As Filed with the Securities and Exchange Commission on April 30, 1998
Registration No. 333-[ ]
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST WASHINGTON REALTY TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1879972
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
4350 East-West Highway, Suite 400
Bethesda, Maryland 20814
(301) 907-7800
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
William J. Wolfe
President and Chief Executive Officer
4350 East-West Highway, Suite 400
Bethesda, Maryland 20814
(301) 907-7800
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
with a copy
to:
R. Ronald Hopkinson, Esq.
Latham & Watkins
885 Third Avenue
Suite 1000
New York, New York 10022
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, please check the following box.
[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Aggregate Aggregate Amount of
Class of Securities Amount to be Price Offering Registration
to be Registered Registered Per Unit (1) Price Fee
Common Stock 55,335 $26.782 $1,481,982 $512
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9.75% Series A 9,538 34.00 324,292 112
Cumulative
Participating
Convertible Preferred Stock $624
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), and based on a per share of $26.782 and $34.00, the
average of the high and low prices of the Company's common stock and convertible
preferred stock, respectively, as reported on the New York Stock Exchange on
April 27, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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PROSPECTUS
SUBJECT TO COMPLETION DATED APRIL 30, 1998
FIRST WASHINGTON REALTY TRUST, INC.
9,538 Shares
9.75% Series A Cumulative Participating Convertible Preferred Stock
(Liquidation Preference of $25 Per Share)
55,335 Shares
Common Stock
($0.01 Par Value Per Share)
------------------------
All of the shares of Common Stock, par value $0.01 per share
(the "Common Stock"), and 9.75% Series A Cumulative Participating Convertible
Preferred Stock, par value $0.01 per share, liquidation value $25.00 per share
(the "Convertible Preferred Stock", and together with the Common Stock, the
"Securities") of First Washington Realty Trust, Inc., a Maryland corporation
(the "Company"), offered hereby are being offered by the Company upon the
exchange of certain partnership units as described more fully herein. The
Company will not receive any of the proceeds from the sale of the shares offered
hereby. See "Plan of Distribution."
The Company engages in the acquisition, property management,
leasing, renovation and development of principally supermarket-anchored
neighborhood shopping centers. The Company is a fully-integrated,
self-administered and self-managed real estate company that operates as a real
estate investment trust (a "REIT"). The Company is the sole general partner of,
and owns approximately 79% of the partnership interests in, First Washington
Realty Limited Partnership (the "Operating Partnership"). For convenience, the
business of the Company and the business of the Operating Partnership are
sometimes referred to herein collectively as the "Company"). All of the
Company's operations are conducted through the Operating Partnership. The
Company owns a portfolio of 49 retail properties. The 49 retail properties
contain a total of approximately 5.2 million square feet of gross leasable area
("GLA"). The Company, through a subsidiary, First Washington Management, Inc.
(the "Management Company"), also provides management, leasing and related
services to properties owned by third parties.
The Company's Common Stock and Convertible Preferred Stock are
listed on the New York Stock Exchange ("NYSE") under the symbol "FRW" and "FRW
pf," respectively. On April 27, 1998, the closing sale price of the Common Stock
and Convertible Preferred Stock as reported on the NYSE were $26.625 and $34 per
share, respectively.
To assist the Company in maintaining its qualification as a
REIT, transfer of the Common Stock and the Convertible Preferred Stock is
restricted, and actual or constructive ownership by any person is limited to
9.8% of the outstanding shares of Common Stock and 9.8% of the outstanding
shares of Convertible Preferred Stock, subject to certain exceptions.
The registration statement of which this Prospectus is a part is being
filed pursuant to contractual obligations of the Company.
This Prospectus relates to (i) the possible issuance by the
Company of up to 55,335 shares (the "Exchange Common Shares") of Common Stock of
the Company if, and to the extent that, holders of up to 55,335 common units of
limited partnership interest in the Operating Partnership ("Common Units")
tender such Common Units for exchange and (ii) the possible issuance by the
Company of up to 9,538 shares (the "Exchanged Preferred Shares," and together
with the Exchange Common Shares, the "Exchange Shares") of Convertible Preferred
Stock of the Company if, and to the extent that, holders of up to 9,538 shares
of preferred units of limited partnership interest in the Operating Partnership
("Exchangeable Preferred Units") tender such Exchangeable Preferred Units for
exchange. The Company is registering the Exchange Shares to provide the holders
thereof with freely tradable securities, but the registration of such shares
does not necessarily mean that any of such shares will be offered or sold by the
holders thereof.
See "Risk Factors" incorporated by reference from the
Company's Current Report on Form 8-K filed on September 10, 1997 for certain
factors relevant to an investment in the Convertible Preferred Stock and Common
Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ________, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York, 10048. Copies of
such material may be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission also maintains a website at
http://www.sec.gov containing reports, prospectuses and information statements
and other information regarding registrants, including the Company, that file
electronically. Copies of such materials and other information concerning the
Company also are available for inspection at The New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration
Statement on Form S-3 (together with all amendments, exhibits and schedules, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities. The Prospectus and any
accompanying Prospectus Supplement do not contain all of the information
included in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Securities, reference is hereby
made to the Registration Statement, including the exhibits and schedules
thereto. Statements contained in this Prospectus and any accompanying Prospectus
Supplement concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. The Registration Statement may be inspected
without charge at the Commission's principal office at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and copies of it or any part thereof
may be obtained from such office, upon payment of the fees prescribed by the
Commission. The Registration Statement also may be retrieved from the
Commission's website.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have previously been filed by
the Company with the Commission are incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 filed with the Commission on March 31, 1998;
(2) the description of the Company's Common Stock and
Convertible Preferred Stock contained in the Company's Registration Statement on
Form 8-A filed with the Commission on August 9, 1996;
(3) the Company's Proxy Statement with respect to its Annual Meeting of
Shareholders to be held on May 8, 1998.
All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the offering of the Securities made hereby shall be
deemed to be incorporated in this Prospectus by reference and to be a part
hereof from the date of filing of such documents. Any statement contained
herein, or in a document incorporated or deemed to be incorporated by reference
herein, shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is delivered,
on the written request of any such person, a copy of any or all of the documents
incorporated herein by reference, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Company, at 4350 East-West
Highway, Suite 400, Bethesda, MD 20814, Attention: Investor Relations; telephone
number (301) 907-7800.
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This Prospectus, including the documents incorporated herein by reference,
contain forward-looking statements within the meaning of Section 27A of the
Securities Act. Also, documents subsequently filed by the Company with the
Commission and incorporated herein by reference will contain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors incorporated herein
by reference and the matters set forth or incorporated in this Prospectus
generally. The Company cautions the reader, however, that such list of factors
may not be exhaustive, particularly with respect to future filings. Prospective
investors should carefully consider, among other factors, the risk factors
incorporated herein by reference.
Although the Company, the Operating Partnership, the Lower
Tier Partnerships (as defined below), and the Management Company are separate
entities, each of which is managed in accordance with its governing documents,
for ease of reference, the term "Company" as used herein shall refer to the
business and properties of the Company, the Operating Partnership, the Lower
Tier Partnerships, and the Management Company, unless the context indicates
otherwise.
THE COMPANY
General
The Company is a fully-integrated, self-administered and
self-managed real estate company that operates as a REIT with expertise in the
acquisition, property management, leasing, renovation and development of
principally supermarket-anchored neighborhood shopping centers. As of March 31,
1998, the Company owned a portfolio of 49 retail properties (the "Retail
Properties" or the "Properties"). The 49 Retail Properties contain a total of
approximately 5.2 million square feet of GLA.
The Company's business strategy is highly focused with respect
to property type and location. The Company concentrates its efforts on
supermarket-anchored neighborhood shopping centers. The Company generally seeks
to own properties located in densely populated areas, that have high visibility,
open-air designs and ease of entry and exit, and that may be readily adaptable
over time to expansion, renovation and redevelopment.
The Retail Properties are strategically located neighborhood
shopping centers principally anchored by well known tenants such as Giant Food,
Safeway, Shoppers Food Warehouse, Food Lion, A&P Superfresh, Winn Dixie, Weis
Markets, Acme Market, Dominick's Supermarket, CVS/Pharmacy and Rite Aid.
Neighborhood shopping centers are typically open-air centers ranging in size
from 50,000 to 150,000 square feet of GLA and anchored by supermarkets and/or
drug stores. The Retail Properties range in size from approximately 3,000 square
feet of GLA to approximately 335,000 square feet of GLA, and average
approximately 106,000 square feet of GLA. The anchor tenants typically offer
daily necessity items rather than specialty goods. Nine of the Retail Properties
are relatively small in size, with less than 50,000 square feet of GLA. Such
properties do not have a large supermarket or drug store anchor tenant, and as
such may be subject to greater variability in consumer traffic and operating
performance.
The Company's assets are held by, and all its operations are
conducted through, the Operating Partnership and the Management Company. Certain
of the Properties are owned by partnerships (or limited liability companies) in
which the Operating Partnership, the Company or a subsidiary of the Company acts
as general partner (or managing member) and owns a controlling interest (the
"Lower Tier Partnerships"). The Company is the sole general partner of the
Operating Partnership and the Company currently owns approximately 79% of the
partnership interests in the Operating Partnership. The limited partners are
individuals, partnerships and others who have contributed their properties in
exchange for partnership interests ("Units"). The limited partners may exchange
their Units for cash, or at the option of the Company, for stock of the Company
on a 1 for 1 basis. The Operating Partnership owns 100% of the non-voting
preferred stock of the Management Company, and is entitled to 99% of the cash
flow from the Management Company.
The Company was formed in April 1994 to continue and expand
the neighborhood shopping center acquisition, management and renovation
strategies of First Washington Management, Inc. ("FWM"), which has been engaged
in the business since 1983. FWM was founded by Stuart D. Halpert, the Company's
Chairman, William J. Wolfe, President and Chief Executive Officer, and Lester
Zimmerman, an Executive Vice President (the "Principals").
The Company has approximately 70 employees, including a team
of asset and property managers and leasing agents and in-house legal,
architectural, engineering, accounting, marketing and computer specialists. The
Company's executive and principal property management office is located at 4350
East-West Highway, Suite 400, Bethesda, Maryland 20814 and its telephone number
is (301) 907-7800. The Company has regional property management offices located
in North Carolina, Pennsylvania and Virginia.
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Growth Strategies
The Company seeks to increase cash flow and distributions, as
well as the value of its portfolio, through intensive property management and
strategic renovation and expansion of its properties and the opportunistic
acquisition of additional neighborhood shopping centers within the Mid-Atlantic
region and the Chicago metropolitan area, where the Company has extensive
knowledge of local market growth patterns and economic conditions. The Company
would also consider acquisitions in other metropolitan markets which management
determines to be both attractive and conveniently accessible.
Intensive Management. A key aspect of the Company's strategy
is improving the operating performance of its properties over time through
intensive property management. The Company seeks to increase operating margins
through a combination of increasing revenues (through increased occupancy and/or
rental rates), maintaining high tenant retention rates (i.e., the percentage of
tenants who renew their leases upon expiration), and aggressively managing
operating expenses.
The Company believes that, as a fully integrated real estate organization with
both owned and third-party managed properties, it enjoys significant operating
efficiencies relative to many of its competitors that operate smaller,
fragmented portfolios. These operating efficiencies are the result of economies
of scale in operating expenses, more effective leasing and marketing efforts,
and enhanced tenant retention levels. The Company also benefits from effectively
spreading certain fixed property management and leasing costs over its entire
owned and third-party managed portfolio. Management believes that the scope of
the Company's portfolio, combined with the Principals' professional and
community ties to the Mid-Atlantic region and the Chicago metropolitan area,
enables the Company to develop long-term relationships with national and
regional tenants which occupy multiple properties in its portfolio, which
improves occupancy rates and tenant retention levels.
Strategic Renovation and Expansion. The Company seeks to increase operating
results through the strategic renovation and expansion of certain of the
Properties. The Retail Properties are typically adaptable for varied tenant
layouts and can be reconfigured to accommodate new tenants or the changing space
needs of existing tenants. In determining whether to proceed with a renovation
or expansion, the Company considers both the cost of such expansion or
renovation and the increase in rent attributable to such expansion or
renovation. The Company believes that the Retail Properties will provide
opportunities for renovation and expansion.
As a fully-integrated real estate organization, the Company maintains expertise
in the development of new retail properties, having developed three of the FWM
Properties containing approximately 525,000 square feet of GLA. Management
believes the Company's principal anchor tenants and other real estate
professionals present the Company with development opportunities which the
Company may pursue.
Opportunistic Acquisitions. Another principal component of the Company's
strategy is the acquisition of additional neighborhood shopping centers within
the Mid-Atlantic region and Chicago, Illinois. The Company will seek to acquire
properties which are strategically located along major traffic arteries in
well-established, densely populated communities. The Company typically selects
properties in locations where it believes the supply of developable land and
zoning restrictions impede the development of competing shopping centers and
where tenants' location alternatives are limited. The Company would also
consider acquisitions in other metropolitan markets which management determines
to be both attractive and conveniently accessible.
Through its third-party management, leasing and related service business and
network of regional management and leasing offices, the Company is familiar with
local conditions in its given markets. Because the Company's third-party clients
frequently seek assistance with the revitalization and disposition of the
properties, the Company believes it is in a unique position to ultimately
acquire such properties. For example, FWM provided property management and
leasing services for five properties acquired from third-party clients. The
Company believes opportunities for neighborhood shopping center acquisitions are
particularly attractive at this time because of the fragmentation in ownership
of such properties, the limited amount of available capital for
non-institutional owners of retail property, and the decline in the construction
of new retail properties.
When evaluating potential acquisitions, the Company will consider such factors
as: (i) economic, demographic, and regulatory conditions in the property's local
and regional market; (ii) the location, construction quality, and design of the
property; (iii) the current and projected cash flow of the property and the
potential to increase cash flow; (iv) the potential for capital appreciation of
the property; (v) the terms of tenant leases, including the relationship between
the property's current rents and market rents and the ability to increase rents
upon lease rollover; (vi) the occupancy and demand by tenants for properties of
a similar type in the market area; (vii) the potential to
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complete a strategic renovation, expansion, or retenanting of the property;
(viii) the property's current expense structure and the potential to increase
operating margins; and (ix) competition from comparable retail properties in the
market area. The Company successfully completed the acquisition of 36 properties
since its organization in April 1994.
Property Management, Leasing And Related Service Business
Through its interest in the Management Company, the Company
has continued the property management, leasing and related service business of
FWM. The Operating Partnership owns all of the non-voting preferred stock of the
Management Company, entitled to 99% of the cash flow of the Management Company.
The outstanding common stock of the Management Company, entitled to 1% of the
cash flow of the Management Company, is owned by certain members of management.
In addition to the Properties, as of March 31, 1998, the Management Company
provided management, leasing and related services to 25 properties comprising
approximately 2.9 million square feet of GLA for 15 third-party clients. In
addition to providing another source of growth for funds from operations,
management believes that the third-party management business allows the Company
to: (i) achieve operating efficiencies in managing its owned properties through
the bulk purchase of goods and services; (ii) develop more extensive, long-term
relationships with tenants in multiple properties; and (iii) identify additional
acquisition opportunities from third-party clients interested in the eventual
sale of their properties.
Services are provided to third-party owners pursuant to
contracts that are of varying lengths of time and which generally provide for
management fees of up to 5.0% of monthly gross property receipts. The management
contracts are typically cancelable upon 30 days' notice or upon certain events,
including the sale of the property. Leasing fees typically range from 3.0% to
6.0% of the minimum base rents payable during the initial term of the lease.
Management believes that the Management Company has an excellent reputation with
respect to lease renewals, increases in net operating income for managed
properties, and its timely and accurate reporting to clients. In addition to its
third-party management and leasing business, the Management Company provides
related services including consulting and brokerage services for which it
receives customary fees.
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Maryland General Corporation Law (the "MGCL") and to the
Company's charter (the "Charter") (a copy of which is an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997) and
the Company's bylaws (the "Bylaws") (a copy of which is an exhibit to the
Registration Statement filed in connection with the June 1994 Offering). See
"Available Information."
General
The Charter authorizes the Company to issue up to 100,000,000 shares of
capital stock, consisting of 90,000,000 shares of common stock, par value $0.01
per share (the "Common Stock"), and 10,000,000 shares of preferred stock, par
value $0.01 per share. As of December 31, 1997, 7,291,732 shares of Common Stock
and 2,314,189 shares of Convertible Preferred Stock were issued and outstanding.
Under Maryland law, stockholders generally are not liable for the corporation's
debts or obligations solely as a result of their status as stockholders. In
determining whether a distribution (other than upon voluntary or involuntary
liquidation), by distribution, redemption or other acquisition of shares or
otherwise, is permitted under the MGCL, the amount of the aggregate liquidation
preference of the Convertible Preferred Stock will not be counted as a liability
of the Company.
Common Stock
Subject to the preferential rights of any other shares or
series of capital stock, holders of shares of Common Stock are entitled to
receive distributions on such shares if, as and when authorized and declared by
the Board of Directors of the Company out of assets legally available therefor
and to share ratably in the assets of the Company legally available for
distribution to its stockholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company. Holders of shares of Convertible Preferred Stock are
entitled to participate in amounts available for distribution on the Common
Stock in excess of $0.4875 per share of Common Stock with respect to any
quarterly distribution payment, based on the number of shares of Common Stock
(or fraction thereof ) into which each share of Convertible Preferred Stock is
(or will be) convertible.
See "--Convertible Preferred Stock--Distributions."
Subject to the matters discussed under "Certain Provisions of
Maryland Law and the Company's Charter and Bylaws--Control Share Acquisitions,"
each outstanding share of Common Stock entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of
directors, and except as provided with
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respect to any other class or series of stock, the holders of such shares of
Common Stock possess the exclusive voting power. There is no cumulative voting
in the election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares of Common Stock will not be
able to elect any directors.
Holders of shares of Common Stock have no preference,
conversion, sinking fund, redemption or exchange rights or preemptive rights to
subscribe for any securities of the Company. All shares of a particular class of
issued Common Stock have equal dividend, distribution, liquidation and other
rights.
Pursuant to the MGCL, a corporation generally cannot (except
under and in compliance with specifically enumerated provisions of the MGCL)
dissolve, amend its charter, merge, sell all or substantially all of its assets,
engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all of the
votes entitled to be cast on the matter) is set forth in the corporation's
charter. The Charter provides for approval of any such action by a majority of
the votes entitled to be cast in the matter, except in the case of amendment of
the Charter provisions relating to removal of directors, classification of the
Board of Directors, voting rights of the Common Stock or voting requirements for
charter amendments. In addition, a number of other provisions of the MGCL could
have a significant effect on the shares of Common Stock and the rights and
obligations of holders thereof. See "Certain Provisions of Maryland Law and the
Company's Charter and Bylaws."
Convertible Preferred Stock
Distributions. Holders of shares of the Convertible Preferred
Stock are entitled to receive, when and as declared by the Board of Directors,
out of assets legally available for the payment of distributions, cumulative
preferential cash distributions in an amount per share of Convertible Preferred
Stock equal to $0.6094 per quarter ($2.4375 per annum) plus a participating
distribution equal to the amount, if any, of distributions in excess of $0.4875
per quarter payable on the applicable Distribution Payment Date with respect to
the number of shares of Common Stock (or fraction thereof) into which a share of
Convertible Preferred Stock is then (or will be) convertible. The amount of
participating distribution payable on any Distribution Payment Date will equal
the number of shares of Common Stock, or fraction thereof, into which a share of
Convertible Preferred Stock is then (or will be) convertible, multiplied by the
quarterly distribution in excess of $0.4875 per share paid with respect to a
share of Common Stock on such Distribution Payment Date. As a result of such
participation right of the Convertible Preferred Stock, distributions on
Convertible Preferred Stock and Common Stock will be made out of cash available
for distribution as follows: (i) first, the outstanding shares of Convertible
Preferred Stock will receive $0.6094 per share per quarter; (ii) second, the
outstanding shares of Common Stock will receive $0.4875 per share per quarter;
and (iii) third, any remaining cash available for distribution will be shared
equally among the outstanding shares of Common Stock and Convertible Preferred
Stock as if all of the outstanding shares of Convertible Preferred Stock were
converted into shares of Common Stock. Distributions with respect to the
Convertible Preferred Stock are cumulative from the date of original issuance of
such stock and are payable quarterly in arrears on the fifteenth day of each
August, November, February, and May or, if such day is not a business day, on
the next succeeding business day (each, a "Distribution Payment Date").
If, for any taxable year, the Company elects to designate as
"capital gains dividends" (as defined in Section 857 of the Internal Revenue
Code of 1986, as amended, the "Code") any portion (the "Capital Gains Amount")
of the dividends (within the meaning of the Code) paid or made available for the
year to holders of all classes of stock (the "Total Dividends"), then the
portion of the Capital Gains Amount that will be allocable to the holders of
Convertible Preferred Stock will be the Capital Gains Amount multiplied by a
fraction, the numerator of which shall be the total dividends (within the
meaning of the Code) paid or made available to the holders of the Convertible
Preferred Stock for the year and the denominator of which shall be the Total
Dividends.
Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Company, subject to the prior rights of any
series of capital stock ranking senior to the Convertible Preferred Stock, the
holders of shares of Convertible Preferred Stock will be entitled to be paid out
of the assets of the Company legally available for distribution to its
stockholders a liquidation preference equal to the sum of $25.00 per share plus
an amount equal to any accrued and unpaid distributions thereon (whether or not
earned or declared) to the date of payment (the "Convertible Preferred
Liquidation Preference Amount"), before any distribution of assets is made to
holders of Common Stock or any other capital stock that ranks junior to the
Convertible Preferred Stock as to liquidation rights. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of Convertible Preferred Stock will have no right or claim to any of the
remaining assets of the Company.
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Redemption. The Convertible Preferred Stock is not redeemable
prior to July 15, 1999, except under certain limited circumstances to preserve
the Company's status as a REIT, as described below under "-- Restrictions on
Ownership, Transfer and Conversion." On and after July 15, 1999, the Company, at
its option (to the extent the Company has assets legally available therefor)
upon not less than 30 nor more than 60 days' written notice, may redeem shares
of the Convertible Preferred Stock, in whole or in part, at any time or from
time to time, for cash at the redemption price per share specified below, plus
all accrued and unpaid distributions, if any, thereon (whether or not earned or
declared) to the date fixed or redemption, if redeemed during the twelve-month
period beginning on July 15, of each year specified below:
<TABLE>
<S> <C> <C>
YEAR PRICE
1999 $27.44
2000 26.95
2001 26.46
2002 25.98
2003 25.49
2004 and thereafter 25.00
</TABLE>
The Convertible Preferred Stock has no stated maturity and
will not be subject to any sinking fund. In addition to the redemption provision
described above, shares of Convertible Preferred Stock will be subject to
redemption under certain circumstances in order to preserve the Company's status
as a REIT. See "--Restrictions on Ownership, Transfer and Conversion."
Voting Rights. Holders of the Convertible Preferred Stock do
not have any voting rights, except as set forth below. In any matter in which
the Convertible Preferred Stock may vote, including any action by written
consent, each share of Convertible Preferred Stock is entitled to one vote. The
holders of each share of the Convertible Preferred Stock may separately
designate a proxy for the vote to which that share of Convertible Preferred
Stock is entitled.
Whenever distributions on any shares of the Convertible
Preferred Stock have been in arrears for six or more quarterly periods, the
holders of such shares of Convertible Preferred Stock (voting separately as a
class with all other series of preferred stock upon which rights to vote on such
matter with the Convertible Preferred Stock have been conferred and are then
exercisable, with each series having a number of votes proportional to the
aggregate liquidation preference of its outstanding shares) will be entitled to
elect two additional directors of the Company at a special meeting called by the
holders of record of at least 10% of the outstanding shares of Convertible
Preferred Stock and such other preferred stock, if any (unless such request is
received less than 90 days before the date fixed for the next annual or special
meeting of the stockholders), or at the next annual meeting of stockholders, and
at each subsequent annual meeting until all distributions accumulated on such
shares of the Convertible Preferred Stock for the past distribution periods and
the then current distribution period have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment. In such event, the
number of directors of the Company will be increased by two. Such right to elect
two directors will continue until payment of the distribution arrearage for the
Convertible Preferred Stock, at which time the term of any such directors shall
expire.
Conversion. Subject to the exceptions described under
"--Restrictions on Ownership, Transfer and Conversion," holders of the
Convertible Preferred Stock have the right, as provided in the charter,
exercisable on or after May 31, 1999, except in the case of Convertible
Preferred Stock called for redemption, to convert all or any of the outstanding
shares of Convertible Preferred Stock (with each share of Convertible Preferred
Stock valued for purposes of conversion at the Convertible Preferred Liquidation
Preference Amount (currently $25.00 per share) determined immediately following
the most recent Convertible Preferred Distribution Payment Date) into shares of
Common Stock at a conversion price of $19.50 per share of Common Stock, subject
to adjustment upon the occurrence of certain events. In the case of Convertible
Preferred Stock called for redemption, conversion rights will expire at the
close of business on the third business day immediately preceding the date fixed
for redemption.
Restrictions on Ownership, Transfer and Conversion. As
discussed below under "--Restrictions on Ownership, Transfer and Conversion,"
because the Company intends to continue to qualify as a REIT under the Code, the
Company's charter contains certain provisions described more fully in that
section restricting the ownership, transfer and conversion of the Convertible
Preferred Stock and other classes of capital stock of the Company.
All certificates representing shares of Convertible Preferred
Stock bear a legend referring to the ownership, transfer and conversion
restrictions applicable to such shares.
- 7 -
<PAGE>
Rank. The Convertible Preferred Stock, with respect to
dividend rights and distributions upon liquidation, dissolution, and winding up,
ranks (i) senior to the Common Stock, all other shares of Common Stock of the
Company of all classes and series, and shares of all other classes or series of
capital stock issued by the Company other than any series of capital stock the
terms of which specifically provide that the capital stock of such series rank
senior to or on a parity with such Convertible Preferred Stock with respect to
dividend rights or distributions upon liquidation, dissolution, or winding up of
the Company, as the case may be; (ii) on a parity with the shares of all other
capital stock issued by the Company the terms of which specifically provide that
the shares rank on a parity with the Convertible Preferred Stock with respect to
dividends and distributions upon liquidation, dissolution, or winding up of the
Company or make no specific provision as to their ranking; and (iii) junior to
any capital stock issued by the Company the terms of which specifically provide
that the shares rank senior to the Convertible Preferred Stock with respect to
dividends and distributions upon liquidation, dissolution, or winding up of the
Company, as the case may be (the issuance of which must have been approved by a
vote of at least two-thirds of the outstanding shares of Convertible Preferred
Stock).
Power To Issue Additional Shares Of Common Stock And Preferred Stock
The Board of Directors has the power under the Charter to
authorize the Company to issue additional authorized but unissued shares of
Common Stock and preferred stock (including any unissued shares of any series of
preferred stock, to the extent permitted by the terms of such series) and to
classify or reclassify unissued shares of Common or preferred stock and
thereafter to cause the Company to issue such classified or reclassified shares
of stock. Prior to the issuance of such shares of Common Stock and shares or
series of preferred stock, the Board of Directors is required by the MGCL and
the Charter of the Company to fix, the terms, preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
share or series. The Company believes that this power of the Board of Directors
provides the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs which might arise. The
additional classes or series, as well as the Common Stock, will be available for
issuance without further action by the Company's stockholders (provided,
however, that the issuance of additional series of preferred stock with rights
senior to the Convertible Preferred Stock is subject to the approval of the
holders of Convertible Preferred Stock), unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. Although the Board of
Directors has no intention at the present time of doing so, it could authorize
the Company to issue a class or series that could, depending upon the terms of
such class or series, delay, defer or prevent a change of control of the Company
or other transaction that might involve a premium price for the Common Stock and
Convertible Preferred Stock or otherwise be in the best interest of the
stockholders.
Restrictions On Ownership, Transfer And Conversion
For the Company to qualify as a REIT under the Code, not more
than 50% in value of the issued and outstanding capital stock may be owned,
actually or constructively, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year and the
capital stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of twelve months (or during a proportionate part of a
shorter taxable year). In addition, rent from Related Party Tenants (as defined
below under "Federal Income Tax Considerations--Taxation of the Company --Income
Tests") is not qualifying income for purposes of the gross income tests of the
Code. See "Federal Income Tax Considerations--Taxation of the
Company--Requirements for Qualification." Because the Board of Directors
believes it is essential for the Company to qualify as a REIT, the Board of
Directors has adopted, and the stockholders prior to the June 1994 Offering have
approved, provisions in the Charter restricting the acquisition and ownership of
shares of the Company's capital stock.
Subject to certain exceptions specified in the Charter, no
holder may own, either actually or constructively under the applicable
attribution rules of the Code, more than 9.8% (by number or value, whichever is
more restrictive) of the outstanding shares of Common Stock (the "Common
Ownership Limit"). Except as described below, the Common Ownership Limit will
not apply, however, to holders of shares of Common Stock who acquire shares of
Common Stock in excess of the Common Ownership Limit solely by reason of the
conversion of shares of Convertible Preferred Stock owned by such holder into
shares of Common Stock.
Subject to certain exceptions specified in the Charter, no
holder may acquire, either actually or constructively under the applicable
attribution rules of the Code, more than 9.8% (by number or value, whichever is
more restrictive) of the outstanding shares of Convertible Preferred Stock (the
"Convertible Preferred Ownership Limit"). Except as described below, there are
no restrictions on the ability of a holder of shares of Convertible Preferred
- 8 -
<PAGE>
Stock to convert such shares into shares of Common Stock even if, as a result of
such conversion, the holder will own shares of Common Stock in excess of the
Common Ownership Limit. However, no person may actually or constructively
acquire or own shares of Convertible Preferred Stock or shares of Common Stock,
or convert Convertible Preferred Stock into Common Stock, to the extent that the
aggregate value of Convertible Preferred Stock and Common Stock actually and
constructively owned by such person would exceed 9.8% of the total value of the
outstanding shares of the capital stock of the Company (the "Aggregate Stock
Ownership Limit"). Under certain circumstances, this limitation could prevent a
person who owns shares of Convertible Preferred Stock from converting a portion
of such shares into shares of Common Stock.
If, as a result of a purported acquisition (actual or
constructive) of capital stock, any person (a "Prohibited Transferee") would
acquire, either actually or constructively under the applicable attribution
rules of the Code, shares of capital stock in excess of an applicable ownership
restriction, such shares will be automatically transferred to a trust for the
benefit of a charitable beneficiary, effective as of the close of business on
the business day prior to the purported acquisition by the Prohibited
Transferee. While such stock is held in trust, the trustee shall have all voting
rights with respect to the shares, and all dividends or distributions paid on
such stock will be paid to the trustee of the trust for the benefit of the
charitable beneficiary (any dividend or distribution paid on shares of capital
stock prior to the discovery by the Company that such shares have been
automatically transferred to the trust shall, upon demand, be paid over to the
trustee for the benefit of the charitable beneficiary). Within 20 days of
receiving notice from the Company of the transfer of shares to the trust, the
trustee of the trust is required to sell the shares held in the trust to a
person who may own such shares without violating the ownership restrictions (a
"Permitted Holder"). Upon such sale, the price paid for the shares by the
Permitted Holder shall be distributed to the Prohibited Transferee to the extent
of the lesser of (i) the price paid by the Prohibited Transferee for the shares
or, in the case of a transfer of shares to a trust resulting from an event other
than an actual acquisition of shares by a Prohibited Transferee, the Market
Price (as defined in the Charter) on the date of transfer to the trust, of the
shares so transferred or (ii) the price per share received by the trustee from
the sale or other disposition of the shares held in the trust. Any proceeds in
excess of this amount shall be paid to the charitable beneficiary.
An automatic repurchase of shares by the Company will occur to
the extent necessary to prevent any violation of the Convertible Preferred
Ownership Limit, Common Ownership Limit, or the Aggregate Stock Ownership Limit
as the result of events other than the actual or constructive acquisition of
capital stock by the holder, such as changes in the relative value of different
classes of the Company's capital stock. In the event of any such automatic
repurchase, the repurchase price of each share will be equal to the market price
on the date of the event that resulted in the repurchase. Any dividend or other
distribution paid to a holder of repurchased shares (prior to the discovery by
the Company that such shares have been automatically repurchased by the Company
as described above) will be required to be repaid to the Company upon demand.
If shares of capital stock which would cause the Company to be
beneficially owned by less than 100 persons are issued or transferred to any
person, such issuance or transfer shall be null and void to the intended
transferee, and the intended transferee would acquire no rights to such stock.
The Board of Directors may waive the Common Ownership Limit or
the Convertible Preferred Ownership Limit or the Aggregate Stock Ownership Limit
with respect to a particular stockholder if evidence satisfactory to the Board
of Directors and the Company's tax counsel is presented that such ownership will
not then or in the future jeopardize the Company's status as a REIT. As a
condition of such waiver, the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the REIT status of the Company.
In addition to any of the foregoing ownership limits, no
holder may own, either actually or constructively under the applicable
attribution rules of the Code, any shares of any class of the Company's capital
stock if such ownership or acquisition (i) would cause more than 50% in value of
the Company's outstanding capital stock to be owned, either actually or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain entities), (ii)
would result in the Company's capital stock being beneficially owned by less
than 100 persons (determined without reference to any rules of attribution), or
(iii) would otherwise result in the Company failing to qualify as a REIT.
Acquisition or ownership (actual or constructive) of the Company's capital stock
in violation of these restrictions will result in automatic transfer of such
stock to a trust for the benefit of a charitable beneficiary, automatic
repurchase of the violative shares by the Company, or the violative transfer
will be deemed void ab initio, as described above.
If the Board of Directors shall at any time determine in good
faith that a person intends to acquire or own, has attempted to acquire or own,
or may acquire or own capital stock of the Company in violation of the above
- 9 -
<PAGE>
described limits, the Board of Directors shall take such action as it deems
advisable to refuse to give effect or to prevent such ownership or acquisition,
including but not limited to causing the Company to repurchase stock, refusing
to give effect to such ownership or acquisition on the books of the Company, or
instituting proceedings to enjoin such ownership or acquisition.
The constructive ownership rules are complex and may cause
Common Stock or Convertible Preferred Stock owned actually or constructively by
a group of related individuals and/or entities to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of the
outstanding Common Stock or less than 9.8% of the outstanding Convertible
Preferred Stock (or the acquisition of an interest in an entity which owns
Common Stock or Convertible Preferred Stock) by an individual or entity could
cause that individual or entity (or another individual or entity) to
constructively own Common Stock or Convertible Preferred Stock in excess of the
limits described above, and thus subject such stock to the Common Ownership
Limit, the Convertible Preferred Ownership Limit, or the Aggregate Stock
Ownership Limit.
All certificates representing shares of the Company's capital
stock bear a legend referring to the restrictions described above.
All persons who own a specified percentage (or more) of the
outstanding shares of the stock of the Company must file a completed
questionnaire annually with the Company containing information regarding their
ownership of such shares, as set forth in the Treasury Regulations. Under
current Treasury Regulations, the percentage will be set between 0.5% and 5.0%,
depending on the number of record holders of shares. In addition, each
stockholder shall upon demand be required to disclose to the Company in writing
such information with respect to the actual and constructive ownership of shares
as the Board of Directors deems necessary to comply with the provisions of the
Code applicable to a REIT or to comply with the requirements of any taxing
authority or governmental agency.
These ownership limitations could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of shares of Common Stock or Convertible Preferred Stock might receive
a premium for their shares over the then prevailing market price or which such
holders might believe to be otherwise in their best interest.
Registration Rights Agreements
Pursuant to various registration rights agreements the Company
has shelf registration statements effective (or has agreed to file a
registration statement) that cover: (i) the resale of shares of Convertible
Preferred Stock and shares of Common Stock and the issuance of shares of Common
Stock upon exchange of Common Units that were issued in private placements at
the time of and since the formation of the Company and (ii) the exchange of the
Exchangeable Debentures and Exchangeable Preferred Units for Convertible
Preferred Stock. The Company is obligated to use its best efforts to maintain
the effectiveness of such registration statements. The exchange of such
outstanding securities for Common Stock and Convertible Preferred Stock will
increase the number of outstanding shares of Common Stock and Convertible
Preferred Stock, and will increase the Company's percentage ownership interest
in the Operating Partnership.
NYSE Listing
The Common Stock is listed on the NYSE under the symbol "FRW."
The Preferred Stock is listed on the NYSE under the symbol "FRW pf." The current
rules of the NYSE effectively preclude the listing on the NYSE of any securities
of an issuer which has issued securities or taken other corporate action that
would have the effect of nullifying, restricting or disparately reducing the per
share voting rights of holders of an outstanding class or classes of equity
securities registered under Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Company does not intend to issue any
additional securities that would make it ineligible for inclusion on the NYSE or
any national securities exchange or national market system. However, in the
event the Company issues additional securities that cause it to become
ineligible for continued inclusion on NYSE, such ineligibility would be likely
to reduce materially the liquidity of an investment in the Common Stock and
would likely depress its market value below that which would otherwise prevail.
Transfer Agent
The transfer agent and registrar for the shares of Common
Stock and Convertible Preferred Stock is American Stock Transfer & Trust
Company.
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<PAGE>
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, including
the descriptions of certain provisions set forth elsewhere in this Prospectus,
is qualified in its entirety by reference to the Partnership Agreement.
Management
The Operating Partnership was organized as a Maryland limited
partnership pursuant to the Maryland Revised Uniform Limited Partnership Act
(the "Act") and the terms of the First Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement"). Generally, pursuant to the
Partnership Agreement, the Company, as the holder of a majority of the
partnership units and sole general partner of the Operating Partnership, has
full, exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, subject to certain limited exceptions. The
limited partners of the Operating Partnership (the "Limited Partners") generally
have no authority to participate in or exercise control or management power over
the business and affairs of the Operating Partnership.
Transferability of Interests
The Partnership Agreement provides that the Company may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, without the consent of a majority in
interest of the Limited Partners, and only upon the admission of a successor
general partner. The Limited Partners may transfer their interests in the
Operating Partnership to any Qualified Transferee (as defined in the Partnership
Agreement), subject to a right of first refusal by the Company and the Operating
Partnership. No transferee may become a substituted limited partner without the
consent of the Company.
Capital Contributions
If the Company determines that the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital contributions,
and the Company borrows such funds from a financial institution or other lender,
then the Company, to the extent consistent with its REIT status, will lend such
funds to the Operating Partnership on comparable terms and conditions as are
applicable to the Company's borrowing of such funds. The Company will contribute
the amount of any required additional funds which were not borrowed from a
financial institution or other lender as an additional capital contribution to
the Operating Partnership. If the Company so contributes additional capital to
the Operating Partnership, the Company's partnership interest in the Operating
Partnership will be increased on a proportionate basis based upon the amount of
such additional capital contributions and the value of the Operating Partnership
at the time of such contributions. Conversely, the partnership interests of the
Limited Partners will be decreased on a proportionate basis in the event of
additional capital contributions by the Company.
Exchange Rights
Pursuant to the Partnership Agreement, the holders of Common
Units have the right to require the Operating Partnership to redeem part or all
of their Common Units for cash or, at the election of the Company, the Company
may acquire such Common Units for shares of Common Stock (on a one-for-one
basis), provided, however, that a holder of Common Units may not effect an
exchange to the extent that it would cause any person to violate any provision
of the charter of the Company (the "Charter"), including those provisions
relating to restrictions on ownership and transfer of the Company's capital
stock. Similarly, holders of Exchangeable Preferred Units may require that the
Company acquire such Exchangeable Preferred Units for shares of Convertible
Preferred Stock (on a one-for-one basis), subject to the limitation set forth in
the Charter. See "Description of Capital Stock-Restrictions on Ownership,
Transfers and Conversion."
Tax Matters
Pursuant to the Partnership Agreement, the Company is the tax
matters partner of the Operating Partnership and, as such, generally has
authority to make tax elections under the Code on behalf of the Operating
Partnership. The net income or net loss of the Operating Partnership will
generally be allocated to the Company and the Limited Partners in accordance
with their priorities of distribution, subject to the compliance with the
provisions of Sections 704(b) and 704(c) of the Code and the regulations
promulgated thereunder. See "Federal Income Tax Considerations--Tax Aspects of
the Operating Partnership."
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<PAGE>
Operations
The Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT. The Partnership Agreement provides
that distributions of cash will be distributed from time to time as determined
by the Company pro rata in accordance with the distribution rights of the
holders of the Exchangeable Preferred Units and the Common Units. Pursuant to
the Partnership Agreement, subject to certain exceptions, the Operating
Partnership will also assume and pay when due, or reimburse the Company for
payment of, all costs and expenses relating to the ownership of interests in and
operation of the Operating Partnership; the Company shall not be reimbursed for
expenses it incurs relating to the organization of the Operating Partnership and
the Company or the initial or subsequent public offerings of shares of the
Company.
Duties and Conflicts
The Partnership Agreement provides that all business
activities of the Company, including all activities pertaining to the
acquisition and operation of shopping center properties, must be conducted
through the Operating Partnership.
Term
The Operating Partnership will continue in full force and
effect until December 31, 2094, or until sooner dissolved upon the bankruptcy,
dissolution, withdrawal or termination of the Company (unless the Limited
Partners other than the Company elect to continue the Operating Partnership),
upon the election of the Company and the approval of the Limited Partners, upon
an entry of decree of judicial dissolution, or upon the sale or other
disposition of all or substantially all the assets of the Operating Partnership.
Indemnification
The Partnership Agreement provides for indemnification of the
Company and the officers and directors of the Company and of the Management
Company, and limits the liability of the Company to the Operating Partnership
and its partners for losses sustained, liabilities incurred or benefits not
derived as a result of errors in judgment or mistakes of fact or law or any act
or omission if the Company acted in good faith. See "Limitation of Liability and
Indemnification."
EXCHANGE OF THE UNITS
Terms of the Exchange of Common Units
Holders of Common Units may exchange up to 55,335 Common Units
of the Operating Partnership for cash, or at the discretion of the Company, for
a like number of Exchange Common Shares. Holders of Exchangeable Preferred
Unites may exchange up to 9,538 Exchangeable Preferred Units for a like number
of Exchanged Preferred Shares. Such Exchange Shares may be resold at any time,
subject to certain exceptions and volume limitations. The number of Exchange
Shares for which the holders of Units may exchange their Units is subject to
adjustment in the event of stock splits, stock dividends, issuance of certain
rights, certain extraordinary distributions and similar events.
A holder of Common Units effecting an exchange (a "Common
Tendering Holder") must deliver to the Company a notice of exchange. A Common
Tendering Holder shall have the right to receive an amount of cash from the
Operating Partnership equal to the Cash Amount (as defined in the Partnership
Agreement) on the Valuation Date (as defined in the Partnership Agreement). The
Company may elect to acquire such tendered Common Units in exchange for a like
number of Exchange Common Shares, in which case the Common Tendering Holder
shall have no right to cause the Operating Partnership to redeem the Common
Units in exchange for the Cash Amount.
A holder of Exchangeable Preferred Units effecting an exchange
(a "Preferred Tendering Holder," and collectively with a Common Tendering
Holder, a "Tendering Holder") must deliver to the Company a notice of exchange.
A Preferred Tendering Holder shall have the right to receive on the day of
receipt by the Company of such notice the number of Exchange Preferred Shares
which corresponds to the tendered Exchangeable Preferred Units.
The Exchange Shares shall be delivered as duly authorized,
validly issued, fully paid and nonassessable shares, free of any pledge, lien,
encumbrance or restriction, other than those provided in the Charter, the Bylaws
of the Company, the Securities Act, relevant state securities or blue sky laws
and any applicable registration rights agreement with respect to such Exchange
Shares entered into by the Tendering Holder. Notwithstanding any delay
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<PAGE>
in such delivery, the Tendering Holder shall be deemed the owner of such
Exchange Shares and rights for all purposes, including, without limitation,
rights to vote or consent, receive dividends, and exercise rights, as of the
date of the exchange notice.
Each Tendering Holder shall continue to own all Units subject
to any exchange, and be treated as a Limited Partner with respect to such Units
for all purposes, until such Units are transferred to the Company and paid for
on the date of the exchange notice. Until the date of the exchange notice, the
Tendering Holder shall have no rights as a stockholder of the Company.
Certain Conditions to the Exchange
The Company will issue Exchange Shares to a Tendering Holder
promptly upon receipt of a notice of exchange subject to the following
conditions:
o In order to protect the Company's status as a REIT, no
Tendering Holder shall be entitled to effect an exchange,
if such exchange would cause such Tendering Holder or any
other Person to violate the Restrictions on Ownership and
Transfer provisions of the Charter.
o No Tendering Holder may effect an exchange for less than
100 Units, or if the Tendering Holder holds less than 100
Units, all of the Units held by such Tendering Holder.
o No Tendering Holder may effect an exchange during the
period after the record date established by the Company
for a distribution from the Operating Partnership to the
partners in the Operating Partnership and prior to the
record date established by the Company for a distribution
to its stockholders of some or all of its portion of such
distribution.
Any attempted exchange in violation of any of the foregoing
conditions shall be null and void ab initio and such Tendering Holder shall not
acquire any rights or economic interest in the Exchange Shares otherwise
issuable upon such exchange
Comparison of the Company and the Operating Partnership
Generally the nature of an investment in Common Stock and
Convertible Preferred Stock (collectively, the "Stock") is similar in several
respects to an investment in the Units of the Operating Partnership. Holders of
Common Stock, holders of Common Units, holders of Convertible Preferred Stock
and holders of Exchangeable Preferred Units receive similar distributions and
shareholders and holders of Units generally share in the risks and rewards of
ownership in the enterprise being conducted by the Company through the Operating
Partnership. However, there are also differences between ownership of Units and
ownership of Stock, some of which may be material to investors.
The information below highlights a number of the significant
differences between the Operating Partnership and the Company relating to, among
other things, form of organization, management control, voting rights, liquidity
and federal income tax considerations. These comparisons are intended to assist
holders of Units in understanding how their investment will be changed if they
exchange their Units for Exchange Shares. This discussion is summary in nature
and does not constitute a complete discussion of these matters, and holders of
Units should carefully review the balance of this Prospectus and the
registration statement of which this Prospectus is a part for additional
important information about the Company.
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<PAGE>
Form of Organization and Assets Owned
The Operating Partnership is organized as a Maryland limited partnership. The
Operating Partnership owns interests in the Properties and the Lower Tier
Partnerships and the Operating Partnership conducts the Company's management and
leasing business. The Operating Partnership's purpose is to conduct any business
that may be lawfully conducted by a limited partnership organized pursuant to
the Act, provided that such business is to be conducted in a manner that permits
the Company to be qualified as a REIT unless the Company ceases to qualify as
REIT.
The Company is a Maryland corporation. The Company has elected to be taxed as a
REIT under the Code, commencing with its taxable year ended December 31, 1994,
and intends to maintain its qualification as a REIT. The Company's primary asset
is its interest in the Operating Partnership, which gives the Company an
indirect investment in the Properties owned by the Operating Partnership. Under
its Charter, the Company may engage in any lawful activity permitted by the
MGCL. However, under the Partnership Agreement, the Company, as general partner,
may not conduct any business other than the business of the Operating
Partnership and cannot own any assets other than its interest in the Operating
Partnership and other assets necessary to carry out its responsibilities under
the Partnership Agreement and its Charter.
Additional Equity
The Operating Partnership is authorized to issue Common Units, Exchangeable
Preferred Units and other partnership interests (including partnership interests
of different series or classes that may be senior to Common Units) in exchange
for additional capital contributions as determined by the Company as its general
partner, in the Company's sole discretion. In exchange for such capital
contributions, the Operating Partnership may issue Common Units and other
partnership interests to the Company, may issue additional Common Units to
existing Limited Partners, and may admit third parties as additional Limited
Partners.
The Board of Directors may issue, in its discretion, additional Common Stock or
shares of Convertible Preferred Stock; provided, that the total number of shares
issued does not exceed the authorized number of shares of stock set forth in the
Charter. As long as the Operating Partnership is in existence, the proceeds of
all equity capital raised by the Company will be contributed to the Operating
Partnership in exchange for Units in the Operating Partnership.
Management Control
All management powers over the business and affairs of the Operating Partnership
are vested in the general partner, and no limited partner of the Operating
Partnership has any right to participate in or exercise control or management
power over the business and affairs of the Operating Partnership except (1) the
general partner of the Operating Partnership may not dispose of all or
substantially all of the Operating Partnership's assets without the consent of
the holders of two- thirds of the outstanding Common Units, and (2) there are
certain limitations on the ability of the general partner of the Operating
Partnership to cause or permit the Operating Partnership to dissolve. See "Vote
Required to Dissolve the Operating Partnership or the Company" below. The
general partner may not be removed by the holders of Common Units with or
without cause.
The business and affairs of the Company are managed under the direction of the
Board of Directors subject to restrictions in the Charter and Bylaws. The board
is classified into three classes of directors. At each annual meeting of the
stockholders, the successors of the class of directors whose terms expire at
that meeting will be elected. The policies adopted by the Board of Directors may
be altered or eliminated without a vote of the stockholders. Accordingly, except
for their vote in the elections of directors, stockholders have no control over
the ordinary business policies of the Company. The Board of Directors cannot
change the Company's policy of maintaining its status as a REIT, however,
without the approval of holders of a majority of the outstanding Common Stock.
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Duties of General Partners and Directors
Under Maryland law, the general partner of the Operating Partnership is
accountable to the Operating Partnership as a fiduciary and, consequently, is
required to exercise good faith and integrity in all of its dealings with
respect to partnership affairs. However, under the Partnership Agreement, the
general partner is not liable for monetary damages for losses sustained or
liabilities incurred by partners as a result of errors of judgment or of any act
or omission, provided that the general partner has acted in good faith.
Under the MGCL, the directors must perform their duties in good faith, in a
manner that they reasonably believe to be in the best interests of the Company
and with the care of an ordinarily prudent person in a like position. Directors
of the Company who act in such a manner generally will not be liable by reason
of being a director of the Company.
Management Liability and Indemnification
As a matter of Maryland law, the general partner has liability for the payment
of the obligations and debts of the Operating Partnership unless limitations
upon such liability are stated in the document or instrument evidencing the
obligations. Under the Partnership Agreement, the Operating Partnership has
agreed to indemnify the general partner and any director or officer of the
general partner from and against all losses, claims, damages, liabilities, joint
or several, expenses (including legal fee and expenses), judgments, fines,
settlements and other amounts incurred in connection with any actions relating
to the operations of the Operating Partnership in which the general partner or
such director or officer is involved, unless (1) the act was in bad faith and
was material to the action; (2) such party received an improper personal
benefit; or (3) in the case of any criminal proceeding, such party had
reasonable cause to believe the act was unlawful. The reasonable expenses
incurred by an indemnitee may be reimbursed by the Operating Partnership in
advance of the final disposition of the proceeding upon receipt by the Operating
Partnership of an affirmation by such indemnitee of his, her or its good faith
belief that the standard of conduct necessary for indemnification has been met
and an undertaking by such indemnitee to repay the amount if it is determined
that such standard was not met.
The Charter contains a provision which eliminates the liability of the Company's
directors and officers to the Company and its stockholders to the fullest extent
permitted by Maryland law. The Bylaws provide indemnification to directors and
officers to the same extent that such directors and officers have
indemnification rights under the Partnership Agreement (as officers and
directors of the general partner).
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Antitakeover Provisions
Except in limited circumstances (See "Voting Rights" below), the general partner
of the Operating Partnership has exclusive management power over the business
and affairs of the Operating Partnership. The general partner may not be removed
by the Limited Partners with or without cause. A Limited Partner may generally
transfer its limited partnership interest without restriction, provided that the
Company and the Operating Partnership have a right of first refusal for any
proposed transfer.
The Charter and Bylaws of the Company contain a number of provisions that may
have the effect of delaying or discouraging an unsolicited proposal for the
acquisition of the Company or the removal of incumbent management. These
provisions include, among other: (1) a staggered board of directors; (2)
authorized stock that may be issued as Preferred Stock in the discretion of the
Board of Directors, with superior voting or other rights to the Common Stock;
(3) a requirement that directors may be removed only for cause and only by the
affirmative vote of two-thirds of the aggregate number of votes then entitled to
be cast generally in the election of directors; and (4) provisions designed to
avoid concentration of share ownership in a manner that would jeopardize the
Company's status as a REIT under the Code. See "Description of Capital Stock-
Restrictions on Ownership, Transfer and Conversion." The MGCL also contains
certain provisions which could have the effect of delaying, deferring or
preventing a change of control of the Company or other transaction. See "Certain
Provisions of Maryland Law and the Company's Charter and Bylaws."
Voting Rights
Under the Partnership Agreement, the Limited Partners have voting rights only as
to the dissolution of the Operating Partnership, the sale of all or
substantially all of the assets or merger of the Operating Partnership, and
certain amendments to the Partnership Agreement, as described more fully below.
Otherwise, all decisions relating to the operation and management of the
Operating Partnership are made by the general partner. As Common Units are
exchanged by holders of Common Units, the Company's percentage ownership of the
Common Units will increase. If additional Units are issued to third parties, the
Company's percentage ownership of the Units will decrease.
The business and affairs of the Company are managed under the direction of the
Board of Directors, consisting of three classes having staggered terms of
office. Each class is to be elected by the stockholders at annual meetings of
the Company. transactions, including most amendments to the Charter, may not be
consummated without the approval of stockholders as set forth below. All shares
of Common Stock have one vote per share, and the Charter permits the Board of
Directors to classify and issue Preferred Stock in one or more series having
voting power which may differ from that of the Common Stock. "See Description of
Capital Stock."
The following is a comparison of the voting rights of the
holders of Units of the Operating Partnership and the stockholders of the
Company as they relate to certain major transactions:
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A. Amendment of the Partnership Agreement or the Charter
The Partnership Agreement may be amended through a proposal by the general
partner or any Limited Partner. Such proposal, in order to be effective, must be
approved by the general partner and by the written vote of holders of at least a
majority of the outstanding Common Units and Exchangeable Preferred Units.
Certain amendments that affect the fundamental rights of a holder of Common
Units must be approved by each affected Limited Partner. In addition, the
general partner may, without the consent of the holders of Common Units, amend
the Partnership Agreement as to certain ministerial matters.
Under MGCL and the Charter, amendments to the Charter generally must be approved
by the Board of Directors and holders of at least a majority of the votes
entitled to be cast on the matter.
B. Vote Required to Dissolve the Operating Partnership or the Company
The general partner may not elect to dissolve the Operating Partnership without
the prior written consent of the holders of at least a majority of the
outstanding Common Units and Exchangeable Preferred Units.
Under the MGCL and the Charter, dissolution of the Company must be approved by
the Board of Directors and holders of at least a majority of the votes entitled
to be cast on the matter.
C. Vote Required to Sell Assets or Merger
Under the Partnership Agreement, the sale, exchange, transfer or other
disposition of all or substantially all of the Operating Partnership's assets
merger or consolidation of the Operating Partnership requires the consent of the
general partner and holders least a majority of the of at outstanding Common
Units and Exchangeable Preferred Units.
Under the MGCL, the sale of all or substantially all of the assets of the
Company or or merger or consolidation of the Company requires the approval of
the Board of Directors and holders of at least a majority of the votes entitled
to be cast on the matter. No approval of the stockholders is required for the
sale of less than all or substantially all of the Company's assets.
Compensation, Fees and Distributions
The general partner does not receive any compensation for its services as
general partner of the Operating Partnership. As a partner in the Operating
Partnership, however, the general partner has the same right to receive pro rata
allocations and distributions as other partners of the Operating Partnership. In
addition, the Operating Partnership will reimburse the general partner for all
expenses incurred relating to the ongoing operation of the Company and any other
offering of additional partnership interests in the Operating Partnership.
The officers and outside directors of the Company any receive compensation for
their services.
Liability of Investors
Under the Partnership Agreement and applicable Maryland law, the liability of
the holders of Common Units and Exchangeable Preferred Units for the Operating
Partnership's debts and obligations is generally limited to the amount of their
investment in the Operating Partnership.
Under Maryland law, stockholders are not personally liable for the debts or
obligations of the Company.
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Liquidity
The Company may not transfer its Units except to a successor general partner
with the consent of a majority in interest of the Limited Partners. Limited
Partners may generally transfer their Units without restriction, provided that
the Company and the Operating Partnership have a right of first refusal for any
proposal transfer.
The Exchange Shares will be freely transferable as registered securities under
the Securities Act, subject to prospectus delivery and other requirements for
registered securities.
Taxes
Income and loss from the Operating Partnership generally is subject to the
"passive activity" limitations. Under the "passive activity" rules, income and
loss from the Operating Partnership that is considered "passive income"
generally can be offset against income and loss from other investments that
constitute "passive activities." The Operating Partnership itself is not subject
to Federal income taxes. Instead, each holder of Units includes its allocable
share of the Operating Partnership's taxable income or loss in determining its
individual federal income tax liability. Cash distributions from the Operating
Partnership are generally not taxable to a holder of Units except to the extent
they exceed such holder's basis in its interest in the Operating Partnership
(which will include such holder's allocable share of the Operating Partnership's
nonrecourse debt). Holders of Common Units are required, in some cases, to file
state income tax returns and/or pay state income taxes in the states in which
the Operating Partnership owns property, even if they are not residents of those
states.
Dividends paid by the Company will be treated as "portfolio" income and cannot
be offset with losses from "passive activities." Distributions made by the
Company to its taxable domestic stockholders out of current or accumulated
earnings and profits will be taken into account by them as ordinary income.
Distributions that are designated as capital gain dividends generally will be
taxed as capital gain at a rate of 20%, 25% or 28%. Distributions in excess of
current or accumulated earnings and profits will be treated as a non-taxable
return of basis to the extent of a stockholder's adjusted basis in its stock,
with the excess taxed as capital gain. See "Federal Income Tax Considerations
Taxation of U.S. Stockholders Generally." The Company may be required to pay
state income taxes in certain states.
CERTAIN PROVISIONS OF MARYLAND LAW AND
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of
Maryland law and the Charter and Bylaws. The summary does not purport to be
complete and is subject to and qualified in its entirety by reference to
Maryland law and to the Charter (a copy of which is an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997) and Bylaws (a
copy of which is an exhibit to the Registration Statement filed in connection
with the June 1994 Offering). See "Available Information."
Classification Of The Board Of Directors
The Bylaws provide that the number of directors of the Company
may be established by the Board of Directors but may not be fewer than the
minimum number required by the MGCL (which under most circumstances is three
directors) nor more than fifteen. Any vacancy will be filled, at any regular
meeting or at any special meeting called for that purpose, by a majority of the
remaining directors, except that a vacancy resulting from an increase in the
number of directors will be filled by a majority vote of the entire Board of
Directors. Pursuant to the Charter, the directors are divided into three
classes. One class held office initially for a term which expired at the annual
meeting of stockholders held in May 1995 (and the directors of such class were
reelected for a full term of three years). Another class held office for a term
which expired at the annual meeting of stockholders held in May 1996 (and the
directors of such class were reelected for a full term of three years) and
another class held office for a term which expired at the annual meeting of
stockholders held in May 1997 (and the directors of such class were reelected
for a full term of three years). As the term of each class expires, directors in
that class will be elected for a term of three years and until their successors
are duly elected and qualify. The Company believes that classification of the
Board of Directors will help to assure the continuity and stability of the
Company's business strategies and policies as determined by the Board of
Directors.
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The classified director provision could have the effect of
making the replacement of incumbent directors more time consuming and difficult,
which could discourage a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. At least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of Common Stock will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of shares of Common Stock will be able to elect all of
the successors of the class of directors whose term expires at that meeting.
Removal Of Directors
The Charter provides that a director may be removed only for
cause (as defined in the Charter) and only by the affirmative vote of at least
two-thirds of the votes entitled to be cast generally in the election of
directors. This provision, when coupled with the provision in the Bylaws
authorizing the Board of Directors to fill vacant directorships, precludes
stockholders from both removing incumbent directors and filling the vacancies
created by such removal with their own nominees.
Business Combinations
Under the MGCL, certain "business combinations" (including a
merger, consolidation, share exchange, or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or more of
the voting power of the corporation's shares or an affiliate of the corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Stockholder") or an
affiliate of such an Interested Stockholder are prohibited for five years after
the most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least: (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other than
shares held by the Interested Stockholder with whom (or with whose affiliate)
the business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. The
Board of Directors has exempted from these provisions of the MGCL any business
combination with certain officers of the Company, any present or future
affiliate or associate of theirs or any other person acting in concert or as a
group with any of the foregoing persons. As a result, these persons may be able
to enter into business combinations with the Company, which may not be in the
best interest of the stockholders, without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock owned by the acquiror, by
officers or by directors who are employees of the corporation. "Control Shares"
are voting shares of stock which, if aggregated with all other such shares of
stock previously acquired by such person, or in respect of which such person is
able to exercise or direct the exercise of voting power (except solely by virtue
of a revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting.
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If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the statute, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for which
voting rights previously have been approved) for fair value determined, without
regard to the absence of voting rights for control shares, as of the date of the
last control share acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply (a) to
shares acquired in a merger, consolidation or share exchange if the corporation
is a party to the transaction or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation.
The business combination statute and the control share
acquisition statute could have the effect of discouraging others to acquire the
Company and of increasing the difficulty of consummating any offer.
Amendment To The Charter
Certain provisions of the Charter, including its provisions on
classification of the Board of Directors, removal of directors, voting rights of
Common Stock and voting requirements for charter amendments, may be amended only
by the affirmative vote of the holders of not less than two-thirds of all of the
votes entitled to be cast on the matter.
Dissolution Of The Company
The dissolution of the Company must be approved by the
affirmative vote of the holders of not less than a majority of all of the votes
entitled to be cast on the matter.
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 of Directors
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 or at the direction
of the Board of Directors, (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 of
Directors may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by or at the direction of the Board of Directors, or (iii) provided that
the Board of Directors has determined that directors shall be elected to 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.
The provisions in the Charter on classification of the Board
of Directors and removal of directors, the business combination and the control
share acquisition provisions of the MGCL, and the advance notice provisions of
the bylaws could have the effect of delaying, deferring or preventing a change
of control or other transaction in which holders of some, or a majority, of the
Common Stock might receive a premium for their Common Stock over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests.
Limitation of Liability and Indemnification
The MGCL permits a Maryland corporation to include in its
charter a provision eliminating the liability of its directors and officers to
the corporation and its stockholders for money damages except for liability
resulting from: (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL. This provision does not limit the ability of the Company or its
stockholders to obtain equitable relief, such as an injunction or rescission.
The Charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
any present or former director or officer from and against any claim or
liability to which such person may become subject
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or which such person may incur by reason of his status as a present or former
director or officer of the Company. The Charter also provides that the Company
may indemnify any other persons permitted but not required to be indemnified by
Maryland law. The Bylaws obligate the Company, to the maximum extent permitted
by Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to: (a) any present or former
director or officer who is made a party to the proceeding by reason of his
service in that capacity or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise
and who is made a party to the proceeding by reason of his service in that
capacity. The Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that: (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted. The
Partnership Agreement also provides for indemnification of the Company, as
general partner, and its officers and directors generally to the same extent as
permitted by the MGCL for a corporation's officers and directors and limits the
liability of the Company to the Operating Partnership and its partners in the
case of losses sustained, liabilities incurred or benefits not derived as a
result of errors in judgment or mistakes of fact or law or any act or omission
if the Company acted in good faith. It is the position of the Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and is unenforceable pursuant to Section
14 of the Securities Act.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax
considerations regarding the Company and the Securities being registered by the
Company is based on current law, is for general information only and is not tax
advice. The information set forth below, to the extent that it constitutes
matters of law, summaries of legal matters or legal conclusions, is the opinion
of Latham & Watkins, tax counsel to the Company, as to the material federal
income tax considerations relevant to purchasers of the Securities. The tax
treatment of a holder of securities will vary depending on his or her particular
situation and this discussion does not purport to deal with all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including, without limitation, insurance companies, financial institutions or
broker-dealers, tax-exempt organizations, stockholders holding securities as
part of a conversion transaction, or a hedge or hedging transaction or as a
position in a straddle for tax purposes, foreign corporations and persons who
are not citizens or residents of the United States, except to the extent
discussed under the headings "Taxation of Tax-Exempt Stockholders" and "Taxation
of Non-U.S. Stockholders") subject to special treatment under the federal income
tax laws. In addition, the summary below does not consider the effect of any
foreign, state, local or other tax laws that may be applicable to holders of the
Securities.
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, current administrative interpretations and
practices of the Internal Revenue Service (the "IRS") (including its practices
and policies as expressed in certain private letter rulings which are not
binding on the IRS except with respect to the particular taxpayers who requested
and received such rulings), and court decisions, all as of the date hereof. No
assurance can be given that future legislation,
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Treasury Regulations, administrative interpretations and practices and/or court
decisions will not adversely affect existing interpretations. Any such change
could apply retroactively to transactions preceding the date of the change. The
Company has not requested, and does not plan to request, any rulings from the
IRS concerning the tax treatment of the Company. Thus, no assurance can be
provided that the statements set forth herein (which are, in any event, not
binding on the IRS or courts) will not be challenged by the IRS or will be
sustained by a court if so challenged.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER
OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF THE SHARES OF THE SECURITIES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Tax Consequences of Redemption or Exchange of Units
The redemption or exchange of Units for cash or Exchange
Shares, will be a fully taxable transaction. Depending upon a holder's
particular situation, it is possible that the amount of gain recognized or even
the tax liability resulting from such gain could exceed the amount of cash and
the value of Exchange Shares received upon such redemption or exchange. HOLDERS
ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE SPECIFIC TAX
CONSEQUENCES OF THE REDEMPTION OR EXCHANGE OF UNITS, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES OF SUCH TRANSACTION.
Taxation Of The Company
General. The Company has elected to be taxed as a REIT under
Sections 856 through 860 (Code), commencing with its taxable year ended December
31, 1994. The Company believes that it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code commencing
with such taxable year, and the Company intends to continue to operate in such a
manner however, the Company's qualification and taxation as a REIT depends upon
the Company's ability to meet (through actual annual results, distribution
levels and diversity of stock ownership) the various qualification tests imposed
under the Code. Accordingly, no assurance can be given that it has operated or
will continue to operate in such a manner so as to qualify or remain qualified.
Further, the anticipated income tax treatment described in this Prospectus may
be changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. See "-Failure to Qualify."
These sections of the Code are highly technical and complex.
The following sets forth the material aspects of the sections that govern the
federal income tax treatment of a REIT and its stockholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
currently distributed to stockholders. This treatment substantially eliminates
the "double taxation" (at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income tax as follows: first, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (defined generally as property acquired by
the Company through foreclosure or otherwise after a default on a loan secured
by the property or a lease of the property) which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, with respect to an asset (a "Built-In Gain
Asset") acquired by the Company from a corporation which is or has been a C
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corporation (i.e., generally a corporation subject to full corporate-level tax)
in certain transactions in which the basis of the Built-In Gain Asset in the
hands of the Company is determined by reference to the basis of the asset in the
hands of the C corporation, if the Company recognizes gain on the disposition of
such asset during the ten-year period (the "Recognition Period") beginning on
the date on which such asset was acquired by the Company, then, to the extent of
the Built-In Gain (i.e., the excess of (a) the fair market value of such asset
over (b) the Company's adjusted basis in such asset, determined as of the
beginning of the Recognition Period), such gain will be subject to tax at the
highest regular corporate tax pursuant to IRS regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that the Company will make an election pursuant to IRS
Notice 88-19. and that the availability or nature of such election is not
modified as proposed in President Clinton's 1999 Federal budget proposal.
Requirements for Qualification. The Code defines a REIT as a
corporation, trust or association (1) which is managed by one or more trustees
or directors; (2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (3) which would
be taxable as a domestic corporation, but for Sections 856 through 859 of the
Code; (4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of which
is held by 100 or more persons; (6) during the last half of each taxable year
not more than 50% in value of the outstanding stock of which is owned, actually
or constructively, by five or fewer individuals (as defined in the Code to
include certain entities); and (7) which meets certain other tests, described
below, regarding the nature of its income and assets and the amount of its
distributions. The Code provides that conditions (1) to (4), inclusive, must be
met during the entire taxable year and that condition (5) must be met during at
least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. Conditions (5) and (6) do not
apply until after the first taxable year for which an election is made to be
taxed as a REIT. For purposes of conditions (5) and (6), pension funds and
certain other tax-exempt entities are treated as individuals, subject to a
"look-through" exception in the case of condition (6).
The Company has satisfied condition (5) and believes that it
has issued sufficient shares to allow it to satisfy condition (6). In addition,
the Company's charter provides for restrictions regarding ownership and transfer
of shares, which restrictions are intended to assist the Company in continuing
to satisfy the share ownership requirements described in (5) and (6) above. Such
ownership and transfer restrictions are described in "Description of Capital
Stock--Restrictions on Ownership, Transfer and Conversion." These restrictions
may not ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above, primarily (though not exclusively) as a
result of fluctuations in value among the different classes of the Company's
capital stock. If the Company fails to satisfy such share ownership
requirements, the Company's status as a REIT will terminate; provided, however,
if the Company complies with the rules contained in the applicable Treasury
Regulations requiring the Company to ascertain the actual ownership of its
shares but the Company does not know, or would not have known through the
exercise of reasonable diligence, whether it failed to meet the requirement in
condition (6) above, the Company will be treated as having met such requirement.
See "--Failure to Qualify."
In addition, a corporation may not elect to become a REIT
unless its taxable year is the calendar year. The Company has and will continue
to have a calendar taxable year.
Ownership of Subsidiaries. The Company owns interests in
certain of the Lower Tier Partnerships through subsidiaries. Code Section 856(i)
provides that a corporation which is a "qualified REIT subsidiary" (defined for
taxable years beginning on or before August 5, 1997, as any corporation if 100
percent of the stock of such corporation is held by the REIT at all times during
the period such corporation was in existence and, for taxable years beginning
after August 5, 1997, as any corporation 100 percent of the stock of which is
owned by the REIT (without regard to prior ownership)) shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities and such items (as the case may be) of the REIT for all
purposes of the Code including the REIT qualification tests. Each of the
Company's subsidiaries qualify as "qualified REIT subsidiaries" within the
meaning of the Code. Thus, in applying the requirements described herein, the
Company's subsidiaries are ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiaries are treated as assets,
liabilities and items of income, deduction, and credit of the Company for all
purposes of the Code including the REIT qualification tests. For this reason,
references under "Federal Income Tax Considerations" to the income and assets of
the Company shall include the income and assets of the Company's subsidiaries.
Because the Company's subsidiaries are treated as "qualified REIT subsidiaries"
they will not be subject to federal income tax. In addition, the Company's
ownership of the voting securities of the subsidiaries will not violate the
restrictions against ownership of securities of any one issuer which constitutes
more than 10% of such issuer's voting securities or more than 5% in value of the
Company assets, described below under "-- Asset Tests."
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Ownership of a Partnership Interest. In the case of a REIT
which is a partner in a partnership, IRS regulations provide that the REIT will
be deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any Lower Tier Partnership) are
treated as assets, liabilities and items of income of the Company for purposes
of applying the requirements described herein. A summary of the rules governing
the Federal income taxation of partnerships and their partners is provided below
in "--Tax Aspects of the Operating Partnership." The Company has direct control
of the Operating Partnership and has and will continue to operate it consistent
with the requirements for qualification as a REIT.
Income Tests. In order to maintain qualification as a REIT,
the Company annually must satisfy two gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). In addition, for taxable years beginning on
or prior to August 5, 1997, short-term gain from the sale or other disposition
of stock or securities, gain from prohibited transaction, and gain on the sale
or other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions). The 30% gross income test has been repealed and will not apply
beginning with the Company's 1998 taxable year.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or an actual or constructive owner of 10% or
more of the REIT, actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for rents received to qualify as "rents from real property," the REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property (subject to a 1% de minimis exception applicable to the
Company beginning with its 1998 taxable year), other than through an independent
contractor from whom the REIT derives no revenue. The REIT may, however,
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not (i) charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being based on a
percentage of receipts or sales, as described above), (ii) rent any property to
a Related Party Tenant (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or (iv) perform services considered to be rendered to the
occupant of the property, other than through an independent contractor from whom
the Company derives no revenue. Notwithstanding the foregoing, the Company may
have taken and may continue to take certain of the actions set forth in (i)
through (iv) above to the extent such actions will not, based on the advice of
tax counsel to the Company, jeopardize the Company's status as a REIT.
The Management Company receives fees in exchange for the
performance of certain management services. Such fees will not accrue to the
Company, but the Company will derive dividends from the Management Company which
qualify under the 95% gross income test, but not the 75% gross income test. The
Company believes that the aggregate amount of any non-qualifying income in any
taxable year has not exceeded and will not exceed the limit on non-qualifying
income under the gross income tests.
The term "interest" generally does not include any amount
received or accrued (directly or indirectly) if the determination of such amount
depends in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales.
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If the Company fails to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if the Company's failure to
meet such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in "--Taxation of the
Company-- General," even if these relief provisions apply, and the Company
retains its status as a REIT, a 100% tax would be imposed with respect to the
excess net income. There can be no assurance that the Company will always be
able to maintain compliance with the gross income tests for REIT qualification
despite its periodic monitoring.
Any gain realized by the Company on the sale of any property
held as inventory or other property held primarily for sale to customers in the
ordinary course of business (including the Company's share of any such gain
realized by the Operating Partnership) will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon the Company's ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends on all
the facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold the Properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Properties (and other properties) and to make such
occasional sales of the Properties as are consistent with the Operating
Partnership's investment objectives. There can be no assurance, however, that
the IRS might not contend that that one or more of such sales is subject to the
100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its
taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total assets
(including its allocable share of the assets held by the Operating Partnership)
must be represented by real estate assets (including (i) its allocable share of
real estate assets held by partnerships in which the Company owns an interest
and (ii) stock or debt instruments held for not more than one year purchased
with the proceeds of a stock offering or long-term (at least five years) debt
offering of the Company), cash, cash items and government securities. Second,
not more than 25% of the Company's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of the Company's total assets and the
Company may not own more than 10% of any one issuer's outstanding voting
securities.
The Operating Partnership owns 100% of the nonvoting preferred
stock of the Management Company and a note of the Management Company. The
Operating Partnership does not and will not own any of the voting securities of
the Management Company, and therefore the Company will not be considered to own
more than 10% of the voting securities of the Management Company. In addition,
the Company believes (and has represented to counsel to the Company for purposes
of its opinion, as discussed below) that the value of its pro rata share of the
securities of the Management Company to be held by the Operating Partnership did
not exceed at any time up to and including the date of this Prospectus 5% of the
total value of the Company's assets and will not exceed such amount in the
future.
President Clinton's 1999 federal budget proposal contains a
provision which would amend the Code so as to prohibit REITs from owning stock
of a corporation possessing more than 10% of the vote or value of all classes of
stock of the corporation. This proposal would be effective with respect to stock
acquired on or after the date of the first Congressional committee action with
respect to the proposal (the "Action Date"). In addition, to the extent that a
REIT's stock ownership is grandfathered by virtue of this effective date, such
grandfathered status will terminate if the subsidiary corporation engages in a
trade or business that it is not engaged in on the Action Date or acquires
substantial new assets on or after such date. Accordingly, if this provision of
the budget proposal is enacted in its present form, the Company's stock
ownership of the Management Company would be grandfathered, but such
grandfathered status would terminate if the Management Company engages in a
trade or business that it is not engaged in on the Action Date or acquires
substantial new assets on or after such date, even if such activities are
undertaken prior to the adoption of the proposal. It is presently uncertain
whether any proposal regarding REIT subsidiaries, such as the Management
Company, will be enacted, or if enacted, what the terms of such proposal
(including its effective date) will be.
After initially meeting the asset tests at the close of any quarter, the Company
will not lose its status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If
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the failure to satisfy the asset tests results from an acquisition of additional
securities of the Management Company or other securities or other property
during a quarter (including as a result of the Company increasing its interests
in the Operating Partnership), the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company has maintained and will continue to maintain adequate records of the
value of its assets to ensure compliance with the asset tests and to take such
other actions within the 30 days after the close of any quarter as may be
required to cure any noncompliance. If the Company fails to cure noncompliance
with the asset tests within such time period, the Company would cease to qualify
as a REIT.
Annual Distribution Requirements. The Company, in order to
maintain its qualification as a REIT, is required to distribute dividends (other
than capital gain dividends) to its stockholders in an amount at least equal to
(A) the sum of (i) 95% of the Company's "REIT taxable income" (computed without
regard to the dividends paid deduction and the Company's net capital gain) and
(ii) 95% of the net income (after tax), if any, from foreclosure property, minus
(B) the excess of the sum of certain items of noncash income over 5% of "REIT
taxable income." In addition, if the Company disposes of any Built-In Gain Asset
during its Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. Such distributions are taxable to holders of
Common Stock and Convertible Preferred Stock (other than tax-exempt entities, as
discussed below) in the year in which paid, even though such distributions
relate to the prior year for purposes of the Company's 95% distribution
requirement. The amount distributed must not be preferential -- e.g., every
shareholder of the class of stock with respect to which a distribution is made
must be treated the same as every other shareholder of that class, and no class
of stock may be treated otherwise than in accordance with its dividend rights as
a class. To the extent that 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 thereon at regular
ordinary and capital gain corporate tax rates. The Company has made and intends
to make timely distributions sufficient to satisfy these annual distribution
requirements.
It is expected that the Company's REIT taxable income will be
less than its cash flow due to the allowance of depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, the Company anticipates
that it will generally have sufficient cash or liquid assets to enable it to
satisfy the distribution requirements described above. It is possible, however,
that the Company, from time to time, may not have sufficient cash or other
liquid assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at taxable income of the Company. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange for short-term, or possibly long-term,
borrowings or to pay dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to
rectify a failure to meet the distribution requirement for a year by paying
"deficiency dividends" to stockholders in a later year, which may be included in
the Company's deduction for dividends paid for the earlier year. Thus, the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during
each calendar year (or in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of
January immediately following such year) at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year, and (iii) any undistributed taxable income from prior periods, the Company
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Any REIT taxable income and net capital
gain on which this excise tax is imposed for any year is treated as an amount
distributed during that year for purposes of calculating such tax.
Failure To Qualify
If the Company fails to qualify for taxation as a REIT in any
taxable year, and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. As a result, the Company's failure to qualify
as a REIT would reduce the cash available for distribution by the Company to its
stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate
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distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief. In
addition, President Clinton's 1999 federal budget proposal contains a provision
which, if enacted in its present from, would result in the immediate taxation of
all gains inherent in a C corporation's assets upon an election by the
corporation to become a REIT in taxable years beginning after January 1, 1999,
and thus could effectively preclude the Company from re-electing to be taxed as
a REIT following a loss of its REIT status.
Taxation Of Taxable U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of
shares of Common Stock who (for United States federal income tax purposes) (i)
is a citizen or resident of the United States, (ii) is a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, unless, in the case of a
partnership, Treasury Regulations provide otherwise, or (iii) is an estate the
income of which is subject to United States federal income taxation regardless
of its source (iv) is a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to be
treated as United States persons, shall also be considered U.S.
Stockholders.
As long as the Company qualifies as a REIT, distributions made
by the Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Stockholders
that are corporations. For purposes of determining whether distributions to
holders of Common Stock are out of current or accumulated earnings and profits,
the earnings and profits of the Company will be allocated first to the
Convertible Preferred Stock (to the extent of the preferred distribution on such
stock), then to the Common Stock (to the extent of distributions equal to
$0.4875 per quarter per share) and then pro-rata between both the Convertible
Preferred Stock and the Common Stock with respect to any distributions in which
the Convertible Preferred Stock is entitled to participate.
Distributions made by the Company that are properly designated
by the Company as capital gain dividends will be taxable to taxable U.S.
Stockholders as gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) from the sale or disposition of a
capital asset. Depending on the period of time the Company held the assets which
produced such gains, and on certain designations, if any, which may be made by
the Company, such gains may be taxable to non-corporate U.S. stockholders at a
20%, 25% or 28% rate. U.S. Stockholders that are corporations may, however, be
required to treat up to 20% of certain capital gain dividends as ordinary
income. For a discussion of the manner in which that portion of any dividends
designated by the Company as capital gain dividends will be allocated among the
holders of Convertible Preferred Stock and Common Stock, see "Description of
Capital Stock--Convertible Preferred Stock--Distributions."
To the extent that the Company makes distributions (not
designated as capital gain dividends) in excess of its current and accumulated
earnings and profits, such distributions will be treated first as a tax-free
return of capital to each U.S. Stockholder, reducing the adjusted basis which
such U.S. Stockholder has in his shares of stock for tax purposes by the amount
of such distribution (but not below zero), with distributions in excess of a
U.S. Stockholder's adjusted basis in his shares taxable as capital gains
(provided that the shares have been held as a capital asset) (which, with
respect to a non-corporate U.S. Stockholder, will be taxable as long-term
capital gain if the shares have been held for more than eighteen months,
mid-term capital gain if the shares have been held for more than one year but
not more than eighteen months, or short-term capital gain if the shares have
been held for one year or less). Dividends declared by the Company in October,
November, or December of any year and payable to a stockholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company on or before January 31 of the
following calendar year. Stockholders may not include in their own income tax
returns any net operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the
sale or exchange by a U.S. Stockholder of shares of the Company will not be
treated as passive activity income, and, as a result, U.S. Stockholders
generally will not be able to apply any "passive losses" against such income or
gain. Distributions made by the Company (to the extent they do not constitute a
return of capital) generally will be treated as investment income for purposes
of
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computing the investment income limitation. Gain arising from the sale or other
disposition of shares, however, will not be treated as investment income under
certain circumstances.
The Company may elect to retain, rather than distribute as a
capital gain dividend, its net long-term capital gains. In such event, the
Company would pay tax on such retained net long-term capital gains. In addition
to the extent designated by the Company, a U.S. Stockholder generally would (i)
include its proportionate share of such undistributed long-term capital gains in
computing its long-term capital gains in its return for its taxable year in
which the last day of the Company's taxable year falls (subject to certain
limitations as to the amount so includible), (ii) be deemed to have paid the
capital gains tax imposed on the Company on the designated amounts included in
such U.S. Stockholder's long-term capital gains, (iii) receive a credit or
refund for such amount of tax deemed paid by it, (iv) increase the adjusted
basis of its Common Stock by the difference between the amount of such
includible gains and the tax deemed to have been paid by it, and (v), in the
case of a U.S. Stockholder that is a corporation, appropriately adjust its
earnings and profits for the retained capital gains in accordance with Treasury
Regulations to be prescribed by the IRS.
Upon any sale or other disposition of shares of the Company, a
U.S. Stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in the shares for tax purposes. Such gain or loss
will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset. In the case of non-corporate holders, capital
gain will be subject to a reduced rate if the shares have been held by the U.S.
Stockholder for more than one year and will be eligible for a further reduced
rate if the shares have been held for more than 18 months. In general, any loss
recognized by a U.S. Stockholder upon the sale or other disposition of shares of
the Company that have been held 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 received by such U.S. Stockholder from the Company which were
required to be treated as long-term capital gains.
Additional Tax Consequences to Holders of Convertible Preferred Stock
Redemption of Convertible Preferred Stock. A redemption of
shares of Convertible Preferred Stock will be treated under Section 302 of the
Code as a distribution taxable as a dividend (to the extent of the Company's
current and accumulated earnings and profits) at ordinary income rates unless
the redemption satisfies one of the tests set forth in Section 302(b) of the
Code and is therefore treated as a sale or exchange of the redeemed shares. The
redemption will be treated as a sale or exchange if it (i) is "substantially
disproportionate" with respect to the holder, (ii) results in a "complete
termination" of the holder's stock interest in the Company, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within the
meaning of Section 302(b) of the Code. In determining whether any of these tests
have been met, shares of capital stock (including Common Stock and other equity
interests in the Company) considered to be owned by the holder by reason of
certain constructive ownership rules set forth in the Code, as well as shares of
capital stock actually owned by the holder, must generally be taken into
account. Because the determination as to whether any of the alternative tests of
Section 302(b) of the Code will be satisfied with respect to any particular
holder of Convertible Preferred Stock depends upon the facts and circumstances
at the time that the determination must be made, prospective holders of
Convertible Preferred Stock are advised to consult their own tax advisors to
determine such tax treatment.
If a redemption of shares of Convertible Preferred Stock is
not treated as a distribution taxable as a dividend to a particular holder, it
will be treated, as to that holder, as a taxable sale or exchange. As a result,
such holder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received (less any portion thereof attributable to
accumulated and declared but unpaid dividends, which will be taxable as a
dividend to the extent of the Company's current and accumulated earnings and
profits), and (ii) the holder's adjusted basis in the shares of Convertible
Preferred Stock for tax purposes. In the case of non-corporate holders, capital
gain will be subject to a reduced rate if the shares have been held by the U.S.
Stockholder for more than one year and will be eligible for a further reduced
rate if such shares have been held for more than 18 months.
If a redemption of shares of Convertible Preferred Stock is
treated as a distribution taxable as a dividend, the amount of the distribution
will be measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
Convertible Preferred Stock for tax purposes will be transferred to the holder's
remaining shares of capital stock in the Company, if any. If the holder owns no
other shares of capital stock in the Company, such basis may, under certain
circumstances, be transferred to a related person or it may be lost entirely.
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Redemption Premium. Section 305(c) of the Code and applicable
Treasury Regulations, provides that, in the case of preferred stock (such as
shares of Convertible Preferred Stock) that is redeemable at the option of the
issuer, but is not mandatorily redeemable or redeemable at the option of the
holder, any excess of redemption price over issue price (such excess, "Preferred
Stock Discount") with respect to such stock is taxable as a constructive
distribution to the holder only if, based on all the facts and circumstances as
of the issue date, redemption is more likely than not to occur. Even if
redemption is more likely than not to occur, however, the regulations provide
that Preferred Stock Discount is not taxable as a constructive distribution if
the redemption premium is solely in the nature of a penalty for premature
redemption, and such premium is paid as a result of changes in economic or
market conditions over which neither the issuer nor the holder has legal or
practical control.
The applicable Treasury Regulations provide a "safe harbor"
pursuant to which redemption pursuant to an issuer's right to redeem is not
treated as more likely than not to occur if: (1) the issuer and the holder are
not "related" within the meaning of the Code, (2) there are no plans,
arrangements or agreements that effectively require or are intended to compel
the issuer to redeem the stock and (3) exercise of the right to redeem would not
reduce the yield of the stock.
The Preferred Stock Discount with respect to the Convertible
Preferred Stock is intended to be solely a penalty for premature redemption.
Moreover, the Company believes that the requirements of the "safe harbor"
described above will be satisfied with respect to the Convertible Preferred
Stock. As a result, the above described constructive distribution rules of
Section 305(c) of the Code should not apply to the Convertible Preferred Stock,
and the Company intends to take this position in all filings with federal taxing
authorities.
Conversion of Convertible Preferred Stock into Common Stock.
In general, no gain or loss will be recognized for Federal income tax purposes
upon conversion of the Convertible Preferred Stock solely into shares of Common
Stock. The basis that a holder will have for tax purposes in the shares of
Common Stock received upon conversion will be equal to the adjusted basis for
such holder in the shares of Convertible Preferred Stock so converted, and,
provided that the shares of Convertible Preferred Stock were held as a capital
asset, the holding period for the shares of Common Stock received would include
the holding period for the shares of Convertible Preferred Stock converted. A
holder will, however, recognize gain or loss on the receipt of cash in lieu of
fractional shares of Common Stock in an amount equal to the difference between
the amount of cash received and the holder's adjusted basis for tax purposes in
the Convertible Preferred Stock for which cash was received. Furthermore, under
certain circumstances, a holder of shares of Convertible Preferred Stock may
recognize gain or dividend income to the extent there are dividends in arrears
on such shares at the time of conversion into Common Stock.
Adjustments to Conversion Price. Adjustments in the conversion
price (or the failure to make such adjustments) pursuant to the anti-dilution
provisions of the Convertible Preferred Stock or otherwise may result in
constructive distributions to the holders of Convertible Preferred Stock that
could, under certain circumstances, be taxable to them as dividends pursuant to
Section 305 of the Code. If such a constructive distribution were to occur, a
holder of Convertible Preferred Stock could be required to recognize ordinary
income for tax purposes without receiving a corresponding distribution of cash.
Backup Withholding
The Company will report to its U.S. Stockholders and the IRS
the amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Stockholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail to
certify their non-foreign status to the Company. See "--Taxation of Non-U.S.
Stockholders."
Taxation Of Tax-Exempt Stockholders
The IRS has ruled that amounts distributed as dividends by a
qualified REIT do not constitute unrelated business taxable income ("UBTI") when
received by a tax-exempt entity. Based on that ruling, provided that a
tax-exempt shareholder (except certain tax-exempt shareholders described below)
has not held its shares as "debt financed property" within the meaning of the
Code and the shares are not otherwise used in a trade or business, the
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dividend income from the Company will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of shares will not constitute UBTI unless such
tax-exempt shareholder has held such shares as "debt financed property" within
the meaning of the Code or has used the shares in trade or business.
For tax-exempt shareholders which are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans exempt from federal income taxation under
Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from
an investment in the Company will constitute UBTI unless the organization is
able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its investment in the Company.
Such prospective investors should consult their own tax advisors concerning
these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act") provides that, effective for taxable
years beginning in 1994, a portion of the dividends paid by a "pension held
REIT" shall be treated as UBTI as to any trust which (1) is described in Section
401(a) of the Code, (2) is tax-exempt under Section 501(a) of the Code, and (3)
holds more than 10% (by value) of the interests in the REIT. Tax-exempt pension
funds that are described in Section 401(a) of the Code are referred to below as
"qualified trusts."
A REIT is a "pension held REIT" if (1) it would not have
qualified as a REIT but for the fact that Section 856(h)(3) of the Code (added
by the 1993 Act) provides that stock owned by qualified trusts shall be treated,
for purposes of the "not closely held" requirement, as owned by the
beneficiaries of the trust (rather than by the trust itself), and (2) either (a)
at least one such qualified trust holds more than 25% (by value) of the
interests in the REIT, or (b) one or more such qualified trusts, each of which
owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI
earned by the REIT (treating the REIT as if it were a qualified trust and
therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A
de minims exception applies where the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look- through" exception
with respect to qualified trusts. As a result of certain limitations on the
transfer and ownership of stock contained in the Charter, the Company is not and
does not expect to be classified as a "pension held REIT."
Taxation of Non-U.S. Stockholders
The rules governing United States federal income taxation of
the ownership and disposition of stock by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Stockholders") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of United States federal income tax and does not address state, local or
foreign tax consequences that may be relevant to a Non-U.S. Stockholder in light
of its particular circumstances. In addition, this discussion is based on
current law, which is subject to change, and assumes that the Company qualifies
for taxation as a REIT. Prospective Non-U.S. Stockholders should consult with
their own tax advisers to determine the impact of federal, state, local and
foreign income tax laws with regard to an investment in stock, including any
reporting requirements.
Distributions. Distributions by the Company to a Non-U.S.
Stockholder that are neither attributable to gain from sales or exchanges by the
Company of United States real property interests nor designated by the Company
as capital gains dividends will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to withholding of
United States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States trade
or business, or if an income tax treaty applies, as attributable to a United
States permanent establishment of the Non- US stockholder. Dividends that are
effectively connected with such a trade or business (or, if an income tax treaty
applies, that are attributable to a United States permanent establishment of the
Non-US stockholder) will be subject to tax on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as domestic
stockholders are taxed with respect to such dividends and are generally not
subject to withholding. Any such dividends received by a Non-U.S. Stockholder
that is a corporation may also be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an
address in a country outside the United States are generally presumed to be paid
to a resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
certain treaties, lower withholding rates
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generally applicable to dividends do not apply to dividends from a REIT, such as
the Company. Certain certification and disclosure requirements must be satisfied
to be exempt from withholding under the effectively connected income and
permanent establishment exemptions discussed above.
Distributions in excess of current or accumulated earnings and
profits of the Company will not be taxable to a Non-U.S. Stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's stock,
but rather will reduce the adjusted basis of such stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's stock, they
will give rise to gain from the sale or exchange of his stock, the tax treatment
of which is described below. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current or accumulated earnings and profits, the distribution will generally be
treated as a dividend for withholding purposes. However, amounts thus withheld
are generally refundable by the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of the Company.
Distributions to a Non-U.S. Stockholder that are designated by
the Company at the time of distribution as capital gains dividends (other than
those arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) investment in the stock is effectively connected with the Non-U.S.
Stockholder's United States trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as domestic stockholders with
respect to such gain (except that a stockholder that is a foreign corporation
may also be subject to the 30% branch profits tax, as discussed above), or (ii)
the Non-U.S. Stockholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable
to gain from sales or exchanges by the Company of United States real property
interests will cause the Non-U.S. Stockholder to be treated as recognizing such
gain as income effectively connected with a United States trade or business.
Non-U.S. Stockholders would thus generally be taxed at the same rates applicable
to domestic stockholders (subject to a special alternative minimum tax in the
case of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation,
as discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability.
The Company or any nominee (e.g., a broker holding shares in
street name) may rely on a certificate of non-foreign status on Form W-8 or Form
W-9 to determine whether withholding is required on gains realized from the
disposition of United States real property interests. A domestic person who
holds shares of the Company's Common Stock on behalf of a Non-U.S. Stockholder
will bear the burden of withholding, provided that the Company has properly
designated the appropriate portion of a distribution as a capital gain dividend.
Sale of Stock. Gain recognized by a Non-U.S. Stockholder upon
the sale or exchange of shares of stock generally will not be subject to United
States taxation unless the stock constitutes a "United States real property
interest" within the meaning of FIRPTA. The stock will not constitute a "United
States real property interest" so long as 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 stock is
held directly or indirectly by Non-U.S. Stockholders. The Company believes that
it is currently a "domestically controlled REIT," and therefore that the sale of
shares of stock will not be subject to taxation under FIRPTA. However, because
the shares of stock will be publicly traded, no assurance can be given that the
Company will continue to be a "domestically- controlled REIT." Notwithstanding
the foregoing, gain from the sale or exchange of shares of stock not otherwise
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) its
investment in the stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business (or, if an income treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Stockholder) or (ii) the Non-U.S. Stockholder is a nonresident alien individual
who is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30% United States withholding tax on the amount
of such individual's gain.
If the Company is not or ceases to be a
"domestically-controlled REIT," whether gain arising from the sale or exchange
by a Non-U.S. Stockholder of shares of Stock would be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest" will
depend on whether the shares are "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (e.g., the New York
Stock Exchange) and on the size of the selling Non-U.S. Stockholder's interest
in the Company. If gain on the sale or exchange of shares of stock were subject
to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to regular
United States
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income tax with respect to such gain in the same manner as a U.S. Stockholder
(subject to any applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals and the possible
application of the 30% branch profits tax in the case of foreign corporations),
and the purchaser of the stock would be required to withhold and remit to the
IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup
withholding tax (which generally is a withholding tax imposed at the rate of 31%
on certain payments to persons that fail to furnish certain information under
the United States information reporting requirements) and information reporting
will generally not apply to distributions paid to Non-U.S. Stockholders outside
the United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of stocks by or through a foreign office of a foreign broker.
Information reporting (but not backup withholding) will apply, however, to a
payment of the proceeds of a sale of stock by a foreign office of a broker that
(a) is a United States person, (b) derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States or
(c) is a "controlled foreign corporation" (generally, a foreign corporation
controlled by United States stockholders) for United States tax purposes, unless
the broker has documentary evidence in its records that the holder is a Non-U.S.
Stockholder and certain other conditions are met, or the stockholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the proceeds of sale of stocks is subject to both backup withholding
and information reporting unless the stockholder certifies under penalties of
perjury that the stockholder is a Non-U.S. Stockholder, or otherwise establishes
an exemption. A Non-U.S. Stockholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
New Withholding Regulations. Final regulations dealing with
withholding tax on income paid to foreign persons and related matters (the "New
Withholding Regulations") were recently promulgated. In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements, but unify current certification
procedures and forms and clarify reliance standards. For example, the New
Withholding Regulations adopt a certification rule, which was in the proposed
regulations, under which a foreign stockholder who wishes to claim the benefit
of an applicable treaty rate with respect to dividends received from a United
Stated corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE IN "TAXATION OF NON-U.S. STOCKHOLDERS" DOES NOT TAKE
THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
Tax Aspects Of The Operating Partnership
General. Substantially all of the Company's investments will
be held indirectly through the Operating Partnership. In general, partnerships
are "pass-through" entities which are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. The Company will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held by the Operating Partnership.
See "--Taxation of the Company."
Entity Classification. The Company's interests in the
Operating Partnership and the Lower-Tier Partnerships involve special tax
considerations, including the possibility of a challenge by the IRS of the
status of the Operating Partnership or a Lower-Tier Partnership as a partnership
(as opposed to an association taxable as a corporation) for federal income tax
purposes. If the Operating Partnership or a Lower-Tier Partnership were treated
as an association, it would be taxable as a corporation and therefore be subject
to an entity-level tax on its income. In such a situation, the character of the
Company's assets and items of gross income would change and preclude the Company
from satisfying the asset tests and possibly the income tests (see "----
Taxation of the Company ---- Asset Tests" and "---- Income Tests"), and, in
turn, would prevent the Company from qualifying as a REIT. See "---- Taxation of
the Company ---- Failure to Qualify" above for a discussion of the effect of the
Company's failure to meet such tests for
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a taxable year. In addition, a change in the Operating Partnership's or a
Lower-Tier Partnership's status for tax purposes might be treated as a taxable
event in which case the Company might incur a tax liability without any related
cash distributions.
The IRS recently finalized and published certain Treasury
Regulations (the "Final Regulations") which provide that a domestic business
entity not otherwise classified as a corporation and which has at least two
members (an "Eligible Entity") may elect to be taxed as a partnership for
federal income tax purposes. The Final Regulations apply for tax periods
beginning on or after January 1, 1997 (the "Effective Date"). Unless it elects
otherwise, an Eligible Entity in existence prior to the Effective Date will have
the same classification for federal income tax purposes that it claimed under
the entity classification Treasury Regulations in effect prior to the Effective
Date. In addition, an Eligible Entity which did not exist, or did not claim a
classification, prior to the Effective Date, will be classified as a partnership
for federal income tax purposes unless it elects otherwise. The Operating
Partnership and each of the Lower-Tier Partnerships intends to claim
classification as a partnership under the Final Regulations.
Partnership Allocations. Although a partnership agreement will
generally determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations
promulgated thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax
purposes, the item subject to the allocation will be reallocated in accordance
with the partners' interests in the partnership, which will be determined by
taking into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The Operating
Partnership's allocations of taxable income and loss are intended to comply with
the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property (such as the Properties) that is contributed
to a partnership in exchange for an interest in the partnership, must be
allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Operating Partnership was formed by way of contributions
of appreciated property (including certain of the Properties). Moreover,
subsequent to the formation of the Operating Partnership, additional persons
have contributed appreciated property to the Operating Partnership in exchange
for interests in the Operating Partnership. The Partnership Agreement requires
that such allocations be made in a manner consistent with Section 704(c) of the
Code.
In general, limited partners of the Operating Partnership who
acquired their limited partnership interests through a contribution of
appreciated property will be allocated depreciation deductions for tax purposes
which are lower than such deductions would be if determined on a pro rata basis.
In addition, in the event of the disposition of any of the contributed assets
which have a Book-Tax Difference, all income attributable to such Book-Tax
Difference will generally be allocated to such limited partners, and the Company
will generally be allocated only its share of capital gains attributable to
appreciation, if any, occurring after the time of contribution to the Operating
Partnership. This will tend to eliminate the Book-Tax Difference over the life
of the Operating Partnership. However, the special allocation rules of Section
704(c) do not always entirely eliminate the Book-Tax Difference on an annual
basis or with respect to a specific taxable transaction such as a sale. Thus,
the carryover basis of the contributed assets in the hands the Operating
Partnership may cause the Company to be allocated lower depreciation and other
deductions, and possibly an amount of taxable income in the event of a sale of
such contributed assets in excess of the economic or book income allocated to it
as a result of such sale. This may cause the Company to recognize taxable income
in excess of cash proceeds, which might adversely affect the Company's ability
to comply with the REIT distribution requirements. See "--Taxation of the
Company--Annual Distribution Requirements."
Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for Book-Tax
Differences, including retention of the "traditional method" or the election of
certain methods which would permit any distortions caused by a Book-Tax
Difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. The Operating Partnership and the
Company have determined to use the "traditional method" for accounting for
Book-Tax Differences with respect to the Properties initially contributed to the
Operating Partnership and with respect to certain assets acquired subsequently.
The Operating
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Partnerships and the Company have not yet decided what method will be used to
account for Book-Tax Differences with respect to properties to be acquired by
the Operating Partnerships in the future.
With respect to any property acquired by the Operating
Partnership in a taxable transaction, such property will initially have a tax
basis equal to its fair market value, and Section 704(c) of the Code will not
apply.
Basis in Operating Partnership Interest. The Company's
adjusted tax basis in its interest in the Operating Partnership generally (i)
will be equal to the amount of cash and the basis of any other property
contributed to the Operating Partnership by the Company, (ii) will be increased
by (a) its allocable share of the Operating Partnership's income and (b) its
allocable share of indebtedness of the Operating Partnership and (iii) will be
reduced, but not below zero, by the Company's allocable share of (a) losses
suffered by the Operating Partnership, (b) the amount of cash distributed to the
Company and (c) by constructive distributions resulting from a reduction in the
Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the
Operating Partnership's loss exceeds the adjusted tax basis of the Company's
partnership interest in the Operating Partnership, the recognition of such
excess loss will be deferred until such time and to the extent that the Company
has adjusted tax basis in its interest in the Operating Partnership. To the
extent that the Operating Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Operating Partnership (such decreases
being considered a cash distribution to the partners), exceeds the Company's
adjusted tax basis, such excess distributions (including such constructive
distributions) constitute taxable income to the Company.
Other Tax Consequences
The Company and its stockholders may be subject to state or
local taxation in various state or local 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 an investment in the Company.
A portion of the cash to be used by the Operating Partnership
to fund distributions to partners is expected to come from the Management
Company, through interest payments and dividends on non-voting preferred stock
to be held by the Operating Partnership. The Management Company will pay federal
and state tax on its net income at full corporate rates, which will reduce the
cash available for distribution to stockholders.
EXPERTS
The consolidated balance sheets of the Company as of December
31, 1997 and 1996 and the consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997 and the financial statement schedules of the Company as of and for each
of the three years in the period ended December 31, 1997, included in the
Company's 1997 Form 10-K, incorporated by reference in this Registration
Statement, have been incorporated herein in reliance on the reports of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by
Latham & Watkins, Washington, D.C. Latham & Watkins has relied as to certain
matters of Maryland law, including the legality of the Common Stock, on the
opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the
Company of up to 55,335 shares of Common Stock if, and to the extent that,
holders of up to 55,335 Common Units tender such units for exchange, and (ii)
the possible issuance by the Company of up to 9,538 shares of Convertible
Preferred Stock if, and to the extent that, holders of up to 9,538 shares of
Exchangeable Preferred Units tender such units for exchange. The Company is
registering the Exchange Shares to provide the holders thereof with freely
tradeable securities, but the registration of such shares does not necessarily
mean that any of such shares will be offered or sold by the holders thereof.
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The Company will not receive any proceeds from the issuance of
the Exchange Shares to holders of Common Units and Exchangeable Preferred Units
upon receiving a notice of exchange (but it may acquire from such holders the
Common Units and Exchangeable Preferred Units tendered).
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Available Information 2
Incorporation of Certain Documents by Reference 2
The Company 4
Description of Capital Stock 7
Partnership Agreement 13
Exchange of the Units 15
Certain Provision of Maryland Law and the Company's Charter and Bylaw 21
Federal Income Tax Considerations 25
Experts 39
Legal Matters 40
Plan of Distribution 40
FIRST WASHINGTON REALTY TRUST, INC.
9,538 Shares
9.75% Series A Cumulative Participating
Convertible Preferred Stock
(Liquidation Preference of $25 Per Share)
55,335 Shares
Common Stock
($0.01 Par Value Per Share)
PROSPECTUS
________, 1998
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INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the amount of fees and
expenses to be incurred in connection with the issuance and distribution of the
Common Stock and Convertible Preferred Stock registered hereby:
SEC Registration Fee $ 624
Printing and Mailing Costs 1,000
Legal Fees and Expenses 5,000
Accounting Fees and Expenses 3,000
Miscellaneous 1,000
-----
Total $10,624
ITEM 15. LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The MGCL permits a Maryland corporation to include in its
charter a provision eliminating the liability of its directors and officers to
the corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL. This provision does not limit the ability of the Company or its
stockholders to obtain equitable relief, such as an injunction or rescission.
The Charter authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
any present or former director or officer from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of his status as a present or former director or officer of the
Company. The Charter also provides that the Company may indemnify any other
persons permitted but not required to be indemnified by Maryland law. The Bylaws
obligate the Company, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Bylaws also permit the
Company to indemnify and advance expenses to any person who served a predecessor
of the Company in any of the capacities described above and to any employee or
agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met. The
termination of any
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proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted. The Partnership Agreement
also provides for indemnification of the Company, as general partner, and its
officers and directors generally to the same extent as permitted by the MGCL for
a corporation's officers and directors and limits the liability of the Company
to the Operating Partnership and its partners in the case of losses sustained,
liabilities incurred or benefits not derived as a result of errors in judgment
or mistakes of fact or law or any act or omission if the Company acted in good
faith. It is the position of the Commission that indemnification of directors
and officers for liabilities arising under the Securities Act is against public
policy and is unenforceable pursuant to Section 14 of the Securities Act.
ITEM 16. EXHIBITS
Exhibit
4.1 Amended and Restated Articles of Incorporation*
4.2 Bylaws**
5 Opinion of Ballard Spahr Andrews & Ingersoll
8. Opinion of Latham & Watkins regarding tax matters
23(a) Consent of Latham & Watkins (included in Exhibit 8)
23(b) Consent of Ballard Spahr Andrews & Ingersoll
(included in Exhibit 5)
23(c) Consent of Coopers & Lybrand L.L.P.
* Included as an exhibit to the Company's Form 10-K for the
fiscal year ended Decmber 31, 1996, and incorporated herein by reference.
**Included as an exhibit to the Company's Registration
Statement on Form S-11, file No. 33-83960, and incorporated herein by reference.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To 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. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in this registration statement or any material change to such
information in this registration statement;
provided, however, that subparagraphs (i) and (ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in the
periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(2) That for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
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<PAGE>
Securities offered herein, and the offering of such Securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) 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.
The undersigned Registrant hereby further undertakes that, for
the purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the Securities offered herein, and the offering of such
Securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15 of
this registration statement, or otherwise (other than insurance), the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such 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 such Act and will be governed by the final adjudication
of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Bethesda, State of Maryland on April 30, 1998.
FIRST WASHINGTON REALTY TRUST, INC.
By:
William J. Wolfe
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Each person whose signature appears below hereby constitutes
and appoints William Wolfe as his attorney-in-fact and agent, with full power of
substitution and resubstitution for him in any and all capacities, to sign any
or all amendments or post-effective amendments to this Registration Statement,
or any Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the
same, with exhibits thereto and other documents in connection therewith or in
connection with the registration of the Securities under the Securities Exchange
Act of 1934, as amended, with the Securities and Exchange Commission, granting
unto such attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary in connection with such
matters and hereby ratifying and confirming all that such attorney-in-fact and
agent or his substitutes may do or cause to be done by virtue hereof.
Signature Title Date
/s/ Stuart D. Halpert Chairman of the Board of Directors April 30, 1998
- -----------------------
Stuart D. Halpert
/s/ William J. Wolfe President, Chief Executive Officer, April 30, 1998
- -----------------------
William J. Wolfe Director
/s/ Lester Zimmerman Executive Vice President, Director April 30, 1998
- -----------------------
Lester Zimmerman
/s/ James G. Blumenthal Executive Vice President and Chief April 30, 1998
- -----------------------
James G. Blumenthal Financial Officer
/s/ Stanley T. Burns Director April 30, 1998
- -----------------------
Stanley T. Burns
/s/ Matthew J. Hart Director April 30, 1998
- -----------------------
Matthew J. Hart
/s/ William M. Russell Director April 30, 1998
- -----------------------
William M. Russell
/s/ Heywood Wilansky Director April 30, 1998
Heywood Wilansky
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<PAGE>
First Washington Realty Trust, Inc.
April 30, 1998
Page 1
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
19th Floor
300 East Lombard Street
Baltimore, Maryland 21202-3268
(410) 528-5600
FAX (410) 528-5650/5651
April 30, 1998
First Washington Realty Trust, Inc.
4350 East-West Highway, Suite 400
Bethesda, Maryland 20814
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have served as Maryland counsel to First Washington Realty
Trust, Inc., a Maryland corporation (the "Company"), in connection with certain
matters of Maryland law arising out of the registration of (a) 55,335 shares of
common stock (the "Common Shares"), $.01 par value per share, of the Company
("Common Stock") issuable if, and to the extent that, holders of up to 55,335
common units of limited partnership interest ("Common Units") in First
Washington Realty Limited Partnership, a Maryland limited partnership (the
"Operating Partnership"), tender such Common Units for exchange and (b) 9,538
shares (the "Preferred Shares") of 9.75% Series A Cumulative Participating
Convertible Preferred Stock, $.01 par value per share, of the Company ("Series A
Preferred Stock") issuable if, and to the extent that, holders of up to 9,538
preferred units of limited partnership interest ("Preferred Units") in the
Operating Partnership tender such Preferred Units for exchange, covered by the
above-referenced Registration Statement, and all amendments thereto (the
"Registration Statement"), filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"1933 Act"). Unless otherwise defined herein, capitalized terms used herein
shall have the meanings assigned to them in the Registration Statement.
In connection with our representation of the Company, and as a
basis for the opinion hereinafter set forth, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of the following
documents (collectively, the "Documents"):
1. The Registration Statement and the related form of
prospectus included therein in the form in which it was transmitted to the
Commission under the 1933 Act;
2. The charter of the Company (the "Charter"), certified as of
a recent date by the State Department of Assessments and Taxation of Maryland
(the "SDAT");
<PAGE>
First Washington Realty Trust, Inc.
April 30, 1998
Page 2
3. The Bylaws of the Company, certified as of a recent date by
its Senior Vice President and Secretary;
4. Resolutions adopted by the Board of Directors of the
Company (the "Board") authorizing the issuance and registration of the Common
Shares and the Preferred Shares, certified as of a recent date by the Senior
Vice President and Secretary of the Company (the "Resolutions");
5. The form of certificate representing a share of Common
Stock, certified as of a recent date by the Senior Vice President and Secretary
of the Company;
6. The form of certificate representing a share of Series A
Preferred Stock, certified as of a recent date by the Senior Vice President and
Secretary of the Company;
7. A certificate as of a recent date of the SDAT as to
the good standing of the Company;
8. A certificate executed by the Senior Vice President and
Secretary of the Company, dated the date hereof; and
9. Such other documents and matters as we have deemed
necessary or appropriate to express the opinion set forth in this letter,
subject to the assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed,
and so far as is known to us there are no facts inconsistent with, the
following:
1. Each individual executing any of the Documents, whether on
behalf of such individual or another person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of
a party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any
of the Documents has duly and validly executed and delivered each of the
Documents to which such party is a signatory, and such party's obligations set
forth therein are legal, valid and binding.
4. Any Documents submitted to us as originals are authentic.
Any Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all such Documents are genuine. All public
records reviewed or relied upon by us or on our behalf are true and complete.
All statements and information contained in the Documents are true and complete.
There has been no oral or written modification of or amendment to any of the
<PAGE>
First Washington Realty Trust, Inc.
April 30, 1998
Page 3
Documents and there has been no waiver of any provision of any of the Documents,
by action or omission of the parties or otherwise.
5. The outstanding shares of stock of the Company have not
been and will not be transferred in violation of any restriction or limitation
contained in the Charter. Neither the Common Shares nor the Preferred Shares
will be transferred in violation of any restriction or limitation contained in
the Charter.
The phrase "known to us" is limited to the actual knowledge,
without independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions,
limitations and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing
under and by virtue of the laws of the State of Maryland and is in good standing
with the SDAT.
2. The issuance of the Common Shares has been duly authorized
and, when and to the extent issued in accordance with the Resolutions and in the
manner described in the Registration Statement, the Common Shares will be
(assuming that the sum of (a) all shares of Common Stock issued as of the date
hereof, (b) any shares of Common Stock issued between the date hereof and the
date on which any of the Common Shares are actually issued (not including any of
the Common Shares) and (c) the Common Shares will not exceed the total number of
shares of Common Stock that the Company is then authorized to issue) validly
issued, fully paid and nonassessable.
3. The issuance of the Preferred Shares has been duly
authorized and, when and to the extent issued in accordance with the Resolutions
and in the manner described in the Registration Statement, the Preferred Shares
will be (assuming that the sum of (a) all shares of Series A Preferred Stock
issued as of the date hereof, (b) any shares of Series A Preferred Stock issued
between the date hereof and the date on which any of the Preferred Shares are
actually issued (not including any of the Preferred Shares) and (c) the
Preferred Shares will not exceed the total number of shares of Series A
Preferred Stock that the Company is then authorized to issue) validly issued,
fully paid and nonassessable.
The foregoing opinion is limited to the laws of the State of
Maryland and we do not express any opinion herein concerning any other law. The
opinion expressed herein is subject to the effect of judicial decisions which
may permit the introduction of parol evidence to modify the terms or the
interpretation of agreements. We express no opinion as to compliance with the
securities (or "blue sky") laws of the State of Maryland.
<PAGE>
First Washington Realty Trust, Inc.
April 30, 1998
Page 4
We assume no obligation to supplement this opinion if any
applicable law changes after the date hereof or if we become aware of any fact
that might change the opinion expressed herein after the date hereof.
This opinion is being furnished to you solely for submission
to the Commission as an exhibit to the Registration Statement and, accordingly,
may not be relied upon by, quoted in any manner to, or delivered to any other
person or entity without, in each instance, our prior written consent.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
Ballard Spahr Andrews & Ingersoll, LLP
<PAGE>
First Washington Realty Trust, Inc.
April 30, 1998
Page 1
LATHAM & WATKINS
ATTORNEYS AT LAW
1001 PENNSYLVANIA AVENUE, N.W.
SUITE 1300
WASHINGTON, D.C. 20004-2505
TELEPHONE (202) 637-2200
FAX (202) 637-2201
April 30, 1998
First Washington Realty Trust, Inc.
4350 East-West Highway, Suite 400
Bethesda, Maryland 20814
Re: Federal Income Tax Consequences
Ladies and Gentlemen:
We have acted as tax counsel to First Washington Realty Trust,
Inc., a Maryland corporation (the "Company"), in connection with its issuance of
up to 55,335 shares of common stock of the Company and 9,538 shares of 9.75%
Series A Cumulative Participating Preferred Stock pursuant to a registration
statement on Form S-3 under the Securities Act of 1933, as amended, filed with
the Securities and Exchange Commission on April _, 1998 (and as so amended as of
the time it becomes effective) (the "Registration Statement").
You have requested our opinion concerning certain of the
federal income tax consequences to the Company in connection with the issuance
described above. This opinion is based on various facts and assumptions,
including the facts set forth in the Registration Statement concerning the
business, properties and governing documents of the Company and First Washington
Realty Limited Partnership (the "Operating Partnership"). We have also been
furnished with, and with your consent have relied upon, certain representations
made by the Company and the Operating Partnership with respect to certain
factual matters through a certificate of an officer of the Company (the
"Officer's Certificate").
In our capacity as tax counsel to the Company, we have made
such legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and other instruments as we have deemed
necessary or appropriate for purposes of this opinion. In our examination, we
have assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures thereon, the legal capacity of natural persons
executing such documents and the conformity to authentic original documents of
all documents submitted to us as copies.
<PAGE>
First Washington Realty Trust, Inc.
April 30, 1998
Page 2
We are opining herein as to the effect on the subject
transaction only of the federal income tax laws of the United States and we
express no opinion with respect to the applicability thereto, or the effect
thereon, of other federal laws, the laws of any state or other jurisdiction or
as to any matters of municipal law or the laws of any other local agencies
within any state.
Based on such facts, assumptions and representations, it is our
opinion that the statements in the Registration Statement set forth under the
caption "Federal Income Tax Considerations" to the extent such information
constitutes matters of law, summaries of legal matters, or legal conclusions,
have been reviewed by us and are accurate in all material respects.
No opinion is expressed as to any matter not discussed herein.
This opinion is based on various statutory provisions,
regulations promulgated thereunder and interpretations thereof by the Internal
Revenue Service and the courts having jurisdiction over such matters, all of
which are subject to change either prospectively or retroactively. Also, any
variation or difference in the facts from those set forth in the Registration
Statement or the Officer's Certificate may affect the conclusions stated herein.
Moreover, the Company's qualification and taxation as a real estate investment
trust depends upon the Company's ability to meet, through actual annual
operating results, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Code, the results of which have
not been and will not be reviewed by Latham & Watkins. Accordingly, no assurance
can be given that the actual results of the Company's operation for any one
taxable year will satisfy such requirements.
This opinion is rendered only to you, and is solely for your
use in connection with the issuance of common stock and preferred stock by the
Company pursuant to the Registration Statement. This opinion may not be relied
upon by you for any other purpose, or furnished to, quoted to, or relied upon by
any other person, firm or corporation, for any purpose, without our prior
written consent. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name under the caption
"Legal Matters" in the Registration Statement.
Very truly yours,
Latham & Watkins
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration
Statement of First Washington Realty Trust, Inc. (the "Company") on Form S-3, of
our report dated January 31, 1998, except for Note 16, as to which the date is
March 26, 1998, on our audits of the consolidated financial statements and
financial statement schedules of the Company as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, which
report is included in the Company's 1997 Form 10-K. We also consent to the
reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Washington, D.C.
April 28, 1998
<PAGE>
