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As filed with the Securities and Exchange Commission on June 30, 1997
Registration No. 333-28601
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
Amendment No. 1
to
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact Name of Registrant as Specified in Its Governing Instruments)
<TABLE>
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MARYLAND 94-3211970
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
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400 South El Camino Real, 11th Floor
San Mateo, California 94402
(415) 343-9300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrar's Principal Executive Offices)
Frank Austin, Esq.
Senior Vice President, Glenborough Realty Trust Incorporated
400 South El Camino Real, 11th Floor
San Mateo, California 94402
(415) 343-9300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
Stephen J. Schrader, Esq.
Justin L. Bastian, Esq.
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304
(415) 813-5600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO THE PUBLIC: From time to time after the
effective date of this Registration Statement.
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, other than securities offered only in connection with
dividend or interest reinvestment plans, 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 of 1933, 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 of 1933, 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. / /
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CALCULATION OF REGISTRATION FEE
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TITLE OF SHARES TO BE AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF REGISTRATION
REGISTERED REGISTERED AGGREGATE PRICE PER SHARE AGGREGATE OFFERING PRICE FEE
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Common Stock, $.001
par value ................. 761,904 shares (1) $16,530,390 (1) $5,011 (2)
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) based on the average of the high and low
reported sales price on the New York Stock Exchange on June 3, 1997
of $21.6875 with respect to 750,177 shares, and on June 23, 1997 of
$22.25 with respect to 11,727 shares.
(2) Of this amount, $4,931 was paid with the inital filing of the
registration statement.
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 AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 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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Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy them be accepted prior to the
time the registration statement becomes effective. A registration statement
relating to these securities has been filed with the Securities and Exchange
Commission. This prospectus shall not constitute an offer to sell or a
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration, or qualification under the securities laws of any such State.
Subject to Completion
Preliminary Prospectus dated June 30, 1997
PROSPECTUS
761,904 SHARES
GLENBOROUGH REALTY TRUST INCORPORATED
COMMON STOCK
This Prospectus relates to the offer and sale from time to time by the holders
thereof of (i) up to 555,060 shares (the "Unit Shares") of common stock, par
value $.001 per share ("Common Stock"), that may be issued by Glenborough Realty
Trust Incorporated (the "Company") to certain holders (the "Unit Holders") of up
to 555,060 units of limited partnership interest (the "Units") in Glenborough
Properties, L.P. (the "Operating Partnership"), of which the Company is the sole
general partner and owns a controlling interest, if and to the extent that such
holders tender such Units for redemption and the Company elects to redeem such
Units for Shares of Common Stock and (ii) up to 206,844 shares (the "Acquisition
Shares," and together with the Unit Shares, the "Shares") of Common Stock
previously issued to certain holders (the "Restricted Stock Holders," and
together with the Unit Holders, the "Selling Stockholders") in connection with
the acquisition by the Company of previously acquired properties or interests.
The Company is registering the Unit Shares issuable upon redemption of the Units
pursuant to the terms of the Registration Rights Agreement dated as of December
28, 1995 and the Registration Rights Agreement dated as of July 12, 1996, by and
between the Company and the holders of Units to allow the Unit Holders to freely
resell the Unit Shares. The Company is registering the Acquisition Shares
pursuant to the Registration Rights Agreement dated as of October 3, 1996 and
two Registration Rights Agreements, each dated November 15, 1996, by and among
the Company and the sellers of certain properties previously acquired by the
Company to allow the Restricted Stock Holders to freely resell the Aquisition
Shares. The registration of the Shares does not necessarily mean that any of
the Unit Shares will be issued by the Company or that any Shares will be offered
and sold by the holders thereof. See "Use of Proceeds" and "Registration
Rights."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "GLB." The Shares of Common Stock are subject to certain restrictions
on ownership and transfer designed to assist the Company in maintaining its
status as a REIT for federal income tax purposes. See "Description of Capital
Stock -- Restrictions on Ownership and Transfer of 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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Selling Stockholders from time to time may offer and sell the Shares held
by them directly or through agents or broker-dealers on terms to be determined
at the time of sale. To the extent required, the names of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Stockholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Shares to be made directly or through agents.
The Company will not receive any of the proceeds from the issuance of the
Shares or the sale of Shares by the Selling Stockholders but has agreed to bear
certain expenses of registration of the Shares under Federal and state
securities laws. The Company will acquire Units in the Operating
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Partnership in exchange for the Unit Shares that the Company may issue to Unit
holders pursuant to the Registration Statement of which this Prospectus is part.
The Selling Stockholders and any agents or broker-dealers that participate
with the Selling Stockholders in the distribution of Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any profit on the
resale of the Shares may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Registration Rights" for indemnification
arrangements between the Company and the Selling Stockholders.
The date of this Prospectus is , 1997
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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 the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.,
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
web site (http://www.sec.gov) containing reports, proxy and information
statements and other information of registrants, including the Company, that
file electronically with the Commission. In addition, the Common Stock is listed
on the New York Stock Exchange and similar information concerning the Company
can be inspected and copied at the offices of 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
(the "Registration Statement") (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Shares. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other documents are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules thereto. For further information regarding the Company
and the Shares, reference is hereby made to the Registration Statement and such
exhibits and schedules which may be obtained from the Commission at its
principal office in Washington, D.C. upon payment of the fees prescribed by the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
b. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
c. The Company's Current Reports on Form 8-K filed with the Commission
on February 5, 1997, March 19, 1997, April 23, 1997, April 24, 1997, April
25, 1997 and May 2, 1997, respectively;
d. The Company's Current Reports on Form 8-K/A, filed with the Commission
on February 24, 1997 and May 14, 1997; and
e. The description of the Registrant's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1-14162).
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference in this Prospectus and to be part hereof from the date of filing
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 the applicable Prospectus Supplement) or in any other 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 (or in the applicable Prospectus
Supplement).
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Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to the Vice President, Capital Markets, Glenborough Realty Trust
Incorporated, 400 South El Camino Real, 11th Floor, San Mateo, California
94402-1708, telephone number: (415) 343-9300.
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As used herein, the term "Company" means Glenborough Realty Trust Incorporated,
a Maryland real estate investment trust, and its consolidated subsidiaries for
the periods from and after December 31, 1995 (the date of the merger of eight
public limited partnerships and Glenborough Corporation, a California
corporation, with and into the Company (the "Consolidation")), and the term
"Operating Partnership" means Glenborough Properties, L.P. in which the Company
holds a 1% interest as sole general partner, and an approximate 90.5% limited
partner interest. Unless otherwise indicated, ownership percentages of the
Company's Common Stock have been computed on a fully converted basis, using an
exchange of Operating Partnership units for Common Stock on a one-for-one basis.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust (a "REIT") that owns a portfolio of 69 office, industrial, retail,
multifamily and hotel properties (the "Properties") located in 19 states
throughout the country, as of June 27, 1997. The Company's principal growth
strategy is to capitalize on the opportunity to acquire portfolios or single
properties from public and private partnerships on attractive terms. This
strategy has evolved from the Company's predecessors' experience since 1978 in
managing real estate partnerships and their assets and, since 1989, in acquiring
management interests from third parties. In addition, three associated companies
(the "Associated Companies") provide comprehensive asset, partnership and
property management services for 59 other properties that are not owned by the
Company.
A portion of the Company's operations is conducted through the Operating
Partnership in which the Company holds a 1% interest as the sole general partner
and in which the Company holds an approximate 90.5% limited partner interest.
The Common Stock is listed on the New York Stock Exchange under the Symbol
"GLB." The Company commenced operations on December 31, 1995, through the merger
of eight public limited partnerships and a management company with and into the
Company. The Company's executive offices are located at 400 South El Camino
Real, Suite 1100, San Mateo, California 94402-1708 and its telephone number is
(415) 343-9300.
SECURITIES TO BE OFFERED
This Prospectus relates to the offer and sale from time to time by the holders
thereof of (i) up to 555,060 shares of Common Stock that may be issued by the
Company to certain holders of up to 555,060 Units in the Operating Partnership,
if and to the extent that such holders tender such Units for redemption and the
Company elects to redeem such Units for shares of Common Stock and (ii) up to
206,844 shares of Common Stock previously issued to certain holders in
connection with the acquisition of previously acquired properties. The Company
is registering the Unit Shares issuable upon redemption of the Units pursuant to
the terms of the Registration Rights Agreement dated as of December 28, 1995 and
the Registration Rights Agreement dated as of July 12, 1996, by
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and between the Company and the Unit Holder, to provide the Unit Holders with
freely tradable Unit Shares. The Company is registering the Acquisition Shares
pursuant to the Registration Rights Agreement dated as of October 3, 1996 and
two Registration Rights Agreements each dated November 15, 1996, by and among
the Company and the Restricted Stock Holders, to provide the Restricted Stock
Holders with freely tradable Acquisition Shares. The Registration of the Shares
does not necessarily mean that any of the Unit Shares will be issued by the
Company or that any Shares will be offered and sold by the holders thereof.
USE OF PROCEEDS
The Company will not receive any of the proceeds of the issuance of the
Shares or the sale of Shares by the Selling Stockholders but has agreed to bear
certain expenses of registration of the Shares under Federal and state
securities laws.
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RISK FACTORS
Prospective investors should read this entire Prospectus carefully, and
should consider carefully the following factors before purchasing the Shares
offered hereby.
LITIGATION RELATED TO CONSOLIDATION
Recent business reorganizations sponsored by others involving the
conversion of partnerships into corporations have given rise to a number of
investor lawsuits. These lawsuits have included claims against the general
partners of the participating partnerships, the partnerships themselves and
related persons involved in the structuring of or benefiting from the conversion
or reorganization, as well as claims against the surviving entity and its
directors and officers. The lawsuits have included, among others, claims that
the structure of the reorganizations, as well as the manner in which they were
submitted for investor approval, involved violations of federal and state
securities laws, common law fraud and negligent misrepresentations, breaches of
fiduciary duty, unfair and deceptive trade practices, negligence and waste,
breaches of the partnership documents of the participating partnerships, failure
to comply with applicable reporting requirements, violations of the rules of the
NASD on suitability and fair practices, and violations of the Racketeer
Influenced and Corrupt Organizations Act. Two lawsuits have been filed
contesting the fairness of the Consolidation, one in California state court and
one in federal court. A settlement of the state court action has been approved
by the court, but objectors to the settlement have appealed that approval. The
Company and the other defendants in the state court action have filed a
responsive brief and the appeal is now pending. Plaintiffs in the federal court
action have agreed voluntarily to take the action off calendar pending
resolution of the state court action.
From time to time the Company is involved in other litigation arising out
of its business activities. It is possible that this litigation and the other
litigation previously described could result in significant losses in excess of
amounts reserved, which could have an adverse effect on the Company's results of
operations and the financial condition of the Company.
CHAPTER 11 REORGANIZATION OF PARTNERSHIP CONSOLIDATION BY SENIOR MANAGEMENT
Robert and Andrew Batinovich, two of the senior officers of the Company,
were also senior members of a management team that formed a publicly registered
limited partnership in 1986 to consolidate a number of predecessor partnerships.
That public partnership was involved in litigation with its primary creditor and
in order to prevent foreclosure filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in May of 1992. The public
partnership, the primary subsidiary of which is GPA, Ltd., which owns an
approximately 4.9% limited partner interest in the Operating Partnership along
with other substantial real estate assets, settled the litigation and obtained
confirmation of a plan of reorganization in January 1994. Investors in the
Common Stock should consider that the consolidation of partnerships into GPA,
Ltd.'s parent partnership did not achieve all of the objectives stated at the
time and should further consider the relevance of that fact to their investment
in the Common Stock of the Company.
RISKS ASSOCIATED WITH ACQUISITIONS
Acquisitions Could Adversely Affect Operations or Stock Value
Consistent with its growth strategy, the Company is continually pursuing
and evaluating potential acquisition opportunities, and is from time to time
actively considering the possible acquisition of specific properties, which may
include properties managed or controlled by one of the Associated Companies or
owned by affiliated parties. It is possible that one or more of such possible
future acquisitions, if completed, could adversely affect the Company's funds
from operations or cash available for distribution, in the short term or the
long term or both, or increase the Company's debt, or be perceived negatively
among investors such that such an acquisition could be followed by a decline in
the market value of the Common Stock.
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Expansion Risk
The Company is experiencing a period of rapid expansion, which management
expects will continue in the near future. This growth has increased the
operating complexity of the Company as well as the level of responsibility for
both existing and new management personnel. The Company's ability to manage its
expansion effectively will require it to continue to update its operational and
financial systems and to expand, train and manage its employee base. The
Company's inability to effectively manage its expansion could have an adverse
effect on the Company's results of operations and financial condition.
Conflict of Interest
The Company has acquired, and from time to time may acquire, properties
from partnerships that Robert Batinovich, the Company's Chief Executive Officer,
and Andrew Batinovich, the Company's Chief Operating Officer, control, and in
which they and members of their families have substantial interests. It is also
possible that the Company may enter into transactions to acquire other
properties controlled by these individuals or in which they or members of their
families have substantial interests in the future. These transactions involve or
will involve conflicts of interest. These transactions may provide substantial
economic benefits such as the payments or unit issuances, relief or deferral of
tax liabilities, relief of primary or secondary liability for debt, and
reduction in exposure to other property-related liabilities. Despite the
presence of appraisals or fairness opinions or review by parties who have no
interest in the transactions, the transactions will not be the product of
arm's-length negotiation and there can be no assurance that these transactions
will be as favorable to the Company as transactions that the Company negotiates
with unrelated parties or will not result in undue benefit to Robert and Andrew
Batinovich and members of their families. Neither Robert Batinovich nor Andrew
Batinovich has guaranteed that any properties acquired from entities they
control or in which they or their families have a significant interest will be
as profitable as other investments made by the Company or will not result in
losses.
Assumption of General Partner Liabilities
The Company and its predecessors have acquired a number of their properties
by acquiring partnerships that own the properties or by first acquiring general
partnership interests and at a later date acquiring the properties, and the
Company may pursue acquisitions in this manner in the future. When the Company
uses this acquisition technique, a subsidiary of the Company becomes a general
partner. As a general partner the Company's subsidiary becomes generally liable
for the debts and obligations of the partnership, including debts and
obligations that may be contingent or unknown at the time of the acquisition. In
addition, the Company's subsidiary assumes obligations under the partnership
agreements, which may include obligations to make future contributions for the
benefit of other partners. The Company undertakes detailed due diligence reviews
to ascertain the nature and extent of obligations that its subsidiary will
assume when it becomes a general partner, but there can be no assurance that the
obligations assumed will not exceed the Company's estimates or that the assumed
liabilities will not have an adverse effect on the Company's results of
operations or financial condition. In addition, an Associated Company may enter
into management agreements pursuant to which it assumes certain obligations as
manager of properties. There can be no assurance that these obligations will not
have an adverse effect on the Associated Companies' results of operations or
financial condition, which could adversely affect the value of the Company's
preferred stock interest in those companies.
Risks Relating to Tender Offers
The Company may, as part of its growth strategy, acquire properties and
portfolios of properties through tender offer acquisitions of interests in
public and private partnerships. Tender offers often result in competing tender
offers, as well as litigation initiated by limited partners in the subject
partnerships or by competing bidders. Due to the inherent uncertainty of
litigation, the Company could be subject to adverse judgments in substantial
amounts. As the Company has not yet attempted an acquisition through the tender
offer process, and because of competing offers and possible litigation, there
can be no assurance that, if undertaken, the
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Company would be successful in acquiring properties through a tender offer or
that the tender offer process would not result in litigation and a significant
judgment adverse to the Company.
CERTAIN TAX RISKS
Consequences of Failure to Qualify as a REIT
The Company has elected to be treated as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code") commencing with its taxable year ending
December 31, 1996. No assurance can be given, however, that the Company will be
able to operate in a manner which would permit it to qualify to make this
election. Qualification as a REIT involves the satisfaction of numerous
requirements (some on an annual and quarterly basis) established under highly
technical and complex Code provisions for which only limited judicial or
administrative interpretation exists, and involves the determination of various
factual matters and circumstances not entirely within the Company's control. The
Company will receive nonqualifying management fee income and will own
nonqualifying preferred stock in the Associated Companies. As a result, the
Company may approach the income and asset test limits imposed by the Code and
could be at risk of not satisfying those tests. In order to avoid exceeding the
asset test limit, for example, the Company may have to reduce its interest in
the Associated Companies. The Company is relying on the opinion of its tax
counsel regarding its ability to qualify as a REIT. This legal opinion is not
binding on the IRS. See "Federal Income Tax Consequences -- Taxation of the
Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
to stockholders because of the additional tax liability to the Company for the
years involved. In addition, distributions to stockholders would no longer be
required to be made. See "Federal Income Tax Consequences -- Failure to
Qualify."
Even if the Company qualifies as a REIT, it will be subject to certain
federal, state and local taxes on its income and property. See "Federal Income
Tax Consequences -- Taxation of the Company."
Possible Changes in Tax Laws
Income tax treatment of REITs may be modified, prospectively or
retroactively, by legislative, judicial or administrative action at any time. No
assurance can be given that legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to the qualification as a REIT or the federal income tax
consequences of this qualification. In addition to any direct effects the
changes might have, the changes might also indirectly affect the market value of
all real estate investments, and consequently the ability of the Company to
realize its investment objectives.
RISKS RELATING TO REAL ESTATE
Environmental Matters
All of the Properties presently owned by the Company have been subject to
Phase I environmental assessments by independent environmental consultants. Some
of the Phase I environmental assessments recommended further investigations in
the form of Phase II environmental assessments, including soil and groundwater
sampling, and all of these investigations have been completed by the Company or
are in the process of being completed. Certain of the Properties owned by the
Company have been found to contain ACMs. The Company believes that these
materials have been adequately contained and that an ACM operations and
maintenance program has been implemented or is in the process of being
implemented for the Properties found to contain ACMs.
Some, but not all, of the properties owned by partnerships managed by the
Associated Companies have been subject to Phase I environmental assessments by
independent environmental consultants. The Associated Companies determine on a
case-by-case basis whether to obtain Phase I environmental assessments on these
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properties and whether to undertake further investigation or remediation.
Certain of these properties contain ACMs. In each case the responsible
Associated Company believes that these materials have been adequately contained
and that an ACM operations and maintenance program has been implemented for the
properties found to contain ACMs.
Six of the Properties owned by the Company are leased in whole or in part
to an operator of auto care centers which include oil change and tune-up
facilities, and ten of the Properties are leased to operators of convenience
stores which sell petroleum-based fuels. These Properties and other of the
Properties contain, and/or may have contained in the past, underground storage
tanks for the storage of petroleum products and/or other hazardous or toxic
substances which create a potential for release of petroleum products and/or
other hazardous or toxic substances. Some of the Properties owned by the Company
are adjacent to or near properties that have contained in the past or currently
contain, underground storage tanks used to store petroleum products or other
hazardous or toxic substances. Several of the Properties have been contaminated
with petroleum products or other hazardous or toxic substances from on-site
operations or operations on adjacent or nearby properties. In addition, certain
of the Properties are on, adjacent to or near properties upon which others have
engaged or may in the future engage in activities that may release petroleum
products or other hazardous or toxic substances.
Although tenants of the Properties owned by the Company generally are
required by their leases to operate in compliance with all applicable federal,
state and local environmental laws, ordinances and regulations and to indemnify
the Company against any environmental liability arising from the tenants'
activities on the Properties, the Company could nevertheless be subject to
environmental liability relating to its management of the Properties or strict
liability by virtue of its ownership interest in the Properties and there can be
no assurance that the tenants would satisfy their indemnification obligations
under the leases. There can be no assurance that any environmental assessments
of the Properties owned by the Company, properties being considered for
acquisition by the Company, or the properties owned by the partnerships managed
by the Associated Companies have revealed all potential environmental
liabilities, that any prior owner or prior or current operator of such
properties did not create an environmental condition not known to the Company or
that an environmental condition does not otherwise exist as to any one or more
of such properties that could have an adverse effect on the Company's results of
operations and financial condition, either directly (with respect to properties
owned by the Company), or indirectly (with respect to properties owned by
partnerships managed by an Associated Company) by adversely affecting the
financial condition of the Associated Company and thus the value of the
Company's preferred stock interest in the Associated Company. Moreover, there
can be no assurance that (i) future environmental laws, ordinances or
regulations will not have an adverse effect on the Company's results of
operations and financial condition or (ii) the current environmental condition
of such properties will not be affected by tenants and occupants of such
properties, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
Risks Related to Ownership and Financing of Real Estate
The Company is subject to risks generally incidental to the ownership of
real estate, including changes in general economic or local conditions, changes
in supply of or demand for similar or competing properties in an area, the
impact of environmental protection laws, changes in interest rates and
availability of financing which may render the sale or financing of a property
difficult or unattractive, changes in tax, real estate and zoning laws, and the
creation of mechanics' liens or similar encumbrances placed on the property by a
lessee or other parties without the Company's knowledge and consent. Should any
of these events occur, there could be an adverse effect on the Company's results
of operations and financial condition.
Availability of Real Estate for Acquisitions
The Company's growth is dependent upon acquisitions. There can be no
assurance that properties will be available for acquisition or, if available,
that the Company will be able to purchase such properties on favorable terms. If
such acquisitions are not available it could have a negative impact on the
growth of the Company, which could have an adverse effect on the performance of
the Company's Common Stock.
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<PAGE> 12
Competition for Acquisition of Real Estate
The Company faces competition from other businesses, individuals, fiduciary
accounts and plans and other entities in the acquisition, operation and sale of
its properties. Some of the Company's competitors are larger and have greater
financial resources than the Company. This competition may result in a higher
cost for properties the Company wishes to purchase.
Competition for Tenants
The Company is subject to the risk that when space becomes available at its
properties the leases may not be renewed, the space may not be let or relet, or
the terms of the renewal or reletting (including the cost of required
renovations or concessions to tenants) may be less favorable to the Company.
Although the Company has established annual property budgets that include
estimates of costs for renovation and reletting expenses that it believes are
reasonable in light of each property's situation, no assurance can be given that
these estimates will sufficiently cover these expenses. If the Company is unable
to promptly lease all or substantially all of the space at its properties, if
the rental rates are significantly lower than expected, or if the Company's
reserves for these purposes prove inadequate, then there could be an adverse
effect on the Company's results of operations and financial condition.
Tenants' Defaults
The ability of the Company to manage its assets is subject to federal
bankruptcy laws and state laws affecting creditors' rights and remedies
available to real property owners. In the event of the financial failure or
bankruptcy of a tenant, there can be no assurance that the Company could
promptly recover the tenant's premises from the tenant or from a trustee or
debtor-in-possession in any bankruptcy proceeding filed by or against that
tenant, or that the Company would receive rent in the proceeding sufficient to
cover its expenses with respect to the premises. In the event of the bankruptcy
of a tenant, the Company will be subject to the provisions of the federal
bankruptcy code, which in some instances may restrict the amount and
recoverability of claims held by the Company against the tenant. If any tenant
defaults on its obligations to the Company, there could be an adverse effect on
the Company's results of operations and financial condition.
Management, Leasing and Brokerage Risks; Lack of Control of Associated
Companies
The Company is subject to the risks associated with the property
management, leasing and brokerage businesses. These risks include the risk that
management contracts or service agreements may be terminated, that contracts
will not be renewed upon expiration or will not be renewed on terms consistent
with current terms, and that leasing and brokerage activity generally may
decline. Acquisition of properties by the Company from the Associated Companies
could result in a decrease in revenues to the Associated Companies and a
corresponding decrease in dividends received by the Company from the Associated
Companies. Each of these developments could have an adverse effect on the
Company's results of operations and financial condition.
To qualify for and to maintain the Company's status as a REIT while
realizing income from the Company's third-party management business, the capital
stock of Glenborough Hotel Group, a Nevada corporation ("GHG"), Glenborough
Corporation, a California corporation ("GC") and Glenborough Inland Realty
Corporation, a California corporation ("GIRC," and collectively with GHG and GC,
the "Associated Companies") (which conduct the Company's third-party management,
leasing and brokerage businesses) is divided into two classes. All of the voting
common stock of the Associated Companies, representing 5% of the total equity of
GC and GIRC, and 25% of the total equity of GHG, is held by individual
stockholders. Nonvoting preferred stock representing the remaining equity of
each Associated Company is held entirely by the Company. Although the Company
holds a majority of the equity interest in each Associated Company, the Company
is not able to elect directors of any Associated Company and, consequently, the
Company has no ability to influence the day-to-day decisions of each entity.
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<PAGE> 13
Uninsured Loss
The Company or in certain instances tenants of the properties carry
comprehensive liability, fire and extended coverage with respect to the
Company's properties, with policy specification and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(such as from earthquakes and floods) that may be either uninsurable or not
economically insurable. Further, certain of the properties are located in areas
that are subject to earthquake activity and floods. Should a property sustain
damage as a result of an earthquake or flood, the Company may incur losses due
to insurance deductibles, co-payments on insured losses or uninsured losses.
Should an uninsured loss occur, the Company could lose some or all of its
capital investment, cash flow and anticipated profits related to one or more
properties, which could have an adverse effect on the Company's results of
operations and financial condition.
Illiquidity of Real Estate
Real estate investments are relatively illiquid and, therefore, will
tend to limit the ability of the Company to vary its portfolio promptly in
response to changes in economic or other conditions. In addition, the Code, and
individual agreements with sellers of properties place limits on the Company's
ability to sell properties, which may adversely affect returns to holders of
Common Stock. Twenty-four of the properties owned by the Operating Partnership
were acquired on terms and conditions under which they can be disposed of only
in a like-kind exchange or other non-taxable transaction.
Potential Liability Under the Americans With Disabilities Act
As of January 26, 1992, all of the Company's properties were required to be
in compliance with the Americans With Disabilities Act (the "ADA"). The ADA
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the federal government, an award of
damages to private litigants and/or a court order to remove access barriers.
Because of the limited history of the ADA, the impact of its application to the
Company's properties, including the extent and timing of required renovations,
is uncertain. Pursuant to certain lease agreements with tenants in certain of
the "single-tenant" Properties, the tenants are obligated to comply with the ADA
provisions. If the Company's costs are greater than anticipated or tenants are
unable to meet their obligations, there could be an adverse effect on the
Company's results of operations and financial condition.
ADDITIONAL CAPITAL REQUIREMENTS
The Company's future growth depends in large part upon its ability to raise
additional capital on satisfactory terms or at all. There can be no assurance
that the Company will be able to raise sufficient capital to achieve its
objectives. If the Company were to raise additional capital through the issuance
of additional equity securities, or securities convertible into or exercisable
for equity securities, the interests of holders of the Offered Securities could
be diluted. Likewise, the Company's Board of Directors is authorized to cause
the Company to issue preferred stock in one or more series and to determine the
distributions and voting and other rights of the preferred stock. Accordingly,
the Board of Directors may authorize the issuance of preferred stock with
voting, distribution and other similar rights which could be dilutive to or
otherwise adversely affect the interests of holders of the Company's capital
stock. If the Company were to raise additional capital through debt financing,
the Company will be subject to the risks described below, among others.
LIMITATION ON OWNERSHIP OF COMMON STOCK MAY PRECLUDE ACQUISITION OF CONTROL
Provisions of the Company's Articles of Incorporation are designed to
assist the Company in maintaining its qualification as a REIT under the Code by
preventing concentrated ownership of the Company which might jeopardize REIT
qualification. Among other things, these provisions provide that (a) any
transfer or acquisition of Common Stock that would result in the
disqualification of the Company as a REIT under the Code will be void, and (b)
if any person attempts to acquire shares of Common Stock that after the
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<PAGE> 14
acquisition would cause the person to own or to be deemed to own, by operation
of certain attribution rules set out in the Code, an amount of Common Stock in
excess of a predetermined limit, which, pursuant to Board action, currently is
9.75% of the outstanding shares of Common Stock (the "Ownership Limitation" and
as to the Common Stock, the transfer of which would cause any person to actually
own Common Stock in excess of the Ownership Limitation, the "Excess Shares"),
the transfer shall be void and the Common Stock subject to the transfer shall
automatically be transferred to an unaffiliated trustee for the benefit of a
charitable organization designated by the Board of Directors of the Company
until sold by the trustee to a third party or purchased by the Company. Robert
Batinovich, his spouse and children (including Andrew Batinovich) and
individuals or entities whose ownership of Common Stock is attributed to Robert
Batinovich in determining the number of shares of Common Stock owned by him for
purposes of compliance with Section 856 of the Code (the "Attributed Owners"),
are exempt from these restrictions, but are prohibited from acquiring shares of
Common Stock if, after the acquisition, they would own in excess of 10.50% of
the outstanding shares of Common Stock. This limitation on the ownership of
Common Stock may have the effect of precluding the acquisition of control of the
Company by a third party without the consent of the Board of Directors. If the
Board of Directors waives the Ownership Limitation for any person, the Ownership
Limitation shall be proportionally and automatically reduced with regard to all
other persons such that no five persons may own more than 49% of the Common
Stock (the aggregate Ownership Limitations as to all of these persons, as
adjusted, the "Adjusted Ownership Limitation"). See "Description of Common
Stock -- Restrictions on Ownership and Transfer of Common Stock" and "Federal
Income Tax Consequences."
OTHER RISKS
Debt Financing
The Company intends to incur additional indebtedness in the future,
including through borrowings under a credit facility, if a credit facility is
available, to finance property acquisitions. As a result, the Company expects to
be subject to risks associated with debt financing, including the risk that
interest rates may increase, the risk that the Company's cash flow will be
insufficient to meet required payments on its debt and the risk that the Company
may be unable to refinance or repay the debt as it comes due. The Company's
current $50 million secured revolving line of credit with Wells Fargo Bank, N.A.
provides that distributions may not exceed 90% of funds from operations and
that, in the event of a failure to pay principal or interest on borrowings
thereunder when due (subject to any applicable grace period), the Company and
its subsidiaries may not pay any distributions on the Common Stock or the
preferred stock. If the Company is unable to obtain acceptable financing to
repay indebtedness at maturity, the Company may have to sell properties to repay
indebtedness or properties may be foreclosed upon, which could have an adverse
effect on the Company's results of operations and financial condition.
Dependence on Executive Officers
The Company is dependent on the efforts of Robert and Andrew Batinovich,
its President and Chief Executive Officer and its Executive Vice President,
Chief Financial Officer and Chief Operating Officer, respectively, and of its
other executive officers. The loss of the services of any of them could have an
adverse effect on the results of operations and financial condition of the
Company.
Board of Directors May Change Investment Policies
The descriptions in this Prospectus of the major policies and the various
types of investments to be made by the Company reflect only the current plans of
the Company's Board of Directors. The Company's Board of Directors may change
the investment policies of the Company without a vote of the stockholders. If
the Company changes its investment policies, the risks and potential rewards of
an investment in the Company may also change. In addition, the methods of
implementing the Company's investment policies may vary as new investment
techniques are developed.
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<PAGE> 15
Effect of Market Interest Rates on Price of Common Stock
One of the factors that may influence the market price of the shares of
Common Stock in public markets will be the annual yield on the price paid for
shares of Common Stock from distributions by the Company. An increase in market
interest rates may lead prospective purchasers of the Common Stock to seek a
higher annual yield from their investments. Such circumstances may adversely
affect the market price of the Common Stock.
Shares Available for Future Sale
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or future conversions or exercises of securities for
future sales, including shares of Common Stock issuable upon exchange of
Operating Partnership units, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales could occur, may adversely affect the prevailing
market price for the Common Stock.
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<PAGE> 16
DESCRIPTION OF COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock and is in all respects subject to and
qualified in its entirety by reference to the applicable provisions of the
Company's Articles of Incorporation ("Charter") and its Bylaws. The Common
Stock is listed on the New York Stock Exchange under the symbol "GLB."
Registrar and Transfer Company is the Company's transfer agent.
GENERAL
The Company's Charter authorizes the Company to issue up to 50,000,000 shares
of Common Stock with a par value of $.001 per share. As of May 31, 1997 there
were approximately 13,194,692 shares of Common Stock issued and outstanding and
no shares of Excess Stock were issued and outstanding. Under Maryland law,
stockholders generally are not liable for the Company's debts or obligations.
The holders of shares of Common Stock are entitled to one vote per share on
all matters voted on by stockholders, including election of directors, and,
except as provided in the Charter in respect of any other class of or series of
stock, the holders of these shares exclusively possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding shares or series of stock,
holders of shares of Common Stock are entitled to receive distributions, when
and as declared by the Board of Directors, out of funds legally available
therefor. Upon any liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata all assets of the
Company legally available for distribution to its stockholders after payment of,
or adequate provisions for, all known debts and liabilities of the Company. All
shares of Common Stock now outstanding are fully paid and nonassessable, as will
be the shares of Common Stock offered by this Prospectus when issued. The
holders of the Common Stock offered hereby will have no preemptive rights to
subscribe to additional stock or securities issued by the Company at a
subsequent date.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF COMMON STOCK
For the Company to qualify as a REIT under the Code, not more than 50% of the
value of its outstanding shares of Common Stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year. Shares of Common
Stock must be beneficially owned by 100 or more persons during at least 335 days
of a taxable year of 12 months (other than the first year) or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Consequences -- 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 Charter, subject to certain exceptions, provides that no
holder, other than Robert Batinovich and the individuals or entities whose
ownership of shares of Common Stock is attributed to Mr. Batinovich under the
Code (the "Attributed Owners"), may own an amount of Common Stock in excess of
the ownership limitation, which, pursuant to Board action, currently is 9.75% of
the outstanding shares of Common Stock (the "Ownership Limitation"). A qualified
trust (as defined in the Charter) generally may own up to 9.9% of the
outstanding shares of Common Stock. The Ownership Limitation provides that
Robert Batinovich and the Attributed Owners may hold up to 10.50% of the
outstanding shares of Common Stock, including shares which Robert Batinovich and
the Attributed Owners may acquire pursuant to an option held by GPA, Ltd. or Mr.
Batinovich to cause the Company to redeem their respective partnership interests
in the Operating Partnership, assuming GPA, Ltd. then dissolves and distributes
these shares to the partners of GPA, Ltd.
The Board of Directors may waive the Ownership Limitation if evidence
satisfactory to the Board of Directors and the Company's tax counsel is
presented that such ownership will not jeopardize the Company's status as a
REIT. As a condition to such waiver, the Board of Directors may require opinions
of counsel satisfactory to it
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<PAGE> 17
and/or an undertaking from the applicant with respect to preserving the REIT
status of the Company. The Ownership Limitation will not apply if the Board of
Directors and the stockholders determine that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT. Any transfer of Common Stock that would (a) create actual or constructive
ownership of Common Stock in excess of the Ownership Limitation, (b) result in
the Common Stock being owned by fewer than 100 persons, or (c) result in the
Company's being "closely held" under Section 856(h) of the Code, shall be null
and void, and the intended transferee will acquire no rights to the Common
Stock.
The Charter also provides that Common Stock involved in a transfer or change
in capital structure that results in a person (other than Robert Batinovich and
the Attributed Owners) owning in excess of the Ownership Limitation or would
cause the Company to become "closely held" (within the meaning of Section 856(h)
of the Code) will automatically be transferred to a trustee for the benefit of a
charitable organization until purchased by the Company or sold to a third party
without violation of the Ownership Limitation. While held in trust, the Excess
Shares will remain outstanding for purposes of any stockholder vote or the
determination of a quorum for such vote and the trustee will be empowered to
vote the Excess Shares. Excess Shares shall be entitled to distributions,
provided that such distributions shall be paid to a charitable organization
selected by the Board of Directors as beneficiary of the trust. The trustee may
transfer the Excess Shares to any individual whose ownership of Common Stock
would be permitted under the Ownership Limitation and would not cause the
Company to become "closely held." In addition, the Company would have the right,
for a period of 90 days, to purchase all or any portion of the Excess Shares
from the trustee at the lesser of (i) where (a) the intended transferee gave
value for the Excess Shares, the price paid for the Excess Shares by the
intended transferee or (b) the intended transferee did not give value for the
Excess Shares, the price per share equal to the average of the market price for
the Common Stock for the five consecutive trading days ending on the date of
the purported transfer to the intended transferee and (ii) the average of the
closing market price for the Common Stock for the five consecutive trading days
ending the date the Company exercises its option to purchase. The intended
transferee would be entitled to receive from the trustee the lesser of (i)
where (a) the intended transferee gave value for the Excess Shares, the price
paid for the Excess Shares by the intended transferee or (b) the intended
transferee did not give value for the Excess Shares, the price per share equal
to the average of the closing market price for the Common Stock for the five
consecutive trading days ending on the date of the purported transfer to the
intended transferee and (ii) the price per share received by the trustee from
the transfer of the Excess Shares to a Permitted Transferee.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Except as otherwise described above, any change in the Ownership
Limitation would require an amendment to the Charter. Such amendments require
the affirmative vote of stockholders owning a majority of the outstanding Common
Stock. In addition to preserving the Company's status as a REIT, the Ownership
Limitation may have the effect of precluding an acquisition of control of the
Company by a third party without the approval of the Board of Directors.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All stockholders of record who own 5% or more of the value of the outstanding
Common Stock (or 1% if there are fewer than 2,000 stockholders of record but
more than 200, or 1/2% if there are 200 or fewer stockholders of record) must
file written notice with the Company containing the information specified in the
Charter by January 30 of each year. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information with
respect to the direct, indirect and constructive ownership of Common Stock as
the Board of Directors deems necessary to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation. The Company intends to use its best efforts to enforce the
Ownership Limitation and will make prohibited transferees aware of their
obligation to pay over any distributions received, will not give effect on its
books to prohibited transfers, will institute proceedings to enjoin any transfer
violating the Ownership Limitation, and will declare all votes of prohibited
transferees invalid.
PREFERRED STOCK
Subject to limitations prescribed by Maryland law and the Company's Charter,
the Board of Directors is authorized to issue, from the authorized but unissued
capital stock of the Company, preferred stock in such classes or series as the
Board of Directors may determine and to establish from time to time the number
of shares of Preferred Stock to be included in any such class or series and to
fix the designation and any preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
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<PAGE> 18
conditions of redemption of the shares of any such class or series, and such
other subjects or matters as may be fixed by resolution of the Board of
Directors. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company.
DESCRIPTION OF PARTNERSHIP UNITS
Substantially all of the Company's assets are held by and all of its
operations are conducted through the Operating Partnership. The Company is the
sole general partner of the Operating Partnership and as of April 30, 1997 held
1.0% of the Units as a general partner and approximately 90.5% of the Units as
a limited partner of the Operating Partnership. Approximately 4.9% of the Units
are held by GPA, Ltd., a subsidiary of the Company, and the remaining Units are
held by persons (or their successors) who contributed interests in the
Properties to the Company in connection with, or subsequent to, the formation
of the Operating Partnership. The following sets forth a description of certain
terms and provisions of the Units and does not purport to be complete and is
subject to and qualified in its entirety by reference to applicable provisions
of California law and the First Amended and Restated Agreement of Limited
Partnership of Glenborough Properties, L.P., as amended (the "Partnership
Agreement").
GENERAL
Holders of Units (other than the Company) hold limited partnership interests
in the Operating Partnership, and all holders of Units (including the Company in
its capacity as general partner) are entitled to share in cash distributions
from, and in the profits and losses of, the Operating Partnership. The Company
holds its interest in the Operating Partnership in the forms of general
partnership and limited partnership interests.
Holders of Units have the rights to which limited partners are entitled under
the Partnership Agreement and the California Revised Uniform Limited Partnership
Act. The Units have not been registered pursuant to the federal or state
securities laws and have not been listed on any exchange or quoted on any
national market system. The Partnership Agreement restricts the transfer of
Units, as described below.
RESTRICTIONS ON TRANSFER OF UNITS BY LIMITED PARTNERS
The limited partners in the Operating Partnership (the "Limited Partners")
are prohibited from transferring all or a portion of their Units without
obtaining the prior consent of the Company, which consent may be given or
withheld in the sole and absolute discretion of the Company.
REDEMPTION OF UNITS
Subject to certain limitations, Limited Partners may require that the Company
redeem all or a portion of their Units in the Operating Partnership. The
Company, in its sole discretion, may elect to redeem Units for cash or shares of
the Company's Common Stock.
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<PAGE> 19
REGISTRATION RIGHTS
The Company has filed the Registration Statement of which this Prospectus is a
part pursuant to its obligations under the Registration Rights Agreement dated
as of December 28, 1995 and the Registration Rights Agreement dated as of July
12, 1996, (the "Unit Shares Registration Rights Agreements") by and between the
Company and the Unit Holders, the Registration Rights Agreement dated as of
October 3, 1996 and two Registration Rights Agreements each dated November 15,
1996 (the "Acquisition Shares Registration Rights Agreements") by and among the
Company and the Restricted Stock Holders.
The following summaries do not purport to be complete and are qualified in
their entirety by reference to each of the respective Registration Rights
Agreements.
UNIT SHARES REGISTRATION RIGHTS AGREEMENTS
Under the Unit Shares Registration Rights Agreements, the Company granted the
Unit Holders certain demand and piggyback registration rights with respect to
any shares of Common Stock that they may own or
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<PAGE> 20
receive if and to the extent the Unit Holders cause the Company to redeem their
Units and the Company elects to effect such redemption with shares of Common
Stock instead of cash. These registration rights include the right to demand
registration of all or any portion of such unregistered shares of Common Stock,
and the right to have such shares included when the Company registers other
shares of its Common Stock or substantially similar securities. Such
registration rights may only be exercised during the period after certain
restrictions on transfer have lapsed and prior to the time when the holders are
permitted to sell their shares pursuant to Rule 144(k) under the Securities Act.
The Company must bear certain expenses of satisfying the registration
requirements resulting from the registration rights, except that the expenses
shall not include any underwriting discounts or commissions or transfer taxes
relating to the shares.
ACQUISITION SHARES REGISTRATION RIGHTS AGREEMENTS
Under the Acquisition Shares Registration Rights Agreements, the Company
granted certain demand and piggyback registration rights with respect to
unregistered shares of Common Stock issued in connection with the acquisition of
certain properties by the Company. These registration rights include the right
under certain circumstances to demand registration of all or a portion of such
unregistered shares of Common Stock, and the right to have such shares included
when the Company registers other shares of Common Stock or similar securities.
The Company must bear certain expenses of satisfying the registration
requirements resulting from the registration rights, except that the expenses
shall not include any underwriters' discounts or commissions, or transfer taxes
relating to the shares.
SELLING STOCKHOLDERS
The following table provides the names of and the number and percentage
of shares of Common Stock beneficially owned by each Unit Holder and Restricted
Stock Holder and number and percentage of shares of Common Stock beneficially
owned by each Unit Holder and Restricted Stock Holder upon completion of the
offering or offerings pursuant to this Prospectus, assuming (i) each Unit Holder
tenders all such Units for redemption, the Company elects to redeem all such
Units for Shares of Common Stock and each Unit Holder sells all of its or his
Unit Shares pursuant to this Prospectus, and (ii) each Restricted Stock Holder
sells all of its or his Acquisition Shares. Since, with respect to the Unit
Holders, the Company, at its election, may redeem some or all of the Units for
cash rather than for Shares of Common Stock, and (assuming the Company elects to
redeem some or all of the Units for Shares of Common Stock) the Unit Holders may
sell all, or some or none of their Shares, and the Restricted Stock Holders may
sell all, or some or none of their Shares, no estimate can be made of the
aggregate number of Shares that are to be offered hereby or that will be owned
by each Selling Stockholder upon completion of the offering to which this
Prospectus relates. The number of Shares in the following table represents the
number of shares of Common Stock the person holds (if any) plus the number of
Shares into which Units held by the person may be redeemed, and the extent to
which the person holds Units as opposed to shares of Common Stock is set forth
in the notes to the following table.
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<PAGE> 21
A portion of the Shares offered by this Prospectus may be offered from
time to time by the Unit Holders and Restricted Stock Holders named below:
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After the Offering(1)
Percentage of Percentage of
Number of Shares Number of Shares Number of Shares
Shares (1) Outstanding(3) Offered Hereby Shares(1) Outstanding(3)
---------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Robert Batinovich............. 1,177,360(2) 8.8% 12,727 1,164,633 8.8%
GPA, Ltd...................... 592,006(4) 4.5% 542,333 49,673 *
John Provine.................. 182,000(5) 1.4% 182,000 0 *
Carlsberg Properties, Inc. ... 24,844(5) * 24,844 0 *
</TABLE>
- --------------
*less than 1%
(1) Assumes redemption of all Units for shares of Common Stock.
(2) Includes (i) 1,044,435 shares of Common Stock, (ii) 12,727 shares which
may be issued upon redemption of 12,727 Units, (iii) 1,083 shares which
are beneficially owned by Angela Batinovich, Mr. Batinovich's minor
daughter, under a trust of which an independent third party is trustee,
(iv) 4,456 shares held by GPA, Ltd., which represents Mr. Batinovich's
portion of all shares of Common Stock held by GPA Ltd., and (v) 114,659
shares of Common Stock that may be issued upon redemption of GPA Ltd.'s
interest in the Operating partnership, which represents Mr. Batinovich's
portion of all shares of Common Stock that may be issued to GPA, Ltd. upon
redemption. Excludes 52,647 shares of Common Stock held by S.S. Rainbow, a
California limited partnership, of which Mr. Batinovich's minor daughter,
Angela Batinovich, is a limited partner and which represents Angela
Batinovich's portion of all shares of Common Stock held by S.S. Rainbow.
Also excludes 83 shares held by GPA, Ltd., which represents Angela
Batinovich's portion of all shares of Common Stock held by GPA, Ltd., and
2,125 shares of Common Stock that may be issued upon redemption of GPA,
Ltd.'s interest in the Operating Partnership, which represents Angela
Batinovich's portion of all shares of Common Stock that may be issued to
GPA, Ltd. upon such redemption and which are held by a trust, of which
Angela Batinovich is sole beneficiary and the trustee is an independent
third party.
(3) Assumes redemption for shares of Common Stock of only the Units owned by
the Selling Stockholder. The total number of shares outstanding used in
calculating the percentage assumes that none of the other Units has been
redeemed.
(4) Includes 13,000 shares of Common Stock and 579,006 shares of Common Stock
that may be issued upon redemption of Units held by GPA, Ltd.
(5) Represents previously unregistered shares of Common Stock.
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<PAGE> 22
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's Charter and Bylaws might discourage
certain types of transactions that involve an actual or threatened change in
control of the Company that might involve a premium price for the Company's
capital stock or otherwise be in the best interest of the stockholders. See
"Description of Common Stock -- Restrictions on Ownership and Transfer of Common
Stock." The issuance of shares of preferred stock or other capital stock by the
Board of Directors may also have the effect of delaying, depriving or preventing
a change in control of the Company. The Bylaws of the Company contain certain
advance notice requirements in the nomination of persons for election to the
Board of Directors which could have the effect of discouraging a takeover 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 prevailing market price,
or which such holders might believe to be otherwise in their best interest.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of material federal income tax consequences is based
on current law and 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 insurance
companies, financial institutions and broker-dealers) subject to special
treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES.
The Company believes that since January 1, 1996, it has operated in a
manner that permits it to satisfy the requirements for taxation as a REIT under
the applicable provisions of the Code. The Company intends to continue to
operate to satisfy such requirements. No assurance can be given, however, that
such requirements will be met.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code 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 thereunder, and administrative and
judicial interpretations thereof. Morrison & Foerster LLP has acted as tax
counsel to the Company in connection with Company's election to be taxed as a
REIT.
In the opinion of Morrison & Foerster LLP, commencing with the Company's
taxable year that ended on December 31, 1996, the Company has been organized in
conformity with the requirements for qualification as a REIT, and its method of
operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, and various qualification tests imposed under the Code
discussed below, the results of which will not be reviewed by Morrison &
Foerster LLP. Accordingly, no assurance can be given that the actual results of
the Company's operations for any particular taxable year will satisfy such
requirements. See "-- Failure to Qualify."
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are satisfied, entities, such as the Company, that invest primarily in
real estate and that otherwise would be treated for federal income tax purposes
as corporations, are generally not taxed at the corporate level on their "REIT
Taxable Income" that is currently distributed to stockholders. This treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from the use of
corporate investment vehicles.
If the Company fails to qualify as a REIT in any year, however, it will be
subject to federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution to
its stockholders could be reduced.
TAXATION OF THE COMPANY
General
In any year in which the Company qualifies as a REIT, in general, it will
not be subject to federal income tax on that portion of its net income that it
distributes to stockholders. This treatment substantially eliminates the "double
taxation" on income 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
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disposition of "foreclosure 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), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75%
gross income test or the 95% gross income 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
real estate investment trust ordinary income for such year, (ii) 95% of its real
estate investment trust 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, if the Company acquires any asset from a C
corporation (i.e., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation, and the Company recognizes gain on the disposition
of such asset during the 10 year period beginning on the date on which such
asset was acquired by the Company, then, to the extent of any built-in gain at
the time of acquisition, such gain will be subject to tax at the highest regular
corporate rate.
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 860 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) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code) at any time
during the last half of each taxable year; and (7) which meets certain other
tests, described below, regarding the nature of income and assets. The Code
provides that conditions (1) to (4), inclusive, must be met during the entire
taxable year and that condition (5) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. Conditions (5) and (6) will not apply until after the first
taxable year for which an election is made by the Company to be taxed as a REIT.
In order to assist the Company in complying with the ownership tests
described above, the Company has placed certain restrictions on the transfer of
the Common Stock and the Company's preferred stock to prevent further
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Common Stock and preferred stock. In fulfilling its
obligations to maintain records, the Company must and will demand written
statements each year from the record holders of designated percentages of its
Common Stock and preferred stock disclosing the actual owners of such Common
Stock and preferred stock. A list of those persons failing or refusing to comply
with such demand must be maintained as part of the Company's records. A
stockholder failing or refusing to comply with the Company's written demand must
submit with his or her tax returns a similar statement disclosing the actual
ownership of Common Stock and preferred stock and certain other information. In
addition, the Company's Charter provides restrictions regarding the transfer of
its shares that are intended to assist the Company in continuing to satisfy the
share ownership requirements. See "Description of Common Stock -- Restrictions
on Ownership and Transfer of Common Stock."
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the 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
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Section 856 of the Code, including satisfying the gross income tests and the
asset tests, described below. Thus, the Company's proportionate share of the
assets, liabilities and items of income of the Operating Partnership will be
treated as assets, liabilities and items of income of the Company for purposes
of applying the requirements described below.
Asset Tests
At the close of each quarter of the Company's taxable year, the Company
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items and government securities (as well as certain temporary
investments in stock or debt instruments purchased with the proceeds of new
capital raised by the Company). Second, although the remaining 25% of the
Company's assets generally may be invested without restriction, securities in
this class may not exceed either (i) 5% of the value of the Company's total
assets as to any one non-government issuer or (ii) 10% of the outstanding voting
securities of any one issuer. The Company's investment in real property through
its interest in the Operating Partnership constitutes qualified assets for
purposes of the 75% asset test. In addition, the Company may own 100% of
"qualified REIT subsidiaries" as defined in the Code. All assets, liabilities,
and items of income, deduction, and credit of such a qualified REIT subsidiary
will be treated as owned and realized directly by the Company.
The Company has analyzed the impact of its ownership interests in the
Associated Companies on its ability to satisfy the asset tests. Based upon its
analysis of the estimated value of the Company's total assets as well as its
estimate of the value of the respective nonvoting preferred stock interests in
the Associated Companies, the Company believes that none of such preferred stock
interests will exceed 5% of the value of the Company's total assets on the last
day of any calendar quarter in 1996. The Company intends to monitor compliance
with the 5% test on a quarterly basis and believes that it will be able to
manage its operations in a manner to comply with the tests, either by managing
the amount of its qualifying assets or reducing its interests in the Associated
Companies, although there can be no assurance that such steps will be
successful. In rendering its opinion as to the qualification of the Company as a
REIT, counsel has relied upon the Company's representation as to the value of
its assets and the value of its interests in the Associated Companies. Counsel
has discussed with the Company its valuation analysis and the future actions
available to it to comply with the 5% tests but it has not independently
verified the valuations.
Gross Income Tests
There are three separate percentage tests relating to the sources of the
Company's gross income which must be satisfied for each taxable year. For
purposes of these tests, where the Company invests in a partnership, the Company
will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the partnership.
See "-- Tax Aspects of the Company's Investment in the Operating Partnerships --
General."
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i)
"rents from real property" (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interests in, real property;
(iii) gains from the sale or other disposition of interests in real property and
real estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of the Company's trade or business ("dealer
property"); (iv) dividends or other distributions on shares in other REITs, as
well as gain from the sale of such shares; (v) abatements and refunds of real
property taxes; (vi) income from the operation, and gain from the sale, of
property acquired at or in lieu of a foreclosure of the mortgage collateralized
by such property ("foreclosure property"); and (vii) commitment fees received
for agreeing to make loans collateralized by mortgages on real property or to
purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if the Company, or an owner of 10% or more of the
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Company, directly or constructively owns 10% or more of such tenant (a "related
party tenant"). In addition, 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. Moreover, an
amount received or accrued generally will not qualify as rents from real
property (or as interest income) for purposes of the 75% and 95% gross income
tests if it is based in whole or in part on the income or profits of any person.
Rent or interest will not be disqualified, however, solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Finally, for
rents received to qualify as rents from real property, the Company generally
must not operate or manage the property or furnish or render services to
tenants, other than through an "independent contractor" from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent that the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy only,
and are not otherwise considered "rendered to the occupant."
The Company will be deemed to provide certain services which are actually
provided by the Operating Partnership with respect to properties owned by the
Operating Partnership. The Company believes that the services provided by the
Operating Partnership are usually or customarily rendered in connection with the
rental of space of occupancy only, and therefore that the provision of such
services will not cause the rents received with respect to its properties to
fail to qualify as rents from real property for purposes of the 75% and 95%
gross income tests. The Company does not intend to rent to related party tenants
or to charge rents that would not qualify as rents from real property because
the rents are based on the income or profits of any person (other than rents
that are based on a fixed percentage or percentages of receipts or sales).
Pursuant to the percentage leases ("Percentage Leases"), GHG leases from
the Operating Partnership the land, buildings, improvements, furnishings, and
equipment comprising the Hotels for a five-year period with a five-year renewal
option. The Percentage Leases provide that the lessee will be obligated to pay
to the Operating Partnership (a) the greater of a fixed rent (the "Base Rent")
or a percentage rent (the "Percentage Rent") (collectively, the "Rents") and (b)
certain other amounts, including interest accrued on any late payments or
charges (the "Additional Charges"). The Percentage Rent is calculated by
multiplying fixed percentages by the gross revenues from the operations of the
Hotels in excess of certain levels. The Base Rent accrues and is required to be
paid monthly. Percentage Rent is due quarterly; however, the lessee will not be
in default for non-payment of Percentage Rent due in any calendar year if the
lessee pays, within 90 days of the end of the calendar year, the excess of
Percentage Rent due and unpaid over the Base Rent with respect to such year.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute rents from real property, the Percentage Leases must be respected
as true leases for federal income tax purposes and not treated as service
contracts, joint ventures or some other type of arrangement. The determination
of whether the Percentage Leases are true leases depends on an analysis of all
the surrounding facts and circumstances. In making such a determination, courts
have considered a variety of factors, including the following: (a) the intent of
the parties, (b) the form of the agreement, (c) the degree of control over the
property that is retained by the property owner (e.g., whether the lessee has
substantial control over the operation of the property or whether the lessee was
required simply to use its best efforts to perform its obligations under the
agreement), and (d) the extent to which the property owner retains the risk of
loss of the property (e.g., whether the lessee bears the risk of increases in
operating expenses or the risk of damage to the property).
In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (a) the
service recipient is in physical possession of the property, (b) the service
recipient controls the property, (c) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (d) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (e) the service provider
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does not use the property concurrently to provide significant services to
entities unrelated to the service recipient, and (f) the total contract price
does not substantially exceed the rental value of the property for the contract
period. Since the determination of whether a service contract should be treated
as a lease is inherently factual, the presence or absence of any single factor
may not be dispositive in every case.
Counsel is of the opinion that the Percentage Leases will be treated as
true leases for federal income tax purposes. Such opinion is based, in part, on
the following facts: (a) the Operating Partnership and the lessee intend for
their relationship to be that of a lessor and lessee and such relationship will
be documented by lease agreements, (b) the lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (c) the lessee bears the cost of, and will be responsible
for, day-to-day maintenance and repair of the Hotels, other than the cost of
maintaining underground utilities, structural elements and exterior painting,
and will dictate how the Hotels are operated, maintained, and improved, (d) the
lessee bears all of the costs and expenses of operating the Hotels (including
inventory costs) during the term of the Percentage Leases (other than real
property taxes, personal property taxes on property owned by the Operating
Partnership, casualty insurance and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do not exceed the
allowance for such costs provided by the Operating Partnership under the
Percentage Leases), (e) the lessee will benefit from any savings in the costs of
operating the Hotels during the term of the Percentage Leases, (f) in the event
of damage or destruction to a Hotel which renders the Hotel unsuitable for
continued use, the lessee will be at economic risk because the Operating
Partnership can elect to terminate the Percentage Lease as to such Hotel, in
which event the lessee can elect to rebuild at its cost less any insurance
proceeds, or accept such termination, (g) the lessee will indemnify the
Partnership against all liabilities imposed on the Partnership during the term
of the Percentage Leases by reason of (i) injury to persons or damage to
property occurring at the Hotels or (ii) the lessee's use, management,
maintenance or repair of the Hotels, (h) the lessee is obligated to pay
substantial fixed rent for the period of use of the Hotels, and (i) the lessee
stands to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Hotels. The Company has represented that the lessee
has and will have its own employees, physically distinct and separate office
space, furniture and equipment, and directors. Further, the Company has
represented that neither the Company nor the Operating Partnership will furnish
or render services to either the lessee or its customers.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of counsel with respect to the relationship between the Operating
Partnership and the lessee is based upon all of the facts and circumstances, and
rulings and judicial decisions involving situations that are considered to be
analogous. Opinions of counsel are not binding upon the Service or any court,
and there can be no assurance that the Service will not assert successfully a
contrary position. If the Percentage Leases are recharacterized as service
contracts or partnership agreements, rather than true leases, part or all of the
payments that the Partnership receives from the lessee may not be considered
rent or may not otherwise satisfy the various requirements for qualification as
rents from real property. In that case, the Company likely would not be able to
satisfy either the 75% or 95% gross income tests and, as a result, could lose
its REIT status.
In order for the Rents to constitute rents from real property, several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). Management has obtained an appraisal of the personal
property at each Hotel indicating that the appraised value of the personal
property at each Hotel is less than 15% of the value at which such Hotel is
acquired. However, the Company has represented that the Operating Partnership
will in no event acquire additional personal property for a Hotel to the extent
that such acquisition would cause the Adjusted Basis Ratio for that Hotel to
exceed 15%. There can be no assurance, however, that the Service
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would not assert that the personal property acquired from a particular
partnership had a value in excess of the appraised value, or that a court would
not uphold such assertion. If such a challenge were successfully asserted, the
Company could fail the 15% Adjusted Basis Ratio as to one or more of the
Percentage Leases, which in turn potentially could cause it to fail to satisfy
the 95% or 75% gross income test and thus could lose its REIT status.
Another requirement for qualification of the Rents as rents from real
property is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as rents from real property if it is based on percentages of receipts or sales
and the percentages (a) are fixed at the time the Percentage Leases are entered
into, (b) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(c) conform with normal business practice. More generally, the Percentage Rent
will not qualify as rents from real property if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the Percentage Leases in a manner
that has the effect of basing the Percentage Rent on income or profit and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, it will not 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 fixed percentage of gross revenue,
as described above).
A further requirement for qualification of Rents as rents from real
property limits the relationship between the Company and its tenants. In the
case of a corporate tenant, the Company must not own 10% or more of the total
combined voting power of the tenant's stock and must not own 10% or more of the
total number of shares of all classes of the tenant's stock outstanding. In the
case of a tenant that is not a corporation, the Company must not own 10% or more
in interest of the tenant's assets or net profits. The Company intends to limit
its ownership interest in GHG to nonvoting preferred stock which constitutes
less than 10% of the total number of outstanding shares of, GHG stock. The
common stock of GHG, which is the only voting stock of GHG, is owned by persons
who are not related to the Company within the definition in the applicable
statute. The common stockholders have a significant economic interest in GHG and
elect the board of directors of GHG. Based upon the foregoing, counsel is of the
opinion that rental payments from GHG will not constitute rent from a party
related to the Company.
The Company will receive nonqualifying management fee income. As a result,
the Company may approach the income test limits and could be at risk of not
satisfying such tests and thus not qualifying as a REIT. Counsel's opinion is
based on the Company's representation that the actual amount of nonqualifying
income will not exceed such limits.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligation not collateralized by an interest on real property are included for
purposes of the 95% test, but not for purposes of the 75% test. For purposes of
determining whether the Company complies with the 75% and 95% income tests,
gross income does not include income from prohibited transactions. A "prohibited
transaction" is a sale of dealer property, excluding certain property held by
the Company for at least four years and foreclosure property. See "-- Taxation
of the Company" and "-- Tax Aspects of the Company's Investment in the Operating
Partnership -- Sale of Properties."
The Company believes that it and the Operating Partnership has held and
managed its properties in a manner that has given rise to rental income
qualifying under the 75% and 95% gross income tests. Gains on sales of
properties will generally qualify under the 75% and 95% gross income tests.
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Even if the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
was due to reasonable cause and not to willful neglect; (ii) the Company reports
the nature and amount of each item of its income included in the 75% and 95%
gross income tests on a schedule attached to its tax return; and (iii) any
incorrect information on this schedule is 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. If these
relief provisions apply, the Company will, however, still be subject to a
special tax upon the greater of the amount by which it fails either the 75% or
95% gross income test for that year.
The 30% Test. The Company must derive less than 30% of its gross income for
each taxable year from the sale or other disposition of (i) real property held
for less than four years (other than foreclosure property and involuntary
conversions), (ii) stock or securities held for less than one year, and (iii)
property in a "prohibited transaction." In this regard, certain of the Company's
assets are subject to existing purchase options. Although the Company believes,
based on the historical experience of certain predecessor partnerships, that it
will satisfy this 30% test, if, contrary to expectations, large numbers of such
options are exercised, more than 30% of the Company's gross income in a taxable
year could be derived from a proscribed source. The Company will, however, use
its best efforts to ensure that it will continue to satisfy each of the
foregoing income requirements.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to make
distributions (other than capital gain distributions) to its stockholders each
year in an amount at least equal to (A) the sum of (i) 95% of the Company's REIT
Taxable Income (computed without regard to the dividends paid deduction and the
REIT's net capital gain) and (ii) 95% of the net income (after tax), if any,
from foreclosure property, minus (B) the sum of certain items of non-cash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
distribution payment after such declaration. To the extent that the Company does
not distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT Taxable Income, as adjusted, it will be subject to tax on
the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be. Furthermore, if the REIT should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain income for such year,
and (iii) any undistributed taxable income from prior periods, the REIT would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. For such purposes, dividends declared to
shareholders of record in October, November, or December of one calendar year
and paid by January 31 of the following calendar year are deemed paid as of
December 31 of the initial calendar year.
The Company believes that it has made and will make timely distributions
sufficient to satisfy the annual distribution requirements. In this regard, the
partnership agreement of the Operating Partnership authorizes the Company, as
general partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that in the
future the Company may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement, due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing the
Company's REIT taxable income on the other hand. Further, as described below, it
is possible that, from time to time, the Company may be allocated a share of
taxable income attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. To avoid any problem with the
95% distribution requirement, the Company will closely monitor the relationship
between its REIT Taxable Income and cash flow and, if necessary, will borrow
funds (or cause the Operating Partnership or other affiliates to borrow funds)
in order to satisfy the distribution requirement. The Company (through the
Operating Partnership) may be required to borrow funds at times when market
conditions are not favorable.
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If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company, nor will they be
required to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate 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 the Company would be entitled to such statutory relief. Under
certain legislative proposals, if enacted, the Company will also be effectively
precluded from re-electing REIT status following a termination of its REIT
qualification. See " Possible Legislative or Other Actions Affecting Tax
Consequences."
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership.
General
The Company holds a direct ownership interest in 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 includes its
proportionate share of the foregoing Operating Partnership items for purposes of
the various REIT income tests and in the computation of its REIT Taxable Income.
See "-- Requirements for Qualification" and "-- Gross Income Tests." Any
resultant increase in the Company's REIT Taxable Income increases its
distribution requirements (see "-- Requirements for Qualification" and
"-- Annual Distribution Requirements"), but is not subject to federal income tax
in the hands of the Company provided that such income is distributed by the
Company to its stockholders. Moreover, for purposes of the REIT asset tests (see
"-- Requirements for Qualification" and "-- Asset Tests"), the Company includes
its proportionate share of assets held by the Operating Partnership.
Tax Allocations with Respect to Certain Properties
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner 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. Consequently, the partnership agreement of the Operating
Partnership requires such allocations to be made in a manner consistent with
Section 704(c) of the Code.
In general, the limited partners of the Operating Partnership will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating
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Partnership of the contributed assets. This will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules under Section 704(c) do not always entirely rectify the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands of the Operating Partnership may cause the company to be allocated
lower depreciation and other deductions, and possibly greater amounts 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 "-- Requirements for Qualification" and "-- Annual
Distribution Requirements." In addition, the application of Section 704(c) to
the Operating Partnership is not entirely clear and may be affected by authority
that may be promulgated in the future.
Basis in Operating Partnership Interest
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership generally (i) is equal to the amount of cash and the basis
of any other property contributed to the Operating Partnership by the Company,
(ii) is increased by (a) its allocable share of the Operating Partnership's
income and (b) increases in its allocable share of indebtedness of the Operating
Partnership and (iii) is reduced, but not below zero, by the Company's allocable
share of (a) the Operating Partnership's losses and (b) the amount of cash
distributed to the Company, and 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 losses would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such losses will be deferred until such time as the recognition of such loss
would not reduce the Company's adjusted tax basis below zero. To the extent that
the Operating Partnership's distributions, or any decrease in the Company's
share of the indebtedness of the Operating Partnership (each such decrease being
considered a constructive cash distribution to the partners), would reduce the
Company's adjusted tax basis below zero, such distributions (including such
constructive distributions) constitute taxable income to the Company. Such
distributions and constructive distributions will normally be characterized as a
capital gain, and if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gains.
Sale of Properties
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership for more than one year will be
long-term capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. The Company's share of any gain
realized by the Operating Partnership on the sale of any dealer property
generally will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "Taxation of the Company" and
"-- Requirements for Qualification" and "-- Gross Income Tests -- The 95% Test."
Under existing law, whether property is dealer property 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 its properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating its properties, and to make such
occasional sales of properties as are consistent with the Company's investment
objectives. Based upon such investment objectives, the Company believes that in
general the Operating Partnership's properties should not be considered dealer
property and that the amount of income from prohibited transactions, if any,
will not be material.
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TAXATION OF STOCKHOLDERS
Taxation of Taxable Domestic Stockholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income. Stockholders that are corporations will not
be entitled to a dividends-received deduction with respect to any distributions
from the Company. Distributions that are designated as capital gain dividends
will be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the stockholder has held its stock. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. To the extent that the Company makes distributions
in excess of current and accumulated earnings and profits, these distributions
are treated first as a tax-free return of capital to the stockholder, reducing
the tax basis of a stockholder's shares of Company stock by the amount of such
distribution (but not below zero), with distributions in excess of the
stockholder's tax basis taxable as capital gains (if the shares of Company stock
are held as a capital asset). In addition, any dividend declared by the Company
in October, November or December of any year and payable to a stockholder of
record on a specific date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January 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.
In general, any loss upon a sale or exchange of shares of Company stock by
a stockholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions from the Company required to be treated by such
stockholder as long-term capital gains.
Backup Withholding
The Company will report to its domestic stockholders and to the Service the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid and redemption proceeds unless such stockholder (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.
Notwithstanding the foregoing, the Company will institute backup withholding
with respect to a stockholder if advised do so by the Service. A stockholder
that does not provide the Company with a correct taxpayer identification number
may also be subject to penalties imposed by the Service. Any amount paid as
backup withholding will be creditable against the stockholder's income tax
liability.
Taxation of Tax-Exempt Stockholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Revenue rulings, however, are
interpretive in nature and are subject to revocation or modification by the
Service. Based upon the ruling and the analysis therein, distributions by the
Company to a stockholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax exempt entity has not financed the acquisition of its
shares of Company stock with "acquisition indebtedness" within the meaning of
the Code, and that the shares of the Company stock are not otherwise used in an
unrelated trade or business of the tax-exempt entity. In addition, REITs
generally treat the beneficiaries of qualified pension trusts as the beneficial
owners of REIT shares owned by such pension trusts for purposes of determining
if more than 50% of the REIT's shares are owned by five or fewer individuals.
However, if a pension trust owns more than 10% of the REIT's shares, it can be
subject to UBTI on all or a portion of REIT dividends made to it, if the REIT is
treated as a "pension-held REIT." In view of the Ownership Limitation, the
Company does not expect to be treated as a "pension-held
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REIT." Consequently, a pension trust stockholder should not be subject to UBTI
on dividends that it receives from the Company. However, because the Common
Stock is publicly traded, no assurance can be given to this effect.
Taxation of Foreign Stockholders
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders are complex and no attempt is made herein to provide more than a
summary of such rules. Prospective foreign investors ("Non-U.S. Stockholders")
should consult with their own tax advisors to determine the impact of federal,
state, local and any foreign income tax laws with regard to an investment in the
Company, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company or the Operating Partnership of "United States real property
interests" ("USRPIs"), as defined in the Code, and not designated by the Company
as capital gains dividends will be treated as dividends of ordinary income to
the extent they are made out of current or accumulated earnings and profits of
the Company. Such distributions will ordinarily be subject to a tax equal to 30%
of the gross amount of the distribution unless an applicable tax treaty reduces
or eliminates that tax. However, if income from the investment in the shares is
treated as effectively connected with the Non-U.S. Stockholder's conduct of a
United States trade or business (or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Stockholder), the Non-U.S. Stockholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such distributions (and may also be subject to the 30% branch profits tax in
the case of a stockholder that is a foreign corporation). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
distributions of ordinary income made to a Non-U.S. Stockholder unless (i) a
lower treaty rate applies and proper certification is provided or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the
distribution is effectively connected with the Non-U.S. Stockholder's conduct of
a United States trade or business (or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Stockholder). 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 ascertaining the requirement of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who seeks to claim the benefit of an applicable treaty rate would be
required to satisfy certain certification and other requirements.
Unless Company stock constitutes a USRPI, distributions in excess of
current and accumulated earnings and profits of the Company will not be taxable
to a stockholder to the extent that such distributions do not exceed the
adjusted basis of the stockholder's shares but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the adjusted
basis of a Non-U.S. Stockholder's shares of Company stock, such distributions
will give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares, as
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distributions will be subject to withholding at the
same rate as dividends. If, however, shares of Company stock are treated as a
USRPI, then unless otherwise treated as a dividend for withholding tax purposes
as described below, any distributions in excess of current or accumulated
earnings and profits will be subject to 10% withholding and, to the extent such
distributions also exceed the adjusted basis of a Non-U.S. Stockholder's shares,
they will also give rise to gain from the sale or exchange of the shares, the
tax treatment of which is described below. Amounts withheld may be refundable if
it is subsequently determined that such amounts are in excess of the Non-U.S.
Stockholder's U.S. tax liability.
Distributions that are designated by the Company at the time of
distribution as capital gain dividends (other than those arising from the
disposition of a USRPI) generally will not be subject to taxation, unless (i)
investment in the shares is effectively connected with the Non-U.S.
Stockholder's United States trade or business (or, if an income tax treaty
applies, it is attributable to a United States permanent establishment of the
Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be subject to
the same treatment as U.S. stockholders with respect to such gain (except that a
stockholder that is a foreign corporation may also
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be subject to the 30% branch profits tax), or (ii) the Non-U.S. Stockholder is a
non-resident alien individual whose is present in the United States for 183 days
or more during the taxable year and either has a "tax home" in the United States
or sold his or her shares under circumstances in which the sale was attributable
to a U.S. office, in which case the non-resident alien individual will be
subject to a 30% tax on the individual's capital gains.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of USRPIs will
be taxed to a Non-U.S. Stockholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of United States real property
interests are taxed to a Non-U.S. Stockholder as gain effectively connected with
a United States trade or business. Non-U.S. Stockholders would thus be taxed at
the normal capital gain rates applicable to U.S. stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Also, distributions subject to FIRPTA
may be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to treaty exemption or rate reduction. The Company is
required by applicable Treasury Regulations to withhold 35% of any distribution
that could be designated by the Company as a USRPI capital gains dividend. This
amount may be creditable against the Non-U.S. Stockholder's FIRPTA tax
liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of Company
stock will generally not be taxed under FIRPTA if the shares do not constitute a
USRPI. Shares of the Company will not be considered a USRPI if the Company is a
"domestically controlled REIT," or if the shares are part of a class of stock
that is regularly traded on an established securities market and the holder
owned less 5% of the class of stock sold during a specified testing period. A
"domestically controlled REIT" is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. The Company believes that it is
a "domestically controlled REIT," and therefore the sale of shares will not be
subject to taxation under FIRPTA. However, since the Company's Common Stock is
publicly traded, no assurance can be given to this effect. If the gain on the
sale of shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as U.S. stockholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
Gain on the sale of Company stock not subject to FIRPTA will still be taxable to
a Non-U.S. Stockholder if (i) investment in the shares is effectively connected
with a United States trade or business of the Non-U.S. Stockholder (or, if an
income tax treaty applies, is attributable to a United States permanent
establishment of the Non-U.S. Stockholder), in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
If the proceeds of a disposition of shares of Company stock are paid by or
through a United States office of a broker, the payment is subject to
information reporting and backup withholding unless the disposing Non-U.S.
Stockholder certifies as to his name, address and non-United States status or
otherwise establishes an exemption. Generally, United States information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the United States through a non-United
States office of a non-United States broker. United States information reporting
requirements (but not backup withholding) will apply, however, to a payment of
disposition proceeds outside the United States if (i) the payment is made
through an office outside the United States of a broker that is either (a) a
United States person, (b) a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) a "controlled foreign corporation" for United States federal
income tax purposes, and (ii) the broker fails to obtain documentary evidence
that the stockholder is a Non-U.S. Stockholder and that certain conditions are
met or that the Non-U.S. Stockholder otherwise is entitled to an exemption.
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Possible Legislative or Other Actions Affecting Tax Consequences
Prospective investors should recognize that the present federal income tax
treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time, and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the Service and the U.S. Treasury Department,
resulting in revisions or regulations and revised interpretations of established
concepts as well as statutory changes. Revisions in federal tax laws and
interpretations thereof could adversely affect the tax consequences of an
investment in the Company. For example, a recent federal budget proposal
contains language, which, if enacted in its present form, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT, and thus would effectively
preclude the Company from re-electing REIT status following a termination of its
REIT qualification.
State Tax Consequences and Withholding
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. Several states in which the Company may conduct business treat
REITs as ordinary corporations. The Company does not believe, however, that
stockholders will be required to file state tax returns, other than in their
respective states of residence, as a result of the ownership of shares of the
Company's capital stock. However, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
EACH INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP AND SALE OF COMMON
STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
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PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the holders
thereof of (i) up to 555,060 Unit Shares of Common Stock that may be issued by
the Company to the holders of up to 555,060 Units in the Operating Partnership,
if and to the extent such holders tender such Units for redemption and the
Company elects to redeem such Units for Shares of Common Stock and (ii) up to
206,844 Acquisition Shares previously issued in connection with the acquisition
by the Company of previously acquired properties or interests. The Company has
registered the Shares for sale pursuant to certain registration rights
agreements, but registration of such Shares does not necessarily mean that any
of such Unit Shares will be issued by the Company or that any Shares will be
offered and sold by the holders thereof.
The Company will not receive any proceeds from the offering by the Selling
Stockholders, from the issuance of the Unit Shares to Unit Holders. The Shares
may be sold from time to time to purchasers directly by any of the Selling
Stockholders. Alternatively, the Selling Stockholders may from time to time
offer the Shares through dealers or agents, who may receive compensation in the
form of commissions from the Selling Stockholders and/or the purchasers of
Shares for whom they may act as agent. The Selling Stockholders and any dealers
or agents that participate in the distribution of Shares may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of Shares by them and any commissions received by any such dealers or
agents might be deemed to be underwriting commissions under the Securities Act.
The distribution of the Shares also may be effected from time to time in one
or more underwritten transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Any such underwritten
offering may be on a "best efforts" or a "firm commitment" basis. In connection
with any such underwritten offering, underwriters or agents may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders or from purchasers of Shares for whom they may act as
agents. Underwriters may sell Shares to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents.
At a time a particular offer of Shares is made, a Prospectus Supplement, if
required, will be distributed that will set forth the name and names of any
dealers or agents and any commissions and other terms constituting compensation
from the Selling Stockholders and any other required information. The Shares may
be sold from time to time at varying prices determined at the time of sale or at
negotiated prices.
In order to comply with the securities laws of certain states, if applicable,
the Shares may be sold only through registered or licensed brokers or dealers.
In addition, in certain states, the Shares may not be sold unless they have been
registered or qualified for sale in such state or an exemption from such
registration or qualification requirement is available and is complied with.
The Shares may also be sold in one or more of the following transactions: (a)
block transactions (which may involve crosses) in which a broker-dealer may sell
all or a portion of such stock as agent but may position and resell all or a
portion of the block as principal to facilitate the transaction; (b) purchases
by any such broker-dealer as principal and resale by such broker-dealer for its
own account pursuant to a Prospectus Supplement; (c) a special offering, an
exchange distribution or a secondary distribution in accordance with applicable
NYSE or other stock exchange rules; (d) ordinary brokerage transactions and
transactions in which any such broker-dealer solicits purchasers; (e) sales "at
the market" to or through a market maker or into an existing trading market, on
an exchange or otherwise, for such shares; and (f) sales in other ways not
involving
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market makers or established trading markets, including direct sales to
purchasers. In effecting sales, broker-dealers engaged by the Selling
Stockholders may arrange for other broker-dealers to participate.
The Company may from time to time issue up to 555,060 Shares upon the
redemption of Units, if and to the extent the Company elects to redeem such
Units with Shares of Common Stock. The Company will acquire the exchanging
holder's Unit in exchange for each Share that the Company issues in connection
with such exchange. Consequently, with each exchange, the Company's interest in
the Operating Partnership will increase.
EXPERTS
The consolidated financial statements and related financial statement
schedules included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and the statement of revenues and certain expenses for
the acquired properties included in the Company's Current Reports on Form 8-K/A
filed February 24, 1997 and May 14, 1997 and incorporated by reference herein
have been audited by Arthur Andersen LLP, independent public accountants, to
the extent and for the periods indicated in their reports and have been
incorporated herein in reliance on such reports given on the authority of that
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered pursuant to
this Prospectus will be passed upon for the Company by Morrison & Foerster LLP,
Palo Alto, California. In addition, the description of the Company's
qualifications and taxation as a REIT under the Code contained in the
Prospectus under the caption "Federal Income Tax Consequences -- General" is
based upon the opinion of Morrison & Foerster LLP.
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Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated fees and expenses payable by the
Company in connection with the issuance and distribution of the Common Stock
registered hereby. All of such fees and expenses are estimates, except the
Securities Act registration fee.
<TABLE>
<CAPTION>
<S> <C>
Securities Act Registration Fee.................................................... $ 5,011
Printing and duplicating fees...................................................... 1,500
Legal fees and expenses............................................................ 5,000
Accounting fees and expenses....................................................... 3,000
Miscellaneous expenses............................................................. 5,489
-------
Total....................................................................... $20,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland GCL permits a Maryland Corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for (i) actual receipt
of an improper benefit or profit in money, property or services or (ii) active
and deliberate dishonesty established by a final judgment as being material to
the cause of action. The Charter contains such a provision which limits such
liability to the maximum extent permitted by the Maryland GCL.
The Charter authorizes the Company to obligate itself to indemnify its present
and former officers and directors and to pay or reimburse reasonable expenses
for those individuals in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time by the laws of Maryland. The Bylaws
of the Company obligate it to indemnify, and advance expenses to present, former
and proposed directors and officers to the maximum extent permitted by Maryland
law. The Maryland GCL 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 a reasonable cause to
believe that the act or omission was unlawful. However, a corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation. In addition, the Maryland GCL requires the Company, as conditions
to advancing expenses, to obtain (i) 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 Company as authorized by the applicable
Bylaws and (ii) a written statement by him or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. The Bylaws of the Company also permit the
Company to provide indemnification and to advance expenses to a present or
former director or officer who served a predecessor of the Company in that
capacity, and to any employee or agent of the Company, or a predecessor of the
Company. Finally, the Maryland GCL requires a corporation (unless its charter
provides otherwise, which the Company's 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 service in
that capacity.
II-1
<PAGE> 38
The Company has entered into indemnification agreements with each of its
directors and executive officers to provide them with indemnification to the
full extent permitted by the Charter and Bylaws of Company.
The Company has obtained an insurance policy to provide liability coverage for
directors and officers of Company.
II-2
<PAGE> 39
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
4.1 - Articles of Amendment and Restatement of Articles
of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.02 to Registrant's
Registration Statement on Form S-11 (File No.
333-09411))
4.2 - Bylaws of the Registrant (incorporated by reference
to Exhibit 3.01 to Registrant's Registration State-
ment on Form S-11 (File No. 333-09411))
5.1 - Opinion of Morrison & Foerster LLP
8.1 - Opinion of Morrison & Foerster LLP relating to
certain tax matters
23.1* - Consent of Arthur Andersen LLP, independent public
accountants
23.2* - Consent of Morrison & Foerster LLP
24.1* - Power of Attorney
*Previously filed.
</TABLE>
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 this
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) any deviation
from the low or high and of the estimated maximum offering price may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(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 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
these 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 reports pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, when applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by
II-3
<PAGE> 40
reference to this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby further undertakes that:
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.
II-4
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
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 Amendment No. 1 to
the Registration Statement, to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Mateo, State of California on June
30, 1997.
GLENBOROUGH REALTY TRUST
INCORPORATED
By: /s/ Frank E. Austin
----------------------------------------
Frank E. Austin
Senior Vice President
General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
1 to the Registration Statement on Form S-3 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Robert Batinovich* Chairman, President and Chief Executive Officer June 30, 1997
- -------------------------
Robert Batinovich
Andrew Batinovich* Director, Executive Vice President, Chief Operating June 30, 1997
------------------------ Officer and Chief Financial Officer
Andrew Batinovich
Sandra L. Boyle* Senior Vice President June 30, 1997
- -------------------------
Sandra L. Boyle
/s/ Frank E. Austin Senior Vice President, General Counsel and June 30, 1997
- ------------------------- Secretary
Frank E. Austin
Terri Garnick* Senior Vice President and Chief Accounting Officer June 30, 1997
- -------------------------
Terri Garnick
Patrick Foley* Director June 30, 1997
- -------------------------
Patrick Foley
</TABLE>
II-5
<PAGE> 42
<TABLE>
<CAPTION>
<S> <C> <C>
Richard A. Magnuson* Director June 30, 1997
-----------------------
Richard A. Magnuson
Laura Wallace* Director June 30, 1997
-------------------------
Laura Wallace
*By: /s/ Frank E. Austin June 30, 1997
-------------------------
Frank E. Austin
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.1 Articles of Amendment and Restatement of Articles of
Incorporation of the Registrant (incorporated by
reference to Exhibit 3.02 to Registrant's
Registration Statement on Form S-11 (File No.
333-09411))
4.2 Bylaws of the Registrant (incorporated by reference
to Exhibit 3.01 to Registrant's Registration
Statement on Form S-11 (File No. 333-09411))
5.1 Opinion of Morrison & Foerster LLP
8.1 Opinion of Morrison & Foerster LLP relating to
certain tax matters
23.1* Consent of Arthur Andersen LLP, independent public
accountants
23.2* Consent of Morrison & Foerster LLP
24.1* Power of Attorney
*Previously Filed.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
June 30, 1997
Glenborough Realty Trust Incorporated
400 South El Camino Real, Suite 1100
San Mateo, CA 94402-1708
Ladies and Gentlemen:
We are acting as counsel to Glenborough Realty Trust Incorporated, a
Maryland corporation (the "Company"), in connection with the offer and sale from
time to time by (i) the holders of up to 555,060 shares (the "Unit Shares") of
common stock, par value $.001 per share ("Common Stock"), that may be issued by
the Company to certain holders of up to 555,060 units of limited partnership
interest (the "Units") in Glenborough Properties, L.P. (the "Operating
Partnership"), if and to the extent that such holders tender such Units for
redemption and the Company elects to redeem such Units for shares of Common
Stock rather than for cash and (ii) up to 206,844 shares (the "Acquisition
Shares") of Common Stock previously issued by the Company in connection with the
acquisition of certain properties. The 555,060 Unit Shares and the 206,844
Acquisition Shares are collectively referred to herein as the "Shares." The
Shares are the subject of a Registration Statement (the "Registration
Statement") filed by the Company on Form S-3 under the Securities Act of 1933,
as amended.
In our capacity as your counsel in connection with such registration, we
are familiar with the proceedings taken and proposed to be taken by the Company
in connection with the authorization and issuance of the Common Stock, and for
the purposes of this opinion, have assumed such proceedings will be timely
completed in the manner presently proposed. In addition, we have made such legal
and factual
<PAGE> 2
Glenborough Realty Trust Incorporated
June 30, 1997
Page 2
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
Based upon and subject to the foregoing, it is our opinion that the
Company has authority pursuant to its Articles of Incorporation to issue the
Shares upon compliance with the applicable provisions of the Act and such state
"blue sky" or securities laws as may be applicable and upon issuance and
delivery of and payment for the Shares in the manner contemplated by the
Registration Statement and/or the applicable Prospectus Supplement, the Shares
will be legally issued, fully paid, and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the reference to us under the heading "Legal
Matters" in the Registration Statement, the Prospectus constituting a part
thereof and any amendments thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE> 1
June 30, 1997
EXHIBIT 8.1
Glenborough Realty Trust Incorporated
400 South El Camino Real
San Mateo, CA 94402-1708
Ladies and Gentlemen:
We are acting as counsel to Glenborough Realty Trust Incorporated, a
Maryland corporation (the "Company"), in connection with the offer and sale from
time to time by (i) the holders of up to 555,060 shares (the "Unit Shares") of
common stock, par value $.001 per share ("Common Stock"), that may be issued by
the Company to certain holders of up to 555,060 units of limited partnership
interest (the "Units") in Glenborough Properties, L.P. (the "Operating
Partnership"), if and to the extent that such holders tender such Units for
redemption and the Company elects to redeem such Units for shares of Common
Stock rather than for cash and (ii) up to 206,844 shares (the "Acquisition
Shares") of Common Stock previously issued by the Company in connection with the
acquisition of certain properties. We have been requested to provide you with
our opinion as to whether the Company is currently organized in conformity with
the requirements for qualification and taxation as a real estate investment
trust ("REIT"), within the meaning of Section 856(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and has so qualified for the past three
taxable years. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Registration Statement.
For purposes of the opinion set forth below, we have relied, with your
consent, upon the accuracy and completeness of the statements and
representations (which statements and representations we have neither
investigated nor verified) contained in the certificate of the Company dated
June 5, 1997 (the "Certificate"). We have also relied upon the accuracy of the
Registration Statement.
<PAGE> 2
Glenborough Realty Trust Incorporated
June 30, 1997
Page Two
Based upon such statements, representations and assumptions, and subject
to the next two succeeding paragraphs, we are of the opinion that, as of the
date hereof, and for its taxable year ended December 31, 1996, the Company has
operated in a manner that will qualified it as a REIT under the Code, and if it
continues to operate in the same manner, it will continue to so qualify.
Our opinion is based upon the documents referred to above and the current
provisions of the Code, Treasury Regulations promulgated thereunder, published
pronouncements of the Internal Revenue Service and case law, any of which may be
changed at any time, possibly with retroactive effect. You should also be aware
that opinions of counsel are not binding upon the Internal Revenue Service or
the courts. Any change in applicable law, or any inaccuracy in the statements,
representations and assumptions on which we have relied may affect the
continuing validity of the opinion set forth herein.
This opinion addresses only the operation of the Company in a manner that
qualifies it as a REIT as of the date hereof and during the taxable year ended
December 31, 1996. We undertake no obligation to update this opinion, or to
ascertain after the date hereof whether circumstances occurring after such date
may affect the conclusions set forth herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act.
Very truly yours,
/s/ Morrison & Foerster LLP
