31, 2015 and $6.50 per square foot per annum from August 1, 2015 to July 31,
2025. The lease also requires the payment of percentage rent annually based on
1% of food item sales, 1.5% of liquor sales and 2% of other sales in excess of
monthly rent paid including their portion of CAM, real estate taxes and
insurance. In 1995, net percentage rent was $23,000. Walgreens has the option to
terminate the lease in 2005, 2010, 2015, and 2020 with a one year notice.
The lease with United Farm Stands Corp. requires a base rent of $12.00 per
square foot per annum until January 31, 1998 and contains three renewal options
of two years each. United Farm Stands Corp. sells fruits and vegetables.
-6-
<PAGE> 12
The lease with Blockbuster Video requires a base rent of $12.00 per square foot
per annum for three years and contains four renewal options of five years each.
Blockbuster Video sells and rents prerecorded audio and video products.
Blockbuster Video will begin paying rent three months after occupancy which is
anticipated to be in July 1996. The seller will master lease this space at
$12.00 per square foot per annum until Blockbuster Video begins paying rent.
For federal income tax purposes, the Company's depreciable basis in the Prospect
Heights buildings will be approximately $1,407,000. Depreciation expense, for
tax purposes, will be computed using the straight-line method. Buildings and
improvements are based upon estimated useful lives of 40 years.
Real estate taxes paid in 1995 for the tax year ended 1994 (the most recent tax
year for which information is available) were $127,033.
At June 1, 1996, Prospect Heights had five tenants. The following tables set
forth certain information with respect to the amount of and expiration of leases
at this Neighborhood Retail Center.
<TABLE>
<CAPTION>
Square Current
Foot Lease Renewal Annual Rent Per
Lessee Leased Ends Options Rent Square Foot
- ------------------ ------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Walgreens 12,600 07/2025 None $ 72,450 $ 5.75
Blockbuster 6,250 07/1999 4/5 75,000 12.00
Power Motion 2,550 07/1998 1/3 27,600 10.82
Dr. W. Beck 2,000 12/1997 1/5 22,000 11.00
United Farm Stands 4,680 01/1998 3/2 56,160 12.00
</TABLE>
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ -------- ------------- ----------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 - - - $ 253,710 - - -
1997 1 2,000 $ 22,000 $ 254,910 $ 11.00 7.12% 8.63%
1998 2 7,230 $ 86,160 $ 233,610 $ 11.92 25.75% 36.88%
1999 1 6,250 $ 75,000 $ 147,450 $ 12.00 22.26% 50.86%
2000-2004 - - - $ 72,450 - - -
2005 - - - $ 73,763 - - -
</TABLE>
* No assumptions were made regarding the releasing of expired leases. It is
management of the Company's current opinion that the space will be released
at market rates.
The Company received a letter appraisal from an independent appraiser, who is a
member in good standing of the American Institute of Real Estate Appraisers (the
"Independent Appraiser"), indicating that, as of June 11, 1996, the appraised
value of Prospect Heights, upon reaching stabilized occupancy, was expected to
be not less than $2,165,000. It should be noted, however, that the letter is
only a preliminary estimate of value to be reflected in the appraisal.
Acquisition of the property is conditioned in part upon receipt of the
appraisal. Neither the letter nor the appraisal (when received by the
Company) should be relied on as measures of true worth or realizable value.
-7-
<PAGE> 13
Montgomery-Sears, Montgomery, Illinois
The Company, through the Advisor, is currently completing its due diligence on
Montgomery-Sears. It is anticipated that the Company will purchase the property
in June, 1996 for a purchase price of $3,419,000 on an all cash basis.
Montgomery-Sears, built in 1990, is a one-story, multi tenant concrete masonry
building aggregating 34,600 rentable square feet.
The table below sets forth certain information with respect to the occupancy
rate at Montgomery-Sears expressed as a percentage of total gross leasable area
for each of the last five years and the average effective annual base rent per
square foot for each of the last five years.
<TABLE>
<CAPTION>
Year Ending Occupancy Annual Rents Received
December 31, Rate Per Square Foot
------------ --------- ---------------------
<S> <C> <C>
1991 95% $ 8.88
1992 95% 9.50
1993 95% 9.84
1994 95% 10.48
1995 95% 9.47
</TABLE>
As of June 14, 1996, Montgomery-Sears was 85% leased. Tenants leasing more than
10% of the building's square footage include Sears Hardware with 20,000 square
feet and Blockbuster Video with 7,000 square feet.
The lease with Sears requires a base rent of $10.50 per square foot per annum
until September 1, 1996, $11.44 per square foot per annum from October 1, 1996
to September 30, 1999 and $12.47 per square foot per annum from October 1, 1999
to July 30, 2000 and contains two renewal options of five years each. Sears has
the right to terminate the lease at any time after July 15, 1997 with 180 days
notice and payment of one year's rent. Sears Hardware sells hardware supplies
and tools. The lease with Blockbuster requires a base rent of $13.20 per square
foot per annum until August 31, 2000 and contains a renewal option for an
additional five years. Blockbuster Video sells and rents prerecorded audio and
video products.
The vacant space, totaling 5,100 square feet, at Montgomery-Sears will be master
leased by the seller for a period of 24 months at $12.00 per square foot per
annum or until such time as a tenant begins paying rent.
For federal income tax purposes, the company's depreciable basis in the
Montgomery-Sears building will be approximately $2,675,000. Depreciation
expense, for tax purposes, will be computed using the straight-line method.
Buildings and improvements are based upon estimated useful lives of 40 years.
Real estate taxes to be paid in 1996 for the tax year ended 1995 (the most
recent tax year for which information is available) were $65,310.
-8-
<PAGE> 14
At June 1, 1996, Montgomery-Sears had three tenants. The following tables set
forth certain information with respect to the amount of and expiration of leases
at this Neighborhood Retail Center.
<TABLE>
<CAPTION>
Square Current
Foot Lease Renewal Annual Rent Per
Lessee Leased Ends Options Rent Square Foot
- -------------- ------- ------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Sears Hardware 20,000 07/2000 2/5 $ 210,000 $ 10.50
Blockbuster 7,000 08/2000 1/5 92,400 13.20
Radio Shack 2,500 09/2000 1/5 25,000 10.00
Vacant* 3,600 06/1998 - 43,200 12.00
Vacant* 1,500 06/1998 - 15,300 10.20
</TABLE>
* The vacancies currently total 5,100 square feet, however, the vacant space
will be master leased by the seller for a two-year period at $12.00 per
square foot, on a net basis, for 3,600 square feet and $10.20 per square
foot, on a net basis, for 1,500 square feet.
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 - - - $ 396,380 - - -
1997 - - - $ 416,640 - - -
1998 1 5,100 $ 61,200 $ 416,640 $ 12.00 14.74% 14.69%
1999 - - - $ 362,178 - - -
2000 3 29,500 $379,004 $ 379,004 $ 12.85 85.26% 100.00%
2001-2005 - - - - - - -
</TABLE>
* No assumptions were made regarding the releasing of expired leases. It is
management of the Company's current opinion that the space will be released
at market rates.
The Company received a letter from the Independent Appraiser indicating that, as
of June 11, 1996, the value of Montgomery-Sears was expected to be not less
than $3,450,000. It should be noted, however, that, the letter is only a
preliminary estimate of the value to be reflected in the appraisal. Acquisition
of the property is conditioned in part upon receipt of the appraisal. Neither
the letter nor the appraisal (when received by the Company) should be relied on
as measures of true worth or realizable value.
-9-
<PAGE> 15
Zany Brainy Store, Wheaton, Illinois
The Company has a commitment, subject to completion of due diligence, to
purchase the Zany Brainy Store, a single tenant retail facility in Wheaton,
Illinois, which facility has been leased to Children's Concepts, Inc., which
does business as Zany Brainy ("Zany Brainy"). It is anticipated that the
Company will purchase this property in July, 1996 for a purchase price of
$2,455,000 on an all cash basis. Zany Brainy sells children's books, computer
software, toys, and related items.
The Zany Brainy Store, built in 1995, is a single tenant retail facility
aggregating 12,499 rentable square feet and is leased 100% to Zany Brainy.
The lease with Zany Brainy requires a base rent of $22.00 per square foot per
annum until November 2000, which increases for the period December 2000 to
November 2005 to the lesser of $24 per square foot per annum or a calculated
amount using the consumer price index. The lease with Zany Brainy contains two
renewal options of five years each.
For federal income tax purposes, the company's depreciable basis in the Zany
Brainy Store will be approximately $1,592,000. Depreciation expense, for tax
purposes, will be computed using the straight-line method. Buildings and
improvements are based upon estimated useful lives of 40 years.
Real estate taxes to be paid in 1996 for the tax year ended 1995 (the most
recent tax year for which information is available) were $1,292 for vacant land.
The following tables set forth certain information with respect to the amount of
and expiration of the Zany Brainy lease.
<TABLE>
<CAPTION>
Square Current
Foot Lease Renewal Annual Rent Per
Lessee Leased Ends Options Rent Square Foot
- --------------- ------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Zany Brainy 12,499 11/2006 2/5 $ 274,978 $ 22.00
</TABLE>
-10-
<PAGE> 16
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-1999 - - - $274,978 - - -
2000 - - - $289,560 (2) - - -
2001-2004 - - - $299,976 - - -
2005 1 12,499 $299,976 $299,976 $ 24.00 100% 100%
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It is
management of the Company's current opinion that the space will be released
at market rates.
(2) The base rent will increase in December 2000 to the lesser of $24.00 per
square foot per annum or $274,978* (1.0 plus the sum of CPI for the first
five years plus .025). For presentation purposes, $24.00 per square foot per
annum was used.
The Company is in the process of obtaining an appraisal prepared by an
independent appraiser who is a member in good standing of the American Institute
of Real Estate Appraisers. Acquisition of the property is conditioned in part
upon receipt of the appraisal.
-11-
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS OF THE COMPANY
This section is amended and restated as follows:
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995 and March 31, 1996, the Company had a total of
2,000,073 Shares ($20,000,730) and 2,909,912 Shares ($29,099,120), in each case
including 20,000 Shares held by the Advisor. At December 31, 1994, only the
20,000 Shares held by the Advisor were outstanding; however,
subscriptions for 189,938.145 Shares had been received as of that date.
Subscriber funds were held in an interest-bearing escrow account with the
Company's unaffiliated escrow agent until January 3, 1995 when subscriptions
for 169,938,145 Shares ($1,699,381) were accepted and those Shares were issued
by the Company. The Stockholders share in their portion of benefits of
ownership of the Company's real property investments according to the number of
Shares held.
The Company's capital needs and resources are expected to undergo changes
as additional Shares are sold in this Offering and additional
properties are acquired. Operating cash flow is expected to increase as these
additional properties are added to the portfolio. Distributions to Stockholders
are determined by the Company's Board of Directors and are dependent on a
number of factors, including the amount of funds available for distribution,
the Company's financial condition, capital expenditures and the annual
distribution required to maintain REIT status under the Code.
As of March 31, 1996, the Company had acquired seven properties, utilizing
approximately $22,700,000 and had cash and cash equivalents of $2,937,473
compared to two properties, utilizing approximately $6,026,023 and cash
and cash equivalents of $338,430 at March 31, 1995. The Company intends to use
these funds and funds from sales of additional Shares to purchase additional
properties, to make distributions and to pay offering costs. To the extent
that these sources are insufficient to meet the Company's short- and long-term
liquidity requirements, the Company may rely on financing of one or more of the
properties.
The properties owned by the Company are currently generating sufficient
cash flow to cover operating expenses of the Company plus pay a monthly
distribution of 8% per annum on weighted average shares. For the three months
ended March 31, 1996, cash provided by operations amounted to $596,106.
Distributions declared for the period were $476,675, a portion of which
represents a return of capital for federal income tax purposes. The return of
capital portion of the distributions can be determined only at year end.
Management monitors the various qualification tests the Company must meet
to maintain its status as a real estate investment trust. Large ownership of
the Company's stock is tested upon purchase to determine that no more than 50%
in value of the outstanding stock is owned directly, or indirectly, by five or
fewer persons or entities at any time. Management of the Company also
determines, on a quarterly basis, that the Gross Income, Asset and Distribution
Tests as described in the section of the Prospectus entitled "Federal Income
Tax Considerations--Taxation of the Company--REIT Qualification Tests" are met.
On an ongoing basis, as due diligence is performed by management of both the
Company and the Advisor on potential real estate purchases or temporary
investment of uninvested capital, management of both entities determines that
the income from the new asset will qualify for REIT purposes. For the year
ended December 31, 1995, the Company qualified as a REIT.
The Company, through the Advisor, is currently completing its due
diligence on three properties and anticipates purchasing two of these
properties in June 1996 and one in July 1996 from an unaffiliated third party
for an aggregate purchase price of $8,039,000 on an all-cash basis.
-12-
<PAGE> 18
The Advisor has guaranteed payment of all public offering expenses
(excluding selling commissions, the marketing contribution and the due
diligence expense allowance fee) in excess of 5.5% of the Gross Offering
Proceeds of the Offering (the Gross Offering Proceeds") or all organization and
offering expenses (including such selling expenses) which together exceed 15%
of the Gross Offering Proceeds.
The Company provides the following programs to facilitate investment in
the Shares and to provide limited liquidity for Stockholders until such time as
a market for the Shares develops:
The Distribution Reinvestment Program allows Stockholders who purchase
Shares pursuant to the Offering to automatically reinvest distributions by
purchasing additional Shares from the Company. Such purchases will not be
subject to selling commissions or the Marketing Contribution and Due Diligence
Expense Allowance Fee and will be sold at a price of $9.05 per Share. As of
March 31, 1996, the Company had received $371,596 through purchase of
approximately 41,060 Shares through the DRP.
The Share Repurchase Program will, subject to certain restrictions,
provide existing Stockholders with limited, interim liquidity by enabling them
to sell shares back to the Company at a price of $9.05 per share. Shares
purchased by the Company will not be available for resale. As of March 31,
1996, the Company has repurchased 3,000 shares from Stockholders for an
aggregate price of $26,838, pursuant to the terms of the Share Repurchase
Program. The remaining $344,758 is available to the Company for investment in
additional properties, maintenance of existing properties or the repurchase of
additional shares pursuant to the terms of the Share Repurchase Program.
RESULTS OF OPERATIONS
As of March 31, 1996, subscriptions for a total of 2,909,912 Shares were
received from the public resulting in $29,088,408 in Gross Offering Proceeds,
which includes the Advisor's capital contribution of $200,000. At March 31,
1996 the Company owned six Neighborhood Retail Centers and one single-
user retail property. See also "-Subsequent Events," below.
As of March 31, 1995, subscriptions for a total of 507,600 Shares were
received from the public resulting in $5,042,205 in Gross Offering Proceeds
which includes the Advisor's capital contribution of $200,000. At March 31,
1995 the Company owned one Neighborhood Retail Center and one single-user
retail property.
PURCHASE OF WALGREENS/DECATUR, DECATUR, ILLINOIS
On January 31, 1995, the Company acquired this Single-User Retail Property
from Inland Property Sales, Inc. ("IPS"), an Affiliate of the Advisor, for the
purchase price of $1,209,053, including acquisition costs of $482. Although it
was originally anticipated that this property would be acquired on an all-cash
basis, management of the Company made the determination, based on the
recommendation of the Advisor, that the investment objectives of the Company
would be better met by assuming a portion of the mortgage loan secured by such
property, since: (i) the terms of the current first mortgage loan were more
favorable for the Company than mortgage rates then currently
available from unaffiliated third parties; and (ii) the Company was able to
apply its available cash towards the acquisition of a second property. The
balance of the assumed mortgage at December 31, 1995 was $750,727. This
mortgage has an interest rate of 7.655% and amortizes over a 25-year period.
The Company is responsible for monthly payments of principal and interest of
$5,689.
-13-
<PAGE> 19
PURCHASE OF THE EAGLE CREST SHOPPING CENTER, NAPERVILLE, ILLINOIS
On March 1, 1995, the Company acquired this Neighborhood Retail Center
("Eagle Crest") from IPS for the purchase price of $4,816,970, including
acquisition costs of $11,059. Although it was originally anticipated that
Eagle Crest would be acquired on an all-cash basis, management of the Company
made the determination, based on the recommendation of the Advisor, that the
investment objectives of the Company would be better met by assuming a portion
of the first mortgage loan secured by such property, as well as entering into a
loan agreement with IPS for the balance of the purchase price. By utilizing
seller financing to purchase Eagle Crest, the Company was able to begin
receiving the net income, after debt service payments, from Eagle Crest on an
expedited basis, thus increasing the Company's earnings to be distributed to
the Stockholders. The balance of the assumed mortgage was paid in full in
April 1995 with interest at 9.5% per annum. In May 1995, the deferred portion
of the purchase price, totaling $1,212,427, was paid to IPS in full from gross
offering proceeds from the Offering. In addition, accrued interest of $22,009
was paid from Company operations.
PURCHASE OF THE MONTGOMERY-GOODYEAR SHOPPING CENTER, MONTGOMERY, ILLINOIS
On September 14, 1995, the Company acquired this Neighborhood Retail
Center from an unaffiliated third party for a purchase price of $1,145,992,
including acquisition costs of $5,992, a portion of which was evidenced by a
promissory note payable to Inland Mortgage Investment Corporation ("IMIC"), an
affiliate of the Advisor, in the gross amount of $600,000. The remainder of
the purchase price was funded with proceeds of the Offering. The promissory
note was paid in full October 1995, with interest at a rate of 10.9% per annum.
The principal amount paid was $600,000 from gross offering proceeds from the
Offering and interest of $4,260 was paid from Company operations.
PURCHASE OF THE HARTFORD/NAPERVILLE PLAZA, NAPERVILLE, ILLINOIS
On September 14, 1995, the Company acquired this newly constructed
Neighborhood Retail Center from an unaffiliated third party for a purchase
price of $4,414,015, including acquisition costs of $14,015 and deposited
$150,000 in an escrow account to be paid to Blockbuster, Inc. to cover the cost
of its leasehold improvements. A portion of the purchase price was evidenced
by a promissory note payable to IMIC, in the gross amount of $600,000. The
remainder of the purchase price was funded with proceeds of the Offering. The
promissory note was paid in full in October 1995, with interest at a rate of
10.9% per annum. The principal amount paid was $600,000 from gross offering
proceeds from the Offering and interest of $5,102 was paid from Company
operations.
PURCHASE OF THE NANTUCKET SQUARE SHOPPING CENTER, SCHAUMBURG, ILLINOIS
On September 20, 1995, the Company acquired this Neighborhood Retail
Center from an unaffiliated third party for a purchase price of $4,257,918,
including acquisition costs of $4,913, a portion of which was evidenced by a
promissory note payable to IMIC, in the gross amount of $3,550,000. The
remainder of the purchase price was funded with proceeds of the Offering. The
promissory note was paid in full in December 1995, with interest at a rate of
10.5% per annum. In addition, as part of the purchase, the Company agreed to
and has paid $51,135 for tenant improvements for two tenants expanding their
space, which was added to the cost of the property.
-14-
<PAGE> 20
In October 1995, the Company received notice from one of its tenants at
Nantucket Square of its intent to close its store, which it did on December 10,
1995. The lease for the 6,228 square feet of space currently expires January
31, 1998. The Company is pursuing a replacement tenant, however, in the
interim, the tenant continues to pay its monthly rent. A second tenant at
Nantucket Square, occupying 3,300 square feet, filed for financial and
reorganization protection under the federal bankruptcy laws. The tenant
continues to occupy the space and pay its monthly rent. The petition filed
with the bankruptcy court by the tenant stated that it is planning on closing a
number of its other stores but did not anticipate closing its store at
Nantucket Square.
PURCHASE OF ANTIOCH PLAZA, ANTIOCH, ILLINOIS
On December 28, 1995, the Company acquired this Neighborhood Retail Center
from an unaffiliated third party for a purchase price of $1,750,365, including
acquisition costs of $365, a portion of which was evidenced by a promissory
note payable to IREC, an affiliate of the Advisor, in the gross amount of
$660,000. The remainder of the purchase price, net of prorations, of
approximately $1,100,000 was funded with proceeds of the Offering. As of
December 31, 1995, the unpaid balance of this note was $360,000. The note
which bore interest at a rate of 9.5% per annum was repaid in full on January
9, 1996. The total amount repaid was $661,163, of which $660,000 was principal
paid from gross offering proceeds from the Offering and $1,163 was interest
paid from Company operations.
PURCHASE OF THE MUNDELEIN PLAZA, MUNDELEIN, ILLINOIS
On March 29, 1996, the Company acquired this Neighborhood Retail Center
from an unaffiliated third party for a purchase price of $5,658,230, including
acquisition costs of $8,230 on an all cash basis.
The following is a list of approximate physical occupancy levels for the
Company's investment properties as of the end of each quarter during 1995 and
1996 (N/A indicates the property was not owned by the Company at the end of the
quarter):
<TABLE>
<CAPTION>
1995 1996
---- ----
at at at at at
Properties 03/31 06/30 09/30 12/31 03/31
------------------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Walgreens 100% 100% 100% 100% 100%
Decatur, Illinois
Eagle Crest 100% 100% 100% 100% 100%
Naperville, Illinois
Montgomery-Goodyear N/A N/A 100% 100% 100%
Montgomery, Illinois
Hartford/Naperville Plaza N/A N/A 48% 90% 100%
Naperville, Illinois
Nantucket Square N/A N/A 92% 81% 81%
Schaumburg, Illinois
Antioch Plaza N/A N/A N/A 33% 49%
Antioch, Illinois
Mundelein Plaza N/A N/A N/A N/A 100%
Mundelein, Illinois
</TABLE>
-15-
<PAGE> 21
The increases in rental income, additional rental income, property
operating expenses to Affiliates and non-affiliates and depreciation for the
three months ended March 31, 1996, as compared to the three months ended
March 31, 1995, is due to the acquisition of properties during 1995.
Operations are expected to increase as additional properties are added to the
portfolio.
The decrease in mortgage interest expense to affiliates and non-affiliates
for the three months ended March 31, 1996, as compared to the three
months ended March 31, 1995, is due to the payoff of the financing relating to
the acquisitions of the properties. As of the date of this Supplement No. 1,
the Company has mortgage indebtedness of $745,242 collateralized by the
Walgreens/Decatur Property.
During 1994, the Advisor advanced $193,300 to the Company for costs
incurred with the Offering. These advances were repaid with a market rate of
interest to the Advisor in January 1995.
Interest income is the result of Offering Proceeds being invested in
short-term investments until a property is purchased.
The increases in professional services to affiliates and non-affiliates
and general and administrative expenses to affiliates and non-affiliates
for the three months ended March 31, 1996, as compared to the three months ended
March 31, 1995, is due to the Company entering the operational stage.
-16-
<PAGE> 22
SUBSEQUENT EVENTS
On April 5, 1996, the Company acquired the Regency Point Shopping Center
located in Lockport, Illinois from an unaffiliated third party for a purchase
price of $5,700,000. As part of the acquisition, the Company assumed an
existing first mortgage loan of approximately $4,473,200 along with a related
interest rate swap agreement. The remainder of the purchase price of
approximately $1,226,800 was funded, after prorations, with proceeds of the
Offering.
The Advisor is continuing to explore the purchase of additional shopping
centers from unaffiliated third parties for the Company and is currently
completing its due diligence on three properties. The properties, Prospect
Heights Plaza, Montgomery-Sears Shopping Center and the Zany Brainy Store, are
to be purchased from an unaffiliated third party. Prospect Heights Plaza,
located in Prospect Heights, Illinois, is anticipated to be purchased in June
1996 for a purchase price of $2,165,000 on an all-cash basis. Montgomery-Sears
Shopping Center, located in Montgomery, Illinois, is anticipated to be
purchased in June 1996 for a purchase price of $3,419,000 on an all-cash basis.
The Zany Brainy Store, located in Wheaton, Illinois, is anticipated to be
purchased in July 1996 for a purchase price of $2,455,000 on an all-cash basis.
There can be no assurance that any or all of these properties will be acquired.
See "Real Property Investments."
In all other respects, the section entitled "Management's Discussion and
Analysis of Financial Conditions of the Company" of the Prospectus remains
unchanged.
EXPERTS
The statements of gross income and direct operating expenses for the year ended
December 31, 1995 for each of Prospect Heights and Montgomery-Sears have been
included herein in reliance upon the report of Bruce Gorlick, C.P.A., Ltd.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
In all other respects, the section of the Prospectus entitled "Experts" remains
unchanged.
-17-
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets (unaudited) at March 31, 1996 and
December 31, 1995 .......................................................... F-1
Statements of Operations (unaudited) for the three months ended March 31, 1996
and 1995 ................................................................... F-3
Statements of Stockholders' Equity (unaudited) at March 31, 1996 and
December 31, 1995 .......................................................... F-4
Statement of Cash Flows (unaudited) for the three months ended
March 31, 1996 and 1995 .................................................... F-5
Notes to Financial Statements ................................................... F-6
Independent Auditors' Report .................................................... F-14
Statement of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 for Prospect Heights Plaza ............ F-15
Notes to the Statement of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 for Prospect Heights Plaza ............ F-16
Independent Auditors' Report .................................................... F-18
Statement of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 of Montgomery-Sears Shopping
Center .................................................................... F-19
Notes to the Statement of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 for Montgomery-Sears
Shopping Center ........................................................... F-20
Pro Forma Balance Sheet (unaudited) at December 31, 1995 ........................ F-22
Notes to Pro Forma Balance Sheet (unaudited) at December 31, 1995 ............... F-24
Pro Forma Statement of Operations (unaudited) for the year ended
December 31, 1995 .......................................................... F-29
Notes to Pro Forma Statement of Operations (unaudited) for the year
ended December 31, 1995 .................................................... F-31
Pro Forma Balance Sheet (unaudited) at March 31, 1996 ........................... F-39
Notes to Pro Forma Balance Sheet (unaudited) at March 31, 1996 .................. F-41
</TABLE>
-18-
<PAGE> 24
<TABLE>
<S> <C>
Pro Forma Statement of Operations (unaudited) for the three months ended
March 31, 1996 ........................................................... F-45
Notes to Pro Forma Statement of Operations (unaudited) for the three
months ended March 31, 1996 .............................................. F-47
</TABLE>
-19-
<PAGE> 25
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Balance Sheets
March 31, 1996 and December 31, 1995
(unaudited)
Assets
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Investment properties (Notes 1, 4 and 5):
Land............................................ $ 7,240,948 5,437,948
Building and improvements....................... 15,982,166 12,074,484
----------- ----------
23,223,114 17,512,432
Less accumulated depreciation................... 272,985 169,894
----------- ----------
Net investment properties....................... 22,950,129 17,342,538
----------- ----------
Cash and cash equivalents including amounts
held by property manager (Note 1)............... 2,937,473 738,931
Restricted cash (Note 1).......................... - 150,000
Accounts and rents receivable (Note 5)............ 492,081 333,823
Deposits and other assets......................... 22,309 158,123
Deferred organization costs (Note 1).............. 26,089 27,462
----------- ----------
Total assets.................................. $26,428,081 18,750,877
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE> 26
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Balance Sheets
(continued)
March 31, 1996 and December 31, 1995
(unaudited)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Liabilities:
Accounts payable................................ $ 43,544 6,875
Accrued offering costs to Affiliates............ 269,570 222,353
Accrued offering costs to non-affiliates........ 31,000 6,444
Accrued interest payable to Affiliates.......... 4,771 5,242
Accrued real estate taxes....................... 463,751 374,180
Distributions payable (Note 7).................. 183,457 129,532
Security deposits............................... 71,133 54,483
Note payable to Affiliates (Note 6)............. - 360,000
Mortgage payable (Note 6)....................... 748,011 750,727
Unearned income................................. 13,268 39,846
Other liabilities............................... 28,852 178,852
Due to Affiliates (Note 2)...................... 69,508 7,277
----------- ----------
Total liabilities............................. 1,926,865 2,135,811
----------- ----------
Stockholders' Equity (Notes 1 and 2):
Common stock, $.01 par value, 24,000,000 Shares
authorized; 2,909,912 and 2,000,073, issued and
outstanding at March 31, 1996 and
December 31, 1995, respectively............... 29,103 19,996
Additional paid-in capital (net of offering
costs of $4,078,208 at March 31, 1996, of
which $2,896,271 was paid to Affiliates)...... 24,953,635 16,835,183
Accumulated distributions in excess
of net income................................. (481,522) (240,113)
----------- ----------
Total stockholders' equity.................... 24,501,216 16,615,066
----------- ----------
Total liabilities and stockholders' equity........ $26,428,081 18,750,877
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 27
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statements of Operations
For the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Income:
Rental income (Notes 1 and 5)................... $ 475,038 70,733
Additional rental income........................ 242,290 8,790
Interest income................................. 43,751 21,598
----------- ----------
761,079 101,121
----------- ----------
Expenses:
Professional services to Affiliates............. 2,000 -
Professional services to non-affiliates......... 26,068 -
General and administrative expenses
to Affiliates................................. 7,903 -
General and administrative expenses
to non-affiliates............................. 2,197 415
Advisor asset management fee.................... 48,540 -
Property operating expenses to Affiliates....... 29,136 2,882
Property operating expenses to non-affiliates... 281,477 8,825
Mortgage interest to Affiliates................. 15,043 20,398
Mortgage interest to non-affiliates............. - 14,499
Depreciation.................................... 103,091 14,444
Amortization.................................... 1,373 -
Acquisition costs expensed...................... 8,985 162
----------- ----------
525,813 61,625
----------- ----------
Net income.................................... $ 235,266 39,496
=========== ==========
Net income per weighted average common stock shares
outstanding (2,394,092 and 343,119 for the
three months ended March 31, 1996 and 1995,
respectively.................................... $ .12 .12
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 28
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statements of Stockholders' Equity
March 31, 1996 and December 31, 1995
<TABLE>
<CAPTION>
Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
------ ---------- ------------- -----
<S> <C> <C> <C> <C>
Balance January 1, 1995..... $ 200 199,800 - 200,000
Net income.................. - - 496,514 496,514
Distributions declared
($.78 per weighted average
common stock shares
outstanding).............. - - (736,627) (736,627)
Proceeds from Offering (net
of Offering costs of
$3,121,175).............. 19,826 16,662,162 - 16,681,988
Repurchases of Shares....... (30) (26,779) - (26,809)
----------- ----------- ----------- ------------
Balance December 31, 1995... 19,996 16,835,183 (240,113) 16,615,066
Net income.................. - - 235,266 235,266
Distributions declared
($.20 per weighted average
common stock shares
outstanding).............. - - (476,675) (476,675)
Proceeds from Offering (net
of Offering costs of
$957,033)................. 9,107 8,118,452 - 8,127,559
----------- ----------- ----------- ------------
Balance March 31, 1996...... $ 29,103 24,953,635 (481,522) 24,501,216
=========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 29
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statement of Cash Flows
For the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 235,266 39,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................ 103,091 14,444
Amortization................................ 1,373 -
Rental income under master lease agreements. 109,333 -
Changes in assets and liabilities:
Accounts and rents receivable............... (158,258) (74,855)
Other assets................................ 135,814 1,075
Accrued interest payable.................... (471) 30,052
Accrued real estate taxes................... 89,571 95,225
Accounts payable............................ 36,669 -
Unearned income............................. (26,578) -
Due to Affiliates........................... 53,646 -
Security deposits........................... 16,650 13,853
----------- ------------
Net cash provided by operating activities......... 596,106 119,290
----------- ------------
Cash flows from investing activities:
Additions to investment properties.............. (153,450) -
Purchase of investment properties............... (5,657,980) (218,418)
----------- ------------
Net cash used in investing activities............. (5,811,430) (218,418)
----------- ------------
Cash flows from financing activities:
Repayment of note to Affiliate.................. (360,000) -
Repayment of loan from Advisor.................. - (193,300)
Proceeds from offering.......................... 9,084,592 4,842,205
Payments of offering costs...................... (885,260) (613,424)
Distributions paid.............................. (422,750) -
Principal payments of debt...................... (2,716) (2,508,857)
Net cash provided by financing activities......... 7,413,866 1,526,624
----------- ------------
Net increase in cash and cash equivalents......... 2,198,542 1,427,496
Cash and cash equivalents at beginning of period.. 738,931 10,934
----------- ------------
Cash and cash equivalents at end of period........ $ 2,937,473 1,438,430
=========== ============
Distributions payable............................. $ 183,457 (58,495)
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 30
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
March 31, 1996
(unaudited)
Readers of this Quarterly Report should refer to the Partnership's audited
financial statements for the fiscal year ended December 31, 1995, which are
included in the Company's 1995 Annual Report, as certain footnote disclosures
which would substantially duplicate those contained in such audited financial
statements have been omitted from this Report.
(1) Organization and Basis of Accounting
Inland Monthly Income Fund III, Inc. (the "Company") was formed on May 12, 1994
to invest in neighborhood retail centers located within an approximate 150-mile
radius of its headquarters in Oak Brook, Illinois. The Company may also
acquire single-user retail properties in locations throughout the United
States, certain of which may be sale and leaseback transactions, net leased to
creditworthy tenants. On October 14, 1994, the Company commenced an initial
public offering (the "Offering") of 5,000,000 shares of common stock (the
"Shares") at a price of $10 per Share and the issuance of 1,000,000 Shares at a
price of $9.05 per Share which may be distributed pursuant to the Company's
distribution reinvestment program (the "DRP"). Inland Real Estate Advisory
Services, Inc. (the "Advisor"), an Affiliate of the Company, is the advisor to
the Company. Subscriber funds were held in an interest-bearing escrow account
with the Company's unaffiliated escrow agent until January 3, 1995. Offering
proceeds were released from escrow on January 3, 1995 when subscriptions were
accepted and Shares issued by the Company. Subscribers received their pro rata
share of interest income earned on their subscriptions while in escrow. As of
March 31, 1996, the Company has repurchased 3,000 Shares. At March 31, 1996,
subscriptions for a total of 2,909,912 Shares have been received, resulting in
$29,088,408 in Gross Offering Proceeds.
The Company qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1995. Since the Company
qualified for taxation as a REIT, the Company generally will not be subject to
federal income tax to the extent it distributes its REIT taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and federal income and excise taxes on its undistributed income.
F-6
<PAGE> 31
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents and are carried at cost, which
approximates fair value. Included in cash and equivalents is $249,890 held by
the Company's affiliated property manager which is unrestricted and held in the
Company's name.
Deferred organization costs are amortized over a 60-month period.
Offering costs were offset against the Stockholders' equity accounts once the
Shares sold exceeded the Minimum Number of Shares and Gross Offering Proceeds
were released from escrow. Offering costs consist principally of printing,
selling and registration costs.
The investment properties are carried at the lower of aggregate cost or net
realizable value. Periodically, the Company will review its real estate
portfolio and if investment properties suffer an impairment in value which is
deemed to be other than temporary, the investment in properties would be
reduced to the net realizable value of the properties. As of March 31, 1996,
there have been no such impairments. Depreciation expense is computed using
the straight-line method. Buildings and improvements are based upon estimated
useful lives of 30 years. Tenant improvements will be depreciated over the
related lease period.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned and the cash rent due under
the provisions of the lease agreements is recorded as deferred rent receivable.
The Company believes that the interest rate associated with the mortgage
payable approximates the market interest rates for this type of debt
instrument, and as such, the carrying amount of the mortgage payable
approximates its fair value.
F-7
<PAGE> 32
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
The carrying amount of cash and cash equivalents, restricted cash, accounts and
rents receivable, accounts payable and other liabilities, accrued offering
costs to Affiliates, accrued offering costs to non-Affiliates, accrued interest
payable to Affiliates, accrued real estate taxes, and distributions payable
approximate fair value because of the relative short maturity of these
instruments.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present
fairly the financial position and results of operations for the periods
presented herein. Results of interim periods are not necessarily indicative of
the results to be expected for the year.
(2) Transactions with Affiliates
As of March 31, 1996, the Company had incurred $4,105,670 of organization and
offering costs. Pursuant to the terms of the Offering, the Advisor is required
to pay organization and offering expenses (excluding sales commissions, the
marketing contribution and the due diligence expense allowance fee) in excess
of 5.5% of the gross proceeds of the Offering (the "Gross Offering Proceeds")
or all organization and offering expenses (including such selling expenses)
which together exceed 15% of Gross Offering Proceeds. As of March 31, 1996,
organizational and offering costs did exceed the 5.5% and 15% limitations. The
Company anticipates that these costs will not exceed these limitations upon
completion of the Offering, however, any excess amounts will be reimbursed by
the Advisor.
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
Offering and to the administration of the Company. In addition, an Affiliate
of the Advisor serves as dealer manager of the Offering and is entitled to
receive selling commissions, a marketing contribution and a due diligence
expense allowance fee from the Company in connection with the Offering. Such
commissions incurred were $2,526,845 and $1,719,406 as of March 31, 1996 and
December 31, 1995, respectively, of which $192,632 and $102,084 were unpaid as
of March 31, 1996 and December 31, 1995, respectively. Other costs to
Affiliates incurred relating to the Offering were $369,426 and $409,858 as of
March 31, 1996 and December 31, 1995, respectively, of which $76,938 and
$120,269 were unpaid as of March 31, 1996 and December 31, 1995, respectively.
F-8
<PAGE> 33
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
As of March 31, 1996, the Advisor has contributed $200,000 to the capital of
the Company for which it received 20,000 Shares.
During 1994, the Advisor advanced $193,300 to the Company for costs incurred
with the Offering. These advances were repaid with a market rate of interest
to the Advisor in January 1995 with interest ranging from 7.75% to 9.50%. The
principal of $193,300 and interest totaling $3,162 were paid from Gross
Offering Proceeds.
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to
the extent that the Advisor Asset Management Fee plus Other Operating Expenses
paid during the previous calendar year exceed 2% of the Company's Average
Invested Assets for that calendar year or 25% of the Company's Net Income for
that calendar year; and (ii) to the extent that Stockholders have not received
an annual Distribution equal to or greater than the 8% Current Return. As of
March 31, 1996, the Company has incurred $48,540 of such fees, all of which
remains unpaid at March 31, 1996. (Defined terms in this paragraph have the
same definitions from the prospectus.)
An Affiliate of the Advisor is entitled to receive Property Management Fees for
management and leasing services. The Company incurred and paid property
management fees of $29,136 and $2,882 for the three months ended March 31, 1996
and 1995, respectively.
F-9
<PAGE> 34
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
(3) Commitments and Contingencies
The Company adopted an Independent Director Stock Option Plan which granted
each Independent Director an option to acquire 3,000 Shares as of October 14,
1994 and an additional 500 Shares on the date of each annual stockholders'
meeting commencing with the annual meeting in 1995 if the Independent Director
is a member of the Board on such date. The options for the initial 3,000 Share
grant are exercisable as follows: 1,000 Shares on the date of grant and 1,000
Shares on each of the first and second anniversaries of the date of grant. The
succeeding options are exercisable on the second anniversary of the date of
grant. No options have been exercised.
In addition to sales commissions, Soliciting Dealers will also receive one
Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting Dealer
during the Offering, subject to state and federal securities laws. The holder
of a Soliciting Dealer Warrant will be entitled to purchase one Share from the
Company at a price of $12 during the period commencing with the first date upon
which the Soliciting Dealer Warrants are issued and ending upon the first to
occur of: (i) October 14, 1999; or (ii) the closing date of a secondary
offering of the Shares by the Company. Notwithstanding the foregoing, no
Soliciting Dealer Warrant will be exercisable until one year from the date of
issuance.
On the behalf of the Company, the Advisor is currently exploring the purchase
of additional shopping centers from unaffiliated third parties.
F-10
<PAGE> 35
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
(4) Investment Properties
<TABLE>
<CAPTION>
Gross amount at which carried
Initial Cost (A) at end of period
---------------- -----------------------------
Buildings Adjustments Land Buildings
Date and to and and
Acq Land improvements Basis (B) improvements improvements Total
------ ------ ------------ ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Single-user Retail
Walgreens/Decatur
Decatur, IL............. 01/95 $ 78,330 1,130,723 - 78,330 1,130,723 1,209,053
Neighborhood Retail Centers
Eagle Crest Shopping Center
Naperville, IL.......... 03/95 1,878,618 2,938,352 - 1,878,618 2,938,352 4,816,970
Montgomery-Goodyear
Montgomery, IL.......... 09/95 315,000 832,909 (6,632) 315,000 826,277 1,141,277
Hartford/Naperville Plaza
Naperville, IL.......... 09/95 990,000 3,426,211 22,082 990,000 3,448,293 4,438,293
Nantucket Square
Schaumburg, IL.......... 09/95 1,908,000 2,352,833 (15,026) 1,908,000 2,337,807 4,245,807
Antioch Plaza
Antioch, IL............. 12/95 268,000 1,487,372 (41,638) 268,000 1,445,734 1,713,734
Mundelein Plaza
Mundelein, IL........... 03/96 1,803,000 3,854,980 - 1,803,000 3,854,980 5,657,980
----------- ----------- ---------- ----------- ----------- -----------
$ 7,240,948 16,023,380 (41,214) 7,240,948 15,982,166 23,223,114
=========== =========== ========== =========== =========== ===========
</TABLE>
(A) The initial cost to the Company, represents the original purchase price of
the property, including amounts incurred subsequent to acquisition, which
were contemplated at the time the property was acquired.
(B) Adjustments to basis includes additions to investment properties and
payments received under master lease agreements. As part of the
Montgomery-Goodyear, Hartford/Naperville Plaza, Nantucket Square and
Antioch Plaza purchases, the Company will receive rent under master lease
agreements on the spaces currently vacant for periods ranging from one year
to eighteen months or until the spaces are leased. Generally accepted
accounting principles require that as these payments are received, they be
recorded as a reduction in the purchase price of the properties rather than
as rental income. As of March 31, 1996, the Company has recorded $242,349
of such payments.
F-11
<PAGE> 36
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
(5) Operating Leases
Master Lease Agreements
As part of the Montgomery-Goodyear, Hartford/Naperville Plaza, Nantucket Square
and Antioch Plaza purchases, the Company will receive rent under master lease
agreements on the spaces currently vacant for periods ranging from one year to
eighteen months or until the spaces are leased. Generally Accepted Accounting
Principles require that as these payments are received, they be recorded as a
reduction in the purchase price of the properties rather than as rental income.
Hartford/Naperville Plaza is fully leased and tenant improvements are
substantially completed. Master lease payments amounted to $29,114 for the
three months ended March 31, 1996.
The seller of Nantucket Square entered into a master lease agreement with the
Company for 4,500 square feet at $15 per square foot for 12 months or until the
space is leased. In addition, the Company received a credit at closing for
rent abatement agreements under current leases. Master lease payments amounted
to $37,268 for the three months ended March 31, 1996.
At March 31, 1996, Antioch Plaza was 49% leased and tenant improvements are
being completed. Certain tenants have begun paying rent. The master lease
payments amounted to $39,921 for the three months ended March 31, 1996. The
master lease agreement on this property expires June 1997.
Master lease payments at Montgomery-Goodyear amounted to $3,030 for the three
months ended March 31, 1996.
Certain tenant leases contain provisions providing for stepped rent increases.
Generally accepted accounting principles require that rental income be recorded
for the period of occupancy using the effective monthly rent, which is the
average monthly rent for the entire period of occupancy during the term of the
lease. The accompanying financial statements include $7,284 and $740 for the
three months ended March 31, 1996 and 1995, respectively, of rental income for
the period of occupancy for which stepped rent increases apply and $19,697 and
$740 in related accounts receivable as of March 31, 1996 and December 31, 1995,
respectively. These amounts will be collected over the terms of the related
leases as scheduled rent payments are made.
F-12
<PAGE> 37
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
March 31, 1996
(unaudited)
(6) Mortgage Payable and Note Payable to Affiliates
Mortgage payable and note payable to Affiliates consist of the following at
March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
7.655% first mortgage secured by Walgreens,
Decatur, Illinois, monthly principal and
interest payments of $5,689, with the
remaining balance due May 2004............ $ 748,011 750,727
------------ ------------
Mortgage payable............................ $ 748,011 750,727
============ ============
9.5% promissory note payable to Inland
Real Estate Investment Corporation, paid
in full on January 9, 1996................ - 360,000
------------ ------------
Note payable to Affiliates.................. $ - 360,000
============ ============
</TABLE>
(7) Subsequent Events
During April 1996, the Company paid distributions of $183,457 to the
Stockholders of record at March 31, 1996 on a weighted average basis for the
month.
On April 5, 1996, the Company completed the acquisition of the Regency Point
Shopping Center located in Lockport, Illinois ("Regency Point"), from a third
party unaffiliated with the Company, for a purchase price of $5,700,000. In
connection with the acquisition of Regency Point, the Company assumed the
existing first mortgage loan of approximately $4,473,200, along with a related
interest rate swap agreement which has the effect of fixing the interest rate
on the mortgage loan at 7.91% per annum. The remainder of the purchase price
was funded, after prorations, with proceeds of the Offering. The related
interest rate swap agreement was terminated on April 18, 1996 resulting in
$48,419 proceeds to the Company. As a result, the first mortgage loan has a
floating interest rate of 180 basis points over the 30-day LIBOR rate, which
rate is adjusted monthly (currently 7.2375%), amortizes over 25 years and
matures August 2000.
F-13
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NATIONAL SHOPPING PLAZAS, INC.
We have audited the accompanying Statement of Gross Income and Direct Operating
Expenses of the Prospect Heights Plaza for the year ended December 31, 1995.
This Statement is the responsibility of the management of the Company. Our
responsibility is to express an opinion on this Statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Monthly Income
Fund III, Inc. as described in Note 2. The presentation is not intended to be
a complete presentation of the Prospect Heights Plaza revenues and expenses.
In our opinion, the Statement referred to above presents fairly, in all
material respects, the gross income and direct operating expenses of Prospect
Heights Plaza as described in Note 2 for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
BRUCE GORLICK, C.P.A., LTD.
A PROFESSIONAL CORPORATION
BUFFALO GROVE, ILLINOIS
MAY 24, 1996
F-14
<PAGE> 39
Prospect Heights Plaza
Statement of Gross Income and Direct Operating Expenses
For the year ended December 31, 1995
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $ 164,152
Operating expense and real estate
tax recoveries................................ 116,075
Other tenant income............................. 100
-----------
Total Gross Income.............................. 280,327
-----------
Direct operating expenses:
Real estate taxes............................... 127,033
Management fees................................. 16,600
Operating expenses.............................. 29,678
Utilities....................................... 3,339
Insurance expense............................... 4,169
-----------
Total Direct Operating Expenses................. 180,819
-----------
Excess of Gross over Direct Operating............. $ 99,508
===========
</TABLE>
F-15
<PAGE> 40
Prospect Heights Plaza
Notes to the Statement of Income and Direct Operating Expenses
December 31, 1995
1. Business
Prospect Heights Plaza is located in Prospect Heights, Illinois. It
consists of approximately 27,830 square feet of gross leasable area and was
78% occupied at December 31, 1995. Prospect Heights Plaza is owned by
Amalgamated Bank of Chicago, Trust No. 5073. Amalgamated Bank of Chicago,
Trust No. 5073 has signed a sale and purchase agreement for the sale of
Prospect Heights Plaza to Inland Monthly Income Fund III, Inc.
2. Basis of Presentation
The Statement has been prepared for the purpose of complying with Rule 3-14
of the Securities and Exchange Commission Regulation S-X and for inclusion
in the Registration Statement on Form S-11 of Inland Monthly Income Fund
III, Inc. and is not intended to be a complete presentation of revenues and
expenses. The Statement has been prepared on the accrual basis of
accounting.
3. Gross Income
National Shopping Plazas, Inc. leases retail space under various lease
agreements with its tenants. All leases are accounted for as operating
leases. Certain of the leases include provisions under which Prospect
Heights Plaza is reimbursed for certain common area, real estate, and
insurance costs. Operating Expense and Real Estate Tax Recoveries
reflected on the Statement of Gross Income and Direct Operating Expenses
includes amounts due for 1995 expenses for which the tenants have not yet
been billed. Certain leases have rent due for the year ended December 31,
1995. Certain leases contain renewal options for various periods at
various rental rates.
Base rentals are reported as income over the lease term as they become
receivable under the provisions of the leases. However, when rentals vary
from a straight-line basis due to short-term rent abatements or escalating
rents during the lease term, the income is recognized based on effective
rental rates. The adjusted increase in base rental income is $11 for the
year ended December 31, 1995, which we consider immaterial.
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
Year Amount
------ --------
<S> <C>
1996 $ 178,710
1997 179,910
1998 116,630
1999 94,450
2000 94,450
Thereafter 332,062
------------
$ 996,212
============
</TABLE>
F-16
<PAGE> 41
Prospect Heights Plaza
Notes to the Statement of Gross Income and Direct Operating Expenses
December 31, 1995
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Prospect Heights Plaza.
Costs such as mortgage interest, depreciation, amortization, and
professional fees are excluded from the Statement.
Prospect Heights Plaza has not received its final real estate bill for
1995. The difference between this estimate and the final bill is not
expected to have a material impact on the Statement of Gross Income and
Direct Operating Expenses.
Prospect Heights Plaza is managed by National Shopping Plazas, Inc. For
the year ended December 31, 1995, Prospect Heights Plaza paid approximately
$17,000 for management fees, as per the management agreement.
F-17
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NATIONAL SHOPPING PLAZAS, INC.
We have audited the accompanying Statement of Gross Income and Direct Operating
Expenses of the Montgomery-Sears Shopping Center ("Montgomery-Sears") for the
year ended December 31, 1995. This Statement is the responsibility of the
management of the Company. Our responsibility is to express an opinion on this
Statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Monthly Income
Fund III, Inc. as described in Note 2. The presentation is not intended to be
a complete presentation of the Montgomery-Sears revenues and expenses.
In our opinion, the Statement referred to above presents fairly, in all
material respects, the gross income and direct operating expenses of
Montgomery-Sears as described in Note 2 for the year ended December 31, 1995,
in conformity with generally accepted accounting principles.
BRUCE GORLICK, C.P.A., LTD.
A PROFESSIONAL CORPORATION
BUFFALO GROVE, ILLINOIS
MAY 29, 1996
F-18
<PAGE> 43
Montgomery-Sears Shopping Center
Statement of Gross Income and Direct Operating Expenses
For the year ended December 31, 1995
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $ 327,610
Operating expense and real estate
tax recoveries.................................. 75,642
Other tenant income............................. 540
----------
Total Gross Income.............................. 403,792
----------
Direct operating expenses:
Real estate taxes............................... 60,996
Management fees................................. 14,800
Operating expenses.............................. 12,596
Utilities....................................... 5,311
Insurance expense............................... 8,364
----------
Total Direct Operating Expenses................. 102,067
----------
Excess of Gross over Direct Operating................ $ 301,725
==========
</TABLE>
F-19
<PAGE> 44
Montgomery-Sears Shopping Center
Notes to the Statement of Income and Direct Operating Expenses
December 31, 1995
1. Business
Montgomery-Sears is located in Montgomery, Illinois. It consists of
approximately 34,600 square feet of gross leasable area and was 85%
occupied at December 31, 1995. Montgomery-Sears is owned by Amalgamated
Bank of Chicago, Trust No. 5435. Amalgamated Bank of Chicago, Trust No.
5435 has signed a sale and purchase agreement for the sale of Montgomery-
Sears to Inland Monthly Income Fund III, Inc.
2. Basis of Presentation
The Statement has been prepared for the purpose of complying with Rule 3-14
of the Securities and Exchange Commission Regulation S-X and for inclusion
in the Registration Statement on Form S-11 of Inland Monthly Income Fund
III, Inc. and is not intended to be a complete presentation of revenues and
expenses. The Statement has been prepared on the accrual basis of
accounting.
3. Gross Income
National Shopping Plazas, Inc. leases retail space under various lease
agreements with its tenants. All leases are accounted for as operating
leases. Certain of the leases include provisions under which Montgomery-
Sears is reimbursed for certain common area, real estate, and insurance
costs. Operating Expense and Real Estate Tax Recoveries reflected on the
Statement of Gross Income and Direct Operating Expenses includes amounts
due for 1995 expenses for which the tenants have not yet been billed.
Certain leases contain renewal options for various periods at various
rental rates.
Base rentals are reported as income over the lease term as they become
receivable under the provisions of the leases. However, when rentals vary
from a straight-line basis due to short-term rent abatements or escalating
rents during the lease term, the income is recognized based on effective
rental rates. The adjusted increase in base rental income is $56 for the
year ended December 31, 1995, which we consider immaterial.
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
Year Amount
------ --------
<S> <C>
1996 $ 335,180
1997 355,440
1998 321,560
1999 258,950
2000 205,800
Thereafter -
------------
$ 1,476,930
============
</TABLE>
F-20
<PAGE> 45
Montgomery-Sears Shopping Center
Notes to the Statement of Gross Income and Direct Operating Expenses
December 31, 1995
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Montgomery-Sears. Costs
such as mortgage interest, depreciation, amortization, and professional
fees are excluded from the Statement.
Montgomery-Sears has not received its final real estate bill for 1995. The
difference between this estimate and the final bill is not expected to
have a material impact on the Statement of Gross Income and Direct
Operating Expenses.
Montgomery-Sears is managed by National Shopping Plazas, Inc. For the year
ended December 31, 1995, Montgomery-Sears paid approximately $15,000 for
management fees, as per the management agreement.
F-21
<PAGE> 46
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
December 31, 1995
(unaudited)
The following unaudited Pro Forma Balance Sheet of the Company is presented to
effect the acquisitions of Mundelein Plaza, the Regency Point Shopping Center,
Prospect Heights Plaza, Montgomery-Sears Shopping Center and the Zany Brainy
store, as of December 31, 1995. This unaudited Pro Forma Balance Sheet should
be read in conjunction with the December 31, 1995 Financial Statements and the
notes thereto as filed on Form 10-K.
This unaudited Pro Forma Balance Sheet is not necessarily indicative of what
the actual financial position would have been at December 31, 1995, nor does it
purport to represent the future financial position of the Company. Unless
otherwise defined, capitalized terms used herein shall have the same meaning as
in the Prospectus.
F-22
<PAGE> 47
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
December 31,
December 31, 1995
1995 Pro Forma Pro Forma
Historical(A) Adjustments(B) Balance Sheet
------------- -------------- -------------
<S> <C> <C> <C>
Assets
Net investment in
properties.................. $ 17,342,538 19,397,230 36,739,768
Cash and cash equivalents..... 738,931 - 738,931
Restricted cash............... 150,000 - 150,000
Accounts and rents
receivable.................. 333,823 167,855 501,678
Other assets.................. 185,585 - 185,585
------------ ----------- -----------
Total assets.................. $ 18,750,877 19,565,085 38,315,962
============ =========== ===========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C> <C>
Accounts payable and accrued
expenses.................... $ 288,037 7,500 295,537
Accrued real estate taxes..... 374,180 202,049 576,229
Distributions payable (C)..... 129,532 - 129,532
Security deposits............. 54,483 52,221 106,704
Mortgage payable.............. 750,727 4,473,200 5,223,927
Notes payable to Affiliate.... 360,000 - 360,000
Other liabilities............. 178,852 - 178,852
------------ ----------- -----------
Total liabilities............. 2,135,811 4,734,970 6,870,781
------------ ----------- -----------
Common Stock(D)............... 19,996 17,245 37,241
Additional paid in capital
(net of Offering costs)(D).. 16,835,183 14,812,870 31,648,053
Accumulated distributions in
excess of net income........ (240,113) - (240,113)
------------ ----------- -----------
Total Stockholders' equity.... 16,615,066 14,830,115 31,445,181
------------ ----------- -----------
Total liabilities and
Stockholders' equity........ $ 18,750,877 19,565,085 38,315,962
============ =========== ===========
</TABLE>
See accompanying notes to pro forma balance sheet.
F-23
<PAGE> 48
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
December 31, 1995
(unaudited)
(A) The December 31, 1995 Historical column represents the historical balance
sheet as presented in the December 31, 1995 10-K as filed with the SEC and
includes the following properties acquired by the Company as of December
31, 1995.
Walgreens, Decatur, Illinois
On January 31, 1995, the Company acquired this property from Inland
Property Sales, Inc. ("IPS"), an Affiliate of the Advisor, for the total
purchase price of $1,209,053, including acquisition costs of $482, and the
assumption of the first mortgage loan with a balance of $750,727 at
December 31, 1995, which is secured by the property. This mortgage has an
interest rate of 7.655% and amortizes over a 25-year period. The Company
is responsible for monthly payments of principal and interest of $5,689.
Eagle Crest Shopping Center, Naperville, Illinois
On March 1, 1995, the Company acquired this property from IPS for the
purchase price of $4,816,970, including acquisition costs of $11,059, and
the assumption of the first mortgage loan of approximately $3,534,000,
which was secured by the property. The balance of the purchase price was
funded through a loan from IPS, totaling $1,212,427, with interest accruing
at 10.5%. On April 20, 1995, the Company paid off the first mortgage
secured by this property. The deferred portion of the purchase price,
totaling $1,212,427, was paid to IPS in May 1995 from Gross Offering
Proceeds. In addition, accrued interest of $22,009 was paid from Company
operations.
Montgomery-Goodyear Shopping Center, Montgomery, Illinois
On September 14, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $1,145,992, including
closing costs of $5,992, a portion of which was evidenced by a promissory
note payable to Inland Mortgage Investment Corporation ("IMIC"), an
Affiliate of the Advisor, in the gross amount of $600,000. The remainder
of the purchase price net of prorations, of approximately $535,000 was
funded with proceeds of the Offering. The promissory note was paid in full
in October 1995, with interest at a rate of 10.9% per annum. The total
amount paid was $604,260, of which $600,000 was principal paid from Gross
Offering Proceeds and $4,260 was interest paid from Company operations.
F-24
<PAGE> 49
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
December 31, 1995
(unaudited)
Hartford Plaza, Naperville, Illinois
On September 14, 1995, the Company acquired this newly constructed property
from an unaffiliated third party for a purchase price of $4,414,015
including closing costs of $14,015, and deposited $150,000 in an escrow
account for leasehold improvements to the Blockbuster, Inc. space. A
portion of the purchase price was evidenced by a promissory note payable to
IMIC, in the gross amount of $600,000. The remainder of the purchase price
was funded with proceeds of the Offering. The promissory note was paid in
full in October 1995 with interest at a rate of 10.9% per annum. The total
amount paid was $605,102, of which $600,000 was principal paid from Gross
Offering Proceeds and $5,102 was interest paid from Company operations.
Nantucket Square Shopping Center, Schaumburg, Illinois
On September 20, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $4,257,918, including
closing costs of $4,913, a portion of which was evidenced by a promissory
note payable to IMIC, in the gross amount of $3,550,000. The remainder of
the purchase price was funded with proceeds of the Offering. In addition,
as part of the purchase, the Company agreed to pay $51,135 for tenant
improvements for two tenants expanding their space, which was added to the
cost of the property. The promissory note was paid in full in December
1995 with interest at a rate of 10.5% per annum. The principal amount paid
was $3,550,000 from Gross Offering Proceeds and interest of $62,011 was
paid from Company operations.
Antioch Plaza, Antioch, Illinois
On December 28, 1995, the Company acquired Antioch Plaza from an
unaffiliated third party for a purchase price of $1,750,365, including
closing costs of $365, a portion of which was evidenced by a promissory
note payable to Inland Real Estate Investment Corporation, an affiliate of
the Advisor ("IREIC"), in the gross amount of $660,000. As of December 31,
1995, the unpaid balance of this note was $360,000. The note which bore
interest at a rate of 9.5% per annum was repaid in full on January 9, 1996
and the total amount paid was $661,163, of which $660,000 was principal
paid from Gross Offering Proceeds and $1,163 was interest paid from Company
operations. The remainder of the purchase price, net of prorations of
approximately $1,100,000 was funded with proceeds of the Offering.
F-25
<PAGE> 50
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
December 31, 1995
(unaudited)
(B) The following pro forma adjustment relates to the acquisition or probable
acquisition of the subject properties as though they were acquired on
December 31, 1995. The terms are described in the notes that follow.
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------------------------------------------------------------
Total
Mundelein Regency Prospect Montgomery- Zany Pro Forma
Plaza Point Heights Sears Brainy Adjustment
--------- ------- -------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Net investment in
properties.................. $ 5,658,230 5,700,000 2,165,000 3,419,000 2,455,000 19,397,230
Cash and cash equivalents..... - - - - - -
Restricted cash............... - - - - - -
Accounts and rent
receivable.................. 84,375 16,867 38,771 27,842 - 167,855
Other assets.................. - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total assets.................. $ 5,742,605 5,716,867 2,203,771 3,446,842 2,455,000 19,565,085
=========== =========== =========== =========== =========== ===========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C> <C> <C> <C> <C>
Accounts payable and accrued
expenses.................... $ 7,500 - - - - 7,500
Accrued real estate taxes..... 89,010 16,867 63,517 32,655 - 202,049
Distributions payable (C)..... - - - - - -
Security deposits............. 15,000 28,621 8,600 - - 52,221
Mortgage payable.............. - 4,473,200 - - - 4,473,200
Notes payable to Affiliate.... - - - - - -
Other liabilities............. - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities............. 111,510 4,518,688 72,117 32,655 2,455,000 4,734,970
----------- ----------- ----------- ----------- ----------- -----------
Common Stock(D)............... 6,548 1,393 2,479 3,970 2,855 17,245
Additional paid in capital
(net of Offering costs)(D).. 5,624,547 1,196,786 2,129,175 3,410,217 2,452,145 14,812,870
Accumulated distributions in
excess of net income........ - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Total Stockholders' equity.... 5,631,095 1,198,179 2,131,654 3,414,187 2,455,000 14,830,115
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
Stockholders' equity........ $ 5,742,605 5,716,867 2,203,771 3,446,842 2,455,000 19,565,085
=========== =========== =========== =========== =========== ===========
</TABLE>
F-26
<PAGE> 51
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
December 31, 1995
(unaudited)
Acquisition of Mundelein Plaza, Mundelein, Illinois
On March 29, 1996, the Company acquired the Mundelein Plaza property
located in Mundelein, Illinois ("Mundelein Plaza") from an unaffiliated
third party for a purchase price of $5,658,230, including closing costs of
$8,230, on an all cash basis, funded from offering proceeds.
Acquisition of Regency Point Shopping Center, Lockport, Illinois
On April 5, 1996, the Company completed the acquisition of the Regency
Point Shopping Center located in Lockport, Illinois ("Regency Point"), from
an unaffiliated third party for a purchase price of $5,700,000. As part of
the acquisition, the Company will assume the existing first mortgage loan
of $4,473,200 along with a related interest rate swap agreement, with the
balance funded with Offering proceeds.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly. The interest
rate swap agreement, in conjunction with the first mortgage, provides for
Bank One, Chicago, to receive from or pay to the Company the difference
between 6.11% and the 30-day LIBOR rate, so that the first mortgage loan
has an effective rate of 7.91% per annum. The first mortgage loan matures
in August 2000. The related interest rate swap agreement was terminated on
April 18, 1996 resulting in $48,419 proceeds to the Company. No pro forma
adjustment has been made as a result of this termination.
Acquisition of Prospect Heights Plaza, Prospect Heights, Illinois
The Company, through the Advisor, is currently completing its due diligence
and anticipates purchasing this property in June 1996 from an unaffiliated
third party for the purchase price of $2,165,000 on an all cash basis.
Acquisition of Montgomery-Sears, Montgomery, Illinois
The Company, through the Advisor, is currently completing its due diligence
and anticipates purchasing this property in June 1996 from an unaffiliated
third party for the purchase price of $3,419,000 on an all cash basis.
Acquisition of Zany Brainy, Wheaton, Illinois
The Company, through the Advisor, is currently completing its due diligence
and anticipates purchasing this property in July 1996 from an unaffiliated
third party for the purchase price of $2,455,000 on an all cash basis.
F-27
<PAGE> 52
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
December 31, 1995
(unaudited)
(C) No pro forma assumptions have been made for the additional payment of
distributions resulting from the additional proceeds raised.
(D) Additional Offering Proceeds of $17,244,320, net of additional Offering
costs of $2,414,205, are reflected as received as of December 31, 1995,
prior to the purchase of the properties. Offering costs consist
principally of registration costs, printing and selling costs, including
commissions.
F-28
<PAGE> 53
Inland Monthly Income Fund III, Inc.
Pro Forma Statement of Operations
For the year ended December 31, 1995
(unaudited)
The following unaudited Pro Forma Statement of Operations of the Company is
presented to effect the acquisitions of the Walgreens/Decatur property, Eagle
Crest Shopping Center, Montgomery-Goodyear property, Nantucket Square Shopping
Center, Mundelein Plaza, Regency Point Shopping Center, Prospect Heights Plaza
and Montgomery-Sears Shopping Center as of January 1, 1995. The remaining
three properties were constructed in 1995 and acquired shortly after
construction was completed. Therefore, the unaudited Pro Forma Statement of
Operations of the Company is presented to effect the acquisition of
Hartford/Naperville Plaza, Antioch Plaza and the Zany Brainy store, as of
August 17, 1995, September 1, 1995 and November 22, 1995, respectively, the
date occupancy commenced at these properties. This unaudited Pro Forma
Statement of Operations should be read in conjunction with the December 31,
1995 Financial Statements and the notes thereto as filed on Form 10-K.
This unaudited Pro Forma Statement of Operations is not necessarily indicative
of what the actual results of operations would have been for the year ended
December 31, 1995, nor does it purport to represent the future results of
operations of the Company. Unless otherwise defined, capitalized terms used
herein shall have the same meaning as in the Prospectus.
F-29
<PAGE> 54
Inland Monthly Income Fund III, Inc.
Pro Forma Statement of Operations
for the year ended December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------------------------
1995 1995 1996
Historical Acquisitions Acquisitions 1995
(A) (B) (C) Pro Forma
---------- ------------ ------------ ---------
<S> <C> <C> <C>
Rental
income................ $ 869,485 585,614 1,700,614 3,155,713
Additional
Rental income......... 228,024 162,536 327,350 717,910
Interest
income (D)............ 82,913 - - 82,913
---------- ---------- ---------- ----------
Total income.......... 1,180,422 748,150 2,027,964 3,956,536
---------- ---------- ---------- ----------
Professional
services and
general and
administrative........ 23,132 - - 23,132
Property operating
expenses.............. 326,721 275,218 501,485 1,103,424
Interest expense........ 164,161 429,997 351,900 946,058
Depreciation (E)........ 169,894 111,767 425,255 706,916
---------- ---------- ---------- ----------
Total expenses.......... 683,908 816,982 1,278,640 2,779,530
---------- ---------- ---------- ----------
Net income(loss) $ 496,514 (68,832) 749,324 1,177,006
========== ========== ========== ==========
Weighted average
common stock shares
outstanding (F)....... 943,156 2,667,588
========== ==========
Net income per weighted
average common stock
outstanding (F)....... $ .53 .44
========== ==========
</TABLE>
See accompanying notes to pro forma statement of operations.
F-30
<PAGE> 55
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
For the year ended December 31, 1995
(unaudited)
(A) The December 31, 1995 Historical column represents the historical statement
of operations of the Company for the year ended December 31, 1995, as filed
with the SEC on Form 10-K.
(B) Total pro forma adjustments for 1995 acquisitions as though they were
acquired the earlier of January 1, 1995 or date that operations commenced.
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------------------------------------------------------
Hartford Total
Montgomery- Naperville Nantucket Antioch 1995
Walgreens Eagle Crest Goodyear Plaza Square Plaza Pro Forma
--------- ----------- ----------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental
income............ 10,651 95,232 101,359 15,077 340,545 22,750 585,614
Additional
Rental income..... - 2,218 19,203 662 140,453 - 162,536
Interest
income (D)........ - - - - - - -
------- ---------- ----------- ---------- ----------- ----------- -----------
Total income...... 10,651 97,450 120,562 15,739 480,998 22,750 748,150
------- ---------- ----------- ---------- ----------- ----------- -----------
Professional
services and
general and
administrative ... - - - - - - -
Property operating
expenses.......... 533 17,376 47,758 3,436 205,903 212 275,218
Interest expense.... 4,840 77,170 46,325 13,625 267,137 20,900 429,997
Depreciation (E).... 3,141 16,324 20,682 8,867 57,357 5,396 111,767
------- ---------- ----------- ---------- ----------- ----------- -----------
Total expenses...... 8,514 110,870 114,765 25,928 530,397 26,508 816,982
------- ---------- ----------- ---------- ----------- ----------- -----------
Net income(loss).. 2,137 (13,420) 5,797 (10,189) (49,399) (3,758) (68,832)
======= ========== =========== ========== =========== =========== ===========
</TABLE>
F-31
<PAGE> 56
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
For the year ended December 31, 1995
(unaudited)
Acquisition of Walgreens/Decatur, Decatur, Illinois
In conjunction with the acquisition, the Company assumed a portion of the
first mortgage loan with a balance of $775,000. This mortgage has an
interest rate of 7.655%, amortizes over a 25-year period and matures May
31, 2004. The Company is responsible for monthly payments of principal
and interest of $5,689. The pro forma adjustment for interest expense for
the period prior to acquisition was estimated using the described loan
terms.
Acquisition of Eagle Crest Shopping Center, Naperville, Illinois
As part of the acquisition, the Company assumed a portion of the first
mortgage loan with a balance of $3,534,000, as well as entering into a
loan agreement with Inland Property Sales, Inc. ("IPS"), an Affiliate of
the Advisor, for the balance of the purchase price for $1,212,427. The
first mortgage bears interest at 9.5% per annum and the loan to IPS bears
interest at 10.5%. The pro forma adjustment for interest expense for the
period prior to acquisition was estimated using the described loan terms.
Acquisition of Montgomery-Goodyear, Montgomery, Illinois
As part of the acquisition, the Company entered into a loan agreement with
Inland Mortgage Investment Corporation ("IMIC"), an affiliate of the
Advisor, for $600,000 which bears interest of 10.9% per annum. The pro
forma adjustment for interest expense for the period prior to acquisition
was estimated using the described loan terms.
Acquisition of Hartford/Naperville Plaza, Naperville, Illinois
In conjunction with the acquisition, the Company entered into a loan
agreement with IMIC for $600,000 which bears interest of 10.9% per annum.
The pro forma adjustment for interest expense was estimated using the
described loan terms.
Acquisition of Nantucket Square Shopping Center, Schaumburg, Illinois
As part of the acquisition, the Company entered into a loan agreement with
IMIC for $3,550,000 which bears interest of 10.5% per annum. The pro
forma adjustment for interest expense for the period prior to acquisition
was estimated using the described loan terms.
F-32
<PAGE> 57
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
For the year ended December 31, 1995
(unaudited)
Acquisition of Antioch Plaza, Antioch, Illinois
This pro forma adjustment reflects the purchase of the Antioch Plaza
property as if the Company had purchased the property as of September 1,
1995, the date the first tenant occupied this newly constructed property.
The pro forma adjustment for operations for the period September 1, 1995
to December 28, 1995 (date of acquisition) was estimated using applicable
lease information. Blockbuster Video was the only tenant occupying the
property during that period. No pro forma adjustment was made for real
estate tax expense and the related recovery income since the property was
vacant land for most of 1995 and the amount would be difficult to estimate
and have an immaterial effect.
As part of the acquisition, the Company entered into a loan agreement with
Inland Real Estate Investment Corporation, an affiliate of the Advisor,
for $660,000 which bears interest of 9.5% per annum. The pro forma
adjustment for interest expense was estimated using the described loan
terms.
F-33
<PAGE> 58
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
for the year ended December 31, 1995
(unaudited)
(C) Total pro forma adjustments for 1996 Acquisitions as though they were
acquired the earlier of January 1, 1995 or date that operations commenced.
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------------------------------------
Total
Mundelein Regency Prospect Montgomery- Zany 1995
Plaza Point Heights Sears Brainy Pro Forma
--------- ------- -------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Rental
income.......... 639,124 541,085 164,152 327,610 28,643 1,700,614
Additional
Rental income... 66,669 63,294 116,175 76,182 5,030 327,350
Interest
income (D)...... - - - - - -
----------- ----------- ----------- ----------- ------------ -----------
Total income.... 705,793 604,379 280,327 403,792 33,673 2,027,964
----------- ----------- ----------- ----------- ------------ -----------
Professional
services and
general and
administrative - - - - - -
Property operating
expenses........ 141,482 71,615 180,819 102,067 5,502 501,485
Interest expense.. - 351,900 - - - 351,900
Depreciation (E).. 128,233 162,500 46,900 83,200 4,422 425,255
----------- ----------- ----------- ----------- ------------ -----------
Total expenses.... 269,715 586,015 227,719 185,267 9,924 1,278,640
----------- ----------- ----------- ----------- ------------ -----------
Net income...... 436,078 18,364 52,608 218,525 23,749 749,324
=========== =========== =========== =========== ============ ===========
</TABLE>
F-34
<PAGE> 59
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
For the year ended December 31, 1995
(unaudited)
Acquisition of Mundelein Plaza, Mundelein, Illinois
Reconciliation of Gross Income and Direct Operating Expenses for the year
ended December 31, 1995 prepared in accordance with Rule 3.14 of
Regulation S-X (*) to the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Mundelein Plaza
------------------------------
*As Pro Forma
Reported Adjustments Total
-------- ----------- -----
<S> <C> <C> <C>
Rental income....... $ 639,124 - 639,124
Additional rental
income............ 66,669 - 66,669
Interest income..... - - -
----------- ----------- -----------
Total income........ 705,793 - 705,793
----------- ----------- -----------
Professional services
and general and
administrative.... - - -
Property operating
expenses.......... 141,482 - 141,482
Interest expense.... - - -
Depreciation (E).... - 128,233 128,233
----------- ----------- -----------
Total expenses...... 141,482 128,233 269,715
----------- ----------- -----------
Net income.......... $ 564,311 (128,233) 436,078
=========== =========== ===========
</TABLE>
F-35
<PAGE> 60
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
For the year ended December 31, 1995
(unaudited)
Acquisition of Regency Point, Lockport, Illinois
As part of the acquisition, the Company will assume the existing first
mortgage loan of $4,473,200, along with a related interest rate swap
agreement.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly. The interest
rate swap agreement, in conjunction with the first mortgage, provides for
Bank One, Chicago, to receive from or pay to the Company the difference
between 6.11% and the 30-day LIBOR rate, so that the first mortgage loan
has an effective rate of 7.91% per annum. The pro forma adjustment for
interest expense for 1995 was estimated using the described loan terms.
The related interest rate swap agreement was terminated on April 18, 1996
resulting in $48,419 proceeds to the Company. The pro forma adjustment
does not give effect to the termination of this agreement.
Reconciliation of Gross Income and Direct Operating Expenses for the year
ended December 31, 1995 prepared in accordance with Rule 3.14 of
Regulation S-X (*) to the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Regency Point
------------------------------
*As Pro Forma
Reported Adjustments Total
-------- ----------- -----
<S> <C> <C> <C>
Rental income....... $ 541,085 - 541,085
Additional rental
income............ 63,294 - 63,294
Interest income..... - - -
----------- ----------- -----------
Total income........ 604,379 - 604,379
----------- ----------- -----------
Professional services
and general and
administrative.... - - -
Property operating
expenses.......... 71,615 - 71,615
Interest expense.... - 351,900 351,900
Depreciation (E).... - 162,500 162,500
----------- ----------- -----------
Total expenses...... 71,615 514,400 586,015
----------- ----------- -----------
Net income.......... $ 532,764 (514,400) 18,364
=========== =========== ===========
</TABLE>
F-36
<PAGE> 61
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
For the year ended December 31, 1995
(unaudited)
Acquisition of Prospect Heights Plaza, Prospect Heights, Illinois
Reconciliation of Gross Income and Direct Operating Expenses for the year
ended December 31, 1995 prepared in accordance with Rule 3.14 of
Regulation S-X (*) to the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Prospect Heights
------------------------------
*As Pro Forma
Reported Adjustments Total
-------- ----------- -----
<S> <C> <C> <C>
Rental income....... $ 164,152 - 164,152
Additional rental
income............ 116,175 - 116,175
Interest income..... - - -
----------- ----------- -----------
Total income........ 280,327 - 280,327
----------- ----------- -----------
Professional services
and general and
administrative.... - - -
Property operating
expenses.......... 180,819 - 180,819
Interest expense.... - - -
Depreciation (E).... - 46,900 46,900
----------- ----------- -----------
Total expenses...... 180,819 46,900 227,719
----------- ----------- -----------
Net income.......... $ 99,508 (46,900) 52,608
=========== =========== ===========
</TABLE>
F-37
<PAGE> 62
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
(continued)
For the year ended December 31, 1995
(unaudited)
Acquisition of Montgomery-Sears, Montgomery, Illinois
Reconciliation of Gross Income and Direct Operating Expenses for the year
ended December 31, 1995 prepared in accordance with Rule 3.14 of
Regulation S-X (*) to the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Montgomery-Sears
------------------------------
*As Pro Forma
Reported Adjustments Total
-------- ----------- -----
<S> <C> <C> <C>
Rental income....... $ 327,610 - 327,610
Additional rental
income............ 76,182 - 76,182
Interest income..... - - -
---------- ---------- ----------
Total income........ 403,792 - 403,792
---------- ---------- ----------
Professional services
and general and
administrative.... - - -
Property operating
expenses.......... 102,067 - 102,067
Interest expense.... - - -
Depreciation (E).... - 83,200 83,200
---------- ---------- ----------
Total expenses...... 102,067 83,200 185,267
---------- ---------- ----------
Net income.......... $ 301,725 (83,200) 218,525
========== ========== ==========
</TABLE>
Acquisition of Zany Brainy, Wheaton, Illinois
This pro forma adjustment reflects the purchase of Zany Brainy as if the
Company had purchased the property as of January 1, 1995. Operations for
this property for the period from November 22, 1995 (date of occupancy) to
December 31, 1995 were estimated using the lease and operating expense
information supplied by the seller. This property will be purchased on an
all cash basis.
(D) No pro forma adjustment has been made relating to interest income which
would have been earned on the additional Offering Proceeds raised.
(E) Depreciation expense is computed using the straight-line method, based
upon an estimated useful life of thirty years.
(F) The pro forma weighted average common stock shares for the year ended
December 31, 1995 was calculated by estimating the additional shares sold
to purchase each of the Company's properties on a weighted average basis.
F-38
<PAGE> 63
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
March 31, 1996
(unaudited)
The following unaudited Pro Forma Balance Sheet of the Company is presented to
effect the acquisition of the Regency Point Shopping Center, Prospect Heights
Plaza, Montgomery-Sears Shopping Center and the Zany Brainy store as of March
31, 1996. This unaudited Pro Forma Balance Sheet should be read in conjunction
with the March 31, 1996 Financial Statements and the notes thereto as filed on
Form 10-Q.
This unaudited Pro Forma Balance Sheet is not necessarily indicative of what
the actual financial position would have been at March 31, 1996, nor does it
purport to represent the future financial position of the Company. Unless
otherwise defined, capitalized terms used herein shall have the same meaning as
in the Prospectus.
F-39
<PAGE> 64
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31,
March 31, 1996
1996 Pro Forma Pro Forma
Historical(A) Adjustments(B) Balance Sheet
------------- -------------- -------------
<S> <C> <C> <C>
Assets
Net investment in
properties.................. $ 22,950,129 13,739,000 36,689,129
Cash and cash equivalents..... 2,937,473 - 2,937,473
Accounts and rents
receivable.................. 492,081 155,731 647,812
Other assets.................. 48,398 - 48,398
------------ ------------ -----------
Total assets.................. $ 26,428,081 13,894,731 40,322,812
============ ============ ===========
Liabilities and Stockholders' Equity
Accounts payable and accrued
expenses.................... $ 418,393 - 418,393
Accrued real estate taxes..... 463,751 207,738 671,489
Distributions payable (C)..... 183,457 - 183,457
Security deposits............. 71,133 37,221 108,354
Mortgage payable.............. 748,011 4,473,200 5,221,211
Other liabilities............. 42,120 - 42,120
------------ ------------ -----------
Total liabilities............. 1,926,865 4,718,159 6,645,024
------------ ------------ -----------
Common Stock (D).............. 29,103 10,671 39,774
Additional paid in capital
(net of Offering costs)(D).. 24,953,635 9,165,901 34,119,536
Accumulated distributions in
excess of net income........ (481,522) - (481,522)
------------ ------------ -----------
Total Stockholders' equity.... 24,501,216 9,176,572 33,677,788
------------ ------------ -----------
Total liabilities and
Stockholders' equity........ $ 26,428,081 13,894,731 40,322,812
============ ============ ===========
</TABLE>
See accompanying notes to pro forma balance sheet.
F-40
<PAGE> 65
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
March 31, 1996
(unaudited)
(A) The March 31, 1996 Historical column represents the historical balance
sheet as presented in the March 31, 1996 10-Q as filed with the SEC and
includes the following properties acquired by the Company as of March 31,
1996.
Walgreens, Decatur, Illinois
On January 31, 1995, the Company acquired this property from Inland
Property Sales, Inc. ("IPS"), an Affiliate of the Advisor, for the total
purchase price of $1,209,053, including acquisition costs of $482, and the
assumption of the first mortgage loan with a balance of $748,011 at March
31, 1996, which is secured by the property. This mortgage has an interest
rate of 7.655% and amortizes over a 25-year period. The Company is
responsible for monthly payments of principal and interest of $5,689.
Eagle Crest Shopping Center, Naperville, Illinois
On March 1, 1995, the Company acquired this property from IPS for the
purchase price of $4,816,970, including acquisition costs of $11,059, and
the assumption of the first mortgage loan of approximately $3,534,000,
which was secured by the property. The balance of the purchase price was
funded through a loan from IPS, totaling $1,212,427, with interest accruing
at 10.5%. On April 20, 1995, the Company paid off the first mortgage
secured by this property. The deferred portion of the purchase price,
totaling $1,212,427, was paid to IPS in May 1995 from Gross Offering
Proceeds. In addition, accrued interest of $22,009 was paid from Company
operations.
Montgomery-Goodyear Shopping Center, Montgomery, Illinois
On September 14, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $1,145,992, including
closing costs of $5,992, a portion of which was evidenced by a promissory
note payable to Inland Mortgage Investment Corporation ("IMIC"), an
Affiliate of the Advisor, in the gross amount of $600,000. The remainder
of the purchase price net of prorations, of approximately $535,000 was
funded with proceeds of the Offering. The promissory note was paid in full
in October 1995, with interest at a rate of 10.9% per annum. The total
amount paid was $604,260, of which $600,000 was principal paid from Gross
Offering Proceeds and $4,260 was interest paid from Company operations.
F-41
<PAGE> 66
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
March 31, 1996
(unaudited)
Hartford Plaza, Naperville, Illinois
On September 14, 1995, the Company acquired this newly constructed property
from an unaffiliated third party for a purchase price of $4,414,015
including closing costs of $14,015, and deposited $150,000 in an escrow
account for leasehold improvements to the Blockbuster, Inc. space. The
leasehold improvements were completed in January, 1996 and were added to
the cost of the property. A portion of the purchase price was evidenced by
a promissory note payable to IMIC, in the gross amount of $600,000. The
remainder of the purchase price was funded with proceeds of the Offering.
The promissory note was paid in full in October 1995 with interest at a
rate of 10.9% per annum. The total amount paid was $605,102, of which
$600,000 was principal paid from Gross Offering Proceeds and $5,102 was
interest paid from Company operations.
Nantucket Square Shopping Center, Schaumburg, Illinois
On September 20, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $4,257,918, including
closing costs of $4,913, a portion of which was evidenced by a promissory
note payable to IMIC, in the gross amount of $3,550,000. The remainder of
the purchase price was funded with proceeds of the Offering. In addition,
as part of the purchase, the Company agreed to pay $51,135 for tenant
improvements for two tenants expanding their space, which was added to the
cost of the property. The promissory note was paid in full in December
1995 with interest at a rate of 10.5% per annum. The principal amount paid
was $3,550,000 from Gross Offering Proceeds and interest of $62,011 was
paid from Company operations.
Antioch Plaza, Antioch, Illinois
On December 28, 1995, the Company acquired Antioch Plaza from an
unaffiliated third party for a purchase price of $1,750,365, including
closing costs of $365, a portion of which was evidenced by a promissory
note payable to Inland Real Estate Investment Corporation, an affiliate of
the Advisor ("IREIC"), in the gross amount of $660,000. The note which
bore interest at a rate of 9.5% per annum was repaid in full on January 9,
1996 and the total amount paid was $661,163, of which $660,000 was
principal paid from Gross Offering Proceeds and $1,163 was interest paid
from Company operations. The remainder of the purchase price, net of
prorations of approximately $1,100,000 was funded with proceeds of the
Offering.
Mundelein Plaza, Mundelein, Illinois
On March 29, 1996, the Company acquired the Mundelein Plaza property
("Mundelein Plaza") from an unaffiliated third party for a purchase price
of $5,658,230, including closing costs of $8,230, on an all cash basis,
funded from offering proceeds.
F-42
<PAGE> 67
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
March 31, 1996
(unaudited)
(B) The following pro forma adjustment relates to the acquisition or probable
acquisition of the subject properties as though they were acquired on March
31, 1996. The terms are described in the notes that follow.
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------------------ Total
Regency Prospect Montgomery- Zany Pro Forma
Point Heights Sears Brainy Adjustments
------- -------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Assets
Net investment in
properties........ $5,700,000 2,165,000 3,419,000 2,455,000 13,739,000
Cash and cash
equivalents....... - - - - -
Accounts and rents
receivable........ 21,072 80,632 54,027 - 155,731
Other assets........ - - - - -
---------- ---------- ---------- ---------- ----------
Total assets........ $5,721,072 2,245,632 3,473,027 2,455,000 13,894,731
========== ========== ========== ========== ==========
Liabilities and
Stockholders' Equity
Accounts payable
and accrued
expenses.......... $ - - - - -
Accrued real estate
taxes............. 21,072 123,284 63,382 - 207,738
Distributions
payable(C)........ - - - - -
Security Deposits... 28,621 8,600 - - 37,221
Mortgage payable.... 4,473,200 4,473,200
Other liabilities... - - - - -
---------- ---------- ---------- ---------- ----------
Total liabilities... 4,522,893 131,884 63,382 - 4,718,159
---------- ---------- ---------- ---------- ----------
Common Stock (D).... $ 1,393 2,458 3,965 2,855 10,671
Additional paid in
capital (net of
Offering
Costs)(D)......... 1,196,786 2,111,290 3,405,680 2,452,145 9,165,901
Accumulated
distributions in
excess of net
income............ - - - - -
---------- ---------- ---------- ---------- ----------
Total Stockholders'
equity............ 1,198,179 2,113,748 3,409,645 2,455,000 9,176,572
---------- ---------- ---------- ---------- ----------
Total liabilities
and Stockholders'
equity............ $5,721,072 2,245,632 3,473,027 2,455,000 13,894,731
========== ========== ========== ========== ==========
</TABLE>
F-43
<PAGE> 68
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
March 31, 1996
(unaudited)
Acquisition of Regency Point, Lockport, Illinois
On April 5, 1996, the Company completed the acquisition of the Regency
Point from an unaffiliated third party for a purchase price of $5,700,000.
As part of the acquisition, the Company assumed the existing first mortgage
loan of $4,473,200 along with a related interest rate swap agreement, with
the balance funded with Offering Proceeds.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly. The interest
rate swap agreement, in conjunction with the first mortgage, provides for
Bank One, Chicago, to receive from or pay to the Company the difference
between 6.11% and the 30-day LIBOR rate, so that the first mortgage loan
has an effective rate of 7.91% per annum. The first mortgage loan matures
in August 2000. The interest rate swap agreement was terminated on April
18, 1996 resulting in $48,419 proceeds to the Company. No pro forma
adjustment has been made as a result of this termination.
Acquisition of Prospect Heights Plaza, Prospect Heights, Illinois
The Company, through the Advisor, is currently completing its due diligence
and anticipates purchasing this property in June 1996 from an unaffiliated
third party for the purchase price of $2,165,000 on an all cash basis.
Acquisition of Montgomery-Sears, Montgomery, Illinois
The Company, through the Advisor, is currently completing its due diligence
and anticipates purchasing this property in June 1996 from an unaffiliated
third party for the purchase price of $3,419,000 on an all cash basis.
Acquisition of the Zany Brainy Store, Wheaton, Illinois
The Company, through the Advisor, is currently completing its due diligence
and anticipates purchasing this property in July 1996 from an unaffiliated
third party for the purchase price of $2,455,000 on an all cash basis.
(C) No pro forma assumptions have been made for the additional payment of
distributions resulting from the additional proceeds raised.
(D) Additional Offering Proceeds of $10,670,432, net of additional Offering
costs of $1,493,860 are reflected as received as of March 31, 1996, prior
to the purchase of the properties. Offering costs consist principally of
registration costs, printing and selling costs, including commissions.
F-44
<PAGE> 69
Inland Monthly Income Fund III, Inc.
Pro Forma Statement of Operations
For the three months ended March 31, 1996
(unaudited)
The following unaudited Pro Forma Statement of Operations of the Company is
presented to effect the acquisitions of Mundelein Plaza, Regency Point Shopping
Center, Prospect Heights Plaza, Montgomery-Sears Shopping Center and the Zany
Brainy store as of January 1, 1996. This unaudited Pro Forma Statement of
Operations should be read in conjunction with the March 31, 1996 Financial
Statements and the notes thereto as filed on Form 10-Q.
This unaudited Pro Forma Statement of Operations is not necessarily indicative
of what the actual results of operations would have been for the three months
ended March 31, 1996, nor does it purport to represent the future financial
position of the Company. Unless otherwise defined, capitalized terms used
herein shall have the same meaning as in the Prospectus.
F-45
<PAGE> 70
Inland Monthly Income Fund III, Inc.
Pro Forma Statement of Operations
for the three months ended March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
1996 Total
Historical Pro Forma 1996
(A) Adjustments(B) Pro Forma
---------- -------------- ---------
<S> <C> <C> <C>
Rental income............... $ 475,038 505,299 980,337
Additional rental income.... 242,290 120,227 362,517
Interest income (C)......... 43,751 - 43,751
------------ ------------- -----------
Total income.............. 761,079 625,526 1,386,605
------------ ------------- -----------
Professional services and
general and
administrative fees....... 38,168 - 38,168
Advisor asset management
fee....................... 48,540 34,348 82,888
Property operating expenses. 310,613 166,660 477,273
Interest expense............ 15,043 88,455 103,498
Depreciation (D)............ 103,091 117,108 220,199
Amortization................ 1,373 - 1,373
Acquisition costs expensed.. 8,985 - 8,985
------------ ------------- -----------
Total expenses.............. 525,813 406,571 932,384
------------ ------------- -----------
Net income................ $ 235,266 218,955 454,221
============ ============= ===========
Weighted average
common stock shares
outstanding (E)........... 2,394,092 3,461,135
============ ===========
Net income per weighted
average common stock
outstanding (E)........... $ .12 .13
============ ===========
</TABLE>
See accompanying notes to pro forma statement of operations.
F-46
<PAGE> 71
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
For the three months ended March 31, 1996
(unaudited)
(A) The March 31, 1996 Historical column represents the historical statement of
operations of the Company for the three months ended March 31, 1996, as
filed with the SEC on Form 10-Q.
(B) Total pro forma adjustments as though the acquisitions of the following
properties occurred on January 1, 1996 on an all cash basis except for
Regency Point where the Company assumed the existing first mortgage loan of
$4,473,200, along with a related interest rate swap agreement.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly. The interest
rate swap agreement, in conjunction with the first mortgage, provides for
Bank One, Chicago, to receive from or pay to the Company the difference
between 6.11% and the 30-day LIBOR rate, so that the first mortgage loan
has an effective rate of 7.91% per annum. The pro forma adjustment for
interest expense for 1996 was estimated using the described loan terms.
The related interest rate swap agreement was terminated on April 18, 1996
resulting in $48,419 proceeds to the Company. The pro forma adjustment
does not give effect to the termination of this agreement.
<TABLE>
<CAPTION>
Mundelein Regency Prospect Montgomery- Zany Pro Forma
Plaza Point Heights Sears Brainy Adjustments Total
--------- ------- -------- ----------- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income..... $ 163,381 139,271 44,552 89,350 68,745 - 505,299
Additional rental
income.......... 32,975 16,034 33,410 25,736 12,072 - 120,227
Interest income... - - - - - - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total income...... 196,356 155,305 77,962 115,086 80,817 - 625,526
---------- ---------- ---------- ---------- ---------- ---------- ----------
Professional services
and general and
administrative.. - - - - - - -
Advisor asset
management fee.. - - - - - 34,348 34,348
Property operating
expenses........ 53,986 19,046 44,325 33,348 15,955 - 166,660
Interest expense.. - - - - - 88,455 88,455
Depreciation (D).. - - - - - 117,108 117,108
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses.... 53,986 19,046 44,325 33,348 15,955 239,911 406,571
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........ $ 142,370 136,259 33,637 81,738 64,862 (239,911) 218,955
========== ========== ========== ========== ========== ========== ==========
</TABLE>
F-47
<PAGE> 72
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
For the three months ended March 31, 1996
(unaudited)
(C) No pro forma adjustment has been made relating to interest income which
would have been earned on the additional Offering Proceeds raised.
(D) Depreciation expense is computed using the straight-line method, based upon
an estimated useful life of thirty years.
(E) The pro forma weighted average common stock shares for the three months
ended March 31, 1996 was calculated by estimating the additional shares
sold to purchase each of the Company's properties on a weighted average
basis.
F-48
<PAGE> 73
PROSPECTUS
INLAND MONTHLY INCOME FUND III, INC.
A REAL ESTATE INVESTMENT TRUST
$10.00 PER SHARE MINIMUM PURCHASE - 300 SHARES
(100 SHARES FOR TAX-EXEMPT ENTITIES)
Inland Monthly Income Fund III, Inc. (the "Company"), a Maryland
corporation, is an infinite-life real estate investment trust (a "REIT").
Capitalized terms used in this Prospectus are defined in the "Glossary."
The Company has registered 6,000,000 shares of common stock, $.01 par
value per share (the "Shares"), of which 1,000,000 Shares are available only to
Stockholders who purchase Shares pursuant to this Offering (as defined below)
and who participate in the Company's distribution reinvestment program. The
Shares are being offered on a "best efforts" basis. Of the proceeds from the
sale of Shares, management of the Company estimates that it will use 87.46% to
acquire Neighborhood Retail Centers and single-user retail properties if the
Maximum Offering (as defined below) is sold. Eight percent (8%) of the Gross
Offering Proceeds (as defined below) will be utilized to pay selling and due
diligence expenses to unaffiliated third parties and 7% of the Gross Offering
Proceeds will be paid to the advisor of the Company, Inland Real Estate
Advisory Services, Inc. (the "Advisor"), a wholly owned subsidiary of Inland
Real Estate Investment Corporation ("IREIC"), and its Affiliates to pay for the
costs of the Offering and the marketing contribution and due diligence expense
allowance fee.
AN INVESTMENT IN THE COMPANY INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 16. SUCH RISKS INCLUDE:
- - There is currently no public trading market for the Shares and no
assurance exists that one will develop. An investor may, therefore, be
unable to liquidate his investment on favorable terms, if at all, and an
investment in the Shares is, therefore, suitable only for those able to
make a long-term investment. (PAGE 16)
- - As of April 15, 1996, the Company had acquired seven Neighborhood Retail
Centers and one single-user retail property representing approximately 74%
of Gross Offering Proceeds. Of these eight properties, the Company
utilized financing in connection with acquisition of seven of the
properties. The Company currently has not specified any additional
properties in which to invest. (PAGE 16)
- - The Company relies on the Advisor and its Affiliates for the daily
operation of the Company and the management of its assets and will pay the
Advisor and its Affiliates substantial fees for rendering such services.
(PAGE 20)
- - No person may own more than 9.8% of the Shares. (PAGE 24)
- - Affiliates of the Advisor are engaged in similar real estate activities
which subject them to various conflicts of interest in their management of
the operations of the Company, such as competition for the time and
services of Affiliates of the Advisor, the fact that the Advisor and its
Affiliates will be receiving compensation from the Company for their
various activities and the fact that the Company may do business with
entities that have pre-existing relationships with the Advisor or its
Affiliates which results in a conflict between the ongoing business
relationship of the Advisor or its Affiliates and the Company's current
interests. (PAGE 19)
- - As the Company has incurred indebtedness secured by certain of its
properties and may incur additional indebtedness on its existing
properties or properties to be acquired in the future, any defaults on
such indebtedness could cause the Company to lose its investment in such
properties. (PAGE 17)
<TABLE>
<CAPTION>
Selling Selling Proceeds to
Price to Public Commissions (A) Company (B)(C)
--------------- --------------- -------------------
<S> <C> <C> <C>
Per Share $ 10 $ .70 $ 9.30
Minimum Purchase 300 Shares $ 3,000 $ 210 $ 2,790
Total Maximum if 6,000,000 Shares Sold $59,050,000 $3,500,000 $55,550,000
</TABLE>
The date of this Prospectus is May 7, 1996. (cover page continued)
<PAGE> 74
(A) The Shares are being offered on a "best efforts" basis. The Company will
pay the Dealer Manager selling commissions equal to 7% of the Gross
Offering Proceeds and one Soliciting Dealer Warrant for every 40 Shares
sold, all of which compensation will be reallowed to Soliciting Dealers.
The Dealer Manager also will receive a marketing contribution and due
diligence expense allowance fee equal to 2.5% of the Gross Offering
Proceeds, some portion of which may be reallowed to Soliciting Dealers.
Certain volume discounts may be given on orders of 25,000 Shares or more
and Soliciting Dealers may, in their discretion, request that the Company
pay them less than the maximum permitted compensation in respect of the
sale of Shares in which event the amounts not paid as commissions will be
retained by the Company.
(B) Before deducting Organization and Offering Expenses which will be charged
to the Company, estimated at $1,771,500 if 6,000,000 Shares (the "Maximum
Offering") are sold. If the aggregate of all Organization and Offering
Expenses, including selling commissions and the marketing contribution and
due diligence expense allowance fee, exceeds 15% of the Gross Offering
Proceeds, the Advisor will pay such excess expenses.
(C) In connection with the sale of Shares purchased under the Distribution
Reinvestment Program (the "DRP"), participants, who are limited to those
investors who purchased Shares pursuant to the Offering, will purchase
Shares net of selling commissions and the marketing contribution and due
diligence expense allowance fee ($9.05 per Share). All Shares issued
pursuant to the DRP will be registered.
The Shares offered hereby (the "Offering") will be sold by securities
dealers (the "Soliciting Dealers") who are members of the National Association
of Securities Dealers, Inc. (the "NASD"). Inland Securities Corporation, an
Affiliate of the Advisor, serves as dealer manager of the offering (the "Dealer
Manager"). The Company received cleared funds representing subscriptions for
150,000 Shares (the "Minimum Offering") on January 3, 1995. The Offering will
terminate on or before October 13, 1996. Prior to the sale of the Minimum
Offering, subscription proceeds received from investors were held in escrow by
the Escrow Agent.
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 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.
PENNSYLVANIA INVESTORS: BECAUSE THE MINIMUM OFFERING AMOUNT WAS LESS THAN
$2,500,000, YOU ARE CAUTIONED TO CAREFULLY EVALUATE THE COMPANY'S ABILITY TO
FULLY ACCOMPLISH ITS STATED OBJECTIVES AND TO INQUIRE AS TO THE CURRENT DOLLAR
VOLUME OF THE COMPANY'S SUBSCRIPTIONS.
THE COMPANY IS NOT A MUTUAL FUND OR AN INVESTMENT COMPANY WITHIN THE
MEANING OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND, THEREFORE,
INVESTORS WILL NOT HAVE THE BENEFIT OF THE PROTECTIONS PROVIDED BY THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS
TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR
CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCES WHICH MAY
FLOW FROM AN INVESTMENT IN THE COMPANY IS PROHIBITED.
(end of cover page)
ii
<PAGE> 75
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY ........................................................................................... 1
ORGANIZATIONAL CHART ......................................................................................... 14
RISK FACTORS ................................................................................................. 15
Investment Risks ...................................................................................... 15
Company Risks ......................................................................................... 17
Risks of Real Estate Ownership ........................................................................ 19
Tax Risks ............................................................................................. 21
ERISA Risks ........................................................................................... 23
ESTIMATED USE OF PROCEEDS OF OFFERING ........................................................................ 24
WHO MAY INVEST ............................................................................................... 25
COMPENSATION TABLE ........................................................................................... 26
Nonsubordinated Payments .............................................................................. 26
Subordinated Payments ................................................................................. 30
CONFLICTS OF INTEREST 34
Competition for the Time and Service of the Advisor and Affiliates .................................... 34
Process for Resolution of Conflicting Opportunities ................................................... 34
Acquisition from Affiliates ........................................................................... 35
The Company may Purchase Properties from Persons with whom Affiliates of the Advisor
have Prior Business Relationships ................................................................... 35
Property Management Services are being Rendered by an Affiliate of the Advisor ........................ 35
Receipt of Commissions, Fees and Other Compensation by the Advisor and its Affiliates ................. 35
Non-Arm's-Length Agreements ........................................................................... 36
Legal Counsel for the Company and the Advisor is the Same Law Firm .................................... 36
Inland Securities Corporation is Participating as Dealer Manager in the Sale of the Shares ............ 36
The Advisor may have Conflicting Fiduciary Obligations in the Event the Company Acquires Properties .... 37
with Affiliates
FIDUCIARY RESPONSIBILITY OF DIRECTORS AND
THE ADVISOR; INDEMNIFICATION ................................................................................. 37
General ............................................................................................... 37
Limitation of Liability and Indemnification ........................................................... 37
Defenses Available .................................................................................... 38
PRIOR PERFORMANCE OF THE COMPANY'S AFFILIATES ................................................................ 39
Prior Investment Programs ............................................................................. 39
Summary Information ................................................................................... 39
Publicly Registered Limited Partnerships .............................................................. 41
Private Partnerships .................................................................................. 45
</TABLE>
iii
<PAGE> 76
<TABLE>
<S> <C>
Private Placement Real Estate Equity Program ......................................................... 46
Private Placement Mortgage and Note Programs .......................................................... 46
Loan Modifications and Work-Outs ...................................................................... 48
Effects of Property Exchanges on Investors ............................................................ 51
Additional Information ................................................................................ 51
MANAGEMENT ................................................................................................... 52
General ............................................................................................... 52
Directors and Executive Officers ...................................................................... 53
Committees of the Board of Directors .................................................................. 55
Compensation of Directors ............................................................................. 55
The Advisor ........................................................................................... 56
The Advisory Agreement ................................................................................ 57
The Management Agent .................................................................................. 58
Other Services ........................................................................................ 60
Independent Director Stock Option Plan ................................................................ 61
SELECTED FINANCIAL DATA ...................................................................................... 62
INVESTMENT OBJECTIVES AND POLICIES ........................................................................... 64
General ............................................................................................... 64
Distributions ......................................................................................... 64
Types of Investments .................................................................................. 64
Acquisition Standards ................................................................................. 65
Description of Leases ................................................................................. 66
Property Acquisition .................................................................................. 66
Borrowing ............................................................................................. 67
Sale or Disposition of Properties ..................................................................... 68
Change in Investment Objectives ....................................................................... 69
Certain Investment Limitations ........................................................................ 69
Appraisals ............................................................................................ 69
Return of Uninvested Proceeds ......................................................................... 69
Additional Offerings and Exchange Listing ............................................................. 69
Joint Ventures ........................................................................................ 69
Other Policies ........................................................................................ 70
REAL PROPERTY INVESTMENTS .................................................................................... 70
The Walgreens/Decatur Property ........................................................................ 71
The Eagle Crest Shopping Center ....................................................................... 72
The Montgomery-Goodyear Property ...................................................................... 75
The Hartford/Naperville Plaza Property ................................................................ 76
The Nantucket Square Shopping Center .................................................................. 78
Antioch Plaza ......................................................................................... 80
The Mundelein Plaza Property .......................................................................... 82
Regency Point Shopping Center ......................................................................... 84
CAPITALIZATION ............................................................................................... 86
PRINCIPAL STOCKHOLDERS ....................................................................................... 87
</TABLE>
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<PAGE> 77
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE FINANCIAL CONDITION OF THE COMPANY ............................................................ 88
Liquidity and Capital Resources ............................................................ 88
Results of Operations ...................................................................... 89
Inflation .................................................................................. 91
Impact of Recent Accounting Pronouncements ................................................. 92
FEDERAL INCOME TAX CONSIDERATIONS ................................................................. 92
Taxation of the Company .................................................................... 93
Taxation of Stockholders ................................................................... 98
Other Tax Considerations ................................................................... 101
ERISA CONSIDERATIONS .............................................................................. 101
DESCRIPTION OF SECURITIES ......................................................................... 102
General .................................................................................... 102
Soliciting Dealer Warrants ................................................................. 103
Issuance of Additional Securities and Debt Instruments ..................................... 104
Restrictions on Transfer ................................................................... 104
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS ........................................................... 105
Certain Article and Bylaw Provisions ....................................................... 106
Stockholders' Meetings ..................................................................... 106
Board of Directors ......................................................................... 106
Stockholder Voting Rights .................................................................. 106
Stockholder Lists; Inspection of Books and Records ......................................... 107
Amendment of the Organizational Documents .................................................. 108
Dissolution or Termination of the Company .................................................. 108
Advance Notice of Director Nominations and New Business .................................... 108
Restrictions on Certain Conversion Transactions and Roll-Ups ............................... 108
Limitation on Total Operating Expenses ..................................................... 110
Transactions with Affiliates ............................................................... 110
Restrictions on Borrowing .................................................................. 111
Restrictions on Investments ............................................................... 111
PLAN OF DISTRIBUTION .............................................................................. 113
General .................................................................................... 113
Escrow Period .............................................................................. 113
Advisor Capital Contribution ............................................................... 113
Subscription Process ....................................................................... 114
Determination of Investor Suitability ...................................................... 114
Compensation ............................................................................... 115
Volume Discounts ........................................................................... 115
Transfer of Shares ......................................................................... 116
Indemnification ............................................................................ 117
HOW TO SUBSCRIBE .................................................................................. 117
SALES LITERATURE .................................................................................. 118
</TABLE>
v
<PAGE> 78
<TABLE>
<S> <C>
INVESTMENT, REINVESTMENT AND SHARE REPURCHASE PROGRAMS............................................. 118
Automatic Purchase Investment Program ...................................................... 118
Distribution Reinvestment Program .......................................................... 119
Share Repurchase Program ................................................................... 120
REPORTS TO STOCKHOLDERS ........................................................................... 121
LEGAL MATTERS ..................................................................................... 122
EXPERTS ........................................................................................... 122
ADDITIONAL INFORMATION ............................................................................ 123
GLOSSARY .......................................................................................... 124
INDEX TO FINANCIAL STATEMENTS ..................................................................... F-i
PRIOR PERFORMANCE TABLES .......................................................................... A-1
DISTRIBUTION REINVESTMENT PROGRAM ................................................................. B-1
SUBSCRIPTION AGREEMENT ............................................................................ I-1
APIP AUTHORIZATION FORM ........................................................................... II-1
</TABLE>
vi
<PAGE> 79
PROSPECTUS SUMMARY
The following is a summary intended solely to supply pertinent facts and
highlights from the material contained in the body of the Prospectus. More
detailed information may be found in the remainder of the Prospectus.
THE COMPANY The Company is in the business of acquiring existing Neighborhood
Retail Centers located within an approximate 150-mile radius of
its headquarters in Oak Brook, Illinois, a Chicago suburb, where
the Advisor maintains its acquisition and property management
headquarters. The Company may also acquire single-user retail
properties, certain of which may be sale and leaseback
transactions, net leased by creditworthy tenants, in locations
throughout the United States. As of April 15, 1996, the Company
has acquired seven Neighborhood Retail Centers and one single-user
retail property. See "Real Property Investments."
The Company's primary business objective is to enhance the
performance and value of its properties through management
strategies designed to address the needs of an evolving retail
marketplace. Key elements of the Company's strategy are:
Acquisitions:
* Selectively acquire well-located
Neighborhood Retail Centers, as well as
single-user retail properties, net leased by
creditworthy tenants.
* Whenever possible, acquire properties on an
all-cash basis, which provides the Company
with a competitive advantage over potential
purchasers who must secure financing. If it
is in the best interest of the Company, the
Company will, in certain instances, acquire
properties subject to existing indebtedness.
Of the eight properties acquired as of
April 15, 1996 by the Company, the Company
utilized financing in connection with the
acquisition of seven of the properties. The
financing on five of the properties was
obtained from an Affiliate and was retired
within 90 days of the date of acquisition
from Gross Offering Proceeds. See "Real
Property Investments."
Operations:
* Actively manage costs and minimize operating
expenses by centralizing all management,
leasing, marketing, financing, accounting,
renovation and data processing activities.
* Improve rental income and cash flow by
aggressively marketing rentable space.
* Emphasize regular maintenance and periodic
renovation to meet the needs of tenants and
to maximize long-term returns.
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* For Neighborhood Retail Centers, maintain a
diversified tenant base, consisting
primarily of retail tenants providing
consumer goods and services.
* Subsequent to the acquisition of the
properties, incur mortgage indebtedness,
when favorable financing terms are
available, to allow the Company to acquire
additional properties and increase the
Company's cash flow.
The Company is a Maryland corporation which filed an
election and its tax return as a real estate investment
trust ("REIT") for the year ended December 31, 1995 and
is located at 2901 Butterfield Road, Oak Brook,
Illinois 60521 (708) 218-8000.
TERMS OF THE OFFERING The Company has registered 6,000,000 shares of common
stock, $.01 par value per share (the "Shares"), of which
1,000,000 Shares are available only to Stockholders who
purchase Shares pursuant to the Offering and who
participate in the Company's Distribution Reinvestment
Program. The Company is offering its Shares for sale on
a "best efforts" basis, which means that the securities
dealers participating in the Offering are under no
obligation to purchase any Shares and, therefore, no
specified amount is guaranteed to be raised. The
Company sold 150,000 Shares (the "Minimum Number of
Shares") to in excess of 100 investors on January 3,
1995, at a price of $10 per Share. As of April 15,
1996, the Company owned seven Neighborhood Retail
Centers and one single-user retail property. Of these
eight properties acquired by the Company, the Company
utilized financing in connection with acquisition of
seven of the properties. Up to 6,000,000 Shares may be
sold, including 1,000,000 Shares reserved for the
Distribution Reinvestment Program. Subscribers for
Shares must purchase a minimum of 300 Shares ($3,000),
except that, a minimum of 100 Shares ($1,000) may be
purchased by Tax-Exempt Entities (as defined herein).
See "Who May Invest." The Offering is being made by
Inland Securities Corporation (the "Dealer Manager") and
other securities dealers (the "Soliciting Dealers") who
are members of the National Association of Securities
Dealers, Inc. (the "NASD"). The Offering will terminate
no later than October 13, 1996.
Pending the sale of the Minimum Number of Shares,
subscribers' funds were forwarded to LaSalle National
Bank, N.A., as escrow agent and were held in
interest-bearing accounts. Interest was paid to
subscribers on January 17, 1995. See "Plan of
Distribution--General" and "--Escrow Period."
RISK FACTORS Investment in the Shares involves risks which are
described in detail in the "Risk Factors" section of the
Prospectus. The following is a summary of the risks
which the Company believes are most relevant to an
investment in the Shares.
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<PAGE> 81
Investment Risks:
* There is currently no public
trading market for the Shares and
no assurance that one will
develop; therefore, the Shares
constitute an illiquid investment.
* As of April 15, 1996, the Company
has acquired seven Neighborhood
Retail Centers and one single-user
retail property, representing
approximately 74% of Gross
Offering Proceeds. The Company
has not currently specified any
additional properties in which to
invest.
* The Eagle Crest Shopping Center
and the Walgreens/Decatur property
were acquired by the Company from
Inland Property Sales, Inc., an
Affiliate. Acquisitions from
Affiliates may be on terms less
favorable to the Company than
arm's-length transactions and may
result in concessions as to price
or otherwise which will have a
negative effect on the value of
the Shares. The Company will
compete for the acquisition of
properties with many other
entities engaged in real estate
investment activities, some of
which have greater resources than
the Company, which may result in
the Company being unable to
acquire certain desirable
properties and have an adverse
impact on Share value.
* Acquisition of Neighborhood Retail
Centers is limited to the
approximate 150-mile radius
surrounding the Advisor's
headquarters in Oak Brook,
Illinois. Adverse economic
conditions affecting that area
could adversely affect the
Company's ability to acquire,
lease and dispose of such
properties, the amount of
Distributions paid and the value
of the Shares.
* If the Company defaults on any
secured indebtedness, the lender
may foreclose and the Company
could lose its investment in the
properties securing such loan and
the value of the Shares would
decrease.
* To ensure that the Company will
not fail to qualify as a REIT, no
person may own, or be deemed to
own by virtue of the attribution
provisions of the Code (as defined
herein), more than 9.8% of the
Shares. Such limitations may have
an anti-takeover effect and may
further limit the liquidity and
value of the Shares.
* Although the Company has
established a working capital
reserve equal to 1% of the Gross
Offering Proceeds, these amounts
may be insufficient to meet the
unanticipated cash needs of the
Company and the Company may have
to obtain financing from either
affiliated or unaffiliated
sources. Additional
financing would likely decrease
the cash available to pay
Distributions.
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<PAGE> 82
* Under certain circumstances, the
Company may borrow funds to
maintain the operations of the
Company's properties or enable it
to maintain its REIT status.
Borrowing increases the Company's
business risks since debt service
increases the expenses of
operations and decreases cash
available to pay Distributions.
Company Risks:
* As of April 15, 1996, the Company
has acquired eight properties,
of which seven are Neighborhood
Retail Centers and one is a
single-user retail property. Two
of the properties were acquired
from an Affiliate. Acquisitions
from Affiliates may be on terms
less favorable to the Company than
arm's-length transactions and may
result in concessions as to price
or otherwise which will have a
negative effect on the value of
the Shares.
* Conflicts of interest between the
Company and its Affiliates,
such as competition for the time
and services of the Advisor and
its Affiliates, the fact that the
Advisor and its Affiliates will be
receiving compensation from the
Company for their various
activities and the fact the
Company may do business with
entities that have pre-existing
relationships with the Advisor or
its Affiliates which results in a
conflict between the ongoing
business relationship of the
Advisor or its Affiliates and the
Company's current interests. Such
conflicts may have an adverse
effect on operations and thus the
value of the Shares.
* The success of the Company will
depend to a large extent on the
quality of the management provided
by the Advisor and its Affiliates.
Since January 1, 1985, Affiliates
of the Advisor have sponsored 77
programs. Certain programs
sponsored or managed by Affiliates
of the Advisor have experienced
setbacks during the course of
business, including commercial
tenant defaults or move-outs,
unfavorable changes in the tax
laws and higher than expected
vacancies as apartment markets
weakened. These negative events
have had the effect of reducing
the benefits which investors in
those programs would have
received. The degree of impact
these negative events have had on
the ability of the affected
programs to attain their original
investment objectives varies by
program. See "Prior Performance
of the Company's Affiliates" and
"Prior Performance Tables."
* The Advisor and its Affiliates
will receive substantial fees
and payments for services rendered
to the Company irrespective of
whether Stockholders receive
Distributions.
* The Directors may authorize the
securities in addition to Shares
issued pursuant to this Offering,
thereby resulting in dilution of
the equity of the Stockholders.
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<PAGE> 83
* All Stockholders, including those
not voting with the majority,
will be bound by the vote of the
Stockholders owning a majority of
the outstanding Shares.
Risks of Real Estate Ownership:
* All equity real estate investments
are subject to some degree of
general economic risks, including
lease defaults, which could
adversely affect income, cash
available for Distributions and
property value. Stockholders can
expect to bear this risk in
proportion to the number of Shares
held.
* Adverse trends for the property
types to be acquired by the
Company or adverse economic
developments in general or within
the Chicago metropolitan area in
particular could have an adverse
effect on the Company's operations
and the value of the Shares would
decrease.
* Future violation of environmental
and other governmental
regulations could result in
substantial expenditures by or
damages to the Company and
decrease the cash available to pay
Distributions.
* Unanticipated renovation or
remodeling costs incurred to
re-lease the Company's properties
could reduce the cash available to
pay Distributions.
Tax Risks:
* The Company's ability to qualify
as a REIT involves the
application of technical and
highly complex provisions of the
Internal Revenue Code of 1986, as
amended (the "Code") to various
factual matters and circumstances
which are often not within the
Company's control. The Company's
qualification as a REIT depends
upon its ability to meet, through
actual operations, various tests
imposed by the Code, and there can
be no assurance that operating
results will allow the Company to
satisfy the Code requirements. In
addition, the actions and
transactions the Company will
undertake to maintain its REIT
status may not produce the highest
economic profit. For example, the
Company does not intend to sell
any property as inventory property
even if so structuring sales would
produce higher profit.
* If the Company loses its REIT
status, its Distributions will
not be deductible, thereby
increasing its tax liability and
substantially reducing the funds
available for distribution to
Stockholders. Such federal income
tax liability could cause the
Company to borrow funds, liquidate
certain of its investments or take
other steps which could adversely
affect its operations and the
value of the Shares.
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<PAGE> 84
* Shefsky Froelich & Devine Ltd.
("Counsel") has rendered its
opinion that, based on certain
representations of the Board as to
the anticipated operations of the
Company, the Company should
qualify as a REIT and
distributions to certain qualified
organizations will not produce
unrelated business taxable income
("UBTI") so long as the Company is
not a "Pension-Held REIT." See
"Federal Income Tax
Considerations" and "ERISA
Considerations." The opinion of
Counsel represents its legal
judgment based on the law in
effect as of the date of this
Prospectus, is not binding on the
Internal Revenue Service (the
"Service") and could be subject to
modification or withdrawal based
on future legislative, judicial or
administrative changes to the
federal income tax laws (or the
interpretation thereof) which
could be applied retroactively.
Stockholders could sustain a
decrease in the value of their
Shares if such changes occur.
ERISA Risks:
* In deciding whether to purchase
Shares, each fiduciary of an
employee benefit plan subject to
ERISA, in consultation with its
advisors, should carefully
consider its fiduciary
responsibilities under ERISA, the
prohibited transaction rules of
ERISA and the Code, the UBTI
consequences and the effect of the
"plan asset" regulations issued by
the Department of Labor. See
"ERISA Considerations."
Should the Company be unable to effectively manage the
impact of these risks, the Company's ability to meet its
investment objectives will be impaired and, therefore,
the benefits to the Stockholders from their investment
in the Company will be reduced. See "Risk Factors" and
"Prior Performance of the Company's Affiliates."
INVESTMENT OBJECTIVES
AND POLICIES The Company's investment objectives are to:
* Provide regular Distributions to
Stockholders in amounts which
may exceed the Company's taxable
income, particularly in the early
years of the Company's operations,
given the non-cash nature of
depreciation expense and, to such
extent, will constitute a
tax-deferred return of capital.
In no event will Distributions
constitute less than 95% of the
Company's REIT taxable income due
to the REIT qualification
requirements. To the extent
Distributions to Stockholders
exceed taxable income, the
Distributions would constitute a
return of capital and would be
sheltered from current taxation
for taxable Stockholders. This
return of capital, however, will
reduce a Stockholder's tax basis
in his Shares, which will result
in more taxable gain upon any sale
or exchange of Shares than would
have occurred absent a return of
capital. Depreciation deductions,
however, will decrease the
Company's tax basis in its
properties, thereby increasing the
Company's taxable income at such
time as the properties are sold.
If and when the Company qualifies
as a REIT, it generally
6
<PAGE> 85
will not be taxed to the extent
of the dividends it pays to
Stockholders;
* Provide a hedge against inflation
by entering into leases which
provide for scheduled rent
escalations or participation in
the growth of tenant sales
designed to provide increased
Distributions and capital
appreciation through increases in
the value of the Company's
properties; and
* Preserve Stockholders' capital by
selectively acquiring
well-located Neighborhood Retail
Centers and single-user retail
properties on an all-cash basis,
whenever possible. However, as of
the date hereof, the Company
utilized financing in connection
with acquisition of seven of the
eight properties acquired.
There can be no assurance the aforementioned objectives
will be achieved.
To the extent possible, it will be the policy of the
Company to avoid the fluctuations in Distributions which
might result if Distributions were based on actual cash
received during the Distribution period. To implement
this policy, the Company may use income earned during
prior periods, or income earned subsequent to the
Distribution declaration date but prior to the payment
date, in order to distribute annualized Distributions
consistent with the Distribution level established from
time to time by the Board. The Company's ability to
implement this policy will be dependent upon the
availability of Cash Flow and the applicable REIT rules.
It will be the general policy of the Company, subject to
the applicable REIT rules, to reinvest that portion of
the proceeds from the sale, financing, refinancing or
other disposition of its properties that represents the
initial investment into additional properties. Through
September 30, 1995, the Company paid Distributions to
its Stockholders on a quarterly basis. Commencing in
October, 1995, the Company began to pay Distributions to
the Stockholders on a monthly basis. However, the
Company reserves a right to revert to paying
Distributions quarterly during the time the proceeds of
the Offering are being invested in properties, with the
record date being the last day of each quarter. Once
the Company has fully invested in properties, the
Company intends to pay Distributions monthly, with the
record date being the first day of each month.
It is the Company's intention, whenever possible, to
acquire properties free and clear of permanent mortgage
indebtedness by paying the entire purchase price of each
property in cash or for shares of the Company's stock.
However, if it is determined to be in the best interests
of the Company, the Company will, in certain instances,
utilize borrowing to acquire properties. On properties
purchased on an all-cash basis, the Company may later
incur mortgage indebtedness by obtaining loans secured
by selected properties, if favorable financing terms are
available. The proceeds from such loans would be used to
acquire additional properties to increase Cash Flow.
The Company may also incur
7
<PAGE> 86
indebtedness to finance improvements to the properties it
acquires. The Company anticipates that aggregate
borrowings related to all of the Company's properties will
not exceed 50% of their combined fair market values.
Notwithstanding the foregoing, the maximum amount of
borrowings in relation to Net Assets shall not exceed 300%
of Net Assets without approval of a majority of the
Stockholders. The Company does not anticipate that it
will incur debt to fund Distributions to Stockholders,
although it may do so if necessary for the Company to
maintain its status as a REIT. See "Investment Objectives
and Policies--Borrowing" and "Summary of the
Organizational Documents--Restrictions on Borrowing."
Affiliates of the Advisor have extensive experience in
the acquisition and management of properties similar to
the properties contemplated to be acquired by the Company.
However, there is no assurance that the Company's
investment objectives will be achieved because, among
other reasons, the Company has acquired only seven
Neighborhood Retail Centers and one single-user retail
property and, due to competition for suitable properties,
the Company may not be able to acquire other properties
meeting its investment criteria. See "Risk
Factors--Investment Risks-- Partially Specified Fund,"
"Risk Factors--Risks of Real Estate Ownership--Competition
with Others for the Acquisition of Properties," "Prior
Performance of the Company's Affiliates" and "Real
Property Investments."
Proceeds of the Offering not used to buy properties
will be used to pay expenses of the Offering and
Acquisition Expenses. Any balance will be applied to
working capital reserves. See "Estimated Use of Proceeds
of the Offering."
THE ADVISOR The Advisor is Inland Real Estate Advisory Services, Inc.,
a wholly owned subsidiary of Inland Real Estate Investment
Corporation, a Delaware corporation ("IREIC"). The
Advisor is an Illinois corporation with its principal
place of business located at 2901 Butterfield Road, Oak
Brook, Illinois 60521 (708) 218-8000. IREIC, as of June
30, 1995, had an audited net worth in excess of
$91,600,000, much of which is illiquid. Limited
partnerships for which IREIC is a general partner own in
excess of 10,500,000 square feet of commercial property in
Chicago and nationwide. See "Management."
COMPENSATION TO BE
PAID TO THE ADVISOR
AND ITS AFFILIATES The Advisor and its Affiliates will be paid substantial
amounts for managing the business of the Company. The
most significant items of compensation are:
Offering Stage: Selling commissions to the Dealer Manager
equal to 7% of the Gross Offering Proceeds, all of which
will be reallowed to Soliciting Dealers; and a marketing
contribution and due diligence expense allowance fee to
the Dealer Manager equal to 2.5% of the Gross Offering
Proceeds (the "Marketing Contribution and Due Diligence
Expense Allowance Fee"), some portion of which will be
reallowed to Soliciting Dealers. The selling commissions
and the Marketing Contribution and Due Diligence Expense
Allowance Fees for the year ended December 31, 1995
totalled $1,719,355, of which $102,084 was unpaid at
December 31,
8
<PAGE> 87
1995. Approximately $1,551,000 of such amount had been
reallowed as of December 31, 1995. See "Compensation
Table." Soliciting Dealers also receive one Soliciting
Dealer Warrant for each 40 Shares sold by such Soliciting
Dealer during the Offering. The holder of a Soliciting
Dealer Warrant will be entitled to purchase one Share from
the Company at a price of $12 during the Exercise Period.
See "Description of Securities--Soliciting
Dealer Warrants."
Acquisition Stage: Reimbursement for actual out-of-pocket
acquisition expenses are anticipated to be up to 0.5% of
Gross Offering Proceeds.
Operational Stage: An annual Advisor Asset Management Fee
of not more than 1% of the Average Invested Assets is paid
quarterly. An Affiliate of the Advisor will also receive
a Property Management Fee equal to not more than 4.5% of
the gross revenues of each of the Company's properties
(90% of the fee typically charged by a third party), paid
monthly. Payment of the Advisor Asset Management Fee is
subordinated to the payment of Distributions in an amount
equal to a non-compounded return equal to 8% per annum on
Invested Capital (the "Current Return"). For the year
ended December 31, 1995, the Company had not incurred or
paid an Advisor Asset Management Fee. The Company
incurred and paid Property Management Fees of $46,791 for
the year ended December 31, 1995. See "Management's
Discussion and Analysis of Financial Condition of the
Company."
Liquidation Stage: A Property Disposition Fee equal to
the lesser of: (i) 3% of the sale price of a property; or
(ii) 50% of the commission customarily paid to third
parties; and after receipt by the Stockholders of a
cumulative, non-compounded 8% per annum return of Invested
Capital (the "Cumulative Return") and a return of their
Invested Capital, an Incentive Advisory Fee equal to 15%
of the net proceeds from the sale of a property. In the
event the Company's Shares are listed on a national
exchange or market and the Advisor is merged into the
Company, the Advisor will receive Shares and the Company
will no longer be obligated to pay the Incentive Advisory
Fee.
There may be a number of other incidental fees for
services or expense reimbursement that the Advisor and its
Affiliates may receive during the operational and
liquidation stages of the Company. See "Compensation
Table" and "Management--Other Services."
REAL PROPERTY
INVESTMENTS As of April 15, 1996, the Company has acquired seven
Neighborhood Retail Centers and one single-user retail
property. The Company has utilized $23,921,085 of Gross
Offering Proceeds for these properties and two of the
properties are secured by debt currently totalling
$5,220,270.
The terms of each of the Company's acquisitions have been
approved by a majority of the Directors (including a
majority of the Independent Directors) as being fair and
reasonable to the Company and the
9
<PAGE> 88
acquisition prices of the properties did not exceed
the appraised values of the properties at the time of
acquisition. Two of the properties, Eagle Crest Shopping
Center and a Walgreens property in Decatur, Illinois were
acquired from an Affiliate. There can be no assurance
that the prices paid to the Affiliate for the Eagle Crest
Shopping Center and the Walgreens/Decatur property did not
exceed that which would be paid by an unaffiliated buyer.
See "Risk Factors--Company Risks--Prices Paid for
Properties Acquired from Affiliates may be More than
Prices Paid by Non-Affiliates" and "Real Property
Investments."
The Company is permitted to invest in general partnerships
or joint venture arrangements with Affiliates as co-owners
of a property wherein the Company will be able to increase
its equity participation in such entity as additional
proceeds of the Offering are received by the Company with
the result that the Company can ultimately own 100% of the
property. The affiliated general or joint venture partner
will not be entitled to any profit on the sale of its
joint venture or general partnership interest to the
Company. See "Investment Objectives and Policies--Joint
Ventures."
PRIOR OFFERINGS
SUMMARY The Inland organization, during the past ten years, has
sponsored seven public and 70 private real estate programs
which have raised in excess in $273,317,000. In excess of
19,500 investors have invested in these Inland-sponsored
programs.
Two of the Inland-sponsored public programs and a majority
of the private programs have investment objectives similar
to those of the Company. Certain programs sponsored or
managed by Affiliates of the Advisor have experienced
setbacks during the course of business, including
commercial tenant defaults or move-outs, unfavorable
changes in the tax laws and higher than expected vacancies
as apartment markets weakened. These negative events have
had the effect of reducing the benefits which investors in
those programs would have received. The degree of impact
these negative events have had on the ability of the
affected programs to attain their original
investment objectives varies by program. See "Prior
Performance of the Company's Affiliates" and "Prior
Performance Tables."
ARTICLES OF
AMENDMENT AND
RESTATEMENT Investors should be particularly aware of the following
provisions contained in the Company's Articles of
Amendment and Restatement (the "Articles"):
* Limitation on accumulation of shares: In order
for the Company to qualify as a REIT, no more
than 50% of the outstanding Shares may be owned,
directly or indirectly, by five or fewer individuals
at any time during the last half of the Company's
taxable year. To ensure that the Company will not
fail to qualify as a REIT under this test, the
Articles place restrictions on the accumulation of
Shares by a single Stockholder. These restrictions
may: (i) discourage a change of control of the
Company; (ii) deter individuals and entities from
making tender offers for Shares, which offers may be
attractive to Stockholders; or (iii) limit the
opportunity for Stockholders to receive a premium for
their Shares
10
<PAGE> 89
in the event an investor is
making purchases of Shares in
order to acquire a block of
Shares. See "Description of
Securities--Restrictions on
Transfer."
* Voting rights: Each Share is
Articles do not provide for
cumulative voting. Stockholders
owning a majority of the
outstanding Shares have the right
to: (i) amend the Articles
subject to certain limitations;
(ii) dissolve the Company; (iii)
elect or remove the Board of
Directors; and (iv) approve or
disapprove the sale of all or
substantially all of the assets of
the Company other than in
connection with a dissolution of
the Company. All Stockholders
will be bound by the vote of
Stockholders owning a majority of
the outstanding Shares, even if a
Stockholder does not vote with the
majority. Stockholders owning in
the aggregate at least 10% of the
outstanding Shares may request the
Directors to call a meeting for
the purpose of voting on any of
the foregoing.
Stockholders owning at least
two-thirds of the outstanding
Shares must approve certain
exchange offers, mergers,
consolidations or similar
transactions commonly known as
Roll-Ups, which affect certain
Stockholder rights. Such
super-majority provisions may have
the effect of: (i) discouraging a
change in control of the Company;
(ii) deterring individuals and
entities from making tender offers
for Shares, which offers may be
attractive to Stockholders; and
(iii) limiting the opportunity for
Stockholders to receive a premium
for their Shares in the event an
investor is making purchases of
Shares in order to acquire a block
of Shares.
* Changes in investment objectives
and policies: The Directors
cannot change the investment
objectives or policies of the
Company unless an amendment to the
Articles is made, which would
require the approval of
Stockholders owning a majority of
the outstanding Shares.
* Distributions: Distributions are
payable out of available cash.
See "Summary of the Organizational Documents" and
"Description of Securities."
AUTOMATIC PURCHASE The Company provides the following programs to
INVESTMENT, facilitate investment in the Shares and to provide
DISTRIBUTION limited liquidity for Stockholders until such time as
REINVESTMENT AND a market for the Shares develops:
SHARE REPURCHASE
PROGRAMS
* The Automatic Purchase Investment
Program allows existing
Stockholders, during the Offering,
to automatically make periodic
purchases of the Company's Shares
through the pre-authorized
transfer of funds from investor
accounts, such as money market and
mutual funds, to the Company.
The minimum purchase is one Share
($10). Participants may withdraw
at any time from the Automatic
Purchase Investment Program and
are subject to limitations on
Share ownership imposed by the
Articles. See "Investment,
Reinvestment and Share Repurchase
Programs -- Automatic Purchase
Investment."
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* The Distribution Reinvestment Program allows
Stockholders who purchase Shares pursuant to
the Offering to automatically reinvest
Distributions by purchasing additional Shares
from the Company, subject to the limitations on
Share ownership imposed by the Articles. Such
purchases will not be subject to selling
commissions or the Marketing Contribution and Due
Diligence Expense Allowance Fee and will be sold
at a price of $9.05 per Share. See "Investment,
Reinvestment and Share Repurchase Programs --
Distribution Reinvestment Program."
* The Share Repurchase Program provides, subject
to certain restrictions, existing Stockholders
with limited, interim liquidity by enabling them
to sell Shares back to the Company at a price of
$9.05 per Share (a reduction of $.95 from the $10
Offering price, reflecting selling commissions
and the Marketing Contribution and Due Diligence
Expense Allowance Fee). Repurchases will be on a
first come, first served basis, and will be
limited in the following ways: (i) not more than
$500,000 worth of the outstanding Shares will be
repurchased in any given year; and (ii) the funds
available for repurchase will be limited to
available proceeds received by the Company from
the sale of Shares under the Distribution
Reinvestment Program. Shares purchased by the
Company are not available for resale. The Share
Repurchase Program will be terminated by the
Company upon the development of a secondary
market for the Company's Shares or upon the
listing of the Company's Shares on a national
securities exchange or market. See "Investment,
Reinvestment and Share Repurchase Programs --
Share Repurchase Program."
WHO MAY INVEST The section of the Prospectus titled "Who May Invest"
describes minimum net worth and income requirements, as
well as a detailed explanation of other suitability
requirements which investors must meet prior to
subscription. In particular, investors must have either:
(i) a minimum annual gross income of $45,000 and a net worth
(exclusive of home, home furnishings and automobiles) of
$45,000; or (ii) a net worth (determined with the foregoing
exclusions) of $150,000. Suitability standards may be
higher in certain states. See "Who May Invest."
ANNUAL VALUATIONS Stockholders which are subject to ERISA will be provided
with an annual statement of value reporting the value
of each Share based upon an estimated amount they would
receive if the Company's assets were sold as of the close of
the Company's fiscal year and if such proceeds (without
reduction for selling expenses) and all the other funds of
the Company were distributed in liquidation of the Company;
provided, however, the Net Asset Value of each Share will be
deemed to be $10 per Share for the first three annual
statements of value following termination of the Offering.
There can be no assurance that: (i) such value could or
will actually be realized by the Company or by Stockholders
upon liquidation (in part because estimates of value do not
necessarily indicate the price at which assets could be
sold, and because no attempt will be made to estimate the
expenses of selling any asset of the Company); (ii)
Stockholders could realize such value if they were to
attempt to sell their Shares; or (iii) such valuation would
comply with the ERISA requirements. Should the Shares
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<PAGE> 91
become listed on a national stock
exchange or market, the Company will no longer provide such
valuations. See "ERISA Considerations."
GLOSSARY OF TERMS For definitions of terms used in this Prospectus, see
"Glossary."
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<PAGE> 92
ORGANIZATIONAL CHART
__________THE INLAND GROUP,INC._____
| |
| |
| |
INLAND COMMERCIAL INLAND REAL ESTATE
PROPERTY MANAGEMENT, INC. INVESTMENT CORPORATION
| | |
| |
| | |
PROPERTY MANAGEMENT AND INLAND REAL ESTATE INLAND SECURITIES
RELATED SERVICES ADVISORY SERVICES INC. CORPORATION
| | |
| |
| ORGANIZATION, ADVISORY SECURITIES
AND REAL ESTATE SERVICES SALES
| |
|
| |
INLAND MONTHLY INCOME FUND III, INC. |
DIRECTORS:
|
ROBERT D. PARKS
G. JOSEPH COSENZA |
ROLAND W. BURRIS ----------------------
DOUGLAS R. FINLAYSON
HEIDI H. LAWTON
Solid lines indicate ownership. Broken lines indicate services.
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<PAGE> 93
RISK FACTORS
Purchase of the Shares offered hereby involves various risk factors in
addition to the factors set forth elsewhere herein. Prospective purchasers
should consider, among others, the following factors:
1. INVESTMENT RISKS
Limited Liquidity. There is currently no public trading market for the
Shares and no assurance exists that one will develop. An investor may not be
able to liquidate his or her investment on favorable terms, or at all.
However, within five years after the date of this Prospectus the Company
anticipates that the Board of Directors will determine whether it is in the
best interests of the Company to: (i) apply to have the Shares listed for
trading on a national stock exchange or market, provided the Company meets the
then applicable listing requirements; and (ii) commence a secondary public
offering. The Company does not intend to apply for listing during the term of
the Offering. See "Investment Objectives and Policies--Additional Offerings
and Exchange Listing." Subject to available funds and the Company's continued
qualification as a REIT, the Company may repurchase Shares from Stockholders.
See "Investment, Reinvestment and Share Repurchase Programs--Share Repurchase
Program."
Partially Specified Fund. As of April 15, 1996, the Company had acquired
eight properties. Two of the properties, the Eagle Crest Shopping Center in
Naperville, Illinois, and a Walgreens property in Decatur, Illinois were
purchased from Inland Property Sales, Inc. ("IPS") an affiliate of the Company.
These properties were acquired with the consent of each of the then
Independent Directors. Although the Company is advising investors of the
parameters the Company will use to make investments, as of the date of this
Prospectus no information is available as to the identification, location,
operating histories, lease terms or other relevant economic and financial data
of the other properties to be purchased by the Company. Since the Company has
not yet determined the other properties it will acquire, there may be a delay
between the sale of the Shares and the Company's purchase of other properties,
which could result in a delay in the benefits to investors, if any, of an
investment in the Company.
The Advisor will evaluate potential property acquisitions and will engage
in discussions with sellers for the purchase of properties for the Company. At
such time during the period of the Offering as the Advisor believes a
reasonable probability exists that a property will be acquired on specified
terms (i.e., upon completion of due diligence, which includes review of the
title insurance commitment, appraisal and environmental analysis), the Company
will issue a supplement to this Prospectus setting forth certain details
concerning the proposed acquisition. Investors should be aware, however, that
acquisitions at this stage require negotiation of final binding agreements and
there can be no assurance that any such properties will be acquired on the same
terms as described in any supplements or other disclosure prepared with respect
thereto. In addition, any properties which are identified by the Company prior
to the termination of the Offering may not be acquired unless sufficient Shares
are sold. In the event any properties which are disclosed to Stockholders as
potential acquisitions are not acquired, or any properties which the Company
acquires prior to the termination of the Offering but are not retained,
subsequently acquired properties may be materially different in a number of
respects. In addition, investors should be aware that audited financial
statements of prior operations of existing properties acquired by the Company,
or of the lessees or of the property or guarantor of the underlying leases,
generally will not be available until after a supplement to this Prospectus
describing such acquisition has been provided to potential investors, and
financial statements for recently constructed properties may not be available
at all.
Limitation on Area in which the Company May Acquire Neighborhood Retail
Centers. Acquisition of Neighborhood Retail Centers is limited to the
approximate 150-mile radius surrounding the Advisor's headquarters in Oak
Brook, Illinois. Adverse economic conditions affecting that area could
adversely affect the Company's ability to acquire, lease and dispose of such
properties.
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<PAGE> 94
Insufficient Reserves. The Company has established a working capital
reserve equal to 1% of the Gross Offering Proceeds. However, if such amount is
insufficient to meet the unanticipated cash needs of the Company, the Company
may have to obtain financing from either affiliated or unaffiliated sources to
service such cash needs. There is no assurance that this financing will be
available or if available, will be available on terms acceptable to the
Company.
Mortgage Indebtedness and Other Borrowings May Increase the Company's
Business Risks. It is the Company's intention, whenever possible, to acquire
properties free and clear of permanent mortgage indebtedness by paying the
entire purchase price of each property in cash or for shares of the Company's
stock. However, if it is determined to be in the best interests of the
Company, the Company will, in certain instances, utilize borrowing to acquire
properties. On properties purchased on an all-cash basis, the Company may
later incur mortgage indebtedness by obtaining loans secured by selected
properties, if favorable financing terms are available. The proceeds from such
loans would be used to acquire additional properties for the purpose of
increasing Cash Flow and providing further diversity. The Company anticipates
that aggregate borrowings related to all of the Company's properties will not
exceed 50% of their combined fair market values, however, the maximum amount of
borrowings in relation to Net Assets shall, in the absence of the consent of a
majority of the Stockholders, not exceed 300% of Net Assets. Incurring
mortgage indebtedness increases the risk of possible loss. If the Company
defaults on its secured indebtedness, the lender may foreclose and the Company
could lose its investment in the properties securing such loan. Any such
foreclosure would be treated as a sale of the property for a purchase price
equal to the outstanding balance of the debt secured by the mortgage, and if
the outstanding balance of the debt secured by the mortgage exceeds the basis
of the property to the Company, there could be taxable income upon a
foreclosure. It will be the policy of the Company to seek to incur only
non-recourse mortgage indebtedness, if available, meaning that the Company will
not be liable for any mortgage repayment in an amount in excess of its
investment in the property. See "Investment Objectives and
Policies--Borrowing" and "Real Property Investments."
Under certain circumstances, the Company may borrow for the purpose of
maintaining the operations of the Company. Borrowing may increase the
Company's business risks. Debt service increases the expense of operations
since the Company will be responsible to retire the debt and pay the attendant
interest which may result in decreased cash available for distributions to
Stockholders. Also, lenders to the Company may require restrictions on future
borrowings, distributions and operating policies. The Company may incur
indebtedness if necessary to satisfy the requirement that the Company
distribute at least 95% of its REIT Taxable Income (as defined herein), or
otherwise as is necessary or advisable to assure that the Company maintains its
qualification as a REIT for federal income tax purposes.
Limits on Share Accumulation May Have an Anti-Takeover Effect. In order
for the Company to qualify as a REIT, no more than 50% of the outstanding
Shares may be owned, directly or indirectly, by five or fewer individuals at
any time during the last half of each of the Company's taxable years. To
ensure that the Company will not fail to qualify as a REIT under this test, the
Articles provide that no person may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.8% of the number or value of
the issued and outstanding stock of the Company. These restrictions may: (i)
discourage a change of control of the Company; (ii) deter individuals and
entities from making tender offers for Shares, which offers may be attractive
to Stockholders; or (iii) limit the opportunity for Stockholders to receive a
premium for their Shares in the event an investor is making purchases of Shares
in order to acquire a block of Shares. See "Description of
Securities--Restrictions on Transfer."
Objectives of Joint Venture Partners May Conflict with the Company's
Objectives. Certain of the Company's investments may be owned by joint
ventures between the Company and Affiliates of the Advisor. Investments in
joint ventures which own properties may involve risks not otherwise present,
including, for example, that the Company's co-venturer might become bankrupt,
that such co-venturer may
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<PAGE> 95
at any time have economic or business interests or goals which are inconsistent
with the interests or goals of the Company or that such co-venturer may be in a
position to take action contrary to the Company's instructions, requests,
policies or objectives. Among other things, actions by such co-venturer might
subject property owned by the joint venture to liabilities in excess of those
contemplated by the terms of the joint venture or other adverse consequences.
See "Investment Objectives and Policies--Joint Ventures."
Seller Financing by Company May Delay Liquidation or Reinvestment. The
Company intends to use its best efforts to sell its properties for cash.
However, the Company may sell its properties either subject to or upon the
assumption of any then outstanding mortgage debt or, alternatively, may provide
financing to purchasers with terms advantageous to the Company. A purchase
money obligation secured by a mortgage may be taken as part payment and there
are no limitations or restrictions on the Company taking such purchase money
obligations. The terms of payment to the Company will be affected by custom in
the area where the property being sold is located and the then prevailing
economic conditions. To the extent the Company receives promissory notes or
other property in lieu of cash from sales, such proceeds (other than any
interest payable thereon) will not be included in net sale proceeds until and
to the extent the promissory notes or other property are actually paid, sold,
refinanced or otherwise disposed of and, therefore, the distribution of the
proceeds of a sale to the Stockholders may be delayed until such time. In many
cases, the Company will receive initial downpayments (cash and other property)
in the year of sale in an amount less than the selling price and subsequent
payments will be spread over a number of years. See "Investment Objectives and
Policies--Sale or Disposition of Properties."
Loss on Dissolution and Termination. At the date of dissolution or
termination of the Company, the undistributed proceeds realized from the
liquidation of assets, if any, will be distributed to Stockholders, but only
after the satisfaction of claims of creditors. Accordingly, a Stockholder's
ability to recover all of his or her investment under such circumstances will
depend on the amount of funds so realized and claims to be satisfied therefrom.
Sponsor has not Previously Operated a REIT. IREIC and its Affiliates
have, during the past ten years, sponsored seven public and 70 private real
estate programs which have raised in excess of $273,317,000. Two of the seven
public programs, Inland's Monthly Income Fund, L.P. and Inland Monthly Income
Fund II, L.P., had investment objectives which were substantially similar to
those of the Company. However, each of the seven prior public programs,
including Inland's Monthly Income Fund, L.P. and Inland Monthly Income Fund II,
L.P., were structured as limited partnerships and not as real estate investment
trusts. Therefore, there can be no assurances that the Company will attain its
investment objectives since the Advisor and its Affiliates have no prior
experience in the management and operation of a REIT.
2. COMPANY RISKS
Prices Paid for Properties Acquired from Affiliates may be More than
Prices Paid by Non-Affiliates. Two properties currently owned by the Company,
the Eagle Crest Shopping Center and the Walgreens/Decatur property, were
acquired by the Company from an Affiliate. The Articles provide that the
Company shall not purchase any property from an Affiliate unless a majority of
the Directors (including a majority of the Independent Directors) not
interested in the transaction approve the purchase as fair and reasonable to
the Company and at a price to the Company no greater than the cost of the asset
to such Affiliate, or if the price to the Company is in excess of such cost,
that substantial justification for such excess exists and that such excess is
reasonable. In no event shall the cost of such asset to the Company exceed its
current appraised value. The Directors (including all of the then Independent
Directors) approved the purchases pursuant to the standards described herein.
However, there can be no assurance that the prices paid to the Affiliate for
the Eagle Crest Shopping Center and the Walgreens/Decatur property did not
exceed that which would be paid by an unaffiliated buyer.
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<PAGE> 96
Conflicts of Interest Between the Company and its Affiliates. The Company
is subject to various conflicts of interest arising out of its relationship
with its Affiliates, such as competition for the time and services of
Affiliates of the Advisor and acquisition of properties from Persons with whom
Affiliates of the Advisor have had prior business relationships and the due
diligence investigation of the Company by the Dealer Manager which cannot be
considered to be an independent review of the Company and, therefore, may not
be as meaningful as a review conducted by an unaffiliated broker-dealer.
Additionally, a substantial portion of the proceeds of the Offering will be
paid to an Affiliate for managing the Company. Such proceeds of the Offering
will pay expenses which include sales commissions and due diligence expense
allowances to the Dealer Manager, and reimbursement to an Affiliate for costs
related to organizing and offering the Shares for sale. An Advisor Asset
Management Fee of not more than 1% per annum of the Average Invested Assets
will be paid quarterly to the Advisor. Payment of the Advisor Asset Management
Fee is subordinated to the payment of Distributions in an amount equal to the
Current Return. Additionally, an Affiliate is being paid a Property Management
Fee equal to not more than 4.5% of the gross revenues of each of the Company's
properties on a monthly basis. The Advisor and its Affiliates will receive
substantial fees and payments for services rendered to the Company irrespective
of whether Stockholders receive Distributions.
If an Affiliate breaches its fiduciary obligations to the Company, or does
not resolve conflicts of interest in the manner described in the section of
this Prospectus titled "Conflicts of Interest--Process for Resolution of
Conflicting Opportunities," the Company may not meet its investment objectives.
The agreement between the Advisor and the Company (the "Advisory Agreement")
grants the Company the first opportunity to buy any Neighborhood Retail Centers
placed under contract by the Advisor or its Affiliates provided the Company is
able to close the purchase of such property within 60 days. The Advisory
Agreement also requires that any single-user retail property net leased by a
creditworthy tenant located anywhere in the United States which is placed under
contract or is about to be placed under contract by the Advisor or its
Affiliates may be purchased by the Company, provided that: (i) the Company has
funds available to make the purchase; (ii) the Board votes to make the purchase
within five days of being offered such property by the Advisor; (iii) the
property meets the Company's acquisition criteria; and (iv) in the event that
more than one real estate investment program sponsored by Affiliates of the
Advisor has funds available to make the purchase, such property will first be
offered to the program which has had funds available for the longest period of
time. The Board, at its discretion, may reject any property presented for
purchase by the Advisor. In exercising this judgment, the Board will consider
the property's location and size and whether the purchase of the property is
consistent with the Company's investment objectives. Any property rejected by
the Board for purchase by the Company may be purchased by the Advisor or its
Affiliates. The Independent Directors, by a majority vote, must approve all
actions by the Advisor or its Affiliates which present potential conflicts of
interest with the Company. See "Compensation Table" and "Management--The
Advisory Agreement."
Dependence on the Directors and Advisor. The Board has sole control over
virtually all aspects of the Company's operations. The success of the Company
will depend to a large extent on the quality of the management provided by the
Advisor, the Management Agent, their Affiliates and employees. Therefore, the
Company will be dependent, in large part, on the ability of the Advisor and its
Affiliates to retain the services of each of its executive officers and key
employees, however, none of such individuals has an employment agreement with
the Advisor or its Affiliates. The loss of any of these individuals could have
a materially adverse effect on the Company. The Company does not currently
maintain key man life insurance policies on any of the individuals employed by
the Advisor or its Affiliates. See "Management."
Dilution. In the event the Company: (i) consummates a secondary offering
of its Shares or any offering of Preferred Shares; or (ii) issues Shares or
Preferred Shares to the seller of a property acquired by the Company in lieu of
or in addition to cash consideration, investors purchasing Shares in this
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<PAGE> 97
Offering who do not participate in any future stock issuance will experience
dilution of their equity investment in the Company.
All Stockholders Bound by Vote of Majority. The Articles, in most cases,
require a vote of only a majority of the Stockholders on those matters on which
Stockholders are required to vote. Therefore, a substantial minority of the
Stockholders may be bound by the decision of the majority of the Stockholders
with respect to any matters put to the Stockholders.
Company's and Stockholders' Rights Against the Directors and the Advisor
are Limited. The Directors and the Advisor are held harmless and indemnified
for certain actions taken by them in good faith and without negligence or
misconduct pursuant to the Articles or the Advisory Agreement, respectively.
As a result, the Company and the Stockholders may have more limited rights
against the Directors and the Advisor than they would otherwise have under
common law and, furthermore, may be obligated to fund the defense of the
Directors and the Advisor in certain cases. In particular, such persons shall
not be liable to the Company and the Stockholders unless: (i) it is proved
that the person actually received an improper benefit or profit in money,
property or services; and (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a
finding in the proceeding that the person's action, or failure to act, was the
result of active or deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. See "Fiduciary Responsibility of
Directors and the Advisor; Indemnification."
3. RISKS OF REAL ESTATE OWNERSHIP
General. All real property investments are subject to some degree of
risk. Equity real estate investments may limit the ability of the Company to
promptly vary its portfolio in response to changing economic, financial and
investment conditions. Such investments will be subject to risks such as
adverse changes in general economic conditions or local conditions which reduce
the demand for the goods or services of tenants. Such investments also will be
subject to other factors affecting real estate values, including: (i) possible
federal, state or local regulations and controls affecting rents, prices of
goods, fuel and energy consumption and prices, water and environmental
restrictions and other factors affecting real property; (ii) increasing labor
and material costs; and (iii) the attractiveness of the property to tenants in
the neighborhood.
The Company is subject to the risk that tenants, as well as lease
guarantors, if any, may be unable to make their lease payments. A default by a
lessee, the failure of a guarantor to fulfill its obligations or other
premature termination of a lease could, depending on the size of the leased
premises and the Advisor's ability to successfully find a substitute tenant,
have an adverse effect on the financial position of the Company. See "Prior
Performance of the Company's Affiliates--Loan Modifications and Work-Outs."
Competition for Tenants and Customers. The Company could be adversely
affected in the event retail centers are built in locations competitive with
properties owned by the Company, causing increased competition for customer
traffic and credit tenants. This could result in decreased cash flow for
tenants and may require the Company to make capital improvements to its
properties which it would not have otherwise made.
Hazardous Waste, Environmental Liens and Other Governmental Regulations.
Recent federal and state statutes impose liability on property owners or
operators for the clean-up or removal of hazardous substances found on their
property. Additionally, such statutes allow the government to place liens for
such liabilities against affected properties, which liens will be senior in
priority to other liens. In addition, there are various local, state and
federal health and safety regulations under which the Company
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could, under certain circumstances, have responsibility for compliance and
liability for fines or damages for noncompliance. For example, properties
acquired are subject to the Americans with Disabilities Act (the "ADA"), which
generally requires that public accommodations, including restaurants and retail
stores, be made accessible to disabled persons. See "--Costs Associated with
Compliance with the Americans with Disabilities Act" in this Section. Under net
leases, the tenant typically is responsible for compliance with the ADA and
other laws and regulations or is required to indemnify the Company when the law
or regulation places the burden on the landlord. However, the Company could be
liable for violations of such laws and regulations to the extent the tenant is
not able to provide indemnification at the time of the violation. State and
federal laws in this area are constantly evolving, and the Company intends to
monitor such laws and take commercially reasonable steps to protect itself from
the impact thereof, including obtaining environmental audits of each property
acquired. However, there can be no assurance that the Company will be protected
from the impact of such laws.
Costs Associated with Compliance with the Americans with Disabilities Act.
Under the ADA, all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities" but generally requires that
buildings be made accessible to people with disabilities. Non-compliance with
the ADA requirements could require removal of access barriers and could result
in the imposition of fines by the federal government or an award of damages to
private litigants. The Company will attempt to structure acquisitions of its
properties so that such properties are in compliance with the ADA, at the
expense of the seller, at the time of acquisition by the Company. However,
there can be no assurance that the acquisitions will be structured in such a
fashion.
Potential Additional Costs in Connection with Acquiring Single-User
Properties. Certain of the properties or portions thereof may be designed or
built primarily for a particular tenant or a specific type of use. If the
Company is holding such a property upon the termination of the lease and the
tenant fails to renew, or such tenant defaults on its lease obligations, the
property may not be readily marketable to a new tenant without substantial
capital improvements or remodeling. Such improvements might require
expenditure of Company funds otherwise available for distribution or require
the sale of such property at a below-market price.
Competition with Others for the Acquisition of Properties. The Company
competes in the acquisition of property with many other entities engaged in
real estate investment activities, some of which have greater resources than
the Company. In addition, the number of entities and the amount of funds
available for investment in properties of a type suitable for investment by the
Company may increase, resulting in increased competition for such investments
and possible increases in the prices paid therefor.
Reliance on Certain Tenants. The Company could be adversely affected in
the event of the bankruptcy or insolvency, or a downturn in the business, of
any tenant generally occupying approximately 30% or more of the gross leasable
area ("GLA") of a Neighborhood Retail Center, or the tenant of any single-user
property ("Anchor Tenant"), or if any Anchor Tenant does not renew its lease
when it expires. In addition, lease termination by one or more Anchor Tenants
could result in lease terminations or reductions in rent by other tenants whose
leases permit cancellation or rent reduction in the event an Anchor Tenant's
lease is terminated. In such event, the Company's ability to re-let the
vacated space could be adversely affected. Similarly, the leases of certain
Anchor Tenants may permit the Anchor Tenant to transfer its lease to another
retailer. The transfer to a new Anchor Tenant could adversely affect customer
traffic in the Neighborhood Retail Center and thereby reduce the income
generated by that center and could also allow other tenants to make reduced
rental payments or to terminate their leases at the center. Each of these
developments could adversely affect the Company's revenues and its ability to
make expected Distributions.
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Inability of Lessees to Meet Their Obligations. The Company is subject to
the risk that tenants, as well as lease guarantors, if any, may be unable to
make their lease payments. A default by a lessee and/or the failure of a
guarantor to fulfill its obligations or other premature termination of a lease
could, depending on the size of the property and the Advisor's ability to
successfully find a substitute tenant, have an adverse effect on the
financial position of the Company.
Restrictions on Re-leasing Space. In many cases, tenant leases will
contain provisions giving the tenant the exclusive right to sell certain types
of merchandise or provide certain types of services within a Neighborhood
Retail Center, or will limit the ability of other tenants to sell such
merchandise or provide such services. When re-leasing space after a vacancy
occurs, these "exclusives" may limit the number and types of prospective
tenants for the vacant space.
Uninsured Losses; Unavailability of Insurance. Each lessee shall be
responsible for insuring its goods and premises and lessees may also reimburse
the Company for a share of the cost of acquiring comprehensive insurance for
the property in which it is located, including casualty, liability, fire and
extended coverage customarily obtained for similar properties in amounts which
the Advisor determines are sufficient to cover reasonably foreseeable losses.
Tenants of single-user, net leased properties will provide such insurance for
those properties. However, there are certain types of losses (generally of a
catastrophic nature, such as losses due to wars) which are either uninsurable
or not economically insurable. Should such an event occur to, or cause the
destruction of, a property owned by the Company, the Company could lose both
its invested capital and anticipated profits from such property. See
"Investment Objectives and Policies--Description of Leases."
Risk of Recharacterization of Sale and Leaseback Transactions. In
addition to the purchase of properties subject to net leases, the Company
intends to enter into sale and leaseback transactions, pursuant to which the
Company will purchase a property from an entity and lease such property to such
entity. In the event of the bankruptcy of such a lessee, a transaction
structured as a sale and leaseback may be recharacterized as either a financing
or as a joint venture, which may result in adverse consequences to the Company.
To the extent the sale and leaseback is treated as a financing, the Company
might not be considered the owner of such property and as such would have the
status of a creditor with respect to the property in question.
Potential Additional Costs in Connection with Acquiring Newly Constructed
Properties. The Company intends primarily to acquire existing or newly
constructed property currently in operation. Although the Company will only
acquire newly constructed buildings on a turnkey basis, the builder's failure
to perform may necessitate legal action by the Company to rescind its purchase
of a property, to compel performance or to sue for damages. Any such legal
action may result in increased costs to the Company.
Risks Associated with Investments in Unimproved Real Property. The Board
has the discretion to invest not more than 10% of the assets of the Company in
unimproved real property. Investment in such real property, in addition to the
risks of real estate investment in general, include the expense and delay which
may be associated with re-zoning the land for a higher use or the development
and environmental concerns of governmental entities and/or community groups.
4. TAX RISKS
General. There are various federal income tax risks associated with an
investment in the Company. Although the provisions of the Code relevant to an
investment in the Company are generally described in the Section of the
Prospectus titled "Federal Income Tax Considerations," each potential investor
is strongly urged to consult his or her own tax advisor concerning the effects
of federal income tax law on an investment in the Company and on his or her
individual tax situation.
21
<PAGE> 100
Investors should recognize that many of the advantages and economic
benefits of an investment in the Company depend upon the continued treatment of
the Company as a REIT for federal income tax purposes. If the Company were no
longer taxed as a REIT, the Company would pay a corporate level tax on its
income which would reduce its cash available to pay Distributions and the yield
from an investment in the Company. The continued treatment of the Company as a
REIT is dependent on the law and regulations, which are subject to change, and
on the Company's ability to continue to satisfy a variety of objective tests
set forth in the Code.
Among the various risks associated with the federal income tax aspects of
the Offering of which investors should be aware are:
Risk of Failing to Qualify as a REIT. Qualification as a REIT involves
the application of certain technical and highly complex provisions of the Code
to various factual matters and circumstances based on the actual operations of
the Company, some of which are not within the Company's control. In
particular, timing differences between the recognition of income and the
receipt of cash could cause the Company to have difficulty meeting the REIT
requirement of distributing 95% of taxable income. Although the Company was
organized and intends to operate so as to qualify as a REIT, no assurance can
be given that the Company will in fact be able to so qualify. Further, the
Company's desire to maintain REIT status could cause it not to acquire certain
properties or undertake certain activities.
If the Company fails to qualify as a REIT or loses its REIT status, its
dividends will not be deductible and its income will be subject to tax, which
will substantially reduce the cash available to pay Distributions. In
addition, such tax liability might cause the Company to borrow funds, liquidate
certain of its investments or take other steps which could affect its operating
results. Moreover, if the Company's REIT status is terminated because of the
failure to meet a technical REIT test or it voluntarily revokes its election,
the Company would be disqualified from electing treatment as a REIT for the
four taxable years following the year in which REIT status is lost.
Limitations on Share Ownership. In order for the Company to qualify as a
REIT, no more than 50% of the outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals at any time during the last half of
the Company's taxable year. To ensure that the Company will not fail to
qualify as a REIT under this test, the Articles provide that no person may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.8% of the number or value of the issued and outstanding stock of the
Company. See "Description of Securities--Restrictions on Transfer."
Tax Liability on Reinvested Distributions. Stockholders that participate
in the Distribution Reinvestment Program will be deemed to have received, and
will for income tax purposes be taxed on, the amount reinvested in Shares.
Therefore, Stockholders (other than Tax-Exempt Entities) will have to use funds
from other sources to pay their tax liability on the value of the Shares
received. See "Federal Income Tax Considerations--Other Tax
Considerations--Distribution Reinvestment Program."
Limitations on Opinion of Counsel. The opinion of Counsel is based and
conditioned on various assumptions and representations made by the Company as
to certain factual matters. As set forth more fully in the Section of the
Prospectus titled "Federal Income Tax Considerations," Counsel has expressed
its opinion based on the facts described in this Prospectus, the Articles and
certain representations by the Company and the Advisor that: (i) the Company
will conduct its operations in a manner to permit it to qualify as a REIT; and
(ii) distributions to a Stockholder which is a Tax-Exempt Entity will not
constitute UBTI under current law, unless: (a) such Stockholder has financed
the acquisition of its Shares with "acquisition indebtedness" (within the
meaning of the Code); or (b) a Qualified Trust (as defined herein) owns more
than 10% of the Shares and the Company is a "Pension-Held REIT" (as defined
herein). See, however, "Description of Securities--Restrictions on Transfer."
22
<PAGE> 101
The Company's qualification as a REIT will depend upon the Company's
ability to meet, through actual operating results, various tests imposed by the
Code. Counsel will not review these operating results or compliance with the
qualification standards. Accordingly, no assurance can be given that the
actual operating results of the Company will allow it to satisfy the REIT
requirements. In addition, this opinion represents Counsel's legal judgment
based on the law in effect as at the date hereof, and is not binding on the
Service and could be subject to modification or withdrawal due to future
changes in the law.
5. ERISA RISKS
Suitability of the Company's Investments for Qualified Pension and
Profit-Sharing Trusts. When considering an investment in the Company with a
portion of the assets of a Qualified Plan, a fiduciary should consider: (i)
whether the investment satisfies the diversification requirements of Section
404(a)(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or other applicable restrictions imposed by ERISA; and (ii) whether
the investment is prudent, since there is anticipated to be only a limited
market in which it can sell or otherwise dispose of the Shares. The Company
has not, and will not, evaluate whether an investment in the Company is
suitable for any particular plan, but, subject to the disclosure included
therein, will accept such entities as Stockholders if an entity otherwise meets
the suitability standards. See "ERISA Considerations."
If the Company is considered a Pension-Held REIT, an investment in the
Company may also produce UBTI which may cause a Qualified Plan holding 10% or
more of the Shares to pay a tax on a portion of the income distributed to it by
the Company. Whether the Company will constitute a Pension-Held REIT will
depend on the concentration of ownership by a Qualified Plan, a factor that is
not within the control of the Company. See "Federal Income Tax Considerations"
and "Description of Securities--Restrictions on Transfer."
In addition to considering their fiduciary responsibilities under ERISA
and the prohibited transaction rules of ERISA and the Code, advisors to
Qualified Plans should also consider the effect of the "Plan Asset" regulations
issued by the Department of Labor. See "ERISA Considerations."
Commencing with and with respect to the year ending December 31, 1994,
Stockholders subject to ERISA will be provided with an annual statement of
value reporting the value of each Share based upon an estimated amount (as
determined by the Company) they would receive if the Company's properties were
sold as of the close of the Company's fiscal year and if such proceeds (without
reduction for selling expenses), together with the other funds of the Company
were distributed in liquidation of the Company; provided, however, the Net
Asset Value of each Share will be deemed to be $10 for the first three years
following termination of the Offering. This annual valuation may be revised by
the Company from time to time. There can be no assurance that: (i) such value
could actually be realized by the Company or by Stockholders upon liquidation
(in part because estimates of value do not necessarily indicate the price at
which assets could be sold, and because no attempt will be made to estimate the
expenses of selling any asset of the Company); (ii) Stockholders could realize
such value if they were to attempt to sell their Shares; or (iii) such value
would comply with the ERISA requirements. Should the Shares become listed on a
national stock exchange or market, the Company will no longer provide such
valuations.
IN VIEW OF THE COMPLEXITY OF THE TAX ASPECTS OF THE OFFERING, PARTICULARLY IN
LIGHT OF THE FACT THAT CERTAIN OF THE TAX ASPECTS OF THE OFFERING WILL NOT BE
THE SAME FOR ALL INVESTORS, PROSPECTIVE INVESTORS ARE STRONGLY ADVISED TO
CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX
SITUATION PRIOR TO INVESTMENT IN THE COMPANY.
23
<PAGE> 102
ESTIMATED USE OF PROCEEDS OF OFFERING
The amounts set forth in the table below represent the Company's current
estimates concerning the use of the Gross Offering Proceeds. All proceeds of
the Offering are held in trust by the Company for the benefit of the
Stockholders, to be used only for the purposes set forth above and will not be
commingled. As of March 31, 1996, the Company had Gross Offering Proceeds of
$29,060,946 and owned seven properties. It utilized $22,649,204 of the Gross
Offering Proceeds for such acquisitions, and $2,306,071 was available to fund
additional acquisitions. The eighth property, Regency Point, was acquired on
April 5, 1996, using $1,226,824 of the amount available to fund additional
acquisitions. Of the Gross Offering Proceeds, 87.46% will be used to acquire
properties if the Maximum Offering is sold. If the Maximum Offering is sold,
6.77% of the Gross Offering Proceeds will be utilized to pay selling and due
diligence expenses to unaffiliated third parties and 4.27% of the Gross
Offering Proceeds will be paid to the Advisor and its Affiliates to pay for the
costs of the Offering and the Marketing Contribution and Due Diligence Expense
Allowance.
<TABLE>
<CAPTION>
MAXIMUM DOLLARS RAISED ACTUAL DOLLARS RAISED
(INCLUDING SHARES SOLD UNDER THE DISTRIBUTION AS OF
REINVESTMENT PROGRAM)(1) MARCH 31, 1996
(SUBJECT TO ADJUSTMENT)
AMOUNT PERCENT AMOUNT PERCENT
--------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Gross Offering Proceeds: $59,050,000 100.00% 29,060,946 100.00%
Less Expenses:
Selling Commissions (2) 3,500,000 5.93% 1,994,188 6.86%
Marketing Contribution and Due Diligence
Expense Allowance Fee (2) 1,250,000 2.11% 532,658 1.84%
Organization and Offering Expenses (3) 1,771,500 3.00% 1,578,825 5.43%
--------------- -------------- ------------ -----------
Total Public Offering Expenses 6,521,500 11.04% 4,105,671 14.13%
Gross Amount Available for Investment(4) 52,528,500 88.96% 24,955,275 85.87%
Acquisition Expenses (5)(6) 295,250 0.50% 76,743 0.26%
Working Capital Reserve (7) 590,500 1.00% 290,609 1.00%
--------------- -------------- ------------ -----------
Net Cash Payments Relating to the
Purchase of Properties $51,642,750 87.46% 24,587,923 84.61%
=============== ============== ============ ===========
</TABLE>
(1) The amounts shown in this table represent the Company's current
estimates concerning the use of the Gross Offering Proceeds if the Maximum
Offering Amount is raised, and, accordingly, may not accurately reflect the
actual application of such proceeds.
(2) The Company will pay the Dealer Manager selling commissions equal to
7% of a maximum of $50,000,000 of the Gross Offering Proceeds and one
Soliciting Dealer Warrant for every 40 Shares sold, all of which compensation
will be reallowed to Soliciting Dealers. The Dealer Manager will also receive
the Marketing Contribution and Due Diligence Expense Allowance Fee equal to
2.5% of a maximum of $50,000,000 of the Gross Offering Proceeds, some portion
of which may be reallowed to Soliciting Dealers. This category of expense will
pay all amounts attributable to marketing and bona fide due diligence expenses.
Certain volume discounts may be given on orders of 25,000 Shares or more and
Soliciting Dealers may, in their discretion, request that the Company
pay them less than the maximum permitted compensation in respect of the sale of
Shares; however, such discounts will not affect the amount of proceeds to the
Company. No selling commission will be paid on any Shares purchased by the
Advisor, its Affiliates, the Dealer Manager or Soliciting Dealers. Any Shares
purchased by the Advisor or its Affiliates will be for investment purposes only
24
<PAGE> 103
and not with a view toward resale. A maximum of $10,000,000 of Shares
purchased under the Distribution Reinvestment Program will not be subject to
selling commissions or the Marketing Contribution and Due Diligence Expense
Allowance Fee and will be sold at a price of $9.05 per Share. See "Conflicts
of Interest," "Management's Discussion and Analysis of the Financial Condition
of the Company," "Plan of Distribution" and "Investment, Reinvestment and Share
Repurchase Programs--Distribution Reinvestment Program."
(3) These figures are the Advisor's best estimates of the legal,
accounting, printing and other offering expenses, including amounts for the
reimbursement of the Advisor for marketing, salaries and direct expenses of its
employees while directly engaged in registering and marketing the Shares and
other marketing and organization expenses. The Advisor has guaranteed payment
of all public offering expenses (excluding selling commissions and the
marketing contribution and due diligence expense allowance fee) in excess of
5.5% of the Gross Offering Proceeds or all Organization and Offering Expenses
(including such selling expenses) which together exceed 15% of the Gross
Offering Proceeds. This guaranty is without recourse to or reimbursement by
the Company.
(4) Of the amount shown in the column captioned "Actual Dollars Raised as
of March 31, 1996," approximately $449,153 was utilized to purchase the
Walgreens/Decatur Property; $4,805,911 was utilized to purchase Eagle Crest;
$1,140,000 was utilized to purchase Montgomery - Goodyear; $4,550,000 was
utilized to purchase Hartford/Naperville; $4,304,140 was utilized to purchase
Nantucket Square; $1,750,000 was utilized to purchase Antioch Plaza; $5,650,000
was utilized to purchase Mundelein Plaza, and $2,306,071 was available for
investment. On April 5, 1996, the Company acquired its eighth property,
Regency Point, using $1,226,824 of the amount available to fund additional
acquisitions.
(5) The Advisor will be reimbursed for actual out-of-pocket Acquisition
Expenses in an amount estimated to be 0.5% of the Gross Offering Proceeds
($295,250, assuming the Maximum Offering, including Shares sold under the DRP).
In addition, the Advisor will be reimbursed for actual out-of-pocket
Acquisition Expenses equal to 0.5% of any funds borrowed by the Company to
acquire properties. Such expenses with respect to borrowed funds will be
payable from the proceeds of such borrowings ($147,625, assuming the Maximum
Offering, including Shares sold under the DRP, are sold, and the borrowings
equal 50% of the Maximum Offering). Acquisition Expenses include but are not
limited to the costs and expenses incurred by the Advisor in the selection,
evaluation and acquisition of, and investment in, the Company's properties,
whether or not acquired or made, including, but not limited to: surveys,
appraisals, title insurance and escrow fees, non-refundable option payments on
properties not acquired, legal and accounting fees and expenses, computer use
related expenses, architectural and engineering reports, environmental and
asbestos audits, travel and communication expenses and personnel and
miscellaneous expenses related to the selection and acquisition of properties.
(6) The Advisor will not receive a fee for the acquisition of properties.
However, the seller of a property may pay a real estate brokerage commission to
a third party in connection with the Company's purchase of a property. Since a
seller may fix the selling price of a property at an amount sufficient to cover
the cost of a real estate commission, the Company, as purchaser, may indirectly
pay such amount in the purchase price, which amount may be considered an
acquisition fee. The Advisor will endeavor, whenever possible, to purchase
properties directly from sellers, without the involvement of a real estate
broker. When a property has been listed by a seller with a real estate broker,
the Advisor will endeavor, whenever possible, to be allocated a portion of the
real estate brokerage commission paid by the seller. All real estate brokerage
commissions so allocated to the Advisor will then be remitted in their entirety
to the Company by the Advisor.
(7) The Company has funded a working capital reserve with 1% of the Gross
Offering Proceeds.
WHO MAY INVEST
An investment in Shares involves certain risks and is suitable only as a
long-term investment for persons of adequate financial means who have no
immediate need for liquidity in their investment. Shares will be sold only to
persons who purchase a minimum of 300 Shares ($3,000) or Tax-Exempt Entities
which purchase a minimum of 100 Shares ($1,000, except Iowa where the minimum
investment for IRAs will be $3,000). In addition, the Company has established
financial suitability standards for investors who purchase Shares. These
standards require investors to have either: (i) a minimum annual gross income
of $45,000 and a net worth (exclusive of home, home furnishings and
automobiles) of $45,000; or (ii) a net worth (determined with the foregoing
exclusions) of $150,000. In the case of gifts to minors, the suitability
standards must be met by the custodian account or by the donor and by acceptance
of the confirmation of purchase or delivery of the Shares, an investor
represents that he satisfied any applicable suitability standards.
25
<PAGE> 104
In purchasing Shares, custodians or trustees of employee pension benefits
plans or IRAs may be subject to the fiduciary duties employed by ERISA or other
applicable laws and to the prohibited transaction rules prescribed by ERISA and
related provisions of the Code. In addition, prior to purchasing Shares, the
trustee or custodian of an employee pension benefit plan or an IRA should
determine that such an investment would be permissible under the governing
instruments of such plan or account and applicable law. See "Federal Income
Tax Considerations--Taxation of Stockholders--Taxation of Tax-Exempt
Stockholders" and "ERISA Considerations."
Suitability standards may be higher in certain states. Investors must
meet all of the applicable requirements set forth in the Subscription
Agreement. Under the laws of certain states, an investor may transfer his
Shares only to persons who meet similar standards, and the Company may require
certain assurances that these standards are met. Investors should carefully
read the requirements in connection with resales of Shares set forth in the
Subscription Agreement and under "Description of Securities--Restrictions on
Transfer."
The Soliciting Dealers Agreements between the Dealer Manager and each of
the Soliciting Dealers requires such securities dealers to make diligent
inquiries as required by law of all prospective purchasers in order to
ascertain whether a purchase of Shares is suitable and appropriate for such
person based upon information provided by the prospective purchaser regarding
his financial situation and investment objectives and to transmit promptly to
the Company, the fully completed subscription documentation and any other
supporting documentation reasonably required by the Company. By executing the
subscription agreement relating to the Shares (the "Subscription Agreement"),
by tendering payment for Shares and by acceptance of the confirmation of
purchase or delivery of the Shares, an investor represents that he satisfies
any applicable suitability standards.
In addition, each Soliciting Dealer will, by completing the Subscription
Agreement, acknowledge its determination that the Shares are a suitable and
appropriate investment for the investor, and will be required to represent and
warrant his or her compliance with applicable laws requiring the determination
of the suitability and appropriateness of the Shares as an investment for the
subscriber. The Company will, in addition to the foregoing, coordinate the
processes and procedures utilized by the Dealer Manager and Soliciting Dealers
and, where necessary, implement such additional reviews and procedures deemed
necessary to assure the adherence by registered representatives to the
suitability standards set forth herein.
COMPENSATION TABLE
The arrangements as to compensation by the Company of the Advisor and
Affiliates are arrangements by and among entities all of which are affiliated
and, consequently, such arrangements were not determined by arm's-length
negotiations. See "Conflicts of Interest." The following table discloses the
significant compensation which may be received from the Company, directly or
indirectly, by the Advisor and its Affiliates. In those instances in which
there are maximum amounts or ceilings on the compensation which may be received
by the Advisor and its Affiliates for services rendered to the Company, the
Advisor and its Affiliates may not recover any excess amounts for those
services by reclassifying such services under a different compensation or fee
category. See "Conflicts of Interest--Receipt of Commissions, Fees and Other
Compensation by the Advisor and its Affiliates."
NONSUBORDINATED PAYMENTS
The following aggregate amounts of compensation and fees payable to the
Advisor and its Affiliates by the Company are not subordinated to the Current
Return or Cumulative Return to the Stockholders.
26
<PAGE> 105
ESTIMATED MINIMUM AND
TYPE OF COMPENSATION METHOD OF COMPENSATION MAXIMUM DOLLAR AMOUNT
UPON COMPLETION OF OFFERING:
Selling Commissions (payable The Dealer Manager Actual amount depends
to the Dealer Manager and will receive $0.70 upon the number of
Soliciting Dealers) per Share for each Shares sold. Selling
Share sold and a commissions in the
Soliciting Dealer amount of $1,369,302
Warrant for each 40 have been incurred
Shares sold. The through December 31,
Dealer Manager will 1995 and $3,500,000
reallow the selling will be paid if the
commissions and Maximum Offering is
Soliciting Dealer sold.
Warrants to
Soliciting Dealers
for each Share they
sell. (1) Shares
purchased under the
Distribution
Reinvestment Program
will be purchased net
of commissions.
Marketing Contribution and An amount equal to Actual amount depends
Due Diligence Expense 2.5% of the Gross upon the number of
Allowance Fee (payable to the Offering Proceeds, Shares sold. Through
Dealer Manager and Soliciting some portion of which December 31, 1995,
Dealers) may be reallowed to $350,053 has been
Soliciting Dealers to incurred and
pay marketing and $1,250,000 will be
bona fide due paid if the Maximum
diligence expenses. Offering is sold.
Shares purchased
under the
Distribution
Reinvestment Program
will be purchased net
of the Marketing
Contribution and Due
Diligence Expense
Allowance Fee.
Reimbursable Expenses (pay- The Advisor or its Through December 31,
able to the Advisor and its Affiliates may 1995 the Company had
Affiliates) advance Organization reimbursed the
and Offering Expenses Advisor and its
for the Company. It Affiliates a total of
will be reimbursed $1,436,564 for
for its actual costs Organization and
incurred in Offering Expenses,
connection with the including selling
Offering on behalf of commissions and the
the Company, Marketing
including legal and Contributions and Due
accounting fees, Diligence Expense
registration and Allowance Fee.
filing fees, printing
costs and selling
expenses. However, if
the aggregate of all
Organization and
Offering Expenses,
including selling
commissions and the
27
<PAGE> 106
ESTIMATED MINIMUM AND
TYPE OF COMPENSATION METHOD OF COMPENSATION MAXIMUM DOLLAR AMOUNT
Marketing
Contribution and Due
Diligence Expense
Allowance Fee,
exceeds 15% of the
Gross Offering
Proceeds, or if the
aggregate of all
Organization and
Offering Expenses,
excluding such
selling expenses,
exceeds 5.5% of the
Gross Offering
Proceeds, the Advisor
or its Affiliates
will promptly pay
such excess expenses
and the Company will
have no liability for
such expenses at any
time thereafter.
ACQUISITION STAGE:
Acquisition Expenses for the An amount estimated Through December 31,
costs and expenses of the to be up to 0.5% of 1995, the Company had
acquisition of properties the Gross Offering not incurred any
including surveys, Proceeds in acquisition expenses
appraisals, title insurance connection with the to affiliates. If
and escrow fees, legal and expenses attendant to the Maximum Offering
accounting fees and expenses, a property is sold, acquisition
computer use related acquisition. (2) expenses will not
expenses, architectural and exceed $295,250;
engineering reports, however, the actual
environmental and asbestos amounts cannot be
audits, travel and determined at the
communication expenses and present time. In no
other related expenses event will such
(payable to the Advisor and amount exceed 6% of
its Affiliates). the purchase price of
any single property.
28
<PAGE> 107
ESTIMATED MINIMUM AND
TYPE OF COMPENSATION METHOD OF COMPENSATION MAXIMUM DOLLAR AMOUNT
OPERATIONAL STAGE (3):
Property Management Fee A Property Management Actual amounts are
(payable to an Affiliate of Fee equal to not more dependent upon
the Advisor) than 4.5% of the results of
gross revenues from operations. Through
the properties will December 31, 1995,
be paid monthly to the Company had
Inland Commercial incurred and paid
Property Management, Property Management
Inc., an Affiliate of Fees of $46,791.
the Advisor (the
"Management Agent").
Compensation for Services In addition to Actual amounts are
property management, dependent upon
the Advisor and its results of operations
Affiliates will and, therefore,
provide other cannot be determined
property-level at the present time.
services to the
Company, and may
receive compensation
for such services,
including leasing
fees, development
fees, construction
management fees, loan
origination and
servicing fees,
property tax
reduction fees and
risk management fees.
However, such
compensation will not
exceed 90% of that
which would be paid
to third parties
providing such
services and all such
compensation must be
approved by a
majority of the
Independent
Directors. See
"Management--Other
Services."
Reimbursable Expenses Certain expenses of Actual amounts are
(payable to the Advisor and the Advisor and its dependent upon
its Affiliates) Affiliates will be results of
reimbursed by the operations. Through
Company. (4) (5) (6) December 31, 1995,
the Company had
reimbursed the
Advisor and its
Affiliates a total of
$7,277 for certain
expenses.
29
<PAGE> 108
ESTIMATED MINIMUM AND
TYPE OF COMPENSATION METHOD OF COMPENSATION MAXIMUM DOLLAR AMOUNT
LIQUIDATION STAGE: A property disposition Actual amounts to be
Property Disposition Fee fee, payable upon the received depend upon the
(payable to the Advisor sale of each of the sale price of Company
and its Affiliates) Company's properties, inproperties and,
an amount equal to the therefore, cannot be
lesser of: (i) 3% of determined at the
the contracted for sales present time.
price of the property;
or (ii) 50% of the
commission paid to third
parties which is
reasonable, customary
and competitive in light
of the size, type and
location of such
property ("Competitive
Real Estate
Commission"). The
amount paid, when added
to the sums paid to
unaffiliated parties,
shall not exceed the
lesser of the
Competitive Real Estate
Commission or an amount
equal to 6% of the
contracted for sales
price. Payment of such
fees shall be made only
if the Advisor provides
a substantial amount of
services in connection
with the sale of the
property. See
"Management--The
Advisory Agreement."
SUBORDINATED PAYMENTS
The following fee payable to the Advisor and its Affiliates by the Company
will be payable only after specified returns have been paid to the Stockholders
as set forth below:
30
<PAGE> 109
ESTIMATED MINIMUM AND
TYPE OF COMPENSATION METHOD OF COMPENSATION MAXIMUM DOLLAR AMOUNT
OPERATIONAL STAGE (3):
Advisor Asset Management An Advisor Asset Actual amounts are
Fee (payable to the Management Fee of not dependent upon results
Advisor) more than 1% of the of operations. For the
Average Invested year ended December 31,
Assets. The fee will 1995, the Company had
be payable quarterly in not incurred or paid an
an amount equal to 1/4 Advisor Asset
of 1% of the Average Management Fee.
Invested Assets of the
Company, as of the last
day of the immediately
preceding quarter,
pursuant to the
Advisory Agreement.
For any year in which
the Company qualifies
as a REIT, the Advisor
must reimburse the
Company: (i) to the
extent that the Advisor
Asset Management Fee
plus Other Operating
Expenses paid during
the previous calendar
year exceed 2% of the
Company's Average
Invested Assets for
that calendar year or
25% of the Company's
Net Income for that
calendar year; and (ii)
to the extent that
Stockholders have not
received an annual
Distribution equal to
or greater than the 8%
Current Return.
LIQUIDATION STAGE (3)
Incentive Advisory Fee After the Stockholders Actual amounts to be
(payable to the Advisor) have first received: received depend upon
(i) their 8% Cumulative the sale price of
Return; and (ii) a Company properties and,
return of their therefore, cannot be
Invested Capital, an determined at the
Incentive Advisory Fee present time.
equal to 15% or the net
proceeds from the sale
of a property. At such
time as the Advisory
Agreement is terminated
due to the listing for
trading of the Shares
on a national exchange
or market, the Incentive
Advisory Fee
31
<PAGE> 110
ESTIMATED MINIMUM AND
TYPE OF COMPENSATION METHOD OF COMPENSATION MAXIMUM DOLLAR AMOUNT
shall also terminate.
The Advisor and
Management Agent may be
merged into the Company
at the time of listing
and may receive shares
in the Company, in an
amount which may be
determined at that
time, based upon the
value of all fees given
up or waived by the
Advisor and Management
Agent through the
merger. See
"Management--The
Advisory Agreement."
- ---------------------
(1) Each Soliciting Dealer Warrant provides the holder with the right to
purchase one Share at a price of $12 per Share during the period beginning from
the date the Soliciting Dealer Warrants are issued and ending upon the first to
occur: (a) October 13, 1999; or (b) the closing date of a secondary offering
of shares of the Company's Common Stock. In addition, no Soliciting Dealer
Warrants will be exercisable until one year from the date of issuance. See
"Plan of Distribution--Compensation."
(2) In accordance with applicable state law, the total of all Acquisition
Expenses paid by the Company in connection with the purchase of a property by
the Company shall in no event exceed an amount equal to 6% of the Contract
Price for the Property (as defined herein), unless a majority of the Directors
(including a majority of the Independent Directors), not otherwise interested
in the transaction, approve the transaction as being commercially competitive,
fair and reasonable to the Company. Notwithstanding the previous sentence, the
total of all Acquisition Expenses paid by the Company in connection with the
purchase of a property by the Company from an Affiliate shall in no event
exceed an amount equal to 6% of the Contract Price for the Property.
(3) The Advisor and its Affiliates will be involved in determining the
types of transactions entered into by the Company. The Advisor benefits from
the Company's retaining ownership of its properties and leveraging its
properties, while Stockholders may be better served by their sale or
disposition or acquisition or hold on an unleveraged basis. Furthermore, the
receipt and retention of certain fees and reimbursements is dependent upon the
Company making investments in properties. Therefore, the interest of the
Advisor in receiving such fees may conflict with the interest of the
Stockholders to earn income on their investment in Shares and may result in the
Company entering into transactions which may not be in the best interest of the
Stockholders.
(4) (i) The Advisor and its Affiliates will be reimbursed for:
(a) the cost to the Advisor or its Affiliates of goods and services
used for and by the Company and obtained from unaffiliated parties;
and (b) administrative services related thereto. "Administrative
services" include only ministerial services such as typing,
recordkeeping, preparation and dissemination of Company reports,
preparation and maintenance of records regarding
Stockholders, recordkeeping and administration of the Automatic
Purchase Investment, Distribution Reinvestment and Share Repurchase
Programs, preparation and dissemination
32
<PAGE> 111
of responses to Stockholder
inquiries and other communications with Stockholders and any other
recordkeeping required for Company purposes.
(ii) In extraordinary circumstances fully justified to the
official or agency administering the state securities laws, the
Advisor and its Affiliates may provide other goods and services to
the Company if all of the following criteria are met: (a) the
goods or services must be necessary to the prudent operation of the
Company; (b) the compensation, price or fee must be equal to the
lesser of 90% of the compensation, price or fee the Company would
be required to pay to independent parties who are rendering
comparable services or selling or leasing comparable goods on
competitive terms in the same geographic location, or 90% of the
compensation, price or fee charged by the Advisor or its Affiliates
for rendering comparable services or selling or leasing comparable
goods on competitive terms; or (c) if at least 95% of gross
revenues attributable to the business of rendering such services or
selling or leasing such goods are derived from persons other than
Affiliates, the compensation, price or fee charged by an
unaffiliated person who is rendering comparable services or selling
or leasing comparable goods must be on competitive terms in the
same geographic location. In addition, any such payment will be
subject to the further limitation described in paragraph (iii)
below. Extraordinary circumstances shall be presumed only when
there is an emergency situation requiring immediate action by the
Advisor or its Affiliates and the goods or services are not
immediately available from unaffiliated parties. Services which
may be performed in such extraordinary circumstances include
emergency maintenance of Company properties, janitorial and other
related services due to strikes or lock-outs, emergency tenant
evictions and repair services which require immediate action, as
well as operating and re-leasing properties with respect to which
the leases are in default or have been terminated.
(iii) No reimbursement will be permitted to the Advisor or its
Affiliates under clause (i)(b) above for items such as rent,
depreciation, utilities, capital equipment and other administrative
items and the salaries, fringe benefits, travel expenses and other
administrative items of any controlling persons of the Advisor, its
Affiliates or any other supervisory personnel except in those
instances in which the Company believes it to be in the best
interest of the Company that the Advisor or its Affiliates operate
or otherwise deal with, for an interim period, a property with
respect to which the lease is in default. Permitted
reimbursements, except as set forth above, include salaries and
related salary expenses for non-supervisory services which could be
performed directly for the Company by independent parties such as
legal, accounting, transfer agent, data processing and duplication.
Controlling persons include, but are not limited to, any person,
irrespective of his or her title, who performs functions for the
Advisor similar to those of: (a) chairman or member of the board
of directors; (b) president or executive vice president; or (c)
those entities or individuals holding 5% or more of the stock of
the Advisor or a person having the power to direct or cause the
direction of the Advisor, whether through ownership of voting
securities, by contract or otherwise. Notwithstanding the
foregoing, and subject to the approval of the Board, the Company
may reimburse the Advisor for expenses related to the activities of
controlling persons undertaken in capacities other than those which
cause them to be controlling persons. The Advisor believes that
its employees and the employees of its Affiliates and controlling
persons who will perform services for the Company for which
reimbursement is allowed pursuant to clause (ii)(c) above, have the
experience and educational background, in their respective fields
of expertise, appropriate for the performance of such services.
33
<PAGE> 112
(iv) The Total Operating Expenses of the Company shall not (in
the absence of a satisfactory showing to the contrary) in any
fiscal year exceed the greater of: (a) 2% of the Average Invested
Assets; or (b) 25% of its Net Income for such year. The
Independent Directors may, upon a finding of unusual and
non-recurring factors which they deem sufficient, determine that a
higher level of expenses is justified in any given year. There are
certain additional restrictions on expenses that will be borne by
the Company.
(5) The Advisor and its Affiliates shall not be compensated for any
services other than those which have been fully disclosed in this Compensation
Table.
(6) The Company shall not pay, directly or indirectly, a commission or fee
to the Advisor or its Affiliates in connection with the reinvestment of the
proceeds of any resale, exchange, financing or refinancing of a Company
property.
CONFLICTS OF INTEREST
The Company is subject to various conflicts of interest arising out of its
relationship with the Sponsor, the Advisor or its Affiliates. All agreements
and arrangements, including those relating to compensation, between the Company
and the Advisor and its Affiliates are not the result of arm's-length
negotiations. The limitations on the Advisor described below have been adopted
to control when the Company enters into transactions with the Advisor and its
Affiliates. With respect to the conflicts of interest described herein, the
Advisor and its Affiliates will endeavor to balance the interests of the
Company with the interests of the Advisor and its Affiliates in making any
determination.
1. Competition for the Time and Service of the Advisor and Affiliates.
The Company relies on the Advisor and its Affiliates for the daily operation of
the Company and the management of its assets. Affiliates of the Advisor have
conflicts of interest in allocating management time, services and functions
among various existing real estate programs and any future real estate programs
or other entities which they may organize or serve, as well as other business
ventures in which they are involved. The Advisor and its Affiliates believe
they have sufficient staff to be fully capable of discharging their
responsibilities in connection with various real estate programs and other
business ventures.
The compensation paid to the Advisor or its Affiliates under the Advisory
Agreement is on terms no less favorable to the Company than those customary for
similar services performed by independent firms in the relevant geographic
area, but in no event more than 2% of the Average Invested Assets less Other
Operating Expenses. See "Compensation Table." The Advisory Agreement provides
that it may be terminated by a majority vote of the Stockholders upon 60 days
prior written notice. See "Management--The Advisory Agreement."
2. Process for Resolution of Conflicting Opportunities. Affiliates of the
Advisor have sponsored and may in the future sponsor both publicly and
privately offered REITs or other entities which may have investment objectives
very similar to those of the Company. The Advisor and its Affiliates could,
therefore, be subject to conflicts of interest between the Company and other
programs in connection with the acquisition of properties. To the extent
possible, the resolution of conflicting investment opportunities between the
Company and other investment entities advised or managed by the Advisor and its
Affiliates will, as a general rule, be resolved by giving priority to the
entity having uninvested funds for the longest period of time. Specifically,
the Advisory Agreement gives the Company the first opportunity to buy
Neighborhood Retail Centers placed under contract by the Advisor or its
Affiliates provided the Company is able to close the purchase of such property
within 60 days. The Advisory Agreement will also require that any single-user
retail property net leased by a creditworthy tenant located anywhere in the
United
34
<PAGE> 113
States which is placed under contract by the Advisor or its Affiliates
may be purchased by the Company provided that: (i) the Company has funds
available to make the purchase; (ii) the Board votes to make the purchase
within five days of being offered such property by the Advisor; (iii) the
property meets the Company's acquisition criteria; and (iv) in the event that
more than one real estate program sponsored by Affiliates of the Advisor has
funds available to make the purchase, such property will first be offered to
the program which has had funds available for the longest period of time.
Other factors which may be considered in connection with the decisions as to
the suitability of the property for investment include: (i) the effect of the
acquisition on the diversification of each entity's portfolio; (ii) the amount
of funds available for investment; (iii) cash flow; and (iv) the estimated
income tax effects of the purchase and subsequent disposition. The Independent
Directors must, by a majority vote, approve all actions by the Advisor or its
Affiliates which present potential conflicts with the Company. See
"Management--The Advisory Agreement."
It is believed that the aforementioned factors, together with the
obligations of the Advisor and the Affiliates to present to the Company any
investment opportunity which could be suitable for the Company, will help to
lessen the competition or conflicts with respect to the purchase of properties
by other entities and the Company.
3. Acquisition from Affiliates. Two of the properties acquired by the
Company were acquired from an Affiliate. The purchase prices for such
properties were not the subject of arm's-length negotiations. The Articles
provide that the purchase price of any property acquired from an Affiliate may
not exceed its fair market value as determined by a competent independent
appraiser who is a member in good standing of the American Institute of Real
Estate Appraisers, and a majority of the Directors (including a majority of the
Independent Directors) not interested in the transaction must approve the
purchase as fair and reasonable to the Company. The Directors (including all of
the then Independent Directors) approved these acquisitions, however, there can
be no assurance that the prices paid to the Affiliate did not exceed that
which would be paid by an unaffiliated purchaser.
4. The Company may Purchase Properties from Persons with whom Affiliates
of the Advisor have Prior Business Relationships. The Company may purchase
properties from certain sellers from whom the Advisor or its Affiliates have
purchased properties in the past and may purchase properties in the future. In
the event the Company purchases properties from such sellers, the Advisor will
experience a conflict between the current interests of the Company and its
interests in preserving any ongoing business relationship. Nevertheless, the
Advisor will not consummate such purchases in a manner which would cause it to
breach its fiduciary obligations to the Company. See "Management."
5. Property Management Services are being Rendered by an Affiliate of the
Advisor. An Affiliate of the Advisor, Inland Commercial Property Management,
Inc., provides property management services for the Company. The Management
Agent renders the management services to the Company on a competitive basis in
a manner consistent with customary business practices. See "Compensation
Table--Nonsubordinated Payments--Operational Stage." The Advisor and the
Management Agent believe that the Management Agent has sufficient personnel and
other required resources to discharge all responsibilities to the various
properties that it manages and will manage in the future.
6. Receipt of Commissions, Fees and Other Compensation by the Advisor and
its Affiliates. In connection with the Offering, the Advisor and its
Affiliates will receive the compensation as described in the "Compensation
Table." Certain compensation is payable notwithstanding the lack of cash
available to make Distributions to the Stockholders. To that extent, the
Advisor benefits from the Company's retaining ownership of its properties and
leveraging its properties, while Stockholders may be better served by their
sale or disposition or acquisition or hold on an unleveraged basis.
Furthermore, the receipt and retention of certain fees and reimbursements is
dependent upon the Company making investments in properties. Therefore, the
interest of the Advisor in receiving such fees may conflict with the interest
of the
35
<PAGE> 114
Stockholders in earning income on their investment in Shares. The
Advisor and its Affiliates recognize that they have a fiduciary duty to the
Company and the Stockholders, and represent that their actions and decisions
will be made in the manner most favorable to the Company and its Stockholders,
so as not to breach their fiduciary duty.
7. Non-Arm's-Length Agreements. The agreements and arrangements,
including those relating to compensation, between the Company and the Advisor
or any of its Affiliates may not be the result of arm's-length negotiations,
but are expected to approximate the terms of arm's-length transactions.
While the Company will make no loans to the Advisor or its Affiliates, the
Company has and may continue to borrow money from the Advisor or its Affiliates
for various purposes including working capital requirements, but only on terms
as to interest rate, security, fees and other charges at least as favorable to
the Company (as determined by a majority of the Directors (including a majority
of the Independent Directors not otherwise interested in the transaction)) as
those charged by unaffiliated lending institutions in the same locality on
comparable loans for the same purpose. See "Real Property Investments."
The Advisor and its Affiliates are not prohibited from providing services
to, and otherwise dealing or doing business with, persons who deal with the
Company, although there are no present arrangements with respect to any such
services. However, no rebates or "give-ups" may be received by the Advisor or
its Affiliates, nor may the Advisor or any such Affiliates participate in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of the Advisory Agreement.
8. Legal Counsel for the Company and the Advisor is the Same Law Firm.
Shefsky Froelich & Devine Ltd. is acting as general counsel to the Company and
as special counsel to the Advisor and some of its Affiliates upon all legal
matters related to the Offering. Shefsky Froelich & Devine Ltd. is not acting
as counsel for the Stockholders or any potential investor.
There is a possibility that in the future the interests of the various
parties may become adverse, and under the Code of Professional Responsibility
of the legal profession, such counsel may be precluded from representing any
one or all of said parties. If any situation arises in which the interests of
the Company appear to be in conflict with those of the Advisor or its
Affiliates, additional counsel may be retained by one or more of the parties to
assure that their interests are adequately protected. Moreover, should such a
conflict not be readily apparent, counsel may inadvertently act in derogation
of the interest of certain parties which could affect the Company's and,
therefore, the Stockholders' ability to meet their investment objectives.
9. Inland Securities Corporation is Participating as Dealer Manager in the
Sale of the Shares. Inland Securities Corporation, a securities dealer
affiliated with the Advisor, is participating as the Dealer Manager in the
Offering and is entitled to selling commissions all of which will be reallowed
to Soliciting Dealers. See "Plan of Distribution--Compensation." Any review
of the structure, formation or operation of the Company performed by the Dealer
Manager will be conducted as if it was an independent review; however, it
cannot be considered to represent such an independent review, and such review
may not be as meaningful as a review conducted by an unaffiliated
broker-dealer. Thus, the Dealer Manager may be subject to a conflict of
interest, which may arise out of its participation in the Offering and its
affiliation with the Advisor, in performing its "due diligence" obligations
which arise under the Securities Act of 1933, as amended (the "Act"). However,
the Dealer Manager believes it has properly performed and will properly perform
these "due diligence" activities.
36
<PAGE> 115
10. The Advisor may have Conflicting Fiduciary Obligations in the Event
the Company Acquires Properties with Affiliates. The Advisor may cause the
Company to acquire an interest in a property through a joint venture with an
Affiliate of the Advisor. In such instance, the Advisor will have a fiduciary
duty to both the Company and the Affiliate participating in the joint venture.
In order to minimize the likelihood of a conflict between these fiduciary
duties, the Advisory Agreement provides guidelines for investments in such
joint ventures in various respects. In addition, the Articles provide that a
majority of the Directors (including a majority of the Independent Directors)
not otherwise interested in the transaction determine that the transaction is
fair and reasonable to the Corporation and is on terms and conditions no less
favorable than from unaffiliated third parties. See "Investment Objectives and
Policies--Joint Ventures."
FIDUCIARY RESPONSIBILITY OF DIRECTORS AND
THE ADVISOR; INDEMNIFICATION
GENERAL
Consistent with the duties and obligations of, and limitations on, the
Directors as set forth in the Articles and under the laws of the State of
Maryland, the Directors are accountable to the Stockholders as fiduciaries and
are required to perform their duties in good faith and in a manner each
Director believes to be in the best interest of the Company and its
Stockholders, with such care, including reasonable inquiry, as a prudent person
in a like position would use under similar circumstances. In addition, the
Independent Directors must review at least annually the relationship of the
Company with the Advisor and the Advisor's performance of its duties under the
Advisory Agreement, and must determine that the compensation paid to the
Advisor is reasonable in relation to the nature and quality of the services
performed. The Advisor also has a fiduciary duty to the Company and the
Stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The liability of the Directors and officers of the Company is limited to
the fullest extent permitted by the MGCL; accordingly, the Directors and
officers shall not be liable to the Company or its Stockholders except that
liability shall not be so limited: (a) if it is proved that the person
actually received an improper benefit or profit in money, property or services;
and (b) to the extent that a judgment or other final adjudication adverse to
the person is entered in a proceeding based on a finding in the proceeding that
the person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding.
The Company's Articles and Bylaws authorize it, to the fullest extent
permitted by Maryland statutory or decisional law, as amended or interpreted
and, without limiting the generality of the foregoing, in accordance with
Section 2-418 of the MGCL, to indemnify and pay or reimburse reasonable
expenses to: any Director, the Advisor or its Affiliates (each an "Indemnified
Party") provided, that: (i) the Director, Advisor or its Affiliates, have
determined, in good faith, that the course of conduct which caused the loss or
liability was in the best interest of the Company; (ii) the Director, the
Advisor or its Affiliates were acting on behalf of or performing services on
the part of the Company; (iii) such liability or loss was not the result of
negligence or misconduct on the part of the Indemnified Party, except that in
the event the Indemnified Party is or was an Independent Director, such
liability or loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of the assets of the Company and not from the
Stockholders. The Company shall not indemnify a Director, the Advisor or its
Affiliates for losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws by such party unless one
or more of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee; (ii) such claims have been
dismissed with
37
<PAGE> 116
prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee; or (iii) a court of competent jurisdiction
approves a settlement of the claims and finds that indemnification of the
settlement and related costs should be made and the court considering the
request has been advised of the position of the Securities and Exchange
Commission (the "Commission") and the published opinions of the Tennessee
Securities Division and any other state securities regulatory authority in
which securities of the Company were offered and sold as to indemnification for
securities law violations.
The Company may advance amounts to persons entitled to indemnification
hereunder for legal and other expenses and costs incurred as a result of any
legal action for which indemnification is being sought only if all of the
following conditions are satisfied: (i) the legal action relates to acts or
omissions with respect to the performance of duties or services by the
indemnified party for or on behalf of the Company; (ii) the legal action is
initiated by a third party who is not a Stockholder or the legal action is
initiated by a Stockholder acting in his or her capacity as such and a court of
competent jurisdiction specifically approves such advancement; and (iii) the
indemnified party receiving such advances undertakes to repay the advanced
funds to the Company, together with the applicable legal rate of interest
thereon, in cases in which such party is found not to be entitled to
indemnification.
The Company shall have the power to purchase and maintain insurance on
behalf of an indemnified party against any liability asserted which was
incurred in any such capacity with the Company or arising out of such status;
provided, however, that the Company shall not incur the costs of any liability
insurance which insures any person against liability for which he, she or it
could not be indemnified under the Articles or the Bylaws.
Neither the amendment nor the adoption of any other provision of the
Articles or the Bylaws shall apply to or affect in any respect the
applicability of indemnification with respect to any act or failure to act
which occurred prior to such amendment, repeal or adoption. The parties
expressly agree that all of the terms and provisions hereof shall be construed
under the MGCL as now adopted or as may be hereafter amended and govern all
aspects of the Articles absent contrary terms contained in the Articles.
To the extent that the indemnification may apply to liabilities arising
under the Act, the Company has been advised that, in the opinion of the
Commission, such indemnification is contrary to public policy and, therefore,
unenforceable.
DEFENSES AVAILABLE
There are certain defenses available to the Directors, officers and the
Advisor under Maryland law and pursuant to the Articles in the event of a
Stockholder action against them. One such defense is the "business judgment
rule." A Director, officer or the Advisor can, under the "business judgment
rule," argue that he or she performed the action giving rise to the
Stockholder's action in good faith and in a manner he or she reasonably
believed to be in the best interests of the Company, and with such care as an
ordinarily prudent person in a like position would have used under similar
circumstances. The Directors, officers and the Advisor are also entitled to
rely on information, opinions, reports or records prepared by experts
(including accountants, consultants, counsel, etc.) who were selected with
reasonable care. However, the Directors, officers and the Advisor shall not
invoke the "business judgment rule" to further limit the rights of the
Stockholders to access records. In the event a Stockholder challenges an
amendment to the Articles made by Directors without the Stockholders' approval,
the Directors are permitted to contend that the Articles permit amendments to
the Articles absent Stockholder vote in certain circumstances. As described
above, the Directors, officers and the Advisor are also indemnified by the
Company pursuant to the Articles, subject to certain limitations.
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<PAGE> 117
PRIOR PERFORMANCE OF THE COMPANY'S AFFILIATES
PRIOR INVESTMENT PROGRAMS
The Inland organization, during the past ten years, has sponsored seven
public and 70 private real estate programs which have raised in excess in
$273,317,000. In excess of 19,500 investors have invested in these
Inland-sponsored programs. The investment objectives and policies of the
Company are similar to those of several investment programs which have owned
and operated retail properties. However, the vast majority of these investment
programs were dissimilar from the Company in that the partnerships owned
apartment properties or whole or partial interests in mortgage loans.
The information in this Section and in the Prior Performance Tables
included in this Prospectus as Exhibit A shows relevant summary information
concerning real estate programs sponsored by officers and directors of the
Advisor and its Affiliates, the purpose of which is to provide information on
the prior performance of these programs so that potential investors may
evaluate the experience of officers and directors of the Advisor and its
Affiliates in sponsoring such programs. The following discussion is intended
to briefly summarize the objectives and performance of prior programs and to
disclose any material adverse business developments sustained by them.
SUMMARY INFORMATION
The table below provides certain summarized information concerning prior
programs through the date of this Prospectus and is qualified in its entirety
by reference to the foregoing introductory discussion and the detailed
information appearing in the Prior Performance Tables in this Prospectus.
Investors should not construe inclusion of the succeeding tables, which cover
the period from January 1, 1986 through December 31, 1995, as implying in any
manner that the Company will have results comparable to those reflected in the
tables; the yield and cash available and other factors could be substantially
different for the Company's properties. Investors should note that by
acquiring Shares in the Company, they will not be acquiring any interests in
any prior programs.
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<PAGE> 118
<TABLE>
<CAPTION>
Prior Prior
Public Private
Programs Programs
---------------- ---------------
<S> <C> <C>
Number of programs sponsored ...................... 7 70
Aggregate amount raised from investors ............ $181,700,000 $91,617,000
Aggregate number of investors ..................... 16,500 3,000
Number of properties purchased .................... 87 107 (1)
Aggregate cost of properties ...................... $163,913,000 (2) $342,021,000(3)
Percentage of properties (based on cost) that were:
Commercial --
Retail .................................... 2.5% 0.0%
Single-user retail net-lease .............. 8.7% 23.5%
Nursing homes ............................. 8.7% 0.2%
Offices ................................... 0.0% 0.0%
Industrial ................................ 0.0% 1.3%
Health clubs .............................. 4.7% 0.0%
Mini-storage .............................. 0.0% 0.4%
Total commercial .......................... 24.6% 28.4%
Multi-family residential ...................... 19.0% 71.5%
Land .......................................... 56.4% 0.3%
Percentage of properties (based on cost) that were:
Newly constructed (within a year of
acquisition) .............................. 8.7% 13.9%
Existing ...................................... 91.3% 86.1%
Construction .................................. 0.0% 0.0%
Number of properties sold ......................... 12 14
22.2% (4) 20.0%
Number of properties exchanged .................... 0 34
49.0%
</TABLE>
(1) Includes 37 properties acquired following the disposition of a program's
original real estate asset. See "--Loan Modifications and Work-Outs" in
this Section.
(2) Includes purchase price and acquisition fees and expenses.
(3) Represents the aggregate purchase prices paid by the investment programs.
Includes $104,768,242 in properties acquired following the disposition of
a program's original real estate asset.
(4) Based on costs of property including portions of land parcels sold at
December 31, 1995, and costs capitalized subsequent to acquisition.
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<PAGE> 119
During the three years prior to December 31, 1995, publicly registered
investment programs sponsored by IREIC purchased a total of 22 parcels of land
totalling 4,136 acres, all located in northeast Illinois. The land was
purchased on an all-cash basis.
Upon written request of the Company, any potential investor may obtain,
without charge, a copy of Table VI, filed with the Commission in connection
with this Offering, which provides more detailed information concerning these
acquisitions.
PUBLICLY REGISTERED LIMITED PARTNERSHIPS
INLAND'S MONTHLY INCOME FUND, L.P. ("MONTHLY INCOME FUND I") -- The
offering period for Monthly Income Fund I began August 3, 1987 and ended August
3, 1988. The objectives were to invest in improved residential, retail,
industrial and other income-producing properties on an all-cash basis to
provide monthly cash distributions of at least 8% per annum throughout the life
of the partnership and to provide a hedge against inflation through capital
appreciation.
Monthly Income Fund I raised $30,000,000 from over 2,200 investors.
Originally, Monthly Income Fund I purchased seven properties, including five in
Illinois, one in Ohio and one in Oklahoma, for a total investment of
$27,511,692 which includes acquisition costs of $25,831,542 plus an additional
$1,487,500 expended for the upgrade of the McHenry Plaza, a neighborhood retail
center, in McHenry, Illinois, plus $192,650 for upgrade costs at other
properties. The properties owned by Inland Monthly Income Fund I include, in
addition to McHenry Plaza, two nursing centers, two retail stores leased on a
triple-net basis by Wal-Mart Stores Inc., a health club facility and an
apartment complex, which was sold on an installment basis in 1994 and 1995.
Through December 31, 1995, cash distributions have been maintained at an 8%
level and on an accrual basis have totaled $335.06 per $500 unit or $18,877,468
including $15,629,880 from operating cash flow, $305,000 of net sales proceeds
from the sale of the apartment complex, $2,095,863 from supplemental capital
contributions from IREIC and $541,725 as a partial return of capital from
partnership reserves. In the opinion of IREIC, the partnership is
substantially meeting its investment objective for cash flow.
Two of Monthly Income Fund I's properties, which represent 26.3% of its
total assets as measured by their original purchase price, are nursing center
facilities which are 100% leased by Elite Care Corporation ("Elite"). Monthly
Income Fund I's lease with Elite became effective in February 1991, following
the termination of a lease with Adventist Living Centers Inc. ("ALC"), the
tenant which was in place when Monthly Income Fund I purchased the properties.
After ALC began experiencing financial difficulties, IREIC sought out Elite as
a replacement nursing home operator/tenant. The net effect to Monthly Income
Fund I was a .5% decrease in the effective rent over the term of the leases for
the two nursing homes, from $67,270 per month when ALC was the tenant to
$66,936 from Elite. Under the terms of the lease agreements for the nursing
care facilities the partnership must approve any sublease transaction. The
current operator of these facilities has negotiated with a new operator to
sublease the facilities. IREIC has reviewed and approved the transaction with
no significant changes to the terms of the leases.
The major tenant at McHenry Plaza is a Walgreens drug store. Other
tenants are Don Robert's Beauty School, Midwest Furniture and Family
Entertainment Center. These tenants took possession of their spaces at the
center from 1990 through 1993, following the July 1989 termination of a lease
with Duckwell-Alco Stores, Inc. ("Alco"), the tenant which leased 94% of the
space in the center at the time Monthly Income Fund I purchased the property.
IREIC embarked on a program to re-lease the center to new tenants, and secured
a $1,700,000 line of credit for property upgrades, remodeling and re-leasing
expenses. Annual principal and interest payments on this debt total $187,943.
Approximately 83% of the property is currently leased. An additional 4,000
square feet of storage area at the rear of the center, representing 7% of the
total space, remains to be leased. Additional expenditures for build-out and
leasing
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commissions are anticipated as the remaining rentable space is leased. The 1995
annual net operating income prior to debt service at McHenry Plaza is $234,000,
compared to approximately $213,000 when Alco was the tenant. The completion of
the redevelopment and lease-up of McHenry Plaza will increase the cash flow
available for distribution by Monthly Income Fund I.
The partnership successfully completed the conversion of the apartment
complex to condominiums. Condominium sales began during the first quarter of
1994. As of December 31, 1995, all of the 38 six-unit buildings at the
property had been sold.
The defaults by ALC and Alco, the expense of upgrades and build-out at the
McHenry Plaza and lower than expected net rental income from the apartment
complex have reduced cash available for distribution by Monthly Income Fund I.
Under the terms of a guarantee agreement, IREIC has made supplementary capital
contributions totaling $2,095,863 from the inception of the program through
December 31, 1995 for the purpose of providing 8% annual cash distributions to
investors. These supplementary capital contributions will begin to be repaid
from cash flow in the future, but only if excess cash flow exists after payment
of an 8% annual distribution to investors. The effect on investors is that
cash flow distributions will not exceed 8% per annum for the foreseeable
future. In addition, IREIC may be reimbursed for its supplementary capital
contributions from the sale or financing of properties, but only after
investors have received the return of their capital. The effect on investors
is that profits from the sale of the properties will be reduced by the amounts
contributed by IREIC under the 8% distribution guarantee agreement.
INLAND MONTHLY INCOME FUND II, L.P. ("MONTHLY INCOME FUND II") -- The
offering period for Monthly Income Fund II began August 4, 1988 and ended
August 4, 1990. The objectives were to invest in improved residential, retail,
industrial and other income-producing properties on an all-cash basis to
provide monthly cash distributions of at least 8% per annum through the first
five years of the partnership and to provide a hedge against inflation through
capital appreciation.
Monthly Income Fund II raised $25,323,569 from more than 2,100 investors
and purchased five properties, a net-leased Wholesale Club retail property in
Indiana, a net-leased health club in Ohio, a net leased nursing center in
Illinois, a net-leased retail store in Arizona and the Water Tower Market Plaza
(formerly Eagle Plaza), a neighborhood retail center in Illinois, for a total
acquisition cost of $21,224,542. Through December 31, 1995, cash distributions
have been maintained at or above an 8% level and on an accrual basis have
totaled $349.65 per $500 unit or $16,279,471, including $11,883,906 from
operations and an additional $4,395,565 which constitutes the net proceeds from
the sale of the Wholesale Club.
One of Monthly Income Fund II's properties, which represents 35.44% of its
total assets, as measured by its original purchase price, is a nursing center
which is 100% leased to Elite. Monthly Income Fund II's lease with Elite
became effective in February 1991, following the termination of a lease with
ALC, the tenant which was in place when Monthly Income Fund II purchased the
property. After ALC began experiencing financial difficulties, IREIC sought
out Elite as a replacement nursing home operator/tenant. The net effect to
Monthly Income Fund II was an 8% decrease in the effective rent from the
nursing center over the term of the lease, from $77,368 per month when ALC was
the tenant to $71,895 from Elite. Under the terms of the lease agreement for
the nursing center the partnership must approve any sublease transaction. The
current operator of this facility has negotiated with a new operator to
sublease the facility. IREIC has reviewed and approved the transaction with no
significant changes to the terms of the lease.
On January 8, 1991, Monthly Income Fund II sold its Wholesale Club
property in Indiana for $4,400,000. Net sales proceeds of $4,395,565 were
distributed to investors on February 1, 1991. The property was purchased by
Monthly Income Fund II in December 1988 for $3,427,278, which included
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acquisition fees of $275,013 and acquisition costs of $9,265. The gain on sale
for financial reporting purposes was $847,467, which is net of selling expenses
and commissions.
On January 21, 1994, the anchor tenant at Eagle Plaza neighborhood retail
center, Eagle Foods, closed its store. Under the terms of its lease, Eagle
Foods has guaranteed rent payments until May 1997. On February 4, 1994 and
with the approval of IREIC, Eagle Foods assigned its lease to Certified Grocers
Midwest, Inc. ("Certified"). The shopping center was subsequently renamed
Water Tower Market Plaza. During August 1995, Certified vacated the store.
Under the original lease, as well as the assignment of the lease, Eagle Foods
has guaranteed payments until November 1998. Eagle Foods has assigned its
lease to Euro-Fresh Markets ("Euro-Fresh") and is currently improving the space
for Euro-Fresh. Euro-Fresh is projected to begin occupancy in April 1996.
In the opinion of IREIC, the partnership is meeting its investment
objective to provide a minimum 8% cash distribution and has, through an early
and profitable sale of the Wholesale Club, achieved capital appreciation on 16%
of the partnership's investment in properties.
INLAND REAL ESTATE GROWTH FUND, L.P. ("GROWTH FUND I") -- The offering
period for Growth Fund I began December 9, 1985 and ended August 9, 1987. The
objectives were to invest in multi-family residential properties on a
moderately leveraged basis for capital appreciation through increases in
property values, tax-sheltered quarterly cash distributions and the build-up of
equity through reduction of mortgage indebtedness.
Growth Fund I raised $9,465,000 from more than 700 investors and purchased
four properties which included one multi-family residential property in Arizona
and a partial interest in another multi-family residential property in
Illinois. The other two properties were repurchased from Growth Fund I by
IREIC. The terms of these repurchase transactions placed Growth Fund I in the
same cash position it would have been in had the properties never been
acquired. Growth Fund I sold the multi-family residential property located in
Illinois as condominium units to individual purchasers for $6,685,950. Of the
total net sales proceeds of $6,455,375, $1,650,000 was used to pay off the
underlying debt on the property, $1,715,198 was distributed to limited partners
during 1994, $1,832,785 was used to pay down the debt on the partnership's
Arizona property and the remainder was used to fund condominium conversion
costs. The property was purchased by Growth Fund I in December 1985 for
$3,836,416, which included acquisition fees of $483,500. The gain on sale for
financial reporting purposes was $2,236,220, which is net of selling expenses
and commissions. Cash distributions to limited partners through December 31,
1995 totaled $509.66 per $1,000 unit or $4,516,868, including $1,281,155 from
operations, $1,724,843 from the sale or refinancing of the partnership's
properties, $943,224 from the repurchase of partnership properties by IREIC and
$567,646 partial return of capital from partnership reserves. The monthly
principal and interest payments on the Arizona property were reduced from
$27,819 to $12,314 as a result of refinancing the Arizona property in
March 1994 and the debt reduction described above.
In IREIC's opinion, the Arizona real estate market has been improving over
the last two years, and a sale of the Arizona property will be evaluated on an
ongoing basis with the intent to profitably conclude the partnership. The
decline in the Arizona market from 1989 through 1992 reduced net operating
income from that property and, therefore, the quarterly cash distributions
which might otherwise have been received by limited partners during that
period. Similarly, the decline of the Arizona market has extended the holding
period for that property. If and when the Arizona property can be sold at a
profit, the annual rate of capital appreciation realized by investors will be
less than if the Arizona market had not declined.
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INLAND REAL ESTATE GROWTH FUND II, L.P. ("GROWTH FUND II") -- The offering
period for Growth Fund II began September 21, 1987 and ended September 21,
1989. The objectives were to invest in improved residential, retail,
industrial and other income-producing properties on a moderately leveraged
basis for capital appreciation through increases in property values,
tax-sheltered quarterly cash distributions and the build-up of equity through
reduction of mortgage indebtedness.
Growth Fund II raised $4,038,250 from 336 investors and purchased two
properties, a multi-family residential property in Illinois and a health club
in Ohio. These properties were purchased for a total acquisition cost of
$5,615,826. The health club is currently approximately 62% financed with 38%
equity. Cash distributions to limited partners through December 31, 1995
totaled $1,135.44 per $1,000 unit or $4,509,182, including $862,410 from
operations and $3,646,772 return of capital from the sale of the multi-family
property in Illinois as 18 individual six-unit apartment buildings. All 18 of
the six-unit buildings were sold to third-party buyers on an installment basis
for $245,334 to $250,000 per building or a total of $4,261,895 (net of selling
expenses). Growth Fund II's cost basis in the buildings was $4,112,195. The
partnership extended financing to buyers to allow buyers to make monthly
interest payments to Growth Fund II for a period of not more than seven to ten
years, at which time the balance of the purchase price would be due. However,
as of December 31, 1995, 13 of the installment sale loans had been prepaid in
full and five had been substantially pre-paid (the partnership continues to be
owed $80,000 on these loans, secured by second mortgages). In the opinion of
IREIC, the sale of the multi-family property as individual six-unit apartment
buildings has resulted in modest capital appreciation within a short holding
period. IREIC is evaluating strategies to sell the partnership's remaining
assets and bring the partnership to a profitable conclusion.
INLAND LAND APPRECIATION FUND, L.P. ("LAND FUND I") -- The offering period
for Land Fund I began October 12, 1988 and ended October 6, 1989. The
objectives were to invest in pre-development land on an all-cash basis and
realize appreciation of such land upon resale.
Land Fund I raised $30,001,000 from 3,425 investors and purchased 25 land
parcels, all in suburban counties surrounding Chicago, Illinois, for an
aggregate purchase price of $25,187,069. As of December 31, 1995, Land Fund I
has completed 51 sales transactions, involving all or portions of 11 parcels,
including three sales of rights-of-way to the Illinois Department of
Transportation plus a land option, which generated $4,774,251 in net sales
proceeds. Land Fund I's cost basis in the land parcels sold was $2,654,277
resulting in a gain, net of selling expenses and commissions, of $2,119,974 for
financial reporting purposes. In the opinion of IREIC, the partnership is
currently meeting its investment objectives and has, through completed sales
transactions, realized significant capital appreciation on the assets sold.
Cash distributions to limited partners through December 31, 1995 totaled
$4,146,395, all from the sale of land parcels.
INLAND LAND APPRECIATION FUND II, L.P. ("LAND FUND II") -- The offering
period for Land Fund II began October 25, 1989 and ended October 24, 1991. The
objectives were to invest in pre-development land on an all-cash basis and
realize appreciation of such land upon resale.
Land Fund II raised $50,476,170 from 5,055 investors and purchased 27 land
parcels and two buildings, all in suburban counties surrounding Chicago,
Illinois, for an aggregate purchase price of $41,314,301. As of December 31,
1995, Land Fund II has had multiple sales transactions involving all or
portions of seven parcels which generated $9,113,875 in net sales proceeds.
Land Fund II's cost basis in the land parcels sold was $5,552,092 resulting in
a gain, net of selling expenses and commissions, of $3,561,783 for financial
reporting purposes. In the opinion of IREIC, the partnership is currently
meeting its investment objectives and has, through completed sales
transactions, realized significant capital appreciation on the assets sold.
Cash distributions to limited partners through December 31, 1995 totaled
$2,836,752, including $2,115,752 from sales and $721,000 from operations.
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INLAND CAPITAL FUND, L.P. ("LAND FUND III") -- The offering period for
Land Fund III began December 13, 1991 and ended August 23, 1993. The
objectives were to invest in pre-development land on an all-cash basis and
realize appreciation of such land upon resale.
Land Fund III raised $32,399,282 from 2,683 investors and purchased 18
land parcels, one of which included a house and several outbuildings, for an
aggregate purchase price of $25,945,990. Land Fund III has completed two sales
transactions, involving the house and portions of two parcels which generated
$646,334 in net sales proceeds. Land Fund III's cost basis in the land parcels
sold was $417,551 resulting in a gain, net of selling expenses and commissions,
of $228,783 for financial reporting purposes. In the opinion of IREIC, the
partnership is currently meeting its investment objectives and has, through
completed sales transactions, realized significant capital appreciation on the
assets sold. Cash distributions to limited partners through December 31, 1995
totaled $646,334, all from the sale of land parcels.
PRIVATE PARTNERSHIPS
Since inception, Affiliates of the Advisor have sponsored 514 private
placement limited partnerships which have raised more than $524,201,000 from
approximately 17,000 investors and invested in properties for an aggregate
price of more than $1 billion in cash and notes. Of the 522 properties
purchased, 93% have been in Illinois. Approximately 90% of the funds were
invested in apartment buildings, 6% in shopping centers, 2% in office buildings
and 2% in other properties. Including sales to Affiliates, 275 partnerships
have sold their original property investments. Officers and employees of IREIC
and its Affiliates invested more than $17,000,000 in these partnerships.
From 1990 and through the end of 1995, investors in Inland's private
partnerships have received total distributions in excess of $82,473,427
consisting of cash flow from partnership operations, sales and refinancing
proceeds and cash received during the course of property exchanges. Following
a proposal by Inland Real Estate Corporation, the former corporate general
partner, investors in 301 private partnerships voted in 1990 to make IREIC the
corporate general partner for those partnerships.
Beginning in December 1993 and continuing into the first quarter of 1994,
investors in 101 private limited partnerships for which IREIC is the general
partner received letters from IREIC informing them of the possible opportunity
to sell the 66 apartment properties owned by those partnerships to a
to-be-formed REIT (the "Apartment REIT") in which Affiliates of IREIC would
receive stock and cash and the limited partners would receive cash. In
connection therewith, the underwriters for the Apartment REIT subsequently
advised IREIC to sell to a third party its management and general partner's
interests in those remaining limited partnerships not selling their apartment
properties to the Apartment REIT (approximately 30% of the Inland-sponsored
limited partnerships owning apartment buildings). The prospective third-party
buyers of IREIC's interests in the remaining partnerships, however, would make
no assurance to support those partnerships financially. As a result, in a
letter from IREIC dated March 30, 1994, investors were informed of IREIC's
decision not to go forward with the formation of the Apartment REIT. Following
this decision, two investors filed a complaint on April 19, 1994 in the Circuit
Court of Cook County, Chancery Division, purportedly on behalf of a class of
other unnamed investors, alleging that IREIC had breached its fiduciary
responsibility to those investors whose partnerships would have sold apartment
properties to the Apartment REIT. The complaint sought an accounting of
information regarding the Apartment REIT matter, an unspecified amount of
damages and the removal of IREIC as general partner of the partnerships that
would have participated in the sale of properties to the Apartment REIT. On
August 1, 1994, Judge Thomas O'Brien granted IREIC's motion to dismiss, finding
that plaintiffs lacked standing to bring this case individually. Plaintiffs
were granted leave to file an amended complaint within 28 days. On August 29,
1994, six investors filed an amended complaint, purportedly on behalf of a class
of other investors, and derivatively on behalf of six limited partnerships of
which IREIC is the general partner. The derivative
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counts seek damages from IREIC for alleged breach of fiduciary duty and breach
of contract, and assert a right to an accounting. IREIC filed a motion to
dismiss in response to the amended complaint. The suit was dismissed on March
31, 1995 with prejudice, and the plaintiffs were given until May 1, 1995 to file
an appeal. They did so, and the parties will be briefing the issues.
PRIVATE PLACEMENT REAL ESTATE EQUITY PROGRAM
WISCONSIN CAPITAL LAND FUND, L.P., an Illinois limited partnership, was
formed in October 1992. The objectives were to invest in pre-development land
in the Madison, Wisconsin area on an all-cash basis and realize appreciation of
such land upon resale. The offering period for units in this privately offered
partnership began October 1992 and ended June 14, 1993 with the maximum amount,
$2,275,000, raised. Seven parcels of land in the Madison, Wisconsin, area were
purchased with the proceeds of the offering. Limited partners will receive
cash distributions as land parcels are sold.
PRIVATE PLACEMENT MORTGAGE AND NOTE PROGRAMS
During 1992 and in 1993, IREIC or its Affiliates sponsored nine private
placement securities offerings, including seven mortgage and note programs,
which are described below.
TRIPLE SECURITY FUND, L.P., an Illinois limited partnership, was formed in
May 1992. The principal investment objectives of the partnership were to
invest in participations in third-party mortgage loans owned by an Affiliate of
IREIC and thereby return investors' capital within five years, and to provide a
10% annual return on invested capital during the life of the partnership. The
return of capital and the 10% annual return were guaranteed by IREIC. The
offering period for interests in this privately offered partnership began in
May 1992 and ended in June 1992 with the maximum amount of $3,000,000 raised.
All of the offering proceeds were used to invest in participations in 14
wraparound mortgage loans and first mortgage loans, secured by condominium,
multi-family residential and commercial properties located in the Chicago
metropolitan area. Limited partners received their first monthly cash
distribution on July 17, 1992. Cash distributions to limited partners through
December 31, 1995 totaled $1,044,218, including $986,185 from operations and
$58,033 from a loan from IREIC, pursuant to the guarantee for that program.
10% INCOME FUND, L.P., an Illinois limited partnership offering
investments in promissory notes, was formed in May 1992. The offering period
for the purchase of notes began in May 1992 and ended June 1992 with the
maximum amount of $2,000,000 raised. Notes with a term of five years and
providing a 10% annual return for the first four years and 10.5% in the fifth
year were issued by the partnership. The return of capital to noteholders and
the specified annual returns are guaranteed by IREIC. 10% Income Fund, L.P.
invested in loans made to an Affiliate of IREIC, which were secured by
collateral assignments of third-party mortgage loans owned by the Affiliate.
Noteholders received their first monthly interest distribution on July 17,
1992. Cash distributions to noteholders through December 31, 1995 totaled
$681,223 including $663,939 from interest earnings and $17,284 from working
capital reserves.
9% INCOME JUNIOR MORTGAGE FUND, L.P., an Illinois limited partnership, was
formed in July 1992. The principal investment objectives of the partnership
were to invest in third-party junior mortgage loans owned by an Affiliate of
the Advisor and thereby return investors' capital within six years, and to
provide a 9% annual return on invested capital during the life of the
partnership. The return of capital and the 9% annual return were guaranteed by
IREIC. The offering period for interests in this privately offered partnership
began in July 1992 and ended September 1992 with the maximum amount of
$1,000,000 raised. All of the offering proceeds were used to invest in
third-party junior mortgage loans owned by the Affiliate, secured by
condominium, multi-family residential and commercial properties located in the
Chicago metropolitan area. Limited partners received their first monthly cash
distribution on September 17, 1992. Cash distributions through December 31,
1995 totaled $357,116, of which $276,364 was interest earnings,
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$73,463 was a return of capital resulting from the amortization of mortgage
loans and $7,339 was a loan from IREIC, pursuant to the distribution
guarantee for that program.
INLAND EMPLOYEE APPRECIATION FUND, L.P., an Illinois limited partnership
offering investments in promissory notes, was formed in December 1992. The
offering period for the purchase of Notes began in December 1992 and ended in
February 1993 with the maximum amount of $400,000 raised. Notes were offered
only to Illinois residents who are employees of IREIC and its Affiliates.
Notes with a term of four years and providing 10% annual interest were issued
by the partnership. The return of capital to noteholders and the specified
annual return are guaranteed by IREIC. Inland Employee Appreciation Fund, L.P.
invested in a loan made to an Affiliate of IREIC, which was secured by
collateral assignments of third-party investor loans owned by the Affiliate.
Noteholders received their first monthly interest distribution on March 17,
1993. Cash distributions through December 31, 1995 totalled $342,060, of which
$339,631 was interest earnings and $2,429 was subsidy income from IREIC,
pursuant to the guarantee for that program.
In February 1993, IREIC sponsored 9% MONTHLY CASH FUND, L.P., an Illinois
limited partnership offering investments in promissory notes to accredited
investors. The offering period for this program began February 1, 1993 and
ended on May 17, 1993 when the maximum amount of $4,000,000 raised. Notes
maturing August 1, 1999 and providing a 9% annual return were issued by the
partnership. 9% Monthly Cash Fund, L.P. invested in loans made to an Affiliate
of IREIC secured by collateral assignments of third party mortgage loans owned
by the Affiliate. The return of capital to noteholders and the 9% annual
return are guaranteed by IREIC. Cash distributions through December 31, 1995
totaled $929,094, of which $924,784 was interest earnings and $4,310 from
working capital reserves.
In April 1993, IREIC sponsored 9% MONTHLY CASH FUND II, L.P., an Illinois
limited partnership offering investments in promissory notes to accredited
investors, with investment objectives identical to those of 9% Monthly Cash
Fund, L.P. The offering period for this program began April 5, 1993 and ended
July 23, 1993, with the maximum amount of $4,000,000 raised. Notes maturing
February 1, 2000 and providing a 9% annual return were issued by the
partnership. 9% Monthly Cash Fund II, L.P. has invested in a loan made to an
Affiliate of IREIC, secured by collateral assignments of third-party mortgage
loans owned by the Affiliate. The return of capital to noteholders and the 9%
annual return are guaranteed by IREIC. Cash distributions through December 31,
1995 totaled $867,945, of which $864,752 was interest earnings and $3,193 from
working capital reserves.
In July 1993, Inland Mortgage Corporation, an Illinois corporation and an
Affiliate of IREIC ("IMC"), sponsored IMC NOTE ISSUE #2 1993, offering
investments in promissory notes. The offering period for this program began
August 25, 1993 and closed on June 13, 1994 after raising $6,800,000. Notes
maturing December 31, 2003 with 8% per annum interest and 100% return of
principal guaranteed by IREIC were issued by IMC. Proceeds of the offering
have been used to invest in a mortgage loan secured by an apartment property in
Manchester, New Hampshire, owned by an Affiliate of IREIC. Investors may also
receive additional interest, dependent on the future sale of the property. An
initial distribution to investors of escrow interest, totaling $13,685, was
made November 17, 1993. Cash distributions through December 31, 1995 totaled
$1,068,666 of which $671,865 was interest earnings and $19,456 was subsidy
income from IREIC pursuant to the guarantee for that program.
In December 1993, IREIC sponsored INLAND CONDOMINIUM FINANCING FUND, L.P.,
an Illinois limited partnership offering investment in promissory notes. The
offering period for this program began December 15, 1993 and closed on June 30,
1994. This partnership offered notes in a maximum principal amount of
$2,000,000 maturing July 1, 2001 with 10% per annum interest and 100% return of
principal guaranteed by IREIC. The proceeds of the offering have been used to
make unsecured loans to limited partnerships which are Affiliates of IREIC, for
the purposes of paying expenses relating to the conversion
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of apartment properties owned by those partnerships to condominiums, and
conducting condominium unit sales and other partnership expenses. Cash
distributions began on March 17, 1994. Distributions through March 31, 1995
totaled $177,893 all of which were interest earnings.
An August 1988 private placement securities offering sponsored by an
Affiliate of IREIC was INLAND JUNIOR MORTGAGE FUND, L.P., an Illinois limited
partnership. The offering period for this program ended May 1989 with $410,000
raised. All of the proceeds available for investment were used to purchase 82
second mortgages owned by Inland Mortgage Investment Corporation ("IMIC"),
secured predominantly by condominium units located in the Chicago metropolitan
area. Cash distributions through December 31, 1995 have totaled $404,175,
including $124,794 from interest earnings and $279,381 return of capital from
loan repayments. In February 1996, 20 limited partners exercised their put
option and IMIC bought their interests. As a result, IMIC currently owns 88%
of the limited partner units.
LOAN MODIFICATIONS AND WORK-OUTS
Between 1990 and December 31, 1995, 38 Inland-sponsored partnerships
owning 25 properties ceased making debt service payments to unaffiliated
lenders which held the underlying financing on the properties. These actions
were taken with the objective of reducing or restructuring the debt to levels
commensurate with the levels of performance of the operating properties. In
the case of six of these partnerships, namely 14 W. Elm Limited Partnership,
1445 North State Parkway Limited Partnership, 5600 Sheridan Limited
Partnership, 5630 Sheridan Limited Partnership, 6030 Sheridan Limited
Partnership and Oak Brook Commons Limited Partnership, the original asset of
each of these partnerships was transferred to a new partnership which was 100%
owned by the old partnership. IREIC believed that the new partnerships were
better positioned to accomplish a work-out with the lender. In connection with
the transfers of three of these properties to the new partnerships discussed
above, the lender holding the first mortgages on these properties filed a
separate proceeding against the general partner and its Affiliates, claiming
contractual interference and other allegations. This complaint was withdrawn as
part of a final settlement reached with the lender in February 1993.
Each of these new partnerships filed for financial reorganization in
federal court. In addition, 1036 N. Dearborn Limited Partnership also filed
for financial reorganization in federal court. All of these filings for
reorganization were an extension of negotiations with the lenders, with the
objective of reducing or restructuring the debt on the properties owned by the
partnerships. In the case of the filing for reorganization by each of the new
partnerships owned by 1445 North State Parkway Limited Partnership, 5600
Sheridan Limited Partnership and 5630 Sheridan Limited Partnership, the
reorganization proceedings were dismissed after each lender approved a
tax-deferred exchange transaction between the new partnership and an
unaffiliated third party. The general partner of the 1036 North Dearborn
Limited Partnership was able to purchase the debt encumbering that property at
a discount from the lender and the filing for reorganization of that
partnership was dismissed. The 1036 North Dearborn property was subsequently
refinanced with a third-party lender and then sold to a third party. Relative
to the new partnerships owned by the 14 W. Elm, 6030 Sheridan and Oak Brook
Commons Limited Partnerships: these three partnerships participated with the
general partner and its affiliates and with 16 other affiliated limited
partnerships, all of whose properties were subject to first-mortgage loans from
the same third-party lender, in a settlement agreement with that lender. Under
the terms of the settlement agreement, the 16 other affiliated limited
partnerships--none of which were in default on their mortgage loans--provided
additional security to the lender with respect to each of their loans by
transferring administration of property tax escrow accounts to the lender. The
transfer of the escrow accounts had no financial impact on the 16 partnerships.
Five of the 16 other partnerships also obtained favorable loan modifications
from the lender. In the case of the new partnership owned by the 14 W. Elm
Limited Partnership, the lender cooperated in a tax-deferred exchange of the
partnership's real estate asset. The partnership assigned its interest in its
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property, subject to the existing indebtedness, to an unaffiliated third party
in exchange for an assignment of the unaffiliated third party's interest in
another property, subject to indebtedness in a principal amount similar to that
on the 14 W. Elm property. This transaction was accomplished with the
objective of avoiding the creation of any current income tax liability to the
partnership or its limited partners. As a result of this tax-deferred
exchange, the 14 W. Elm Limited Partnership owns a net-lease commercial
property secured by a long-term lease with a creditworthy tenant. The debt
service on the indebtedness used to acquire the exchange property is in the
form of fully amortizing payments over the term of the store lease, with the
net-lease payments received from the tenant equal to the required debt service
payments. The possibility of cash flow distributions to the limited partners
is, therefore, precluded. However, the expectation exists for equity
accumulation through the amortization of the loan and, therefore, a
distribution to the limited partners upon the disposition of the exchange
property. IREIC believes that the limited partners of the 14 W. Elm Limited
Partnership are in a better position to realize a return of their capital
investment through the ultimate disposition of the exchange property. In the
case of the new partnership owned by the Oak Brook Commons Limited Partnership,
the lender acquired the property through foreclosure and the general partner
has supplied the Oak Brook Commons Limited Partnership with a new property, an
ownership interest in a retail store in Marshall, Minnesota, leased on a
triple-net basis by Wal-Mart Stores, Inc. In the case of the new partnership
owned by the 6030 Sheridan Limited Partnership, the lender agreed to permit a
tax-deferred exchange of the partnership's property, similar to that completed
by the 14 W. Elm Limited Partnership and subsequently the lender sold its
mortgage to an unaffiliated party who then acquired the property. The new
partnership acquired a replacement property similar to that acquired by the 14
W. Elm Limited Partnership, which property was then conveyed to the 6030
Sheridan Limited Partnership.
Of the original partnerships discussed above, Mr. Daniel L. Goodwin, a
Director of IREIC, served as individual general partner of all but the Oak
Brook Commons Limited Partnership, in which Mr. G. Joseph Cosenza, a Director
of IREIC and the Company, served as individual general partner. Prior to the
filing for reorganization, and as part of the strategy thereof, Mr. Cosenza
relinquished his position as individual general partner of the Oak Brook
Commons Limited Partnership and Mr. Goodwin did the same for all except the
1036 N. Dearborn Limited Partnership, for which he continues to serve as
individual general partner. These actions were taken upon the advice of
counsel to reduce the chances of delay in the reorganization efforts. The
corporate general partner of each partnership has elected to continue the
business of each of the partnerships in which the individual general partner
relinquished his position.
Four of the 38 Inland-sponsored partnerships described in the first
paragraph of this section owned four adjacent office buildings in Park Ridge,
Illinois. These four operating partnerships were, in turn, owned by 21 other
Inland-sponsored partnerships which had sold their original real estate assets
and reinvested a portion of the proceeds from those sales in ownership units in
the four operating partnerships. During 1991, the lenders which held the first
mortgages encumbering the four office buildings acquired the deeds to the
properties in lieu of foreclosure. The four operating partnerships were
subsequently liquidated. The general partner of the 21 partnerships which had
owned the four operating partnerships arranged for the transfer to each of the
21 partnerships of certain ownership interests in five net-lease commercial
properties having long-term leases with creditworthy tenants. The debt service
on the indebtedness used to acquire the commercial properties consists of
principal and interest payments which fully amortize the indebtedness over the
term of the store leases, with the net-lease payments received from the tenants
equal to the required debt service payments. The possibility of cash flow
distributions to the limited partners in the 21 partnerships is, therefore,
precluded. However, the expectation exists for equity accumulation through the
amortization of the loan and, therefore, a future distribution to the limited
partners upon the disposition of the commercial properties. The 21
partnerships experienced minimal adverse tax consequences from the liquidation
of the four operating partnerships and their receipt of the ownership interests
in the commercial properties. IREIC believes that the limited partners of the
21 partnerships are now positioned to realize a return of their capital
investment through the ultimate disposition of the commercial properties.
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In the case of the 900 DeWitt and the Hoffman Ridge Limited Partnerships,
two of the 38 limited partnerships mentioned in the first paragraph of this
section, tax-deferred exchanges of the partnerships' properties were
accomplished, in the same manner as described above. The partnerships acquired
net-lease commercial properties. Subsequent to the exchanges, the 900 DeWitt
and Hoffman Ridge properties were acquired by the first-mortgage lenders whose
loans were secured by those properties.
In the case of the Park Colony Limited Partnership, one of the 38 limited
partnerships mentioned in the first paragraph of this section, the partnership
defaulted on a loan secured by a second mortgage against the Park Colony
property. The lender which owned the second-mortgage loan purchased the
position of the lender which had funded the first mortgage loan secured by the
property. The lender then sold the debt, at a substantial discount, to an
Affiliate of the general partner of Park Colony Limited Partnership, and all
legal actions associated with the loan default were dismissed. The partnership
then refinanced the debt at the lower principal amount, retiring the debt owned
by the Affiliate. In December 1993, a new general partner replaced IREIC.
IREIC believes that this debt reduction is of significant benefit to the
partnership, which is now better positioned to realize its investment
objectives.
In 1990, the New England Limited Partnership, acting as nominee for 14
Florida limited partnerships which own the Sunset Ridge Apartments in
Manchester, New Hampshire, ceased making payments on the bond financing for
that property, which bonds were issued by the New Hampshire Housing Finance
Authority. In August 1993, an Affiliate of the general partner for those
partnerships purchased the bonds and the interests of two savings and loan
associations which had acted as bond credit-enhancers, at a substantial
discount. The partnerships which own the property are obtaining refinancing
funds to pay off the bonds and the amounts due to the Affiliate under the
credit-enhancement instruments for approximately the discounted price paid by
the Affiliate.
In April 1993, the West Haven Limited Partnership ceased making payments
on the first mortgage loan for that partnership's property. The general
partner attempted to negotiate with the lender to modify the terms of the loan
to a level commensurate with the operating performance of the West Haven
property, but no agreement was reached. A tax-deferred exchange was
accomplished and the partnership acquired an interest in a net-lease commercial
property. The West Haven property will be acquired by the lender whose loan
was secured by a first mortgage against the property.
In the case of the other partnerships referred to in the first paragraph
of this section, subsequent to the acquisition of net-leased commercial
properties via tax-deferred exchanges, the Townsgate, Riverdale, Northwoods and
Bridgeview properties were acquired by the first-mortgage lenders whose loans
were secured by the properties. The Covington Associates and Westbrooke
Limited Partnerships' tax-deferred exchange property, Townsgate II, was
acquired by the first mortgage lender and the two partnerships acquired
net-lease commercial properties via second tax-deferred exchanges. In the case
of the Bensenville Industrial Limited Partnership, subsequent to the
acquisition of a replacement net-lease commercial property, the Bensenville
property was acquired by the first-mortgage lender whose loan was secured by
the property.
In addition to the above-described developments, the corporate general
partner of the Walton Place Limited Partnership and the Barrington Lakes
Limited Partnership settled litigation with the lenders for the properties
which resulted in the transfer of the properties and an agreement to make cash
settlements by the partnerships to the lenders. In each case, the litigation
resulted after the partnership ceased making debt service payments in an effort
to bring about a renegotiation of the terms of the financing. The lenders
agreed to permit a tax-deferred exchange of the partnerships' respective
properties.
In January 1995, the Timberlake Limited Partnership ceased making payments
on the first mortgage loan for that partnership's property. IREIC is
attempting to negotiate with the lender to modify
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the terms of the loan to a level commensurate with the operating performance of
the Timberlake property, but to date, no agreement has been reached. It is
IREIC's intent to initiate a tax-deferred exchange whereby the partnership will
acquire an interest in a net-lease commercial property prior to the Timberlake
property being acquired by the lender whose loan is secured by a first mortgage
against the property.
EFFECTS OF PROPERTY EXCHANGES ON INVESTORS
The Inland organization has used a strategy of tax-deferred property
exchanges to mitigate the adverse effects of 1986 tax law changes and the
weakening of apartment markets in the late 1980s on Inland's tax-shelter
private partnerships and investors in those partnerships. The loss of
deficit-producing properties to foreclosure would otherwise have resulted in
the loss of investors' capital, as well as substantial income tax liability for
those investors. Through the exchange program, deficit-producing apartment
properties have been disposed of, net-leased retail properties have been
acquired, and most tax liability continues to be deferred. Gradually, through
the amortization of debt secured by the new, net-leased properties owned by
these partnerships, the partnerships and their investors are rebuilding equity
which may be realized upon the future sale or refinancing of these properties.
One of the primary investment objectives of these tax-shelter partnerships--the
deferral of tax liability, continues to be met to a significant degree.
However, no cash flow is being received by the investors in these partnerships.
In addition, the tax-deferred exchanges have extended the expected term of these
tax-shelter partnerships. If and when the net-leased properties are sold or
refinanced, there is no assurance that investors will realize any profit or a
complete return of capital. Because the duration of these partnerships has been
extended, when the net-leased properties are sold or refinanced, the annual rate
of appreciation realized by investors, if any, will be less than if the tax law
had not been changed and apartment markets had not declined in the late 1980s.
ADDITIONAL INFORMATION
Through December 31, 1995, 18 private partnerships sponsored by Affiliates
of the Advisor which sold properties on an installment basis re-acquired their
properties as a result of defaults by the purchasers. Thirteen of the
properties that were re-acquired were subsequently sold. One property was
returned to the lender and the remaining properties are being operated by the
partnerships.
Through December 31, 1995, seven private partnerships sponsored by
Affiliates of the Advisor have agreed to modifications of the original terms of
the installment receivables. The impact of these modifications on the
installment receivables includes reductions in net interest income during the
first year or two following a modification (and corresponding decreases in
distributions to limited partners during that period) and increases in interest
income thereafter (and corresponding increases in distributions), as well as
the deferral of some interest until maturity and, in the case of two
partnerships, the extension of a maturity date. The decreases in distributions
to limited partners range from 25% to 50% of the originally scheduled
distributions for the initial one- or two-year period of the modifications
followed by similar increases over the originally scheduled distributions for
the year or two following the modifications. Any interest deferred until
maturity would result in a lower-than-originally-scheduled distribution until
the maturity date, when such deferred amounts would be received from the
borrowers. The distribution to investors of the principal proceeds due upon
maturity would also be received at a later date, i.e., one to two years later,
due to a negotiated extension of the original maturity date.
During 1988, one private partnership sponsored by an Affiliate of IREIC
transferred its property to the municipality in which it was located pursuant
to an involuntary conversion proceeding. On March 1, 1989, the proceeds of the
conversion were reinvested in a new property, a transaction intended to qualify
as tax-deferred under the Code.
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Except for re-acquisitions of previously owned properties upon default by
the purchaser, the transfer of a defaulted loan, the tax-deferred property
exchanges and the disputes with lenders described herein, there have been no
further major adverse business developments or conditions experienced by these
prior partnerships which would be material to investors in the Company.
Upon written request to the Company, any potential investor may obtain,
without charge, the most recent Annual Report on Form 10-K filed with the
Commission by any public program sponsored by Affiliates which has reported to
the Commission within the last 24 months. Copies of any exhibits to such
Annual Reports shall be provided, upon request, for a reasonable fee.
MANAGEMENT
GENERAL
The Company operates under the direction of the Board of Directors, which
is responsible for the management and control of the affairs of the Company.
However, the Board of Directors has retained the Advisor to manage the
Company's day-to-day affairs, subject to the Board's supervision.
Investment policies of the Company, as well as fees and expenses of the
Company, have been established by the Directors and will be reviewed and
approved by the Directors (including a majority of the Independent Directors)
not less often than annually and with sufficient frequency to determine that
the policies being followed are in the best interest of the Stockholders. All
Directors are responsible, as a result of their fiduciary duties, for
determining the reasonableness of the total fees and expenses of the Company in
light of the investment experience of the Company and the fees and expenses of
comparable advisor companies in supervising the relationship of the Company
with the Advisor and its Affiliates. Each such determination and the basis
therefor shall be set forth in the minutes of the Directors.
The Independent Directors shall determine from time to time, but not less
often than annually, that the compensation which the Company contracts to pay
to the Advisor is reasonable in relation to the nature and quality of the
services performed and that such compensation is within the limits prescribed
by applicable state regulatory authorities. The Independent Directors shall
also supervise the performance of the Advisor and the compensation paid to it
by the Company to determine that the provisions of the Advisory Agreement are
being carried out. Each such determination shall be based on the factors set
forth below and all other factors that the Independent Directors may deem
relevant and the findings of the Independent Directors on each such factor
shall be recorded in the minutes of the Board. Such factors include: (i) the
size of the Advisory Fee in relation to the size, composition and
profitability of the portfolio of the Company; (ii) the success of the Advisor
in generating opportunities that meet the investment objectives of the Company;
(iii) the rates charged to other REITs and to investors other than REITs by
advisors performing similar services; (iv) additional revenues realized by the
Advisor and any Affiliate through their relationship with the Company,
including loan administration, underwriting or brokerage commissions,
servicing, engineering, inspection and other fees, whether paid by the Company
or by others with whom the Company does business; (v) the quality and extent of
service and advice furnished by the Advisor; (vi) the performance of the
investment portfolio of the Company, including income, conservation or
appreciation of capital, frequency of problem investments and competence in
dealing with distress situations; and (vii) the quality of the portfolio of the
Company in relationship to the investments generated by the Advisor for its own
account. See "Fiduciary Responsibility of Directors and the Advisors;
Indemnification" and "--The Advisory Agreement" in this Section.
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The Board is currently comprised of five individuals, a majority of whom
are independent (the "Independent Directors"). Each of the Directors serves
for a one-year term and will be elected annually. See "Summary of
Organizational Documents."
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Directors and the Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position and Office with the Company
- -------------------------- --- --------------------------------------------
<S> <C> <C>
Robert D. Parks 52 President, Chief Executive Officer, Chief
Operating Officer and Affiliated Director
G. Joseph Cosenza 52 Affiliated Director
Roland W. Burris 58 Independent Director
Douglas R. Finlayson, M.D. 56 Independent Director
Heidi N. Lawton 33 Independent Director
Roberta S. Matlin 51 Vice President -- Administration
Cynthia M. Hassett 37 Secretary, Treasurer and Chief Financial
Officer
Patricia A. Challenger 42 Assistant Secretary
</TABLE>
Robert D. Parks. President, Chief Executive Officer, Chief Operating
Officer and Affiliated Director of the Company since its formation in 1994.
Mr. Parks joined The Inland Group, Inc. and its Affiliates ("TIGI") in 1968.
He is Director of TIGI and is President, Chairman and Chief Executive Officer
of Inland Real Estate Investment Corporation ("IREIC") and is a Director of
Inland Securities Corporation. Mr. Parks is responsible for the ongoing
administration of existing partnerships, corporate budgeting and administration
for IREIC. He oversees and coordinates the marketing of all limited
partnership interests nationwide and has overall responsibility for the
portfolio management of all partnership investments and investor relations.
Mr. Parks received his B.A. Degree from Northeastern Illinois University and
M.A. from the University of Chicago. He is a registered Direct Participation
Program Principal with the National Association of Securities Dealers, Inc. and
a licensed real estate broker. He is a member of the Real Estate Investment
Association and the National Association of Real Estate Investment Trusts.
G. Joseph Cosenza. Affiliated Director of the Company since its formation
in 1994. Mr. Cosenza joined TIGI in 1968. Mr. Cosenza is a Director, Vice
Chairman and Chief Executive Officer of TIGI. Mr. Cosenza oversees,
coordinates and directs Inland's many enterprises and, in addition, immediately
supervises a staff of three persons who engage in property acquisition. Mr.
Cosenza has been a consultant to other real estate entities and lending
institutions on property appraisal methods. Mr. Cosenza received his B.A.
Degree from Northeastern Illinois University and his M.S. Degree from Northern
Illinois University. From 1967 to 1968, Mr. Cosenza taught at the LaGrange
School District in Hodgkins, and from 1968 to 1972, he served as Assistant
Principal and teacher in the Wheeling School District. He has been a licensed
real estate broker since 1968 and an active member of various national and
local real estate associations, including the National Association of Realtors
and the Urban Land Institute. Mr. Cosenza has also been Chairman of the Board
of American National Bank of DuPage and part owner of American National Bank of
DuPage and Burbank State Bank, and has served on the Board of Directors of
Continental Bank of Oakbrook Terrace. Mr. Cosenza was the individual general
partner of a limited partnership which ceased making debt service payments to
an unaffiliated lender with the objective of reducing or restructuring the debt
to a level which was commensurate with the level of performance of the property
owned by such partnership. The lender acquired the property owned by such
partnership through foreclosure and an affiliate of Mr. Cosenza supplied the
partnership with the new property, an ownership
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interest in a retail store in Marshall, Minnesota, leased on a triple-net basis
by Wal-Mart Stores, Inc. See "Prior Performance of the Company's
Affiliates--Loan Modifications and Work-Outs."
Roland W. Burris. Independent Director since January 1996. Mr. Burris
has been the Managing Partner of Jones, Ware & Grenard, a Chicago law firm
since June 1995, where he practices primarily in the areas of environmental,
banking and consumer protection. After obtaining his law degree from Howard
University Law School in 1963, Mr. Burris began a career in the banking
industry initially as a federal bank examiner and then at Continental Illinois
National Bank where he rose to the position of vice president. From 1973 to
1995, Mr. Burris was involved in State of Illinois government including holding
the positions of State Comptroller and Attorney General of the State of
Illinois. Mr. Burris completed his undergraduate studies at Southern Illinois
University and studied international law as an exchange student at the
University of Hamburg in Germany. Mr. Burris serves on many boards, including
the Illinois Criminal Justice Authority, the Financial Accounting Foundation,
the Law Enforcement Foundation of Illinois, the African American Citizens
Coalition on Regional Development and the Boy Scouts of America. He currently
serves as chair of the Illinois State Justice Commission. He is also serving as
an adjunct professor in the Master of Public Administration Program at
Southern Illinois University.
Douglas R. Finlayson, M.D. Independent Director of the Company since
October 1994. Dr. Finlayson is a full-time family practice and nutritional
medicine physician with Partners in Primary Care in Rolling Meadows, Illinois
and Westlake Clinic in Ingleside, Illinois. He joined the Clinic in 1992.
From 1968 to 1971, Dr. Finlayson was a battalion surgeon in the United States
Army. Dr. Finlayson began private practice in 1971 joining the staff of
Northwest Community Hospital, and from 1982 until 1988, Dr. Finlayson served as
Medical Director of the Rolling Meadows Alcohol and Drug Dependence Program of
Lutheran Welfare Services. From 1988 until joining Westlake Clinic in 1992,
Dr. Finlayson practiced medicine on a part-time basis primarily in the area of
nutritional medicine. Since 1975, Dr. Finlayson has been involved with buying
and selling real estate assets, including vacant land, speculative housing and
rental properties, for his own account. In 1978, Dr. Finlayson acquired and
developed 100 acres in South Barrington, Illinois, and as a member of the
Church Building Committee, led the development of the Willow Creek Community
Church Campus. Since 1983, Dr. Finlayson has been designing computer software
systems for medical application including projects for the Illinois Hospital
Association. Dr. Finlayson holds a B.S. Degree in Chemistry from the
University of Illinois and a M.D. Degree from the University of Heidelberg,
Germany.
Heidi N. Lawton. Independent Director of the Company since October 1994.
Ms. Lawton is managing broker, owner and president of Lawton Realty Group, an
Oak Brook, Illinois real estate brokerage firm which she founded in 1989.
Lawton Realty Group employs four full-time associates and generates sales
volume of approximately $20,000,000 annually. The firm specializes in
commercial, industrial and investment real estate brokerage. Ms. Lawton is
responsible for all aspects of the operations of the company. She also
structures real estate investments for clients -- procuring partner/investors,
acquiring land and properties and obtaining financing for development and/or
acquisition. Prior to founding Lawton Realty Group and while she was earning
her B.S. Degree in business management from the National College of Education,
she was managing broker for VCR Realty in Addison, Illinois. While there, she
was engaged primarily in brokerage of industrial and commercial property. She
also provided property management services, including leasing, for a portfolio
of more than 100 properties, including condominium complexes, industrial,
apartment and small retail shopping centers. At the beginning of her career in
real estate, she acted as a general contractor building and selling
single-family homes as well as a retail center in Lombard, Illinois. As a
licensed real estate professional since 1982, she has served as a member of the
Certified Commercial Investment Members, secretary of the Northern Illinois
Association of Commercial Realtors, and is a past board member and commercial
director of the DuPage Association of Realtors.
Roberta S. Matlin. Vice President - Administration of the Company since
March 1995. Ms. Matlin joined Inland in 1984 as Director of Investor
Administration and currently serves as Senior Vice President -
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Investments of IREIC directing the day-to-day internal operations. She is also
the President and a Director of Inland Securities Corporation. Prior to joining
Inland, Ms. Matlin spent 11 years with the Chicago Region of the Social Security
Administration of the United States Department of Health and Human Services. Ms.
Matlin received her B.A. Degree from the University of Illinois. She is
registered with the NASD as a general securities principal.
Cynthia M. Hassett. Secretary, Treasurer and Chief Financial Officer of
the Company since January 1995. Ms. Hassett has been Secretary and Treasurer
of the Advisor since its formation in 1994. Ms. Hassett joined Inland in 1983
and is a Vice President of IREIC. Ms. Hassett is responsible for the
Investment Accounting Department which includes the accounting for the Company
and all public limited partnership accounting functions along with quarterly
and annual SEC filings. Prior to joining Inland, Ms. Hassett was on the audit
staff of Altschuler, Melvoin and Glasser since 1980. She received her B.S.
Degree in Accounting from Illinois State University. Ms. Hassett is a
Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants.
Patricia A. Challenger. Assistant Secretary of the Company since March
1995. Ms. Challenger joined Inland in 1985. She is currently a Senior Vice
President of IREIC in the area of asset management. As head of the Asset
Management Department, she develops operating and disposition strategies for
all investment-owned properties. Ms. Challenger received her B.S. Degree from
George Washington University and her Master's Degree from Virginia Tech
University. Ms. Challenger was selected and served from 1980 to 1984 as
Presidential Management Intern, where she was part of a special government-wide
task force to eliminate waste, fraud and abuse in government contracting and
also served as Senior Contract Specialist responsible for capital improvements
in 109 government properties. Ms. Challenger is a licensed real estate
salesperson, NASD registered securities sales representative and is a member of
the Urban Land Institute.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Board has established an Audit Committee consisting
of two Independent Directors, Ms. Lawton and Mr. Burris. The Audit Committee
makes recommendations concerning the engagement of independent public
accountants, reviews the plans and results of the audit engagement with the
independent public accountants, approves professional services provided by, and
the independence of, the independent public accountants, considers the range of
audit and non-audit fees and consults with the independent public accountants
regarding the adequacy of the Company's internal accounting controls.
Executive Committee. The Board may establish an Executive Committee
consisting of three Directors, including two Independent Directors. The
Executive Committee would likely exercise all powers of the Directors except
for those which require actions by all of the Directors or the Independent
Directors under the Articles or Bylaws or under applicable law.
Executive Compensation Committee. The Board may establish an Executive
Compensation Committee consisting of three Directors, including two Independent
Directors, to establish compensation policies and programs for the Company's
executive officers. The Executive Compensation Committee will exercise all
powers of the Board in connection with establishing and implementing
compensation matters, including incentive compensation and benefit plans.
COMPENSATION OF DIRECTORS
The Company pays its Independent Directors an annual fee of $1,000. In
addition, Independent Directors receive $250 for attendance (in person or by
telephone) at each quarterly meeting of the Board or committee thereof.
Officers of the Company who are Directors are not paid any directors' fees.
Each
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Independent Director received options to purchase 3,000 Shares at the initial
public offering price of $10 per Share under the Company's Independent Director
Stock Option Plan. On the date of the annual meeting of the Company's
Stockholders, each Independent Director then in office will receive an annual
grant of options to purchase 500 Shares at the then-current market price. See
"--Independent Director Stock Option Plan" in this Section.
THE ADVISOR
The Advisor is a wholly owned subsidiary of IREIC. The Advisor is an
Illinois corporation and the following table sets forth information with
respect to the executive officers and directors of the Advisor. The
biographies of Robert D. Parks, G. Joseph Cosenza, Roberta S. Matlin, Patricia
A. Challenger and Cynthia M. Hassett are set forth above.
Name Position and Office with the Advisor
---- ------------------------------------
Robert D. Parks Chairman of the Board and President
G. Joseph Cosenza Director
Norbert J. Treonis Director
Roberta S. Matlin Director and Secretary
Patricia A. Challenger Vice President -- Asset Management
Cynthia M. Hassett Treasurer
Norbert J. Treonis (age 45) has been the Chairman of the Board of
Directors of Inland Commercial Property Management Inc. since its formation in
1994. Mr. Treonis joined TIGI and its Affiliates in 1975 and he is currently
Chairman and Chief Executive Officer of Inland Property Management Group, Inc.
and a Director of TIGI. He serves on the Board of Directors of all Inland
subsidiaries involved in the property management, acquisitions and maintenance
of real estate, including Mid-America Management Corp. and American Building
Services, Inc. Mr. Treonis is charged with the responsibility of the overall
management and leasing of all apartment units, retail, industrial and
commercial properties nationwide. Mr. Treonis is a licensed real estate
broker. He is a past member of the Board of Directors of American National
Bank of DuPage, the Apartment Builders and Managers Association of Illinois,
the National Apartment Association and the Chicago Apartment Association.
The Advisor is a member of a group of affiliated corporations, The Inland
Group, Inc. ("TIGI"), which is engaged in businesses related to many aspects of
real estate and mortgage financing. The relevant skills and experience of each
of these companies, developed over the course of 30 years in business,
primarily in the Chicago metropolitan area, is available to the Company in the
conduct of its business.
The first of the TIGI-affiliated businesses was started by a group of
Chicago school teachers in 1967, and incorporated the following year. The
founders of TIGI all remain actively involved in overseeing these companies.
The businesses of these TIGI-affiliated companies are still centered in the
Chicago metropolitan area, since the founders of TIGI believe that sound real
estate operations require detailed knowledge of local conditions. Over the
past 30 years, TIGI-affiliated companies have experienced significant growth.
TIGI-affiliated companies, in the aggregate, in April 1996 were ranked by
Crain's Chicago Business as the 32nd largest privately held business group
headquartered in the Chicago area. Limited partnerships for which IREIC is the
general partner own in excess of 9,800 acres of pre-development land in the
Chicago area, as well as 10,500,000 square feet of commercial property in
Chicago and nationwide.
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As TIGI-affiliated companies bought and sold properties over the years,
necessary expertise in real estate financing was developed. This function was
formally recognized in 1977, with the incorporation of IMC. IMC, during its
history, has originated more than $1 billion in financing, including loans to
third parties and affiliated entities.
Further delineation of functions and duties associated with financing
occurred in 1990, with the separate incorporation of Inland Mortgage Investment
Corporation ("IMIC") and Inland Mortgage Servicing Corporation ("IMSC"). IMIC,
as of March 1, 1996, owned a $57,000,000 loan portfolio, and IMSC serviced a
loan portfolio of 455 loans exceeding $460,000,000.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Advisor generally has
responsibility for the day-to-day operations of the Company, administers the
Company's bookkeeping and accounting functions, serves as the Company's
consultant in connection with policy decisions to be made by the Directors,
manages or causes to be managed the Company's properties and renders other
services as the Directors deem appropriate. The Advisor is subject to the
supervision of the Directors and has only such functions as are delegated to
it.
The Advisor bears the expenses incurred by it in connection with
performance of its duties under the Advisory Agreement, including employment
expenses of its personnel, certain travel and other expenses of the directors,
officers and employees of the Advisor, rent, telephone, and equipment expenses
to the extent such expenses relate to the office maintained by both the Company
and the Advisor and miscellaneous administrative expenses incurred in
supervising, monitoring and inspecting real property or other investments of
the Company or relating to its performance under the Advisory Agreement. The
Advisor receives reimbursement for certain expenses it incurs. The Company
bears its own expenses for functions not required to be performed by the
Advisor under the Advisory Agreement, which generally include capital raising
and financing activities, corporate governance matters and other activities not
directly related to the Company's properties.
The Advisory Agreement, which was entered into by the Company, with the
unanimous approval of the Directors, including the Independent Directors, is
for a one-year term subject to successive one-year renewals upon the mutual
consent of the parties. It may be terminated by either party, or by mutual
consent of the parties or by a majority of the Independent Directors of the
Company or the Advisor, as the case may be, upon 60 days written notice without
cause or penalty. In the event of the termination of the Advisory Agreement,
the Advisor will cooperate with the Company and take all reasonable steps
requested to assist the Directors in making an orderly transition of the
advisory function.
For any year in which the Company qualifies as a REIT, the Advisor must
reimburse the Company: (i) to the extent that the Advisor Asset Management Fee
plus Other Operating Expenses paid during the previous calendar year exceed 2%
of the Company's Average Invested Assets for that calendar year; or (ii) 25%
of the Company's Net Income for that calendar year.
The Advisory Agreement gives the Company the first opportunity to buy any
Neighborhood Retail Centers placed under contract by the Advisor or its
Affiliates provided the Company is able to close the purchase within 60 days.
The Advisory Agreement also provides the Company with the first opportunity to
purchase any single-user retail property net leased by a creditworthy tenant
located anywhere in the United States which is placed under contract or about
to be placed under contract by the Advisor or its Affiliates, provided that:
(i) the Company has funds available to make the purchase; (ii) the Board votes
to make the purchase within five days of being offered such property by the
Advisor; (iii) the property meets the Company's acquisition criteria; and (iv)
in the event that more than one real estate investment program
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sponsored by the Advisor or its Affiliates has funds available to make the
purchase, such property will first be offered to the program which has had funds
available for the longest period of time.
If the Advisor or its Affiliates perform services that are outside of the
scope of the Advisory Agreement, compensation is at such rates and in such
amounts as are agreed by the Advisor and the Independent Directors. The
Directors (including a majority of its Independent Directors) approved the
payment to the Advisor of an Acquisition Expense reimbursement equal to
approximately 0.5% of Gross Offering Proceeds to cover costs incurred in the
Advisor's site selection and acquisition activities (including travel and
related items) on behalf of the Company. See "Compensation Table."
Many REITs which are listed on national exchanges or markets are
considered "self-administered," since the employees of the REIT perform all
significant management functions. In contrast, REITs that are not
self-administered, like the Company, typically engage a third-party to perform
management functions on its behalf, such as an advisor. Accordingly, should
the Company commence a secondary public offering and apply to have the Shares
listed for trading on a national stock exchange or market, it may be in the
Company's best interest to become self-administered. In this event, if the
Independent Directors determine that the Company should become
self-administered, the Advisory Agreement permits the Advisor to merge into the
Company and for the Company to allow such merger, with the consideration
determined through appropriate means agreed to by the Company and the Advisor.
In the event the Advisor is merged into the Company, certain key employees of
the Advisor will become employees of the Company.
In the event the Advisory Agreement is terminated due to the listing for
trading of the Shares on a national exchange or market, provision for payment
of the Incentive Advisory Fee will also be terminated. The Advisor and the
Management Agent may be merged into the Company at the time of listing and may
receive Shares in the Company in an amount which would be determined at that
time, based upon the value of all fees given up or waived by the Advisor and
the Management Agent through the merger. In the event the Advisory Agreement
is terminated for any reason other than the merger of the Advisor into the
Company, all obligations of the Advisor and its Affiliates to offer properties
to the Company for purchase shall also terminate.
The Company has agreed to indemnify the Advisor and pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to the
Advisor with respect to acts or omissions of the Advisor, provided that: (i)
the Advisor determined, in good faith, that the course of conduct which caused
a loss or liability was in the best interest of the Company; (ii) the Advisor
was acting on behalf of or performing services for the Company; (iii) such
liability or loss was not the result of misconduct on the part of the Advisor;
and (iv) such indemnification or agreement to hold harmless is recoverable only
out of the Company's net assets and not from the Stockholders.
THE MANAGEMENT AGENT
Inland Commercial Property Management, Inc. ("ICPM" or the "Management
Agent"), an Affiliate of the Advisor, provides property management services to
the Company. ICPM, an Illinois corporation, is a wholly owned subsidiary of
Mid-America Management Corp. ("Mid-America"), which manages approximately
14,600 multi-family units, including approximately 13,600 in the Chicago
metropolitan area more than any other firm in that market. ICPM was
incorporated in 1994 to segregate responsibility for Mid-America's growing
management portfolio of commercial properties. In August 1988, Mid-America and
its Affiliates owned or managed 1.3 million square feet of retail property.
This figure had grown to 5.8 million square feet by August 1991 and 9.6 million
square feet in April 1996.
ICPM is responsible for collections, leasing and maintenance of the
commercial properties which it manages. A substantial portion of the
portfolio, approximately 7.6 million square feet, consists of
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properties triple-net leased to creditworthy tenants, whereby the tenant
operates and maintains the property and rent is net of property taxes, insurance
and operating expenses.
The following table sets forth information with respect to the executive
officers and directors of ICPM. The biography of Mr. Norbert J. Treonis is set
forth above.
Name Position and Office with ICPM
---- -----------------------------
Norbert J. Treonis Chairman of the Board of Directors
Robert H. Baum Director
Daniel L. Goodwin Director
D. Scott Carr President
Kristi Wells Vice President
Robert M. Barg Secretary/Treasurer
Robert H. Baum (age 52) has been a Director of ICPM since its formation.
Mr. Baum has been with TIGI and its Affiliates since 1967 and is one of the
four original principals. Mr. Baum is Executive Vice President-General Counsel
and a Director of TIGI. In his capacity as General Counsel, Mr. Baum is
responsible for the supervision of the legal activities of TIGI and its
Affiliates. This responsibility includes the supervision of the Inland Law
Department and serving as liaison with all outside counsel. Mr. Baum is a
member of the North American Securities Administrators Association Real Estate
Advisory Committee and is a member of the Securities Advisory Committee to the
Secretary of State of Illinois. He is also a member of the American
Corporation Counsel Association, as well as a member of several bar
associations. Mr. Baum has been admitted to practice before the Supreme Courts
of the United States and the State of Illinois, as well as the bars of several
federal courts of appeals and federal district courts. He received his B.S.
Degree from the University of Wisconsin and his J.D. Degree from Northwestern
University School of Law.
Daniel L. Goodwin (age 52) has been a Director of ICPM since its
formation. Mr. Goodwin is Chairman of the Board of Directors of TIGI, a
billion-dollar real estate and financial organization located in Oak Brook,
Illinois. Mr. Goodwin has been with TIGI and its Affiliates since 1967. Among
TIGI's subsidiaries is the largest property management firm in Illinois and one
of the largest commercial real estate and mortgage banking firms in the
Midwest. Mr. Goodwin has served as Director of the Avenue Bank of Oak Park and
as a Director of the Continental Bank of Oakbrook Terrace. He was also
Chairman of the Bank Holding Company of American National Bank of DuPage.
Currently, he is the Chairman of the Board of Inland Mortgage Investment
Corporation.
Mr. Goodwin has served on the Board of the Illinois State Affordable
Housing Trust Fund for the past six years. He is an advisor for the Office of
Housing Coordination Services of the State of Illinois, and a member of the
Seniors Housing Committee of the National Multi-Housing Council. Illinois
Governor James Edgar appointed him Chairman of the Housing Production Committee
for the Illinois State Affordable Housing Conference. He has also served as a
member of the Cook County Commissioner's Economic Housing Development
Committee, and he was the Chairman of the DuPage County Affordable Housing Task
Force. The 1992 Catholic Charities Award was presented to Mr. Goodwin for his
work in addressing affordable housing needs. The City of Hope designated him
as the 1980's Man of the Year for the Illinois construction industry. In 1989,
the Chicago Metropolitan Coalition on Aging presented Mr. Goodwin with an award
in recognition of his efforts in making housing more affordable to Chicago's
senior citizens. On May 4, 1995, PADS, Inc. (Public Action to Deliver Shelter)
presented Mr. Goodwin with an award, recognizing TIGI as the leading corporate
provider of transitional housing for the homeless people of DuPage County.
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Mr. Goodwin is a product of Chicago-area schools, and obtained his
Bachelor's and Master's Degrees from Illinois universities. Following
graduation, he taught for five years in the Chicago public schools. In 1990,
he received the Northeastern Illinois University President's Meritorious
Service Award. Mr. Goodwin holds a Master's Degree in Education from Northern
Illinois University and, in 1986, he was awarded an honorary doctorate from
Northeastern Illinois University College of Education. He is currently a
trustee of Illinois Benedictine College, and a member of the Board of Governors
of Illinois State Colleges and Universities. He was elected chairman of the
Northeastern Illinois University Board of Trustees in January 1996. Mr.
Goodwin served as a member of Governor Edgar's Transition Team. He also
served as a member of the Illinois House of Representatives Speaker's Advisory
Council.
Mr. Goodwin was the individual general partner of 14 W. Elm Limited
Partnership, 1445 North State Limited Partnership, 5600 Sheridan Limited
Partnership, 5630 Sheridan Limited Partnership and 6030 Sheridan Limited
Partnership, each of which ceased making debt service payments to unaffiliated
lenders with the objective of reducing or restructuring the debt to a level
which was commensurate with the level of performance of the property owned by
such partnerships. See "Prior Performance of the Company's Affiliates--Loan
Modifications and Work-Outs."
D. Scott Carr (age 30) has been an officer of ICPM since its formation.
Mr. Carr was appointed Vice President and Secretary of ICPM in July 1994 and
was appointed President in July 1995. Mr. Carr joined TIGI and its Affiliates
in 1987. Mr. Carr has responsibility for all the portfolio of commercial
properties managed by ICPM, including management and leasing. Mr. Carr is a
licensed real estate broker. He is a Certified Property Manager candidate with
the Institute of Real Estate Management and a member of the International
Council of Shopping Centers.
Kristi A. Wells (age 30) has been an employee of ICPM since its formation.
Ms. Wells was appointed Assistant Vice President in July 1994 and in July 1995
was appointed Vice President. Ms. Wells joined TIGI in 1990. Ms. Wells is a
licensed real estate broker and is a member of the International Counsel of
Shopping Centers.
Robert M. Barg (age 42) has been the Secretary and Treasurer of ICPM since
January 1995. Mr. Barg joined the Inland Property Management Group in January
1986 and is Vice President and Controller of Mid-America. Prior to joining
TIGI, Mr. Barg was an Accounting Manager for the Charles H. Shaw Co. He
received his B.S. Degree in Business Administration from the University of
Illinois - Chicago and a Master's Degree from Western Illinois University. Mr.
Barg is a Certified Public Accountant and is a member of the Illinois CPA
Society. He holds a real estate sales license and is registered with the NASD
as a securities sales representative.
OTHER SERVICES
In addition to the services described above provided by the Advisor and
its Affiliates, Affiliates of the Advisor may provide other property-level
services to the Company and may receive compensation for such services,
including leasing, development, construction management, loan origination and
servicing, property tax reduction and risk managing fees. However, under no
circumstances will such compensation exceed 90% of that which will be paid to
third parties providing such services and all such compensation must have the
prior approval of a majority of the Directors, including a majority of the
Independent Directors.
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INDEPENDENT DIRECTOR STOCK OPTION PLAN
The Company adopted the Independent Director Stock Option Plan (the
"Independent Director Stock Option Plan") concurrently with the commencement of
the Offering. Only non-employee Directors are eligible to participate in the
Independent Director Stock Option Plan.
A total of 50,000 shares of Common Stock have been authorized and reserved
for issuance under the Independent Director Stock Option Plan. If the
outstanding shares of Common Stock are increased, decreased or changed into, or
exchanged for, a different number or kind of shares or securities of the
Company through a reorganization or merger in which the Company is the
surviving entity, or through a combination, recapitalization, reclassification,
stock split, stock dividend, stock consolidation or otherwise, an appropriate
adjustment shall be made in the number and kind of shares that may be issued
pursuant to options. A corresponding adjustment to the consideration payable
with respect to options granted prior to any such change shall also be made.
Any such adjustment, however, shall be made without change in the total
payment, if any, applicable to the portion of the options not exercised but
with a corresponding adjustment in the price for each share.
The Independent Director Stock Option Plan provides for the grant of
non-qualified stock options to Independent Directors as of the date such
individuals become Directors. The option price for Directors who became
directors on or before the date of the Offering or during the period of the
Offering is the fair market value of the Common Stock at the date of the
commencement of the Offering (i.e., $10). The option price for Directors who
become Directors after the completion of the Offering will be the market price
of the Common Stock as of that date.
Each Independent Director received an option to acquire Shares pursuant to
the following formula: 3,000 Shares as of the date such individuals became
Directors of the Company and an additional 500 Shares on the date of each
annual stockholders' meeting if the Independent Director is a member of the
Board on such date. The options for the initial 3,000 Share grant are
exercisable as follows: 1,000 Shares on the date of grant and 1,000 Shares on
each of the first and second anniversaries of the date of grant. These
succeeding options are exercisable on the second anniversary of the date of
grant. Shares subject to an option granted under the Independent Director
Stock Option Plan will expire on the tenth anniversary of the grant and may be
purchased for cash or through the delivery of Common Stock. Notwithstanding
any other provisions of the Independent Director Stock Option Plan to the
contrary, no option issued pursuant thereto may be exercised if such exercise
would jeopardize the Company's status as a REIT under the Code.
No option may be sold, pledged, assigned or transferred by an Independent
Director in any manner otherwise than by will or the laws of descent or
distribution. Options granted under the Independent Director Stock Option Plan
are generally exercisable in the case of death or disability for a period of
one year after death or the disabling event or three months after the
Independent Director ceases to be a member of the Board for any reason except
death or disability.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or upon sale of all or substantially all of the Company's property, the
Independent Director Stock Option Plan shall terminate, and any outstanding
options shall terminate and be forfeited. Notwithstanding the foregoing, the
Board may provide in writing in connection with, or in contemplation of, any
such transaction for any or all of the following alternatives (separately or in
combinations): (i) for the assumption by the successor corporation of the
options theretofore granted or the substitution by such corporation for such
options of options covering the stock of the successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices; (ii) for the
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continuance of the Independent Director Stock Option Plan by such successor
corporation in which event the Independent Director Stock Option Plan and the
options shall continue in the manner and under the terms so provided; or (iii)
for the payment in cash or Shares in lieu and in complete satisfaction of such
options.
SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from
the financial statements of the Company. Balance sheet data as of December 31,
1995 and 1994 and income statement data for the years ended December 31, 1995
and 1994 have been derived from the audited financial statements of the
Company. In addition, the data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements of the Company and related notes
thereto included elsewhere in this reprinted Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994
---- ----
<S> <C> <C>
Total assets ........................... $18,750,877 $2,402,373
Mortgage payable ....................... 750,727 --
Total income ........................... 1,180,422 --
Net income ............................. 496,514 --
Net income per share (a) ............... .53 --
Distributions declared ................. 736,627 --
Distributions per share (a) ............ .78 --
Funds from Operations (a) (b) .......... 666,408 --
Funds available for distributions (b) .. 787,011 --
Cash flows from operating activities ... 978,350 --
</TABLE>
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<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994
---- ---
<S> <C> <C>
Cash flows from investing activities ... $(6,577,843) $(1,703,498)
Cash flows from financing activities ... 6,327,490 1,714,432
Weighted average number of common shares
outstanding ........................... 943,156 20,000
</TABLE>
(a) The net income and distributions per share are based upon the weighted
average number of common shares outstanding. The $.78 per share
Distribution for the fiscal year ended December 31, 1995, represented
110.5% of the Company's Funds From Operations ("FFO") and 93.6% of funds
available for distribution for that period. See Footnote (b) below for
information regarding the Company's calculation of FFO. Distributions by
the Company to the extent of its current and accumulated earnings and
profits for federal income tax purposes will be taxable to Stockholders as
ordinary dividend income. Distributions in excess of earnings and profits
generally will be treated as a non-taxable reduction of the stockholder's
basis in the Shares to the extent thereof, and thereafter as taxable gain
(a return of capital). These Distributions will have the effect of
deferring taxation of the amount of the Distribution until the sale of the
Stockholder's Shares. For 1995, $42,414 (or 5.76%) of the $736,627
Distribution paid for 1995 represented a return of capital. In order to
maintain its qualification as a REIT, the Company must make annual
distributions to Stockholders of at least 95% of its taxable income (which
does not include net capital gains) which was approximately $659,500 (or
89.5%) of the Distribution paid. Under certain circumstances, the Company
may be required to make Distributions in excess of cash available for
distribution in order to meet the REIT distribution requirements.
Distributions are determined by the Company's Board of Directors and are
dependent on a number of factors, including the amount of funds available
for distribution, the Company's financial condition, any decision by the
Board of Directors to reinvest funds rather than to distribute the funds,
the Company's capital expenditure, the annual distribution required to
maintain REIT status under the Code and other factors the Board of
Directors may deem relevant.
(b) "FFO" means net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization
and other non-cash items. FFO and funds available for distribution are
calculated as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net income .......................... $496,514 --
Depreciation ........................ 169,894 --
-------- ----
Funds from operations (1) ......... 666,408 --
Deferred rent receivable (2) ........ (12,413) --
Rental income received under master
lease agreements (3) .............. 133,016 --
-------- ----
Funds available for distribution .. $787,011 --
======== ====
</TABLE>
(1) FFO does not represent cash generated from operating
activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available
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to fund cash needs. FFO should not be considered as an alternative
to net income as an indicator of the Company's operating performance
or as an alternative to cash flow as a measure of liquidity. FFO as
reported by the Company may not be comparable to other similarly
titled measures of other real estate companies.
(2) Reference is made to Note (5) of the Notes to Financial
Statements of the Company.
(3) As part of the Montgomery-Goodyear, Hartford/Naperville
Plaza, Nantucket Square and Antioch Plaza purchases, the Company
will receive rent under master lease agreements on the spaces
currently vacant for periods ranging from one year to 18 months or
until the spaces are leased. Generally accepted accounting
principles require that as these payments are received, they be
recorded as a reduction in the purchase price of the properties
rather than as rental income. As of December 31, 1995, the Company
had recorded $133,016 of such payments.
INVESTMENT OBJECTIVES AND POLICIES
1. General. The Company's investment objectives are to: (i) make regular
Distributions to the Stockholders in amounts which may exceed the Company's
taxable income due to the non-cash nature of depreciation expense and, to such
extent, will constitute a tax-deferred return of capital, but in no event less
than 95% of the Company's taxable income pursuant to the REIT qualification
requirements; (ii) provide a hedge against inflation by entering into leases
which contain clauses for scheduled rent escalations or participation in the
growth of tenant sales, permitting the Company to increase Distributions and
provide capital appreciation; and (iii) preserve Stockholders' capital.
2. Distributions. The Company intends to pay regular monthly
Distributions to its Stockholders. However, the Company reserves the right,
prior to the completion of the acquisition process, to pay Distributions on a
quarterly basis out of Cash Flow, in an amount determined by the Board. The
continuation of Distributions and the size of the Distributions depend upon a
variety of factors. There can be no assurance that Distributions will be made.
Through December 31, 1995, Distributions declared totaled $736,627, of which
$42,414 was a return of capital for federal income tax purposes. In addition,
distributions to Stockholders of record on January 31, 1996 and February 29,
1996 were $142,449 and $150,742, respectively, a portion of which may be a
return of capital.
To the extent possible, it will be the policy of the Company to avoid the
fluctuations in Distributions which might result if Distributions were based on
actual cash received during the Distribution period. To implement this policy,
the Company may use cash received during prior periods, or cash received
subsequent to the Distribution period and prior to the payment date for such
Distribution, in order to pay annualized Distributions consistent with the
Distribution level established from time to time by the Board. The Company's
ability to maintain this policy will be dependent upon the availability of Cash
Flow and applicable REIT rules. Therefore, there can be no assurance that
there will be Cash Flow available to pay Distributions, or that Distributions
will not fluctuate. Monthly Distributions will be calculated on the basis of
12 thirty-day months, with the record date being the first day of the month.
However, the Board could elect to pay Distributions quarterly, to reduce
administrative costs. It will be the general policy of the Company, subject to
applicable REIT rules, to reinvest proceeds from the sale, financing,
refinancing or other disposition of its properties through the purchase of
additional properties. See "--Sale or Disposition of Properties" in this
Section.
3. Types of Investments. The Company was formed to acquire existing
Neighborhood Retail Centers located within an approximate 150-mile radius of
its headquarters in Oak Brook, Illinois, a Chicago
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suburb, where the Advisor maintains its acquisition and property management
headquarters, as well as single-user properties net leased by creditworthy
tenants, located throughout the United States. The Company may enter into sale
and leaseback transactions, pursuant to which the Company will purchase a
property from an entity and lease the property to such entity. It is the
Company's intention, whenever possible, to acquire properties free and clear of
permanent mortgage indebtedness by paying the entire purchase price of each
property in cash or for shares of the Company's stock. However, if it is
determined to be in the best interests of the Company, the Company will, in
certain instances, utilize borrowing to acquire properties. On properties
purchased on an all-cash basis, the Company may later incur mortgage
indebtedness by obtaining loans secured by selected properties, if favorable
financing terms are available. The proceeds from such loans would be used to
acquire additional properties and increase Cash Flow. Certain of these
properties will be subject to "net" leases. "Net" leases typically require that
tenants pay all or a majority of the operating expenses including real estate
taxes, special assessments and sales and use taxes, utilities, insurance and
building repairs related to the property, as well as lease payments. The leases
will be long-term (typically 15 to 25 years, but generally not less than ten
years) and may provide for a base minimum annual rent with periodic increases.
For purposes hereof, a creditworthy tenant shall be defined as a tenant with a
minimum net worth equal to ten times one year's rental payments required under
the terms of the lease or, alternatively, a tenant for whom payments under the
lease are guaranteed by an affiliate having a minimum net worth of $10
million.
The Company will elect to purchase properties based on an examination and
evaluation by the Advisor of the potential value of the site, the financial
condition and business history of the property, the demographics of the area in
which the property is located or to be located, the proposed purchase price,
geographic and market diversification and potential sales. In acquiring a
property, the Advisor requires a Phase I environmental report and, if
necessary, a Phase II environmental report. In a sale-leaseback situation, the
seller of the property generally is assuming the operating risk which may
increase the price paid for the property. All acquisitions from Affiliates are
subject to approval by a majority of the Directors, including a majority of the
Independent Directors.
The Advisor and its Affiliates may purchase properties in their own name,
assume loans in connection therewith and temporarily hold title thereto for the
purpose of facilitating the acquisition of such property, borrowing money or
obtaining financing for the Company, the completion of construction of the
property or any other purpose related to the business of the Company. In no
event, however, may the Advisor or its Affiliates transfer any property to the
Company which it has held in excess of 12 months prior to commencement of the
Offering, except those specified in this Prospectus.
4. Acquisition Standards. Through its experience with the acquisition of
approximately 750 properties by Affiliates, the Advisor believes the Company
has the ability to identify quality properties capable of meeting the
investment objectives of the Offering. In evaluating potential acquisitions,
the Company considers a number of factors, including a property's: (a)
geographic location and type; (b) construction quality and condition; (c)
current and projected cash flow; (d) potential for capital appreciation; (e)
lease rent roll, including the potential for rent increases; (f) potential for
economic growth in the tax and regulatory environment of the community in which
the property is located; (g) potential for expanding the physical layout of the
property and/or the number of sites; (h) occupancy and demand by tenants for
properties of a similar type in the same geographic vicinity; (i) prospects for
liquidity through sale, financing or refinancing of the property; (j)
competition from existing properties and the potential for the construction of
new properties in the area; and (k) treatment under applicable federal, state
and local tax and other laws and regulations.
Statistics in this section are excerpted from Woods & Poole Economics,
Inc., 1993 MSA Profile, Metropolitan Area Forecasts to 2015. Woods & Poole
Economics, Inc. is a Washington, D.C.-based independent research firm that
specializes in long-term county economic and demographic forecasts.
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Chicago statistics are for the Chicago Metropolitan Statistical Area/Primary
Metropolitan Statistical Area, as defined by the Office of Management and
Budget. All earnings, personal income and retail sales data are presented in
inflation-adjusted 1987 "constant" dollars.
In 1991, Chicago had the third largest population among 310 metropolitan
areas in the nation with more than 7.4 million people. Chicago today is one of
the nation's largest metropolitan areas and retail markets. While the rate of
growth of this large market from 1990 through 2015 is forecast to trail that of
the nation as a whole, in absolute numbers Chicago will be a leader in
increases in population, jobs, per capita income and retail sales. Population
is forecast to increase 0.37% per year in the Chicago metropolitan area,
compared to 0.88% for the nation as a whole; for jobs, the forecasted annual
increase is 0.67% for Chicago, compared to 0.77% for the nation; for retail
sales, the total forecasted increase from 1990 to 2015 is 71% for Chicago and
85% for the nation.
Woods & Poole Economics, Inc. projects that from 1990 through 2015, the
Chicago metropolitan area will add 722,830 persons, the 16th largest increase
among the nation's 310 metropolitan areas, with Chicago retaining its current
place as third largest metropolitan area in the nation.
For the same period it is forecast that the Chicago area will: (i) see a
48% rise in per capita income, improving the area's ranking from 24th to 16th
among the nation's 310 metropolitan areas; (ii) lead the nation in the number
of new jobs, with 789,210; and (iii) see a rise in annual retail sales from
$46.8 billion to $79.9 billion, the largest increase among any metropolitan
area in the nation.
5. Description of Leases. The Company anticipates that with regard to its
properties, lessees will generally be required to pay a share, either pro rata
or fixed, of the real estate taxes, insurance, utilities and common area
maintenance of the properties. It is the Company's intent that a substantial
number of these leases will also contain provisions which increase the amount
of base rent payable at certain points during the lease term and/or provide for
the payment of additional rent calculated as a percentage of a tenant's gross
sales above predetermined thresholds. The terms of the leases with Anchor
Tenants will generally have initial terms of ten to 25 years, with one or more
options available to the lessee upon expiration of the initial term. By
contrast, smaller tenant leases typically have three to five year terms.
During the initial term of a "net" lease, anticipated to be not less than
ten years, but typically 15 to 25 years, the tenant will pay the Company, as
lessor, a predetermined minimum annual rent generally based upon the Company's
cost of purchasing the land and building. In addition to the minimum annual
rent, lessees may pay the Company additional annual rent as a result of
predetermined periodic increases.
Each "net" lease tenant will be required to obtain liability insurance
covering the properties owned by the Company. The third party liability
coverage will insure, among others, the Company and the Advisor. Each tenant
will be required to obtain, at its own expense, property insurance naming the
Company as the insured party for fire and other casualty losses in an amount
equal to the full value of such property. All such insurance must be approved
by the Advisor. In general, the "net" lease may be assigned or subleased with
the Company's prior written consent, but the original tenant will remain fully
liable under the lease unless the assignee meets certain income and net worth
tests.
6. Property Acquisition. The Company's acquisitions are anticipated to be
acquisitions of fee interests in real property, although other methods of
acquiring a property may be utilized if it is deemed to be advantageous to the
Company. For example, the Company may acquire properties through a joint
venture or the acquisition of substantially all of the interests of an entity
which in turn owns the real property. The Company may also use wholly owned
subsidiaries to acquire a property. Such wholly
66
<PAGE> 145
owned subsidiaries will be formed solely for the purpose of acquiring a property
or properties. See "--Joint Ventures" in this Section.
As of April 15, 1996, the Company had acquired seven Neighborhood Retail
Centers and one single-user property. Two of these properties, the Eagle Crest
Shopping Center and the Walgreen/Decatur property, were acquired from an
Affiliate. The purchase prices for those properties were not the subject of
arm's-length negotiations. The Articles provide that the Company shall not
purchase a property from an Affiliate unless a majority of the Directors
(including a majority of the Independent Directors) not interested in the
transaction approve the purchase as fair and reasonable to the Company and at a
price to the Company no greater than the cost of the asset to such Affiliate,
or if the price to the Company is in excess of such cost, that substantial
justification for such excess exists and that such excess is reasonable. In no
event shall the cost of such asset to the Company exceed its current appraised
value. A majority of the Directors (including a majority of the then
Independent Directors) approved the purchases of the Eagle Crest Shopping
Center and the Walgreen/Decatur property as being fair and reasonable to the
Company and at a price to the Company no greater than the cost of the assets to
such Affiliate. There can be no assurance, however, that the prices paid to
the Affiliate for the Eagle Crest Shopping Center and the Walgreens/Decatur
property did not exceed that which would be paid by an unaffiliated buyer. See
"Real Property Investments."
In some cases, construction may be required after the purchase contract
has been entered into, but before the purchase is consummated. In such cases,
the Company will be obligated to purchase the property at the completion of
construction, provided the construction conforms to definitive plans,
specifications and costs approved by the Advisor and embodied in the
construction contract. The Company will receive a certificate of an architect,
engineer or other appropriate party, stating that the property complies with
all plans and specifications. The Company will not be permitted to construct
or develop properties, or render any services in connection with such
development or construction.
If remodeling is required prior to the purchase of a property, the Company
will pay a negotiated maximum amount either upon completion or in installments
commencing prior to completion. Such amount will be based on the estimated
cost of such remodeling. In such instances, the Company will also have the
right to review the lessee's books during and following completion of the
remodeling to verify actual costs. In the event of substantial disparity
between estimated and actual costs, an adjustment in purchase price may be
negotiated. If remodeling is required after the purchase of a property, an
Affiliate of the Advisor may serve as construction manager for a fee no greater
than 90% of the fee a third party would charge for such services.
The Advisor and its Affiliates may purchase properties in their own name,
and assume loans in connection therewith and temporarily hold title thereto for
the purpose of facilitating the acquisition of such property, obtaining
financing for the Company, the completion of construction of the property or
any other purpose related to the business of the Company, in accordance with
the terms set forth in the Bylaws.
7. Borrowing. It is the Company's intention, whenever possible, to
acquire properties free and clear of permanent mortgage indebtedness by paying
the entire purchase price of each property in cash or for shares of the
Company's stock. However, if it is determined to be in the best interest of
the Company, the Company will, in certain instances, utilize borrowing to
acquire properties. On properties purchased on an all cash basis, the Company
may later incur mortgage indebtedness by obtaining loans secured by selected
properties, if favorable financing terms are available. The proceeds from such
loans would be used to acquire additional properties and increase Cash Flow.
The Company may also incur indebtedness to finance improvements to the
properties it acquires. The Company anticipates that aggregate borrowings
related to all of the Company's properties will not exceed 50% of their
combined fair
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<PAGE> 146
market values, however, the maximum amount of borrowings in relation to Net
Assets shall, in the absence of the consent of a majority of the
Stockholders, not exceed 300% of Net Assets.
If the Company does borrow funds secured by its properties, it intends to
incur only non-recourse indebtedness, if available, in connection with such
borrowings, meaning that the lenders' rights on default will generally be
limited to foreclosure on the property which secured the obligation. The
Company will not borrow funds from a program sponsored by the Advisor or its
Affiliates which makes or invests in mortgage loans. If the Company incurs
mortgage indebtedness, it would endeavor to obtain level payment financing,
meaning that the amount of debt service payable would be substantially the same
each year, although some mortgages might provide for a so-called "balloon"
payment. Any mortgages secured by Company property will comply with the
restrictions set forth by the Commissioner of Corporations of the State of
California. See "Summary of the Organizational Documents--Restrictions on
Borrowing."
8. Sale or Disposition of Properties. The determination of whether a
particular property should be sold or otherwise disposed of will be made after
consideration of relevant factors, including performance or projected
performance of the property and market conditions, with a view toward achieving
the principal investment objectives of the Company.
In general, it will be the Company's policy to hold its properties, prior
to sale, for a minimum of four years. See "Federal Income Tax
Considerations--Taxation of the Company--Prohibited Transactions." Furthermore,
the general policy of the Company will be to reinvest proceeds from the sale,
financing, refinancing or other disposition of its properties that represents
the initial investment into additional properties or, secondarily, to use such
proceeds for the maintenance or repair of existing properties or to increase
reserves for such purposes. The objective of reinvesting such portion of the
sale, financing and refinancing proceeds is to increase the real estate assets
owned by the Company, and the Cash Flow derived from such assets, prior to
listing the Company's Shares on a national securities exchange or market, with
the further objective of maximizing Share prices at the time of listing.
Notwithstanding this policy, the Board, in its discretion, may distribute to
Stockholders all of the proceeds from the sale, financing, refinancing or other
disposition of the Company's properties. In determining whether all of such
proceeds should be distributed to Stockholders, the Board will consider, among
other factors, the desirability of properties available for purchase, real
estate market conditions, the likelihood of the listing of the Company's shares
on a national securities exchange or market and compliance with REIT
regulations. Because the Company may reinvest such portion of the proceeds
from the sale, financing or refinancing of its properties, the Company could
hold Stockholders' capital indefinitely. However, the affirmative vote of the
Stockholders controlling a majority of the Shares will force the Company to
liquidate its assets and dissolve. See "Summary of the Organizational
Documents--Dissolution or Termination of the Company."
In connection with a sale of a property owned by the Company, the
Company's general policy will be to obtain an all-cash sale price. However, a
purchase money obligation secured by a mortgage on the property sold may be
taken as partial payment; there are no limitations or restrictions on the
Company taking such purchase money obligations. The terms of payment to the
Company will be affected by custom in the area in which the property being sold
is located and the then prevailing economic conditions. To the extent the
Company receives notes and other property instead of cash from sales, such
proceeds (other than any interest payable thereon) will not be included in net
sale proceeds until and to the extent the notes or other property are actually
paid, sold, refinanced or otherwise disposed of and, therefore, the
distribution of the proceeds of a sale to the Stockholders may be delayed until
such time. In such cases, the Company will receive payments (cash and other
property) in the year of sale in an amount less than the selling price and
subsequent payments will be spread over a number of years.
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<PAGE> 147
9. Change in Investment Objectives. The Stockholders have no voting
rights with respect to implementing the investment objectives and policies of
the Company, all of which are the responsibility of the Board. The Board will
not, however, make any material change in the principal investment objectives
described herein under the caption "Investment Objectives and
Policies" without first obtaining the written consent or approval of the
Stockholders controlling a majority of the Shares.
10. Certain Investment Limitations. The Company will not: (i) invest
more than 10% of its total assets in unimproved real property; (ii) invest in
commodities or commodity future contracts; (iii) issue redeemable equity
securities; (iv) issue shares on a deferred payment basis or other similar
arrangement; and (v) operate in such a manner as to be classified as an
"investment company" for purposes of the Investment Company Act of 1940, as
amended. See "Summary of the Organizational Documents--Restrictions on
Investments."
11. Appraisals. The consideration for the properties acquired by the
Company will be based on their fair market value as determined by a majority of
the Directors (including a majority of the Independent Directors). All real
property acquisitions made and to be made by the Company have been or will be
supported by an appraisal prepared by a competent, independent appraiser who is
a member-in-good standing of the American Institute of Real Estate Appraisers
prior to the purchase of the property. The purchase price of each property
will not exceed its appraised value. It should be noted, however, that
appraisals are estimates of value and should not be relied on as measures of
true worth or realizable value. The appraisal will be maintained in the
Company's records for at least five years and copies of such appraisals will be
available for review by Stockholders upon their request.
12. Return of Uninvested Proceeds. Any of the proceeds of this Offering
allocable to investments in real property which have not been invested in real
property or committed for such purpose within the later of: (i) 24 months from
the original effective date of this Prospectus; or (ii) 12 months from the
termination of the Offering, will be returned by the Company to the
Stockholders. All funds received by the Company out of the escrow account will
be available for the general use of the Company from the time of such receipt
until the expiration of the period discussed above and may be expended to
operate the properties which have been acquired and to reimburse the Advisor
for certain expenses of the Company, to the extent allowable under the Advisory
Agreement. Funds will not be segregated or held separate from other funds of
the Company pending investment, and interest will be payable to the
Stockholders if uninvested funds are returned to them.
13. Additional Offerings and Exchange Listing. Within five years after
the original date of this Prospectus, the Company anticipates that the Board of
Directors will determine whether it is in the best interests of the Company to:
(i) apply to have the Shares listed for trading on a national stock exchange or
market, provided the Company meets the then applicable listing requirements;
and (ii) commence a secondary public offering. The Company believes that the
completion of this secondary offering and exchange listing will allow the
Company to increase its size, portfolio diversity, stockholder liquidity,
access to capital and stability, and decrease its operating costs through
economies of scale. If listing of the Shares is not feasible within five years
of the original date of this Prospectus, the Board may decide to: (i) sell the
Company's assets individually; or (ii) list the Shares at a future date to
provide liquidity for Stockholders.
14. Joint Ventures. The Company shall be permitted to invest in joint
venture arrangements with other public real estate programs formed by the
Advisor or any of its Affiliates if a majority of Directors (including a
majority of Independent Directors) not otherwise interested in the transaction
approve the transaction as being fair and reasonable to the Company and the
investment by each such joint venture partner is substantially on the same
terms and conditions as those received by other joint venturers.
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<PAGE> 148
The Company shall be permitted to invest in general partnerships or joint
venture arrangements with Affiliates other than publicly registered Affiliates
only under the following conditions: (i) the investment is necessary to
relieve the Company from any commitment to purchase a property entered into
prior to the closing of the Offering; (ii) there are no duplicate property
management or other fees; (iii) the investment of each entity is on
substantially the same terms and conditions; and (iv) the Company must have a
right of first refusal if the Advisor or its Affiliates wish to sell the
property held in such joint venture. In addition, the Company shall be
permitted to invest in general partnerships or joint venture arrangements with
Affiliates as co-owners of a property wherein the Company will be able to
increase its equity participation in such entity as additional proceeds of the
Offering are received by the Company with the result that the Company will end
up with up to a 100% equity ownership of the property. The affiliated general
or joint venture partner will not be entitled to any profit or other benefit on
the sale of its joint venture or general partnership interest to the Company.
It should be noted that there is a potential risk of an impasse on joint
venture decisions (i.e., that the Company and its joint venture partner will be
unable to agree on a matter material to the joint venture). Furthermore, there
can be no assurance that the Company will have sufficient financial resources
to exercise its right of first refusal. The Company will not enter into joint
venture arrangements with entities unaffiliated with the Advisor and its
Affiliates. See "Risk Factors--Investment Risks--Objectives of Joint Venture
Partners May Conflict with the Company's Objectives."
15. Other Policies. In determining whether to purchase a particular
property, the Company may first obtain an option to purchase such property.
The amount paid for the option, if any, usually would be surrendered if the
property was not purchased and normally would be credited against the purchase
price if the property was purchased.
The Company will not invest in any multi-family residential properties,
leisure home sites, farms, ranches, timberlands, unimproved or mining
properties. Assuming the Maximum Offering is sold, the Company does not intend
to invest more than approximately 20% of the anticipated proceeds in any one
property.
The Company holds all funds, pending investment in properties, in assets
which will allow the Company to continue to qualify as a REIT. Such
investments are highly liquid and provide for appropriate safety of principal
and may include, but are not limited to, investments such as GNMA bonds and
real estate mortgage investment conduits ("REMICs"). See "Federal Income Tax
Considerations--Taxation of the Company--REIT Qualification Tests."
The Company will not make distributions-in-kind, except for: (i)
distributions of readily marketable securities; (ii) distributions of
beneficial interest in a liquidating trust established for the dissolution of
the Company and the liquidation of its assets in accordance with the terms of
the Articles; or (iii) distributions of in-kind property which meet all of the
following conditions: (a) the Directors advise each Stockholder of the risks
associated with direct ownership of the property; (b) the Directors offer each
Stockholder the election of receiving in-kind property distributions; and (c)
the Directors distribute in-kind property only to those Stockholders who accept
the Directors' offer.
REAL PROPERTY INVESTMENTS
The Company currently owns seven Neighborhood Retail Centers and one
single-user retail property. The terms of the Company's leases vary depending
upon tenant size, but in many cases contain contractual provisions which
automatically increase the amount of base rent payable at certain points during
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<PAGE> 149
the term of the lease. Such leases may also contain provisions which provide
for the payment of additional rent calculated as a percentage of a tenant's
gross sales above pre-determined thresholds.
THE WALGREENS/DECATUR PROPERTY
On January 31, 1995, the Company acquired the Walgreens/Decatur property
from Inland Property Sales, Inc. ("IPS"), an Affiliate of the Advisor, for the
purchase price of $1,209,053, including acquisition costs of $482. Although it
was originally anticipated that this property would be acquired on an all cash
basis, management of the Company made the determination, based on the
recommendations of the Advisor, that the investment objectives of the Company
would be better met by assuming a portion of the first mortgage loan secured by
such property, since: (i) the terms of the current first mortgage loan are more
favorable for the Company than mortgage rates currently available from
unaffiliated third parties; and (ii) the Company was able to apply its
available cash towards the acquisition of an additional property.
The Walgreen Company ("Walgreens"), which is the largest drug store chain
in the United States based on sales volume and is considered to be creditworthy
by the Company, leases 100% of the free-standing building, which has 13,500
square-feet of GLA and was constructed in 1988. IPS purchased the
Walgreens/Decatur property in 1990 for a purchase price of $1,152,500,
including a cash downpayment of $112,500 and first-mortgage debt of $1,040,000.
On June 9, 1994, IPS refinanced the Walgreens/Decatur property. The existing
first-mortgage loan was retired in the amount of $1,025,498, including nine
days of interest at $2,462. A new first mortgage loan was funded in the
principal amount of $1,075,000.
The following table describes the formulation of the purchase price paid
by the Company:
<TABLE>
<S> <C>
IPS 1990 cash downpayments for purchase ........... $ 112,500
1994 excess refinancing proceeds received by IPS .. $ (24,044)
Costs of June 9, 1994 refinancing
Closing costs paid by IPS to third parties ... $ 34,364
Closing costs paid by IPS to Affiliate ....... $ 10,751
Initial paydown of first mortgage loan ............ $ 300,000
Acquisition costs ................................. $ 482
Assumption of first mortgage loan ................. $ 775,000
----------
TOTAL PURCHASE PRICE .............................. $1,209,053
==========
</TABLE>
As of December 31, 1995, the balance of the assumed mortgage was
approximately $751,000. This mortgage has an interest rate of 7.655%,
amortizes over a 25-year period and matures May 31, 2004. The Company is
responsible for monthly payments of principal and interest of $5,689. For
federal income tax purposes, the Company's basis in the Walgreens/Decatur
property is $1,130,723. Real estate taxes and insurance for the
Walgreens/Decatur property paid in 1995 were $24,600 and $1,701, respectively.
Walgreens' lease requires it to pay $127,820 in annual base rent ($9.47
per square foot). The rent does not include any allowances for tenant
improvements, leasing commissions or similar amounts. The lease provides for
payment of percentage rent equal to the amount by which 2.5% of general sales
and 1% of liquor sales exceed the base rent. 2.5% of general merchandise sales
and 1% of liquor sales currently equal approximately $80,000; therefore, no
percentage rent is currently payable. Walgreens has the option to cancel the
lease on September 1, 2008 or it can exercise up to five, five-year extensions.
The lease is on a double-net basis. Walgreens guarantees payment of rent,
reimbursement of property taxes and payment of all other property expenses,
exclusive of the roof and structural elements of the building.
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<PAGE> 150
The table below sets forth certain information with respect to the
occupancy rate of the Walgreens/Decatur property as a percentage for the time
IPS owned the property and the annual rent per square foot received for that
period, as well as since the Company owned the property. The information
provided by IPS is unaudited.
<TABLE>
<CAPTION>
Annual Rents
Year Ending Occupancy Received
December 31, Rate Per Sq. Ft.
------------ --------- ------------
<S> <C> <C>
1995 100% $9.47
1994 100% $9.47
1993 100% $9.47
1992 100% $9.47
1991 100% $9.47
</TABLE>
The Company received an appraisal prepared by an independent appraiser who
is a member in good standing of the American Institute of Real Estate
Appraisers reflecting a fair market value of the Walgreens/Decatur property as
of May 9, 1994 of $1,550,000. It should be noted, however, that appraisals are
estimates of value and should not be relied on as measures of true worth or
realizable value.
THE EAGLE CREST SHOPPING CENTER
On March 1, 1995, the Company acquired the Eagle Crest Shopping Center
("Eagle Crest"), a Neighborhood Retail Center located in Naperville, Illinois,
from IPS for a purchase price of $4,816,970, including acquisition costs of
$11,059. Although it was originally anticipated that Eagle Crest would be
acquired on an all-cash basis, management of the Company made the
determination, based on the recommendation of the Advisor, that the investment
objectives of the Company would be better met by assuming a portion of the
first mortgage loan held by IPS secured by such property, as well as entering
into a loan agreement with IPS for the balance of the purchase price. By
utilizing seller financing to purchase Eagle Crest, the Company was able to
begin receiving the net income, after debt service payments, from Eagle Crest
on an expedited basis, thus increasing the Company's earnings to be distributed
to the Stockholders.
Eagle Crest aggregates 67,650 square feet of GLA and is 100% leased. Its
major tenant is Eagle Foods, Inc. ("Eagle"). Eagle, which leases 46,096 square
feet (approximately 68%) of Eagle Crest's GLA, is the only tenant at Eagle
Crest which leases more than 10% of Eagle Crest's GLA and is considered
creditworthy by the Company. IPS purchased Eagle Crest in April 1991 for
$3,200,000, including a cash down payment of $457,893, first- and
second-mortgage debt of $2,244,139 and a note owed to the seller in the amount
of $493,192. In 1992, IPS refinanced the first-mortgage debt in the principal
amount of $2,450,000, realizing $76,792 in net refinancing proceeds. Since
purchasing Eagle Crest, IPS expended $142,441 for capital improvements at the
property. In 1993, Eagle completed extensive improvements to its store at
Eagle Crest, converting the store to a "country market" format. On March 1,
1994, IPS again refinanced Eagle Crest, increasing the principal amount of the
first mortgage loan from $2,450,000 to $3,600,000, using the additional
$1,150,000 in loan proceeds, plus $50,000 of IPS's funds, to reimburse
$1,200,000 to Eagle for the improvements made by Eagle to its store. In return
for the reimbursement Eagle began paying an additional $157,500 per annum in
rent under its lease. Eagle's lease requires it to pay base rent equal to
$6.61 per square foot per annum through 1995 and increasing to $6.68 per square
foot per annum through February 2014. The lease contains five five-year
renewal options at a base rent equal to $6.68 per square foot. Eagle leases
its store on a double-net basis and is responsible for paying its pro rata
share of property taxes and a fixed amount of the common area maintenance
("CAM") at Eagle Crest, which payments were $48,674 and $19,207, respectively,
for 1995.
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The following table describes the formulation of the purchase price paid
by the Company:
<TABLE>
<S> <C>
IPS 1991 cash downpayment for purchase .............. $ 457,813
Cumulative IPS capital improvements to Eagle Crest .. 142,441
1992 excess refinancing proceeds received by IPS .... (76,792)
1994 Refinancing:
Closing costs paid by IPS to third parties ..... 59,995
Closing costs paid by IPS to Affiliate ......... 36,000
Loan guarantee fee paid by IPS to Affiliate ......... 12,500
Assumption of first mortgage loan ................... 3,600,000
1994 pay-off of note by IPS to original seller ...... 220,000
Pay-off of unpaid notes owed to original seller ..... 353,954*
Acquisition costs ................................... 11,059
------------
TOTAL PURCHASE PRICE ................................ $ 4,816,970
============
</TABLE>
* Amount of principal and accrued interest due as of July 1, 1994.
Interest is accruing at the rate of $1,970 per month and this amount will
be adjusted at the time of purchase by the Company.
The balance of the assumed mortgage was paid in full in April 1995 with
interest at 9.5% per annum. The total amount paid was $3,551,100, of which
$3,533,760 was principal paid from Gross Offering Proceeds and $17,340 was
interest paid from Company operations. The deferred portion of the purchase
price, totaling $1,212,427, was paid to IPS in full from Gross Offering
Proceeds, including accrued interest of $22,009, in May 1995. The interest was
paid from Company operations. At December 31, 1995, for federal income tax
purposes, the Company's basis in the Eagle Crest building was $2,938,352.
None of the rents received from any of the Eagle Crest tenants include
allowances for tenant improvements, leasing commissions or similar amounts.
Property taxes payable in 1995 for the tax year ended 1994 (the most recent tax
year for which information is available) totalled $72,854.
The table below sets forth certain information with respect to the
occupancy rate for the time IPS has owned the property and the annual rent per
square foot received for that period, as well as since the Company owned the
property. The information supplied by IPS is unaudited. Information for prior
years, when Eagle Crest was owned by the third party which sold it to IPS, is
unavailable.
<TABLE>
<CAPTION>
Annual
Year Ending Rents
December Occupancy Received
31, Rate Per Sq. Ft.
- ----------- --------- -----------
<S> <C> <C>
1995 100% $ 8.70
1994 100% $ 8.16
1993 100% $ 6.06
1992 100% $ 6.11
1991 100% $ 6.00
(nine months
annualized)
</TABLE>
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At March 31, 1996, Eagle Crest had a total of 13 tenants. The following
tables set forth certain information with respect to the amount of and
expiration of leases at this Neighborhood Retail Center:
<TABLE>
<CAPTION>
Approx.
Gross Average Percent of Percent of
Leasable Area Base Rent Total Annual
("GLA") of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1 $1,505 $15,260 $573,357 $10.14 2.22% 2.66%
1997 4 5,590 86,670 564,540 15.50 8.26% 15.35%
1998 4 9,525 130,745 481,127 13.73 14.08% 27.17%
1999 1 4,028 42,294 350,382 10.50 5.95% 12.07%
2000-2005 -- -- -- 308,088 -- -- --
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It
is management of the Company's current opinion that the space will be
released at market prices.
<TABLE>
<CAPTION>
Square Feet Renewal Current Annual Rent Per
Lessee Leased Lease Ends Options Base Rent Square Foot
- ----------------------- ----------- ---------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Eagle Foods 46,096 2/2014 5/5 years $308,088 $ 6.68
Blue Angel Travel 910 6/1997 None 16,800 18.46
State Farm Insurance 888 7/2000 None 17,746 19.98
Dental Office 900 7/1997 None 17,158 19.06
Pot Pourri Gifts 4,028 1/1999 1/5 years 40,280 10.00
La Cantina Lounge 2,000 12/1998 1/5 years 30,980 15.49
Pepe's Restaurant 2,000 12/1998 1/5 years 30,980 15.49
Prudential Real Estate 4,250 2/1998 None 42,500 10.00
The Grill 1,275 11/1998 1/5 years 17,850 14.00
Clothes Clean Center 1,700 6/1997 None 23,800 14.00
Hair Inc. 1,505 4/1999 3/3 years 15,260 10.14
The Sewing Room 2,080 10/1997 None 27,560 13.25
Coffee Grinder (outlet) 18 6/1996 None 6,000 333.33
</TABLE>
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<PAGE> 153
The Company received an appraisal prepared by a competent, independent
appraiser who is a member in good standing of the American Institute of Real
Estate Appraisers reflecting a fair market value of Eagle Crest as of August 1,
1994 of $4,850,000. It should be noted, however, that appraisals are estimates
of value and should not be relied on as measures of true worth or realizable
value.
THE MONTGOMERY-GOODYEAR PROPERTY
On September 14, 1995, the Company acquired the Montgomery-Goodyear
Shopping Center located in Montgomery, Illinois ("Montgomery-Goodyear") from an
unaffiliated third party for a purchase price of $1,145,992, including
acquisition costs of $5,992, a portion of which was evidenced by a promissory
note payable to Inland Mortgage Investment Corporation, an affiliate of the
Advisor ("IMIC"), in the gross amount of $600,000, bearing interest at a rate
of 10.9% per annum and maturing on October 14, 1995. The remainder of the
purchase price, net of prorations, of approximately $535,000 was funded with
proceeds of the Offering. The promissory note was paid in full in October
1995. The total amount paid was $604,260, of which $600,000 was principal paid
from Gross Offering Proceeds and $4,260 was interest paid from Company
operations. At December 31, 1995, for federal income tax purposes, the
Company's basis in the Montgomery-Goodyear building was $827,390. Real estate
taxes and insurance for the Montgomery-Goodyear property paid in 1995 were
$25,450 and $3,012, respectively.
Montgomery-Goodyear, built in 1991, aggregates 12,863 square feet of gross
leasable area ("GLA") and is 100% occupied. Its major tenant is Goodyear Tire
& Rubber Co. which leases 6,293 square feet and is considered creditworthy by
the Company. The other tenants are Merlin Corporation, which leases
approximately 28% of GLA, and National Carpet Outlet, Inc., which leases the
remaining 23% of GLA.
The table below sets forth certain information with respect to the
occupancy rate at the Montgomery-Goodyear property for the time an unaffiliated
third party had owned the property and the annual rent per square foot received
for the period, as well as since the Company owned the property. The
information was supplied by the seller of Montgomery-Goodyear to the Company.
Construction of the Montgomery-Goodyear property was completed in late 1991.
<TABLE>
<CAPTION>
Annual Rents
Year Ending Occupancy Received
December 31, Rate Per Square Foot
------------ --------- ---------------
<S> <C> <C>
1995 100% $11.39
1994 100% 11.39
1993 100% 11.39
1992 100% 11.39
</TABLE>
At March 31, 1996, Montgomery-Goodyear had a total of three tenants. The
following tables set forth certain information with respect to the amount of
and expiration of leases at this Neighborhood Retail Center:
75
<PAGE> 154
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1 3,010 $36,120 $146,520 $12.00 23.40% 24.65%
1997-2000 -- -- -- 115,080 -- -- --
2001 -- -- -- 116,467 -- -- --
2002-2005 -- -- -- 121,428 -- -- --
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It
is management of the Company's current opinion that the space will be
released at market rates.
<TABLE>
<CAPTION>
Current
Square Feet Lease Renewal Annual Rent Per
Lessee Leased Ends Options Base Rent Square Foot
- ---------------------------- ----------- ------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Goodyear Tire & Rubber Co. 6,293 11/2006 5/5years $63,600 $10.10
Merlin Corporation 3,560 10/2006 3/5years 46,800 13.15
National Carpet Outlet, Inc. 3,010 9/1996 1/1year 36,120 12.00
</TABLE>
The Company received an appraisal prepared by an independent appraiser who
is a member in good standing of the American Institute of Real Estate
Appraisers reflecting a fair market value of Montgomery-Goodyear as of May 10,
1995 of $1,260,000. It should be noted, however, that appraisals are estimates
of value and should not be relied on as measures of true worth or realizable
value.
THE HARTFORD/NAPERVILLE PLAZA PROPERTY
On September 14, 1995, the Company acquired the Hartford/Naperville Plaza
property located in Naperville, Illinois ("Hartford/Naperville") from an
unaffiliated third party for a purchase price of $4,414,015, including
acquisition costs of $14,015, a portion of which was evidenced by a promissory
note payable to IMIC, in the gross amount of $600,000, bearing interest at a
rate of 10.9% per annum and maturing on October 14, 1995. In addition, the
Company paid closing costs of $13,915 and deposited $150,000 in an escrow
account for leasehold improvements to the Blockbuster, Inc. space. The
remainder of the purchase price was funded with proceeds of the Offering. The
promissory note was paid in full in October 1995. The total amount paid was
$605,102, of which $600,000 was principal paid from Gross Offering Proceeds and
$5,102 was interest paid from Company operations. At December 31, 1995, for
federal income tax purposes, the Company's basis in the Hartford/Naperville
building was $3,325,211. Real estate taxes for Hartford/Naperville paid in
1995 were $25,450.
Hartford/Naperville aggregates 43,862 square feet of GLA and construction
was completed in July 1995. Its anchor tenants include nationally recognized
tenants such as Sears Hardware with 21,000 square feet and Blockbuster Video
with 6,500 square feet, as well as Keller/Williams Realty with 6,160 square
feet, and each is considered creditworthy by the Company.
Hartford/Naperville is currently 100% leased and is anchored by Sears
Hardware, Blockbuster Video and Keller/Williams Realty, each of which leases
more than 10% of the building's square footage.
76
<PAGE> 155
The lease with Sears Hardware requires a base rent of $9.35 per square foot per
annum until August 2005 and contains three renewal options of five years each.
Sears Hardware sells hardware supplies and tools. The lease with Blockbuster
Video requires a base rent of $15 per square foot per annum until September 30,
2000 and $17.25 per square foot per annum from October 1, 2000 until October 31,
2005, and contains four renewal options of five years each. Blockbuster Video
sells and rents prerecorded audio and video products. The lease with
Keller/Williams Realty requires a base rent of $15 per square foot per annum
until December 2000 and such lease has no renewal options. Keller/Williams
Realty is a local real estate brokerage firm.
At March 31, 1996, Hartford/Naperville had a total of eight tenants. The
following tables set forth certain information with respect to the amount of
and expiration of leases at this Neighborhood Retail Center:
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-1999 -- -- -- $548,170 -- -- --
2000 4 11,610 $178,728 $551,186 $15.39 26.47% 32.43%
2001 1 2,992 $ 40,392 $384,067 $13.50 6.82% 10.52%
2002-2004 -- -- -- $343,675 -- -- --
2005 3 29,260 $343,675 $343,675 $11.75 66.71% 100.00%
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It
is management of the Company's current opinion that the space will be
released at market rates.
<TABLE>
<CAPTION>
Current
Square Feet Lease Renewal Annual Rent Per
Lessee Leased Ends Options Base Rent Square Foot
- ---------------------- ----------- ------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sears Hardware 21,000 8/2005 3/5years $196,350 $ 9.35
Blockbuster Video 6,500 10/2005 4/5years 97,500 15.00
Keller/Williams Realty 6,160 12/2000 None 92,400 15.00
Hair Cuttery 1,320 3/2000 1/5years 21,780 16.50
Signature Cleaners 1,760 12/2005 1/5years 35,200 20.00
Aspen Bakery 2,600 11/2000 1/5years 41,600 16.00
Sound Deluxe 2,992 2/2001 1/5years 40,390 13.50
Nancy's Pizza 1,530 12/2000 3/5years 22,950 15.00
</TABLE>
The Company received an appraisal prepared by an independent appraiser who
is a member in good standing of the American Institute of Real Estate
Appraisers reflecting a prospective value of Hartford/Naperville of the leased
fee interest upon reaching stabilized occupancy as of October 1, 1995 of
$4,680,000. It should be noted, however, that appraisals are estimates of
value and should not be relied on as true worth or realizable value.
77
<PAGE> 156
THE NANTUCKET SQUARE SHOPPING CENTER
On September 20, 1995, the Company acquired the Nantucket Square Shopping
Center property located in Schaumburg, Illinois ("Nantucket Square") from an
unaffiliated third party for a purchase price of $4,257,918, including
acquisition costs of $4,913, a portion of which was evidenced by a promissory
note payable to IMIC in the gross amount of $3,550,000, bearing interest at a
rate of 10.5% per annum and maturing on November 19, 1995. The remainder of
the purchase price was funded with proceeds of the Offering. The promissory
note was paid in full in December 1995. The total amount paid was $3,612,011,
of which $3,550,000 was principal paid from Gross Offering Proceeds and $62,011
was interest paid from Company operations. There are two buildings on the
property, one of which is a one-story, multi-tenant shopping mall located on
approximately 7.75 acres of land containing 53,720 square feet. The other
building is a one-story, free-standing building which houses a Burger King
restaurant containing approximately 3,260 square feet. Real estate taxes for
the shopping mall and the Burger King restaurant outlot were $152,122 and
$39,733, respectively, for 1993. Subsequent to the purchase of the property,
the Company paid $51,135 for tenant improvements, from Gross Offering Proceeds,
for two tenants expanding their space, which sum was added to the cost of the
property. At December 31, 1995, for federal income tax purposes, the Company's
basis in the Nantucket Square building was $2,372,160
Nantucket Square is currently 89% leased (100% leased when including the
master lease) and has four tenants which lease more than 10% of the building's
square footage. The lease with Play It Again Sports requires a current base
rent of $10 per square foot per annum until September 30, 1998, $10.50 per
square foot per annum from October 1, 1998 to September 30, 1999 and $11 per
square foot per annum from October 1, 1999 to September 30, 2000 with no
renewal provisions. Play It Again Sports sells sports equipment and related
accessories. The lease with Kathy's Hallmark requires a current base rent of
$10.50 per square foot per annum until February 28, 1999 and $11.50 per square
foot per annum from March 1, 1999 until May 31, 2000, and contains one renewal
option of five years. Kathy's Hallmark sells greeting cards and gift items.
The lease with Super Trak Corp. requires a current base rent of $7 per square
foot per annum until November 30, 1998 and $7.50 per square foot per annum from
December 1, 1998 until November 30, 2003, and contains three renewal options of
five years each. Super Trak sells auto parts and accessories. The lease with
Fashionation requires a base rent of $8.76 per square foot per annum until
January 31, 1998 and such lease has one renewal option of five years.
Fashionation is a clothing retailer. In October 1995, the Company received
notice from one of its tenants at Nantucket Square of its intent to close its
store. The tenant, which occupies 6,228 square feet of space, vacated the
premises on December 10, 1995. The lease for the space currently expires on
January 31, 1998. The tenant is continuing to pay its monthly rent, however,
the Company is pursuing a replacement tenant. A second tenant at Nantucket
Square, occupying 3,300 square feet of space, filed for financial and
reorganization protection under the federal bankruptcy laws. This tenant
continues to occupy its space and pay its monthly rent. The bankruptcy
petition filed with the bankruptcy court stated this tenant planned on closing
a number of its other stores but did not anticipate closing its store at
Nantucket Square.
The table below sets forth certain information with respect to the
occupancy rate at the Nantucket Square property for the time an unaffiliated
third party had owned the property and the annual rent per square foot received
for the period, as well as since the Company owned the property. The
information, supplied by the seller of Nantucket Square to the Company, is
unaudited. Information for prior years is not available to the Company.
<TABLE>
<CAPTION>
Annual Rents
Year Ending Occupancy Received Per
December 31, Rate Square Foot
------------ --------- ------------
<S> <C> <C>
1995 81% $8.54
1994 83% 8.44
</TABLE>
78
<PAGE> 157
At March 31, 1996, Nantucket Square had a total of 17 tenants. The
following tables set forth certain information with respect to the amount of
and expiration of leases at this Neighborhood Retail Center:
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 2 4,500 $ 42,750 $589,081 $9.50 7.90% 7.26%
1997 -- -- -- 554,563 -- -- --
1998 5 11,106 109,772 559,980 9.88 19.49% 19.60%
1999 1 1,050 12,477 467,558 11.88 1.84% 2.67%
2000 5 17,218 204,368 459,340 11.87 30.22% 44.49%
2001 1 2,403 27,000 255,562 11.24 4.22% 10.56%
2002 3 5,661 103,540 229,162 18.29 9.93% 45.18%
2003 1 11,743 88,072 126,022 7.50 20.61% 69.89%
2004 1 3,300 37,950 37,950 11.50 5.79% 100.00%
2005 -- -- -- -- -- -- --
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It
is management's current opinion that the space will be released at market
rates.
79
<PAGE> 158
<TABLE>
<CAPTION>
Current
Square Feet Lease Renewal Annual Rent Per
Lessee Leased Ends Options Base Rent Square Foot
- ------------------------ ----------- ------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Currency Exchange 1,246 12/2000 1/5years $18,067 $14.50
Baskin-Robbins Ice Cream 900 11/2000 None 14,769 16.41
Express Services 1,050 2/1998 1/3years 11,025 10.50
Travel Agency 1,050 7/1999 None 11,550 11.00
Vacant* 2,400 22,800 9.50
Mail Works Plus 1,200 12/1997 1/5years 13,500 11.25
Imperial Cleaners 1,200 12/2002 1/10years 16,800 14.00
Proof Positive Photo 1,200 4/1998 1/3years 15,022 12.52
Nancy's Pizza 1,200 8/1998 2/5years 12,000 10.00
Vacant* 2,100 19,950 9.50
Fashionation 6,228 1/1998 1/5years 54,557 8.76
Super Trak 11,743 11/2003 3/5years 82,201 7.00
Kathy's Hallmark 7,156 5/2000 1/5years 75,138 10.50
Clothes Time 3,300 4/2004 2/5years 34,650 10.50
Great Clips 1,428 9/1998 1/5years 14,994 10.50
Radio Shack 2,403 2/2001 None 24,600 10.24
Once Upon A Child 2,703 7/2000 1/5years 25,678 9.50
Play It Again Sports 5,213 9/2000 None 52,130 10.00
Burger King 3,261 7/2002 1/5years 67,900 20.82
</TABLE>
- -------------------
* The vacancies currently total 4,500 square feet, however, the vacant
space is being master leased by the seller at $15.00 per square foot for
one year, on a gross basis. For purposes of the charts appearing on this
and the prior page, the Company presented the vacant space as being master
leased at a rate of $9.50 per square foot, on a net basis.
The Company received an appraisal prepared by an independent appraiser who
is a member in good standing of the American Institute of Real Estate
Appraisers reflecting a fair market value of Nantucket Square as of September
14, 1995 in the range of $4,400,000 to $4,600,000. It should be noted,
however, that appraisals are estimates of value and should not be relied on as
true worth or realizable value.
ANTIOCH PLAZA
On December 28, 1995, the Company acquired Antioch Plaza located in
Antioch, Illinois ("Antioch Plaza") from an unaffiliated third party for a
purchase price of $1,750,365, including acquisition costs of $365, a portion of
which was evidenced by a promissory note payable to Inland Real Estate
Investment Corporation, an affiliate of the Advisor ("IREIC"), in the gross
amount of $660,000, which bore interest at a rate of 9.5% per annum. The
remainder of the purchase price, net of prorations of approximately $1,100,000
was funded with proceeds of the Offering. The loan to IREIC was repaid in full
on January 9, 1996 and the total amount paid was $661,163, of which $660,000
was principal paid from Gross Offering Proceeds and $1,163 was interest paid
from Company operations. Antioch Plaza, built in 1995, consists of a
two-building, free-standing, masonry-constructed strip center aggregating
19,810 square feet of gross leasable area. Its major tenant is Blockbuster
Video which leases 6,500 square feet of GLA and is considered creditworthy by
the Company. At the time of acquisition, a second lease had been signed by
80
<PAGE> 159
a dry-cleaning establishment and a third lease was under negotiation. At
December 31, 1995, for federal income tax purposes, the Company's basis in the
Antioch Plaza building was $1,480,648.
Antioch Plaza is currently 49% leased (100% leased when including the
master lease) and is anchored by Blockbuster Video. Currently 10,160 square
feet of the vacant space at Antioch Plaza is being master leased by the seller
until June 1997 at $12 per square foot, on a net basis. Blockbuster Video
leases more than 10% of the building's square footage. The lease with
Blockbuster Video requires a base rent of $10 per square foot per annum until
August 31, 2000 and $11 per square foot per annum from September 1, 2000 until
August 31, 2005, and contains four renewal options of five years each.
Blockbuster Video sells and rents prerecorded audio and video products.
At March 31, 1996, Antioch Plaza had a total of three tenants. The
following tables set forth certain information with respect to the amount of
and expiration of leases at this Neighborhood Retail Center:
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases of Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent(1) Leases Leases Leases
- ------------ --------- ------------- ----------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 -- -- -- $224,720 -- -- --
1997 1 10,160 $121,920 224,720 $12.00 51.29% 54.25%
1998 -- -- -- 102,800 -- -- --
1999 2 3,150 37,800 102,800 12.00 15.99% 36.77%
2000 -- -- -- 67,167 -- -- --
2001-2004 -- -- -- 71,500 -- -- --
2005 1 6,500 71,500 71,500 11.00 32.99% 100.00%
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It
is management of the Company's current opinion that the space will be
released at market rates.
<TABLE>
<CAPTION>
Current
Square Feet Lease Renewal Annual Rent Per
Lessee Leased Ends Options Base Rent Square Foot
----------------- ----------- ------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Blockbuster Video 6,500 8/2005 4/5 years $ 65,000 $10.00
Antioch Floral 1,650 12/1999 1/3 years 19,800 12.00
One Hour Cleaners 1,500 12/1999 1/3 years 18,000 12.00
Vacant* 10,160 6/1997 None 121,920 12.00
</TABLE>
- ----------------
* The vacancies currently total 10,160 square feet, however, the vacant
space is being master leased by the seller until June 1997 at $12.00 per
square foot, on a net basis.
81
<PAGE> 160
The Company received an appraisal prepared by an independent appraiser who
is a member in good standing of the American Institute of Real Estate
Appraisers reflecting a fair market value of Antioch Plaza as of December 18,
1995 of $1,850,000. It should be noted, however, that appraisals are estimates
of value and should not be relied on as measures of true worth or realizable
value.
THE MUNDELEIN PLAZA PROPERTY
On March 29, 1996, the Company acquired the Mundelein Plaza property
located in Mundelein, Illinois ("Mundelein Plaza") from an unaffiliated third
party for a purchase price of $5,658,230, including acquisition costs of
$8,230, on an all cash basis. Mundelein Plaza, built in 1990, consists of two
one-story, multi-tenant brick and block strip centers located on approximately
4.3 acres of land. Mundelein Plaza aggregates 67,896 square feet of GLA and
was constructed in 1990. Its anchor tenant is Sears Home Life with 47,000
square feet. Sears Home Life is a nationally recognized home furnishings chain
and is considered creditworthy by the Company.
Mundelein Plaza is currently 100% leased. Sears Home Life is the only
tenant occupying 10% or more of the rentable square feet. The lease with Sears
Home Life requires a base rent of $8.47 per square foot per annum until October
23, 1996, $8.72 per square foot per annum from October 24, 1996 to October 23,
1997, $9.29 per square foot per annum from October 24, 1997 to October 23,
1998, $9.53 per square foot per annum from October 24, 1998 to October 23,
1999, $9.81 per square foot per annum from October 24, 1999 to October 23, 2000
and contains two renewal options of five years each. Although there currently
is no vacant space at Mundelein Plaza, the seller is providing a lease guaranty
for 6,181 square feet of space, on a net basis, through December 1997. 4,088
square feet of the space which is subject to the lease guaranty is currently
leased by Color Tile, Inc., which recently filed for financial and
reorganization protection under the federal bankruptcy laws. This tenant
continues to occupy its space and is anticipated to pay its monthly rent. The
bankruptcy petition filed with the Bankruptcy Court stated that this tenant
planned on closing a number of its other stores. The Company has been advised
that Color Tile, Inc. considers the store at Mundelein Plaza to be one of its
best performing stores and the Company does not anticipate the closing of the
Color Tile store at Mundelein Plaza. The other space, 2,093 square feet, is
leased to Tile World, Ltd., on a month-to-month lease. For federal income tax
purposes, the Company's basis in Mundelein Plaza will be approximately
$3,847,000. Depreciation expense, for tax purposes, will be computed using the
straight-line method. Buildings and improvements are based upon estimated
useful lives of 40 years. Property taxes paid in 1995 for the tax year ended
1994 (the most recent tax year for which information is available) were
$84,768.
The table below sets forth certain information with respect to the
occupancy rate at Mundelein Plaza expressed as a percentage of total gross
leasable area for each of the last five years and the average effective annual
base rent per square foot for each of the last five years.
<TABLE>
<CAPTION>
Average Effective
Year Ending Occupancy Annual Rent Per
December 31, Rate Square Foot
------------ ----------------- ---------------
<S> <C> <C>
1995 100% $9.41
1994 97% 9.22
1993 97% 9.03
1992 97% 8.93
1991 97% 8.90
</TABLE>
82
<PAGE> 161
At March 31, 1996, Mundelein Plaza had a total of eight tenants. The
following tables set forth certain information with respect to the amounts of
and expiration of leases at this Neighborhood Retail Center:
<TABLE>
<CAPTION>
Approx.
Gross Average Percent of Percent of
Leasable Area Base Rent Total Annual
("GLA") of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent Leases(1) Leases Leases
- ----------------- --------------- ------------- -------------- ------ --------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1 3,100 $46,800 $685,209 $15.10 4.57% 6.83%
1997 2 7,628 97,506 654,902 12.78 11.23% 14.89%
1998 1 1,620 28,172 583,236 17.39 2.39% 4.83%
1999 -- -- -- 567,888 -- -- --
2000 3 51,460 524,605 582,389 10.19 75.79% 90.08%
2001-2004 -- -- -- 59,280 -- -- --
2005 -- -- -- 61,871 -- -- --
</TABLE>
(1) No assumptions were made regarding the releasing of expired leases. It
is management of the Company's current opinion that the space will be
released at market rates.
<TABLE>
<CAPTION>
Square Current Annual Base Rent
Feet Term Renewal Base Per Square
Lessee Leased Ends Options Rent Foot
------------------------ ------ -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Color Tile, Inc. (1) 4,088 12/2009 None $ 55,188 $13.50
R R B Cycles, Ltd. 2,460 12/2000 None 37,259 15.15
Cartel, Inc. 1,620 12/1998 None 26,555 16.51
C M C Music, Inc. 5,535 06/1997 1/5years 66,420 12.00
Esterquest (Pet store) 3,100 12/1996 None 46,800 15.10
Sears Roebuck & Co.
(Sears Home Life) 47,000 10/2000 2/5years 400,301 8.52
Tile World, Ltd. (1) (2) 2,093 Month to None 31,086 14.85
Month
Minnesota Fats 2,000 08/2000 3/5 years 21,600 10.80
</TABLE>
(1) Although currently leased, these spaces are subject to a lease guaranty
from the seller through December 1997.
(2) This space is currently leased on a month-to-month basis.
83
<PAGE> 162
The Company received a letter appraisal prepared by an independent
appraiser who is a member in good standing of the American Institute of Real
Estate Appraisers reflecting a fair market value of Mundelein Plaza as of March
28, 1996 of not less than $5,650,000. It should be noted, however, that
appraisals are estimates of value and should not be relied on as measures of
true worth of realizable value.
REGENCY POINT SHOPPING CENTER
On April 5, 1996, the Company acquired Regency Point Shopping Center
located in Lockport, Illinois ("Regency Point") from an unaffiliated third
party for a purchase price of $5,700,000. As part of the acquisition, the
Company assumed the existing first mortgage loan of approximately $4,473,200,
along with a related interest rate swap agreement. The remainder of the
purchase price of approximately $1,226,800 was funded, after prorations, with
proceeds of the Offering. For federal income tax purposes, the Company's basis
in the Regency Point building will be approximately $4,875,000. Property taxes
paid in 1995 for the tax year ended 1994 (the most recent tax year for which
information is available) were $16,867. Regency Point is located in the Des
Plaines River Valley Enterprise Zone, therefore, the assessed value of the
property will remain fixed until the year 2003.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly and amortizes over
25 years. The interest rate swap agreement, in conjunction with the first
mortgage, provides for Bank One, Chicago, to receive from or pay to the Company
the difference between 6.11% and the 30-day LIBOR rate, so that the first
mortgage loan has an effective rate of 7.91% per annum. The first mortgage
loan matures in August 2000. The interest rate swap agreement expires
concurrently therewith.
Regency Point, built in 1993 and 1994, consists of a one-story,
multi-tenant brick and block strip center aggregating 54,875 of rentable square
feet. Its anchor tenants include nationally recognized tenants such as
Walgreens with 13,000 square feet, Ace Hardware with 15,505 square feet and the
United States Postal Service with 2,503 square feet and are considered
creditworthy by the Company.
Regency Point is currently 95% leased and is anchored by Walgreens and Ace
Hardware. The vacant space at Regency Point is being master leased by the
seller for a one-year period at $14 per square foot for 1,600 square feet, on a
net basis, and $10 per square foot for 1,450 square feet, on a gross basis.
Regency Point was 88% occupied at December 31, 1995, 100% occupied at December
31, 1994 and 36% occupied at December 31, 1993. Walgreens and Ace Hardware
both lease more than 10% of the building's square footage. The lease with
Walgreens requires Walgreens to pay base rent equal to $10.98 per square foot
per annum until December 31, 2013 and contains six renewal options of five
years. Walgreens is a national pharmacy chain providing prescriptive and
over-the-counter medications, sundries and household items. The lease with Ace
Hardware requires Ace Hardware to pay base rent equal to $7.49 per square foot
per annum until October 31, 2008 and contains one renewal option for five
years. Ace Hardware is a national retail hardware chain.
The table below sets forth certain information with respect to the
occupancy rate at Regency Point expressed as a percentage of total gross
leasable area for each of the last three years (since the opening of Regency
Point) and the average effective annual base rent per square foot for each of
the last three years.
84
<PAGE> 163
<TABLE>
<CAPTION>
Average
Effective
Annual Rent
Year Ending Occupancy Per Square
December 31, Rate Foot
------------ --------- -----------
<S> <C> <C>
1995(1) 93% $9.83
1994 100% 10.09
1993(2) 36% 3.57
</TABLE>
(i) During 1995, an additional 5,000 square feet of space was added to
Regency Point, of which 1,950 square feet is leased with rent beginning in
February 1996.
(ii) Regency Point was built in 1993 and 1994. The occupancy rate and average
effective annual rent per square foot represent the initial rent-up phase
of this property.
At March 31, 1996, Regency Point had a total of 17 tenants. The following
table sets forth information with respect to the amount of and expiration of
leases at this Neighborhood Retail Center:
<TABLE>
<CAPTION>
Average Percent of Percent of
Approx. Base Rent Total Annual
GLA of Annual Total Per Square Building GLA Base Rent
Number of Expiring Base Rent Annual Foot Under Represented Represented
Year Ending Leases Leases Expiring Base Expiring By Expiring By Expiring
December 31, Expiring (square feet) Leases Rent Leases Leases Leases
- ------------ --------- ------------- ---------------- ------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 -- -- -- $613,655 -- -- --
1997 3 5,690 $ 74,882 620,670 $13.16 10.37% 12.06%
1998 5 9,945 142,378 553,623 14.32 18.12% 25.72%
1999 3 3,900 53,560 415,775 13.73 7.11% 12.88%
2000 1 985 15,240 362,821 15.47 1.79% 4.20%
2001 -- -- -- 348,670 -- -- --
2002 -- -- -- 349,869 -- -- --
2003 1 1,398 19,572 350,615 14.00 2.55% 5.58%
2004 1 2,503 31,913 339,432 12.75 4.56% 9.40%
2005 -- -- -- 307,728 -- -- --
</TABLE>
(1) No assumptions were made regarding the releasing of expired
leases. It is management of the Company's current opinion that the
space will be released at market rates.
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<PAGE> 164
<TABLE>
<CAPTION>
Square Current Rent
Feet Lease Renewal Annual Per Square
Lessee Leased Ends Options Base Rent Foot
----------------- ------ ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Walgreens 13,000 12/2013 6/5yr. $142,740 $10.98
Cellular Center 1,820 8/99 1/5yr. 24,570 13.50
Body Basters 1,600 4/97 1/3yr. 23,138 14.46
Personal Finance 985 1/2000 1/5yr. 13,950 14.16
J.C. Flick 5,265 11/98 1/3yr&1/2yr. 64,556 12.26
Ace Hardware 15,505 10/2008 1/5yr. 116,280 7.49
Vet 1,300 10/98 1/5yr. 18,937 14.56
Subway 1,105 12/98 1/5yr. 16,515 14.94
Cost Cutters 975 12/98 1/5yr. 13,481 13.82
Little Ceasars 1,040 1/99 2/5yr. 13,520 13.00
Just $1 1,040 1/99 1/5yr. 13,520 13.00
Optometrist 1,040 4/97 1/5yr. 14,548 13.98
Brown's Chicken 1,398 12/2003 1/5yr. 18,174 13.00
Cleaners 1,300 12/98 1/5yr. 19,751 15.19
U.S. Post Office 2,503 3/2004 2/5yr. 30,036 12.00
Currency Exchange 550 1/2006 1/10yr. 12,000 21.81
Vacant* 1,600 4/1997 None 22,400 14.00
1,450 4/1997 None 14,500 10.00
Dunkin Donuts 1,400 1/2006 2/5yr. 21,700 15.49
</TABLE>
* The vacancies currently total 3,050 square feet, however, the vacant
space will be master leased by the seller at $14.00 per square foot, on a
net basis, for 1,600 square feet and $10.00 per square foot, on a gross
basis, for 1,450 square feet, for a one-year period.
The Company received an appraisal prepared by an independent
appraiser who is a member in good standing of the American Institute of
Real Estate Appraisers reflecting a fair market value of Regency Point
as of March 7, 1996 of $5,710,000. It should be noted, however, that
appraisals are estimates of value and should not be relied on as
measures of true worth of realizable value.
The Directors, including the Independent Directors, approved each
of these acquisitions as being fair and reasonable to the Company.
CAPITALIZATION
The following table indicates the proposed equity capital
structure of the Company after giving effect to the sale of the Minimum
and Maximum Offering, without adjustment for the payment of
Organization and Offering Expenses and Acquisition Expenses to be
incurred. See "Estimated Use of Proceeds of Offering."
<TABLE>
<CAPTION>
Minimum (1) Maximum (1)
----------- -----------
<S> <C> <C>
150,000 Shares Minimum .... $1,500,000
===========
6,000,000 Shares Maximum .. $59,050,000
===========
</TABLE>
- -----------------------
(1) The Company was capitalized through the cash contribution of
$200,000 by the Advisor, for which the Advisor received 20,000 shares
of Common Stock.
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<PAGE> 165
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock, including shares of
Common Stock which may be purchased within 60 days of the date of this
reprinted Prospectus upon the exercise of outstanding stock options by:
(i) each stockholder known by the Company to own beneficially in
excess of 5% of the outstanding shares of Common Stock; (ii) each
Director; (iii) each executive officer; and (iv) all Directors and
executive officers as a group. Except as otherwise indicated in the
footnotes to the table, the persons named below have sole voting and
investment power with respect to the shares of Common Stock
beneficially owned by such person.
<TABLE>
<CAPTION>
SHARES TO BE
BENEFICIALLY OWNED
AFTER COMPLETION
OF THE OFFERING
SHARES BENEFICIALLY (ASSUMING THE
OWNED AS OF THE DATE OF MAXIMUM OFFERING
THIS REPRINTED PROSPECTUS IS SOLD)
---------------------------- ---------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------ ---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Robert D. Parks (a)(b) 26,365 * 26,365 *
G. Joseph Cosenza (a)(b) 22,500 * 22,500 *
Roland W. Burris (c)(f) -- * -- *
Douglas R. Finlayson, M.D. (d)(f) -- * -- *
Heidi N. Lawton (e)(f) -- * -- *
Cynthia M. Hassett (a) -- * -- *
Roberta S. Matlin (a) 105 * 105 *
Directors and Executive Officers as a Group
(seven persons)
</TABLE>
---------------------------
(a) The business address of each of Messrs. Parks and Cosenza,
Ms. Hassett and Ms. Matlin is c/o The Inland Group, Inc., 2901
Butterfield Road, Oak Brook, Illinois 60521.
(b) Includes 20,000 Shares owned by the Advisor, of which
Messrs. Parks and Cosenza disclaim beneficial ownership. The
Advisor is a wholly-owned subsidiary of IREIC, which is an
affiliate of TIGI. Messrs. Parks and Cosenza are control persons
with respect to TIGI. See, generally, "Management -- the
Advisor."
(c) The business address of Mr. Burris is c/o Jones, Ware &
Grenard, 180 North LaSalle Street, Suite 3800, Chicago, Illinois
60601.
(d) The business address of Dr. Finlayson is c/o Westlake
Clinic, 214 Washington Street, Ingleside, Illinois 60041.
(e) The business address of Ms. Lawton is c/o Lawton Realty
Group, 2100 Clearwater Drive, Suite 106, Oak Brook, Illinois
60521.
(f) Does not include 1,000, 2,500 and 2,500 Shares issuable upon
exercise of options granted to Mr. Burris, Dr. Finlayson and Ms.
Lawton, respectively, pursuant to the Company's Independent
Director Stock Option Plan.
* Less than 1% of the Company's outstanding shares of Common Stock, as
of the date of this Prospectus.
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<PAGE> 166
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE FINANCIAL CONDITION OF THE COMPANY
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1994, subscriptions for a total of 189,938.145
Shares had been received from the public resulting in $1,899,381 in
gross offering proceeds, which includes $200,000 received from the
Advisor for 20,000 Shares. Subscriber funds were held in an
interest-bearing escrow account with the Company's unaffiliated escrow
agent until January 3, 1995 when the subscriptions were accepted and
the Shares were issued by the Company. As of December 31, 1995,
subscriptions for a total of 2,000,073 Shares had been received,
including Shares purchased through the DRP, resulting in $19,976,354 in
Gross Offering Proceeds, as defined below. The Stockholders share in
their portion of benefits of ownership of the Company's real property
investments according to the number of Shares held.
The Company's capital needs and resources are expected to undergo
changes during its first two years of operations as a result of the
completion of the public offering of Shares and the acquisition of
properties. Operating cash flow is expected to increase as these
additional properties are added to the portfolio. Distributions to
Stockholders are determined by the Company's Board of Directors and are
dependent on a number of factors, including the amount of funds
available for distribution, the Company's financial condition, capital
expenditures, and the annual distribution required to maintain REIT
status under the Code.
As of December 31, 1995, the Company had acquired six properties
utilizing approximately $17,795,000 of Gross Offering Proceeds and had
cash and cash equivalents of $738,931. The Company intends to use
these funds for the purchase of additional properties, to pay
distributions and for offering costs. In addition, the Company has
$150,000 held in an escrow for leasehold improvements to the
Blockbuster, Inc. space at Hartford/Naperville Plaza. To the extent
that these sources are insufficient to meet the Company's short and
long-term liquidity requirements the Company may rely on financing of
one or more of the properties.
The properties owned by the Company are currently generating
sufficient cash flow to cover operating expenses of the Company plus
pay a monthly distribution of 8% per annum on weighted average shares.
For the year ended December 31,1995, cash provided by operations
amounted to $978,350. Distributions declared for the period were
$736,627, of which approximately $42,414 represents a return of capital
for federal income tax purposes.
Management of the Company monitors the various qualification tests
the Company must meet to maintain its status as a real estate
investment trust. Large ownership of the Company's stock is tested
upon purchase to determine that no more than 50% in value of the
outstanding stock is owned directly, or indirectly, by five or fewer
persons or entities at any time. Management of the Company also
determines, on a quarterly basis, that the Gross Income, Asset and
Distribution Tests as described in the section of the Prospectus
entitled "Federal Income Tax Considerations -- Taxation of the Company
-- REIT Qualification Tests" are met. On an ongoing basis, as due
diligence is performed by management of both the Company and the
Advisor on potential real estate purchases or temporary investments of
uninvested capital, management of both entities determines that the
income from the new asset will qualify for REIT purposes. For the year
ended December 31, 1995, the Company qualified as a REIT.
The Advisor has guaranteed payment of all public offering expenses
(excluding selling commissions, the Marketing Contribution and the Due
Diligence Expense Allowance Fee) in excess of 5.5% of the Gross
Offering Proceeds of the Offering (the "Gross Offering Proceeds") or
all organization and
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<PAGE> 167
offering expenses (including such selling
expenses) which together exceed 15% of the Gross Offering Proceeds.
The Company provides the following programs to facilitate
investment in the Shares and to provide limited liquidity for
Stockholders until such time as a market for the Shares develops:
The Automatic Purchase Investment Program allows existing
Stockholders, during the Offering, to automatically make periodic
purchases of the Company's Shares through the pre-authorized
transfer of funds from investor accounts to the Company. See
"Investment, Reinvestment and Share Purchase Programs --
Automatic Purchase Investment."
The Distribution Reinvestment Program allows Stockholders
who purchase Shares pursuant to the Offering to automatically
reinvest distributions by purchasing additional Shares from the
Company. Such purchases will not be subject to selling
commissions or the Marketing Contribution and Due Diligence
Expense Allowance Fee and will be sold at a price of $9.05 per
Share. As of December 31, 1995, the Company had received
$371,506 through the DRP and had repurchased 3,000 Shares from
Stockholders for an aggregate price of $26,838, pursuant to the
terms of the Share Repurchase Program. The remaining $344,668 is
available to the Company for investment in additional properties,
maintenance of existing properties or the repurchase of
additional Shares pursuant to the terms of the Share Repurchase
Program. See "Investment, Reinvestment, and Share Repurchase
Programs -- Distribution Reinvestment Program."
The Share Repurchase Program, subject to certain
restrictions, provides existing Stockholders with limited,
interim liquidity by enabling them to sell Shares back to the
Company at a price of $9.05 per Share. Shares purchased by the
Company will not be available for resale. As of December 31,
1995, the Company repurchased 3,000 Shares. See "Investment,
Reinvestment and Share Repurchase Programs -- Share Repurchase
Program."
RESULTS OF OPERATIONS
As of December 31, 1995, subscriptions for a total of 2,000,073
Shares had been received from the public resulting in $19,976,354 in
Gross Offering Proceeds, which includes the Advisor's capital
contribution of $200,000 and Shares purchased through the DRP. At
December 31, 1995, the Company owned five Neighborhood Retail Centers
and one single-user retail property.
During 1994, the Advisor advanced $193,300 to the Company for
costs incurred with the Offering. These advances were repaid to the
Advisor in January 1995 with interest ranging from 7.75% to 9.50%. The
principal of $193,300 and interest totaling $3,162 were paid from Gross
Offering Proceeds.
PURCHASE OF WALGREENS/DECATUR, DECATUR, ILLINOIS
On January 31, 1995, the Company acquired this property from
Inland Property Sales, Inc. ("IPS"), an Affiliate of the Advisor, for
the purchase price of $1,209,053, including acquisition costs of $482,
as contemplated and discussed in the Prospectus. Although it was
originally anticipated that this property would be acquired on an
all-cash basis, management of the Company made the determination, based
on the recommendation of the Advisor, that the investment objectives of
the Company would be better met by assuming a portion of the mortgage loan
secured by such property, since: (i) the terms of the current first
mortgage loan were more favorable for the Company than mortgage rates then
currently available from unaffiliated third parties; and (ii) the Company
was able to apply its available cash towards the acquisition of a second
property. The balance of the assumed mortgage at December 31, 1995 was
$750,727. This
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<PAGE> 168
mortgage has an interest rate of 7.655% and amortizes over a 25-year
period. The Company is responsible for monthly payments of principal and
interest of $5,689.
PURCHASE OF EAGLE CREST SHOPPING CENTER, NAPERVILLE, ILLINOIS
On March 1, 1995, the Company acquired this property ("Eagle
Crest") from IPS for the purchase price of $4,816,970, including
acquisition costs of $11,059, as contemplated and discussed in the
Prospectus. Although it was originally anticipated that Eagle Crest
would be acquired on an all-cash basis, management of the Company made
the determination, based on the recommendation of the Advisor, that the
investment objectives of the Company would be better met by assuming a
portion of the first mortgage loan secured by such property, as well as
entering into a loan agreement with IPS for the balance of the purchase
price. By utilizing seller financing to purchase Eagle Crest, the
Company was able to begin receiving the net income, after debt service
payments, from Eagle Crest on an expedited basis, thus increasing the
Company's earnings to be distributed to the Stockholders. The balance
of the assumed mortgage was paid in full in April 1995 with interest at
9.5% per annum. In May 1995, the deferred portion of the purchase
price, totaling $1,212,427, was paid to IPS in full from Gross Offering
Proceeds. In addition, accrued interest of $22,009 was paid from
Company operations.
PURCHASE OF MONTGOMERY-GOODYEAR SHOPPING CENTER, MONTGOMERY,
ILLINOIS
On September 14, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $1,145,992, including
acquisition costs of $5,992, a portion of which was evidenced by a
promissory note payable to Inland Mortgage Investment Corporation
("IMIC"), an affiliate of the Advisor, in the gross amount of $600,000.
The remainder of the purchase price was funded with proceeds of the
Offering. The promissory note was paid in full October 1995, with
interest at a rate of 10.9% per annum. The principal amount paid was
$600,000 from Gross Offering Proceeds and interest of $4,260 was paid
from Company operations.
PURCHASE OF HARTFORD/NAPERVILLE PLAZA, NAPERVILLE, ILLINOIS
On September 14, 1995, the Company acquired this newly constructed
property from an unaffiliated third party for a purchase price of
$4,414,015, including acquisition costs of $14,015 and deposited
$150,000 in an escrow account to be paid to Blockbuster, Inc. to cover
the cost of its leasehold improvements. A portion of the purchase
price was evidenced by a promissory note payable to IMIC, in the gross
amount of $600,000. The remainder of the purchase price was funded
with proceeds of the Offering. The promissory note was paid in full in
October 1995, with interest at a rate of 10.9% per annum. The
principal amount paid was $600,000 from Gross Offering Proceeds and
interest of $5,102 was paid from Company operations.
PURCHASE OF NANTUCKET SQUARE SHOPPING CENTER, SCHAUMBURG, ILLINOIS
On September 20, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $4,257,918, including
acquisition costs of $4,913, a portion of which was evidenced by a
promissory note payable to IMIC, in the gross amount of $3,550,000.
The remainder of the purchase price was funded with proceeds of the
Offering. The promissory note was paid in full in December 1995, with
interest at a rate of 10.5% per annum. In addition, as part of the
purchase, the Company agreed to and has paid $51,135 for tenant
improvements for two tenants expanding their space, which was added to
the cost of the property.
In October 1995, the Company received notice from one of its
tenants at Nantucket Square of its intent to close its store, which it
did on December 10, 1995. The lease for the 6,228 square feet of space
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<PAGE> 169
currently expires January 31, 1998. The Company is pursuing a
replacement tenant, however, in the interim, the tenant continues to
pay its monthly rent. A second tenant at Nantucket Square, occupying
3,300 square feet, filed for financial and reorganization protection
under the federal bankruptcy laws. The tenant continues to occupy the
space and pay its monthly rent. The petition filed with the bankruptcy
court by the tenant stated that it is planning on closing a number of
its other stores but did not anticipate closing its store at Nantucket
Square.
PURCHASE OF ANTIOCH PLAZA, ANTIOCH, ILLINOIS
On December 28, 1995, the Company acquired Antioch Plaza from an
unaffiliated third party for a purchase price of $1,750,365, including
acquisition costs of $365, a portion of which was evidenced by a
promissory note payable to Inland Real Estate Investment Corporation,
an affiliate of the Advisor ("IREIC"), in the gross amount of $660,000.
The remainder of the purchase price, net of prorations, of
approximately $1,100,000 was funded with proceeds of the Offering. As
of December 31, 1995, the unpaid balance of this note was $360,000.
The note which bore interest at a rate of 9.5% per annum was repaid in
full on January 9, 1996 and the total amount paid was $661,163, of
which $660,000 was principal paid from Gross Offering Proceeds and
$1,163 was interest paid from Company operations.
Interest income for the year ended December 31, 1995 is the result
of Gross Offering Proceeds being invested in short-term investments
until a property is purchased.
As of March 31, 1996, subscriptions for a total of approximately
2,906,095 Shares were received bringing total Gross Offering Proceeds
to $29,060,946. On March 29, 1996, the Company acquired Mundelein
Plaza located in Mundelein, Illinois from an unaffiliated third party
for a purchase price of $5,658,230, including acquisition costs of
$8,230, on an all cash basis. On April 5, 1996, the Company completed
its acquisition of Regency Point. See the Section of this Prospectus
entitled "Real Property Investments." Both of these acquisitions were
approved by the Directors, including the Independent Directors, as
being fair and reasonable to the Company. Of the eight properties
acquired as of April 15, 1996 by the Company, the Company utilized
financing in connection with seven of these acquisitions. The
financing on five of the acquisitions was provided by an Affiliate of
the Advisor and, in each case, the loans were repaid within 90 days
after the funding of the loans by the Affiliate. One of these
properties also was acquired by assuming a portion of a loan from an
entity unaffiliated with the Company. This loan, which contained terms
deemed favorable by management of both the Advisor and the Company, was
repaid within 60 days of the date of acquisition. As to the other
three properties, one was acquired on an all cash basis and the other
two properties were acquired subject to financings from entities
unaffiliated with the Company, which financings contained terms which
were deemed favorable by management of both the Advisor and the Company.
The Advisor, on behalf of the Company, continues to pursue the acquisition
of Neighborhood Retail Centers from parties unaffiliated with the Company.
INFLATION
For the Company's Neighborhood Retail Centers, inflation is likely
to increase rental income from leases to new tenants and lease
renewals, subject to market conditions. Continued inflation may cause
capital appreciation of these properties over time as rental rates and
the replacement cost of the properties rise.
The Company's rental income and operating expenses for those
properties owned or to be owned and operated under triple-net leases,
like the Walgreens/Decatur property, are not likely to be directly
affected by future inflation, since property expenses are the
responsibility of the tenants. The capital appreciation of triple-net
leased properties is likely to be influenced by interest rate
fluctuations. To the
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<PAGE> 170
extent that inflation determines interest rates, future inflation may
have an effect on the capital appreciation of triple-net leased
properties.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of" was issued
in March 1995 and is effective for fiscal years beginning after
December 15, 1995.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation Plans" was issued in October 1995. The
Statement is effective for fiscal years beginning after December 15,
1995. As allowed by the new Statement, the Company plans to continue
to use Accounting Principles Board Option No. 25, "Accounting for Stock
Issued to Employees" in accounting for its stock options.
Neither of these accounting pronouncements are expected to have a
material effect on the financial position or results of operations of
the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The Company intends to be organized and operate in a manner that
permits it to qualify as a REIT under the applicable provisions of the
Code and Regulations (the "REIT Requirements") and receive the
beneficial tax treatment described below. However, no assurance can be
given that the activities and operations of the Company will allow it
to meet the REIT Requirements, which are highly technical and complex.
The following discusses the rules the Company must comply with to
receive REIT treatment, the federal income tax consequences to the
Company and its Stockholders of the Company maintaining REIT status and
all material federal income tax consequences to an investor in the
Offering. The discussion is qualified in its entirety by the
applicable REIT qualification provisions contained in the Code, the
rules and regulations promulgated thereunder, and administrative and
judicial interpretations thereof. Shefsky Froelich & Devine Ltd. has
acted and will act as tax counsel to the Company in connection with the
organization of the Company and its election to be taxed as a REIT for
federal income tax purposes and has rendered the opinion set forth
below. The tax implications of an investment in the Company's Shares
is set forth in "--Taxation of Stockholders" in this Section. Each
prospective purchaser of Shares, however, is urged to consult his tax
advisor with respect to the federal, state, local, foreign and other
tax consequences of the purchase, ownership and disposition of Shares
which may be particular to his tax situation.
In brief, a corporation that invests primarily in real estate can,
if it complies with the detailed provisions in Code Sections 856-860,
qualify as a REIT and therefore claim tax deductions for the dividends
it pays to its stockholders. Such a corporation is, therefore,
generally not taxed on its "REIT taxable income" to the extent such
income is currently distributed to stockholders, thereby substantially
eliminating the "double taxation" that a corporation generally bears.
However, as discussed in greater detail below, such an entity could be
subject to tax in certain circumstances even if it qualifies as a REIT
and would likely suffer adverse consequences, including reduced cash
available for distribution to its stockholders, if it failed to qualify
as a REIT. See "--Taxation of the Company--Failure to Qualify" in this
Section. The Board intends that the Company will operate in a manner
that permits it to elect REIT status for the taxable year ending
December 31, 1994 and to maintain this status in each taxable year
thereafter, so long as REIT status remains advantageous to the Company
and the Stockholders.
Shefsky Froelich & Devine Ltd. is of the opinion, assuming that
the actions described in this Section are completed on a timely basis
and the Company timely files the requisite elections, that the Company
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<PAGE> 171
has been organized in conformity with the requirements for
qualification as a REIT beginning with its taxable year ending December
31, 1995, and its proposed method of operation (as described in this
Prospectus and represented by management) will enable it to satisfy the
REIT Requirements. This opinion has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and is based
and conditioned on various assumptions and certain representations made
to Shefsky Froelich & Devine Ltd. by the Company and the Advisor as to
certain factual matters. The Company's qualification and taxation as a
REIT will depend upon the Company's ability to meet, through operation
of the properties it acquires, the REIT qualification requirements.
Shefsky Froelich & Devine Ltd. has not reviewed these operating results
or compliance with the qualification standards. Accordingly, no
assurance can be given that the actual operating results of the Company
will allow the Company to satisfy the REIT Requirements in any tax
year. In addition, this opinion represents counsel's legal judgment
and is not binding on the Service.
TAXATION OF THE COMPANY
General. In any year in which the Company qualifies as a REIT and
has a valid election in place, it will claim deductions for the
dividends it pays to the Stockholders, and therefore will not be
subject to federal income tax on that portion of its "REIT taxable
income" or capital gain which is, in effect, distributed to the
Stockholders. The Company will, however, be subject to tax at normal
corporate rates on any taxable income or capital gain not distributed.
Although the Company, if it maintains REIT status, can eliminate
(or substantially reduce) its federal income tax liability by
maintaining its REIT status and paying sufficient dividends, the
Company could be subject to tax on certain items of income. If the
Company fails to satisfy either the 95% Test or the 75% Test (as
defined below), yet maintains its REIT status by meeting other
requirements, it will be subject to a 100% tax on the greater of the
amount by which the Company fails either test. The Company will also
be subject to a 100% tax on the net income from any "prohibited
transaction," as described below. In addition, if the Company fails to
annually distribute 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,
it would be subject to an excise tax equal to 4% of the difference
between the amount required to be distributed under such formula and
the amount actually distributed. The Company may also be subject to
the corporate alternative minimum tax. Additionally, the Company will
be subject to tax at the highest corporate rate on any non-qualifying
income from "foreclosure property," although the Company will not own
any "foreclosure property" unless it makes loans secured by interests
in real property and forecloses on the property following a default on
the loan.
If the Company acquires any asset from a C corporation (generally,
a corporation subject to full corporate-level tax) in a transaction in
which the basis of the assets in the Company's hands are determined by
reference to the basis of the assets (or any other property) in the
hands of the selling corporation (or if a REIT such as the Company
holds such an asset beginning on the first day of the first taxable
year for which the Company qualifies as a REIT), and the Company
recognizes gain on the disposition of such an asset during the 10-year
period beginning on the date on which such asset was acquired by the
Company (or the date that the Company first qualified as a REIT) (the
"Recognition Period"), then, pursuant to guidelines to be issued by the
Service, the excess of the fair market value as of the beginning of the
applicable Recognition Period over the Company's adjusted basis in such
asset at the beginning of such Recognition Period will be subject to
tax at the highest regular corporate tax rates.
REIT Qualification Tests. The Code defines a REIT as a
corporation, trust or association:
(i) that is managed by one or more trustees or directors;
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<PAGE> 172
(ii) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of
beneficial interest;
(iii) that would be taxable as a domestic corporation but
for its status as a REIT;
(iv) that is neither a financial institution nor an
insurance company;
(v) the beneficial ownership of which is held by 100 or
more persons on at least 335 days in each full taxable year,
proportionately adjusted for a partial taxable year;
(vi) at all times during the second half of each taxable
year, no more than 50% in value of the outstanding stock is
owned, directly, or indirectly, by five or fewer persons or
entities; and
(vii) the Gross Income, Asset and Distribution Tests,
described in greater detail below, are met.
Conditions (i) through (iv) and (vii) must be met during each
taxable year for which REIT status is sought while conditions (v) and
(vi) do not have to be met until after the first taxable year for which
a REIT election is made.
Although the Voting Test (as defined below) generally prevents a
REIT from owning more than 10% of the voting stock of an entity, the
Code provides an exception for ownership of voting stock in a qualified
REIT subsidiary (a "QRS"), a corporation that is wholly-owned by a REIT
throughout the subsidiary's existence. For purposes of the Asset and
Gross Income Tests described below, all assets, liabilities and tax
attributes of a QRS are treated as belonging to the REIT. A QRS is not
subject to federal income tax, but may be subject to state or local
tax. The Company may in the future hold direct or indirect
interests in one or more partnerships or joint ventures. In general, a
partnership is not subject to federal income tax and instead, allocates
its tax attributes to its partners. The partners are subject to tax on
their allocable share of the income and gain, without regard to whether
they receive distributions from the partnership. Each partner's share
of a partnership's tax attributes is determined in accordance with the
partnership agreement. In addition, for purposes of the Asset and
Income Tests, the Company will be deemed to own and earn (based on its
capital interest) an undivided interest in each asset and a share of
each item of gross income.
The Company, in satisfying the general tests described above, must
meet, among others, the following requirements:
A. Share Ownership Tests. The Shares and any other capital stock
the Company issues (with the Shares, "Capital Stock") must be held by a
minimum of 100 persons (determined without attribution to the owners of
any entity owning Capital Stock) for at least 335 days in each full
taxable year, proportionately adjusted for partial taxable years. In
addition, at all times during the second half of each taxable year, no
more than 50% in value of the Capital Stock may be owned, directly or
indirectly, by five or fewer individuals (determined with attribution
to the owners of any entity owning Capital Stock). However, these two
requirements do not apply until after the first taxable year an entity
seeks REIT status. The Company will issue sufficient Capital Stock
pursuant to the Offering to allow the Company to satisfy these
requirements and has indicated that it will not admit investors as
Stockholders until it is likely that the admission will allow there to
be sufficient Stockholders to meet these requirements. In addition,
the Company's Articles contain provisions restricting the transfer of
Capital Stock, which provisions are intended to assist the Company in
satisfying both requirements. Furthermore, the APIP and Distribution
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Reinvestment Program contain provisions that prevent their operations
from causing a violation of these tests as do the terms of the options
granted to the Independent Directors and the terms of the Soliciting
Dealer Warrants. Moreover, the Company will maintain records which
disclose the actual ownership of the outstanding Capital Stock, and the
Company demands written statements each year from the record holders of
5% or more of the Capital Stock disclosing the beneficial owners
thereof. Those Stockholders failing or refusing to comply with the
Company's written demand are required by the Code and the Articles to
submit, with their tax returns, a similar statement disclosing the
actual ownership of Capital Stock and certain other information. See
"Description of Securities--Restrictions on Transfer."
B. Asset Tests. The Company must satisfy, on the last day of each
calendar quarter, two tests based on the composition of its assets.
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 due to changes in
value. In addition, if the failure to satisfy the Asset Tests results
from an acquisition during a quarter, the failure can be cured by
disposing of non-qualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the
value of its assets to insure compliance with the Asset Tests, and will
take such other actions within 30 days after the close of any quarter
as may be required to cure any non-compliance.
1. 75% Asset Test. At least 75% of the value of the Company's
total assets must be represented by "real estate assets," cash, cash
items (including receivables from the operations of the Company) and
government securities (the "75% Asset Test"). Real estate assets
include interests in real property (including undivided interests in
real property, leaseholds of land and options to acquire land),
interests in mortgages on real property, shares in other qualifying
REITs and property attributable to certain temporary investments of new
capital for a one year period beginning on the date the REIT received
the new capital. Property will qualify as attributable to the temporary
investment of new capital if the property is stock or a debt instrument
and the money used to purchase such stock or debt instrument
is received by the REIT in exchange for stock in the REIT (other than
amounts received pursuant to a dividend reinvestment plan) or in a
public offering of debt obligations which have a maturity of at least
five years. The Company will own the properties, and the purchase
contracts will apportion no more than 5% of the purchase price of any
property to property other than "real property," as defined in the
Code. In addition, the Company will invest funds not used to acquire
properties in cash sources, GNMA certificates, REMIC interests, "new
capital" investments or other liquid investments which will allow it to
qualify under the 75% Asset Test. Therefore, the Company's investment
in the properties will constitute "real estate assets" and should allow
the Company to meet the 75% Asset Test.
2. Limitation Tests. The remaining 25% of the Company's assets
generally may be invested without restriction, although if invested in
securities, such securities may not exceed either: (i) 5% of the value
of the Company's total assets as to any one non-government issuer; or
(ii) 10% of the outstanding voting securities of any one issuer. A
partnership interest held by a REIT is not considered a "security" for
purposes of these tests.
C. Gross Income Tests. The Company must satisfy for each calendar
year three separate tests based on the composition of its gross income,
as defined under its method of accounting.
1. The 75% Gross Income Test (the "75% Test"). At least 75% of
the Company's gross income for the taxable year must result from "rents
from real property" (as defined below), interest on obligations secured
by real property mortgages, gains from the sale of interests in real
property and real estate mortgages (other than gain from property held
primarily for sale to customers in the ordinary course of the Company's
trade or business), dividends from other qualifying REITs, certain
other investments relating to real property or mortgages thereon, and,
for a limited time, income from the investment of new capital. Income
will qualify as attributable to the temporary investment of "new
capital" if the income is
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attributable to the ownership of a stock or
debt instrument, but only during the one year period beginning on the
date the REIT receives such "new capital." New capital is defined as
amounts received in exchange for the issuance of stock (other than
amounts received pursuant to a dividend reinvestment plan) or a public
offering of debt obligations which have a maturity of at least five
years. The Company will invest funds not otherwise invested in
properties in cash sources, GNMA certificates, REMIC interests, "new
capital" investments or other liquid investments which will allow the
Company to qualify under the 75% Test.
Income attributable to a lease of real property will generally
qualify as "rent from real property" under the 75% Test (and the 95%
Test described below) subject to the rules discussed below:
(i) Rent from a particular tenant will not qualify if the
Company, or an owner of 10% or more of the stock of the Company,
directly or indirectly owns 10% or more of the stock, assets or
net profits of the tenant.
(ii) The portion of rent attributable to personal property
rented with real property will not qualify unless the portion
attributable to personal property is 15% or less of the total
rent received under the lease.
(iii) Rent will not qualify if it is based in whole, or in
part, on the income or profits of any person. However, rent
will not fail to qualify if it is based on a fixed percentage
(or designated varying percentages) of receipts or sales,
including amounts above a base amount so long as the base amount
is fixed at the time the lease is entered into, the provisions
are in accordance with normal business practice and the arrangement
is not an indirect method for basing rent on income or profits.
(iv) Rental income will not qualify if the Company
furnishes or renders services to tenants, other than through an
"independent contractor" from whom the Company derives no
revenue. The "independent contractor" requirement, however,
does not apply to the extent that the services provided by the
Company are "usually or customarily rendered" in connection with
the rental of space, and are not otherwise considered "rendered
to the occupant."
The Company represents that it will not directly or indirectly own
10% or more of any tenant that leases space in the properties. The
Company will not charge rent that is based on the income or profits of
any person in certain properties.
Tenants will receive certain services in connection with their
leases to the properties. The Company believes that the services to be
provided are usually or customarily rendered in connection with the
rental of space, and therefore the provision of these services will not
cause the rents received with respect to the properties to fail to
qualify as rents from real property for purposes of the 75% and 95%
Tests. The Board intends to hire "independent contractors" to render
services which it believes, after consultation with Shefsky & Froelich
Ltd., are not "usually or customarily rendered" in connection with the
rental of space, including physical development or redevelopment
activities.
2. The 95% Gross Income Test (the "95% Test"). In addition to
deriving 75% of its gross income from the sources listed above, at
least 95% of the Company's gross income for the taxable year must be
derived from the above-described qualifying income, or from dividends,
interest or gains from the sale or disposition of stock or other
securities that are not Dealer Property (as defined below). Dividends
and interest on obligations not collateralized by an interest in real
property qualify under the 95% Test, but not under the 75% Test. The
Company will invest funds not otherwise invested in properties in cash
sources, GNMA certificates, REMIC interests, "new capital" investments
or other liquid investments which will allow the Company to qualify
under the 95% Test. For purposes of determining whether the
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Company complies with the 75% and 95% Tests, gross income does not
include income from prohibited transactions.
The Company's share of income from the properties will primarily
give rise to rental income qualifying under the 75% and 95% Tests, and
gains on sales of the properties, substantially all of which will
generally qualify under the 75% and 95% Tests. The Company's
anticipated operating results indicate that it is unlikely that the
Company will have sufficient, if any, non-qualifying income to cause
adverse consequences.
If the Company fails to satisfy either the 75% or 95% Tests for
any taxable year, it may retain its status as a REIT for such year if
the failure was due to reasonable cause and not due to willful neglect,
the Company attached to its return a schedule of the sources of its
income, and any incorrect information on the schedules was not due to
fraud. If this relief provision was available, the Company would
remain subject to tax with respect to the excess net income.
3. The 30% Test. The Company must derive less than 30% of its
gross income for each taxable year from the sale or other disposition
of: (i) real property held for less than four years (other than
foreclosure property and involuntary conversions); (ii) stock or
securities held for less than one year; and (iii) property in a
prohibited transaction. The Company currently intends to hold the
properties for more than four years and not to own any property that
will cause a prohibited transaction and will structure its activities
to comply with this test. In addition, the Company will invest amounts
not invested in properties in investments that will allow it to comply
with this test, and therefore may maintain increased cash reserves or
make relatively low earning liquid investments in order to prevent
violations of this test.
D. Annual Distribution Requirements (the "Distribution Test"). In
addition to the other tests described above, the Company is required to
distribute dividends (other than capital gain dividends) to the
Stockholders each year in an amount at least equal to the difference
between: (i) the sum of: (a) 95% of the Company's REIT taxable income
(computed without regard to the dividends paid deduction and the REIT's
net capital gain); and (b) 95% of the net income (after tax), if any,
from foreclosure property; and (ii) the sum of certain items of
non-cash income. Whether sufficient amounts have been distributed is
based on amounts paid in the taxable year to which they relate, or in
the following taxable year if the Company files an election before it
timely files its tax return for such year and if paid on or before the
first regular Distribution payment after such declaration. If the
Company fails to meet the Distribution Test as a result of an
adjustment to the Company's tax return by the Service, the Company may
cure the failure by paying a "deficiency dividend" (plus penalties and
interest to the Service) within a specified period. To the extent that
the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100% of its REIT taxable
income, as adjusted, it will be subject to tax on the undistributed
portion.
The Company intends to pay sufficient dividends each year to
satisfy the Distribution Test. See "Investment Objectives and
Policies--Distributions." It is possible that the Company may not have
sufficient cash or other liquid assets to meet the Distribution Test
due to tax accounting rules and other timing differences. The Company
will closely monitor the relationship between its REIT taxable income
and cash flow and, if necessary to comply with the Distribution Test,
will borrow funds to provide cash flow needed to satisfy the
distribution requirement.
Failure to Qualify. If the Company fails to qualify for taxation
as a REIT in any taxable year and the relief provisions are not
available or cannot be met, the Company will not be able to deduct its
dividends and will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate
rates, thereby reducing cash available for Distributions. In such
event, all Distributions to Stockholders (to the extent of current and
accumulated earnings and profits), will be taxable as ordinary
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income. Unless entitled to relief under specific statutory provisions, the
Company will not be eligible to elect REIT status for the four taxable
years following the year during which qualification was lost.
Prohibited Transactions. As discussed above, the Company will be
subject to a 100% tax on any net income from "prohibited transactions".
Net income from a prohibited transaction arises from the sale or
exchange of property held for sale to customers in the ordinary course
of its trade or business ("Dealer Property") unless such property is
foreclosure property. In addition, there is an exception for certain
sales of Dealer Property so long as the property sold: (i) is a real
estate asset under the 75% Asset Test; (ii) has been held for at least
four years; (iii) has capitalized expenditures not in excess of 30% of
the net sales price; (iv) was held for production of rental income for
at least four years; and (v) when combined with other sales in the
year, does not cause the REIT to have made more than seven sales of
Dealer Property during the taxable year. Although the Company will
eventually sell each of the properties, its
primary intention in acquiring and operating the properties is the
production of rental income and it does not expect to hold any property
for sale to customers in the ordinary course of its trade or business.
TAXATION OF STOCKHOLDERS
Taxation of Taxable Domestic Stockholders. As long as the Company
qualifies as a REIT, Distributions paid to the Company's taxable
domestic Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be ordinary
dividend income. Dividend income is characterized as "portfolio"
income under the passive loss rules and cannot be offset by a
Stockholder's current or suspended passive losses. Corporate
Stockholders cannot claim the dividends received deduction for such
dividends unless the Company loses its REIT status. Distributions that
are designated as capital gain dividends will be taxed as long-term
capital gains (to the extent they do not exceed the Company's actual
net capital gain for the taxable year). However, corporate
Stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits are treated first as a tax-deferred
return of capital to the Stockholder, reducing the Stockholder's tax
basis in its Shares by the amount of such distribution. Because
earnings and profits are reduced for depreciation and other non-cash
items, it is possible that a portion of each Distribution will
constitute a tax-deferred return of capital. Distributions in excess
of the Stockholder's tax basis are taxable as capital gains. Although
Stockholders generally recognize taxable income in the year that a
Distribution is received, any Distribution declared by the Company in
October, November or December of any year and payable to a Stockholder
of record on a specific date in any such month shall be treated as both
paid by the Company and received by the Stockholder on December 31 of
the year it was declared even if paid by the Company during January of
the following calendar year. Because the Company is not a pass-through
entity for tax purposes, Stockholders may not use any operating or
capital losses of the Company to reduce their tax liabilities.
In general, the sale of Shares held for more than 12 months will
produce long-term capital gain or loss, while all other sales will
produce short-term gain or loss, in each case with the gain or loss
equal to the difference between the amount of cash received form the
sale and the Stockholder's basis in the Shares sold. However, any loss
from a sale or exchange of Shares by a Stockholder who has held such
stock for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss, to the extent of
distributions from the Company that the Stockholder treated as
long-term capital gains. In addition, please note that Distributions
in excess of earnings and profits that reduce a Stockholder's basis
will tend to increase the gain or sale.
Backup Withholding. The Company will report to its domestic
Stockholders and to the Service the amount of dividends paid during
each calendar year, and the amount (if any) of tax it withheld. A
Stockholder may be subject to backup withholding at the rate of 31%
with respect to dividends paid unless such Stockholder: (a) is a
corporation or comes within other exempt categories; or (b) provides a
taxpayer identification number, certifies as to no loss of exemption,
and otherwise complies with applicable requirements. A Stockholder
that does not provide the Company with its correct taxpayer
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identification number may also be subject to penalties imposed by the
Service. Any amount paid as backup withholding can be credited 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" in this Section.
Taxation of Tax-Exempt Stockholders. Distributions by the Company
to a Stockholder that is a tax-exempt entity should not constitute UBTI
unless the tax-exempt entity borrows funds to acquire its Shares (or
otherwise incurs acquisition indebtedness within the meaning of the
Code with respect to its acquisition of the Shares), or the Shares are
otherwise used in an unrelated trade or business of the tax-exempt
entity.
Notwithstanding the foregoing, if the Company constitutes a
"Pension-Held REIT", certain Qualified Plans that are Stockholders
could recognize UBTI even without incurring debt to acquire their
Shares. The Company will constitute a Pension-Held REIT if either:
(i) at least one Qualified Plan holds more than 25% (by value) of the
Shares; or (ii) one or more Qualified Plans (each of which owns more
than 10% by value of the Shares) hold an aggregate of more than 50% (by
value) of the Shares. If the Company constitutes a Pension-Held REIT,
then a portion of the dividends received by any Qualified Plan that
holds 10% or more of the Shares will constitute UBTI based on the ratio
of the Company's gross income (less allowable deductions) which is
considered UBTI itself, bears to the Company's total gross income (less
allowable deductions). Notwithstanding the foregoing, the Ownership
Limit contained in the Articles should prevent the Company from
unintentionally constituting a Pension-Held REIT because no
Stockholder, whether a Qualified Plan or otherwise, is permitted to own
more than 9.8% (by value) of the Shares without requesting and
obtaining prior Board approval.
Taxation of Foreign Stockholders. The following discussion is
intended only as a summary of the rules governing income taxation of
non-resident alien individuals, foreign corporations, foreign
partnerships, and foreign trusts and estates (collectively, "Foreign
Stockholders"). Prospective Foreign Stockholders should consult with
their own tax advisors to determine the impact of federal, state, and
local income tax laws on an investment in the Company, including any
reporting requirements.
In general, Foreign Stockholders will be subject to regular U.S.
income tax with respect to their investment in the Company if the
investment is "effectively connected" with the conduct of a trade or
business in the U.S. A corporate Foreign Stockholder that receives
income that is treated as effectively connected with a U.S. trade or
business may also be subject to the "branch profits tax" under Code
Section 884. The following discussion applies to Foreign Stockholders
whose investment in the Company is not considered "effectively
connected."
Generally, any dividend that constitutes ordinary income for tax
purposes will be subject to a U.S. tax equal to the lesser of 30% of
the dividend or the rate in an applicable tax treaty. A Distribution
in excess of the Company's earnings and profits is treated first as a
return of capital that will reduce a Foreign Stockholder's basis in its
Shares (but not below zero) and then as gain from the disposition of
such Shares, subject to the rules discussed below for dispositions.
Distributions by the Company that are attributable to gain from
the sale or exchange of a U.S. real property interest are taxed to a
Foreign Stockholder as if the Distributions were gains "effectively
connected" with a United States trade or business. Accordingly, a
Foreign Stockholder will be taxed at the capital gain rates applicable
to a U.S. stockholder (subject to any applicable alternative minimum
tax and a special alternative minimum tax in the case of non-resident
alien individuals). In addition, such dividends
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may also be subject to a 30% branch profits tax when made to a corporate
Foreign Stockholder that is not entitled to treaty exemptions.
Although tax treaties may reduce the Company's withholding
obligations, the Company will generally be required to withhold from
dividends to Foreign Stockholders, and remit to the Service, 34% of
designated capital gain dividends and 30% of ordinary dividends paid
out of earnings and profits. In addition, if the Company designates
prior dividends as capital gain dividends, subsequent dividends, up to
the amount of such prior dividends, will be treated as capital gain
dividends for purposes of withholding. If the amount of tax withheld
by the Company with respect to a distribution to a Foreign Stockholder
exceeds its U.S. tax liability with respect to such distribution, the
Foreign Stockholder may file for a refund of such excess from the
Service. The 34% 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.
Unless the Shares constitute a U.S. real property interest under
Code Section 897, a sale of Shares by a Foreign Stockholder generally
will not be subject to U.S. income taxation. The Shares will not
constitute a U.S. real property interest if the Company is a
"domestically controlled REIT." A domestically controlled REIT is a
REIT in which at all times during a specified testing period less than
50% in value of its shares is held directly or indirectly by Foreign
Stockholders. It is currently anticipated that the Company will be a
domestically controlled REIT, and therefore that the sale of Shares
will not be subject to such taxation. However, because the Shares may
be publicly traded, no assurance can be given that the Company will
continue to be a domestically controlled REIT. Notwithstanding the
foregoing, capital gain not subject to such rules will be taxable to a
Foreign Stockholder if the Foreign Stockholder is a non-resident alien
individual who is present in the U.S. for 183 days or more during the
taxable year and certain other conditions apply, in which case the
non-resident alien individual will be subject to a 30% tax on his or
her U.S. source capital gains. If the Company did not constitute a
domestically-controlled REIT, whether a Foreign Stockholder's sale of
stock would be subject to tax as a sale of a U.S. real property
interest would depend on whether the Shares were "regularly traded" on
an established securities market and on the size of the selling
Stockholder's interest in the Company. If the gain on the sale of
Shares was subject to taxation under these rules, the Foreign
Stockholder would be subject to the same treatment as a U.S.
Stockholder with respect to the gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals). In addition, Distributions that are
treated as gain from the disposition of stock and are subject to tax
under Code Section 897 may also be subject to a 30% branch profits tax
when made to a foreign corporate stockholder that is not entitled to
treaty exemptions. In any event, a purchaser of Shares from a Foreign
Stockholder will not be required 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, the purchaser of stock may be required to withhold 10% of
the purchase price and remit this amount to the Service.
If the proceeds of a disposition of Shares are paid by or through
a U.S. office of a broker-dealer, the payment is subject to information
reporting and to backup withholding unless the disposing Foreign
Stockholder certifies as to his name, address and non-U.S. status or
otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of
disposition proceeds if the payment is made outside the U.S. through a
non-U.S. office of a non-U.S. broker-dealer. U.S. information
reporting requirements (but not backup withholding) will apply,
however, to a payment of disposition proceeds outside the U.S. if (i)
the payment is made through an office outside the U.S. of a
broker-dealer that is either (a) a U.S. person, (b) a foreign person
that derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the U.S. or (c) a "controlled
foreign corporation" for U.S. federal income tax purposes, and (ii) the
broker-dealer fails to initiate documentary evidence that the
Stockholder is a Foreign Stockholder and that certain conditions are
met or that the Foreign Stockholder otherwise is entitled to an
exemption.
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OTHER TAX CONSIDERATIONS
Distribution Reinvestment Program. Stockholders who purchase
Shares in the Offering and participate in the Distribution Reinvestment
Program will recognize taxable dividend income in the amount they would
have received had they not elected to participate, even though they
receive no cash. These deemed dividends will be treated as actual
dividends from the Company to the participating Stockholders and will
retain the character and tax effects applicable to all dividends. See
"--Taxation of Stockholders" in this Section. Capital Stock received
under the program will have a holding period beginning with the day
after purchase, and a tax basis equal to their cost, which is the gross
amount of the deemed Distribution.
State and Local Taxes. The Company and its Stockholders may be
subject to state or local taxation in various jurisdictions, including
those in which it or they 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 a investment in the
Shares of the Company.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising
under ERISA and the prohibited transaction provisions of Code Section
4975 that may be relevant to a prospective purchaser. This discussion
does not deal with all aspects of ERISA or Code Section 4975 or, to the
extent not preempted, state law that may be relevant to particular
employee benefit plan Stockholders (including plans subject to Title I
of ERISA, other employee benefit plans and IRAs subject to the
prohibited transaction provisions of Code Section 4975, and
governmental plans and church plans that are exempt from ERISA and Code
Section 4975 but that may be subject to state law requirements) in
light of their particular circumstances.
In considering whether to invest a portion of the assets of a
pension, profit-sharing, retirement or other employee benefit plan
("Plan"), fiduciaries of the Plan should consider, among other things
whether the investment: (i) will be in accordance with the documents
and instruments covering the investments by such Plan; (ii) will allow
the Plan to satisfy the diversification requirements of ERISA, if
applicable; (iii) will result in UBTI to the Plan (see "Federal Income
Tax Considerations--Taxation of Stockholders--Taxation of Tax-Exempt
Stockholders"); (iv) will provide sufficient liquidity; and (v) is
prudent under the general ERISA standards. In addition to imposing
general fiduciary standards of investment prudence and diversification,
ERISA and the corresponding provisions of the Code prohibit a wide
range of transactions involving the assets of the Plan and persons who
have certain specified relationships to the Plan ("parties in interest"
within the meaning of ERISA, "disqualified persons" within the meaning
of the Code). Thus, a designated Plan fiduciary considering an
investment in the Shares should also consider whether the acquisition
or the continued holding of the Shares might constitute or give rise to
a direct or indirect prohibited transaction.
The fiduciary of an IRA or of an employee benefit plan not subject
to Title I of ERISA because it is a governmental or church plan or
because it does not cover common law employees (a "Non-ERISA Plan")
should consider that such an IRA or Non-ERISA Plan may only make
investments that are authorized by the appropriate governing documents,
not prohibited under Code Section 4975 and permitted under applicable
state law.
The Department of Labor (the "DOL") has issued final regulations
(the "DOL Regulations") which provide guidance on the definition of
Plan assets under ERISA. Under the DOL Regulations, if a Plan acquires
an equity interest in an entity, which is neither a "publicly-offered
security" nor a security issued by an investment company registered
under the Investment Company Act of 1940, as amended, the Plan's
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assets would include, for ERISA purposes, both the equity
interest and an undivided interest in each of the entity's underlying
assets unless certain specified exceptions apply. The DOL Regulations
define a publicly-offered security as a security that is "widely-held",
"freely-transferable," and either part of a class of securities
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration
statement under the Act (provided the securities are registered under
the Exchange Act within 190 days after the end of the fiscal year of
the issuer during which the offering occurred). The Shares are being
sold in an offering registered under the Act and will be registered
under the Exchange Act.
The DOL Regulations provide that a security is "widely-held" only
if it is part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security
will not fail to be "widely-held" because the number of independent
investors falls below 100 subsequent to the initial offering as a
result of events beyond the issuer's control. The Company expects the
Shares to be "widely-held" upon the completion of the Offering.
The DOL Regulations provide that whether a security is
"freely-transferable" is a factual question to be determined on the
basis of all relevant facts and circumstances. The DOL Regulations
further provide that when a security is part of an offering in which
the minimum investment is $10,000 or less, as is the case with this
Offering, certain restrictions ordinarily will not, alone or in
combination, affect the finding that such securities are
freely-transferable. One type of restriction that will not affect a
finding that securities are freely transferable is a restriction or
prohibition against a transfer or assignment which would result in a
termination or reclassification of an entity for federal or state
income tax purposes. The Company believes that the Ownership Limit
imposed under the Articles on the transfer of the Shares are designed
to prevent violations of the five-or-fewer rule (which would cause a
termination of REIT status for tax purposes) or which are otherwise
permitted under the DOL Regulations and, therefore, will not cause the
Shares to not be "freely-transferable." The DOL Regulations are
interpretive in nature and, therefore, no assurance can be given that
the DOL and the United States Department of the Treasury will not
conclude that the Shares are not freely-transferable.
Assuming that the Shares will be "widely-held," the Company
believes that the Shares will be "publicly offered securities" for
purposes of the Regulations and that the assets of the Company will not
be deemed to be "plan assets" of any Plan that invests in the Shares.
DESCRIPTION OF SECURITIES
GENERAL
The total number of Shares of stock which the Company has
authorized is 30,000,000 of which 24,000,000 shares are common stock,
$.01 par value per share (the "Common Stock"), and 6,000,000 shares are
preferred stock, $.01 par value per share (the "Preferred Stock"). The
Shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable.
Stockholders have no preemptive rights to purchase or subscribe
for securities of the Company, and the Common Stock is not convertible
or subject to redemption at the option of the Company. The Common
Stock is entitled to one vote per share and Shares do not have
cumulative voting rights. Subject to the rights of the holders of any
class of capital stock of the Company having any preference or priority
over the Common Stock, the Stockholders are entitled to Distributions
in such amounts as may be declared by the Board from time to time out
of funds legally available for such payments and, in the event
of liquidation, to share ratably in any assets of the Company remaining
after payment in full of all creditors and provisions for any
liquidation preferences on any outstanding Preferred Stock.
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The Company may, at the discretion of the Board, authorize the
listing, issuance and sale of Shares on a national securities exchange
or market. It is not the present intention of the Company to list the
Shares prior to the termination of the Offering. However, the Company
anticipates that within five years from the original date of this
Prospectus it will apply to have the Shares listed, provided the
Company meets the applicable listing requirements and the Board
determines such action to be in the best interests of the Company.
Generally, the Directors, without further action by the
Stockholders, are authorized to issue up to 6,000,000 shares of
Preferred Stock in one or more series and to determine and fix, as to
any series, all the relative rights and preferences of shares
including, without limitation, preferences, limitations or relative
rights with respect to redemption rights, conversion rights, if any,
voting rights, if any, dividend rights and preferences on liquidation.
It is the current intention of the Company to issue only the
Shares and Soliciting Dealer Warrants as described below, although it
may from time to time issue other securities through public offerings
or private placements. The Company may also issue shares of either
Common Stock or Preferred Stock in whole or partial payment for a
property if, in the judgment of the Board, such a transaction would be
advantageous to the Company.
All Shares are fully transferable, subject only to restrictions
which would cause loss of REIT status. See "--Restrictions on
Transfer" in this Section. However, each person acquiring Shares must
notify the Company of any such transfer and provide his name, address,
taxpayer identification number, number of Shares acquired, Service Form
W-9 and the name of the transferor Stockholder prior to any Share
transfer being recorded on the books and records of the Company.
Additionally, the transferee Stockholder must present the stock
certificate representing such Shares or an affidavit of lost
certificate. Such properly executed documentation must be presented
one calendar month prior to the last date of the current quarter to be
effective as of the first day of the next quarter. Failure to provide
such information could result in a transfer not being recognized by the
Company on a timely basis.
SOLICITING DEALER WARRANTS
The Company has agreed, for the sum of $100, to issue warrants to
the Dealer Manager to purchase Shares in the Company equal to 2.5% of
the number of Shares sold by the Dealer Manager (and/or the Soliciting
Dealers). These warrants (the "Soliciting Dealer Warrants") will be
issued on a quarterly basis commencing 60 days after the Minimum
Offering is sold. The Dealer Manager will reallow all Soliciting
Dealer Warrants to the Soliciting Dealers, unless such issuance of the
Soliciting Dealer Warrants is prohibited by either federal or state
securities laws. The Soliciting Dealer Warrants will not be registered
under the Act pursuant to the exemption set forth in Section 4(2) of
the Act.
Each Soliciting Dealer will receive from the Dealer Manager one
Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting
Dealer during the Offering. All Shares sold by the Company other than
through the Distribution Reinvestment Program will be included in the
computation of the number of Shares sold to determine the number of
Soliciting Dealer Warrants to be issued. The holder of a Soliciting
Dealer Warrant will be entitled to purchase one Share from the Company
at a price of $12 (120% of the public offering price per Share) during
the time period beginning from the date the Soliciting Dealer Warrants
are issued and ending upon the first to occur of: (i) October 13,
1999; or (ii) the closing date of a secondary offering of Shares by the
Company (the "Exercise Period"). A Soliciting Dealer Warrant may not be
exercised if the Shares to be issued upon the exercise of the Soliciting
Dealer Warrant have not been registered in the state of residence of the
holder of the Soliciting Dealer Warrant or if a prospectus required under
the laws of such state cannot be delivered to the buyer on behalf of the
Company. Notwithstanding the foregoing, no Soliciting Dealer Warrants will
be exercisable until one year from the date of issuance.
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In addition, holders of Soliciting Dealer Warrants may not exercise the
Soliciting Dealer Warrants to the extent such exercise would jeopardize
the Company's status as a REIT under the Code.
The terms of the Soliciting Dealer Warrants, including the
exercise price and the number and type of securities issuable upon
exercise of a Soliciting Dealer Warrant and the number of such Warrants
may be adjusted in the event of stock dividends, certain subdivisions,
combinations and reclassification of Shares or the issuance to
Stockholders of rights, options or warrants entitling them to purchase
Shares or securities convertible into Shares. The terms of the
Soliciting Dealer Warrants may also be adjusted if the Company engages
in certain merger or consolidation transactions or if all or
substantially all of the Company's assets are sold. Soliciting Dealer
Warrants are not transferable or assignable except by the Dealer
Manager, the Soliciting Dealers, their successors in interest, or to
individuals who are both officers and directors of such a person.
Exercise of these Soliciting Dealer Warrants will be under the terms
and conditions detailed in this Prospectus and in the Warrant Purchase
Agreement, which is an exhibit to the Registration Statement.
Should the Company, at its option, during the Exercise Period prepare and
file a registration statement for any of its securities under the Act, the
Company shall give reasonable written notice thereof to the holders of
Soliciting Dealer Warrants. Any holders of Soliciting Dealer Warrants which
timely notify the Company of their desire to register their Shares may do so in
such public offering, subject to certain limitations which may be imposed by
the underwriter of such public offering.
As holders of Soliciting Dealer Warrants, persons do not have the rights
of Stockholders, may not vote on Company matters and are not entitled to
receive Distributions.
ISSUANCE OF ADDITIONAL SECURITIES AND DEBT INSTRUMENTS
The Directors are authorized to issue additional shares or convertible
securities for cash, property or other consideration on such terms as they may
deem advisable and to classify or reclassify any unissued shares of capital
stock of the Company without approval of the holders of such outstanding
securities. The Directors may issue debt obligations with conversion
privileges on more than one class of capital stock. The Directors may issue
debt obligations with conversion privileges on such terms and conditions as the
Directors may determine whereby the holders thereof may acquire Shares.
Subject to certain restrictions, the Directors may also issue warrants, options
and rights to buy Shares on such terms as they deem advisable (notwithstanding
the possible dilution in the value of the outstanding Shares which may result
from the exercise of such warrants, options or rights to buy Shares) as part of
a ratable issue to Stockholders, as part of a public or private offering or as
part of a financial arrangement with parties other than the Advisor or
Directors, officers or employees of the Company or the Advisor.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, Shares must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months (other than the first year) or during a proportionate part of
a shorter taxable year. Further, not more than 50% of the value of the
issued and outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals during the last half of a taxable year
(other than the first year) or during a proportionate part of a shorter taxable
year.
Since the Board believes it is essential for the Company to continue to
qualify as a REIT, the Articles provide that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% (the
"Ownership Limit") of the number or value of any class of the issued and
outstanding stock of the Company. The Directors, upon receipt of a ruling from
the Service, an opinion of
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counsel or other evidence satisfactory to the Directors and upon other
conditions as the Directors may direct, may also exempt a proposed transferee
from the Ownership Limit. As a condition of this exemption, the intended
transferee must give written notice to the Company of the proposed transfer no
later than 15 days prior to any transfer which, if effected, would result in
the intended transferee owning shares in excess of the Ownership Limit. The
Directors may require opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary or advisable in order to determine or
ensure the Company's status as a REIT. Any transfer of Shares that would: (i)
create a direct or indirect ownership of Shares in excess of the Ownership
Limit; (ii) result in the Shares being owned by fewer than 100 persons; or
(iii) result in the Company being "closely-held" within the meaning of Code
Section 856(b), shall be null and void, and the intended transferee will
acquire no right to the Shares. The foregoing restrictions on transferability
and ownership will not apply if the Directors determine that it is no longer in
the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT.
Any purported transfer of Shares that would result in a person owning
Shares in excess of the Ownership Limit or cause the Company to become
"closely-held" under Code Section 856(b) that is not otherwise permitted as
provided above will constitute excess shares ("Excess Shares"). Upon the
Company determining the existence of Excess Shares, it shall make a demand upon
such Stockholders to sell such Excess Shares. Within 30 days after the Company
requests such holder to sell such Excess Shares, the Excess Shares shall be
deemed to have been offered for sale to the Company, or its designee, at a
price per Share equal to the lesser of: (a) the price per Share in the
transaction that created such Excess Shares (or, in the case of a devise or
gift, the market price at the time of such devise or gift); and (b) the market
price of the equity shares to which such Excess Shares relates on the date the
Company, or its designee, accepts such offer. The Company shall have the right
to accept such offer for a period of 30 days after the later of: (i) the date
of Transfer which resulted in such Excess Shares; and (ii) the date the Board
determines in good faith that a Transfer resulting in Excess Shares has
occurred, if the Company does not receive a notice of such Transfer pursuant to
the terms of the Articles but in no event later than a permitted Transfer
pursuant to and in compliance with the terms of the Articles. If the Company
accepts such offer, it shall be required to pay the full purchase price for
such Shares within such 30 day period.
All persons who own, directly or by virtue of the attribution provisions
of the Code, more than 9.8% (or such other percentage between 1/2 of 1% and 5%,
as provided in the rules and regulations promulgated under the Code) of the
number or value of the outstanding Shares must give the Company written notice
by January 31st of each year. In addition, each Stockholder shall, upon
demand, be required to disclose to the Company in writing all information
regarding the direct, indirect and constructive ownership of Shares as the
Directors deem reasonably necessary to comply with the provisions of the Code
applicable to a REIT, to comply with the requirements of any taxing authority
or governmental agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
Shares might receive a premium for their Shares over the then prevailing market
price or a price which such holders might believe to be otherwise in their best
interest.
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS
Each Stockholder shall be bound by and deemed to have agreed to the terms
of the Organizational Documents by his, her or its election to become a
Stockholder. The Organizational Documents, consisting of the Articles and
Bylaws, were reviewed and ratified by a majority of the Directors (including a
majority of the Independent Directors) at the first meeting of such Directors.
The following is a summary of certain provisions of the Organizational
Documents and does not purport to be complete. This summary is
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qualified in its entirety by specific reference to the Organizational Documents
filed as Exhibits to the Company's Registration Statement.
CERTAIN ARTICLE AND BYLAW PROVISIONS
Stockholders' rights and related matters are governed by the Maryland
General Corporation Law ("MGCL"), the Articles and Bylaws. Certain provisions
of the Articles and Bylaws, which are summarized below, may make it more
difficult to change the composition of the Board and may discourage or make
more difficult any attempt by a person or group to obtain control of the
Company.
STOCKHOLDERS' MEETINGS
An annual meeting of the Stockholders will be held not less than 30 days
after the delivery of the Company's annual report, but within six months after
the end of each fiscal year, for the purpose of electing Directors and for the
transaction of such other business as may become before the meeting. A special
meeting of the Stockholders may be called by the chief executive officer, a
majority of the Directors or a majority of the Independent Directors, and shall
be called by an officer of the Company upon written request of the Stockholders
holding in the aggregate not less than 10% of the outstanding Shares. Upon
receipt of a written request, either in person or by mail, stating the
purpose(s) of the meeting, the Company shall provide all Stockholders, within
ten days after receipt of said request, written notice, either in person or by
mail, of a meeting and the purpose of such meeting to be held on a date not
less than 15 nor more than 60 days after the distribution of such notice, at a
time and place specified in the request, or if none is specified, at a time and
place convenient to the Stockholders. At any meeting of the Stockholders, each
Stockholder is entitled to one vote for each Share owned of record on the
applicable record date. In general, the presence in person or by proxy of a
majority of the outstanding Shares shall constitute a quorum, and the majority
vote of the Stockholders will be binding on all Stockholders of the Company.
BOARD OF DIRECTORS
The Articles and Bylaws provide that the number of directors of the
Company may not be fewer than three nor more than nine, a majority of which
will be independent. This provision may only be amended by a vote of a
majority of the Board. A vacancy in the Board caused by the death, resignation
or incapacity of a Director or by an increase in the number of Directors
(within the limits described above) may be filled by the vote of a majority of
the remaining Directors. With respect to a vacancy created by the death,
resignation or incapacity of an Independent Director, the remaining Independent
Directors shall nominate a replacement. Vacancies occurring as a result of the
removal of a Director by Stockholders shall be filled by a majority vote of the
Stockholders. Any Director may resign at any time and may be removed with or
without cause by the Stockholders owning at least a majority of the
outstanding Shares.
A Director shall have had at least three years of relevant experience
demonstrating the knowledge and experience required to successfully acquire and
manage the type of assets being acquired by the Company. At least one of the
Independent Directors shall have three years of relevant real estate
experience.
STOCKHOLDER VOTING RIGHTS
Except as otherwise provided, all Shares shall have equal voting rights.
Stockholders are entitled to vote by written consent and do not have cumulative
voting rights. The voting rights per share of equity securities of the Company
(other than the Shares) sold in a private offering shall not exceed voting
rights which bear the same relationship to the voting rights of the Shares of
the Company as the consideration paid to the Company for each privately offered
Company share bears to the book value of each Share.
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All elections for Directors shall be decided by the affirmative vote of a
majority of votes cast at a meeting or without a meeting, provided that a
quorum is present (defined as a majority of the aggregate number of votes
entitled to be cast thereon). Any or all Directors may be removed, with or
without cause, by the affirmative vote of the holders of at least a majority of
the outstanding Shares entitled to vote at an annual or special meeting. All
other questions shall be decided by a majority of the votes cast at a meeting.
If no meeting is held, 100% of the Stockholders must consent in writing.
Without concurrence of a majority of the outstanding Shares, the Directors
may not: (a) amend the Articles, except for amendments which do not adversely
affect the rights, preferences and privileges of the Stockholders, including
amendments to provisions relating to Director qualifications, fiduciary duty,
liability and indemnification, conflicts of interest, investment policies or
investment restrictions; (b) sell all or substantially all of the Company's
assets other than in the ordinary course of the Company's business or in
connection with liquidation and dissolution; (c) cause a merger or other
reorganization of the Company; or (d) dissolve or liquidate the Company, other
than before the initial investment in a property by the Company. For purposes
of the above provision, a sale of all or substantially all of the Company's
assets shall mean the sale of two-thirds or more of the Company's assets based
on the total number of properties or the current fair market value of these
assets.
With respect to Shares owned by the Advisor, the Sponsor, the Directors or
any Affiliate, neither the Advisor, the Sponsor, the Directors, nor any
Affiliate may vote or consent on matters submitted to the Stockholders
regarding the removal of the Advisor, the Sponsor, the Directors or any
Affiliate or any transaction between the Company and any of them. In
determining the requisite percentage and interest of Shares necessary to
approve a matter on which the Advisor, the Sponsor, the Directors and any
Affiliate may not vote or consent, any Shares owned by them shall not be
included.
Each Stockholder entitled to vote may do so: (i) at a meeting in person,
by written proxy or by a signed writing or consent directing the manner in
which he or she desires that his or her vote be cast (which must be received by
the Directors prior to such meeting); or (ii) without a meeting by a signed
writing or consent directing the manner in which he or she desires that his or
her vote be cast (which must be received by the Directors prior to the date the
votes of the Stockholders are to be counted).
STOCKHOLDER LISTS; INSPECTION OF BOOKS AND RECORDS
An alphabetical list of names, record addresses and business telephone
numbers (if any) of all Stockholders with the number of Shares held by each,
shall be maintained as part of the books and records of the Company at the
Company's principal office. Such list shall be updated at least quarterly and
shall be open for inspection by a Stockholder or his designated agent upon such
Stockholder's request. Such list shall also be mailed to any Stockholder
requesting the list within ten days of receipt of a request. The Company may
impose a reasonable charge for expenses incurred in reproducing such list and
may require the Stockholder requesting such Stockholder's list to represent
that the list is requested with respect to matters relating to Stockholders'
voting rights under the Articles and the exercise of Stockholders' rights under
federal proxy laws.
Any Stockholder and any designated representative thereof shall be
permitted access to all records of the Company at all reasonable times and may
inspect and copy any of them. In addition, the books and records of the
Company shall be open for inspection by state securities administrators upon
reasonable notice and during normal business hours at the principal place of
business of the Company.
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AMENDMENT OF THE ORGANIZATIONAL DOCUMENTS
The Articles may be amended by the affirmative vote of a majority of the
then outstanding Shares, without the necessity for concurrence by the
Directors. Unless otherwise stated in the Articles, the Bylaws may be amended
in a manner not inconsistent with the Articles by a majority vote of the
Directors, except that an amendment of any matter which requires greater than a
majority vote of the Directors must be amended by the requisite vote and no
Bylaw adopted by the Stockholders may be amended by the Directors if the
provision of such Bylaw provides that it may not be amended without a
Stockholder vote.
DISSOLUTION OR TERMINATION OF THE COMPANY
The Company is an infinite-life REIT which may be dissolved pursuant to
the procedures set forth in the MGCL at any time by the affirmative vote of a
majority of the Stockholders. However, should the Board of Directors determine
within five years after the original date of this Prospectus that the Shares
will not be listed for trading on a national stock exchange or market, the
Company anticipates recommending to the Stockholders that the Company be
liquidated within ten years of the date thereof.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that: (a) with respect to an annual meeting of
Stockholders, nominations of persons for election to the Board and the proposal
of business to be considered by Stockholders may be made only: (i) pursuant to
the Company's notice of the meeting; (ii) by the Board; or (iii) by a
Stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws; and (b) with respect to
special meetings of Stockholders, only the business specified in the Company's
notice of meeting may be brought before the meeting of Stockholders, and
nominations of persons for election to the Board may be made only: (i)
pursuant to the Company's notice of the meeting; (ii) by the Board; or (iii)
provided that the Board has determined that directors shall be elected at such
meeting, by a Stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
RESTRICTIONS ON CERTAIN CONVERSION TRANSACTIONS AND ROLL-UPS
The Articles require that 66_% in interest of the Stockholders and all the
Independent Directors approve certain exchange offers, mergers, consolidations
or similar transactions involving the Company in which the Stockholders receive
securities in a surviving entity having a substantially longer duration or
materially different investment objectives and policies, or that provides
significantly greater compensation to management from that which is described
in this Prospectus, except for any such transaction effected because of changes
in applicable law, or to preserve tax advantages for a majority in interest of
the Stockholders. In should be noted that standards such as "substantially
longer life," "materially different investment objectives and policies" or
"provides significantly greater compensation to management" are not defined and
are by their nature potentially ambiguous. Any ambiguities will be resolved by
the Directors.
In connection with a proposed Roll-Up, as defined below, an appraisal of
all of the Company's assets shall be obtained from a person with no current or
prior business or personal relationship with the Advisor or the Directors and
who is engaged, to a substantial extent, in the business of rendering opinions
regarding the value of assets of the type held by the Company (an "Independent
Expert"). The appraisal will be included in a prospectus used to offer the
securities of a Roll-Up Entity, as defined below, and shall be filed with the
Commission and the state regulatory commissions as an exhibit to the
registration statement for the offering. Accordingly, an issuer using the
appraisal shall be subject to liability for violation
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of Section 11 of the Act and comparable provisions under state laws for any
material misrepresentations or material omissions in the appraisal. The
Company's assets shall be appraised in a consistent manner. The appraisal
shall be based on an evaluation of all relevant information, and shall indicate
the value of the Company's assets as of a date immediately prior to the
announcement of the proposed Roll-Up transaction. The appraisal shall assume
an orderly liquidation of the Company's assets over a 12-month period. The
terms of the engagement of the Independent Expert shall clearly state that the
engagement is for the benefit of the Company and its Stockholders. A summary
of the independent appraisal, indicating all material assumptions underlying
the appraisal, shall be included in a report to the Stockholders in connection
with a proposed Roll-Up. A Roll-Up is a transaction involving the acquisition,
merger, conversion or consolidation, either directly or indirectly, of the
Company and the issuance of securities of a Roll-Up Entity, as defined below. A
Roll-Up does not include: (i) a transaction involving securities of the
Company that have been for at least 12 months listed on a national securities
exchange or traded through the Nasdaq National Market; or (ii) a transaction
involving the conversion to corporate, trust or association form of only the
Company if, as a consequence of the transaction, there will be no significant
adverse change in any of the following: (a) Stockholders' voting rights; (b)
the term and existence of the Company; (c) Sponsor or Advisor compensation; or
(d) the Company's investment objectives. A Roll-Up Entity is a partnership,
real estate investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of a proposed
Roll-Up.
Notwithstanding the foregoing, the Company may not participate in any
proposed Roll-Up which would:
(i) result in the Stockholders having rights to meetings less
frequently or which are more restrictive to Stockholders than those
provided in the Articles;
(ii) result in the Stockholders having voting rights that are
less than those provided in the Articles;
(iii) result in the Stockholders having greater liability than as
provided in the Articles;
(iv) result in the Stockholders having rights to receive reports
that are less than those provided in the Articles;
(v) result in the Stockholders having access to records that
are more limited than those provided in the Articles;
(vi) include provisions which would operate to materially impede
or frustrate the accumulation of Shares by any purchaser of the
securities of the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity);
(vii) limit the ability of an investor to exercise the voting
rights of its securities in the Roll-Up Entity on the basis of the
number of the Shares held by that investor;
(viii) result in investors in the Roll-Up Entity having rights of access
to the records of the Roll-Up Entity that are less than those
provided in the Articles; or
(ix) place any of the costs of the transaction on the Company if
the Roll-Up is not approved by the Stockholders;
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provided, however, that nothing herein shall be construed to prevent
participation in any proposed Roll-Up which would result in Stockholders having
rights and restrictions comparable to those contained in the Articles, with the
prior approval of a majority of the Stockholders.
Stockholders who vote "no" on the proposed Roll-Up shall have the choice
of:
(i) accepting the securities of the Roll-Up Entity offered in
the proposed Roll-Up; or
(ii) one of either:
(a) remaining as Stockholders of the Company
and preserving their interests therein on the same terms
and conditions as previously existed; or
(b) receiving cash in an amount equal to the
Stockholders' pro rata share of the appraised value of the
net assets of the Company.
The foregoing provisions in the Articles, Bylaws and the MGCL could have
the effect of discouraging a takeover or other transaction in which holders of
some, or a majority, of the Shares might receive a premium for their Shares
over the then prevailing market price or which these holders might believe to
be otherwise in their best interests.
LIMITATION ON TOTAL OPERATING EXPENSES
The Articles provide that, subject to the conditions described in the
following paragraph, the annual Total Operating Expenses of the Company shall
not exceed in any fiscal year the greater of 2% of the Average Invested Assets
of the Company or 25% of the Company's Net Income. The Independent Directors
have a fiduciary responsibility to limit the Company's annual Total Operating
Expenses to amounts that do not exceed the foregoing limitations. The
Independent Directors may, however, determine that a higher level of Total
Operating Expenses is justified for such period because of unusual and
non-recurring expenses. Any such finding by the Independent Directors and the
reasons in support thereof shall be recorded in the minutes of the meeting of
Directors. Within 60 days after the end of any fiscal quarter of the Company
for which Total Operating Expenses (for the 12 months then ended) exceed 2% of
Average Invested Assets or 25% of Net Income, whichever is greater, there shall
be sent to the Stockholders a written report of such fact, together with an
explanation of the facts the Independent Directors considered in arriving at
the conclusion that such higher operating expenses were justified. In the
event the Total Operating Expenses exceed the limitations described above and
if the Directors are unable to conclude that such excess was justified then,
within 60 days after the end of the Company's fiscal year, the Advisor shall
reimburse the Company in the amount by which the aggregate annual Total
Operating Expenses paid or incurred by the Company exceed the limitation.
TRANSACTIONS WITH AFFILIATES
The Articles impose certain restrictions upon dealings between the Company
and the Advisor, the Sponsor, any Director or Affiliates thereof. In
particular, the Company may not:
(i) borrow money from the Advisor, the Sponsor, any Director or
Affiliates thereof, unless a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in
such transaction determines that such transaction is fair and
reasonable and no less favorable to the Company than from
unaffiliated parties under the same or similar circumstances;
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(ii) invest in joint ventures with an Affiliated program except in
compliance with the requirements set forth in the Articles. See
"Investment Objectives and Policies--Joint Ventures";
(iii) enter into any other transaction with the Advisor, the
Sponsor, any Director or Affiliates thereof, unless a majority of
the Directors (including a majority of the Independent Directors)
not otherwise interested in such transaction determines that the
transaction is fair and reasonable to the Company and is on terms
and conditions no less favorable than from unaffiliated third
parties, except for advisory arrangements with the Advisor.
Notwithstanding the above, the Company was allowed to acquire the
Eagle Crest Shopping Center and the Walgreens/Decatur property from
IPS. See "Conflicts of Interest--Acquisitions from Affiliates" and
"--Non-Arm's-Length Agreements" and "Real Property Investments"; or
(iv) sell property to or loan money to the Advisor, the Sponsor,
any Director or Affiliates thereof (except as provided in the
Articles).
RESTRICTIONS ON BORROWING
The Company may not incur indebtedness to enable it to make Distributions
except as necessary to satisfy the requirement that the Company distribute at
least 95% of its REIT Taxable Income, or otherwise as necessary or advisable to
assure that the Company maintains its qualification as a REIT for federal
income tax purposes. The aggregate borrowing of the Company, secured and
unsecured, shall be reasonable in relation to the Net Assets of the Company and
shall be reviewed by the Board at least quarterly. The Company anticipates
that aggregate borrowings related to all of the Company's properties will not
exceed 50% of their combined fair market values, however, the maximum amount of
borrowings in relation to Net Assets shall, in the absence of a satisfactory
showing that a higher level of borrowing is appropriate, not exceed 300% of Net
Assets. Any borrowings in excess of such 300% level shall only occur with the
consent of a majority of the Stockholders. See "Investment Objectives and
Policies--Borrowing." The Company shall not borrow funds from the Advisor, the
Sponsor, any Director or Affiliates thereof, unless a majority of the Directors
(including a majority of the Independent Directors), not otherwise interested
in such transaction, determines that such transaction is fair and reasonable
and no less favorable to the Company than from unaffiliated parties under the
same or similar circumstances.
RESTRICTIONS ON INVESTMENTS
The investment policies set forth in the Articles shall be approved by a
majority of Independent Directors. The Articles prohibit investments in: (i)
any foreign currency or bullion; (ii) short sales; and (iii) any security in
any entity holding investments or engaging in activities prohibited by the
Articles.
In addition to other investment restrictions imposed by the Directors from
time to time consistent with the Company's objective to qualify as a REIT, the
Company will observe the following restrictions on its investments set forth in
its Articles:
(i) not more than 10% of the Company's total assets will be
invested in unimproved real property or mortgage loans on
unimproved real property. For purposes of this paragraph,
"unimproved real properties" does not include properties under
construction, under contract for development or plan for
development within one year;
(ii) the Company may not invest in commodities or commodity
future contracts. Such limitation is not intended to apply to
interest rate futures, when used solely for hedging purposes;
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(iii) the Company shall not invest in or make mortgage loans
unless an appraisal is obtained concerning the underlying property.
Mortgage indebtedness on any property shall not exceed such
property's appraised value. In cases in which the majority of
Independent Directors so determine, and in all cases in which the
mortgage loan involves the Advisor, the Sponsor, the Directors or
any Affiliates, such appraisal must be obtained from an Independent
Expert concerning the underlying property. The appraisal shall be
maintained in the Company's records for at least five years, and
shall be available for inspection and duplication by any
Stockholder. In addition to the appraisal, a mortgagee's or owner's
title insurance policy or commitment as to the priority of the
mortgage or condition of the title must be obtained. The Company
may not invest in real estate contracts of sale otherwise known
as land sale contracts;
(iv) the Company may not make or invest in mortgage loans,
including construction loans, on any one property if the aggregate
amount of all mortgage loans outstanding on the property, including
the loans of the Company, would exceed an amount equal to 85% of the
appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other
underwriting criteria provided that such loans would in no event
exceed the appraised value of the property at the date of the loans;
(v) the Company may not make or invest in any mortgage loans
that are subordinate to any mortgage or equity interest of the
Advisor, the Sponsor, any Director or Affiliates thereof;
(vi) the Company shall not invest in equity securities unless a
majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transaction approves the
transaction as being fair, competitive and commercially reasonable.
Investments in entities affiliated with the Advisor, the Sponsor,
any Director or Affiliates thereof are subject to the restrictions
on joint venture investments. Notwithstanding these restrictions,
the Company may purchase its own securities, when traded on a
secondary market or on a national securities exchange or market, if
a majority of the Directors (including a majority of the Independent
Directors) determine such purchase to be in the best interests of
the Company;
(vii) the Company shall not issue: (a) redeemable equity
securities; (b) debt securities unless the historical debt service
coverage (in the most recently completed fiscal year) as adjusted
for known charges is sufficient to properly service the higher level
of debt; (c) options or warrants to purchase Shares to the Advisor,
the Sponsor, any Director or Affiliates thereof except on the same
terms as sold to the general public, provided that the Company may
issue options or warrants to persons not affiliated with the Company
at exercise prices not less than the fair market value of such
securities on the date of grant and for consideration (which may
include securities) that in the judgment of the Independent
Directors have a market value not less than the value of such option
on the date of grant); options or warrants issuable to the Advisor,
the Sponsor, any Director or Affiliates thereof shall not exceed an
amount equal to ten percent (10%) of the outstanding Shares on the
date of grant of any options or warrants; or (d) issue Shares on a
deferred payment basis or similar arrangement;
(viii) to the extent the Company invests in real property, a majority of
the Directors shall determine the consideration paid for such real
property, based on the fair market value of the property. If a
majority of the Independent Directors determine, or if the real
property is acquired from the Advisor, the Sponsor, any Director or
Affiliates thereof, such fair
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market value shall be determined by a qualified independent real
estate appraiser selected by the Independent Directors;
(ix) the Company may not invest in indebtedness (herein called
"Junior Debt") secured by a mortgage on real property which is
subordinate to the lien of other indebtedness (herein called "Senior
Debt"), except where the amount of such Junior Debt, plus the
outstanding amount of the Senior Debt, does not exceed 90% of the
appraised value of such property, if after giving effect thereto,
the value of all such investments of the Company (as shown on the
books of the Company in accordance with generally accepted
accounting principles, after all reasonable reserves but before
provision for depreciation) would not then exceed 25% of the
Company's tangible assets. The value of all investments in Junior
Debt of the Company which does not meet the aforementioned
requirements would be limited to 10% of the Company's tangible
assets (which would be included within the 25% limitation);
(x) engage in trading, as compared with investment activities;
and
(xi) engage in underwriting or the agency distribution of
securities issued by others.
Subject to the above restrictions, a majority of the Independent Directors may
alter the investment policies if they determine that such change is in the best
interests of the Company.
PLAN OF DISTRIBUTION
GENERAL
The Company is offering on a "best efforts" basis 5,000,000 Shares for a
purchase price of $10.00 per Share with a minimum investment of $3,000 ($1,000
in the case of Tax-Exempt Entities, except Iowa where the minimum investment
for IRAs will be $3,000) and 1,000,000 Shares for a purchase price of $9.05 per
Share pursuant to the Distribution Reinvestment Program. "Best efforts" means
that no one is guaranteeing that any specified amount of capital will be
raised. The Offering period for the Company began on October 14, 1994 and will
terminate not later than October 13, 1996 and may be terminated at an earlier
date. The Company reserves the right to terminate the Offering at any time.
ESCROW PERIOD
Subscription proceeds for qualified subscriptions for 150,000 Shares were
deposited in a segregated escrow account with the LaSalle National Bank, N.A.,
120 South LaSalle Street, Chicago, Illinois, and were held in trust for the
benefit of the subscribers, and were not commingled. Prior to the date the
minimum number of 150,000 Shares had been sold, escrowed funds were temporarily
invested in federally insured bank accounts (e.g., money market deposit
accounts and savings accounts), short-term certificates of deposit issued by a
bank, short-term securities issued or guaranteed by the United States
government and any other investments permitted under Rule 15c2-4 of the
Exchange Act. These subscription proceeds were released from escrow and paid
over to the Company in January 1995 for the payment of the expenses incurred in
connection with the Offering, and then for the purposes described under
"Estimated Use of Proceeds of Offering."
ADVISOR CAPITAL CONTRIBUTION
The Advisor made a capital contribution to the Company in the amount of
$200,000 prior to the commencement of the Offering, for which the Advisor
received 20,000 Shares. The Advisor may not sell
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this initial investment while it remains the Advisor but may transfer the
Shares to an Affiliate. The Advisor and its Affiliates may purchase additional
Shares for their own accounts. However, at no time will the Advisor own 9.8%
or more of the total number of the Company's Shares outstanding. Purchases of
Shares by the Advisor were not counted towards the Minimum Offering. Any
purchases of Shares by the Advisor during the Offering will be for investment
purposes only and not with a view toward immediate resale.
SUBSCRIPTION PROCESS
The Shares are being offered to the public through the Soliciting Dealers.
The Dealer Manager also sells Shares directly. The form of Soliciting Dealers
Agreement between the Dealer Manager and the Soliciting Dealers requires the
broker-dealers to make diligent inquiries, as required by law, of all
prospective purchasers in order to ascertain whether a purchase of Shares is
suitable for such person and transmit promptly to the Company the completed
subscription documentation and any supporting documentation reasonably required
by the Company.
The Shares are being sold when, as and if subscriptions therefor are
received and accepted by the Company, subject to the satisfaction by the
Company of certain other conditions and approval by counsel of certain legal
matters. The Company has the unconditional right to accept or reject any
subscription. Subscriptions will be accepted or rejected within ten days (and
generally within 24 hours) after its receipt of a copy of the Subscription
Agreement, fully completed, and payment in good funds for the number of
subscribed Shares. If the subscription is accepted, a confirmation will be
mailed not more than five days after acceptance of the investor as a
Stockholder. A sale of the Shares may not be completed until at least five
business days after the date the subscriber receives a final Prospectus and a
copy of the Organizational Documents, as may be required by certain state
regulatory authorities. If for any reason the subscription is rejected, the
check and subscription agreement will be returned to the subscriber, without
interest or deduction, within ten days after receipt.
Shares will only be sold to persons who purchase a minimum of 300 Shares
($3,000) or Tax-Exempt Entities which purchase a minimum of 100 Shares ($1,000,
except Iowa where the minimum investment for IRAs will be $3,000). Subsequent
purchases may be made in increments of 100 Shares. Subscriptions will be
accepted for fractional Shares only in the discretion of the Company.
DETERMINATION OF INVESTOR SUITABILITY
The Company, the Dealer Manager and each Soliciting Dealer shall make
every reasonable effort to determine that those persons being offered or sold
the Shares are appropriate in light of the suitability standards set forth
herein and are appropriate to such investor's investment objectives and
financial situation. The Soliciting Dealers shall ascertain that the investors
can reasonably benefit from the Company, and the following shall be relevant to
such determination: (i) the investor has the capability of understanding the
fundamental aspects of the Company, which capacity may be evidenced by the
following: (a) the nature of employment experience; (b) educational level
achieved; (c) access to advice from qualified sources, such as attorneys,
accountants, tax advisors, etc.; and (d) prior experience with investments of a
similar nature; (ii) the investor has apparent understanding of: (a) the
fundamental risks and possible financial hazards of this type of investment;
(b) the lack of liquidity of this investment; (c) the Advisor's role in
directing or managing the investment; and (d) the tax consequences of the
investment; and (iii) the investor has the financial capability to invest in
the Company.
By executing the subscription agreement, each Soliciting Dealer
acknowledges his determination that the Shares are a suitable investment for
the investor, and will be required to represent and warrant his compliance with
the applicable laws requiring the determination of the suitability of the
Shares as an investment for the subscriber. The Company and its Affiliates
will, in addition to the foregoing, coordinate
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the processes and procedures utilized by the Dealer Manager and Soliciting
Dealers and, where necessary, implement such additional reviews and procedures
deemed necessary to determine that investors meet the suitability standards set
forth herein. The Dealer Manager and/or the Soliciting Dealers shall maintain
for at least six years a record of the information obtained to determine that
an investor meets the suitability standards imposed on the offer and sale of
Shares and a representation of the investor that the investor is investing for
the investor's own account or, in lieu of such representation, information
indicating that the investor for whose account the investment was made met the
suitability standards.
COMPENSATION
The Company will pay the Dealer Manager a 7% sales commission on all
Shares sold for serving as a dealer manager of the Offering and for the sale of
Shares through its efforts, all of which will be reallowed to Soliciting
Dealers, as compensation for their services in soliciting and obtaining
subscribers for the purchase of Shares, further described below. Up to an
additional 2.5% of the Gross Offering Proceeds may be paid as a Marketing
Contribution and Due Diligence Expense Allowance Fee. The total of reallowed
commissions and reimbursed expenses paid by the Dealer Manager will not exceed
9.5% of the purchase price of the Shares sold by a Soliciting Dealer.
Soliciting Dealers will also receive one Soliciting Dealer Warrant for each 40
Shares sold by such Soliciting Dealer during the Offering, subject to federal
and state securities laws. The holder of a Soliciting Dealer Warrant will be
entitled to purchase one Share from the Company at a price of $12 during the
period commencing with the first date upon which the Soliciting Dealer Warrants
are issued and ending upon the first to occur of: (i) October 13, 1999 or (ii)
the closing date of a secondary offering of the Shares by the Company (the
"Exercise Period"). Subject to certain limitations, the Soliciting Dealer
Warrants may not be transferred, assigned, pledged or hypothecated for a
period of one year following issuance thereof. In addition, no Soliciting
Dealer Warrants will be exercisable until one year from the date of issuance.
See "Description of Securities--Soliciting Dealer Warrants."
The Dealer Manager may award sales incentive items to Soliciting Dealers
in connection with their sales activities. The value of each item will be less
than $50 per annum per participating salesperson. In addition, the Dealer
Manager may pay incentive compensation to its regional marketing
representatives for their activities as wholesalers in connection with the
distribution of the Shares, subject to the overall restrictions on commissions
described herein. The Dealer Manager will reallow commissions to Soliciting
Dealers who sell 50,000 or more Shares during the Offering, as an incentive.
This incentive commission, equal to 1% of the price of the Shares initially
will be paid following the sale of 50,000 Shares by a Soliciting Dealer and,
thereafter, will be paid quarterly in the event additional Shares are sold.
The incentive compensation will be reduced by the amount of any marketing costs
paid by the Dealer Manager on behalf of, or to, the Soliciting Dealers.
The Company shall not pay or award, directly or indirectly, any
commissions or other compensation to any person engaged by a potential investor
for investment advice as an inducement to such advisor to advise the investor
to purchase Shares, provided, however, that this provision shall not prohibit
the normal sales commission payable to a registered broker-dealer or other
property licensed person for selling the Shares.
VOLUME DISCOUNTS
Commissions will be reduced below 7% for obtaining subscriptions from
Stockholders in accordance with the following:
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<TABLE>
<CAPTION>
Amount of
Purchaser's Investment Maximum Commission
------------------------ ------------------
From To per Share
----------- ----------- ------------------
<S> <C> <C>
$ 250,000 499,999 5.5%
500,000 999,999 4.0%
1,000,000 and over 2.5%
</TABLE>
Any reduction from the 7% commission otherwise payable to the Dealer Manager
and reallowable to a Soliciting Dealer in respect of a purchaser's subscription
will be credited to such purchaser in the form of additional whole Shares or
fractional Shares purchased net of commissions.
Subscriptions may be combined for the purpose of crediting a purchaser
with additional Shares and determining commissions payable to the Dealer
Manager and reallowable to Soliciting Dealers so long as all such purchases are
made through the same Soliciting Dealer. Tax-Exempt Entities may be combined
in computing amounts invested if they each have the same person who exercises
investment discretion. If the Subscription Agreement/Signature Page fails to
indicate by marking the "Additional Purchase" space that subscriptions are to
be combined, the Company cannot be held responsible for failing to properly
combine subscriptions.
Employees and associates of the Company and its Affiliates will be
permitted to purchase Shares net of sales commissions and the Marketing
Contribution and Due Diligence Expense Allowance Fee ($9.05 per Share). Prior
to the time the Minimum Number of Shares was sold, such persons were required
to pay $10 per Share and received a return of the commission amount promptly
upon the receipt of the Minimum Offering.
TRANSFER OF SHARES
A Stockholder may assign all or some of his Shares, subject to the
Ownership Limit contained in the Articles. This assignment shall confer upon
the assignee the right to become a Stockholder in the following manner and
subject to certain conditions, including the following: (i) an instrument of
assignment executed by both the assignor and assignee of the Shares
satisfactory in form to the Company shall be delivered to the Company; (ii)
reimbursement of the Company for reasonable expenses and filing costs incurred
in connection with such transfer, which amount shall not exceed $100; (iii) no
assignment shall be effective until the first day of the month following the
month in which the Company actually receives the instrument of assignment which
complies with the requirements of (i) and (ii) above; (iv) no assignment of
beneficial ownership (other than by gift, bequest, inheritance or operation of
law) shall be effective prior to the termination of the Offering; (v) no
assignment shall be effective if such assignment would, in the opinion of
counsel to the Company, result in the termination of the Company's status as a
REIT under the Code; (vi) an assignment may be rejected if such assignment
would cause 25% or more of the issued and outstanding Shares to be held by
Tax-Exempt Entities that are considered "benefit plan investors" under ERISA or
otherwise cause the assets of the Company to be Plan assets; and (vii) no
assignment shall be effected if the assignment would, to the knowledge of the
Company, violate the provisions of any applicable federal or state securities
laws.
The Shares will not initially be listed on a national stock exchange or
market. Within five years after the original date of this Prospectus, the
Company anticipates that the Board will determine whether it is in the best
interests of the Company to: (i) apply to have the Shares listed for trading
on a national stock exchange or market, provided the Company meets the then
applicable listing requirements; and (ii) commence a secondary public offering.
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INDEMNIFICATION
The Company will indemnify the Dealer Manager and the Soliciting Dealers
against certain liabilities, including liabilities under the Act; provided,
however, that the Company shall not indemnify the Dealer Manager or any
Soliciting Dealer from any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws unless one or more
of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee and a court of competent
jurisdiction has approved indemnification of the litigation costs; or (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee and the court has approved
indemnification of the litigation costs; or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnitee and the court has approved indemnification of the settlement and
related costs and the court considering the request has been advised of the
position of the Commission and the published opinions of any state securities
regulatory authority in which securities of the Company were offered and sold
as to indemnification for securities law violations. The Soliciting Dealer
will be required to indemnify the Company and the Advisor against certain such
liabilities. In the opinion of the Commission, indemnification for liabilities
arising under the Act is against public policy and, therefore, unenforceable.
The Dealer Manager and each of the Soliciting Dealers may be deemed to be an
"underwriter" as that term is defined in the Act. See "Investment,
Reinvestment and Share Repurchase Programs."
HOW TO SUBSCRIBE
Shares may be purchased by an investor who meets the suitability standards
described above under "Plan of Distribution--Suitability of the Investment" by
proceeding as follows:
1. Read the entire Prospectus and the current supplement(s), if any,
accompanying the Prospectus.
2. Complete the execution copy of the Subscription Agreement. A specimen
copy of the Subscription Agreement, including instructions for completing the
Subscription Agreement, is included in the Prospectus as Exhibit I.
3. Deliver a check for the full purchase price of the Shares being
subscribed for, payable to "LNB/Escrow Agent for MIFIII," along with the
completed Subscription Agreement to the Soliciting Dealer whose name appears on
the Subscription Agreement.
4. By executing the Subscription Agreement and by paying the full purchase
price for the Shares subscribed for, each investor attests that he meets the
suitability standards as stated in the Subscription Agreement and will be bound
by all of the terms of the Subscription Agreement.
Within ten days (and generally within 24 hours) of the Company's receipt
of each completed Subscription Agreement, the Company will accept or reject the
subscription. If the subscription is accepted, a confirmation will be mailed
within five days. If for any reason the subscription is rejected, the check
and Subscription Agreement will be promptly returned to the subscriber, without
interest or deduction, within ten days after receipt.
Subscriptions on behalf of IRAs, Keogh plans and 401(k) plans must be
processed through and forwarded to the Company by an approved trustee. In the
case of IRA, Keogh plans and 401(k) plan Stockholders, the confirmation will be
sent to the trustee.
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SALES LITERATURE
In addition to and apart from this Prospectus, the Company may use certain
supplemental sales material in connection with the Offering. This material,
prepared by the Advisor may consist of a brochure describing the Advisor and
its Affiliates and the objectives of the Company. It would contain pictures and
summary descriptions of properties similar to those to be acquired by the
Company that Affiliates of the Company have previously acquired. This material
may also include pictures and summary descriptions of properties similar to
those to be acquired by the Company as well as a brochure, audiovisual
materials and taped presentations highlighting and explaining various features
of the Offering, properties of prior real estate programs and real estate
investments in general; and articles and publications concerning real estate.
Business reply cards, introductory letters and seminar invitation forms may be
sent to Soliciting Dealers and prospective investors. No person has been
authorized to prepare for, or furnish to, a prospective investor any sales
literature other than: (i) that described herein; and (ii) newspaper
advertisements or solicitations of interest limited to identifying the Offering
and the location of sources of further information.
Use of any sales materials is conditioned upon filing with and, if
required, clearance by appropriate regulatory agencies. Such clearance (if
provided), however, does not indicate that the regulatory agency allowing the
use of the materials has passed on the merits of the Offering or the adequacy
or accuracy of the materials.
This Offering is made only by means of this Prospectus. Except as
described herein, the Company has not authorized the use of other supplemental
literature or sales material in connection with this Offering. Although it is
believed that the information contained in such literature does not conflict
with any of the information set forth in this Prospectus, such material does
not purport to be complete, and should not be considered as a part of this
Prospectus, or as incorporated in this Prospectus by reference, or as forming
the basis of the Offering described herein.
INVESTMENT, REINVESTMENT AND SHARE REPURCHASE PROGRAMS
AUTOMATIC PURCHASE INVESTMENT PROGRAM
The Automatic Purchase Investment Program ("APIP") allows Stockholders,
during the Offering, to automatically make periodic purchases of the Shares
through the pre-authorized transfer of funds from investor accounts, such as
money market and mutual funds. Stockholders who choose to participate in the
program will complete an authorization form and will mark the appropriate box
on the Subscription Agreement. Shares may be purchased at the Offering price
of $10 per Share, including selling commissions and the Marketing Contribution
and Due Diligence Expense Allowance Fee equal to $.95 per Share. The minimum
periodic purchase is one Share ($10) from any single investor account. Each
Stockholder electing to participate in the APIP agrees that if, at any time
during the Offering, he fails to meet the suitability requirements for making
an investment in the Company or cannot make the other representations or
warranties set forth in the Subscription Agreement, he will promptly so notify
the Company.
Shares will only be sold under the APIP so long as the Shares are subject
to a current and effective registration statement filed with the Commission and
are registered under applicable state securities laws (or are subject to an
exemption from such laws). Sales under the APIP will be suspended during any
interruption in the effectiveness of the registration of the Shares. The
Company will maintain the APIP only during the Offering. Participants may
withdraw at any time by providing ten days' written notice to the Company. In
addition, a Stockholder may not acquire Shares under the APIP to the extent
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such purchase will cause it to exceed the Ownership Limit set forth in the
Articles. A copy of the APIP authorization form is provided as Exhibit II to
this Prospectus.
Funds received from Stockholders under the APIP will be used to purchase
Shares. The record date for the purchase of such Shares will be the first day
of the month following the receipt of the funds, but in no event later than the
first day of the last month of the Offering. Shares acquired under the APIP
will be acquired on the first day of the month after funds are received (except
that funds received under APIP during the last month of the Offering will
acquire Shares as of the last day of the Offering), and the record date for the
first Distributions for such Shares will be on the first day of that month.
DISTRIBUTION REINVESTMENT PROGRAM
The Distribution Reinvestment Program (the "DRP") allows Stockholders who
purchase Shares pursuant to this Offering ("Participants") to automatically
reinvest Distributions in the Company by permitting purchase of additional
Shares. Stockholders who purchase Shares pursuant to this Offering and elect
to take part in the DRP will authorize the Company to use Distributions payable
to them to purchase additional Shares. However, a Participant will not be able
to acquire Shares under the DRP to the extent such purchase would cause it to
exceed the Ownership Limit.
Purchases under the DRP will not be subject to selling commissions or the
Marketing Contribution and Due Diligence Expense Allowance Fee and will be sold
at a price of $9.05 per Share. Participants in the DRP may also purchase
fractional Shares, so that 100% of Distributions will be used to acquire
Shares. Shares will be purchased under the DRP on the record date for the
Distribution used to purchase the Shares. The record date for Distributions
for such Shares acquired under the DRP will be on the last day of the month
subsequent to the month of purchase. Each Participant agrees that if, at any
time prior to listing of the Shares on a national securities exchange or
market, he fails to meet the suitability requirements for making an investment
in the Company or cannot make the other representations or warranties set forth
in the Subscription Agreement, he will promptly so notify the Company in
writing.
Participants will acquire Shares from the Company at a fixed price of
$9.05 per Share. It is possible that a secondary market will develop for the
Shares, and that Shares may be bought and sold on the secondary market at
prices lower or higher than the $9.05 per Share price which will be paid under
the DRP. Neither the Company nor its Affiliates will receive a fee for selling
Shares under the DRP. The Company does not warrant or guarantee that
Participants will be acquiring Shares at the lowest possible price. A
Participant may terminate participation in the DRP at any time without penalty,
by delivering written notice to the Company a minimum of ten business days
prior to the record date for the next Distribution. Prior to listing of the
Shares on a national exchange or market, any transfer of Shares by a
Participant to a non-Participant will terminate participation in the DRP with
respect to the transferred Shares. Upon termination, Distributions will be
distributed to the Stockholder instead of being used to purchase Shares under
the DRP. Within 90 days after the end of the Company's fiscal year, the
Company will: (i) issue certificates evidencing ownership of Shares purchased
through the DRP during the prior fiscal year (ownership of said Shares will be
in book-entry form prior to the issuance of certificates); and (ii) provide
each Participant with an individualized report on his or her investment,
including the purchase date(s), purchase price and number of Shares owned, as
well as the dates of distribution and amounts of Distributions received during
the prior fiscal year. The individualized statement to Participants will
include receipts and purchases relating to each Participant's participation in
the DRP including the tax consequences relative thereto. The Directors by
majority vote (including a majority of Independent Directors) may amend or
terminate the DRP upon 30 days' notice to Participants.
Stockholders who participate in the Distribution Reinvestment Program will
recognize taxable dividend income in the amount they would have received had
they not elected to participate, even though
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they receive no cash. These deemed dividends will be treated as actual
dividends from the Company to the participating Stockholders and will retain
the character and tax effects applicable to all dividends. Shares received
under the program will have a holding period beginning with the day after
purchase, and a tax basis equal to their cost, which is the gross amount of the
deemed Distribution. See "Federal Income Tax Considerations--Taxation of
Stockholders--Taxation of Taxable Domestic Stockholders" for a full discussion
of the tax effects of dividend distributions.
If the Company's Shares are listed on a national securities exchange or
market, Shares purchased by the Company for the DRP will be purchased on such
exchange or market, at the prevailing market price, and will be sold to
Stockholders at such price. The reservation of any Shares from this Offering
remaining for issuance under the DRP will be cancelled. The Shares will
continue to have the status of authorized but unissued Shares. These Shares
will not be issued unless they are first registered with the Commission under
the Act and under appropriate state securities laws or are otherwise issued in
compliance with such laws.
SHARE REPURCHASE PROGRAM
The Share Repurchase Program ("SRP") may, subject to certain restrictions,
provide eligible Stockholders with limited, interim liquidity by enabling them
to sell Shares back to the Company at a price of $9.05 per Share (a reduction
of $.95 from the $10 Offering price, reflecting selling commissions and the
Marketing Contribution and Due Diligence Expense Allowance Fee).
Repurchases under the SRP will be made quarterly by the Company on a
first-come, first-served basis, and will be limited in the following ways: (i)
not more than $500,000 worth of the outstanding Shares will be repurchased in
any given year; and (ii) the funds available for repurchase will be limited to
available proceeds received by the Company from the sale of Shares under the
DRP. The determination of available funds from sales under the DRP will be at
the sole discretion of the Board. In making this determination, the Board will
consider the need to use proceeds from the Share sales under the DRP for
investment in additional properties, or for maintenance or repair of existing
properties. Such property-related uses will have priority over the need to
allocate funds to the SRP. To be eligible to offer Shares for purchase to the
SRP, the Stockholder must have beneficially held the Shares for at least one
year.
The Company cannot guarantee that funds will be available for repurchase.
If no funds are available for the SRP at the time when repurchase is requested,
the Stockholder could: (i) withdraw his request for repurchase; or (ii) ask
that the Company honor the request at such time, if any, when funds are
available. Such pending requests will be honored on a first come, first served
basis. There is no requirement that Stockholders sell their Shares to the
Company. The SRP is only intended to provide interim liquidity for
Stockholders until a secondary market develops for the Shares. No such market
presently exists and no assurance can be given that one will develop. The SRP
will exist during the Offering period and will be terminated following the
close of the Offering period upon: (i) the development of a secondary market
for the Shares (i.e., at such time as a secondary market-maker quotes a bid and
ask price for at least 30 continuous trading days); or (ii) the listing of the
Shares on a national securities exchange or market.
Shares purchased by the Company under the SRP will be cancelled, and will
have the status of authorized but unissued Shares. Shares acquired by the
Company through the SRP will not be reissued unless they are first registered
with the Commission under the Act and under appropriate state securities laws
or otherwise issued in compliance with such laws.
In the event that the Company begins selling its properties, the purchase
price paid by the SRP for Shares will be adjusted accordingly. Because the
availability of purchase funds for the SRP cannot be
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predetermined, and because the demand for repurchase by Stockholders cannot be
predetermined, there can be no assurance that the Company will be able to
establish and maintain the SRP.
REPORTS TO STOCKHOLDERS
The Advisor will keep, or cause to be kept, full and true books of account
on an accrual basis of accounting, in accordance with generally accepted
accounting principles ("GAAP"). All of such books of account, together with a
copy of the Articles and any amendments thereto, will at all times be
maintained at the principal office of the Company, and will be open to
inspection, examination and duplication at reasonable times by the Stockholders
or their agents.
The Advisor will submit to each Stockholder audited annual reports of the
Company within 120 days following the close of each fiscal year. The annual
reports will contain the following: (i) audited financial statements; (ii) the
ratio of the costs of raising capital during the period to the capital raised;
(iii) the aggregate amount of advisory fees and the aggregate amount of fees
paid to the Advisor and any Affiliate of the Advisor by the Company and
including fees or charges paid to the Advisor and any Affiliate of the Advisor
by third parties doing business with the Company; (iv) the Total Operating
Expenses of the Company, stated as a percentage of the Average Invested Assets
and as a percentage of Net Income; (v) a report from the Independent Directors
that the policies being followed by the Company are in the best interests of
its Stockholders and the basis for such determination; and (vi) separately
stated, full disclosure of all material terms, factors and circumstances
surrounding any and all transactions involving the Company, the Directors, the
Advisor and any Affiliate thereof occurring in the year for which the Annual
Report is made. Independent Directors shall be specifically charged with the
duty to examine and comment in the report on the fairness of such transactions.
In addition, unaudited quarterly reports containing the information
required by Form 10-Q will be submitted to each Stockholder within 60 days
after the end of the first three fiscal quarters of each fiscal year.
Concurrently with any Distribution, the Company shall provide Stockholders
with a statement disclosing the source of the funds distributed. If such
information is not available concurrently with the making of a Distribution, a
statement setting forth the reasons why such information is not available shall
be provided concurrently. In no event shall such information be provided to
Stockholders more than 60 days of making such Distribution.
Within 60 days following the end of any calendar quarter during the period
of the Offering in which the Company has closed an acquisition of a property, a
report will be submitted to each Stockholder containing: (i) the location and
a description of the general character of the property acquired during the
quarter; (ii) the present or proposed use of such property and its suitability
and adequacy for such use; (iii) the terms of any material lease affecting the
property; (iv) the proposed method of financing, if any, including estimated
down payment, leverage ratio, prepaid interest, balloon payment(s), prepayment
penalties, "due-on-sale" or encumbrance clauses and possible adverse effects
thereof and similar details of the proposed financing plan; and (v) a statement
that title insurance has been or will be obtained on the property acquired. In
addition, a report will be sent to each Stockholder and submitted to
prospective investors at such time as the Advisor believes a reasonable
probability exists that a property will be acquired: (i) on specified terms
(i.e., upon completion of due diligence which includes review of the title
insurance commitment, appraisal and environmental analysis); and (ii) involving
the use of 10% or more, on a cumulative basis, of the net proceeds of this
Offering.
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After the completion of the last acquisition, the Advisor shall, upon
request, send to the Commissioner of Corporations of the State of California a
schedule, verified under the penalty of perjury, reflecting: (i) each
acquisition made; (ii) the purchase price paid; (iii) the aggregate of all
Acquisition Fees paid on each transaction; and (iv) a computation showing
compliance with the Articles. The Company shall, upon request, submit to the
Commissioner of Corporations of the State of California or to any of the
various state securities administrators any report or statement required to be
distributed to Stockholders pursuant to the Articles or any applicable law or
regulation.
The Company's federal tax return (and any applicable state income tax
returns) will be prepared by the accountants regularly retained by the Company.
Appropriate tax information will be submitted to the Stockholders within 30
days following the end of each fiscal year of the Company. A specific
reconciliation between GAAP and income tax information will not be provided to
the Stockholders; however, such reconciling information will be available in
the office of the Company for inspection and review by any interested
Stockholder. Concurrent with the dissemination of appropriate tax information
to Stockholders, the Company will annually provide each Stockholder with an
individualized report on his or her investment, including the purchase date(s),
purchase price and number of Shares owned, as well as the dates of distribution
and amounts of Distributions received during the prior fiscal year. The
individualized statement to Stockholders will include any purchases of Shares
under the DRP and the APIP. Stockholders requiring individualized reports on a
more frequent basis may request such reports. The Company will make every
reasonable effort to supply more frequent reports, as requested, but the
Company, at its sole discretion, may require payment of an administrative
charge which will be paid: (i) directly by the Stockholder; or (ii) through
pre-authorized deductions from Distributions payable to the Stockholder making
the request.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Shapiro and Olander, Baltimore, Maryland. Legal matters in
connection with the Company's status as REIT for federal income tax purposes
have been passed upon, on behalf of the Company, by Shefsky Froelich & Devine
Ltd. (counsel to the Company). Shefsky Froelich & Devine Ltd. does not purport
to represent Stockholders or potential investors who should consult their own
counsel. See "Conflicts of Interest--Legal Counsel for the Company and the
Advisor is the Same Law Firm."
The statements in the section in the Prospectus titled "Federal Income Tax
Considerations" and elsewhere as they relate to federal income tax matters and
the statements in the section in the Prospectus titled "ERISA Considerations"
have been reviewed by the firm of Shefsky Froelich & Devine Ltd. and are
included herein reliance upon the authority of such firm as experts.
EXPERTS
The financial statements of the Company as of December 31, 1995, and 1994,
and for the year ended December 31, 1995 and for the period from May 12, 1994
(formation date) to December 31, 1994, the historical summaries of gross income
and direct operating expenses of the Walgreens/Decatur Property for each of the
years in the three-year period ended June 30, 1994, the historical summaries of
gross income and direct operating expenses of Eagle Crest/Naperville for each
of the years in the three-year period ended June 30, 1994 and the historical
summary of gross income and direct operating expenses of Regency Point for the
year ended December 31, 1995, have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
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The statement of gross income and direct operating expenses for the year
ended December 31, 1994 for Nantucket Square Shopping Center included in this
Prospectus has been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and is included
herein in reliance upon the authority of said firm as experts in giving said
report.
The statement of gross income and direct operating expenses for the year
ended December 31, 1995 for Mundelein Plaza has been included herein in
reliance upon the report of Bruce Gorlick, C.P.A., Ltd., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto with respect to the offer and
sale of Shares which the Company has filed with the Commission and which may be
inspected and copied at the Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at 500
West Madison Street, Fourteenth Floor, Chicago, Illinois 60661 and 75 Park
Place, Suite 1400, New York, New York 10007. This material, as well as copies
of all other documents filed with the Commission, may be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 upon payment
of the fee prescribed by the Commission.
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GLOSSARY
The definitions used in the Prospectus are set forth below:
"ACQUISITION EXPENSES" means expenses related to the Company's selection,
evaluation and acquisition of, and investment in, properties, whether or not
acquired or made, including but not limited to legal fees and expenses, travel
and communications expenses, cost of appraisals and surveys, non-refundable
option payments on property not acquired, accounting fees and expenses,
computer use related expenses, architectural and engineering reports,
environmental and asbestos audits, title insurance and escrow fees, and
personnel and miscellaneous expenses related to the selection and acquisition
of properties.
"ADA" means the Americans with Disabilities Act of 1990.
"ADVISOR" means the person(s) or entity responsible for directing or performing
the day-to-day business affairs of the Company, including a person or entity to
which an Advisor subcontracts substantially all such functions. The Advisor is
Inland Real Estate Advisory Services, Inc. or anyone which succeeds it in such
capacity.
"ADVISOR ASSET MANAGEMENT FEE" means an amount equal to 1% of the Average
Invested Assets.
"ADVISORY AGREEMENT" means the agreement between the Company and the Advisor
pursuant to which the Advisor will act as the Sponsor of the Company.
"AFFILIATE" means: (i) any Person directly or indirectly owning, controlling
or holding, with the power to vote 10% or more of the outstanding voting
securities of such other Person; (ii) any Person 10% or more of whose
outstanding voting securities are directly or indirectly owned, controlled or
held, with the power to vote, by such other Person; (iii) any Person directly
or indirectly controlling, controlled by or under common control with such
other Person; (iv) any executive officer, director, trustee or general partner
of such other Person; and (v) any legal entity for which such Person acts as an
executive officer, director, trustee or general partner.
"AFFILIATED DIRECTORS" means those Directors affiliated with the Company or its
Affiliates.
"ANCHOR TENANT" means tenants generally occupying approximately 30% or more of
the GLA of a Neighborhood Retail Center, or the tenant of any single-user
property.
"ARTICLES" means the Company's Articles of Incorporation, as amended to date.
"AVERAGE INVESTED ASSETS" shall mean, for any period, the average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests and in loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"BOARD" means the Board of Directors of the Company.
"BYLAWS" means the Bylaws of the Company.
"CASH FLOW" means, with respect to any period: (i) all cash receipts derived
from investments made by the Company; plus (ii) cash receipts from operations
(including any interest from temporary investments
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of the Company) without deduction for depreciation or amortization; less (iii)
cash receipts used to pay operating expenses (including the Advisor Asset
Management Fee).
"CODE" means the Internal Revenue Code of 1986, as amended, or corresponding
provisions of subsequent revenue laws.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANY" means Inland Monthly Income Fund III, Inc., a Maryland corporation.
"COMPETITIVE REAL ESTATE COMMISSION" means the real estate or brokerage
commission paid for the purchase or sale of a property which is reasonable,
customary and competitive in light of the size, type and location of such
property.
"COMPANY FIXED ASSETS" means the real estate, together with the buildings,
leasehold interests, improvements, equipment, furniture, fixtures and personal
property associated therewith, used by the Company in the conduct of its
business.
"CONTRACT PRICE FOR THE PROPERTY" means the amount actually paid or allocated
to the purchase, development, construction or improvement of a property
exclusive of Acquisition Expenses.
"CONTROL SHARES" means voting shares of stock which, if aggregated with all
other such shares of stock previously acquired by the acquirer, or in respect
of which the acquirer is able to exercise or direct the exercise of voting
power except solely by virtue of irrevocable proxy, would entitle the acquirer
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) 1/5 or more but less than 1/3; (ii) 1/3 or more but
less than a majority; or (iii) a majority of all voting power.
"CONTROL SHARE ACQUISITION" means the acquisition of Control Shares subject to
certain exceptions.
"COUNSEL" means Shefsky Froelich & Devine Ltd.
"CUMULATIVE RETURN" means a cumulative, non-compounded return, equal to 8% per
annum on Invested Capital commencing upon acceptance of the investor's
subscription.
"CURRENT RETURN" means a non-cumulative, non-compounded return, equal to 8% per
annum on Invested Capital.
"DEALER MANAGER" means Inland Securities Corporation.
"DEVELOPMENT FEE" means a fee for the packaging of a property of the Company,
including negotiating and approving plans, and undertaking to assist in
obtaining zoning and necessary variances and necessary financing for the
specific property, either initially or at a later date.
"DIRECTORS" means the members of the Board of Directors of the Company.
"DISTRIBUTIONS" means any cash distributed to Stockholders arising from their
interest in the Company.
"EQUITY STOCK" shall mean stock that is either Common Stock and/or Preferred
Stock.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
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"EXCESS SHARES" means shares held by a Stockholder in excess of 9.8% of the
outstanding Shares entitled to vote.
"EXERCISE PERIOD" means the period commencing upon the issuance of the
Soliciting Dealer Warrants and ending upon the first to occur of: (i) October
13, 1999; or (ii) the closing date of a secondary offering of Shares by the
Company.
"EXTENDED TERMINATION DATE" means October 13, 1996.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"GAAP" means generally accepted accounting principles.
"GLA" means gross leasable area.
"GROSS DOLLARS INVESTED IN PROPERTIES" means the amount actually paid or
allocated to the purchase, development, construction or improvement of
properties acquired by the Company.
"GROSS OFFERING PROCEEDS" means the total proceeds from the sale of Shares
during the initial public offering period (and from sales under the
Distribution Reinvestment Program during such period) before deductions for
Organization and Offering Expenses. For purposes of calculating Gross Offering
Proceeds, the purchase price for all Shares, including those for which volume
discounts apply, shall be deemed to be $10 per Share, except for Shares
purchased under the Distribution Reinvestment Program in which case the
purchase price for such Shares shall be $9.05 per Share.
"GROSS REVENUES FROM PROPERTIES" means all cash receipts derived from the
operation of Company Fixed Assets.
"INCENTIVE ADVISORY FEE" means an amount equal to 15% of the net proceeds from
the sale of a property after the Stockholders have first received: (i) their
Cumulative Return; and (ii) a return of their Invested Capital.
"INDEPENDENT DIRECTORS" means the Directors who: (i) are not affiliated,
directly or indirectly, with the Company or the Advisor, whether by ownership
of, ownership interest in, employment by, any material business or professional
relationship with, or as an officer or director of the Company, the Advisor or
its Affiliates; (ii) do not serve as a director for more than two other REITs
organized by the Company or the Advisor; and (iii) perform no other services
for the Company, except as Directors. For this purpose, an indirect
relationship shall include circumstances in which a member of the immediate
family of a Director has one of the foregoing relationships with the Company or
the Advisor. For purposes of determining whether or not the business or
professional relationship is material, the gross revenue derived by the
prospective Independent Director from the Sponsor and Advisor and Affiliates
shall be deemed material per se if it exceeds five percent of the prospective
Independent Directors: (i) annual gross revenue, derived from all sources,
during either of the last two years; or (ii) net worth, on a fair market value
basis.
"INDEPENDENT EXPERT" shall mean a person with no current or prior business or
personal relationship with the Advisor or the Directors and who is engaged, to
a substantial extent, in the business of rendering opinions regarding the value
of assets of the type held by the Company.
"INITIAL INVESTMENT" shall mean the $200,000 investment in Shares made pursuant
to the Articles.
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"INTERESTED STOCKHOLDER" means for purposes of the MGCL, any person who owns
10% or more of the voting power of the then outstanding voting stock of the
Company.
"INVESTED CAPITAL" means the original issue price of the Shares reduced by
prior distributions from the sale or financing of Company Fixed Assets.
"IRA" means an individual retirement account established pursuant to Code
Section 408.
"LEVERAGE" shall mean the aggregate amount of indebtedness of the Company for
money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"MANAGEMENT AGENT" means an entity which provides property management services
to the Company. The Management Agent is Inland Commercial Property Management,
Inc., an Affiliate of the Advisor, or anyone which succeeds it in such
capacity.
"MARKETING CONTRIBUTION AND DUE DILIGENCE EXPENSE ALLOWANCE FEE" means an
amount equal to 2.5% of the Gross Offering Proceeds, a portion of which may be
reallowed to Soliciting Dealers to pay marketing and due diligence expenses.
"MAXIMUM OFFERING" means 6,000,000 Shares (which includes 1,000,000 Shares
available under the Distribution Reinvestment Program).
"MGCL" means the Maryland General Corporation Law.
"MINIMUM OFFERING" means 150,000 Shares.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NEIGHBORHOOD RETAIL CENTER" shall mean any property located within an
approximate 150-mile radius of the Oak Brook, Illinois headquarters of the
Advisor leased primarily to one or more retail tenants providing for the sale
of household goods (food, drugs, apparel, etc.) and personal services (laundry,
dry cleaning, etc.) for the day-to-day living needs of the immediate
neighborhood with GLA ranging from approximately 5,000 to 150,000 square feet.
"NET ASSETS" or "NET ASSET VALUE" means the total assets of the Company (other
than intangibles) at cost before deducting depreciation or other non-cash
reserves less total liabilities of the Company, calculated at least quarterly
on a basis consistently applied.
"NET INCOME" means, for any period, total revenues applicable to such period,
less the expenses applicable to such period other than additions to or
allowances for reserves for depreciation, amortization or bad debts or other
similar non-cash reserves; provided, however, that Net Income shall not include
the gain from the sale of the Company's assets.
"NET PROCEEDS" means the proceeds received by the Company with respect to the
sale of Shares less Organization and Offering Expenses.
"NON-U.S. STOCKHOLDER" means a Stockholder which is a foreign corporation or a
nonresident alien of the United States.
"OFFERING" means the offering of Shares of the Company pursuant to this
Prospectus.
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"ORGANIZATION AND OFFERING EXPENSES" means those expenses incurred by and to be
paid from the assets of the Company in connection with and in preparing the
Company for registration and subsequently offering and distributing Shares to
the public, including, but not limited to, total underwriting and brokerage
discounts and commissions (including fees of the underwriters' attorneys),
expenses for printing, engraving, mailing, salaries of employees while engaged
in sales activity, charges of transfer agents, registrars, trustees, escrow
holders, depositaries, experts, expenses of qualification of the sale of the
securities under federal and state laws, including taxes and fees, and
accountants' and attorneys' fees.
"OTHER OPERATING EXPENSES" means Total Operating Expenses less the Advisor
Asset Management Fee.
"OWNERSHIP LIMIT" means the beneficial ownership of no more than 9.8% of the
outstanding Shares of the Company.
"PARTICIPANT" means a Stockholder who purchases Shares pursuant to this
Offering and elects to participate in the DRP.
"PERSON" means any natural person, partnership, corporation, association,
trust, limited liability company or other legal entity.
"PROPERTY DISPOSITION FEE" means a real estate disposition fee, payable (under
certain conditions) to the Advisor and its Affiliates upon the sale of the
Company's property in an amount equal to the lesser of: (i) 3% of the
contracted for sales price of the property; or (ii) 50% of the commission paid
to third parties which is reasonable, customary and competitive in light of the
size, type and location of such property.
"PROPERTY MANAGEMENT FEE" shall mean any fee paid to an Affiliate or third
party as compensation for management of the Company's properties. The Property
Management Fee shall be a percentage of the aggregate gross revenues from the
properties, not to exceed 5.0% if paid to a third party or 4.5% if paid to an
Affiliate of the Advisor.
"PROSPECTUS" means the final prospectus of the Company in connection with the
initial registration of Shares filed with the Commission on Form S-11, as
amended.
"QUALIFIED PLAN" means any qualified pension, profit-sharing or other
retirement plan (including a Keogh plan) and any trust, bank commingled trust
fund for such a plan.
"REGISTRATION STATEMENT" means the initial registration of Shares on Form S-11
and related exhibits, as amended, filed by the Company with the Commission.
"REIMBURSABLE EXPENSES" means those certain expenses of the Advisor and its
Affiliates which will be reimbursed by the Company.
"REIT" means a corporation, trust, association or other legal entity (other
than a real estate syndication) which is engaged primarily in investing in
equity interests in real estate (including fee ownership and leasehold
interests) or in loans secured by real estate or both.
"REIT PROVISIONS" means Code Sections 856 through 860.
"REIT TAXABLE INCOME" means the taxable income as computed for a corporation
which is not a REIT: (i) without the deductions allowed by Code Sections 241
through 247, 249 and 250 (relating generally to the deduction for dividends
received); (ii) excluding amounts equal to: (a) the net income from
foreclosure property; and (b) the net income derived from prohibited
transactions; (iii) deducting amounts equal to: (x)
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any net loss derived from prohibited transactions; and (y) the tax imposed by
Code Section 857(b)(5) upon a failure to meet the 95% and/or the 75% gross
income tests; and (iv) disregarding the dividends paid, computed without regard
to the amount of the net income from foreclosure property which is excluded
from REIT Taxable Income.
"REMICS" means real estate mortgage investment conduits.
"ROLL-UP" means a transaction involving the acquisition, merger, conversion or
consolidation either directly or indirectly of the Company and the issuance of
securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities of the Company that have
been for at least 12 months listed on a national securities exchange
or traded through The Nasdaq Stock Market - Nasdaq National Market;
or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Company if, as a consequence of the
transaction, there will be no significant adverse change in any of
the following:
(a) Stockholders' voting rights;
(b) the term and existence of the Company;
(c) Sponsor or Advisor compensation; or
(d) the Company's investment objectives.
"ROLL-UP ENTITY" means a partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
"SELLING COMMISSION" means an amount equal to 7% of the Gross Offering Proceeds
payable to the Dealer Manager which will be reallowed to Soliciting Dealers for
each Share sold.
"SERVICE" means the Internal Revenue Service of the United States of America.
"SHARES" means the common stock, par value $.01 per share, of the Company.
"SOLICITING DEALERS" means the dealer members of the National Association of
Securities Dealers, Inc. designated by the Dealer Manager and the Advisor.
"SPONSOR" means any Person directly or indirectly instrumental in organizing,
wholly or in part, the Company or any Person who will control, manage or
participate in the management of the Company, and any Affiliate of such Person.
Not included is any Person whose only relationship with the Company is as that
of an independent property manager of the Company's assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. A Person may also be deemed a Sponsor of the
Company by:
i. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either alone or
in conjunction with one or more other Persons;
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ii. receiving a material participation in the Company in connection with
the founding or organizing of the business of the Company, in
consideration of services or property, or both services and property;
iii. having a substantial number of relationships and contacts with the
Company;
iv. possessing significant rights to control Company properties;
v. receiving fees for providing services to the Company which are
paid on a basis that is not customary in the industry; or
vi. providing goods or services to the Company on a basis which was
not negotiated at arm's-length with the Company.
"STOCKHOLDERS" means holders of shares of Common Stock.
"TAX-EXEMPT ENTITIES" means any investor that is exempt from federal income
taxation, including without limitation a Qualified Plan, an endowment fund or a
charitable, religious, scientific or education organization.
"TERMINATION DATE" means October 13, 1996.
"TOTAL OPERATING EXPENSES" means the aggregate expenses of every character paid
or incurred by the Company as determined under generally accepted accounting
principles, including Advisor Asset Management Fees, but excluding:
a. the expenses of raising capital such as Organization and
Offering Expenses, legal, audit, accounting, underwriting,
brokerage, listing, registration and other fees, printing and other
such expenses, and taxes incurred in connection with the issuance,
distribution, transfer, registration and stock exchange listing of
the Shares;
b. interest payments;
c. taxes;
d. non-cash expenditures such as depreciation, amortization and
bad debt reserves;
e. incentive fees payable to the Advisor; and
f. Acquisition Expenses, real estate commissions on resale of
property and other expenses connected with the acquisition,
disposition and ownership of real estate interests, mortgage loans
or other property (such as the costs of foreclosure, insurance
premiums, legal services, maintenance, repair and improvement of
property).
"UBTI" means unrelated business taxable income as described in the Code.
"USRPI" means a United States real property interest described in Code Section
897. Generally, such an interest would be a direct interest in real property
located in the United States or an interest in a domestic corporation which
owns other USRPI's with a fair market value equal to at least 50% of the sum of
the fair market value of its USRPI's, foreign real property and assets used in
a trade or business.
130
<PAGE> 209
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report .............................................. F-1
Balance Sheets for the Company as of December 31, 1995 and 1994 ........... F-2
Statement of Operations for the year ended December 31, 1995 .............. F-4
Statement of Stockholders' Equity for the year ended December 31, 1995 and
for the period from May 12, 1994 (formation of the Company) to December 31,
1994 ...................................................................... F-5
Statement of Cash Flows for the year ended December 31, 1995 and
the period May 12, 1994 (formation of the Company) to December 31, 1994 ... F-6
Notes to Financial Statements ............................................. F-8
Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for Walgreens/Decatur property for the six-month
period ended December 31, 1994. ........................................... F-17
Independent Auditor's Report .............................................. F-18
Historical Summaries of Gross Income and Direct Operating Expenses
(unaudited) of the Walgreens/Decatur property for each of
the three years in the three year period ended June 30, 1994 .............. F-19
Notes to Historical Summaries of Gross Income and Direct Operating
Expenses ................................................................. F-20
Historical Summary of Gross Income and Direct Operating Expenses
(unaudited) for the Eagle Crest Shopping Center for the six-month
period ended December 31, 1994 ........................................... F-22
Independent Auditor's Report .............................................. F-23
Historical Summaries of Gross Income and Direct Operating Expenses
(Historical Summaries) of the Eagle Crest/Naperville property for each
of the three years in the three year period ended June 30, 1994 ........... F-24
Notes to the Historical Summaries of Gross Income and Direct Operating
Expenses .................................................................. F-25
Report of Independent Public Accountants .................................. F-27
Statement of Gross Income and Direct Operating Expenses for the year
ended December 31, 1994 of Nantucket Square Shopping Center ............... F-28
Notes to the Statement of Gross Income and Direct Operating Expenses
for the year ended December 31, 1994 of Nantucket Square Shopping Center .. F-29
</TABLE>
F-i
<PAGE> 210
<TABLE>
<S> <C>
Statement of Gross Income and Direct Operating Expenses for the
seven-month period ended July 31, 1995 - Nantucket Square Shopping
Center (unaudited) ....................................................... F-31
Report of Independent Public Accountants .................................. F-32
Statement of Gross Income and Direct Operating Expenses
for the Year Ended December 31, 1995 of Mundelein Plaza ................... F-33
Notes to the Statement of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 for Mundelein Plaza .................. F-34
Independent Auditors' Report .............................................. F-36
Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 of Regency Point ..................... F-37
Notes to Historical Summary of Gross Income and Direct Operating Expenses
for the year ended December 31, 1995 of Regency Point ..................... F-38
Pro Forma Balance Sheet (unaudited) at December 31, 1995 .................. F-40
Notes to Pro Forma Balance Sheet (unaudited) at December 31, 1995 ......... F-42
Pro Forma Statement of Operations (unaudited) of the Company for
the year ended December 31, 1995 .......................................... F-45
Notes to Pro Forma Statement of Operations (unaudited) for the
year ended December 31, 1995 .............................................. F-47
</TABLE>
F-ii
<PAGE> 211
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Inland Monthly Income Fund III, Inc.:
We have audited the financial statements of Inland Monthly Income
Fund III, Inc. (the Company) as listed in the accompanying index. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Inland Monthly Income Fund
III, Inc. as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for the year ended December 31, 1995 and for the period from
May 12, 1994 (formation date) to December 31, 1994 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 19, 1996
F-1
<PAGE> 212
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Balance Sheets
December 31, 1995 and 1994
Assets
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Investment properties (Notes 1 and 4):
Land............................................ $ 5,437,948 -
Building and improvements....................... 12,074,484 -
----------- ---------
17,512,432 -
Less accumulated depreciation................... 169,894 -
----------- ---------
Net investment properties....................... 17,342,538 -
----------- ---------
Cash and cash equivalents including amounts
held by property manager (Note 1)............... 738,931 10,934
Restricted cash (Note 1).......................... 150,000 -
Escrowed funds (Note 1)........................... - 1,699,381
Accounts and rents receivable (Note 5)............ 333,823 -
Deposits and other assets (Note 4)................ 158,123 4,117
Offering costs (Note 1)........................... - 687,941
Deferred organization costs (Note 1).............. 27,462 -
----------- ---------
Total assets.................................. $18,750,877 2,402,373
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 213
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Balance Sheets
(continued)
December 31, 1995 and 1994
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Liabilities:
Liability for subscriptions received (Note 1)... $ - 1,699,381
Accounts payable................................ 6,875 -
Accrued offering costs to Affiliates (Note 2)... 222,353 54,981
Accrued offering costs to non-affiliates........ 6,444 254,711
Accrued interest payable to Affiliates.......... 5,242 -
Accrued real estate taxes....................... 374,180 -
Distributions payable (Note 7).................. 129,532 -
Security deposits............................... 54,483 -
Notes payable to Affiliates (Notes 4 and 7)..... 360,000 -
Mortgage payable (Notes 4 and 6)................ 750,727 -
Unearned income................................. 39,846 -
Other liabilities............................... 178,852 -
Due to Affiliates (Note 2)...................... 7,277 193,300
----------- ---------
Total liabilities............................. 2,135,811 2,202,373
----------- ---------
Stockholders' Equity (Notes 1 and 2):
Common stock, $.01 par value, 24,000,000 Shares
authorized; 2,000,073 and 20,000 issued and
outstanding at December 31, 1994 and
December 31, 1995, respectively.............. 19,996 200
Additional paid-in capital (net of offering
costs of $3,121,175 at December 31, 1995, of
which $2,129,264 was paid to Affiliates)...... 16,835,183 199,800
Accumulated distributions in excess
of net income................................. (240,113) -
----------- ---------
Total stockholders' equity.................... 16,615,066 200,000
----------- ---------
Commitments and contingencies (Notes 3, 5 and 7)..
----------- ---------
Total liabilities and stockholders' equity........ $18,750,877 2,402,373
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 214
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statement of Operations
For the year ended December 31, 1995
<TABLE>
<S> <C>
Income:
Rental income (Notes 1 and 5).................... $ 869,485
Additional rental income......................... 228,024
Interest income.................................. 82,913
-----------
1,180,422
-----------
Expenses:
Professional services to Affiliates.............. 7,277
Professional services to non-affiliates.......... 1,615
General and administrative expenses
to non-affiliates.............................. 13,880
Property operating expenses to Affiliates........ 46,791
Property operating expenses to non-affiliates.... 279,930
Mortgage interest to Affiliates.................. 146,821
Mortgage interest to non-affiliates.............. 17,340
Depreciation..................................... 169,894
Acquisition costs expensed....................... 360
-----------
683,908
-----------
Net income..................................... $ 496,514
===========
Net income per weighted average
common stock shares outstanding
(943,156 for the year ended
December 31, 1995)............................... $ .53
===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 215
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statement of Stockholders' Equity
For the year ended December 31, 1995 and
for the period from May 12, 1994 (formation of the Company)
to December 31, 1994
<TABLE>
<CAPTION>
Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Proceeds from initial
offering.................. $ 200 199,800 - 200,000
-------- ---------- -------- ----------
Balance December 31, 1994... 200 199,800 - 200,000
Net income.................. - - 496,514 496,514
Distributions declared
($.78 per weighted average
common stock shares
outstanding).............. - - (736,627) (736,627)
Proceeds from Offering (net
of Offering costs of
$3,121,175).............. 19,826 16,662,162 - 16,681,988
Repurchases of Shares....... (30) (26,779) - (26,809)
-------- ---------- -------- ----------
Balance December 31, 1995... $ 19,996 16,835,183 (240,113) 16,615,066
======== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 216
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statement of Cash Flows
For the year ended December 31, 1995
and for the period from May 12, 1994 (formation of the Company)
to December 31, 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 496,514
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 169,894 -
Rental income under master lease agreements... 133,016 -
Changes in assets and liabilities:
Accounts and rents receivable............... (333,823) -
Deposits and other assets................... (4,006) -
Accounts payable............................ 6,875 -
Accrued interest payable.................... 5,242 -
Accrued real estate taxes................... 374,180 -
Security deposits........................... 54,483 -
Other liabilities........................... 28,852 -
Due to Affiliates........................... 7,277 -
Unearned income............................. 39,846 -
------------ ------------
Net cash provided by operating activities......... 978,350 -
------------ ------------
Cash flows from investing activities:
Escrowed funds.................................. - (1,699,381)
Payments for acquisition expenses............... - (4,117)
Purchase of investment properties............... (6,376,708) -
Tenant improvements............................. (51,135) -
Deposit for tenant improvements................. (150,000) -
------------ ------------
Net cash used in investing activities............. (6,577,843) (1,703,498)
------------ ------------
Cash flows from financing activities:
Repayment of loan from Advisor.................. (193,300) 193,300
Proceeds from offering.......................... 19,803,163 200,000
Repurchase of Shares............................ (26,809) -
Subscriptions received.......................... - 1,699,381
Payments of offering costs...................... (2,514,129) (378,249)
Distributions paid.............................. (607,095) -
Principal payments of debt...................... (10,106,878) -
Payment of deferred organization costs.......... (27,462) -
------------ ------------
Net cash provided by financing activities......... 6,327,490 1,714,432
------------ ------------
Net increase in cash and cash equivalents......... 727,997 10,934
Cash and cash equivalents at beginning of period.. 10,934 -
------------ ------------
Cash and cash equivalents at end of period........ $ 738,931 10,934
============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 217
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Statement of Cash Flows
(continued)
For the year ended December 31, 1995
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<S> <C>
Purchase of Walgreens, Decatur, Illinois:
Purchase price of investment property......................... $ (1,209,053)
Assumption of debt (Note 4)................................... 1,061,409
-------------
(147,644)
-------------
Purchase of the Eagle Crest Shopping Center, Naperville, Illinois:
Purchase price of investment property......................... (4,816,970)
Assumption of debt............................................ 3,533,769
Note payable (Note 4)......................................... 1,212,427
-------------
(70,774)
-------------
Purchase of Montgomery-Goodyear, Montgomery, Illinois:
Purchase price of investment property......................... (1,145,992)
Note payable (Note 4)......................................... 600,000
-------------
(545,992)
-------------
Purchase of Hartford/Naperville Plaza, Naperville, Illinois:
Purchase price of investment property......................... (4,414,015)
Note payable (Note 4)......................................... 600,000
-------------
(3,814,015)
-------------
Purchase of Nantucket Square, Schaumburg, Illinois:
Purchase price of investment property......................... (4,257,918)
Note payable (Note 4)......................................... 3,550,000
-------------
(707,918)
-------------
Purchase of Antioch Plaza, Antioch, Illinois:
Purchase price of investment property......................... (1,750,365)
Note payable (Note 4)......................................... 660,000
-------------
(1,090,365)
-------------
Purchase of investment properties............................... $ (6,376,708)
=============
Distributions payable........................................... $ 129,532
=============
Cash paid for interest.......................................... $ 158,919
=============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 218
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
For the year ended December 31, 1995 and
for the period from May 12, 1994 (formation of the Company)
to December 31, 1994
(1) Organization and Basis of Accounting
Inland Monthly Income Fund III, Inc. (the "Company") was formed on May 12, 1994
to invest in neighborhood retail centers located within an approximate 150-mile
radius of its headquarters in Oak Brook, Illinois. The Company may also
acquire single-user retail properties in locations throughout the United
States, certain of which may be sale and leaseback transactions, net leased to
creditworthy tenants. On October 14, 1994, the Company commenced an initial
public offering ("Offering") of 5,000,000 shares of common stock ("Shares") at
a price of $10 per Share and the issuance of 1,000,000 Shares at a price of
$9.05 per Share which may be distributed pursuant to the Company's distribution
reinvestment program (the "DRP"). Inland Real Estate Advisory Services, Inc.
(the "Advisor"), an Affiliate of the Company, is the advisor to the Company.
At December 31, 1994, subscriptions for a total of 189,938.145 Shares had been
received from the public resulting in $1,899,381 in Gross Offering Proceeds,
which includes $200,000 received from the Advisor for 20,000 Shares.
Subscriber funds were held in an interest-bearing escrow account with the
Company's unaffiliated escrow agent until January 3, 1995. At December 31,
1994, escrowed funds of $1,699,381 were reflected as escrowed deposits, along
with the corresponding liability for subscriptions received, in the
accompanying financial statements. Offering proceeds were released from escrow
on January 3, 1995 when subscriptions were accepted and Shares issued by the
Company. Subscribers received their pro rata share of interest income earned
on their subscriptions while in escrow. At December 31, 1995, subscriptions
for a total of 2,000,073 Shares have been received, resulting in $19,976,354 in
Gross Offering Proceeds. As of December 31, 1995, the Company has repurchased
30 Shares.
The Company qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1995. Since the Company
qualified for taxation as a REIT, the Company generally will not be subject to
federal income tax to the extent it distributes its REIT taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and federal income and excise taxes on its undistributed income.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
OS
F-8
<PAGE> 219
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
The Company considers all highly liquid investments purchased with a maturity
of three months of less to be cash equivalents and are carried at cost, which
approximates fair value. Included in cash and equivalents is $142,720 held by
the Company's affiliated property manager which is unrestricted and held in the
Company's name.
Restricted cash represents amounts held in escrow for tenant improvements at
Naperville/Hartford Plaza. The Company has recorded a corresponding payable as
a component of other liabilities.
Deferred organization costs will be amortized over a 60-month period.
Offering costs were offset against the Stockholders' equity accounts once the
Shares sold exceeded the Minimum Number of Shares and Gross Offering Proceeds
were released from escrow. Offering costs consist principally of printing,
selling and registration costs.
The investment properties are carried at the lower of aggregate cost or net
realizable value. Periodically, the Company will review its real estate
portfolio and if investment properties suffer an impairment in value which is
deemed to be other than temporary, the investment in properties would be
reduced to the net realizable value of the properties. As of December 31,
1995, there have been no such impairments. Depreciation expense is computed
using the straight-line method. Buildings and improvements are based upon
estimated useful lives of 30 years. Tenant improvements will be depreciated
over the related lease period.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned and the cash rent due under
the provisions of the lease agreements is recorded as deferred rent receivable.
The Company believes that the interest rates associated with the mortgage
payable and notes payable to Affiliates approximate the market interest rates
for these types of debt instruments, and as such, the carrying amount of the
mortgage payable and notes payable to Affiliates approximate their fair value.
The carrying amount of cash and cash equivalents, restricted cash, accounts and
rents receivable, accounts payable and other liabilities, accrued offering
costs to Affiliates, accrued offering costs to non-Affiliates, accrued interest
payable to Affiliates, accrued real estate taxes, and distributions payable
approximate fair value because of the relative short maturity of these
instruments.
Certain amounts in the 1994 financial statements have been reclassified to
conform with the 1995 presentation. Such reclassifications did not change the
1994 reported results.
F-9
<PAGE> 220
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" was issued in March 1995 and
is effective for fiscal years beginning after December 15, 1995.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation Plans" was issued in October 1995. The Statement is
effective for fiscal years beginning after December 15, 1995. As allowed by
the new Statement, the Company plans to continue to use Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting
for its stock options.
Neither of these accounting pronouncements are expected to have a material
effect on the financial position or results of operations of the Company.
Inflation
(2) Transactions with Affiliates
Pursuant to the terms of the Offering, the Advisor is required to pay
organizational and offering expenses (excluding sales commissions, the
marketing contribution and the due diligence expense allowance fee) in excess
of 5.5% of the gross proceeds of the Offering (the "Gross Offering Proceeds")
or all organization and offering expenses (including selling commissions) which
together exceed 15% of Gross Offering Proceeds. As of December 31, 1995,
organizational and offering costs did exceed the 5.5% and 15% limitations. The
Company anticipates that these costs will not exceed these limitations upon
completion of the Offering, however, any excess amounts will be reimbursed by
the Advisor.
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
Offering and to the administration of the Company. In addition, an Affiliate
of the Advisor serves as dealer manager of the Offering and is entitled to
receive selling commissions, a marketing contribution and a due diligence
expense allowance fee from the Company in connection with the Offering. Such
commissions incurred were $1,719,406 for the year ended December 31, 1995, of
which $102,084 was unpaid as of December 31, 1995. Other costs to Affiliates
incurred relating to the Offering were $409,858 for the year ended December 31,
1995, of which $120,269 was unpaid as of December 31, 1995. Other costs to
Affiliates incurred relating to the administration of the Company were $7,277,
all of which was unpaid at December 31, 1995.
As of December 31, 1995, the Advisor has contributed $200,000 to the capital of
the Company for which it received 20,000 Shares.
During 1994, the Advisor advanced $193,300 to the Company for costs incurred
with the Offering. These advances were repaid to the Advisor in January 1995
with interest ranging from 7.75% to 9.50%. The principal of $193,300 and
interest totaling $3,162 were paid from Gross Offering Proceeds.
F-10
<PAGE> 221
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to
the extent that the Advisor Asset Management Fee plus Other Operating Expenses
paid during the previous calendar year exceed 2% of the Company's Average
Invested Assets for the calendar year or 25% of the Company's Net Income for
that calendar year; and (ii) to the extent that Stockholders have not received
an annual Distribution equal to or greater than the 8% Current Return. As of
December 31, 1995, the Company has not incurred or paid any of such fees.
An Affiliate of the Advisor is entitled to receive Property Management Fees for
management and leasing services. The Company incurred and paid Property
Management Fees of $46,791 for the year ended December 31, 1995.
(3) Commitments and Contingencies
The Company adopted an Independent Director Stock Option Plan which granted
each Independent Director an option to acquire 3,000 Shares as of October 19,
1994 and an additional 500 Shares on the date of each annual stockholders'
meeting commencing with the annual meeting in 1995 if the Independent Director
is a member of the Board on such date. The options for the initial 3,000
Shares granted shall be exercisable as follows: 1,000 Shares on the date of
grant and 1,000 Shares on each of the first and second anniversaries of the
date of grant. The succeeding options are exercisable on the second
anniversary of the date of grant. No options have been exercised.
In addition to sales commissions, Soliciting Dealers will also receive one
Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting Dealer
during the Offering, subject to state and federal securities laws. The holder
of a Soliciting Dealer Warrant will be entitled to purchase one Share from the
Company at a price of $12 during the period commencing with the first date upon
which the Soliciting Dealer Warrants are issued and ending upon the first to
occur of: (i) October 14, 1999 or (ii) the closing date of a secondary offering
of the Shares by the Company. Notwithstanding the foregoing no Soliciting
Dealer Warrant will be exercisable until one year from the date of issuance.
On behalf of the Company, the Advisor is currently exploring the purchase of
additional Neighborhood Retail Centers and single-user retail properties from
unaffiliated third parties.
F-11
<PAGE> 222
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
(4) Investment Properties
Purchase of Walgreens, Decatur, Illinois
On January 31, 1995, the Company acquired this property from Inland Property
Sales, Inc. ("IPS"), an Affiliate of the Advisor, for the total purchase price
of $1,209,053, including acquisition costs of $482, and the assumption of the
first mortgage loan with a balance of $750,727 at December 31, 1995, which is
secured by the property. This mortgage has an interest rate of 7.655% and
amortizes over a 25-year period and matures May 31, 2004. The Company is
responsible for monthly payments of principal and interest of $5,689.
Purchase of Eagle Crest Shopping Center, Naperville, Illinois
On March 1, 1995, the Company acquired this property from IPS for the purchase
price of $4,816,970, including acquisition costs of $11,059, and the assumption
of the first mortgage loan which was secured by the property. The Company made
monthly principal payments of $500,000 on the first mortgage loan. The balance
of the purchase price as funded through a loan from IPS, totaling $1,212,427,
with interest accruing at 10.5%. On April 20, 1995, the Company paid off the
first mortgage totaling approximately $1,328,000 secured by this property. The
deferred portion of the purchase price, totaling $1,212,427, was paid to IPS in
May 1995 from Gross Offering Proceeds. In addition, accrued interest of
$22,009 was paid from Company operations.
Purchase of Montgomery-Goodyear Shopping Center, Montgomery, Illinois
On September 14, 1995, the Company acquired this property from an unaffiliated
third party for a purchase price of $1,145,992, including closing costs of
$5,992, a portion of which was evidenced by a promissory note payable to Inland
Mortgage Investment Corporation ("IMIC"), an affiliate of the Advisor, in the
gross amount of $600,000. The remainder of the purchase price was funded with
proceeds of the Offering. The promissory note was paid in full in October
1995, with interest at a rate of 10.9% per annum. The principal amount paid
was $600,000 from Gross Offering Proceeds and interest of $4,260 was paid from
Company operations.
Purchase of Hartford Plaza, Naperville, Illinois
On September 14, 1995, the Company acquired this newly constructed property
from an unaffiliated third party for a purchase price of $4,414,015 including
closing costs of $14,015, and deposited $150,000 in an escrow account for
future tenant buildout. A portion of the purchase price was evidenced by a
promissory note payable to IMIC, in the gross amount of $600,000. The
remainder of the purchase price was funded with proceeds of the Offering. The
promissory note was paid in full in October 1995, with interest at a rate of
10.9% per annum. The principal amount paid was $600,000 from Gross Offering
Proceeds and interest of $5,102 was paid from Company operations.
F-12
<PAGE> 223
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
Purchase of Nantucket Square Shopping Center, Schaumburg, Illinois
On September 20, 1995, the Company acquired this property from an unaffiliated
third party for a purchase price of $4,257,918, including closing costs of
$4,913, a portion of which was evidenced by a promissory note payable to IMIC,
in the gross amount of $3,550,000. The remainder of the purchase price was
funded with proceeds of the Offering. In addition, as part of the purchase,
the Company agreed to and has paid $51,135 for tenant improvements for two
tenants expanding their space, which was added to the cost of the property.
The promissory note was paid in full in December 1995, with interest at a rate
of 10.5% per annum. The principal amount paid was $3,550,000 from Gross
Offering Proceeds and interest of $62,011 was paid from Company operations.
Purchase of Antioch Plaza, Antioch, Illinois
On December 28, 1995, the Company acquired Antioch Plaza from an unaffiliated
third party for a purchase price of $1,750,365, including closing costs of
$365, a portion of which was evidenced by a promissory note payable to Inland
Real Estate Investment Corporation, an affiliate of the Advisor ("IREIC"), in
the gross amount of $660,000. As of December 31, 1995, the unpaid balance of
this note was $360,000. The note which bore interest at a rate of 9.5% per
annum was repaid in full on January 9, 1996 and the total amount paid was
$661,163, of which $660,000 was principal paid from Gross Offering Proceeds and
$1,163 was interest paid from Company operations. The remainder of the
purchase price, net of prorations of approximately $1,100,000 was funded with
proceeds of the Offering. Its major tenant is Blockbuster Video which leases
6,500 square feet of gross leasable area and is considered creditworthy by the
Company.
Cost and accumulated depreciation of the above properties are summarized as
follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Single-user retail:
Cost................................ $ 1,209,053
Less accumulated depreciation....... 34,550
------------
1,174,503
------------
Neighborhood Shopping Centers:
Cost................................ 16,303,379
Less accumulated depreciation....... 135,344
------------
16,168,635
------------
Total................................. $ 17,342,538
============
</TABLE>
F-13
<PAGE> 224
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
(5) Operating Leases
Master Lease Agreements
As part of the Montgomery-Goodyear, Hartford/Naperville Plaza, Nantucket Square
and Antioch Plaza purchases, the Company will receive rent under master lease
agreements on the spaces currently vacant for periods ranging from one year to
eighteen months or until the spaces are leased. Generally Accepted Accounting
Principles require that as these payments are received, they be recorded as a
reduction in the purchase price of the properties rather than as rental income.
Hartford/Naperville Plaza is fully leased and tenant improvements are
substantially completed. Master lease payments amounted to $98,804 and were
received through December 31, 1995, at which time the majority of tenants began
paying rent.
The seller of Nantucket Square entered into a master lease agreement with the
Company for 4,500 square feet at $15 per square foot for 12 months or until the
space is leased. In addition, the Company received a credit at closing of
approximately $48,000 for rent abatement agreements under current leases,
$28,893 of which is included as a component of master lease payments recorded
at December 31, 1995 and the balance is recorded as prepaid rent.
At December 31, 1995, Antioch Plaza was 33% leased and tenant improvements are
being completed. Certain tenants have begun paying rent. The master lease
payments amounted to $1,717 through December 31, 1995. The master lease
agreement on this property expires June 1997.
Minimum lease payments to be received, excluding master lease payments, in the
future from the operating leases are as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
1996.................................. $ 2,024,010
1997.................................. 2,002,852
1998.................................. 1,851,929
1999.................................. 1,692,580
2000.................................. 1,546,352
Thereafter............................ 10,837,583
-----------
Total................................. $19,955,306
===========
</TABLE>
Remaining lease terms range from one year to thirty-three years. Pursuant to
the lease agreements, tenants of the properties are required to reimburse the
Company for some or all of their pro rata share of the real estate taxes and
operating expenses of the property. Such amounts are included in additional
rent income.
F-14
<PAGE> 225
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
Certain tenant leases contain provisions providing for stepped rent increases.
Generally Accepted Accounting Principles require that rental income be recorded
for the period of occupancy using the effective monthly rent, which is the
average monthly rent for the entire period of occupancy during the term of the
lease. The accompanying financial statements include an increase of $12,413 of
rental income for the period of occupancy for which stepped rent increases
apply and $12,413 in related accounts receivable as of December 31, 1995.
These amounts will be collected over the terms of the related leases as
scheduled rent payments are made.
(6) Mortgage Payable
As of December 31, 1995, the required principal payments on the Company's
mortgage payable over the next five years are as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
1996.................................. $ 11,185
1997.................................. 12,072
1998.................................. 13,029
1999.................................. 14,062
2000.................................. 15,177
Thereafter............................ 685,202
</TABLE>
(7) Subsequent Events
As of March 28, 1996, subscriptions for a total of 2,869,084 Shares were
received, bringing total Gross Offering Proceeds to $28,679,020.
The Company, through the Advisor, is currently completing its due diligence on
Regency Point and anticipates purchasing the property in March 1996 from a
third party unaffiliated with the Company for a purchase price of $5,700,000.
As part of the acquisition, it is anticipated the Company will assume the
existing first mortgage loan of approximately $4,473,200, along with a related
interest rate swap agreement. The remainder of the purchase price of
approximately $1,226,800 will be funded, after prorations, with proceeds of the
Offering.
The first mortgage loan has a floating interest rate of 180 basis points over
the 30-day LIBOR rate, which rate is adjusted monthly and amortizes over 25
years. The interest rate swap agreement, in conjunction with the first
mortgage, provides for Bank One, Chicago, to receive from or pay to the Company
the difference between 6.11% and the 30-day LIBOR rate, so that the first
mortgage loan has an effective fixed rate of 7.91% per annum. The first
mortgage loan matures in August 2000. The interest rate swap agreement expires
concurrently therewith.
F-15
<PAGE> 226
INLAND MONTHLY INCOME FUND III, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
In January 1996, the Company paid a distribution of $129,532 to the
Stockholders of which approximately $7,460 was a return of capital.
In January 1996, the balance of $360,000 on the note payable to Affiliates of
relating to the purchase of Antioch Plaza, was paid in full along with interest
of $1,163.
Regency Point, built in 1993 and 1994, consists of a one-story, multi-tenant
brick and block strip center aggregating 54,875 of rentable square feet. Its
anchor tenants include nationally recognized tenants such as Walgreens with
13,000 square feet, Ace Hardware with 15,505 square feet and the United States
Postal Service with 2,503 square feet and are considered creditworthy by the
Company.
The Company, through the Advisor, is currently completing its due diligence on
Mundelein Plaza, located in Mundelein, Illinois and anticipates purchasing the
property in March 1996 from a third party unaffiliated with the Company for a
purchase price of $5,650,000, on an all cash basis. Mundelein Plaza, built in
1990, consists of two one-story, multi-tenant brick and block strip centers
aggregating approximately 68,000 rentable square feet. Mundelein Plaza is
currently 100% leased and is anchored by Sears Home Life with 47,000 square
feet and is considered creditworthy by the Company.
The Directors, including the Independent Directors approved the acquisitions of
Regency Point and Mundelein Plaza on February 8, 1996 and March 28, 1996,
respectively, as being fair and reasonable to the Company, subject to the
satisfactory completion of the due diligence process.
F-16
<PAGE> 227
Walgreens/Decatur Property
Historical Summary of Gross Income and Direct Operating Expenses
Six Month Period Ended December 31, 1994
Unaudited
<TABLE>
<S> <C>
Gross Income:
Base Rental Income............................... $ 63,910
Real Estate Tax Recovery......................... 12,080
---------
75,990
---------
Direct Operating Expenses:
Real Estate Taxes................................ 12,080
Management Fees.................................. 1,917
Operating Expenses............................... 295
Insurance Expense................................ 810
---------
15,102
---------
Excess of Gross Income over
Direct Operating Expenses........................ $ 60,888
=========
</TABLE>
F-17
<PAGE> 228
Independent Auditor's Report
The Board of Directors
Inland Property Sales, Inc.:
We have audited the accompanying Historical Summaries of Gross Income and
Direct Operating Expenses (Historical Summaries) of the Walgreens/Decatur
Property for each of the years in the three-year period ended June 30, 1994.
These Historical Summaries are the responsibility of the management of the
Company. Our responsibility is to express an opinion on the Historical
Summaries based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Historical Summaries are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical Summaries. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the Historical Summaries. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and for inclusion in the Registration Statement of Form S-11 of
Inland Monthly Income Fund III, Inc. as described in Note 2. The presentation
is not intended to be a complete presentation of the Walgreens/Decatur Property
revenues and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in
all material respects, the gross income and direct operating expenses described
in Note 2 for each of the years in the three-year period ended June 30, 1994 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
July 29, 1994
F-18
<PAGE> 229
Walgreens/Decatur Property
Historical Summaries of Gross Income and Direct Operating Expense
Years ended June 30, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gross Income:
Base rental income.................. $ 127,820 127,820 127,820
Real estate tax recovery............ 24,733 23,732 23,479
---------- ---------- ----------
152,533 151,552 151,299
---------- ---------- ----------
Direct Operating Expenses:
Real estate taxes................... 24,733 23,732 23,479
Management fees..................... 3,811 3,820 3,809
Operating expenses.................. 933 338 496
Insurance expense................... 1,537 1,636 1,577
---------- ---------- ----------
31,014 29,526 29,361
---------- ---------- ----------
Excess of gross income over direct
operating expenses $ 121,539 122,026 121,938
========== ========== ==========
</TABLE>
See accompanying notes to Historical Summaries
F-19
<PAGE> 230
Walgreens/Decatur Property
Notes to Historical Summaries of Gross Income and Direct Operating Expenses
Years ended June 30, 1994, 1993 and 1992
1. Business
The Walgreens/Decatur Property (the Property) is a free-standing, single-
tenant retail property located in Decatur, Illinois. The Property consists
of 13,500 square feet of gross leasable area, and is leased to the
Walgreens Company (Walgreens). The Property is owned by Inland Property
Sales, Inc. (IPS).
2. Basis of Presentation
The Historical Summaries have been prepared for the purpose of complying
with Rule 3-14 of the Securities and Exchange Commission Regulations S-X
and for inclusion in the Registration Statement on Form S-11 of Inland
Monthly Income Fund III, Inc. and are not intended to be a complete
presentation of the Walgreens/Decatur Property revenues and expenses. The
Historical Summaries have been prepared on the accrual basis of accounting.
3. Gross Income
Walgreens leases the property under an operating lease agreement whereby
Walgreens is responsible for all operating expenses of the property except
for expenses related to the exterior and structural portions of the
building, roof and entryways. In addition, Walgreens reimburses the
Property for real estate taxes and is responsible for insurance on the
Property. The lease provides for payment of contingent rent based on a
percentage applied to the amount by which Walgreens' sales, as defined,
exceed predetermined levels. No such contingent rent was due for the years
ended June 30, 1994, 1993 and 1992. The lease expires on April 30, 2028,
and Walgreens has the option to exercise up to five, five-year extensions.
Minimum rents to be received from Walgreens under the operating lease in
effect at June 30, 1994 are approximately as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $ 128,000
1996 128,000
1997 128,000
1998 128,000
1999 128,000
Thereafter 3,691,000
----------
$4,331,000
==========
</TABLE>
F-20
<PAGE> 231
Walgreens/Decatur Property
Notes to Historical Summaries of Gross Income and Direct Operating Expenses
Years ended June 30, 1994, 1993 and 1992
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of the Property. Costs such
as mortgage interest, depreciation, amortization, and professional fees are
excluded from the Historical Summaries.
The Property was managed by Mid-America Corp., an affiliate of Inland
Monthly Income Fund III, Inc., under an agreement in principle through
December 31, 1993, for a fee of 2.5% of gross revenues, as defined.
Effective January 1, 1994, Mid-America Corp. assigned the agreement to
Inland Commercial Property Management, Inc., also an affiliate of Inland
Monthly Income Fund III, Inc.
5. Commitments and Contingencies
It is anticipated that Inland Monthly Income Fund III, Inc. will purchase
the Property from IPS at a price expected to be no greater than its
historical cost. In no event will the purchase price exceed the current
appraised value of the Property. There can be no assurance that the
purchase price will not exceed that which would be paid by an unaffiliated
buyer.
F-21
<PAGE> 232
Eagle Crest Shopping Center
Historical Summary of Gross Income and Direct Operating Expenses
Six Month Period Ended December 31, 1994
Unaudited
<TABLE>
<S> <C>
Gross Income:
Base Rental Income............................... $ 283,338
Real Estate Tax Recovery......................... 50,870
Other tenant income.............................. 1,785
-----------
335,993
-----------
Direct Operating Expenses:
Real Estate Taxes................................ 37,343
Management Fees.................................. 15,792
Operating Expenses............................... 26,024
Utilities........................................ 6,717
Insurance Expense................................ 2,109
-----------
87,985
-----------
Excess of Gross Income over
Direct Operating Expenses........................ $ 248,008
===========
</TABLE>
F-22
<PAGE> 233
Independent Auditor's Report
The Board of Directors
Inland Property Sales, Inc.
We have audited the accompanying Historical Summaries of Gross Income and
Direct Operating Expenses (Historical Summaries) of the Eaglecrest/Naperville
Property for each of the years in the three-year period ended June 30, 1994.
These Historical Summaries are the responsibility of the management of the
Company. Our responsibility is to express an opinion on the Historical
Summaries based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Historical Summaries are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical Summaries. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the Historical Summaries. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and for inclusion in the Registration Statement on Form S-11 of
Inland Monthly Income Fund III, Inc. as described in Note 2. The presentation
is not intended to be a complete presentation of the Eaglecrest/Naperville
Property revenues and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in
all material respects, the gross income and direct operating expenses described
in Note 2 for each of the years in the three-year period ended June 30, 1994 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
July 29, 1994
F-23
<PAGE> 234
Eagle Crest Shopping Center
Historical Summaries of Gross Income and Direct Operating Expenses
Years ended June 30, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gross income:
Base rental income.................. $ 442,077 367,367 373,609
Operating expense and real estate
tax recoveries.................... 112,031 106,865 100,683
Other tenant income................. 15,881 1,361 839
---------- ---------- ----------
569,989 475,593 475,131
---------- ---------- ----------
Direct operating expenses:
Real estate taxes................... 72,908 71,119 71,640
Management fees..................... 25,226 21,769 21,976
Operating expenses.................. 90,263 79,843 50,532
Utilities........................... 15,586 15,235 13,554
Insurance expense................... 3,220 3,283 6,944
---------- ---------- ----------
207,203 191,249 164,646
---------- ---------- ----------
Excess of gross income over direct
operating expenses.................. $ 362,786 284,344 310,485
========== ========== ==========
</TABLE>
See accompanying notes to Historical Summaries
F-24
<PAGE> 235
Eagle Crest Shopping Center
Notes to Historical Summaries of Gross Income and Direct Operating Expenses
Years ended June 30, 1994, 1993 and 1992
1. Business
Eagle Crest Shopping Center (Eagle Crest) is a shopping center located in
Naperville, Illinois. It consists of approximately 68,000 square feet of
gross leasable area and was 100% occupied at June 30, 1994. Its major
tenant is Eagle Foods, Inc. (Eagle) which leases 46,096 square feet of the
shopping center. Eagle Crest is owned by Inland Property Sales, Inc.
(IPS).
2. Basis of Presentation
The Historical Summaries have been prepared for the purpose of complying
with Rule 3-14 of the Securities and Exchange Commission Regulation S-X and
for inclusion in the Registration Statement on Form S-11 of Inland Monthly
Income Fund III, Inc. and are not intended to be a complete presentation of
Eagle Crest's revenues and expenses. The Historical Summaries have been
prepared on the accrual basis of accounting.
3. Gross Income
Eagle Crest leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. Certain of the
leases include provisions under which Eagle Crest is reimbursed for certain
common area, real estate tax, and insurance costs. In addition, certain
leases provides for payment of contingent rentals based on a percentage
applied to the amount by which the tenant's sales, as defined, exceed
predetermined levels. No such contingent rent was due for the years ended
June 30, 1994, 1993 and 1992. Certain leases contain renewal options for
various periods at various rental rates.
Base rentals are reported as income over the lease term as they become
receivable under the provision of the leases. However, when rental vary
from a straight-line basis due to short-term rent abatements or escalating
rents during the lease term, the income is recognized based on effective
rental rates. Related adjustments increased base rental income by $123,394
and $67,079 for the years ended June 30, 1994 and 1992, respectively, and
decreased base rental income by $5,100 for the year ended June 30, 1993.
Minimum rents to be received from tenants under operating leases in effect
at June 30, 1994 are approximately as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $ 582,000
1996 568,000
1997 560,000
1998 476,000
1999 374,000
Thereafter 4,518,000
-----------
$ 7,078,000
===========
</TABLE>
F-25
<PAGE> 236
Eagle Crest Shopping Center
Notes to Historical Summaries of Gross Income and Direct Operating Expenses
Years ended June 30, 1994, 1993 and 1992
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Eagle Crest. Costs such as
mortgage interest, depreciation, amortization, and professional fees are
excluded from the Historical Summaries.
Eagle Crest was managed by Mid-America Corp., an affiliate of Inland
Monthly Income Fund III, Inc., through December 31, 1993 for a fee of 4.5%
of gross revenues,, as defined. The management agreement, which expires on
March 31, 1995, is renewable annually. Effective January 1, 1994, Mid-
America Corp. assigned the management contract to Inland Commercial
Property Management, Inc., also an affiliate of Inland Monthly Income Fund
III, Inc.
5. Commitments and Contingencies
It is anticipated that Inland Monthly Income Fund III, Inc. will purchase
Eagle Crest from IPS at a price expected to be no greater than its
historical cost. In no event will the purchase price exceed the current
appraised value of the Property. There can be no assurance that the
purchase price will not exceed that which would be paid by an unaffiliated
buyer.
F-26
<PAGE> 237
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE GENERAL PARTNERS OF
SCHAUMBEACH ASSOCIATES, INC.
We have audited the accompanying Statement of Gross Income and Direct Operating
Expenses of the NANTUCKET SQUARE SHOPPING CENTER for the year ended December
31, 1994. This Statement is the responsibility of the management of the
Company. Our responsibility is to express an opinion on this Statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Monthly Income
Fund III, Inc. as described in Note 2. The presentation is not intended to be
a complete presentation of the Nantucket Square Shopping Center revenues and
expenses.
In our opinion, the Statement referred to above presents fairly, in all
material respects, the gross income and direct operating expenses of Nantucket
Square Shopping Center as described in Note 2 for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
September 7, 1995
F-27
<PAGE> 238
NANTUCKET SQUARE SHOPPING CENTER
STATEMENT OF GROSS INCOME AND DIRECT OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Gross Income:
Base Rental Income...................................... $ 480,770
Operating Expense and Real Estate Tax Recoveries........ 193,753
Other Tenant Income..................................... 4,533
----------
Total Gross Income................................... $ 679,056
----------
Direct Operating Expenses:
Real Estate Taxes....................................... 156,122
Management Fees......................................... 35,002
Operating Expenses...................................... 74,954
Utilities............................................... 10,355
Insurance............................................... 14,254
----------
Total Direct Operating Expenses...................... $ 290,687
----------
Excess of Gross Income over Direct Operating Expenses..... $ 388,369
==========
</TABLE>
F-28
<PAGE> 239
Nantucket Square Shopping Center
Notes to the Statement of Gross Income and Direct Operating Expenses
December 31, 1994
1. Business
Nantucket Square Shopping Center (Nantucket Square) is located in
Schaumburg, Illinois. It consists of approximately 57,263 square feet of
gross leasable area and was 82.9 percent occupied at December 31, 1994.
Nantucket Square is owned by Schaumbeach Associates, LTD. Schaumbeach
Associates, LTD. has signed a sale and purchase agreement for the sale of
Nantucket Square to Inland Monthly Income Fund III, Inc.
2. Basis of Presentation
The Statement has been prepared for the purpose of complying with Rule 3-14
of the Securities and Exchange Commission Regulation S-X and for inclusion
in the Registration Statement on Form S-11 of Inland Monthly Income Fund
III, Inc. and is not intended to be a complete presentation of Nantucket
Square's revenues and expenses. The statement has been prepared on the
accrual basis of accounting.
3. Gross Income
Nantucket Square leases retail space under various lease agreements with
its tenants. All leases are accounted for as operating leases. Certain of
the leases include provisions under which Nantucket Square is reimbursed
for certain common area, real estate and insurance costs. Operating
Expense and Real Estate Tax Recoveries reflected on the Statement of Gross
Income and Direct Operating Expenses includes amounts due for 1994 expenses
for which the tenants have not yet been billed. In addition, certain
leases provide for payment of contingent rentals based on a percentage
applied to the amount by which the tenant's sales, as defined, exceeds
predetermined levels. Contingent rent for the year ended December 31, 1994
was not material to base rental income. Certain leases contain renewal
options for various periods at various rental rates.
Base rentals are reported as income over the lease term as they become
receivable under the provision of the leases. However, rentals from
tenants with rent abatements or escalating rents during the lease term
should be recognized as revenue on a straight-line basis over the
respective lease term. An adjustment to recognize rents on a straight-line
basis increased base rental income by $22,337 for the year ended December
31, 1994.
F-29
<PAGE> 240
Nantucket Square Shopping Center
Notes to the Statement of Gross Income and Direct Operating Expenses
December 31, 1994
3. Gross Income (continued)
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1994, are approximately as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $ 495,242
1996 487,846
1997 493,751
1998 405,826
1999 383,787
Thereafter 909,056
-----------
$ 3,175,508
===========
</TABLE>
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Nantucket Square. Costs
such as mortgage interest, depreciation, amortization and professional fees
are excluded from the statement.
Nantucket Square has not received its final real estate tax bill for 1994.
Real Estate tax expense is estimated upon bills for 1993. The difference
between this estimate and the final bill is not expected to have a material
impact on the Statement of Gross Income and Direct Operating Expenses.
Subsequent to the sale of Nantucket Square (see Note 1), property value may
be reassessed. Such reassessment may cause future real estate tax expense
to be incomparable to that reflected in 1994.
Nantucket Square is managed by Mid-America Asset Management Company.
Subsequent to the sale of Nantucket Square (see Note 1), the current
management agreement ceases. Any new management agreement may cause future
management fees to be incomparable to that reflected in 1994.
F-30
<PAGE> 241
The following unaudited Statement of Gross Income and Direct Operating Expenses
for Nantucket Square is for the seven months ended July 31, 1995 and is
included as additional information subsequent to the audited financial
statements for the period ended December 31, 1994.
Nantucket Square Shopping Center
Statement of Gross Income and Direct Operating Expenses
For the Seven Month Period Ended July 31, 1995
(unaudited)
<TABLE>
<S> <C>
Gross Income:
Base Rental Income................................ $ 274,572
Operating Expense and
Real Estate Tax Recoveries...................... 121,123
Other Tenant Income............................... 4,878
---------
Total Gross Income.............................. 400,573
---------
Direct Operating Expenses:
Real Estate Taxes................................. 100,061
Management Fees................................... 20,417
Operating Expenses................................ 34,456
Utilities......................................... 4,927
Insurance......................................... 11,910
---------
Total Direct Operating Expenses................. 171,771
---------
Excess of Gross Income over
Direct Operating Expenses......................... $ 228,802
=========
</TABLE>
F-31
<PAGE> 242
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NATIONAL SHOPPING PLAZAS, INC.
We have audited the accompanying Statement of Gross Income and Direct Operating
Expenses of the Mundelein Plaza for the year ended December 31, 1995. This
Statement is the responsibility of the management of the Company. Our
responsibility is to express an opinion on this Statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Monthly Income
Fund III, Inc. as described in Note 2. The presentation is not intended to be
a complete presentation of the Mundelein Plaza revenues and expenses.
In our opinion, the Statement referred to above presents fairly, in all
material respects, the gross income and direct operating expenses of Mundelein
Plaza as described in Note 2 for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
BRUCE GORLICK, C.P.A., LTD.
A PROFESSIONAL CORPORATION
BUFFALO GROVE, ILLINOIS
MARCH 14, 1996
F-32
<PAGE> 243
Mundelein Plaza
Statement of Gross Income and Direct Operating Expenses
For the year ended December 31, 1995
<TABLE>
<S> <C>
Gross income:
Base rental income.............................. $ 639,124
Operating expense and real estate
tax recoveries................................ 66,518
Other tenant income............................. 151
---------
Total Gross Income.............................. 705,793
---------
Direct operating expenses:
Real estate taxes............................... 84,768
Management fees................................. 26,300
Operating expenses.............................. 15,277
Utilities....................................... 4,966
Insurance expense............................... 10,171
---------
Total Direct Operating Expenses................. 141,482
---------
Excess of Gross over Direct Operating............. $ 564,311
=========
</TABLE>
F-33
<PAGE> 244
Mundelein Plaza
Notes to the Statement of Income and Direct Operating Expenses
December 31, 1995
1. Business
Mundelein Plaza is located in Mundelein, Illinois. It consists of
approximately 67,896 square feet of gross leasable area and was 100%
occupied at December 31, 1995. Mundelein Plaza is owned by Amalgamated
Bank of Chicago, Trust No. 5457. Amalgamated Bank of Chicago, Trust No.
5457 has signed a sale and purchase agreement for the sale of Mundelein
Plaza to Inland Monthly Income Fund III, Inc.
2. Basis of Presentation
The Statement has been prepared for the purpose of complying with Rule 3-14
of the Securities and Exchange Commission Regulation S-X and for inclusion
in the Registration Statement on Form S-11 of Inland Monthly Income Fund
III, Inc. and is not intended to be a complete presentation of revenues and
expenses. The Statement has been prepared on the accrual basis of
accounting.
3. Gross Income
National Shopping Plazas, Inc. leases retail space under various lease
agreements with its tenants. All leases are accounted for as operating
leases. Certain of the leases include provisions under which Mundelein
Plaza is reimbursed for certain common area, real estate, and insurance
costs. Operating Expense and Real Estate Tax Recoveries reflected on the
Statement of Gross Income and Direct Operating Expenses includes amounts
due for 1995 expenses for which the tenants have not yet been billed.
Certain leases have rent due for the year ended December 31, 1995. Certain
leases contain renewal options for various periods at various rental rates.
Base rentals are reported as income over the lease term as they become
receivable under the provisions of the leases. However, when rentals vary
from a straight-line basis due to short-term rent abatements or escalating
rents during the lease term, the income is recognized based on effective
rental rates. The adjusted increase in base rental income is $1,944 for
the year ended December 31, 1995, which we consider immaterial.
Minimum rents to be received from tenants under operating leases in effect
at December 31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 $ 684,649
1997 570,844
1998 552,623
1999 565,086
2000 554,840
Thereafter 937,770
-----------
$ 3,865,812
===========
</TABLE>
F-34
<PAGE> 245
Mundelein Plaza
Notes to the Statement of Gross Income and Direct Operating Expenses
December 31, 1995
4. Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Mundelein Plaza. Costs
such as mortgage interest, depreciation, amortization, and professional
fees are excluded from the Statement.
Mundelein Plaza has not received its final real estate bill for 1995. The
difference between this estimate and the final bill is not expected to
have a material impact on the Statement of Gross Income and Direct
Operating Expenses.
Mundelein Plaza is managed by National Shopping Plazas, Inc. For the year
ended December 31, 1995, Mundelein Plaza paid approximately $26,000 for
management fees, as per the management agreement.
F-35
<PAGE> 246
[KPMG PEAT MARWICK LLP LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Inland Monthly Income Fund III, Inc.:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of the Regency Point Shopping Center
for the year ended December 31, 1995. This Historical Summary is the
responsibility of the management of the Company. Our responsibility is to
express an opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Historical Summary is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical Summary. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the Historical Summary. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and
for inclusion in the Registration Statement on Form S-11 of Inland Monthly
Income Fund III, Inc., as described in note 2. It is not intended to be a
complete presentation of the Regency Point Shopping Center's revenues and
expenses.
In our opinion, the Historical Summary referred to above presents fairly, in
all material respects, the gross income and direct operating expenses described
in note 2 for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
March 8, 1996
F-36
<PAGE> 247
REGENCY POINT SHOPPING CENTER
Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1995
<TABLE>
<S> <C>
============================================================================
Gross income:
Base rental income $ 541,085
Operating expense and real estate tax recoveries 63,294
- ----------------------------------------------------------------------------
Total gross income $ 604,379
============================================================================
Direct operating expenses:
Real estate taxes 16,867
Management fees 23,660
Operating expenses 17,645
Utilities 4,013
Insurance 9,430
- ----------------------------------------------------------------------------
Total direct Operating expenses $ 71,615
============================================================================
Excess of gross income over direct operating expenses $ 532,764
============================================================================
</TABLE>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-37
<PAGE> 248
REGENCY POINT SHOPPING CENTER
Notes to Historical Summary of Gross Income and Direct Operating Expenses
Year ended December 31, 1995
- ------------------------------------------------------------------------------
(1) BUSINESS
Regency Point Shopping Center (Regency Point) is located in Lockport,
Illinois. It consists of approximately 53,480 square feet of gross
leasable area and was 93 percent occupied at December 31, 1995. Regency
Point is owned by Metropolitan Real Estate Co. (Metropolitan).
Metropolitan has signed a sale and purchase agreement for the sale of
Regency Point to Inland Monthly Income Fund III, Inc., an unaffiliated
third party.
(2) BASIS OF PRESENTATION
The Historical Summary has been prepared for the purpose of complying
with Rule 3-14 of the Securities and Exchange Commission Regulation S-X
and for inclusion in the Registration Statement on Form S-11 of Inland
Monthly Income Fund III, Inc. and is not intended to be a complete
presentation of Regency Point's revenues and expenses. The Historical
Summary has been prepared on the accrual basis of accounting.
(3) GROSS INCOME
Regency Point leases retail space under various lease agreements with
its tenants. All leases are accounted for as operating leases. Certain
of the leases include provisions under which Regency Point is reimbursed
for certain common area, real estate, and insurance costs. Operating
expense and real estate tax recoveries reflected on the Historical
Summary include amounts due for 1995 expenses for which the tenants have
not yet been billed. In addition, certain leases provide for payment of
contingent rentals based on a percentage applied to the amount by which
the tenant's sales, as defined, exceed predetermined levels. No such
contingent rent was due for the year ended December 31, 1995. Certain
leases contain renewal options for various periods at various rental
rates.
Base rentals are reported as income over the lease term as they become
receivable under the provisions of the leases. However, when rentals
vary from a straight-line basis due to short-term rent abatements or
escalating rents during the lease term, the income is recognized based on
effective rental rates. Related adjustments increased base rental income
by $15,289 for the year ended December 31, 1995.
F-38
<PAGE> 249
REGENCY POINT SHOPPING CENTER
Notes to Historical Summary of Gross Income and Direct Operating Expenses
==============================================================================
Minimum rents to be received from tenants under operating leases in
effect at December 31, 1995, are approximately as follows:
==============================================================================
<TABLE>
<CAPTION>
==============================================================================
Year Amount
- ------------------------------------------------------------------------------
<S> <C>
1996 $ 584,000
1997 568,000
1998 552,000
1999 399,000
2000 352,000
Thereafter $3,203,000
- ------------------------------------------------------------------------------
$5,658,000
==============================================================================
</TABLE>
(4) DIRECT OPERATING EXPENSES
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of Regency Point. Costs
such as mortgage interest, depreciation, amortization and professional
fees are excluded from the Historical Summary.
Regency Point has not received its final real estate tax bill for 1995.
Real estate tax expense is estimated based upon bills for 1994. The
difference between this estimate and the final bill is not expected to
have a material impact on the Historical Summary. Regency Point is
located in a tax enterprise zone and, as such, the assessed value of the
property is anticipated to remain constant through 2003.
Regency Point is managed by Philip's Management, Inc., for a fee of 4.5%
of gross revenues, as defined. Subsequent to the sale of Regency Point
(note 1), the current management agreement ceases. Any new management
agreement may cause future management fees to differ from the amounts
reflected in 1995.
F-39
<PAGE> 250
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
December 31, 1995
(unaudited)
The following unaudited Pro Forma Balance Sheet of the Company is presented to
effect the acquisitions of Mundelein Plaza and Regency Point as of December 31,
1995. This unaudited Pro Forma Balance Sheet should be read in conjunction
with the December 31, 1995 Financial Statements and the notes thereto as filed
on Form 10-K.
This unaudited Pro Forma Balance Sheet is not necessarily indicative of what
the actual financial position would have been at December 31, 1995, nor does it
purport to represent the future financial position of the Company. Unless
otherwise defined, capitalized terms used herein shall have the same meaning as
in the Prospectus.
F-40
<PAGE> 251
Inland Monthly Income Fund III, Inc.
Pro Forma Balance Sheet
December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
-------------------------
December 31,
December 31, Acquisition Acquisition 1995
1995 Mundelein Regency Pro Forma
Historical(A) Plaza (B) Point (B) Balance Sheet
------------- --------- --------- --------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents..... $ 738,931 - - 738,931
Restricted cash............... 150,000 - - 150,000
Accounts and rents
receivable.................. 333,823 84,375 16,867 435,065
Other assets.................. 185,585 - - 185,585
Net investment in
properties.................. 17,342,538 5,658,230 5,700,000 28,700,768
------------ --------- --------- ----------
Total assets.................. $ 18,750,877 5,742,605 5,716,867 30,210,349
============ ========= ========= ==========
Liabilities and Stockholders' Equity
Accounts payable and accrued
expenses.................... $ 288,037 7,500 - 288,037
Accrued real estate taxes..... 374,180 89,010 16,687 480,057
Distributions payable (C)..... 129,532 - - 129,532
Security deposits............. 54,483 15,000 28,621 98,104
Mortgage payable.............. 750,727 - 4,473,200 5,223,927
Notes payable to Affiliate.... 360,000 - - 360,000
Other liabilities............. 178,852 - - 178,852
------------ --------- --------- ----------
Total liabilities............. 2,135,811 111,510 4,518,688 6,766,009
------------ --------- --------- ----------
Common Stock(D)............... 19,996 6,548 1,393 27,937
Additional paid in capital
(net of Offering costs)(D).. 16,835,183 5,624,547 1,196,786 23,656,516
Accumulated distributions in
excess of net income........ (240,113) - - (240,113)
------------ --------- --------- ----------
Total Stockholders' equity.... 16,615,066 5,631,095 1,198,179 23,444,340
------------ --------- --------- ----------
Total liabilities and
Stockholders' equity........ $ 18,750,877 5,742,605 5,716,867 30,210,349
============ ========= ========= ==========
</TABLE>
See accompanying notes to pro forma balance sheet.
F-41
<PAGE> 252
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
December 31, 1995
(unaudited)
(A) The December 31, 1995 Historical column represents the historical balance
sheet as presented in the December 31, 1995 10-K as filed with the SEC and
includes the following properties acquired by the Company as of December
31, 1995.
Walgreens, Decatur, Illinois
On January 31, 1995, the Company acquired this property from Inland
Property Sales, Inc. ("IPS"), an Affiliate of the Advisor, for the total
purchase price of $1,209,053, including acquisition costs of $482, and the
assumption of the first mortgage loan with a balance of $750,727 at
December 31, 1995, which is secured by the property. This mortgage has an
interest rate of 7.655% and amortizes over a 25-year period. The Company
is responsible for monthly payments of principal and interest of $5,689.
Eagle Crest Shopping Center, Naperville, Illinois
On March 1, 1995, the Company acquired this property from IPS for the
purchase price of $4,816,970, including acquisition costs of $11,059, and
the assumption of the first mortgage loan of approximately $3,534,000,
which was secured by the property. The balance of the purchase price was
funded through a loan from IPS, totaling $1,212,427, with interest accruing
at 10.5%. On April 20, 1995, the Company paid off the first mortgage
secured by this property. The deferred portion of the purchase price,
totaling $1,212,427, was paid to IPS in May 1995 from Gross Offering
Proceeds. In addition, accrued interest of $22,009 was paid from Company
operations.
Montgomery-Goodyear Shopping Center, Montgomery, Illinois
On September 14, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $1,145,992, including
closing costs of $5,992, a portion of which was evidenced by a promissory
note payable to Inland Mortgage Investment Corporation ("IMIC"), an
Affiliate of the Advisor, in the gross amount of $600,000. The remainder
of the purchase price net of prorations, of approximately $535,000 was
funded with proceeds of the Offering. The promissory note was paid in full
in October 1995, with interest at a rate of 10.9% per annum. The total
amount paid was $604,260, of which $600,000 was principal paid from Gross
Offering Proceeds and $4,260 was interest paid from Company operations.
F-42
<PAGE> 253
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
December 31, 1995
(unaudited)
Hartford Plaza, Naperville, Illinois
On September 14, 1995, the Company acquired this newly constructed property
from an unaffiliated third party for a purchase price of $4,414,015
including closing costs of $14,015, and deposited $150,000 in an escrow
account for leasehold improvements to the Blockbuster, Inc. space. A
portion of the purchase price was evidenced by a promissory note payable to
IMIC, in the gross amount of $600,000. The remainder of the purchase price
was funded with proceeds of the Offering. The promissory note was paid in
full in October 1995 with interest at a rate of 10.9% per annum. The total
amount paid was $605,102, of which $600,000 was principal paid from Gross
Offering Proceeds and $5,102 was interest paid from Company operations.
Nantucket Square Shopping Center, Schaumburg, Illinois
On September 20, 1995, the Company acquired this property from an
unaffiliated third party for a purchase price of $4,257,918, including
closing costs of $4,913, a portion of which was evidenced by a promissory
note payable to IMIC, in the gross amount of $3,550,000. The remainder of
the purchase price was funded with proceeds of the Offering. In addition,
as part of the purchase, the Company agreed to pay $51,135 for tenant
improvements for two tenants expanding their space, which was added to the
cost of the property. The promissory note was paid in full in December
1995 with interest at a rate of 10.5% per annum. The principal amount paid
was $3,550,000 from Gross Offering Proceeds and interest of $62,011 was
paid from Company operations.
Antioch Plaza, Antioch, Illinois
On December 28, 1995, the Company acquired Antioch Plaza from an
unaffiliated third party for a purchase price of $1,750,365, including
closing costs of $365, a portion of which was evidenced by a promissory
note payable to Inland Real Estate Investment Corporation, an affiliate of
the Advisor ("IREIC"), in the gross amount of $660,000. As of December 31,
1995, the unpaid balance of this note was $360,000. The note which bore
interest at a rate of 9.5% per annum was repaid in full on January 9, 1996
and the total amount paid was $661,163, of which $660,000 was principal
paid from Gross Offering Proceeds and $1,163 was interest paid from Company
operations. The remainder of the purchase price, net of prorations of
approximately $1,100,000 was funded with proceeds of the Offering.
F-43
<PAGE> 254
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Balance Sheet
(continued)
December 31, 1995
(unaudited)
(B) Acquisition of Mundelein Plaza, Mundelein, Illinois
This pro forma adjustment reflects the purchase of Mundelein Plaza as if
the Company had purchased the property as of December 31, 1995, at the
terms described below.
On March 29, 1996, the Company acquired the Mundelein Plaza property
located in Mundelein, Illinois ("Mundelein Plaza") from an unaffiliated
third party for a purchase price of $5,658,230, including closing costs of
$8,230, on an all cash basis, funded from offering proceeds.
Acquisition of Regency Point, Lockport, Illinois
This pro forma adjustment reflects the purchase of Regency point as if the
Company had purchased the property, assuming the existing first mortgage
with a balance of $4,473,200, as of January 1, 1995. The balance of the
purchase price after prorations was funded with Offering Proceeds.
On April 5, 1996, the Company completed the acquisition of the Regency
Point Shopping Center located in Lockport, Illinois ("Regency Point"), from
an unaffiliated third party for a purchase price of $5,700,000. As part of
the acquisition, the Company will assume the existing first mortgage loan
of $4,473,200 along with a related interest rate swap agreement.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly. The interest
rate swap agreement, in conjunction with the first mortgage, provides for
Bank One, Chicago, to receive from or pay to the Company the difference
between 6.11% and the 30-day LIBOR rate, so that the first mortgage loan
has an effective rate of 7.91% per annum. The first mortgage loan matures
in August 2000. The interest rate swap agreement expires concurrently
therewith.
(C) No pro forma assumptions have been made for the additional payment of
distributions resulting from the additional proceeds raised.
(D) Additional Offering Proceeds of $7,941,016, net of additional Offering
costs of $1,111,742, are reflected as received as of January 1, 1995, prior
to the purchase of the properties. Offering costs consist principally of
registration costs, printing and selling costs, including commissions.
F-44
<PAGE> 255
Inland Monthly Income Fund III, Inc.
Pro Forma Statement of Operations
For the year ended December 31, 1995
(unaudited)
The following unaudited Pro Forma Statement of Operations of the Company is
presented to effect the acquisitions of the Walgreens/Decatur property, Eagle
Crest Shopping Center, Montgomery-Goodyear property, Nantucket Square Shopping
Center, Mundelein Plaza and Regency Point Shopping Center as of January 1,
1995. The Company's remaining two properties, Hartford/Naperville Plaza and
Antioch Plaza, were constructed in 1995 and acquired shortly after construction
was completed. The following unaudited Pro Forma Statement of Operations of
the Company is presented to also effect the acquisition of Hartford/Naperville
Plaza and Antioch Plaza as of August 17, 1995 and September 1, 1995,
respectively, the date occupancy commenced at these properties. This unaudited
Pro Forma Statement of Operations should be read in conjunction with the
December 31, 1995 Financial Statements and the notes thereto as filed on Form
10-K.
This unaudited Pro Forma Statement of Operations is not necessarily indicative
of what the actual financial position would have been for the year ended
December 31, 1995, nor does it purport to represent the future financial
position of the Company. Unless otherwise defined, capitalized terms used
herein shall have the same meaning as in the Prospectus.
F-45
<PAGE> 256
Inland Monthly Income Fund III, Inc.
Pro Forma Statement of Operations
for the year ended December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
---------------------------------------------------------
1995 Naperville
Historical Walgreens Eagle Crest Montgomery- Hartford Nantucket
(A) (B) (C) Goodyear (D) Plaza (E) Square (F)
---------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rental
income.......... $ 869,485 10,651 95,232 101,359 15,077 340,545
Additional
Rental income... 228,024 - 2,218 19,203 662 140,453
Interest
income (K)...... 82,913 - - - - -
---------- --------- ---------- ----------- --------- ---------
Total income.... 1,180,422 10,651 97,450 120,562 15,739 480,998
---------- --------- ---------- ----------- --------- ---------
Professional
services and
general and
administrative 23,132 - - - - -
Property operating
expenses........ 326,721 533 17,376 47,758 3,436 205,903
Interest expense.. 164,161 4,840 77,170 46,325 13,625 267,137
Depreciation (L).. 169,894 3,141 16,324 20,682 8,867 57,357
---------- --------- ---------- ----------- --------- ---------
Total expenses.... 683,908 8,514 110,870 114,765 25,928 530,397
---------- --------- ---------- ----------- --------- ---------
Net income...... $ 496,514 2,137 (13,420) 5,797 (10,189) (49,399)
========== ========= ========== =========== ========= =========
Weighted average
common stock shares
outstanding (M). 943,156
===========
Net income per weighted
average common stock
outstanding (M). $ .53
===========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Adjustments
----------------------------------
Antioch Mundelein Regency 1995
Plaza (G) Plaza(H)(I) Point(H)(J) Pro Forma
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Rental
income.......... 22,750 639,124 541,085 2,635,308
Additional
Rental income... - 66,669 63,294 520,523
Interest
income (K)...... - - - 82,913
-------- --------- --------- ----------
Total income.... 22,750 705,793 604,379 3,238,744
-------- --------- --------- ----------
Professional
services and
general and
administrative - - - 23,132
Property operating
expenses........ 212 141,482 71,615 815,036
Interest expense.. 20,900 - 351,900 946,058
Depreciation (L).. 5,396 128,233 162,500 572,394
-------- --------- --------- ----------
Total expenses.... 26,508 269,715 586,015 2,356,620
-------- --------- --------- ----------
Net income...... (3,758) 436,078 18,364 882,124
======== ========= ========= ==========
Weighted average
common stock shar
outstanding (M). 2,284,268
==========
Net income per weig
average common st
outstanding (M). $ .39
==========
</TABLE>
See accompanying notes to pro forma statement of operations.
F-46
<PAGE> 257
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
For the year ended December 31, 1995
(unaudited)
(A) The December 31, 1995 Historical column represents the historical statement
of operations of the Company for the year ended December 31, 1995, as filed
with the SEC on Form 10-K.
(B) Acquisition of Walgreens/Decatur, Decatur, Illinois
This pro forma adjustment reflects the purchase of the Walgreens/Decatur
property as if the Company had purchased the property as of January 1,
A995. The pro forma adjustment for operations for the period from January
1, 1995 to January 30, 1995 (date of acquisition) was estimated using the
1995 historical results.
In conjunction with the acquisition, the Company assumed a portion of the
first mortgage loan with a balance of $775,000. This mortgage has an
interest rate of 7.655%, amortizes over a 25-year period and matures May
31, 2004. The Company is responsible for monthly payments of principal and
interest of $5,689. The pro forma adjustment for interest expense for the
period prior to acquisition was estimated using the described loan terms.
(C) Acquisition of Eagle Crest Shopping Center, Naperville, Illinois
This pro forma adjustment reflects the purchase of the Eagle Crest Shopping
Center as if the Company had purchased the property as of January 1, 1995.
The pro forma adjustment for operations for the period from January 1, 1995
to February 28, 1995 (date of acquisition) was estimated using the 1995
historical results.
As part of the acquisition, the Company assumed a portion of the first
mortgage loan with a balance of $3,534,000, as well as entering into a loan
agreement with Inland Property Sales, Inc. ("IPS"), an Affiliate of the
Advisor, for the balance of the purchase price for $1,212,427. The first
mortgage bears interest at 9.5% per annum and the loan to IPS bears
interest at 10.5%. The pro forma adjustment for interest expense for the
period prior to acquisition was estimated using the described loan terms.
(D) Acquisition of Montgomery-Goodyear, Montgomery, Illinois
This pro forma adjustment reflects the purchase of the Montgomery-Goodyear
property as if the Company had purchased the property as of January 1,
1995. The pro forma adjustment for operations for the period from January
1, 1995 to September 13, 1995 (date of acquisition) was estimated using the
1995 historical results and applicable lease information.
F-47
<PAGE> 258
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
For the year ended December 31, 1995
(unaudited)
As part of the acquisition, the Company entered into a loan agreement with
Inland Mortgage Investment Corporation ("IMIC"), an affiliate of the
Advisor, for $600,000 which bears interest of 10.9% per annum. The pro
forma adjustment for interest expense for the period prior to acquisition
was estimated using the described loan terms.
(E) Acquisition of Hartford/Naperville Plaza, Naperville, Illinois
This pro forma adjustment reflects the purchase of the Hartford/Naperville
Plaza property as if the Company had purchased the property as of August
17, 1995, the date the first tenant occupied this newly constructed
property. The pro forma adjustment for operations for the period August
17, 1995 to September 14, 1995 (date of acquisition) was estimated using
the 1995 historical results and applicable lease information. Sears
Hardware was the only tenant occupying the property during that period.
In conjunction with the acquisition, the Company entered into a loan
agreement with IMIC for $600,000 which bears interest of 10.9% per annum.
The pro forma adjustment for interest expense was estimated using the
described loan terms.
(F) Acquisition of Nantucket Square Shopping Center, Schaumburg, Illinois
This pro forma adjustment reflects the purchase of the Nantucket Square
Shopping Center as if the Company had purchased the property as of January
1, 1995. The pro forma adjustment for operations for the period from
January 1, 1995 to September 19, 1995 (date of acquisition) was estimated
using the information presented in the Statement of Gross Income and Direct
Operating Expenses for the year ended December 31, 1994.
As part of the acquisition, the Company entered into a loan agreement with
IMIC for $3,550,000 which bears interest of 10.5% per annum. The pro forma
adjustment for interest expense for the period prior to acquisition was
estimated using the described loan terms.
(G) Acquisition of Antioch Plaza, Antioch, Illinois
This pro forma adjustment reflects the purchase of the Antioch Plaza
property as if the Company had purchased the property as of September 1,
1995, the date the first tenant occupied this newly constructed property.
The pro forma adjustment for operations for the period September 1, 1995 to
December 28, 1995 (date of acquisition) was estimated using applicable
lease information. Blockbuster Video was the only tenant occupying the
property during that period. No pro forma adjustment was made for real
estate tax expense and the related recovery income since the property was
vacant land for most of 1995 and the amount would be difficult to estimate
and have an immaterial effect.
F-48
<PAGE> 259
Inland Monthly Income Fund III, Inc.
Notes to Pro Forma Statement of Operations
For the year ended December 31, 1995
(unaudited)
As part of the acquisition, the Company entered into a loan agreement with
Inland Real Estate Investment Corporation, an affiliate of the Advisor, for
$660,000 which bears interest of 9.5% per annum. The pro forma adjustment
for interest expense was estimated using the described loan terms.
(H) Reconciliation of Gross Income and Direct Operating Expenses for the year
ended December 31, 1995 prepared in accordance with Rule 3.14 of Regulation
S-X (*) to the Pro Forma Adjustments:
<TABLE>
<CAPTION>
Mundelein Plaza Regency Point
---------------------------------- -------------------------------
*As Pro Forma *As Pro Forma
Reported Adjustments Total Reported Adjustments Total
---------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Rental income.......... $ 639,124 - 639,124 541,085 - 541,085
Additional rental
income............... 66,669 - 66,669 63,294 - 63,294
Interest income........ - - - - - -
---------- -------- ------- ------- -------- -------
Total income........... 705,793 - 705,793 604,379 - 604,379
---------- -------- ------- ------- -------- -------
Professional services
and general and
administrative....... - - - - - -
Property operating
expenses............. 141,482 - 141,482 71,615 - 71,615
Interest expense....... - - - - 351,900 351,900
Depreciation (L)....... - 128,233 128,233 - 162,500 162,500
---------- -------- ------- ------- -------- -------
Total expenses......... 141,482 128,233 269,715 71,615 514,400 586,015
---------- -------- ------- ------- -------- -------
Net income............. $ 564,311 (128,233) 436,078 532,764 (514,400) 18,364
========== ======== ======= ======= ======== =======
</TABLE>
(I) Acquisition of Mundelein Plaza, Mundelein, Illinois
This pro forma adjustment reflects the purchase of Mundelein Plaza as if
the Company had purchased the property as of January 1, 1995. Operations
for this property for the year ended December 31, 1995 were estimated using
the information presented in the Statement of Gross Income and Direct
Operating Expenses for the year ended December 31, 1995. (Note H) This
property was purchased on an all cash basis.
F-49
<PAGE> 260
(J) Acquisition of Regency Point, Lockport, Illinois
This pro forma adjustment reflects the purchase of Regency Point as if the
Company had purchased the property as of January 1, 1995. The pro forma
adjustment for operations was estimated using the Statement of Gross Income
and Direct Operating Expenses for the year ended December 31, 1995. (Note
H)
As part of the acquisition, the Company will assume the existing first
mortgage loan of $4,473,200, along with a related interest rate swap
agreement.
The first mortgage loan has a floating interest rate of 180 basis points
over the 30-day LIBOR rate, which rate is adjusted monthly. The interest
rate swap agreement, in conjunction with the first mortgage, provides for
Bank One, Chicago, to receive from or pay to the Company the difference
between 6.11% and the 30-day LIBOR rate, so that the first mortgage loan
has an effective rate of 7.91% per annum. The pro forma adjustment for
interest expense for 1995 was estimated using the described loan terms.
(K) No pro forma adjustment has been made relating to interest income which
would have been earned on the additional Offering Proceeds raised.
(L) Depreciation expense is computed using the straight-line method, based upon
an estimated useful life of thirty years.
(M) The pro forma weighted average common stock shares for the year ended
December 31, 1995 was calculated by estimating the additional shares sold
to purchase each of the Company's properties on a weighted average basis.
F-50
<PAGE> 261
EXHIBIT A
PRIOR PERFORMANCE TABLES
The prior performance tables contain information concerning public real
estate limited partnerships sponsored by Affiliates of the Advisor. This
information has been summarized, in part, in narrative form under "Prior
Performance of the Company's Affiliates." The purpose of the tables is to
provide information on the performance of those partnerships in evaluating the
experience of the Affiliates of the Advisor as sponsors of such programs.
However, the inclusion of these tables does not imply that the Company will
make investments comparable to those reflected in the tables or that investors
in the Company will experience returns comparable to those experienced in the
programs referred to in these tables. Persons who purchase Shares in the
Company will not thereby acquire any ownership in any of the partnerships to
which these tables relate. The tables consist of:
<TABLE>
<S> <C>
Table I Experience in Raising and Investing Funds
Table II Compensation to IREIC and Affiliates
Table III Operating Results of Prior Programs
Table IV Results of Completed Programs
Table V Sales or Disposals of Properties
Table VI Acquisition of Properties by Programs*
</TABLE>
* Prospective investors in the Company may obtain copies of Table VI by
contacting the Advisor.
Except with respect to Inland Land Appreciation Fund, L.P., Inland Land
Appreciation Fund II, L.P., and Inland Capital Fund, L.P. the partnerships
presented in the tables are public real estate limited partnerships formed
primarily to acquire, operate and sell existing residential and commercial real
properties. Generally, the investment objectives of those partnerships were as
follows:
(1) Capital appreciation; and
(2) Cash distributions for limited partners.
In addition, with respect to private limited partnerships, an objective
was the generation of tax loss deductions which generally will be used to
offset taxable income from other sources.
The Company's investment objectives are to: (i) provide regular
Distributions to Stockholders in amounts which may exceed the Company's taxable
income due to the non-cash nature of depreciation expense and, to such extent,
will constitute a tax-deferred return of capital, but in no event less than 95%
of the Company's taxable income, pursuant to the REIT qualification
requirements; (ii) provide a hedge against inflation by entering into leases
which contain clauses for scheduled rent escalations or participation in the
growth of tenant sales, permitting the Company to increase Distributions and
provide capital appreciation; and (iii) preserve Stockholders' capital.
A-1
01-96-132
<PAGE> 262
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents information on a dollar and percentage basis showing the
experience of Inland Real Estate Investment Corporation (IREIC), of which the
Advisor is a wholly owned subsidiary, in raising and investing funds in prior
partnerships where the offering closed in the three years prior to December 31,
1995. The Table particularly focuses upon the dollar amount available for
investment in properties expressed as a percentage of total dollars raised.
Since 1986, Inland Real Estate Investment Corporation has organized and
completed the offerings of four public partnerships which have primarily
invested in existing residential real property and three public partnerships
which have invested in undeveloped land.
A-2
01-96-132
<PAGE> 263
TABLE I-(CONTINUED)
EXPERIENCE IN RAISING AND INVESTING FUNDS (A)
(000'S OMITTED)
<TABLE>
<CAPTION>
Inland Capital
Fund, L.P.
---------------
<S> <C> <C>
Dollar amount offered .................................... $60,000
Dollar amount raised ..................................... 32,399 100.00%
Less offering expenses:
Selling Commissions:
Affiliated parties ..................................... 3,239 10.00
Unaffiliated parties ................................... 0 0.00
Organizational expenses ................................. 15 0.05
Other offering expenses (B) ............................. 1,227 3.79
Reserves (C) ............................................. 1,972 6.08
------- ------
Available for investment ................................. $25,946 80.08%
------- ------
Acquisition costs:
Cash down payments (D) .................................. $24,286 74.96%
Acquisition fees ........................................ 1,444 4.46
Other cash expenditures capitalized (E) .................. 821 2.53
------- ------
Acquisition costs related to the purchase of properties .. $26,551 81.95%
------- ------
Percent leverage ......................................... 0.00%
Date offering began ...................................... 12-13-91
Length of offering (in months) ........................... 20
Months to invest 90% of amount available for
investment (measured from beginning of offering) ........ 36
</TABLE>
A-3
01-96-132
<PAGE> 264
TABLE I-(CONTINUED)
EXPERIENCE IN RAISING AND INVESTING FUNDS
(000'S OMITTED)
NOTES TO TABLE I
(A) The figures in this table are cumulative and are as of December 31,
1995. The dollar amount raised represents the cash proceeds collected by the
partnerships. The Table reflects payments made from investor capital
contributions upon receipt.
(B) Consists of legal, accounting, printing and other offering expenses,
including amounts to be paid to Inland Securities Corporation to be used as
incentive compensation to its regional marketing representatives and amounts
for reimbursement of the IREIC for marketing, salaries and direct expenses of
its employees while directly engaged in registering and marketing the Units and
other marketing and organization expenses.
(C) Includes 1% of the offering proceeds committed to the Unit Repurchase
Program of each partnership. Partnership expenses, including operating expenses
during the offering period or thereafter not related to the offering, may be
paid from these reserves.
(D) Cash down payments include amounts paid and mortgage financing at
closing.
(E) Consists of acquisition expenses and improvements to the property
subsequent to acquisition which are capitalized and paid or to be paid from the
proceeds of the offering.
A-4
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<PAGE> 265
TABLE II
COMPENSATION TO IREIC AND AFFILIATES(A)
Table II summarizes the amount and type of compensation paid to IREIC in
connection with prior partnerships.
Some partnerships acquired their properties from Affiliates of the Advisor
which had purchased such properties from unaffiliated third parties.
A-5
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<PAGE> 266
TABLE II
COMPENSATION TO IREIC AND AFFILIATES(A)
(000'S OMITTED)
<TABLE>
<CAPTION>
Other
Inland Public
Capital Programs
Fund, L.P. 6 Programs
---------- ----------
<S> <C> <C>
Date offering commenced ....................................... 12-13-91 -
Dollar amount raised .......................................... $ 32,399 $ 149,306
========= ==========
Amounts paid or payable to general partner or affiliates
from proceeds of offerings:
Selling commissions and underwriting fees (B) ................ $ 3,239 $ 2,819
Other offering expenses (C) .................................. 249 2,225
Acquisition cost and expense (D) ............................. 1,444 9,591
========= ==========
Dollar amount of cash available (deficiency) from operations
before deducting (adding) payments to (from) general partner
or affiliates (E) ............................................. $ 1,559 $ 13,615
========= ==========
Amounts paid to (received from) general partner or affiliates
related to operations:
Property management fees (F) ................................. $ 94 $ 952
Partnership subsidies received (G) ........................... 0 (582)
Accounting services .......................................... 60 285
Data processing service ...................................... 39 228
Legal services ............................................... 48 121
Other administrative services ................................ 96 652
Property upgrades ............................................ 19 186
Property operating expenses .................................. 1 6
Dollar amount of property sales and refinancings before
payments to general partner and affiliates (H):
Cash ......................................................... $ 647 $ 19,534
Equity in notes and undistributed sales proceeds ............. 0 9,686
Dollar amounts paid or payable to general partner or affiliates
from sales and refinancings (I):
Sales commissions ............................................ $ 0 $ 467
Property upgrade ............................................. 0 172
Mortgage brokerage fee ....................................... 0 15
Participation in cash distributions .......................... 0 93
</TABLE>
A-6
01-96-132
<PAGE> 267
TABLE II-(CONTINUED)
COMPENSATION TO IREIC AND AFFILIATES
(000'S OMITTED)
NOTES TO TABLE II
(A) The figures in this Table II relating to proceeds of the offerings are
cumulative and are as of December 31, 1995 and the figures relating to cash
available from operations are for the three years ending December 31, 1995. The
dollar amount raised represents the cash proceeds collected by the
partnerships. Amounts paid or payable to IREIC or affiliates from proceeds of
the offerings represent payments made or to be made to IREIC and affiliates
from investor capital contributions.
(B) Inland Capital Fund paid all commissions to an affiliate of the
general partner, who in turn paid $2,711,791 to third party soliciting dealers.
(C) Consists of legal, accounting, printing and other offering expenses,
including amounts to be paid to Inland Securities Corporation to be used as
incentive compensation to its regional marketing representatives and amounts
for reimbursement of the general partner for marketing, salaries and direct
expenses of its employees while directly engaged in registering and marketing
the Units and other marketing and organization expenses.
(D) Represents initial cash down payments and future principal payments
and prepaid items and fees paid to IREIC and its affiliates in connection with
the acquisition of properties less amounts paid to unaffiliated third parties
to acquire such properties. Cash down payments include amounts received at
closing.
<TABLE>
<CAPTION>
Inland Public
Capital Programs
Fund, L.P. 6 Programs
---------- ----------
<S> <C> <C>
Acquisition fees ....................... $1,444 $ 9,478
Reimbursement (at cost) for upgrades and
acquisition due diligence ............. 0 113
Partnership down payments .............. 0 44,585
Inland down payments ................... 0 (44,585)
------ ---------
Acquisition cost and expense ........... $1,444 $ 9,591
====== =========
</TABLE>
(E) See Note (G) to Table III.
(F) An Affiliate of the Advisor provides property management services for
all properties acquired by the partnerships. Management fees have not exceeded
6% of the gross receipts from the properties managed. With respect to Inland
Capital Fund, L.P., Inland Land Appreciation Fund II, L.P. and Inland Land
Appreciation Fund, L.P. (included in "Other Public Programs"), IREIC receives
an asset management fee equal to 1/4% of total partnership capital limited to a
cumulative total over the life of the partnership of 2% of the land's original
cost to the partnership.
(G) The amounts shown in the table for Other Public Programs represent
supplemental capital contributions from IREIC in accordance with the terms of
the partnership agreements.
(H) See Table V and Notes thereto regarding sales and disposals of
properties.
(I) Real estate sales commissions and participations in cash distributions
are paid or payable to IREIC and/or its affiliates in connection with the sales
of properties. Payments of all amounts shown are subordinated to the receipt by
the limited partners of their original capital investment. See Table V and
Notes thereto.
A-7
01-96-132
<PAGE> 268
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents operating results for limited partnerships the
offerings of which closed during each of the five years ended prior to December
31, 1995. The operating results consist of:
-- The components of taxable income (loss);
-- Taxable income or loss from operations and property sales;
-- Cash available and source, before and after cash distributions to
investors; and
-- Tax and distribution data per $1,000 invested.
A-8
01-96-132
<PAGE> 269
TABLE III-(CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
<TABLE>
<CAPTION>
Inland Capital
Fund, L.P.
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross revenues ........................................... $ 457 $ 744 $ 564 $ 104 $ 0
Profit on sale of properties ............................. 229 0 0 0 0
Less:
Operating expenses ....................................... 146 64 4 1 0
Interest expense ......................................... 0 0 0 0 0
Partnership expenses ..................................... 167 175 86 1 0
Depreciation and amortization ............................ 5 4 3 3 1
----- ----- ----- ----- ----
Net income (loss)-GAAP basis ............................. $ 368 $ 501 $ 471 $ 99 $(1)
===== ===== ===== ===== ====
Taxable income (loss) (A):
Allocated to investors from operations ................... 137 495 466 100 (1)
Allocated to general partner from operations ............. 1 5 5 1 0
---- ----- ----- ----- ----
Total from operations .................................... 138 500 471 101 (1)
From gain on sale:
Capital (allocated to investors) ........................ 231 0 0 0 0
Capital (allocated to general partner) .................. 0 0 0 0 0
Ordinary (recapture) .................................... 0 0 0 0 0
----- ----- ----- ----- ----
$ 369 $ 500 $ 471 $ 101 $(1)
===== ===== ===== ===== ====
Cash available (deficiency) from operations (G) .......... 172 633 397 94 0
Cash available from sales (B) ............................ 646 0 0 0 0
Cash (deficiency) from refinancings ...................... 0 0 0 0 0
----- ----- ----- ----- ----
Total cash available (deficiency) before
distributions and special items .......................... 818 633 397 94 0
Less distributions to investors:
From operations .......................................... 0 0 0 0 0
From sales and refinancings .............................. 645 0 0 0 0
From return of capital ................................... 0 0 0 0 0
From supplemental capital
contribution (return on capital) (E) (H) ................. 0 0 0 0 0
Less distributions to general partner:
From operations .......................................... 0 0 0 0 0
From sales and refinancings .............................. 0 0 0 0 0
----- ----- ----- ----- ----
Cash available after distributions before special items .. 173 633 397 94 0
</TABLE>
<TABLE>
<CAPTION>
Inland Land
Appreciation Fund II, L.P.
----------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross revenues ........................................... $ 508 $ 494 $ 545 $ 841 $1,386 $ 896 $0
Profit on sale of properties ............................. 2,858 219 485 0 0 0 0
Less:
Operating expenses ....................................... 248 263 266 132 67 13 0
Interest expense ......................................... 0 0 0 0 0 0 0
Partnership expenses ..................................... 230 191 180 254 181 80 0
Depreciation and amortization ............................ 3 4 5 2 2 2 1
------ ----- ------ ----- ------ ----- ----
Net income (loss)-GAAP basis ............................. $2,885 $ 255 $ 579 $ 453 $1,136 $ 801 $(1)
====== ===== ====== ===== ====== ===== ====
Taxable income (loss) (A):
Allocated to investors from operations ................... 315 227 144 477 1,141 800 (1)
Allocated to general partner from operations ............. 3 2 1 5 12 8 0
------ ----- ------ ----- ------ ----- ----
Total from operations .................................... 318 229 145 482 1,153 808 (1)
From gain on sale:
Capital (allocated to investors) ........................ 2,333 219 351 0 0 0 0
Capital (allocated to general partner) .................. 329 0 93 0 0 0 0
Ordinary (recapture) .................................... 0 0 0 0 0 0 0
------ ----- ------ ----- ------ ----- ----
$2,980 $ 448 $ 589 $482 $1,153 $ 808 $(1)
====== ===== ====== ==== ====== ===== ====
Cash available (deficiency) from operations (G) .......... 5 9 164 511 1,253 694 0
Cash available from sales (B) ............................ 7,488 450 1,176 0 0 0 0
Cash (deficiency) from refinancings ...................... 0 0 0 0 0 0 0
------ ----- ------ ----- ------ ----- ----
Total cash available (deficiency) before
distributions and special items .......................... 7,493 459 1,340 511 1,253 694 0
Less distributions to investors:
From operations .......................................... 0 0 0 454 267 0 0
From sales and refinancings .............................. 1,000 0 1,116 0 0 0 0
From return of capital ................................... 0 0 0 00 0 0 0
From supplemental capital
contribution (return on capital) (E) (H) ................. 0 0 0 0 0 0 0
Less distributions to general partner:
From operations .......................................... 0 0 0 0 0 0 0
From sales and refinancings .............................. 0 0 0 0 93 0 0
------ ----- ------ ----- ------ ----- ----
Cash available after distributions before special items .. 6,493 459 131 57 986 694 0
</TABLE>
A-9
<PAGE> 270
TABLE III-(CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
<TABLE>
<CAPTION>
Inland Capital Inland Land
Fund, L.P. Appreciation Fund II, L.P.
-------------------------------- ---------------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Special items:
Fixed asset additions (C) ......................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Advances (repayments) from (to)
general partner or affiliates ..................... 23 2 1 (85) 85 3 1 (19) 10 (5) (272) 287
Repurchase of units (I) ........................... 0 (2) 0 0 0 (36) (52) (143) (47) 0 0 0
Use of partnership reserves ....................... 0 2 0 0 0 36 52 143 47 0 0 0
Use of cash available for offering purposes ....... 0 0 0 0 0 0 0 0 (50) 0 0 0
---- ---- ---- ---- --- ------ ---- ----- ---- ---- ----- ----
Cash available (deficiency) after distributions and
special items (J) ................................. $196 $635 $398 $ 9 $85 $6,496 $460 $ 112 $ 17 $981 $ 422 $287
==== ==== ==== ==== === ====== ==== ===== ==== ==== ===== ====
Tax and distribution data per $1,000 invested (D):
Federal income tax results:
Ordinary income (loss):
From operations (E) ............................... $ 4 $ 15 $ 14 $ 3 $ 0 $ 6 $ 5 $ 3 $ 9 $ 23 $ 16 $ 0
From recapture .................................... 0 0 0 0 0 0 0 0 0 0 0 0
Capital gain ...................................... 7 0 0 0 0 46 4 7 0 0 0 0
Cash distributions to investors:
Source (on GAAP basis):
Investment income ................................. 0 0 0 0 0 0 0 0 9 5 0 0
Return of capital ................................. 20 0 0 0 0 20 0 22 0 0 0 0
Supplemental capital contributions (return on
capital) (E) (H) .................................. 0 0 0 0 0 0 0 0 0 0 0 0
Source (on cash basis):
Sales ............................................. 20 0 0 0 0 20 0 22 0 0 0 0
Refinancings ...................................... 0 0 0 0 0 0 0 0 0 0 0 0
Operations ........................................ 0 0 0 0 0 0 0 0 9 5 0 0
Return of capital ................................. 0 0 0 0 0 0 0 0 0 0 0 0
Supplemental capital contributions (return on
capital) (E) (H) .................................. 0 0 0 0 0 0 0 0 0 0 0 0
Percent of properties remaining unsold (F) ........ 98.43% 89.13%
====== ======
</TABLE>
A-10
<PAGE> 271
TABLE III-(CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S INCLUDED)
NOTES TO TABLE III
(A) "Taxable income (loss)" represents the aggregate amounts shown on the
partnerships' tax returns for such years. One of the principal differences
between the tax basis of reporting and generally accepted accounting principles
(GAAP) is that depreciation is based upon the rates established by the
Accelerated Cost Recovery System (ACRS) for property placed in service after
January 1, 1981. Use of ACRS usually results in a higher charge against
operations than would be the result if the depreciation rate was based upon the
economic useful life as required by GAAP. Further, under GAAP, to the extent
that interest rates on notes received in connection with the sale of a property
are deemed to be below market interest rates at the date of sale, such notes
would be required to be discounted based upon market interest rates.
(B) See Table V and Notes thereto regarding sales and disposals of
properties.
(C) Fixed asset additions represent betterments and improvements to
properties which have been paid for from the operations of the respective
properties.
(D) Tax data per $1,000 is based on the income (loss) allocated to
investors for federal income tax purposes. Tax and distribution data per $1,000
invested is based on total capital raised.
(E) Taxable ordinary income from operations relating to Inland Monthly
Income Fund II, L.P. include taxable income at the limited partner level due to
taxable guaranteed payments relating to the IREIC's supplemental capital
contributions. A limited partner's basis in his partnership interest will be
increased by the amount of supplemental capital contributions allocated to him
and reduced by distributions from supplemental capital contributions. The
amount of supplemental capital contributions per $1,000 invested are $0 for
1989 through 1995 and $1 for 1988 for Inland Monthly Income Fund, II, L.P.
(F) Percent of properties remaining unsold represents original total
acquisition cost of properties retained divided by original total acquisition
cost of all properties in the program, plus the total of uninvested offering
proceeds (if any).
A-11
<PAGE> 272
TABLE III-(CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S INCLUDED)
NOTES TO TABLE III
(G) "Cash Available (Deficiency) from Operations," represents all cash
revenues and funds received by the partnerships, including but not limited to
operating income less operating expenses, and interest income. These amounts do
not include payments made by the partnerships from offering proceeds nor do
they include proceeds from sales or refinancings. These amounts also exclude
advances from or repayments to IREIC and affiliates which are disclosed
elsewhere in the table and include principal payments on long-term debt. For
example:
<TABLE>
<CAPTION>
Inland Land
Inland Capital Appreciation
Fund, L.P. Fund II, L.P.
------------------------------- -----------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by operating activities
per the Form 10-K annual report or 10-Q
quarterly report ........................ 195 635 398 9 85 8 10 145 521 1,248 422
Payments to (from) general partner and
affiliates .............................. (23) (2) (1) 85 (85) (3) (1) 19 (10) 5 272
Principal payments on long-term debt .... 0 0 0 0 0 0 0 0 0 0 0
Payments for deferred loan fees 0 0 0 0 0 0 0 0 0 0 0
---- ----- ----- --- ---- ---- ---- ----- ---- ----- ----
172 633 397 94 0 5 9 164 511 1,253 694
==== ===== ===== === ==== ==== ==== ===== ==== ===== ====
</TABLE>
(H) IREIC was required to make supplemental capital contributions if
necessary, in sufficient amounts to allow the partnerships to make
distributions to limited partners equal to an 8% per annum non-compounded
return on their invested capital through August 4, 1993. The cumulative amounts
of such supplemental capital contributions for Monthly Income Fund II was
$30,155, which was repaid in 1993.
(I) Each entity established a unit repurchase program which provides
limited liquidity to eligible investors who have suffered severe adverse
financial conditions or who have died or become legally incapacitated. These
funds were utilized by the partnerships to repurchase units, on a limited
basis, for pre-determined amounts pursuant to the terms of the prospectus.
(J) Cash deficiencies for certain years are the result of (1) current year
distributions from operations that include a portion of accumulated cash flows
from operations of prior years or; (2) current year distributions from sales
which include proceeds relating to prior year property sales.
A-12
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<PAGE> 273
TABLE IV
RESULTS OF COMPLETED PROGRAMS
Table IV is a summary of operating and disposition results of prior public
partnerships sponsored by Affiliates of the Advisor, which during the five
years ended prior to December 31, 1995 have sold their properties and either
hold notes with respect to such sales or have liquidated. No public partnership
has disposed of all its properties.
A-13
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<PAGE> 274
TABLE V
SALES OR DISPOSALS OF PROPERTIES
Table V presents information on the results of the sale or disposals of
public partnership properties during the three years ended prior to December
31, 1995. Since 1993, partnerships sponsored by Affiliates of the Advisor have
sold 14 properties in whole or in part. The table provides certain information
to evaluate property performance over the holding period such as:
--Sale proceeds received by the partnerships in the form of cash down
payments at the time of sale after expenses of sale and secured notes
received at sale;
--Cash invested in properties;
--Cash flow (deficiency) generated by the property;
--Taxable gain (ordinary and total); and
--Terms of notes received at sale.
A-14
01-96-132
<PAGE> 275
TABLE V(CONTINUED)
SALES OR DISPOSALS OF PROPERTIES(A)
(000'S OMITTED)
<TABLE>
<CAPTION>
Selling Price, net of closing costs
------------------------------------------------------------------
Cash Selling
Received, commissions
net of paid or
Date Date of Closing payable to Mortgage at
Property Acquired Sale Costs(B) Inland Time of Sale
-------- -------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
LAND I .52 ACRE OF PARCEL #18 .................. 1/29/90 3/11/93 33 0 0
LAND I 4.41 ACRES OF PARCEL #23 ................ 5/8/90 Var 93 170 0 0
LAND II PARCEL #23A ............................ 10/30/92 3/16/93 183 0 0
LAND II PARCELS #11 & #13 ...................... 8/20/91 5/3/93 70 0 0
&
9/23/92
LAND II 5 ACRES OF PARCEL #15 .................. 9/4/91 9/1/93 95 0 0
GROWTH FUND I - COUNTRY CLUB, 55 UNITS ......... 12/30/85 Var 93 5,673 0 1,650
LAND II 10 ACRES OF PARCEL #22 ................. 10/30/92 1/6/94 166 0 0
LAND II .258 ACRES OF PARCEL #6 ................ 4/16/91 10/1/94 10 0 0
LAND II 11 ACRES OF PARCEL #15 ................. 9/4/91 12/1/94 274 0 0
GROWTH FUND I - COUNTRY CLUB, 31 UNITS ......... 12/30/85 Var 94 2,432 0 0
LAND I 35.88 ACRES OF PARCEL #23 ............... 5/8/90 Var 94 1,149 0 0
MONTHLY INCOME FUND I -
SCHAUMBURG TERRACE, 22 BUILDINGS .............. 6/24/88 Var 94 701 0 0
LAND I 3.44 ACRES OF PARCEL #23 ................ 5/8/90 Var 95 139 0 0
MONTHLY INCOME FUND I -
SCHAUMBURG TERRACE, 16 BUILDINGS............... 6/24/88 Var 95 409 0 0
LAND II 60 ACRES OF PARCEL #23 ................. 10/30/92 Var 95 4,196 0 0
LAND II PARCEL #25 ............................. 1/28/93 10/31/95 3,292 0 0
CAPITAL FUND PARCEL #10A ....................... 9/16/94 4/21/95 286 0 0
CAPITAL FUND 17.742 ACRES OF PARCEL #2 ......... 11/9/93 8/2/95 361 0 0
LAND I 27.575 ACRES OF PARCEL #4 ............... 4/18/89 8/25/95 542 0 0
</TABLE>
<TABLE>
<CAPTION>
Selling Price, net of closing costs Cost of Properties including closing
----------------------------------- costs and other cash expenditures
Secured -----------------------------------------
Notes Net Original Partnership
Received at Selling Mortgage Capital
Property Sale(C) Price Financing Invested(D) Total
-------- ----------- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
LAND I .52 ACRE OF PARCEL #18 ................... 0 33 0 4 4
LAND I 4.41 ACRES OF PARCEL #23 ................. 0 170 0 128 128
LAND II PARCEL #23A ............................. 0 183 0 183 183
LAND II PARCELS #11 & #13 ....................... 828(F) 898 0 453 453
LAND II 5 ACRES OF PARCEL #15 ................... 0 95 0 55 55
GROWTH FUND I - COUNTRY CLUB, 55 UNITS .......... 0 4,023 1,168 1,495 2,663
LAND II 10 ACRES OF PARCEL #22 .................. 0 166 0 105 105
LAND II .258 ACRES OF PARCEL #6 ................. 0 10 0 4 4
LAND II 11 ACRES OF PARCEL #15 .................. 0 274 0 122 122
GROWTH FUND I - COUNTRY CLUB, 31 UNITS .......... 0 2,432 658 843 1,501
LAND I 35.88 ACRES OF PARCEL #23 ................ 156 1,305 0 971 971
MONTHLY INCOME FUND I -
SCHAUMBURG TERRACE, 22 BUILDINGS ............... 4,912(G) 5,613 0 5,019 5,019
LAND I 3.44 ACRES OF PARCEL #23 ................. 0 139 0 98 98
MONTHLY INCOME FUND I -
SCHAUMBURG TERRACE, 16 BUILDINGS ............... 3,790(G) 4,199 0 3,683 3,683
LAND II 60 ACRES OF PARCEL #23 .................. 0 4,196 0 2,900 2,900
LAND II PARCEL #25 .............................. 0 3,292 0 1,730 1,730
CAPITAL FUND PARCEL #10A ........................ 0 286 0 221 221
CAPITAL FUND 17.742 ACRES OF PARCEL #2 .......... 0 361 0 196 196
LAND I 27.575 ACRES OF PARCEL #4 ................ 0 542 0 231 231
</TABLE>
A-15
<PAGE> 276
TABLE V(CONTINUED)
SALES OR DISPOSALS OF PROPERTIES(A)
(000'S OMITTED)
<TABLE>
<CAPTION>
Excess
(deficiency)
of property Amount of
operating subsidies Total
cash receipts included in Taxable Ordinary
over cash operating Gain Income Capital
Property expenditures(E) cash receipts from Sale from Sale Gain
- --------------------------------------- --------------- ------------ --------- --------- -------
<S> <C> <C> <C> <C> <C>
LAND I .52 ACRE OF PARCEL #18.............. 0 0 29 0 29
LAND I 4.41 ACRES OF PARCEL #23............ 0 0 42 0 42
LAND II PARCEL #23A........................ (6) 0 0 0 0
LAND II PARCELS #11 & #13.................. 9 0 445 0 445
LAND II 5 ACRES OF PARCEL #15.............. 1 0 40 0 40
GROWTH FUND I - COUNTRY CLUB, 55 UNITS..... 1,375 0 1,592 0 1,592
LAND II 10 ACRES OF PARCEL #22............. 0 0 61 0 61
LAND II .258 ACRES OF PARCEL #6............ 0 0 6 0 6
LAND II 11 ACRES OF PARCEL #15............. 1 0 152 0 152
GROWTH FUND I - COUNTRY CLUB, 31 UNITS..... 775 0 1,223 0 1,223
LAND I 35.88 ACRES OF PARCEL #23........... 4 0 360 360 0
MONTHLY INCOME FUND I -
SCHAUMBURG TERRACE, 22 BUILDINGS.......... 1,556 0 1,609 0 1,609
LAND I 3.44 ACRES OF PARCEL #23............ 0 0 33 33 0
MONTHLY INCOME FUND I -
SCHAUMBURG TERRACE, 16 BUILDINGS.......... 1,152 0 1,398 0 1,398
LAND II 60 ACRES OF PARCEL #23............. (80) 0 1,100 1,100 0
LAND II PARCEL #25......................... 60 0 1,562 0 1,562
CAPITAL FUND PARCEL #10A................... (9) 0 67 67 0
CAPITAL FUND 17.742 ACRES OF PARCEL #2..... 1 0 164 0 164
LAND I 27.575 ACRES OF PARCEL #4........... 14 0 311 0 311
</TABLE>
A-16
01-96-132
<PAGE> 277
TABLE V-(CONTINUED)
SALES OR DISPOSALS OF PROPERTIES
(000'S OMITTED)
NOTES TO TABLE V
(A) The table includes all sales of properties by the partnerships during
the three years ended December 31, 1995. All sales have been made to parties
unaffiliated with the partnership.
(B) Consists of cash payments received from the buyers and the assumption
of certain liabilities by the buyers at the date of sale, less expenses of
sale.
(C) The stated principal amount of the notes is shown in the table under
"Secured Notes Received at Sale." All sales with notes received at sale are
being reported for tax purposes on the installment basis.
(D) Amounts represent the dollar amount raised from the offerings of
limited partnership units, less sales commissions and other offering expenses.
(E) Represents "Cash Available (Deficiency) from Operations (including
subsidies)" as adjusted for appli-cable "Fixed Asset Additions" through the
year of sale.
(F) The partnership provided financing in the amount of $828,000. The
amount financed earned interest at 8% annually, paid monthly, until maturity
and was paid off on October 27, 1993.
(G) As of December 31, 1995, the Partnership has sold all of the
thirty-eight six-unit condominium buildings comprising the Schaumburg Terrace
condominium complex to unaffiliated third parties. The Partnership received
$249,596 from one all cash sale in 1994. In addition, the Partnership received
$823,518 in down payment proceeds, and provided mortgage loans totaling
$8,701,439 to the purchasers for the thirty-seven additional sales. The
principal balances of these loans range from approximately $211,000 to
$256,000. These loans require monthly principal and interest payments totaling
$67,763 with an interest rate of 8.625% per annum for ten years (based on a
thirty year amortization) and payment of all remaining principal at the end of
that period.
A-17
01-96-132
<PAGE> 278
INLAND MONTHLY INCOME FUND III, INC.
DISTRIBUTION REINVESTMENT PROGRAM
Inland Monthly Income Fund III, Inc., a Maryland corporation (the
"Company"), pursuant to its Articles of Amendment and Restatement (the
"Articles") has adopted a Distribution Reinvestment Program (the "DRP"), the
terms and conditions of which are set forth below. Capitalized terms shall
have the same meaning as set forth in the Articles unless otherwise defined
herein.
1. As agent for the Stockholders who purchase Shares pursuant to the
Company's prospectus dated May 7, 1996 (the "Offering") and elect to
participate in the DRP (the "Participants"), the Company will apply all
distributions, paid with respect to the Shares held by each Participant (the
"Distributions"), including Distributions paid with respect to any full or
fractional Shares acquired under the DRP, to the purchase of the Shares for
said Participants directly, if permitted under state securities laws and, if
not, through the Dealer-Manager or Participating Dealers registered in the
Participant's state of residence. Neither the Company nor its Affiliates will
receive a fee for selling Shares under the DRP.
2. Procedure for Participation. Any Stockholder who purchases Shares
in the Offering may elect to become a Participant by completing and executing
the Subscription Agreement or other appropriate authorization form as may be
available from the Company, the Dealer-Manager or Soliciting Dealer.
Participation in the DRP will begin with the next Distribution payable after
receipt of a Participant's subscription or authorization, provided it is
received prior to the record date for the Distribution used to purchase the DRP
Shares. Shares will be purchased under the DRP on the record date for the
Distribution used to purchase the Shares. The record date for Distributions
for such Shares acquired under the DRP will be on the last day of the month
subsequent to the month of purchase. Each Participant agrees that if, at any
time prior to listing of the Shares on a national securities exchange or
market, he fails to meet the suitability requirements for making an investment
in the Company or cannot make the other representations or warranties set forth
in the Subscription Agreement, he will promptly so notify the Company in
writing.
3. Purchase of Shares. Commencing with the first Distribution paid
after the effective date of the Offering of Shares pursuant to the Prospectus
and continuing until the termination of the Offering, Participants will acquire
Shares from the Company at a fixed price of $9.05 per Share. Participants in
the DRP may also purchase fractional Shares so that 100% of the Distributions
will be used to acquire Shares. However, a Participant will not be able to
acquire Shares under the DRP to the extent such purchase would cause it to
exceed the Ownership Limit.
It is possible that a secondary market will develop for the Shares, and
that the Shares may be bought and sold on the secondary market at prices lower
or higher than the $9.05 per Share price which will be paid under the DRP.
The Company shall endeavor to acquire Shares on behalf of Participants
at the lowest price then available. However, the Company does not guarantee or
warrant that the Participant will be acquiring Shares at the lowest price
possible price.
B-1
<PAGE> 279
If the Company's Shares are listed on a national securities exchange or
market, Shares purchased by the Company for the DRP will be purchased on such
exchange or market, at the prevailing market price, and will be sold to
Stockholders at such price. The reservation of any Shares from this Offering
remaining for issuance under the DRP will be cancelled. The Shares will
continue to have the status of authorized but unissued Shares. These Shares
will not be issued unless they are first registered with the Securities and
Exchange Commission (the "Commission") under the Act and under appropriate
state securities laws or are otherwise issued in compliance with such laws.
It is understood that reinvestment of Distributions does not relieve a
Participant of any income tax liability which may be payable on the
Distributions.
4. Share Certificates. Within 90 days after the end of the Company's
fiscal year, the Company will issue certificates evidencing ownership of Shares
purchased through the DRP during the prior fiscal year. The ownership of the
Shares will be in book-entry form prior to the issuance of such certificates.
5. Reports. Within 90 days after the end of the Company's fiscal
year, the Company will provide each Participant with an individualized report
on his or her investment, including the purchase date(s), purchase price and
number of Shares owned, as well as the dates of distribution and amounts of
Distributions received during the prior fiscal year. The individualized
statement to Stockholders will include receipts and purchases relating to each
Participant's participation in the DRP including the tax consequences relative
thereto.
6. Termination by Participant. A Participant may terminate
participation in the DRP at any time, without penalty, by delivering to the
Company a written notice, a minimum of ten business days prior to the record
date for the next Distribution. Prior to listing of the Shares on a national
stock exchange or market, any transfer of Shares by a Participant to a
non-Participant will terminate participation in the DRP with respect to the
transferred Shares. If a Participant terminates DRP participation, the Company
will provide the terminating Participant with a certificate evidencing the
whole shares in his or her account and a check for the cash value of any
fractional share in such account. Upon termination of DRP participation,
Distributions will be distributed to the Stockholder in cash.
7. Amendment or Termination of DRP by the Company. The Directors of
the Company may by majority vote (including a majority of the Independent
Directors) amend or terminate the DRP for any reason upon 30 days' written
notice to the Participants.
8. Liability of the Company. The Company shall not be liable for any
act done in good faith, or for any good faith omission to act, including,
without limitation, any claims or liability: (a) arising out of failure to
terminate a Participant's account upon such Participant's death prior to
receipt of notice in writing of such death; and (b) with respect to the time
and the prices at which Shares are purchased or sold for a Participant's
account. To the extent that indemnification may apply to liabilities arising
under the Act or the securities act of a state, the Company has been advised
that, in the opinion of the Commission and certain state securities
commissioners, such indemnification is contrary to public policy and,
therefore, unenforceable.
9. Governing Law. This DRP shall be governed by the laws of the
State of Maryland.
B-2
<PAGE> 280
PLEASE MAIL THE WHITE COPY, THE YELLOW COPY, AND YOUR
[LOGO] CHECK MADE PAYABLE TO "LNB/ESCROW AGENT FOR MIFIII" TO:
Inland Securities Corporation, 2901 Butterfield Road, Oak
Brook, Illinois 60521, Attn: Investor Services. Please use
ballpoint pen or type the information.
________________________________________________________________________________
INLAND MONTHLY INCOME FUND III, INC., INSTRUCTIONS TO
PURCHASERS
________________________________________________________________________________
INSTRUCTIONS Any Person desiring to subscribe for Shares
should carefully read and review the Prospectus and, if
he/she desires to subscribe for Shares, complete the
Subscription Agreement/Signature Page which follows these
instructions. Follow the appropriate instruction listed
below for the items indicated. Please print in ink or type
the information.
________________________________________________________________________________
INVESTMENT Item 1--Enter the number of Shares to be purchased and the
A dollars and cents amount of the purchase. Minimum purchase
300 Shares ($3,000). Qualified Plans 100 Shares
($1,000). (Iowa requires 300 Shares ($3,000) for IRA
accounts.) Item 2--Check if you desire to participate in
Distribution Reinvestment Program. Item 3--Check if you
desire to participate in Automatic Purchase Investment
Program.
________________________________________________________________________________
REGISTRATION Item 4--Enter the exact name in which the Shares are to be
INFORMATION held. For co-owners enter the names of all owners. For
B investments by qualified plans, include the exact name of
the plan. If this is an additional purchase by a
qualified plan, please use the same exact plan name as
previously used. Item 5--Enter mailing address, state of
residence and telephone number of owner. Item 6--Check the
appropriate box. If the owner is a non-resident alien, he
must apply to the United States Internal Revenue Service for
an identification number via Form SS-4 for an individual or
SS-5 for a corporation, and supply the number to the Company
as soon as it is available. Item 7-- Check this box if the
owner is an employee of Inland or an individual who has been
continuously affiliated with Inland as an independent
contractor. Item 8--Enter birth date(s) or date of
incorporation. Item 9--Enter the Social Security number or
Taxpayer I.D. number. The owner is certifying that this
number is correct.
________________________________________________________________________________
C Item 10--The residence address if different.
________________________________________________________________________________
D Item 11--Check the appropriate box to indicate the type of
entity which is subscribing. If additional purchase, this
should be exactly the same as previous investment.
________________________________________________________________________________
SIGNATURE Item 12--The Subscription Agreement/Signature Page must be
E executed and initialed by the owner(s), or if applicable, the
trustee or custodian.
________________________________________________________________________________
ALTERNATE ADDRESS Item 13--If owners desire direct deposit of his/her/their
FOR DISTRIBUTIONS cash distributions to an account or address other than as
(OPTIONAL) set forth in the Subscription Agreement/Signature Page,
F please complete. Please make sure account has been opened
and account number is provided, as well as informing recipient
that distribution will be forthcoming and is an asset
transfer.
________________________________________________________________________________
BROKER/DEALER Item 14--Enter the name of the Broker/Dealer and the
REGISTERED name of the Registered Representative, along with the street
REPRESENTATIVE address, city, state, zip code and telephone number of the
G Registered Representative. By executing the Subscription
Agreement/Signature Page, the Registered Representative
substantiates compliance with Appendix F to Article III,
Section 34 of the NASD's Rules of Fair Practice, by
certifying that the Registered Representative has reasonable
grounds to believe, based on information obtained from the
investor concerning his, her or its investment objectives,
other investments, financial situation and needs and any
other information known by such Registered Representative,
that investment in the Company is suitable for such investor
in light of his, her or its financial position, net worth and
other suitability characteristics and that the Registered
Representative has informed the investor of all pertinent
facts relating to the liability, liquidity and marketability
of an investment in the Company during its term. The
Registered Representative (authorized signature) should sign
and date.
________________________________________________________________________________
SUBMISSION OF The properly completed and executed White and Yellow
SUBSCRIPTION copies of the Subscription Agreement/Signature Page together
with a CHECK MADE PAYABLE TO "LNB/ESCROW AGENT FOR MIFIII"
should be returned to the owner's Registered Representative
or the offices of Inland Securities Corporation, 2901
Butterfield Road, Oak Brook, Illinois 60521.
NOTE: If a Person other than the Person in whose name the Shares will be held
is reporting the income received from the Company, you must notify the
Company in writing of that Person's name, address and Social Security
number.
This Specimen Copy of the Subscription Agreement/Signature Page (Exhibit I
of the Prospectus) should not be executed.
ALL INVESTORS AND THEIR REGISTERED REPRESENTATIVES MUST SIGN THE SUBSCRIPTION
AGREEMENT/SIGNATURE PAGE PRIOR TO TENDERING ANY FUNDS FOR INVESTMENT IN
SHARES.
CALIFORNIA INVESTORS
All Certificates representing Shares which are sold in the State of California
will bear the following legend conditions: IT IS UNLAWFUL TO CONSUMMATE A SALE
OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
01-94-100-2
I-1
<PAGE> 281
[LOGO] INLAND MONTHLY INCOME FUND III, INC.
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
<TABLE>
<S><C>
PLEASE READ THIS SUBSCRIPTION AGREEMENT/SIGNATURE PAGE AND THE TERMS AND CONDITIONS BEFORE SIGNING.
SUBSCRIBER MUST READ THE SUBSCRIPTION INSTRUCTIONS.
(1) INVESTMENT MAKE CHECK PAYABLE TO LNB/ESCROW AGENT FOR IMIF III
This subscription is in the amount of $_________________ for the purchase of ______________ Shares of Inland Monthly Income
Fund III, Inc. at $10 per Share. Minimum initial investment: 300 Shares (100 Shares for IRA, Keogh and qualified plan
accounts-Iowa requires 300 Shares for IRA accounts)
This is an: / /INITIAL INVESTMENT / / ADDITIONAL INVESTMENT
(2) DISTRIBUTION REINVESTMENT PROGRAM: / / YES Subscriber elects to participate in the Distribution Reinvestment Program
described in the Prospectus.
Distributions will be made by check unless box is marked.
(3) AUTOMATIC PURCHASE INVESTMENT PROGRAM: / / YES See Attachment A
(4) REGISTERED OWNER
/ /Mr. / /Mrs. / /Ms. __________________________________________________ __________________________________
(AREA CODE) HOME TELEPHONE
CO-OWNER
/ /Mr. / /Mrs. / /Ms.____________________________________________________ __________________________________
(AREA CODE) BUSINESS TELEPHONE
(5) MAILING ADDRESS
____________________________________________________
B CITY, STATE & ZIP CODE
____________________________________________________
STATE OF RESIDENCE _____ (8) BIRTH DATE ________________ ___________________ (6) PLEASE INDICATE
MONTH DAY YEAR MONTH DAY YEAR CITIZENSHIP STATUS
/ / U.S. CITIZEN
/ / RESIDENT ALIEN
/ / NON-RESIDENT ALIEN
(9) SOCIAL SECURITY #_________________________________________ CORPORATE OR CUSTODIAL
TAX IDENTIFICATION NUMBER
CO-OWNER (7) / / EMPLOYEE OR AFFILIATE
SOCIAL SECURITY # _______________________________ # _______________________
C
(10) RESIDENCE ADDRESS IF DIFFERENT FROM ABOVE
__________________________________________________________________________________________________________
STREET CITY STATE ZIP CODE
(11) CHECK ONE-IMPORTANT-REFER TO REGISTRATION REQUIREMENTS ON BACK
A / / INDIVIDUAL OWNERSHIP H / / IRA L / / PENSION OR PROFIT SHARING PLAN
B / / JOINT TENANTS WITH RIGHT M / / TRUST/DATE TRUST ESTABLISHED ____________
OF SURVIVORSHIP I / / QUALIFIED PLAN (KEOGH) NAME OF TRUSTEE OR OTHER ADMINISTRATOR
D C / / COMMUNITY PROPERTY ___________________________________
D / / TENANTS IN COMMON J / / SIMPLIFIED EMPLOYEE PENSION/TRUST (S.E.P.) / / TAXABLE / / GRANTOR A OR B
E / / TENANTS BY THE ENTIRETY K / / UNIFORM GIFTS TO MINORS ACT N / / ESTATE
F / / CORPORATE OWNERSHIP STATE OF ______________ A CUSTODIAN O / / OTHER (SPECIFY) ________________________
G / / PARTNERSHIP OWNERSHIP FOR _____________________________ / / TAXABLE / / NON-TAXABLE
(12) AGREEMENT DATED ____________________________ 19 ______ X ________________________________________________________
SIGNATURE-REGISTERED OWNER
______________________________________________________________
(PRINT NAME OF CUSTODIAN OF TRUSTEE) X_________________________________________________________
SIGNATURE-CO-OWNER
______________________________________________________________
AUTHORIZED SIGNATURE (CUSTODIAN OR TRUSTEE) A sale of the Shares may not be completed by the Soliciting
Dealers until at least five business days after receipt of
the Prospectus.
PLEASE INITIAL WHERE INDICATED BELOW.
The investor named above by executing this Subscription Agreement/Signature Page (or in the case of fiduciary accounts, the
person authorized to sign on such investor's behalf), initialing EACH representation and by paying the full purchase price for the
Shares subscribed for:
(A) acknowledges receipt of the Prospectus of the Company relating to the Shares, wherein the terms and conditions of the
offering of the Shares are described. _________________
(B) represents that I (we) either: (i) have a net worth (excluding home, home furnishings and automobiles) of at least $45,000
and estimate that (without regard to investment in the Company) I (we) have gross income due in the current year of at least
E $45,000; or (ii) have a net worth (excluding home, home furnishings and automobiles) of at least $150,000 or such higher
suitability as may be required by certain states and set forth on page E-2 herein; In the case of sales to fiduciary
accounts, the suitability standards must be met by the beneficiary, the fiduciary account or by the donor or grantor who
directly or indirectly supplies the funds for the purchase of the Shares. _________________
(C) represents that the investors purchasing the Shares for his or her own account and if I am (we are) purchasing Shares on
behalf of a trust or other entity of which I am (we are) trustee(s) or authorized agent(s) I (we) have due authority to
execute the Subscription Agreement/Signature Page and do hereby legally bind the trust or other entity of which I am (we
are) trustee(s) or authorized agent(s). _________________
(D) acknowledges that the Shares are not liquid; _________________ (not required for Minnesota residents)
(E) certifies, under penalties of perjury (i) that the taxpayer identification number shown on the Subscription
Agreement/Signature Page is true, correct and complete and (ii) that he is not subject to backup withholding either
because he has not been notified that he is subject to backup withholding as a result of a failure to report all interest
or distributions, or the Internal Revenue Service has notified him that he is no longer subject to backup withholding.
(F) if an Affiliate of the Company, represents that the Shares are being purchased for investment purposes only and not with a
view toward immediate resale. _________________
(13) (OPTIONAL) DIRECTLY DEPOSIT CASH DISTRIBUTIONS TO:
_______________________________________________________________________
ACCOUNT NUMBER-MUST BE FILLED IN
NAME OF BANK,
F BROKERAGE FIRM
OR INDIVIDUAL _______________________________________________________ X____________________________________
SIGNATURE-REGISTERED OWNER
MAILING ADDRESS
_______________________________________________________
CITY, STATE & X____________________________________
ZIP CODE _______________________________________________________ SIGNATURE-CO-OWNER
(14) BROKER/DEALER DATA-COMPLETED BY SELLING REGISTERED REPRESENTATIVE (PLEASE USE REP'S ADDRESS-NOT HEADQUARTERS)
NAME OF
SALESPERSON
/ / Mr. / / Mrs. / / Ms.
______________________________________________ _____________________________________
MAILING ADDRESS SALESPERSON'S TELEPHONE
_______________________________________________________________
G CITY, STATE & IS THIS A NEW BROKER/DEALER?
ZIP CODE _______________________________________________________________
BROKER/DEALER / / YES / / NO
NAME _______________________________________________________________
MAILING ADDRESS X____________________________________
________________________________________________________________ SIGNATURE-REGISTERED REPRESENTATIVE
CITY, STATE &
ZIP CODE ________________________________________________________________
</TABLE>
INLAND MONTHLY INCOME FUND III, INC.
#5010
I-2
<PAGE> 282
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
CERTAIN STATES HAVE IMPOSED SPECIAL FINANCIAL SUITABILITY STANDARDS FOR
INVESTORS WHO PURCHASE SHARES.
IF THE INVESTOR IS A RESIDENT OF MAINE, THE INVESTOR MUST HAVE EITHER: (i)
A NET WORTH (EXCLUDING HOME, HOME FURNISHINGS AND AUTOMOBILES) OF $200,000; OR
(ii) A MINIMUM ANNUAL GROSS INCOME OF $50,000 AND A NET WORTH (EXCLUSIVE OF
HOME, HOME FURNISHINGS AND AUTOMOBILES) OF $50,000.
IF THE INVESTOR IS A RESIDENT OF MASSACHUSETTS, THE INVESTOR MUST HAVE
EITHER: (i) A NET WORTH (EXCLUDING HOME, HOME FURNISHINGS AND AUTOMOBILES) OF
$225,000; OR (ii) A MINIMUM ANNUAL GROSS INCOME OF $60,000 AND A NET WORTH
(EXCLUSIVE OF HOME, HOME FURNISHINGS AND AUTOMOBILES) OF $60,000.
THE COMPANY INTENDS TO ASSERT THE FOREGOING REPRESENTATIONS AS A DEFENSE
IN ANY SUBSEQUENT LITIGATION WHERE SUCH ASSERTION WOULD BE RELEVANT. THE
COMPANY SHALL HAVE THE RIGHT TO ACCEPT OR REJECT THIS SUBSCRIPTION IN WHOLE OR
IN PART, SO LONG AS SUCH PARTIAL ACCEPTANCE OR REJECTION DOES NOT RESULT IN AN
INVESTMENT OF LESS THAN THE MINIMUM AMOUNT SPECIFIED IN THE PROSPECTUS. AS USED
ABOVE, THE SINGULAR INCLUDES THE PLURAL IN ALL RESPECTS IF SHARES ARE BEING
ACQUIRED BY MORE THAN ONE PERSON. AS USED IN THIS AGREEMENT, "INLAND" REFERS TO
THE INLAND COMPANIES AND ITS AFFILIATES. THIS AGREEMENT AND ALL RIGHTS
HEREUNDER SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF ILLINOIS.
OFFICE USE ONLY Investor Check Date _______________ OWNER ACCOUNT
Investor Check # ________________ NUMBER
Check Amount $ ________________ ------
CO-OWNER
BROKER/DEALER ACCOUNT NUMBER _______
NUMBER _______________________________
I-3
<PAGE> 283
AUTOMATIC PURCHASE INVESTMENT PROGRAM AUTHORIZATION FORM
(This automatic check plan is described in the Prospectus under
AUTOMATIC PURCHASE INVESTMENT PROGRAM)
The Investor is to complete Sections A and B. This form should be returned to:
INLAND MONTHLY INCOME FUND III, INC.
(SEE ADDRESS BELOW)
A. To: INLAND MONTHLY INCOME FUND III, INC. ("MIFIII")
You are hereby authorized to draw checks on my account for investment
in MIFIII to be used for the periodic purchase of Shares, with a minimum
periodic purchase of one Share ($10) from any single investor account.
MIFIII ACCOUNT NUMBER____________________________________________________
(If assigned)
AMOUNT OF EACH CHECK $___________________________________________________
DATE ON WHICH PERIODIC INVESTMENT TO BE MADE_____________________________
(e.g. 15th of each month, last business day of each month)
If I change fiduciaries or desire to terminate or suspend this program
I agree to notify you in writing ten days prior to the occurrence of
either of these events.
I further agree that if, at any time, during the offering by MIFIII, I
no longer meet the suitability requirements for making an investment in
MIFIII or can no longer make the other representations or warranties set
forth in the Subscription Agreement, I will promptly notify MIFIII.
_________________________________________________________________________
DATE INVESTOR SIGNATURE
_________________________________________________________________________
If joint account, both must sign INVESTOR SIGNATURE
_________________________________________________________________________
NAME OF SALESPERSON DEALER FIRM NAME
AUTHORIZATION TO HONOR CHECKS DRAWN
BY INLAND MONTHLY INCOME FUND III
____________________________________________ FIDUCIARY NAME
____________________________________________ FIDUCIARY ADDRESS
__________________ __________ ________ CITY/STATE/ZIP
B. For my benefit, and as a convenience to me, I hereby request and authorize
you to issue and charge to my account, a check(s), made payable to the
order of LNB/Escrow Agent for MIFIII. I agree that your rights in respect
to each such check shall be the same as if it were a check drawn on you
and signed personally by me. This authority is to remain in effect until
revoked by me in writing. Until you receive such notice, you shall be
fully protected in honoring any such check.
I further agree that if any such check be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be
under no liability whatsoever even though such dishonor results in the
loss of investment advantage.
_________________________________________________________________________
DATE INVESTOR SIGNATURE
_________________________________________________________________________
FIDUCIARY ACCOUNT NUMBER INVESTOR SIGNATURE
Check should be made payable to:
LNB/ESCROW AGENT FOR MIFIII FBO __________________________________
(Account Holder/Investor)
MAIL CHECK TO: INLAND MONTHLY INCOME FUND III, INC.
DEBBIE JAENT
2901 BUTTERFIELD ROAD
OAK BROOK, ILLINOIS 60521
(708) 218-8000
II-1
<PAGE> 284
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in the
Prospectus and supplemental literature authorized by the Company and referred
to in this Prospectus, and, if given or made, such information and
representations must not be relied upon. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any of the securities
offered hereby in any state to any person to whom it is unlawful to make such
offer. Neither the delivery of this 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 respective dates at which
information is given herein, or the date hereof. However, if any material
change in the affairs of the Company shall occur during the time when a copy of
this Prospectus is required to be delivered, the Company will amend or
supplement this Prospectus to reflect such change.
TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
PROSPECTUS SUMMARY ............................ 1
ORGANIZATIONAL CHART .......................... 14
RISK FACTORS .................................. 15
ESTIMATED USE OF PROCEEDS OF OFFERING ......... 24
WHO MAY INVEST ................................ 25
COMPENSATION TABLE ............................ 26
CONFLICTS OF INTEREST ......................... 34
FIDUCIARY RESPONSIBILITY OF DIRECTORS AND
THE ADVISOR; INDEMNIFICATION ................ 37
PRIOR PERFORMANCE OF THE COMPANY'S AFFILIATES.. 39
MANAGEMENT .................................. 52
SELECTED FINANCIAL DATA ....................... 62
INVESTMENT OBJECTIVES AND POLICIES ............ 64
REAL PROPERTY INVESTMENTS ..................... 70
CAPITALIZATION ................................ 86
PRINCIPAL STOCKHOLDERS ........................ 87
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE FINANCIAL CONDITION OF THE COMPANY ...... 88
FEDERAL INCOME TAX CONSIDERATIONS ............. 92
ERISA CONSIDERATIONS .......................... 101
DESCRIPTION OF SECURITIES ..................... 102
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS ....... 105
PLAN OF DISTRIBUTION .......................... 113
HOW TO SUBSCRIBE ............................. 117
SALES LITERATURE .............................. 118
INVESTMENT, REINVESTMENT AND SHARE
REPURCHASE PROGRAMS ......................... 118
REPORTS TO STOCKHOLDERS ...................... 121
LEGAL MATTERS ................................. 122
EXPERTS ...................................... 122
ADDITIONAL INFORMATION ........................ 123
GLOSSARY ..................................... 124
INDEX TO FINANCIAL STATEMENTS ................. F-i
PRIOR PERFORMANCE TABLES ...................... A-1
DISTRIBUTION REINVESTMENT PROGRAM ............. B-1
SUBSCRIPTION AGREEMENT ........................ I-1
APIP AUTHORIZATION FORM ....................... II-1
</TABLE>
Until August 5, 1996, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver prospectuses when acting as Soliciting Dealers with respect to their
unsold allotments or subscriptions.
INLAND
MONTHLY
INCOME
FUND III, INC.
6,000,000 SHARES
_________________
PROSPECTUS
MAY 7, 1996
_________________
INLAND SECURITIES
CORPORATION
<PAGE> 285
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee .... $20,362
NASD Filing Fee ........................................ 6,405
Printing and Mailing Expenses .......................... 275,000
Blue Sky Fees and Expenses (including counsel fees) .... 125,000
Legal Fees and Expenses ................................ 250,000
Accounting Fees and Expenses ........................... 60,000
Advertising and Sales Literature ....................... 375,000
Due Diligence .......................................... 200,000
Miscellaneous .......................................... 459,733
----------
Total .............................................. $1,771,500
==========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
Employees and associates of the Company and its Affiliates will be
permitted to purchase Shares net of sales commissions. Prior to the time that
the Minimum Number of Shares is sold, such persons may be required to pay $10
per Share and will receive a return of the commission amount promptly upon the
receipt of subscriptions for the Minimum Number of Shares.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On May 12, 1994, Inland Real Estate Advisory Services, Inc. (the
"Advisor") acquired 100 Shares at a price of $10 per Share, paid in cash. No
sales commission or other consideration was paid in connection with such sale,
which was effective without registration under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption from registration in
Section 4(2) of the Act as a transaction not involving any public offering. On
May 25, 1994 the Advisor purchased an additional 19,900 Shares at a price of
$10 per Share, paid in cash. No sales commission or other consideration was
paid in connection with such sale, and the sale was made in reliance upon the
exemption from registration in Section 4(2) of the Act.
II-1
<PAGE> 286
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Second Articles of Amendment and Restatement and Amended and
Restated Bylaws authorize it, to the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted and, without limiting
the generality of the foregoing, in accordance with Section 2-418 of the
Maryland General Corporation Law, to indemnify and pay or reimburse reasonable
expenses to: any Director, Advisor or its Affiliates (each an "Indemnified
Party"), provided, that: (i) the Director, Advisor or its Affiliates have
determined, in good faith, that the course of conduct which caused the loss or
liability was in the best interest of the Company; (ii) the Director, the
Advisor or its Affiliates were acting on behalf of or performing services on
the part of the Company; (iii) such liability or loss was not the result of
negligence or misconduct on the part of the Indemnified Party, except that in
the event the Indemnified Party is or was an Independent Director, such
liability or loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of the assets of the Company and not from the
Stockholders. The Company shall not indemnify a Director, the Advisor or its
Affiliates for losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws by such party unless one
or more of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee; (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee; or (iii) a court of competent jurisdiction
approves a settlement of the claims and finds that indemnification of the
settlement and related costs should be made and the court considering the
request has been advised of the position of the Securities and Exchange
Commission (the "Commission") and the published opinions of the Tennessee
Securities Division and any other state securities regulatory authority in
which securities of the Company were offered and sold as to indemnification for
securities law violations.
The Company may advance amounts to persons entitled to indemnification
hereunder for legal and other expenses and costs incurred as a result of any
legal action for which indemnification is being sought only if all of the
following conditions are satisfied: (i) the legal action relates to acts or
omissions with respect to the performance of duties or services by the
indemnified party for or on behalf of the Company; (ii) the legal action is
initiated by a third party who is not a Stockholder or the legal action is
initiated by a Stockholder acting in his or her capacity as such and a court of
competent jurisdiction specifically approves such advancement; and (iii) the
indemnified party receiving such advances undertakes to repay the advanced
funds to the Company, together with the applicable legal rate of interest
thereon, in cases in which such party is found not to be entitled to
indemnification.
The Company shall have the power to purchase and maintain insurance on
behalf of an indemnified party against any liability asserted which was
incurred in any such capacity with the Company or arising out of such status;
provided, however, that the Company shall not incur the costs of any liability
insurance which insures any person against liability for which he, she or it
could not be indemnified under the Articles.
Neither the amendment nor the adoption of any other provision of the
Articles or the Bylaws shall apply to or affect in any respect the
applicability of indemnification with respect to any act or failure to act
which occurred prior to such amendment, repeal or adoption.
To the extent that the indemnification may apply to liabilities arising
under the Act, the Company has been advised that, in the opinion of the
Commission, such indemnification is contrary to public policy and, therefore,
unenforceable.
II-2
<PAGE> 287
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Inapplicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements Included in the Reprinted Prospectus
dated May 7, 1996.
Independent Auditors' Report
Balance Sheets for the Company as of December 31, 1995 and
1994
Statement of Operations for the year ended December 31, 1995
Statement of Stockholders' Equity for the year ended December
31, 1995 and for the period from May 12, 1994 (formation of
the Company) to December 31, 1994
Statement of Cash Flows for the year ended December 31, 1995
and the period May 12, 1994 (formation of the Company) to
December 31, 1994
Notes to Financial Statements
Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for Walgreens/Decatur property for the
six-month period ended December 31, 1994
Independent Auditors' Report
Historical Summaries of Gross Income and Direct Operating
Expenses (unaudited) of the Walgreens/Decatur properly for
each of the three years in the three year period ended
June 30, 1994
Notes to Historical Summaries of Gross Income and Direct
Operating Expenses
Historical Summary of Gross Income and Direct Operating
Expenses (unaudited) for the Eagle Crest Shopping Center for
the six-month period ended December 31, 1994
Independent Auditor's Report
Historical Summaries of Gross Income and Direct Operating
Expenses (Historical Summaries) of the Eagle Crest/Naperville
property for each of the three years in the three year period
ended June 30, 1994
Notes to the Historical Summaries of Gross Income and Direct
Operating Expenses
Report of Independent Public Accountants
II-3
<PAGE> 288
Statement of Gross Income and Direct Operating Expenses for
the year ended December 31, 1994 of Nantucket Square Shopping
Center
Notes to the Statement of Gross Income and Direct Operating
Expenses for the year ended December 31, 1994 of Nantucket
Square Shopping Center
Statement of Gross Income and Direct Operating Expenses for
the seven-month period ended July 31, 1995 - Nantucket Square
Shopping Center (unaudited)
Report of Independent Public Accountants
Statement of Gross Income and Direct Operating Expenses for
the Year Ended December 31, 1995 of Mundelein Plaza
Notes to the Statement of Gross Income and Direct Operating
Expenses for the year ended December 31, 1995 for Mundelein
Plaza
Independent Auditors' Report
Historical Summary of Gross Income and Direct Operating
Expenses for the year ended December 31, 1995 of Regency
Point
Notes to Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31, 1995 of
Regency Point
Pro Forma Balance Sheet (unaudited) at December 31, 1995
Notes to Pro Forma Balance Sheet (unaudited) at December 31,
1995
Pro Forma Statement of Operations (unaudited) of the Company
for the year ended December 31, 1995
Notes to Pro Forma Statement of Operations (unaudited) for
the year ended December 31, 1995
(b) Financial Statements Included in Supplement No. 1 to the
Reprinted Prospectus dated May 7, 1996.
Balance Sheets (unaudited) at March 31, 1996 and December
31, 1995
Statements of Operations (unaudited) for the three months
ended March 31, 1996 and 1995
Statements of Stockholders' Equity (unaudited) at March 31,
1996 and December 31, 1995
II-4
<PAGE> 289
Statement of Cash Flows (unaudited) for the three months
ended March 31, 1996 and 1995
Notes to Financial Statements
Independent Auditors' Report
Statement of Gross Income and Direct Operating Expenses for
the year ended December 31, 1995 for Prospect Heights Plaza
Notes to the Statement of Gross Income and Direct Operating
Expenses for the year ended December 31, 1995 for Prospect
Heights Plaza
Independent Auditors' Report
Statement of Gross Income and Direct Operating Expenses for
the year ended December 31, 1995 of Montgomery-Sears Shopping
Center
Notes to the Statement of Gross Income and Direct Operating
Expenses for the year ended December 31, 1995 for
Montgomery-Sears Shopping Center
Pro Forma Balance Sheet (unaudited) at December 31, 1995
Notes to Pro Forma Balance Sheet (unaudited) at December 31,
1995
Pro Forma Statement of Operations (unaudited) for the year
ended December 31, 1995
Notes to Pro Forma Statement of Operations (unaudited) for
the year ended December 31, 1995
Pro Forma Balance Sheet (unaudited) at March 31, 1996
Notes to Pro Forma Balance Sheet (unaudited) at March 31,
1996
Pro Forma Statement of Operations (unaudited) for the three
months ended March 31, 1996
Notes to Pro Forma Statement of Operations (unaudited) for
the three months ended March 31, 1996
All financial statement schedules have been omitted as the required
information is inapplicable or is presented in the financial statements or
related notes.
II-5
<PAGE> 290
(f) Exhibits
1.1 Dealer Manager Agreement between
Registrant and Dealer Manager*
1.2 Form of Soliciting Dealers Agreement
between Dealer Manager and Soliciting Dealers*
1.3 Form of Warrant Purchase Agreement*
3(a) Articles of Incorporation of Inland
Monthly Income Fund III, Inc.*
3(a)(1) Articles of Amendment and Restatement of Inland
Monthly Income Fund III, Inc.*
3(a)(2) Second Articles of Amendment and Restatement of
Inland Monthly Income Fund III, Inc.*
3(b) Bylaws of Inland Monthly Income Fund
III, Inc.*
3(b)(1) Amended and Restated Bylaws of Inland Monthly Income
Fund III, Inc.*
4 Specimen Stock Certificate*
5 Opinion of Shefsky Froelich & Devine
Ltd. (f/k/a Shefsky & Froelich Ltd.) as to the
legality of the securities being registered*
5(a) Opinion of Shapiro and Olander as to
the legality of the securities being registered*
8 Opinion of Shefsky & Froelich Ltd. as
to tax matters*
10(a) Custodial Agreement between Inland
Monthly Income Fund III, Inc. and LaSalle National
Bank, N.A.*
10(b) Advisory Agreement*
10(d) Form of Management Agreement*
10(e) Independent Director Stock Option Plan*
10(f) Amended and Restated Independent Director Stock
Option Plan
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of Shefsky Froelich & Devine
Ltd. (f/k/a Shefsky & Froelich Ltd.)
II-6
<PAGE> 291
23(c) See Exhibit 99(a)
23(d) See Exhibit 99(b)
23(e) See Exhibit 99(c)
23(f) Consent of Arthur Andersen LLP
23(g) Consent of Bruce Gorlick, C.P.A., Ltd.
23(h) Consent of Shapiro and Olander
24 Power of Attorney (included on
signature page of Post-Effective Amendment No. 1 to the
Registration Statement)*
27 Financial Data Schedule
99(a) Consent of Douglas R. Finlayson,
M.D. to be named as an Independent Director*
99(b) Consent of Brenda G. Gujral to be
named as an Independent Director*
99(c) Consent of Hugh D. Robinson to be
named as an Independent Director*
99(d) Consent of Heidi N. Lawton to be
named as an Independent Director*
99(e) Consent of Robert L. Sohol to be
named as an Independent Director*
_______________
* Previously filed.
II-7
<PAGE> 292
ITEM 36. UNDERTAKINGS.
A. The Registrant undertakes:
(a) to file any prospectuses required by Section
10(a)(3) of the Act as post-effective amendments to this
Registration Statement;
(b) that for the purpose of determining any liability
under the Act, each such post-effective amendment may be
deemed to be a new registration statement relating to the
securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof;
(c) that all post-effective amendments will comply
with the applicable forms, rules and regulations of the
Commission in effect at the time such post-effective
amendments are filed; and
(d) to remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
B. The Registrant undertakes to file, during any period in which offers or
sales are being made, a post-effective amendment to the Registration Statement
to: (a) include any prospectus required by Section 10(a)(3) of the Act; (b)
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; and (c)
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement.
C. The Registrant undertakes to send to each Stockholder at least on an
annual basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
D. The Registrant undertakes to provide to the Stockholders the financial
statements required by Form 10-K for the first full fiscal year of operations
of the Company.
E. The Registrant hereby undertakes to send to the Stockholders, within 60
days after the close of each quarterly fiscal period, the information specified
by Form 10-Q, if such report is required to be filed with the Securities and
Exchange Commission.
F. The Registrant undertakes to file a sticker supplement pursuant to Rule
424(c) under the Act during the distribution period describing each property
not identified in the prospectus at such time as there arises a reasonable
probability that such property will be acquired and to consolidate all such
stickers into a post-effective amendment filed at least once every three
months, with the information contained in such amendment provided
simultaneously to the existing Stockholders. Each sticker supplement should
also disclose all compensation and fees received by the Advisor and its
Affiliates in connection with any such acquisition. The post-effective
amendment shall include audited financial
II-8
<PAGE> 293
statements meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period.
The Registrant also undertakes to file, after the end of the distribution
period, a current report on Form 8-K containing the financial statements and
any additional information required by Rule 3-14 of Regulation S-X, to reflect
each commitment (i.e., the signing of a binding purchase agreement) made after
the end of the distribution period involving the use of 10% or more (on a
cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to the Stockholders at least once each
quarter after the distribution period of the offering has ended.
G. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-9
<PAGE> 294
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS (A)
(000'S OMITTED, EXCEPT FOR SQUARE FEET OR ACRES)
Table VI presents information concerning the acquisition of real
properties by real estate limited partnerships sponsored by Inland Real Estate
Investment Corporation in the three years ended December 31, 1995. The detail
provided with respect to each acquisition includes the property size, location,
purchase price and the amount of mortgage financing. This information is
intended to assist the prospective investor in evaluating the property mix as
well as the terms involved in acquisitions by prior partnerships sponsored by
IREC.
II-10
01-96-132
<PAGE> 295
TABLE VI-(CONTINUED)
ACQUISITION OF PROPERTIES BY PROGRAMS (A)
(000'S OMITTED, EXCEPT FOR NUMBER OF APARTMENT UNITS, SQUARE FEET OR ACRES)
<TABLE>
<CAPTION>
Number Mortgage Other
of Units/ Purchase Financing Cash Cash Total
Square Feet/ Date of Price Plus at Date of Down Expenditures Acquisition
Property Acres Purchase Acquisition Fee Purchase Payment Capitalized(A) Cost(B)
- ------------------------------------------ ----------- -------- --------------- ---------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
LAND APPRECIATION FUND-II
Parcel #24 - Kendall County, Illinois..... 4 Acres 1/21/93 691 0 691 10 701
Parcel #24A - Kendall County, Illinois.... 2,400 Sq. Ft. 1/21/93 166 0 166 3 169
Parcel #25 - Kendall County, Illinois..... 657 Acres 1/28/93 1,701 0 1,701 15 1,716
Parcel #26 - Kane County, Illinois........ 90 Acres 3/10/93 1,266 0 1,266 53 1,319
Parcel #27 - Kendall County, Illinois..... 84 Acres 3/11/93 1,030 0 1,030 9 1,039
------------- ------ -- ------ ---- ------
TOTAL 835 Acres $4,854 $0 $4,854 $ 90 $4,944
============= ====== == ====== ==== ======
</TABLE>
II-11
01-96-132
<PAGE> 296
TABLE VI-(CONTINUED)
ACQUISITION OF PROPERTIES BY PROGRAMS (A)
(000'S OMITTED, EXCEPT FOR NUMBER OF APARTMENT UNITS, SQUARE FEET OR ACRES)
<TABLE>
<CAPTION>
Number Mortgage Other
of Units/ Purchase Financing Cash Cash Total
Square Feet/ Date of Price Plus at Date of Down Expenditures Acquisition
Property Acres Purchase Acquisition Fee Purchase Payment Capitalized(B) Cost(C)
- ------------------------------------ ----------- -------- --------------- ---------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INLAND CAPITAL FUND, L.P.
Parcel #2 - McHenry County, Illinois...... 201 Acres 11/9/93 2,133 0 2,133 71 2,204
Parcel #3 - Will County, Illinois......... 34 Acres 3/4/94 1,322 0 1,322 2 1,324
Parcel #4 - Will County, Illinois......... 87 Acres 3/30/94 1,903 0 1,903 39 1,942
Parcel #5 - LaSalle County, Illinois...... 191 Acres 4/1/94 537 0 537 26 563
Parcel #6 - DeKalb County, Illinois....... 59 Acres 5/11/94 717 0 717 57 774
Parcel #7 - Kendall County, Illinois...... 201 Acres 7/28/94 1,579 0 1,579 19 1,598
Parcel #8 - Kendall County, Illinois...... 133 Acres 8/17/94 1,395 0 1,395 15 1,410
Parcel #9 - LaSalle County, Illinois...... 336 Acres 8/30/94 1,058 0 1,058 18 1,076
Parcel #10 - Kendall County, I.linois..... 224 Acres 9/16/94 2,891 0 2,891 25 2,916
Parcel #10A - Kendall County, Illinois.... 7 Acres 9/16/94 222 0 222 2 224
Parcel #11 - Kane County, Illinois........ 123 Acres 9/26/94 1,427 0 1,427 4 1,431
Parcel #12 - Kendall County, Illinois..... 110 Acres 9/28/94 644 0 644 7 651
Parcel #13 - LaSalle County, Illinois..... 353 Acres 10/6/94 1,108 0 1,108 20 1,128
Parcel #14 - Kendall County, Illinois..... 135 Acres 10/26/94 1,073 0 1,073 11 1,084
Parcel #15 - McHenry County, Illinois..... 170 Acres 10/31/94 2,968 0 2,968 46 3,014
Parcel #16 - McHenry County, Illinois.... 207 Acres 11/30/94 1,845 0 1,845 55 1,900
Parcel #17 - LaSalle County, Illinois..... 236 Acres 12/7/94 1,122 530 592 13 1,135
Parcel #18 - Kendall County, Illinois..... 387 Acres 11/02/95 1,028 0 1,028 33 1,061
----------- ------- ---- ------- ---- -------
TOTAL 3,194 Acres $24,972 $530 $24,442 $463 $25,435
=========== ======= ==== ======= ==== =======
</TABLE>
II-12
01-96-132
<PAGE> 297
TABLE VI-(CONTINUED)
ACQUISITION OF PROPERTIES BY PROGRAMS
NOTES TO TABLE VI
(A) "Other Cash Expenditures Capitalized" consists of improvements to the
property and acquisition expenses which are capitalized and paid or to be paid
from the proceeds of the offering.
(B) "Total Acquisition Cost" is the sum of columns captioned "Purchase
Price Plus Acquisition Fee" and "Other Cash Expenditures Capitalized."
II-13
01-96-132
<PAGE> 298
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-11 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oak Brook,
State of Illinois, on the 14th day of June, 1996.
INLAND MONTHLY INCOME FUND III, INC.
By: /s/Robert D. Parks
-----------------------------------
Title: President, Chief Executive
Officer, Chief Operating
Officer and Chairman of the
Board of Directors
II-14
<PAGE> 299
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------- --------------------------------------- -----------------------
<S> <C> <C>
/s/Robert D. Parks President, Chief Executive Officer, June 14, 1996
- -------------------------------------- Chief Operating Officer and Chairman
Robert D. Parks of the Board of Directors
/s/G. Joseph Cosenza Director June 14, 1996
- --------------------------------------
G. Joseph Cosenza
/s/Cynthia M. Hassett June 14, 1996
- ----------------------------- Secretary, Treasurer and Chief
Cynthia M. Hassett Financial Officer (Principal Accounting
Officer)
/s/Roland W. Burris Director June 14, 1996
- -----------------------------
Roland W. Burris
/s/Douglas R. Finlayson, M.D. Director June 14, 1996
- -----------------------------
Douglas R. Finlayson, M.D.
/s/Heidi N. Lawton Director June 14, 1996
- -----------------------------
Heidi N. Lawton
</TABLE>
II-15
<PAGE> 300
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- ------------------------------------------------------------------------------
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 10
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
- ------------------------------------------------------------------------------
INLAND MONTHLY INCOME FUND III, INC.
- ------------------------------------------------------------------------------
<PAGE> 301
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ----------------------------------------------- ------
<S> <C> <C>
1.1 Dealer Manager Agreement between Registrant
and Dealer Manager*
1.2 Form of Soliciting Dealers Agreement between
Dealer Manager and Soliciting Dealers*
1.3 Form of Warrant Purchase Agreement*
3(a) Articles of Incorporation of Inland Monthly Income
Fund III, Inc.*
3(a)(1) Articles of Amendment and Restatement of Inland Monthly
Income Fund III, Inc.*
3(a)(2) Second Articles of Amendment and Restatement of
Inland Monthly Income Fund III, Inc.*
3(b) Bylaws of Inland Monthly Income Fund III, Inc.*
3(b)(1) Amended and Restated Bylaws of Inland Monthly
Income Fund III, Inc.*
4 Specimen Stock Certificate*
5 Opinion of Shefsky Froelich & Devine Ltd. (f/k/a Shefsky &
Froelich Ltd.) as to the legality of the securities being
registered*
5(a) Opinion of Shapiro and Olander as to the legality of the
securities being registered*
8 Opinion of Shefsky & Froelich Ltd. as to tax matters*
10(a) Custodial Agreement between Inland Monthly
Income Fund III, Inc. and LaSalle National Bank, N.A.*
10(b) Advisory Agreement*
</TABLE>
- ---------------------
* Previously filed
<PAGE> 302
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ----------------------------------------------- ------
<S> <C> <C>
10(d) Form of Management Agreement*
10(e) Independent Director Stock Option Plan*
10(f) Amended and Restated Independent Director Stock Option Plan
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of Shefsky Froelich & Devine Ltd. (f/k/a Shefsky & Froelich
Ltd.)
23(c) See Exhibit 99(a)
23(d) See Exhibit 99(b)
23(e) See Exhibit 99(c)
23(f) Consent of Arthur Andersen L.L.P.
23(g) Consent of Bruce Gorlick, C.P.A., Ltd.
23(h) Consent of Shapiro and Olander
24 Power of Attorney (included on signature page of Post-Effective
Amendment No. 1 to Registration Statement)*
27 Financial Data Schedule
99(a) Consent of Douglas R. Finlayson, M.D. to be named as an Independent
Director*
99(b) Consent of Brenda G. Gujral to be named as an Independent Director*
99(c) Consent of Hugh D. Robinson to be named as an Independent Director*
99(d) Consent of Heidi N. Lawton to be named as an Independent Director*
99(e) Consent of Robert L. Sohol to be named as an Independent Director*
</TABLE>
- ---------------------
* Previously filed
<PAGE> 1
EXHIBIT 10(f)
Amended and Restated Independent Director Stock Option Plan
<PAGE> 2
AMENDED AND RESTATED
INLAND MONTHLY INCOME FUND III, INC.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
ARTICLE I
GENERAL
1.1 PURPOSE:
Inland Monthly Income Fund III, Inc., a Maryland corporation (the
"Corporation"), hereby adopts this Independent Director Stock Option Plan (the
"Plan"). The purpose of the Plan is to foster and promote the long-term
financial success of the Corporation by attracting and retaining outstanding
non-employee directors by enabling them to participate in the Corporation's
growth through the granting of Options (as defined in Article II) which entitle
them to purchase shares of the Company's common stock, par value $0.01 per
share ("Common Stock").
1.2 PARTICIPATION:
Only directors of the Corporation who at the time an Option is granted
meet the following criteria ("Directors") shall receive an Option under the
Plan: (a) the director is not, and has not been for at least two years, an
employee or officer of the Corporation or any subsidiary of the Corporation;
and (b) the director is a "disinterested person" as such term is defined in
Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act") or any similar rule which may subsequently be in effect ("Rule 16b-3").
1.3 SHARES SUBJECT TO THE PLAN:
Shares of Common Stock to be issued upon exercise of Options granted
under the Plan may be in whole or in part from authorized but unissued shares
or treasury shares of the Corporation's Common Stock. A maximum of 50,000
shares of Common Stock (the "Plan Maximum") may be issued for all purposes
under the Plan (subject to adjustment pursuant to Section 3.2). Any shares of
Common Stock reserved for issuance under Options which for any reason are
cancelled or terminated without having been exercised shall not be counted in
determining whether the Plan Maximum has been reached. Options for fractional
shares shall not be granted.
1.4 GENDER AND NUMBER:
Except when otherwise indicated by the context, words in the masculine
gender when used in the Plan shall include the feminine gender, the singular
shall include the plural, and the plural shall include the singular.
<PAGE> 3
ARTICLE II
STOCK OPTION AWARDS
2.1 AWARD OF STOCK OPTIONS:
Effective on the later of the date on which a Director becomes a
member of the Board of Directors with the Company or October 14, 1994, each
Director who satisfies the conditions set forth in Section 1.2 will
automatically be awarded a stock option (an "Initial Option" or the "Initial
Options") under the Plan to purchase 3,000 (subject to adjustment pursuant to
Section 3.2) shares of Common Stock. Effective on the date of each Annual
Meeting, commencing with the Annual Meeting in 1995, each Director then in
office who satisfies the conditions set forth in Section 1.2 will automatically
be awarded a stock option (a "Subsequent Option" or the "Subsequent Options",
collectively with the "Initial Options" referred to herein as an "Option" or
"Options") to purchase 500 (subject to adjustment pursuant to Section 3.2)
shares of Common Stock. The Options are not intended to qualify as "incentive
stock options" as defined in Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code").
2.2 STOCK OPTION CERTIFICATES:
The award of an Option shall be evidenced by a certificate executed by
an officer of the Corporation.
2.3 OPTION PRICE:
The purchase price of Common Stock (the "Option Price") under each
Initial Option granted shall be the Fair Market Value (as defined in Section
3.5) of the Common Stock on the date of the grant, which, until the earlier of
(i) the termination of the Company's offering of Common Stock which commenced
on October 14, 1994 or (ii) October 14, 1996 (the "Initial Offering Period),
shall be $9.05. The Option Price under each Subsequent Option granted on the
date of any Annual Meeting shall be the Fair Market Value of the Common Stock
on the last business day preceding the date of the Annual Meeting, provided
however that during the Initial Offering Period the Option Price shall be
$9.05.
2.4 EXERCISE AND TERM OF OPTIONS:
(a) Options may be exercised by the delivery of written notice of
exercise and payment of the aggregate Option Price for the shares to be
purchased to the Corporate Secretary of the Corporation. The Option Price may
be paid in cash (including check, bank draft or money order) or, unless in the
opinion of counsel to the Corporation to do so may result in a possible
violation of law, by delivery of Common Stock already owned by the Director,
valued at Fair Market Value on the date of the exercise. As soon as
practicable after receipt of each notice and full payment, the Corporation
shall deliver to the Director a certificate or certificates representing the
acquired shares of Common Stock.
(b) Each certificate for Shares issued upon exercise of an Option,
unless at the time of exercise such Shares are registered with the Securities
and Exchange Commission (the
2
<PAGE> 4
"Commission"), under the Securities Act of 1933, as amended (the "Act"), shall
bear the following legend:
NO SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THESE SHARES SHALL
BE MADE EXCEPT PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION IS NOT REQUIRED.
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Act of the securities represented thereby) shall also bear the above legend
unless, in the opinion of such counsel as shall be reasonably approved by the
Company, the securities represented thereby need no longer be subject to such
restrictions.
(c) A Director's Initial Option shall become exercisable: (i)
1,000 shares on the date of grant, (ii) 1,000 shares on the first anniversary
of the date of grant, and (iii) 1,000 shares on the second anniversary of the
date of grant (subject to Section 3.1) and shall continue to be exercisable
until the first to occur of the tenth anniversary of the date of grant or three
months following the date the Director ceases to be a Director. Each of a
Director's Subsequent Options shall become exercisable on the second
anniversary of the date on which the Subsequent Option(s) was granted (subject
to Section 3.1) and shall continue to be exercisable until the first to occur
of the tenth anniversary of the date on which the Subsequent Option(s) was
granted or three months following the date the Director ceases to be a
Director. In the event that the death or disability of the Director occurs,
all outstanding Options will be exercisable by the Director (or his legal
representative or designated beneficiary) for one year following the Director's
death or disability, provided, however, if the Option is exercised within the
first six months after it becomes exercisable, any shares of Common Stock
issued on such exercise may not be sold until the six month anniversary of the
date of the grant of the Option.
(d) Notwithstanding any other terms or provisions herein to the
contrary, no Option may be exercised if such exercise would jeopardize the
Corporation's status as a real estate investment trust under the Code.
ARTICLE III
MISCELLANEOUS PROVISIONS
3.1 NONTRANSFERABILITY; BENEFICIARIES:
No Option awarded under the Plan shall be transferable by the Director
otherwise than by will or, if the Director dies intestate, by the laws of
descent and distribution. All Options shall be exercisable during the
Director's lifetime only by the Director or his legal representative. Any
transfer contrary to this Section 3.1 will nullify the Option. In the event of
a Director's death prior to the exercise of any Options which were then
exercisable, such Options may be
3
<PAGE> 5
exercised within one year after the Director's death (regardless of the
expiration date of such Options under Section 2.4(b)) by the Director's
beneficiary, designated as provided below or, in the absence of any such
designation, his estate. Each Director may name, from time to time, any
beneficiary or beneficiaries (who may be named contingently or successively)
who may exercise such Options. Each designation will revoke all prior
designations by such Director, will be in writing and will be effective only
when filed with the Corporate Secretary of the Corporation during his lifetime.
3.2 ADJUSTMENT UPON CERTAIN CHANGES:
(a) If the outstanding shares of Common Stock are (i) increased,
decreased, or (ii) changed into, or exchanged for, a different number or kind
of shares or securities of the Corporation, through a reorganization or merger
in which the Corporation is the surviving entity, or through a combination,
recapitalization, reclassification, stock split, stock dividend, stock
consolidation or otherwise, an appropriate adjustment shall be made in the
number and kind of shares that may be issued pursuant to an Option. A
corresponding adjustment to the consideration payable with respect to all
Options granted prior to any such change shall also be made. Any such
adjustment, however, shall be made without change in the total payment, if any,
applicable to the portion of the Option not exercised but with a corresponding
adjustment in the price for each share.
(b) Upon the dissolution or liquidation of the Corporation, or
upon a reorganization, merger or consolidation of the Corporation with one or
more corporations as a result of which the Corporation is not the surviving
corporation or upon sale of all or substantially all of the Corporation's
property, the Plan shall terminate, and any outstanding Options shall terminate
and be forfeited. Notwithstanding the foregoing, the Board of Directors may
provide in writing in connection with, or in contemplation of, any such
transaction for any or all of the following alternatives (separately or in
combinations): (i) for the assumption by the successor corporation of the
Options theretofore granted or the substitution by such corporation for such
Options of awards covering the stock of the successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices; (ii) for the continuance of the Plan by such successor
corporation in which event the Plan and the Options shall continue in the
manner and under the terms so provided; or (iii) for the payment in cash or
shares of Common Stock in lieu of and in complete satisfaction of such Options.
3.3 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN:
The Board of Directors may suspend or terminate the Plan or any
portion thereof at any time and may amend it from time to time in such respects
as the Board of Directors may deem advisable in order that any Options
thereunder shall conform to or otherwise reflect any change in applicable laws
or regulations, or to permit the Corporation or the Directors to enjoy the
benefits of any change in applicable laws or regulations, or in any other
respect the Board of Directors may deem to be in the best interests of the
Corporation; provided, however, that no such amendment shall, without
stockholder approval to the extent required by law, agreement or the rules of
any exchange upon which the Common Stock may be listed or national market on
4
<PAGE> 6
which it may be traded: (a) except as provided in Section 3.2, materially
increase the number of shares of Common Stock which may be issued under the
Plan; (b) materially modify the requirements as to eligibility for
participation in the Plan; (c) materially increase the benefits accruing to
Directors under the Plan; or (d) extend the termination date of the Plan. No
such amendment, suspension or termination shall: (x) impair the rights of
Directors under any outstanding Option without the consent of the Directors
affected thereby; or (y) make any change that would disqualify the Plan, or any
other plan of the Corporation intended to be so qualified, from the exemption
provided by Rule 16b-3. No provision of the Plan which states the amount and
price of securities to be awarded, specifies the timing of awards or sets forth
the formula that determines the amount, price and timing of awards may be
amended more than once every six months, except to comply with changes in the
Code, or the Employee Retirement Income Security Act, as amended ("ERISA"), or
the rules thereunder.
3.4 TAX WITHHOLDING:
(a) The Corporation shall have the power to withhold, or require a
Director to remit to the Corporation, an amount sufficient to satisfy any
withholding or other tax due from the Corporation with respect to any amount
payable and/or shares issuable under the Plan, and the Corporation may defer
such payment or issuance unless indemnified to its satisfaction.
(b) Subject to the consent of the Board of Directors, due to the
exercise of an Option, a Director may make an irrevocable election (an
"Election") to: (A) have shares of Common Stock otherwise issuable hereunder
withheld; or (B) tender back to the Corporation shares of Common Stock
received; or (C) deliver back to the Corporation previously acquired shares of
Common Stock of the Corporation having a Fair Market Value sufficient to
satisfy all or part of the Director's estimated tax obligations associated with
the transaction. Such Election must be made by a Director prior to the date on
which the relevant tax obligation arises (the "Tax Date"). The Board of
Directors may disapprove of any Election, may suspend or terminate the right to
make Elections, or may provide with respect to any Option under this Plan that
the right to make Elections shall not apply to such Option.
3.5 DEFINITION OF FAIR MARKET VALUE:
The term "Fair Market Value" as it relates to Common Stock on any
given date means: (a) the mean of the high and low sales prices of the
Corporation's Common Stock as reported on any national exchange on which the
Common Stock is traded; or (b) if the Common Stock is not listed on any
national stock exchange, the mean of the high and low sales prices of the
Corporation's Common Stock as reported by the National Association of
Securities Dealers Automated Quotation System (or, if not so reported, by the
system then regarded as the most reliable source of such quotations) or, if
there are no reported sales on such date, the mean of the closing bid and asked
prices as so reported; or (c) if the Common Stock is listed on a national
exchange or quoted in the domestic over-the-counter market, but there are no
reported sales or quotations, as the case may be, on the given date, the value
determined pursuant to (a) or (b) above using the reported sale prices or
quotations on the last previous date on which so
5
<PAGE> 7
reported; or (d) if none of the foregoing clauses apply, the fair value as
determined in good faith by the Corporation's Board of Directors consistently
with the provisions of Section 2.3.
3.6 PLAN NOT EXCLUSIVE:
The adoption of the Plan shall not preclude the adoption by
appropriate means of any other stock option or other incentive plan for
Directors.
3.7 LISTING, REGISTRATION AND LEGAL COMPLIANCE:
Each Option shall be subject to the requirement that if at any time
counsel to the Corporation shall determine that the listing, registration or
qualification thereof or of any shares of Common Stock or other property
subject thereto upon any securities exchange or under any foreign, federal or
state securities or other law or regulation, or the consent or approval of any
governmental body or the taking of any other action to comply with or
otherwise, with respect to any such law or regulation, is necessary or
desirable as a condition to or in connection with the award of such Option or
the issue, delivery or purchase of shares of Common Stock or other property
thereunder, no such Option may be exercised or paid in Common Stock or other
property unless such listing, registration, qualification, consent, approval or
other action shall have been effected or obtained free of any conditions not
acceptable to the Corporation, and the holder of the award will supply the
Corporation with such certificates, representations and information as the
Corporation shall request and shall otherwise cooperate with the Corporation in
effecting or obtaining such listing, registration, qualification, consent,
approval or other action. The Corporation may at any time impose any
limitations upon the exercise, delivery or payment of any Option which, in the
opinion of the Board of Directors, are necessary or desirable in order to cause
the Plan or any other plan of the Corporation to comply with Rule 16b-3. If
the Corporation as part of an offering of securities or otherwise, finds it
desirable because of foreign, federal or state legal or regulatory requirements
to reduce the period during which Options may be exercised, the Board of
Directors may, without the holders' consent, so reduce such period on not less
than 15 days written notice to the holders thereof.
3.8 RIGHTS OF DIRECTORS:
Nothing in the Plan shall confer upon any Director any right to serve
as a Director for any period of time or to continue his present or any other
rate of compensation.
3.9 REQUIREMENTS OF LAW; GOVERNING LAW:
The granting of Options under this Plan shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required. The
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Illinois. The provisions of this Plan
shall be interpreted so as to comply with the conditions or requirements of
Rule 16b-3 under the Exchange Act, unless a contrary interpretation of any such
provision is otherwise required by applicable law.
6
<PAGE> 1
EXHIBIT 23(a)
Consent of KPMG Peat Marwick LLP
<PAGE> 2
The Board of Directors
Inland Monthly Income Fund III, Inc.:
We consent to the use of our reports relating to the financial statements of
Inland Monthly Income Fund III, Inc. as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for the year ended December 31,
1995 and for the period from May 12, 1994 (formation date) to December 31,
1994, the historical summaries of gross income and direct operating expenses of
the Walgreen/Decatur Property for each of the years in the three-year period
ended June 30, 1994, and the historical summaries of gross income and direct
operating expenses of the Eagle Crest Shopping Center for each of the years in
the three-year period ended June 30, 1994, the historical summary of gross
income and direct operating expenses of Regency Point Shopping Center for the
year ended December 31, 1995 included herein (or incorporated herein by
reference) and to the reference to our firm under the heading "Experts" in this
Registration Statement on Form S-11.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
June 14, 1996
<PAGE> 1
EXHIBIT 23(b)
Consent of Shefsky Froelich & Devine Ltd. (f/k/a Shefsky & Froelich Ltd.)
<PAGE> 2
CONSENT OF SHEFSKY FROELICH & DEVINE LTD.
Shefsky Froelich & Devine Ltd. hereby consents to the reference to the
use of our name under the heading "Legal Matters" in this Prospectus
constituting a part of this Post-Effective Amendment No. 10 to Registration
Statement on Form S-11.
SHEFSKY FROELICH & DEVINE LTD.
/s/ Shefsky Froelich & Devine Ltd.
Chicago, Illinois
June 14, 1996
<PAGE> 1
EXHIBIT 23(f)
Consent of Arthur Andersen L.L.P.
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) dated September 7, 1995, on the Statement
of Gross Income and Direct Operating Expenses of the Nantucket Square Shopping
Center for the year ended December 31, 1994, included in or made a part of this
Registration Statement on Form S-11.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
June l4, 1996
<PAGE> 1
EXHIBIT 23(g)
Consent of Bruce Gorlick, C.P.A., Ltd.
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) on the Statement of Gross Income and Direct
Operating Expenses of the Mundelein Plaza, Prospect Heights Plaza and
Montgomery-Sears Shopping Center for the year ended December 31, 1995,
including in or made a part of this Registration Statement on Form S-11.
/s/ BRUCE GORLICK, C.P.A., LTD.
A PROFESSIONAL CORPORATION
Buffalo Grove, Illinois
June 14, 1996
<PAGE> 1
EXHIBIT 23(h)
Consent of Shapiro and Olander
<PAGE> 2
CONSENT OF SHAPIRO AND OLANDER
Shapiro and Olander hereby consents to the reference to our firm under the
caption "Legal Matters" in this Prospectus constituting a part of this
Post-Effective Amendment No. 10 to Registration Statement on Form S-11.
SHAPIRO AND OLANDER
By: /s/ CHRISTOPHER DEAN OLANDER
--------------------------------------
Christopher Dean Olander
Baltimore, Maryland
June 14, 1996
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