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As filed with the Securities and Exchange Commission on April 10, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact Name of Registrant as Specified in Its Governing Instruments)
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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
(650) 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
(650) 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
(650) 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 REGISTERED AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
REGISTERED PRICE PER SHARE OFFERING PRICE REGISTRATION FEE(1)
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Common Stock, $.001
par value .................. 597,961 shares $31.28125(1) $18,704,999(1) $5,518
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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 prices on the New York Stock Exchange on April 8, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE 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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Subject to Completion
Preliminary Prospectus dated April 10, 1998
PROSPECTUS
597,961 SHARES
GLENBOROUGH REALTY TRUST INCORPORATED
COMMON STOCK
This Prospectus relates to the offer and sale from time to time by the
holders (the "Selling Stockholders") of up to 597,961 shares (the "Shares") of
Common Stock, par value $.001 per share (the "Common Stock") of the Company,
consisting of (i) up to 72,564 Shares (the "Partnership Interests Acquisition
Shares") which were issued in connection with the acquisition by the Company of
all the limited partnership interests in a limited partnership, (ii) up to
173,200 Shares (the "Portfolio Acquisition Shares") which were issued in
connection with the acquisition by the Company of a diversified real estate
portfolio, and (iii) up to 352,197 shares of Common Stock (the "Unit Shares")
which may be issued by the Company to certain holders (the "Unit Holders") of up
to 352,197 units of limited partnership interests (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. The Company is registering the Partnership
Interests Acquisition Shares pursuant to a Registration Rights Agreement dated
December 12, 1997, by and among the Company and the holders of such Shares, to
provide such Selling Stockholders with freely tradable securities. The Company
is registering the Portfolio Acquisition Shares pursuant to a Registration
Rights Agreement dated April 9, 1998, by and between the Company and the holder
of such Shares, to provide such Selling Stockholder with freely tradable
securities. The Company is registering the Unit Shares issuable upon redemption
of the Units pursuant to the terms of a Registration Rights Agreement dated as
of April 10, 1997, by and between the Company and a limited partnership, to
provide such Selling Stockholders with freely tradable securities.
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 Transfer."
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 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 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 put.
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 April , 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith 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, 1997;
b. The description of the Registrant's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1-14162); and
c. The description of the Registrant's 7 3/4% Convertible Preferred Stock
(liquidation preference $25.00 per share), par value $0.001 per share, 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
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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.
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:
(650) 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 91.5%
limited partner interest, as of March 31, 1998. Unless otherwise indicated,
ownership percentages of the Company's Common Stock and interests in the
Operating Partnership have been computed on a fully converted basis, using an
exchange of Operating Partnership units ("Units") for Common Stock on a
one-for-one basis and assuming no shares of Series A Preferred Stock (defined
herein) are exchanged for shares of Common Stock. 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 141 office, office/flex, industrial,
retail, multifamily and hotel properties (collectively, the "Properties," and
each a "Property") located in 24 states throughout the country, as of March 31,
1998. The Company's principal growth strategy is to capitalize on the
opportunity to acquire diversified portfolios or individual properties on
attractive terms from public and private partnerships as well as from REITs and
life insurance companies and other institutions. 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, as of March 31, 1998 two associated companies
(the "Associated Companies") provided comprehensive asset, partnership and
property management services for 46 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 91.5% limited partner interest, as
of March 31, 1998.
The Common Stock is listed on the New York Stock Exchange under the Symbol
"GLB." 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 (650)
343-9300.
TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ended December 31, 1996. As a REIT, the Company generally
is not subject to Federal income tax on net income that it distributes to its
stockholders. See "Federal Income Tax Considerations."
SECURITIES TO BE OFFERED
This Prospectus relates to the offer and sale from time to time by the
Selling Stockholders of up to 597,961 Shares of Common Stock of the Company,
consisting of (i) up to 72,564 Partnership Interests Acquisition Shares which
were issued in connection with the acquisition by the Company of all the limited
partnership interests in a limited partnership, (ii) up to 173,200 Portfolio
Acquisition Shares which were issued in connection with the acquisition by the
Company of a diversified real estate portfolio and (iii) up to 352,197 Unit
Shares that may be issued by the Company to the Unit Holders if and to the
extent the Unit Holders tender such Units for redemption and the Company elects
to redeem such Units for shares of Common Stock. The Company is registering the
Partnership Interests Acquisition Shares pursuant to a Registration Rights
Agreement, dated
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December 12, 1997 (the "Partnership Interest Shares Registration Rights
Agreement"), by and among the Company and the sellers of such limited
partnership interests to provide such sellers with freely tradable securities.
The Company is registering the Portfolio Acquisition Shares pursuant to a
Registration Rights Agreement dated April 9, 1998 (the "Acquisition Shares
Registration Rights Agreement") by and among the Company and the sellers of such
diversified real estate portfolio, to provide such sellers with freely tradable
securities. The Company is registering the Unit Shares pursuant to a
Registration Rights Agreement dated April 10, 1997 (the "Unit Shares
Registration Rights Agreement") by and among the Company and a limited
partnership, to provide such Unit Holders with freely tradable securities if and
to the extent the Unit Holders tender their Units for redemption and the Company
elects to redeem such Units for Shares of Common Stock.
USE OF PROCEEDS
The Company will not receive any of the proceeds from 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.
RISK FACTORS
Prospective investors should read this entire Prospectus carefully,
including all appendices and supplements hereto and thereto, and should consider
carefully the following factors before purchasing the Shares offered hereby.
RISKS ASSOCIATED WITH ACQUISITIONS
Risks Associated with the Addition of a Substantial Number of New Properties
The Company is currently experiencing a period of rapid growth. Since the
Consolidation on December 31, 1995 and through March 31, 1998, the Company has
invested approximately $1.2 billion in properties. The Company's ability to
manage its growth effectively will require it to apply successfully its
experience managing its existing portfolio to new markets and to an increased
number of properties. There can be no assurance that the Company will be able to
manage these operations effectively. The Company's inability to effectively
manage its expansion could have an adverse effect on the Company's results of
operations and financial condition.
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.
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
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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 and other REITs. 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 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.
Conflict of Interest
The Company has acquired, and from time to time may acquire, properties
from partnerships that Robert Batinovich, the Company's Chairman and Chief
Executive Officer, and Andrew Batinovich, the Company's President and Chief
Operating Officer, control, and in which they and members of their families have
substantial interests. 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 arms-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.
DEPENDENCE ON EXECUTIVE OFFICERS
The Company is dependent on the efforts of Robert and Andrew Batinovich,
its Chief Executive Officer and its President 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. Each of Robert and Andrew Batinovich have
entered into employment agreements with the Company.
RISKS ASSOCIATED WITH DEBT FINANCING
The Company selectively seeks to use leverage to increase the rate of
return on its investments and to allow the Company to make more investments than
it otherwise could. Such use of leverage presents an element of risk in the
event that the cash flow from the Company's properties is insufficient to meet
the Company's debt service requirements. To the extent the Company determines to
obtain additional debt financing in the future, it may do so through mortgages
on some of its properties. As of December 31, 1997, $148.1 million of the
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Company's outstanding debt was secured by mortgages. The existing mortgages, a
substantial portion of which are cross-collateralized, are on non-recourse or
cross-collateralized bases. To the extent indebtedness is cross-collateralized,
lenders may seek to foreclose upon properties which are not the primary
collateral for their loans, which may, in turn, result in acceleration of other
indebtedness secured by the properties. Foreclosure on properties would result
in a loss of income and asset value to the Company.
The Company's organizational documents limit the Company's ability to
incur, or permit any consolidated partnership or subsidiary corporation to
incur, additional debt if the total debt, including the additional debt, would
exceed 50% of the Borrowing Base, defined in the Company's Charter as the
greater of Fair Market Value or Total Market Capitalization. The debt of the
Operating Partnership is included in the calculation of such additional debt and
total debt. Fair Market Value is based upon the value of the Company's assets as
determined by an independent appraiser. Total Market Capitalization is based
upon the market value of the Company's outstanding capital stock, including
shares issuable on exercise of redemption options by holders of units of the
Operating Partnership. An exception is made for refinancings and borrowings
required to make distributions to maintain the Company's status as a REIT. As of
March 31, 1998, the Company's debt was approximately 26.3% of the Borrowing
Base.
In December 1997, the Operating Partnership replaced its $50 million
secured line of credit with a new $250 million unsecured line of credit (the
"Acquisition Credit Facility") with Wells Fargo Bank, N.A. ("Wells Fargo Bank").
The Acquisition Credit Facility 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), distributions may not exceed the lesser of (i) 90% of funds from
operations and (ii) the minimum amount that the Company must distribute to it
stockholders in order to avoid federal tax liability and remain qualified as a
REIT. 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.
CERTAIN TAX RISKS
General
The Company has elected to be treated as a REIT under the Code, commencing
with its taxable year ended December 31, 1996. No assurance can be given,
however, that the Company will be able to operate in a manner which will permit
it to maintain its status as a REIT. 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 receives nonqualifying management fee income
and owns 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 Internal Revenue Service ("IRS"). See "Federal Income Tax
Consequences -- Taxation of the Company."
Consequences of Failure to Qualify as a REIT
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.
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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. However, distributions to stockholders would no
longer be required to be made. See "Federal Income Tax Consequences -- Failure
to Qualify."
Even if the Company continues to qualify 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
Under federal, state and local laws, ordinances and regulations relating to
protection of the environment ("Environmental Laws"), a current or previous
owner or operator of real estate may be liable for contamination resulting from
the presence or discharge of petroleum products or other hazardous or toxic
substances at such property, and may be required to investigate and clean-up
such contamination at such property or such contamination which has migrated
from such property. Such laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of, or was
responsible for, the presence of such contamination, and the liability under
such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. In
addition, the owner or operator of a property may be subject to claims by third
parties based on personal injury, property damage and/or other costs, including
investigation and clean-up costs, resulting from environmental contamination
present at or emanating from such property. Environmental Laws may also impose
restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated, and these restrictions may require
expenditures. Under the Environmental Laws, any person who arranges for the
transportation, disposal or treatment of hazardous or toxic substances may also
be liable for the costs of investigation or clean-up of such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person.
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing building materials ("ACM"). Such laws require that ACM be
properly managed and maintained, that those who may come into contact with ACM
be adequately apprised and trained, and that special precautions, including
removal or other abatement, be undertaken in the event ACM is disturbed during
renovation or demolition of a building. Such laws may impose fines and penalties
on building owners or operators for failure to comply with these requirements
and may allow third parties to seek recovery from owners or operators for
personal injury associated with exposure to asbestos fibers.
Some of the Properties, as well as properties previously owned by the
Company, are leased or have been leased, in part, to owners and operators of dry
cleaners that operate on-site dry cleaning plants, auto care centers, or to
owners or operators of other businesses that use, store or otherwise handle
petroleum products or other hazardous or toxic substances. Some of these
Properties contain, or may have contained, underground
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storage tanks for the storage of petroleum products and other hazardous or toxic
substances. These operations create a potential for the release of petroleum
products or other hazardous or toxic substances. Some of the Properties are
adjacent to or near other properties that have contained 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, or are adjacent to or near other properties upon which
others, including former owners or tenants of the Properties, have engaged or
may in the future engage in activities that may release petroleum products or
other hazardous or toxic substances.
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
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.
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.
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing Environmental Laws as well as the cost of
complying with future legislation. In addition, the presence of petroleum
products or other hazardous or toxic substances at any of the Properties owned
by the Company,
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or the failure to remediate such property properly, may adversely affect the
Company's ability to borrow by using such real property as collateral. The cost
of defending against claims of liability and the cost of complying with
Environmental Laws, including investigation or clean-up of contaminated
property, could materially adversely affect the Company's results of operations
and financial condition.
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 and Competition for 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. Furthermore, 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.
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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 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") and Glenborough Corporation, a
California corporation ("GC," and together with GHG, 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 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.
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.
As of March 31, 1998, forty-two 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
The Company's properties are 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
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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.
Risk Related to Development Joint Ventures
The Company may from time to time enter into joint ventures with selected
developers ("JV Partners") for the purpose of developing new projects in which
such JV Partner has, in the opinion of the Company, significant expertise or
experience. Such projects generally require various governmental and other
approvals, the receipt of which cannot be assured. Such development activities
may entail certain risks, including the risk that: (i) the expenditure of funds
on and devotion of management's time to projects which may not come to fruition;
(ii) construction costs of a project may exceed original estimates, possibly
making the project uneconomical; (iii) occupancy rates and rents at a completed
project may be less than anticipated; and (iv) expenses at a completed
development may be higher than anticipated. In addition, JV Partners may have
significant control over the operation of the joint venture assets. Therefore,
such investments may, under certain circumstances, involve risks such as the
possibility that the JV Partner might become bankrupt, have economic or business
interests or goals that are inconsistent with the business interest or goals of
the Company, or be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or objectives.
Consequently, actions by a JV Partner might result in subjecting property owned
by the joint venture to additional risk. Although the Company will seek to
maintain sufficient control of any joint venture to permit the Company's
objectives to be achieved, it may be unable to take action without the approval
of its JV Partners or its JV Partners could take actions binding on the joint
venture without the Company's consent. Additionally, should a JV Partner become
bankrupt the Company could become liable for such JV Partner's share of joint
venture liabilities. These risks may result in a development project having an
adverse effect on the Company's result 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 Shares 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 Shares. 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 Charter 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 capital stock of the Company 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 capital stock of the Company that
after the 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 capital
stock of the Company in excess of a predetermined limit, which, pursuant to
Board action, currently is 9.9% of the value of the outstanding shares of
capital stock of the Company (the "Ownership Limitation" and as to the capital
stock of the Company, the transfer of which would cause any person to actually
own capital stock of the Company in excess of the Ownership Limitation, the
"Excess Shares"), the transfer shall be void and the capital stock of the
Company subject to the transfer shall automatically be transferred to an
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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 capital stock of the Company if, after
the acquisition, they would own in excess of 9.9% of the outstanding shares of
capital stock of the Company. 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 50% of the value of the capital stock of the Company (the
aggregate Ownership Limitations as to all of these persons, as adjusted, the
"Adjusted Ownership Limitation"). See "Description of Capital Stock --
Restrictions on Ownership and Transfer of Common Stock" and "Federal Income Tax
Consequences." This limitation on the ownership of capital stock of the Company
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.
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 was approved by the
court, but objectors to the settlement appealed that approval. On February 17,
1998, the Court of Appeals rejected the objectors' contentions and upheld the
settlement. 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.
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, which owns an approximate 1.7% limited partner interest in the
Operating Partnership along with other substantial real estate assets, and less
than 0.5% interest in the Company, settled the litigation and obtained
confirmation of a plan of reorganization in January 1994.
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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.
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.
YEAR 2000 COMPLIANCE
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such applications will be necessary. In
addition, the ability of third parties ("Third Parties") with whom the Company
transacts business to adequately address their Year 2000 issues is outside of
the Company's control. The Company has completed its identification of
applications that are not yet "Year 2000" compliant and has commenced
modification or replacement of such applications, as necessary. Given
information known at this time about the Company's systems that are
non-compliant, coupled with the Company's ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, management does
not expect Year 2000 compliance costs to have any material adverse impact on the
Company's liquidity or ongoing results of operations. No assurance can be given,
however, that all of the Company's or Third Parties' systems will be Year 2000
compliant or that compliance costs or the impact of the Company's or Third
Parties' failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company's future liquidity or results of
operations.
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.
DESCRIPTION OF CAPITAL 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 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.
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GENERAL
The Company's Charter authorizes the Company to issue up to 200,000,000
shares of capital stock, of which 188,000,000 shares have been designated Common
Stock, par value $0.001 per share, and 12,000,000 shares of which have been
designated 7 3/4% Series A Convertible Preferred Stock (liquidation preference
$25.00 per share) par value $0.001 per share (the "Series A Preferred Stock").
As of March 23, 1998 there were 31,549,756 shares of Common Stock issued and
outstanding, 11,500,000 shares of Series A Preferred Stock issued and
outstanding and no Shares-in-Trust were issued and outstanding. Under Maryland
law, stockholders generally are not liable for the Company's debts or
obligations.
COMMON STOCK
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 the holders of shares of Series A
Preferred Stock and 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 and after the payment of all liquidation preferences of the holders
of the Series A Preferred Stock and any other series of capital stock that has a
liquidation preference. All shares of Common Stock now outstanding are fully
paid and nonassessable. 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 capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year (the
"closely-held test"). Shares of capital 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
(the "100 person test"). 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 and Preferred
Stock in excess of the Ownership Limitation, which, pursuant to Board action,
currently is 9.9% of the value of the outstanding shares of Common Stock and
Preferred Stock. A qualified trust (as defined in the Charter) generally may own
up to 9.9% of the outstanding shares of Common Stock and Preferred Stock. The
Ownership Limitation provides that Robert Batinovich and the Attributed Owners
may hold up to 9.9% of the outstanding shares of Common Stock and Preferred
Stock, including shares which Robert Batinovich and the Attributed Owners may
acquire pursuant to an option held by GPA, Ltd. (the "GPA Redemption Option") 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.
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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 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 or Preferred Stock
that would (a) create actual or constructive ownership of Common Stock and
Preferred Stock in excess of the Ownership Limitation, (b) result in the Company
failing the 100 person test, or (c) result in the Company failing the
closely-held test, shall be null and void, and the intended transferee will
acquire no rights to the Common Stock or Preferred Stock.
The Charter also provides that Common Stock or Preferred 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 fail either the closely-held test or
the 100 person test 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 (a "Permitted Transferee") whose
ownership of Common Stock or Preferred Stock would be permitted under the
Ownership Limitation and would not cause the Company to fail the closely-held
test. 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
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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 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.
Series A Preferred Stock. In January 1998, the Company issued 11,500,000
shares of Series A Preferred Stock. The following description of the Company's
Series A Preferred stock is in all respects subject and qualified in its
entirety by reference to the applicable provisions of the Company's Charter,
including the Articles Supplementary applicable to the Series A Preferred Stock,
and Bylaws.
The Series A Preferred Stock ranks senior to the Company's Common Stock as
to dividends and liquidation amounts. The dividend per share on the Series A
Preferred Stock is equal to the greater of: (i) $1.9375 per annum; or (ii) the
cash distributions on the shares of Common Stock into which a share of Series A
Preferred Stock is convertible. The Company currently pays regular dividends to
holders of Series A Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred stock are entitled to receive in preference to
any distribution to the holders of Common Stock, an amount per share of Series A
Preferred Stock equal to the sum of $25.00 and any accrued but unpaid dividends
with respect thereto.
Except in certain instances relating to the preservation of the Company's
status as a REIT, the Series A Preferred Stock is not redeemable prior to
January 16, 2003. On and after January 16, 2003, the Series A Preferred Stock
may be redeemed at the option of the Company, in whole or from time to time in
part, initially at 103.88% of the Liquidation Preference per share and
thereafter at prices declining to 100% of the Liquidation Preference on and
after January 16, 2008, plus in each case accumulated, accrued and unpaid
dividends, if any, to the redemption date.
Shares of Series A Preferred Stock are convertible, in whole or in part, at
any time, at the option of the holder thereof, into shares of Common Stock at an
initial conversion price of $32.83 per share of Common Stock (equivalent to a
conversion rate of 0.7615 of a share of Common Stock for each share of Series A
Preferred Stock), subject to certain adjustments.
Holders of the Series A Preferred Stock generally will have no voting
rights. However, if dividends on the Series A Preferred Stock are in arrears for
six quarterly dividend periods, the holders of the Series A Preferred Stock have
the right to elect two additional directors to serve on the Company's Board of
Directors until such dividend arrearage is eliminated. In addition, certain
changes that would be materially adverse to the rights of holders of the Series
A Preferred Stock cannot be made without the affirmative vote of holders of
two-thirds of the outstanding Series A Preferred Stock.
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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 March 31, 1998 held
1.0% of the Units as a general partner and approximately 91.5% of the Units as a
limited partner 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 Second 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.
SHARES AVAILABLE FOR FUTURE SALE
As of March 31, 1998, the Company had approximately (i) 31,549,756 shares
of Common Stock outstanding, (ii) 11,500,000 shares of Series A Preferred Stock
outstanding and (iii) 2,369,283 Units outstanding. In addition, there are
approximately 2,369,283 shares of Common Stock reserved for issuance upon
redemption of limited partnership interests in the Operating Partnership and
8,757,234 shares of Common Stock reserved for issuance upon conversion of
outstanding shares of Series A Preferred Stock. If, in the future, the Company
issues Units in connection with the acquisition of properties, a number of
shares of Common Stock for which such Units are exchangeable will be reserved
for issuance upon redemption of such Units. In addition, at any given time,
there are reserved for issuance under the Company's 1996 Stock Incentive Plan 8%
of the number of shares of Common Stock (including shares of Common Stock
issuable upon conversion of all securities convertible into shares of Common
Stock) outstanding determined as of the day immediately following the most
recent issuance of shares of Common Stock. All of the shares of Common Stock,
other than shares purchased by affiliates and shares reserved for issuance in
connection with the GPA Redemption Option, will be tradable without restriction
under the Securities Act.
As of March 31, 1998, Robert Batinovich and the Attributed Owners owned
shares of Common Stock, and indirectly own Operating Partnership interests which
may be converted into shares of Common Stock, which in
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<PAGE> 20
the aggregate represent approximately 5.1% of the outstanding Common Stock
including Units of the Operating Partnership which may be converted into shares
of Common Stock, assuming only Units held by such persons are converted into
shares of Common Stock and no shares of Series A Preferred Stock are converted
into shares of Common Stock. Such shares of Common Stock may be sold by Robert
Batinovich and the Attributed Owners without the consent of the Company. After
the expiration of any applicable lock-up period, Robert Batinovich and the
Attributed Owners may sell shares acquired through the GPA Redemption Option or
the Batinovich Redemption Option, pursuant to the Registration Statement of
which this Prospectus is a part. See "Registration Rights" below. Robert
Batinovich and the Attributed Owners and other Affiliates of the Company also
may sell Restricted Shares after their respective lock-up periods without
registration in accordance with the exemptions provided by Rule 144 under the
Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated in accordance with the Rule) who has beneficially
owned his or her shares for at least one year, as well as any persons who may be
deemed "affiliates" of the Company (as defined in the Securities Act), would be
entitled to sell within any three month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then outstanding number of
shares or the average weekly trading volume of the shares during the four
calendar weeks preceding each such sale. After shares are held for two years, a
person who is not deemed an "affiliate" of the Company is entitled to sell such
shares under Rule 144 without regard to the volume limitations. As defined in
Rule 144, an "affiliate" of an issuer is a person that directly or indirectly,
through the use of one or more intermediaries, controls, or is controlled by, or
is under common control with, such issuer.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares for future sale, will have
on the market price prevailing from time to time. Sales of substantial amounts
of shares of Common Stock (including shares issued upon the redemption of Units
or the exercise of options), or the perception that such sales could occur,
could adversely affect prevailing market price of the Shares.
REGISTRATION RIGHTS
The Company has filed the Registration Statement of which this Prospectus
is a part pursuant to its obligations (i) with respect to the Partnership
Interests Acquisition Shares under the Partnership Interests Acquisition
Registration Rights Agreement, (ii) with respect to the Portfolio Acquisition
Shares under the Portfolio Acquisition Shares Registration Rights Agreement and
(iii) with respect to the Unit Shares under the Unit Shares Registration Rights
Agreement. 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.
PARTNERSHIP INTERESTS REGISTRATION RIGHTS AGREEMENT
Under the Partnership Interests Registration Rights Agreement, the Company
granted certain demand and piggyback registration rights with respect to the
unregistered Shares of Common Stock issued in connection with the acquisition by
the Company of limited partnership interests in a limited partnership. 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 its Common Stock or substantially similar securities. The Company must
bear the 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 AGREEMENT
Under the Acquisition Shares Registration Rights Agreement, the Company
granted certain demand and piggyback registration rights with respect to the
unregistered Shares of Common Stock issued in connection with the acquisition of
a diversified real estate portfolio. 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
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<PAGE> 21
right to have such shares included when the Company registers other shares of
Common Stock or similar securities. The Company must bear the expenses to
satisfy 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.
UNIT SHARES REGISTRATION RIGHTS AGREEMENT
Under the Unit Shares Registration Rights Agreements, the Company granted
the Unit Holders certain demand and piggyback registration rights with respect
to shares of Common Stock received 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, either for its own
account or another security holder. Such registration rights may only be
exercised during the period after certain restrictions on transfer have lapsed
and prior to the time when the holder is permitted to sell its shares pursuant
to Rule 144 under the Securities Act. The Company must bear the 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.
SELLING STOCKHOLDERS
The following table provides the names of and the number and percentage of
shares of Common Stock beneficially owned by each Selling Stockholder, and the
number and percentage of shares of Common Stock beneficially owned by each
Selling Stockholder upon completion of the offering or offerings pursuant to
this Prospectus, assuming (i) each Unit Holder tenders all of his/her Units for
redemption and that the Company elects to redeem all such Units for shares of
Common Stock and (ii) each Selling Stockholder sells all of its or his/her
respective Shares. Since (i) the Unit Holders may elect to tender all, or some
or none of their Units for redemption and the Company may elect to redeem all,
or some or none of such tendered Units for Shares of Common Stock or cash and
(ii) the Selling Stockholders 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 an
offering to which this Prospectus relates. The number of shares in the following
table represents the number of shares of Common Stock the person beneficially
owns, and the extent to which the person holds Units as opposed to shares of
Common Stock is set forth in the notes to such table.
<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(2) Offered Hereby Shares(1) Outstanding(2)
---------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Eaton & Lauth 846,000(3) 2.1% 173,200 672,800 1.6%
Unit Holders (4) 352,198(5) * 352,198 0 *
S.H. Scripps Trust 302,459(6) * 56,439 246,020 *
Laurence Walker 65,791(7) * 16,125 49,666 *
</TABLE>
- --------------
*less than 1%
(1) Assumes (i) the exchange of all Units held by each person for shares of
Common Stock on a one-for-one basis, and (ii) conversion of all shares of
Series A Preferred Stock into shares of Common Stock.
(2) Assumes (i) the exchange for shares of Common Stock only of the Units owned
by the Selling Stockholder, and (ii) conversion of all shares of Series A
Preferred Stock into shares of Common Stock. The total number of shares
outstanding used in calculating the percentage assumes no other Units have
been exchanged for shares of Common Stock.
(3) Includes 672,800 shares of Common Stock that may be issued upon exchange of
Units held by Eaton & Lauth.
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(4) Represents 62 Unit Holders, whose aggregate number of shares (assuming all
Units held by such Unit Holders are redeemed for shares of Common Stock)
represents less than one percent of the outstanding shares of Common Stock
of the Company.
(5) Represents 352,198 Shares of Common Stock that may be issued upon
redemption of Units.
(6) Includes 115,443 shares of Common Stock of the Company that represents the
total number of shares Mr. Scripps may receive pursuant to his interest in
Glenborough Partners, a California limited partnership ("Partners"), which
holds 691,883 Units, assuming Partners tenders all of its Units for
redemption, and the Company elects to redeem such Units for shares of
Common Stock, and includes 16,769 shares of Common Stock held indirectly
that represents all of Mr. Scripps' portion of shares of Common Stock held
directly by Partners.
(7) Includes 7,194 shares of Common Stock of the Company that represents the
total number of shares Mr. Walker may receive pursuant to his interest in
Partners, which holds 691,883, assuming Partners tenders all of its Units
for redemption, and the Company elects to redeem such Units for shares of
Common Stock, and includes 1,045 shares of Common Stock held indirectly
that represents all of Mr. Walker's portion of shares of Common Stock held
directly by Partners.
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<PAGE> 23
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 Capital 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. See "Description of Capital Stock
- -- Preferred Stock." 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 interests.
FEDERAL INCOME TAX CONSEQUENCES
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 provisions of the Code and regulations thereunder relating to
qualification and operation as a REIT are highly technical and complex. The
following sets forth the material aspects of the laws 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 the
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" (generally the REIT's taxable income adjusted for, among other
things, the disallowance of the dividends-received deduction generally available
to corporations) that is currently distributed to stockholders. This
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treatment substantially eliminates the "double taxation" (i.e., taxation at both
the corporate and stockholder levels) that generally results from investing in
corporations.
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. 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. (However, a REIT can elect to "pass through" any of its taxes
paid on its undistributed net capital gain to its stockholders on a pro rata
basis). Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if the Company
has: (i) net income from the sale or other disposition of "foreclosure property"
which is 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 property held for at
least four years, foreclosure property and property involuntarily converted),
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 it 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 ordinary income for such year;
(ii) 95% of its net capital gain 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 (the "100
person test"); (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 (the
"closely-held test"); 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
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<PAGE> 25
of a taxable year of less than 12 months. Beginning in 1998, a REIT's failure to
satisfy condition (6) during a taxable year will not result in its
disqualification as a REIT under the Code for such taxable year as long as (i)
the REIT satisfies the stockholder demand statement requirements described in
the succeeding paragraph and (ii) the REIT did not know, or exercising
reasonable diligence, would not have known, whether it had failed condition (6).
Furthermore, a REIT must also report its income, for federal income tax
purposes, based on the calendar year. The Treasury has proposed legislation that
would also prevent any "person" (i.e., an individual, corporation, partnership
or trust) from possessing more than 50% of the total combined voting power of
all classes of voting stock or more than 50% of the total value of shares of all
classes of stock of a REIT.
In order to assist the Company in complying with the 100 person test and
the closely-held test, 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. See "Description of Capital Stock --
Restrictions on Transfer." 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 federal income 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 Capital Stock
- -- Restrictions on Ownership and Transfer of Common Stock." Furthermore, the
Company reports its income, for federal income tax purposes, based on the
calendar year.
Although the Company intends to satisfy the stockholder demand letter rules
described in the preceding paragraph, beginning in 1998, its failure to satisfy
these requirements will not result in its disqualification as a REIT but may
result in the imposition of IRS penalties against the Company.
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 a partnership shall retain the same character in the
hands of a partner qualifying as a REIT for purposes of 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 Treasury has also proposed legislation
that also would prohibit investment in securities of any one issuer that would
exceed 10% of the value of all classes of stock of such issuer.
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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,"
which are, in general, corporate subsidiaries 100% owned by a REIT. All assets,
liabilities, and items of income, deduction and credit of 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 (two beginning in 1998) 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.
For purposes of determining whether the Company complies with the 75% test
and 95% test (described below), gross income does not include income from
prohibited transactions. See "-- Tax Aspects of the Company's Investment in the
Operating Partnership -- Sale of Properties."
In addition, rents received from a tenant will not qualify as rents from
real property in satisfying the 75% test (or the 95% test described below) if
the Company, or an owner of 10% or more of the Company, directly or
constructively owns 10% or more of such tenant (a "related party tenant"). 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
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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." For both the
related party tenant rules and determining whether an entity qualifies as an
independent contractor, certain attribution rules of the Code apply, pursuant to
which shares of a REIT held by one entity are deemed held by another.
Under prior law, if a REIT provides impermissible services to its tenants,
all of the rent from those tenants would have been disqualified from satisfying
the 75% test and 95% test (described below). Beginning in 1998, however, rents
will not be disqualified if a REIT provides de minimis, impermissible services.
For this purpose, services provided to tenants of a property are considered de
minimis where income derived from the services rendered equals 1% or less of all
income derived from the property (threshold determined on a property-by-property
basis). For purposes of this 1% threshold, the amount treated as received for
any service shall not be less than 150% of the direct cost of the Company in
furnishing or rendering the service.
The Company will be deemed to provide certain services which are actually
provided by the Operating Partnership (which is not an independent contractor of
the Company) 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% test and 95% test (described below).
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
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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 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 IRS or any court, and
there can be no assurance that the IRS 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% test or 95% test (described below) and, as a result, could lose
its REIT status.
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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 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 75% test or the
95% (described below) 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) is fixed at the time the Percentage Leases are entered
into, (b) is 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) conforms 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).
As described above, a further requirement, under the related party tenant
rules, 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 will constitute 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, will be owned by persons who are not
related to the Company within the definition in the applicable statute. The
common stockholders will have a significant economic interest in GHG and will
elect the board of directors of GHG. Based upon the foregoing, counsel is of the
opinion that rental payments from GHG will not constitute rentals 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.
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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. Furthermore,
income earned on interest rate swaps and caps entered into as liability hedges
against variable rate indebtedness qualify for the 95% test (but not the 75%
test). Beginning in 1998, income earned on liability hedges against all of a
REIT's indebtedness, such as options, futures, and forward contracts, will
qualify for the 95% test (but not the 75% test). In certain cases, Treasury
Regulations treat a debt instrument and a liability hedge as a synthetic debt
instrument for all purposes of the Code. If a liability hedge entered into by a
REIT is subject to these rules, income earned thereon will operate to reduce its
interest expense, and, therefore, such income will not affect the REIT's
compliance with either the 75% or 95% tests.
Even if the Company fails to satisfy one or both of the 75% or 95% 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% 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% test for that year.
The 30% Test. Prior to 1998, the Company must have derived less than 30% of
its gross income for each taxable year from the sale or other disposition of:
(i) real property held for less than four years (other than foreclosure property
and involuntary conversions); (ii) stock or securities held for less than one
year; and (iii) property in a "prohibited transaction." The 30% test has been
repealed with respect to tax years beginning after December 31, 1997.
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. (However, a REIT can elect to "pass through" any of
its taxes paid on its undistributed net capital gain to its shareholders on a
pro rata basis.) Furthermore, if the REIT should fail to distribute during each
calendar year at least the sum of: (i) 85% of its ordinary income for such year;
(ii) 95% of its net capital gain 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
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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 net
capital gain 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.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the IRS, 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.
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.
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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 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) of the Code 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) of
the Code 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.
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Sale of Properties
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership will be 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.
TAXATION OF STOCKHOLDERS
Taxation of Taxable U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of shares of
Company stock who (for U.S. federal income tax purposes): (i) is a citizen or
resident of the United States; (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof (except, in the case of a partnership, the
Treasury provides otherwise by Regulations); (iii) is an estate the income of
which is subject to United States Federal income taxation regardless of its
source; or (iv) is a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
persons, within the meaning of Section 7701(a)(30) of the Code, who have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date that elect to continue to be treated as United States persons, shall also
be considered U.S. Stockholders.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations. Distributions
made by the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. Stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to noncorporate U.S. Stockholders at a 20%, 25% or 28% rate. U.S.
Stockholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that the
Company makes distributions (not designated as capital gain dividends) in excess
of its current and accumulated earnings and profits, such distributions will be
treated first as a tax-free return of capital to each U.S. Stockholder, reducing
the adjusted basis which such U.S. Stockholder has in his shares of Company
stock for tax purposes by the amount of such distribution (but not below zero),
with distributions in excess of a U.S. Stockholder's adjusted basis in his
shares taxable as capital gain, provided that the shares have been held as a
capital asset (which, with respect to a non-corporate U.S. Stockholder, will be
taxable as long-term capital gain if the shares have been held for more than
eighteen months, mid-term capital gain if the shares have been held for more
than one year but not more than eighteen months, or short-term capital gain if
the shares have been held for one year or less). Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the
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stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company on or before January 31 of the following calendar year.
Stockholders may not include in their own income tax returns any net operating
losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale of
exchange by a U.S. Stockholder of shares of Company stock will not be treated as
passive activity income and, as a result, U.S. Stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment interest limitation. However, gain arising from the sale or other
disposition of Company stock (or distributions treated as such), will not be
treated as investment income under certain circumstances.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition to the extent
designated by the Company, a U.S. Stockholder generally would: (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of the Company's taxable year falls (subject to certain limitations as to
the amount so includable); (ii) be deemed to have paid the capital gains tax
imposed on the Company on the designated amounts included in such U.S.
Stockholder's long-term capital gains; (iii) receive a credit or refund for such
amount of tax deemed paid by it; (iv) increase the adjusted basis of its Shares
by the difference between the amount of such includable gains and the tax deemed
to have been paid by it; and (v) in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
IRS.
Upon any sale or other disposition of Company stock, a U.S. Stockholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between (i) the amount of cash and the fair market value of
any property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Company stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset and, with respect to a non-corporate U.S.
Stockholder, will be mid-term or long-term gain or loss if such shares have been
held for more than one year or more than eighteen months, respectively. In
general, any loss recognized by a U.S. Stockholder upon the sale or other
disposition of shares of Company stock that have been held for six months or
less (after applying certain holding period rules) will be treated as a
long-term capital loss, to the extent of capital gain dividends received by such
U.S. Stockholder from the Company which were required to be treated as long-term
capital gains.
Information Reporting and Backup Withholding
The Company will report to each U.S. Stockholder and to the IRS 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. The Company will also
institute backup withholding with respect to a stockholder when instructed to do
so by the IRS. A stockholder that does not provide the Company with his correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
stockholder's federal income tax liability, if any.
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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 IRS.
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
Common Stock with "acquisition indebtedness" within the meaning of the Code, and
that the shares of the Company's 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 Company 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 REIT." See "Description of Capital Stock
- -- Restrictions on Transfer." 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 Non-U.S. Stockholders
The rules governing United States federal income taxation of the ownership
and disposition of Company stock by persons who or that are not U.S.
Stockholders ("Non-U.S. Stockholders") are complex and no attempt is made herein
to provide more than a summary of such rules. Prospective 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 gain 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. Unless such distributions are effectively connected with the Non-U.S.
Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty
applies, is attributable to a U.S. permanent establishment of the Non-U.S.
Stockholder), the gross amount of the distributions will ordinarily be subject
to U.S. withholding tax at a 30% or lower treaty rate, if applicable. In
general, Non-U.S. Stockholders will not be considered engaged in a U.S. trade or
business (or, in the case of an income tax treaty, as having a U.S. permanent
establishment) solely by reason of their ownership of the Company's stock. If
income on the Company's stock is treated as effectively connected with the
Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax
treaty applies, is attributable to a U.S. 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 U.S. 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 U.S. trade or business (or, if an income tax treaty applies, is attributable
to a U.S. permanent establishment of the Non-U.S. Stockholder).
Pursuant to 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 certain income
tax treaties, lower withholding rates generally applicable to dividends do not
apply to dividends from a REIT, such as the Company. Under recently promulgated
temporary Treasury Regulations, certain Non-U.S. Stockholders who
35
<PAGE> 36
seek to claim the benefit of an applicable treaty rate are required to satisfy
certain residency requirements. In addition, certain certification and
disclosure requirements must be satisfied under the effectively connected income
and permanent establishment exemptions discussed in the preceding paragraph.
Unless the Company's stock constitutes a USRPI, distributions in excess of
current and accumulated earnings and profits of the Company will not be taxable
to a Non-U.S. Stockholder to the extent that such distributions do not exceed
the adjusted basis of the Non-U.S. 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 the Company's capital
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, the Company's
stock is 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 generally be subject to 10%
withholding and, to the extent such distributions also exceed the adjusted basis
of a Non-U.S. Stockholder's stock, they will also give rise to gain from the
sale or exchange of the stock, the tax treatment of which is described below.
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 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
("USRPI Capital Gains"), such as properties beneficially owned by the Company
(including property held by the Operating Partnership), 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, such distributions are taxed
to a Non-U.S. Stockholder as gain effectively connected with a U.S. trade or
business regardless or whether such dividends are designated as capital gain
dividends. 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) on such distributions. Also, distributions of USRPI Capital Gains
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
consisting of USRPI Capital Gains. 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. 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
36
<PAGE> 37
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals),
and the purchaser of the stock may be required to withhold 10% of the purchase
price and remit such amount to the IRS. However, since the Company's Common
Stock is publicly traded, no assurance can be given to this effect.
Gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if:
(i) investment in the shares is effectively connected with a U.S. trade or
business of the Non-U.S. Stockholder (or, if an income tax treaty applies, is
attributable to a U.S. 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 U.S. for 183 days or more
during the taxable year and has a "tax home" in the U.S., in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of shares were to be subject to taxation
under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as
U.S. stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals).
If the proceeds of a disposition of shares of Company stock are paid by or
through a U.S. 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-U.S. status or otherwise establishes
an exemption. Generally, U.S. information reporting and backup withholding will
not apply to a payment of disposition proceeds if the payment is made outside
the U.S. through a non-U.S. office of a non-U.S. broker. U.S. information
reporting requirements (but not backup withholding) will apply, however, to a
payment of disposition proceeds outside the U.S. if: (i) the payment is made
through an office outside the U.S. of a broker that is either (a) a U.S. person,
(b) a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the U.S. or (c) a "controlled
foreign corporation" for U.S. federal income tax purposes; and (ii) the broker
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.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were recently
promulgated. In general, the New Withholding Regulations do not significantly
alter the substantive withholding and information reporting requirements
described above, but unify current certification procedures and forms and
clarify reliance standards. For example, the New Withholding Regulations adopt a
certification rule under which a Non-U.S. stockholder who wishes to claim the
benefit of an applicable treaty rate with respect to dividends received from a
U.S. corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designed by the REIT as capital gain
dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules.
EXCEPT AS PROVIDED IN THIS PARAGRAPH, THE DISCUSSION SET FORTH ABOVE IN
"TAXATION OF FOREIGN STOCKHOLDERS" DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS
INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
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
37
<PAGE> 38
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 IRS 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.
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 OWN 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.
38
<PAGE> 39
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the
holders thereof of up to 597,961 Shares of Common Stock, 245,764 shares of which
were previously issued by the Company to certain of the Selling Stockholders and
352,197 shares of which may be issued to the holders of 352,197 Units if and to
the extent such Unit Holders tender such Units for redemption and the Company
elects to redeem such Units for shares of Common Stock. 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 Shares will be offered and sold by the holders thereof.
The Company will not receive any proceeds from the offering by the Selling
Stockholders. 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 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.
39
<PAGE> 40
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, 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.
40
<PAGE> 41
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>
<S> <C>
Securities Act Registration Fee................................. $ 5,518
Printing and duplicating fees................................... 1,500
Legal fees and expenses......................................... 25,000
Accounting fees and expenses.................................... 3,000
Miscellaneous expenses.......................................... 4,982
----------
Total..................................................... $ 40,000
==========
</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> 42
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.
<TABLE>
<CAPTION>
ITEM 16. EXHIBITS
<S> <C> <C>
3.1 - 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))
3.2 - Bylaws of the Registrant (incorporated by reference to Exhibit 3.02 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
3.3 - Articles Supplementary relating to the Series A Preferred Stock (incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
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 (included in Exhibit 5.1)
24.1 - Power of Attorney (included on signature page hereto)
</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 end 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.
II-2
<PAGE> 43
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 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.
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-3
<PAGE> 44
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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Mateo, State of California on April 9, 1998.
GLENBOROUGH REALTY TRUST
INCORPORATED
By: /s/ Robert Batinovich
-----------------------------
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Robert Batinovich, Andrew
Batinovich, Stephen Saul and Frank E. Austin as his/her true and lawful
attorneys-in-fact and agents, jointly and severally, with full power of
substitution and resubstitution, for and in his/her stead, in any and all
capacities, to sign on his/her behalf the Registration Statement on Form S-3 in
connection with the sale by Glenborough Realty Trust Incorporated of shares of
offered securities, and to execute any amendments thereto (including
post-effective amendments) or certificates that may be required in connection
with this Registration Statement, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission and granting unto said attorneys-in-fact and agents,
jointly and severally, the full power and authority to do and perform each and
every act and thing necessary or advisable to all intents and purposes as he/she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, jointly and severally, or his/her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ Robert Batinovich Chairman and Chief Executive Officer April 9, 1998
-----------------------------
/s/ Andrew Batinovich Director, President and Chief Operating Officer April 9, 1998
-----------------------------
/s/ Stephen Saul Executive Vice President and Chief Financial Officer April 9, 1998
-----------------------------
/s/ Terri Garnick Senior Vice President and Chief Accounting Officer April 9, 1998
-----------------------------
Director April , 1998
-----------------------------
/s/ Patrick Foley Director April 9, 1998
-----------------------------
Director April , 1998
-----------------------------
/s/ Laura Wallace Director April 9, 1998
-----------------------------
</TABLE>
II-4
<PAGE> 45
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
3.1 - 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))
3.2 - Bylaws of the Registrant (incorporated by reference to Exhibit 3.02 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
3.3 - Articles Supplementary relating to the Series A Preferred Stock (incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
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 (included in Exhibit 5.1)
24.1 - Power of Attorney (included on signature page hereto)
</TABLE>
<PAGE> 1
EXHIBIT 5.1
April 10, 1998
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 352,197 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 352,197 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 245,764 shares (the "Acquisition
Shares") of Common Stock previously issued or to be issued by the Company in
connection with the acquisition of certain properties and limited partnership
interests. The 352,198 Unit Shares and the 245,764 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 (the "Act").
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 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.
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Glenborough Realty Trust Incorporated
April 10, 1998
Page 2
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 , the applicable agreement and/or the partnership
agreement of the Operating Partnership, 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
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EXHIBIT 8.1
April 9, 1998
Glenborough Realty Trust Incorporated
400 South El Camino Real, 11th Floor
San Mateo, California 94402
Ladies and Gentlemen:
We have acted as special tax counsel to Glenborough Realty Trust
Incorporated, a Maryland corporation (the "Company") in connection with the
offer and sale from time to time by the holders (the "Selling Stockholders") of
up to 597,961 shares (the "Shares") of Common Stock, par value $.001 per share
(the "Common Stock") of the Company, which Shares comprise the following: (i) up
to 72,564 Shares (the "Partnership Interests Acquisition Shares") which were
issued in connection with the acquisition by the Company of all the limited
partnership interests in a limited partnership; (ii) up to 173,200 Shares (the
"Portfolio Acquisition Shares") which were issued in connection with the
acquisition by the Company of a diversified real estate portfolio; and (iii) up
to 352,197 shares of Common Stock (the "Unit Shares") that may be issued by the
Company to certain holders (the "Unit Holders") of up to 352,197 units of
limited partnership interests (the "Units") in Glenborough Properties, L.P., a
California limited partnership (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. The Partnership
Interests Acquisition Shares, Portfolio Acquisition Shares, and Unit Shares are
the subject of a Registration Statement (the "Registration Statement") filed by
the Company on Form S-3 with the Securities and Exchange Commission ("SEC") on
April 9, 1998, under the Securities Act of 1933 (the "Act"). Capitalized terms
not defined herein shall have the meanings ascribed to them in the certificate
(or incorporated therein by reference), dated April 9, 1998 (the "Certificate"),
delivered to Morrison & Foerster LLP which provides certain representations of
fact by the Company relevant to this opinion.
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Glenborough Realty Trust Incorporated
April 9, 1998
Page 2
You have requested our opinion as to whether the Company has operated
in a manner to qualify it 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"). This opinion is solely for the benefit of the Company and may not be
relied upon by, nor may copies be delivered to, any other person without our
prior written consent.
In our capacity as tax counsel to the Company and for purposes of
rendering this opinion, we have examined and relied upon the following, with
your consent: (i) the Certificate; (ii) the Registration Statement and (iii)
such other documents we have considered relevant to our analysis. In our
examination of such documents, we have assumed the authenticity of original
documents, the accuracy of copies, the genuineness of signatures, and the legal
capacity of signatories. We have also assumed that all parties to such documents
have acted, and will act, in accordance with the terms of such documents.
Furthermore, our opinion is based on (a) our understanding of the facts
as represented to us in the Certificate and (b) the assumption that (I) the
Company is operated and will continue to be operated in the manner described in
the Certificate, (II) the facts contained in the Registration Statement are true
and complete in all material respects, and (III) all representations of fact
contained in the Certificate are true and complete in all material respects. We
have not undertaken any independent inquiry into or verification of these facts
either in the course of our representation of the Company or for the purpose of
rendering this opinion. While we have reviewed all representations made to us to
determine their reasonableness, we have no assurance that they are or will
ultimately prove to be accurate.
We also note that the tax consequences addressed herein depend upon the
actual occurrence of events in the future, which events may or may not be
consistent with any representations made to us for purposes of this opinion. In
particular, qualification and taxation of the Company as a REIT under the Code
depends upon the Company's ability to satisfy or maintain on a continuing basis
certain distribution levels, diversity of stock ownership, and the various
qualification tests imposed by the Code. To the extent that the facts differ
from those represented to us or assumed by us herein, our opinion should not be
relied upon.
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Glenborough Realty Trust Incorporated
April 9, 1998
Page 3
Our opinion herein is based on existing law as contained in the Code,
the Treasury Regulations promulgated thereunder, administrative pronouncements
of the Internal Revenue Service ("IRS") and court decisions as of the date
hereof. The provisions of the Code and the Treasury Regulations, IRS
administrative pronouncements and case law upon which this opinion is based
could be changed at any time, perhaps with retroactive effect. In addition, some
of the issues under existing law that could significantly affect our opinion
have not yet been authoritatively addressed by the IRS or the courts, and our
opinion is not binding on the IRS or the courts. Hence, there can be no
assurance that the IRS will not challenge or that the courts will agree with our
conclusions.
Based upon, and subject to, the foregoing and the next paragraph below,
we are of the opinion that, commencing with the Company's taxable year ending
December 31, 1996 through its taxable year ending December 31, 1997, the Company
has been organized in conformity with the requirements for qualification as a
REIT under the Code and its method of operation has enabled it to so qualify,
and if it operates after December 31, 1997 in the same manner as it has prior to
that date, it will continue to so qualify.
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 express no opinion as to matters governed
by any laws other than the Code, the Treasury Regulations, published
administrative announcements and rulings of the IRS and case law.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the reference to our firm under the caption
"Experts" and to the use of our reports dated January 21, 1998 with respect to
the consolidated financial statements of Glenborough Realty Trust Incorporated,
the combined financial statements of the GRT Predecessor Entities, the
consolidated financial statements of Glenborough Hotel Group, and related
financial statement schedules included on Form 10-K of Glenborough Realty Trust
Incorporated for the year ended December 31, 1997, incorporated by reference
into this Registration Statement and the related Prospectus of Glenborough
Realty Trust Incorporated.
San Francisco, California ARTHUR ANDERSEN LLP
April 9, 1998
